Experts: Builders’ Shift to More Home Construction Might Take 1-2 Years – Real Time Economics

Home-building experts predict it might take a year, perhaps two, before the industry fully shifts to constructing a greater volume of homes at lower prices from its current focus of padding profit margins by selling fewer, more expensive homes.

That shift, often described in the industry as pace versus price, is critical to U.S. home construction getting back to its annual average rate of construction starts since 2000 and providing more of a boost to gross domestic product. So far this year, builders are starting homes at a rate of about 60% to 65% of the industry’s annual average of 1 million.

In recent years, builders have focused mostly on building expensive homes to cater to better-heeled buyers. Meanwhile, many first-time and entry-level buyers have remained sidelined by stringent mortgage qualification standards such as requirements for hefty down payments and high credit scores.

The shift to production volume over price will take time, two builders and a housing economist said Thursday at a Houston conference of the National Association of Real Estate Editors.

John Johnson, chief executive of Houston-based David Weekley Homes, a closely held builder that operates in 10 states, predicts that the industry will shift to pace over price “within the next 12 to 18 months.” He added that the supply side of the equation is constrained, too, since builders still face a shortage of labor and lots. Meanwhile, demand will return despite lofty prices for new homes.

David Weekley Homes CEO John Johnson on factors needed to boost US home construction.

“I think the demand will be there,” Mr. Johnson said. “Right now, there’s a little bit of a lull due to sticker shock [of high prices], but that will soon pass.”

Brad Hunter, chief economist for home-building research firm Metrostudy, part of Hanley Wood LLC, foresees a “gradual” shift to a greater production pace starting within the next 18 to 24 months. For now, he says, large, public builders are pushing for both high prices and greater production volumes. It doesn’t appear that the latter is panning out in any significant way.

Brad Hunter, chief economist for Metrostudy, on how soon builders might shift to production pace over high prices.

Other factors must precede or coincide with the shift. Many homes that builders are starting are on land that builders paid top-of-the-market prices for in recent years, meaning those builders have little latitude to lower prices. In addition, demand must return before builders can justify ramping up production significantly. That likely will require a further easing of mortgage-qualification standards for entry-level buyers.

“When the demand is there [for entry-level homes], the supply will be there,” said Will Holder, president of Trendmaker Homes in Houston, which is part of the Weyerhaeuser Co. home-building operations being bought by TRI Pointe Homes Inc.

There are signs of late, though, that the market is in the very early stages of making a turn back toward its lower end. Price gains for new and existing homes have slowed this year after two years of steep increases. Some regional builders that cater to entry-level buyers, such as LGI Homes Inc., are reporting surging sales. And at least one national builder, D.R. Horton Inc., is targeting the affordable market by rolling out a program to build smaller homes priced at roughly $120,000 to $150,000.

“We’re starting to see builders say, ‘There’s this untapped niche that is being ignored by much of the market, so I’m going to focus on that,’” Metrostudy’s Mr. Hunter said. “I think that means we’ll start seeing the return of smaller [less-expensive] homes.”


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12 June 2014 | 7:57 pm – Source:

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