{"id":4425,"date":"2023-08-03T15:45:33","date_gmt":"2023-08-03T15:45:33","guid":{"rendered":"https:\/\/frankbuysphilly.com\/homebuilders-are-at-max-capacity-and-the-housing-shortage-keeps-widening\/"},"modified":"2023-08-03T15:45:33","modified_gmt":"2023-08-03T15:45:33","slug":"homebuilders-are-at-max-capacity-and-the-housing-shortage-keeps-widening","status":"publish","type":"post","link":"https:\/\/frankbuysphilly.com\/homebuilders-are-at-max-capacity-and-the-housing-shortage-keeps-widening\/","title":{"rendered":"Homebuilders are at max capacity. And the housing shortage keeps widening"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<figure class=\"wp-block-video\"><video autoplay controls src=\"https:\/\/www.housingwire.com\/wp-content\/uploads\/2023\/08\/AdobeStock_566110498.mov\"><\/video><figcaption class=\"wp-element-caption\">Aerial drone inspection of Lennar&#8217;s Westview housing development Miami, Florida. Taken by Felix Mizioznikov. <\/figcaption><\/figure>\n<p>Everywhere you look there seems to be bad news for the existing-home market \u2014 interest rates remain north of 7% and the median home price\u00a0<a href=\"https:\/\/www.nar.realtor\/newsroom\/existing-home-sales-retreated-3-3-in-june-monthly-median-sales-price-reached-second-highest-amount\" target=\"_blank\" rel=\"noreferrer noopener\">nears record levels<\/a>\u00a0at more than $410,000 as of June.<\/p>\n<p>The dynamics creating that dour landscape for perspective homebuyers eying existing homes are at the same time helping to boost another sector of the home market, however.&nbsp;<\/p>\n<p>New-home sales were up nearly 24% in June year over year, according to the\u00a0<a href=\"https:\/\/www.census.gov\/construction\/nrs\/current\/index.html#:~:text=MONTHLY%20NEW%20RESIDENTIAL%20SALES%2C%20JUNE%202023&amp;text=Sales%20of%20new%20single%E2%80%90family,of%20Housing%20and%20Urban%20Development.\"><strong>U.S<\/strong><\/a><a href=\"https:\/\/www.census.gov\/construction\/nrs\/current\/index.html#:~:text=MONTHLY%20NEW%20RESIDENTIAL%20SALES%2C%20JUNE%202023&amp;text=Sales%20of%20new%20single%E2%80%90family,of%20Housing%20and%20Urban%20Development.\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>.<\/strong><\/a><a href=\"https:\/\/www.census.gov\/construction\/nrs\/current\/index.html#:~:text=MONTHLY%20NEW%20RESIDENTIAL%20SALES%2C%20JUNE%202023&amp;text=Sales%20of%20new%20single%E2%80%90family,of%20Housing%20and%20Urban%20Development.\"><strong> Census Bureau<\/strong><\/a>, after jumping 20% in May. Meanwhile, existing-home sales plummeted by 19% in June year over year after\u00a0<a href=\"https:\/\/www.housingwire.com\/articles\/existing-home-sales-in-may-were-slightly-less-bad-than-april\/\" target=\"_blank\" rel=\"noreferrer noopener\">declining by 20%<\/a>\u00a0in May, according to the\u00a0<a href=\"https:\/\/www.nar.realtor\/newsroom\/existing-home-sales-retreated-3-3-in-june-monthly-median-sales-price-reached-second-highest-amount#:~:text=Total%20existing-home%20sales1,5.13%20million%20in%20June%202022).\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>National Association of Realtors<\/strong>.<\/a><\/p>\n<p>In a recent earnings call, Sheryl Palmer, chairman and CEO of national homebuilder\u00a0<strong>Taylor Morrison<\/strong>, said about two-thirds of homeowners now have mortgage interest rates below 4%.<\/p>\n<p>\u201cThis has driven meaningful share gains for new construction,\u201d she added, \u201cwith the percentage of new-home listings more than doubling from long-term norms to over 30% of the market.\u201d<\/p>\n<p><strong>Fannie Mae<\/strong>\u2019s vice president of economic and strategic research, Hamilton Fout, said the gap between homeowners now holding historically low mortgage rates (i.e., below 4%) and today\u2019s current market rates has created a so-called <a href=\"https:\/\/www.housingwire.com\/articles\/you-cant-buy-whats-not-for-sale-in-the-housing-market\/\" target=\"_blank\" rel=\"noreferrer noopener\">\u201clock-in effect.