Housing market builds (some) momentum | News
MANTECA, Calif. - The economic impact of an improving home building industry was impossible to miss on Nutmeg Landing one recent morning.
Near a bank of newly constructed homes, workers hauled in a truckload of windows, passing other trucks from a tree service, a tile company and a plumbing firm.
This Central California city has seen single-family home building bump up slightly this year, to about 280 homes, but that's far short of the 600 to 800 that were built annually leading up to the 2006 housing bust.
Manteca's situation mirrors that of many cities. The pounding of hammers and the rumble of construction trucks are louder now in more neighborhoods as single-family home building rises from post-World-War-II lows.
Nationwide, single-family home starts will be up 25% this year from 2011, which was the worst in more than half a century, and they'll jump another 35% next year, the National Association of Home Builders predicts. The upturn is fueling optimism that home building will again aid the U.S. economic recovery.
But the industry's recovery - if not derailed by another recession - will be slow, will be more visible in some regions than others and will face challenges, given the industry's need to rebuild its workforce and supply of undeveloped lots.
The industry is "getting better, but we were very ill, and the convalescence period will be very long," says David Crowe, chief economist with the National Association of Home Builders.
The NAHB reported Tuesday that its index of U.S. builder sentiment improved in December, reaching its highest level in more than six years. November housing starts, which the government will announce today, will provide more insight into the market. Economics consulting firm IHS Global Insight predicts a decline from October, but it says that's largely due to a monthly drop in the volatile multifamily sector.
Overall, home builders are benefiting from the same improving conditions that are helping the existing home market.
Job growth helped drive the unemployment rate down to 7.7% in November from its peak of 10% in the fall of 2010. That's fueling more housing demand as more people can afford to form households.
Improving sales and fewer foreclosures have thinned once-bloated supplies of homes for sale. That, too, is driving demand for construction.
Based on October's selling pace, the nation's supply of new homes for sale was 4.8 months, down from 12 months three years ago. Existing homes for sale were at a 5.4-month supply in October, down 22% from a year ago, says the National Association of Realtors.
"There's less supply across the board," says Bert Selva, CEO of Shea Homes, one of the nation's largest private new home builders.
Rising home prices have also convinced buyers that the housing market has hit bottom.
After largely falling for six years, U.S. home prices were up 6.3% in October year-over-year, CoreLogic says. New home prices are also up for the first time in six years. Crowe estimates they've posted a 2% to 4% gain this year. RBC Capital Markets home building analyst Robert Wetenhall predicts they'll jump 4% next year.
Buyers now see that homes are no longer "going to get cheaper tomorrow," says Martin Connor, chief financial officer of luxury home builder Toll Bros.
Toll Bros. expects to deliver 3,300 homes this year, up from 2,600 last year, it says. Other builders are seeing similar bumps. D.R. Horton's new home sales were up 21% in fiscal 2012 from the year before, it reported last month. PulteGroup's home sales were up 27% in the third quarter vs. last year, it says.
Investors smell opportunity
The improved performance - and outlook for builders - has captivated investors. The Dow Jones U.S. Home Construction Index, which includes major builders, is up 82% for the year, vs. 15% for the S&P 500 index.
Some optimism may be unwarranted, says MKM Partners home building analyst Megan McGrath. She says home builders face several obstacles that will slow their growth next year, even if the U.S. avoids a major economic bruise stemming from the fiscal cliff issues of higher taxes and greater spending cuts.
One challenge is lot shortages.
Given the dearth of land development since the housing bust, builders in some markets now seeing strong rebounds in home sales don't have ample supplies of new lots to support increased building, Crowe says.
"No one has developed land in six years," McGrath says. Builders are now "running to catch up." She says it'll take at least a year.
The lot situation is already resulting in higher prices. Lot prices are up about 25% for the year in parts of Northern California, 30% in Phoenix and 15% in parts of Denver and Orange County, Calif., Shea Homes' Silva says. In those markets, the recovery has been relatively strong compared with other parts of the country, home price data indicate.
Yet, the inflation in lot prices appears to be broad-based. Nine of 10 builders around the country report increases in lot prices, according to a recent survey by John Burns Real Estate Consulting. That's up from one in 10 builders about two years ago.
