Ivy Zelman is still bullish in her take on the next couple of years for housing.
In the latest issue of The Z Report, a twice-monthly amalgam of data points and insights, Zelman’s constructive “thesis” navigates a slightly more unforgiving fairway of opportunity for builders.
If you build it, they will come. However, now it depends on what “it” you build, how much it costs and where it is.
Here’s a few samples of Zelman & Associates commentary on a series of mid-year fits and starts in a housing market that has been expected to enjoy plenty of headroom for fundamentals-driven growth through the end of next year at least.
- “Based on our July survey results, we would characterize the overall condition of the new construction market as healthy, but softer than earlier this year…”
- “… While we are very confident in our positive view of the housing cycle and believe strongly in the key tenets of our thesis, we also believe higher incentives are more likely than not due to the time of year and builders’ desire to achieve unit targets…”
- “…. while we believe a rebound in growth to the 8-10% range is very possible, we do not expect it to occur in a vacuum. We suspect that homebuilders will respond to softer order growth with less aggressive price increases and/or more incentives to reignite urgency.”
Zelman notes that for-sale inventory–both on the resales and new construction front–has started to inch upward, and that price-power has probably tested its upper limits at least in several parts of the average selling price spectrum. No better time than now to try The Z Report for a free-trial period by linking here.
At this point in the cycle, builders need their ear to the ground–with data that’s sensitive to market shifts, head-fakes, opportunity areas, and, ultimately, risk. And they need to see a cause-and-effect relationship between their price tactics and absorption pace. Risk is out there in the form of debt.
Nationally, across all business sectors, firms have been scaling back on debt after a binge in borrowing as the economy recovered after the financial crisis.
And according to Wall Street Journal financial correspondent Sam Goldfarb, “while corporate leverage has increased in the postcrisis period, residential-mortgage debt and municipal-bond debt have both been declining as a percentage of GDP.
At the same time, borrowing for builders–especially for acquisition and development of land, which is where they tend to take their biggest chances–is as accommodative as it has been in a long time.
National Association of Home Builders vp for Survey and Housing Policy Research Paul Emrath looks here at the easing trends among lenders. Emrath notes:
The stability was particularly evident in the market for acquisition and development loans. Sixteen percent of builders and developers responding to the NAHB survey said availability of new credit for land acquisition was better, perfectly balancing the 16 percent who said it had gotten worse. Similarly, 17 percent reported better credit conditions for land development, while 15 percent said it was “worse”. Some net easing was still apparent in the market for new single-family construction loans, as 23 percent of builders said availability was better in the second quarter of 2018, while 10 percent said it was “worse”
So, it figures that as the risk and forward uncertainty intensify, the banks push are pushing more aggressively to get builders to borrow.
Will they ever learn?
However, maybe the Zelman notion that builders will start flipping the switches and levers on their new home prices, incentives, and upgrades, to reboot the market into a higher gear for another 18 months or so.