\u201d<\/a> That\u2019s because existing homeowners are \u201cdisincentivized to list their homes due to not wanting to give up a mortgage rate much lower than current market rates [and this] continues to suppress the number of existing-home listings,\u201d Fout said.\u00a0<\/p>\n<p>\u201cWe believe this lack of existing homes on the market is pushing prospective buyers toward new homes, bolstering sales and construction,\u201d he added.<\/p>\n<p>Also helping to propel new-home sales is a huge deficit in existing homes. That shortage is estimated to range from 1.5 million units, according to the Robert Dietz, chief economist for the\u00a0<strong>National\u00a0\u00a0Association of Home Builders<\/strong>\u00a0(NAHB), to some 4.4 million units,\u00a0<a href=\"https:\/\/www.wsj.com\/articles\/how-severe-is-the-housing-shortage-it-depends-on-how-you-define-shortage-89cdbee7\" target=\"_blank\" rel=\"noreferrer noopener\">according to\u00a0Fannie Mae<\/a>\u00a0\u2014 and up to 7.3 million units per the\u00a0<strong>National Low Income Housing Coalition<\/strong>.<\/p>\n<p>\u201cOne metric I like is how many jobs are we producing relative to how many housing permits are we producing,\u201d said Erik Heuser, executive vice president and chief corporate operations officer at&nbsp;<a href=\"https:\/\/www.taylormorrison.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">Taylor Morrison<\/a>. \u201cAnd as a country, it\u2019s 2.6 [jobs for every permit] and the historic average is 1.6.&nbsp;<\/p>\n<p>\u201cAnd so, as of today,\u201d he added, \u201cwe&#8217;re producing far more jobs than we are permits, and you&#8217;ve got a kind of a baseline structural undersupply.\u201d<\/p>\n<p>Deitz said the \u201cunderbuilding\u201d in the home market between 2012-2019 \u201cleft us with the housing deficit.\u201d<\/p>\n<p>This year, even with the boom in new-home construction, \u201cwe\u2019re expecting a number somewhat below 900,000 for single-family home starts,\u201d Deitz added. \u201cWe need to build above 1.1 million to start reducing our deficit.\u201d<\/p>\n<p>\u201cRight now, whatever number you want to believe,\u201d said Brian Hale, founder and CEO of consultancy&nbsp;<strong>Mortgage Advisory Partners<\/strong>, \u201c\u2026 homebuilders aren\u2019t building enough houses to cover that gap anytime in the next 10 years.\u201d&nbsp;<\/p>\n<p>So, even at the current rate of new-home construction, with demand at stellar levels, the homebuilding industry is still falling well short of the break-even point needed to actually reduce the nation\u2019s housing deficit, assuming the experts are correct.<\/p>\n<h2 id=\"h-peak-production\">Peak production<\/h2>\n<p>At around 30% now, the homebuilding industry is likely near the peak level of new-home sales as a share of the entire housing market, according to industry experts who spoke with&nbsp;<strong>HousingWire<\/strong>.&nbsp;<\/p>\n<p>The homebuilding industry faces a number of operational ceilings in terms of the volume of new homes it can produce annually. Those include <a href=\"https:\/\/www.housingwire.com\/podcast\/homebuilders-struggle-with-a-shortage-of-labor-and-materials\/\" target=\"_blank\" rel=\"noreferrer noopener\">material shortages<\/a> (such as a current lack of electrical transformers and the volatility of wood pricing) as well as shortages of <a href=\"https:\/\/www.housingwire.com\/articles\/labor-market-is-moderating-gracefully-but-remains-too-hot-for-the-feds-like\/\" target=\"_blank\" rel=\"noreferrer noopener\">skilled labor<\/a>, zoning restrictions and available land. In addition, financing challenges due to <a href=\"https:\/\/www.housingwire.com\/articles\/homebuilders-still-need-lower-mortgage-rates\/\" target=\"_blank\" rel=\"noreferrer noopener\">high rates<\/a> are disproportionately affecting small and regional privately held homebuilders, which typically rely on debt financing to purchase land and fund construction costs.