"We're not worrying about whether we can sell houses anymore," says San Diego builder Ure Kretowicz of Cornerstone Communities. Instead, builders are worried about finding lots for future building, he says. Lot prices in that city are up 30% in the past 18 months, Kretowicz says. Large and small builders are scrambling for them, and multiple offers are common.
Major builders are shopping in many areas. Pulte said in October that it increased its 2012 land-spending plans by $90 million to $1 billion. Toll Bros. will spend $600 million on land this year. That's double last year's level, Connor says.
In Phoenix, where home prices rose 25% in October year-over-year, given strong investor interest, farm land intended for future housing has quadrupled in price in the past two years, says land broker Nate Nathan.
Labor shortages will be a more pervasive problem than lot shortages, Crowe says. Both could drive home prices higher.
Many workers left the industry because of the length of the downturn, and took jobs in more stable industries or returned to Mexico, he says. About 1.4 million home construction jobs have been lost since 2006.
In Atlanta, foundations for new homes recently have sat untouched for two to three weeks waiting for framing crews, says Stephen Palmer, manager of builder Home South Communities. Dallas builder Larry Craven says he's had to extend build times from 90 days to 110 for the same reason.
McGrath says the biggest impact from shortages of labor and finished lots will be most acute in Northern California, Phoenix, parts of Florida, Texas and Washington, D.C.
She says single-family home building will rise only 23% next year, because of labor and lot constraints, rather than 35%, as the NAHB predicts.
A lift for the economy
The upturn in home building is already being reflected in national economic figures.
Through the first three quarters of this year, residential investment accounted for 16% of the growth in the nation's gross domestic product, vs. 2% in the same three quarters of 2011, says University of California, Los Angeles, economist Edward Leamer.
For the same period in 2010, residential investment was a drag on the economy, Leamer says.
"We're all feeling guardedly optimistic," that housing is becoming an engine of economic growth, says Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA.
Not all regions will see the same boost, says Jody Kahn, vice president at John Burns Real Estate Consulting. It routinely ranks regions poised for home-building growth based on such measures as job growth, home price trends and home inventories.
Kahn's latest data show Southern California, the Southwest and Texas as having the strongest foundations to support home building.
In general, those regions are seeing either the strongest job growth in the nation, the most rapid home price appreciation this year or the tightest home inventories, Kahn's data show.
The Northwest and Florida are less well positioned, while the Northeast, Southeast and Midwest bring up the rear, Kahn says.
Southern Florida ranks in the middle, in part because its job growth is slower than other regions. Its inventory of existing homes for sale is also relatively slim, Kahn's data show.
The Northeast, meanwhile, has among the largest supplies of existing homes for sale, which hurts new home demand, and lackluster payroll job growth.
The comparison between Southern California and the Midwest is most telling.
While Southern California has seen a 1.7% gain in payroll job growth for the year through September, the Midwest has come in at just 1.2%.
Southern California has about half the inventory of homes for sale as the Midwest. Meanwhile, its home prices are up much more - 5% year-over-year in October, vs. a 3% jump in the Midwest, Kahn's data show.
Anthony Pasquinelli, division manager for BNA Homes, sees a long road ahead for the Chicago market where BNA builds.
Home prices in Chicago were down 2.3% in October year-over-year, while they rose nationally, CoreLogic says. The metropolitan area also has more distressed home loans than the national average. Almost 11% are 60 or more days late, vs. 8% nationwide, says mortgage tracker Lender Processing Services.
Distressed homes typically sell at a discount, providing tough competition for home builders. That won't end for years, Pasquinelli says.
The market is "better this year, but it's still awful," he says.
By Julie Schmit
Upcoming Events near Manteca / Tracy / Ripon
Most popular stories from nearby communities
- The SJDC Jazz Festival presents the group Espacio, with celebrated saxophonist Eric Marienthal
- Celebrate "Navidad en Mexico" at Delta College's Atherton Auditorium on Dec.5 8pm
- $60 Million in Training Funds Available to California Business Owners
- SJDC Culinary Arts Winter Feast, Dec. 11
- Ceremony of Carols Delta College's Winter Choral Concert Dec. 4, 7:30pm