<\/p>\n<p>Doug Faron is one of three founding partners at Florida-based&nbsp;<a href=\"https:\/\/www.shorehamcapital.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>Shoreham Capital<\/strong><\/a><strong>,<\/strong>&nbsp;a privately held built-for-rent (BFR) and multifamily residential developer focused on projects in the Southeast, primarily Florida. He said large publicly held homebuilders, particularly those with affiliated mortgage lenders, do have \u201ccheaper access to capital\u201d and that\u2019s \u201cdefinitely an advantage in the credit markets.\u201d<\/p>\n<p>\u201cIt\u2019s most certainly more difficult in this environment to utilize debt, but it is still very possible,\u201d Faron added. \u201cWhile it\u2019s much harder [in the current high-rate environment], we anticipate still being able to use both debt and equity capital to push projects forward.\u201d<\/p>\n<p>Deitz said higher interest rates work to constrict the supply of new construction because two-thirds of home construction is still undertaken by private builders. He stressed that \u201ctheir primary source of capital to acquire land for development and then to build the home before they get the revenue from selling it comes from debt financing.\u201d<\/p>\n<p>Another headwind facing homebuilders is there are just <a href=\"https:\/\/www.wsj.com\/articles\/the-u-s-is-running-short-of-land-for-housing-11664125841\" target=\"_blank\" rel=\"noreferrer noopener\">not enough developable lots<\/a> (or land) in many parts of the country, according to Shannon Faries, director of strategic relationships at\u00a0<strong>Land Gorilla<\/strong>, a provider of construction-loan management software as a service to both the residential and commercial markets.<\/p>\n<p>Dietz concurs, adding that two-thirds of homebuilders say lot inventories are \u201clow or very low.\u201d<\/p>\n<p>\u201cAnd that&#8217;s, in part, because of the <a href=\"https:\/\/www.housingwire.com\/articles\/is-zoning-the-answer-to-the-affordable-housing-crisis\/\" target=\"_blank\" rel=\"noreferrer noopener\">regulatory environment<\/a> [restrictive zone rules],\u201d Faries said. \u201cIn addition, all these banks that have traditionally made those [land-acquisition] loans are not making quite as many of those loans as they used to because there\u2019s stress in the banking system.\u00a0<\/p>\n<p>\u201cSo that\u2019s a further headwind. How are you going to build millions of homes if you can\u2019t get the financing to develop the lots in the first place?\u201d<\/p>\n<p>Faron of Shoreham Capital said there are still plenty landowners out there willing to sell properties. \u201cBut the question is,\u201d he added, \u201cat what price?\u201d<\/p>\n<p>\u201cWhat has made it much more difficult is the cost of capital,\u201d Faron explained. \u201cIt just means you have to look that much further.&nbsp;<\/p>\n<p>\u201cBefore [when interest rates were much lower] maybe there were 10 land sites that worked [cost-wise], but now there\u2019s only one, and you have to find that one.\u201d<\/p>\n<p>Dietz explained that lumber\/materials, labor, land and financing are all \u201climiting factors\u201d on the supply of homes in the country.&nbsp;<\/p>\n<p>\u201cYou can&#8217;t just solve one to solve the whole problem,\u201d he stressed. \u201cThe better way of saying that is that there&#8217;s no simple, scalable solution to the housing shortage.\u201d<\/p>\n<h2>Bigger is better for homebuilders<\/h2>\n<p>Heuser at Taylor Morrison concedes that big national homebuilders have some built-in market advantages, adding that the perks of being big are leveraged by <a href=\"https:\/\/www.investors.com\/research\/homebuilders-top-ranked-industry-suddenly-sees-cracks-appear-dr-horton-lennar\/\" target=\"_blank\" rel=\"noreferrer noopener\">publicly held homebuilders<\/a> to expand their market share.<\/p>\n<p>\u201cI used to own a small homebuilder, so I am all for small homebuilders, and I think that they will always be part of the housing ecosystem,\u201d Heuser said.&nbsp;<strong><\/strong><\/p>\n<p>He added, however, that large public homebuilders have a leg up in access to capital markets as well as in land-acquisition efforts because they \u201ctend to get early looks and are going to get those favored [land] deals.\u201d He added that the publicly traded homebuilders also have an advantage in attracting more of the skilled labor pool in a market where labor is still scarce; in purchasing power due to scale dynamics; and in \u201cconsumer mindshare\u201d due to the visibility of large builders in local markets.<\/p>\n<p>Taylor Morrison operates across 11 states in the West, Southwest and Southeast through several brand names \u2014 Taylor Morrison, Esplanade, Darling Homes and\u00a0<a href=\"https:\/\/www.prnewswire.com\/news-releases\/taylor-morrison-unveils-new-build-to-rent-brand-yardly-301676677.html\" target=\"_blank\" rel=\"noreferrer noopener\">Yardly<\/a>. Heuser said the homebuilder currently has about 5.8 years\u2019 worth of owned or controlled land for future housing development.\u00a0<\/p>\n<p>\u201cAnd we\u2019ve increased our projected land spend for this year from $1.6 billion to $1.8 billion,\u201d Heuser added.<\/p>\n<p>\u201cSo, you add all those things up, and you just get a generally a competitive advantage,\u201d Heuser said. Plus, larger homebuilders like Taylor Morrison, via its affiliated mortgage lender&nbsp;<strong>Taylor Morrison Home Funding<\/strong>, can offer attractive buydown rates to perspective homebuyers.&nbsp;<\/p>\n<p>\u201cEither we can just put a big incentive on the home [such as free hardwood flooring or other finishing upgrades] which is kind of a one-time thing, but then they still have a higher interest rate over a period of time, so it&#8217;s less affordable,\u201d he explained \u201cOr we can create a systemically lower mortgage rate, which on net should be a win for them and a win for us.<\/p>\n<p>\u201c\u2026&nbsp;A [permanent buydown] rate in the 5.5% range seems to be the trigger point for the consumer today,\u201d Heuser added, \u201cbecause they know rates will never be 3% again, and they don\u2019t like 7%, but 5.5% they can swallow.\u201d<\/p>\n<p>Hale said larger homebuilders may make a little bit less per home by offering incentives such as rate buydowns, but their velocity of sales picks up as a result of the bargain rates, and that allows them to still make a healthy profit.<\/p>\n<p>\u201cSo, the homebuilders with a mortgage entity are using that mortgage entity to offer temporary or permanent buydowns or both, and making it very accommodative for the buyer,\u201d he added.<\/p>\n<p>Deitz said the big national builders that are publicly traded companies and vertically integrated with lending arms and land-development companies \u201caccount for maybe a third or so of total single-family construction [volume based on units].\u201d<\/p>\n<p>\u201cThose national builders are more likely to be engaged and orchestrate buydowns,\u201d he added. \u201cAnd our estimates are that maybe about a third of builders nationwide are actually engaged in mortgage rate buydowns.<\/p>\n<p>\u201c\u2026 It has been an advantage,\u201d Deitz said, \u201cand it does offer the builders an opportunity to gain some market share in a market with elevated interest rates.\u201d<\/p>\n<h2>Build-for-rent\u00a0<\/h2>\n<p>The tailwinds pushing up new-home demand and sales for now include the lock-in effect created by high interest rates and <a href=\"https:\/\/www.housingwire.com\/articles\/how-much-will-home-prices-climb-over-the-next-year\/\" target=\"_blank\" rel=\"noreferrer noopener\">still-high home prices<\/a>; a growing <a href=\"https:\/\/www.housingwire.com\/articles\/housing-market-tracker-inventory-shocks-lower\/\" target=\"_blank\" rel=\"noreferrer noopener\">housing deficit<\/a> in the face of still-strong homebuyer demand; favorable demographics ahead due to the huge volume of <a href=\"https:\/\/www.housingwire.com\/articles\/a-boomer-market-on-the-horizon\/\" target=\"_blank\" rel=\"noreferrer noopener\">baby boomer and millennial homebuyers<\/a>; and the ability of homebuilders with captive mortgage companies to offer <a href=\"https:\/\/www.housingwire.com\/articles\/borrowers-facing-affordability-challenges-opt-for-permanent-rate-buydowns\/\" target=\"_blank\" rel=\"noreferrer noopener\">attractive buydown rates<\/a>.<\/p>\n<p>None of that is permanent, however. Dietz said the favorable demographics existing today, for example, will give way to headwinds in the 2030s as the generations following the baby boomers and millennials are much smaller.&nbsp;<\/p>\n<p>Likewise, industry experts said interest rates will likely come down in the not-to-distant future, and that will eventually restart the existing-home sales engine \u2014 whether that\u2019s next year or in 2025. That, in turn, will likely soften demand for new homes \u2014 or at least make it harder for new-home sales to expand as a percentage of overall sales.<\/p>\n<p>Another important factor propelling new-home construction for both small and large homebuilders that some argue is better insulated from the rate environment, however, is the still-growing <a href=\"https:\/\/www.housingwire.com\/articles\/build-for-rent-housing-is-a-bet-on-the-new-normal\/\" target=\"_blank\" rel=\"noreferrer noopener\">build-for-rent<\/a> (BFR) market.<\/p>\n<p>Heuser of Taylor Morrison, which operates a BFR brand called Yardly, as well as Faron of Shoreham Capital both remain bullish on the future of the BFR market.&nbsp;<\/p>\n<p>Heuser said Yardly currently controls some 7,200 lots across 30 BFR communities, with about half already under development. He described Yardly as an \u201cevolving business,\u201d which was launched three years ago.<\/p>\n<p>One of Shoreham Capital\u2019s business partners, Nick Zoumas, is the founder and president of&nbsp;<strong>JNS Homes<\/strong>, a Florida-based homebuilder. Shoreham, a BFR and traditional multifamily developer, has broken ground on some 600 units \u2014 the bulk of which are single-family BFR homes \u2014 and has some 1,500 additional units in the pipeline.<\/p>\n<p>Heuser said in total there are about 15 million single-family rentals in the country currently, of which only about <a href=\"https:\/\/www.housingwire.com\/articles\/institutional-sfr-market-poised-for-a-rebound\/\" target=\"_blank\" rel=\"noreferrer noopener\">4% are owned by large institutional players<\/a>, such as real estate investment trusts, or REITs. However, BFR production accounts for about 5% of annual new-home production now, \u201cor about 70,000 units a year across the United States,\u201d Heuser added, and its growing.<\/p>\n<p>\u201cIncomes are up 12% since 2020, but home prices are up 24%, and given what&#8217;s happened in mortgage rates, the monthly mortgage is up 74%,\u201d he said. \u201cSo, that just means not everybody can afford a new house, or a house altogether.\u201d<\/p>\n<p>Heuser said the Taylor Morrison\u2019s goal is to eventually sell its BFR communities to investors, adding that \u201cthe nice thing\u201d is you are still generating revenue from the properties prior to such as sale. \u201cYou\u2019re getting rental income, and so you&#8217;ve got some optionality in terms of the exit,\u201d he explained.<\/p>\n<p>Faron of Shoreham Capital said there has been a slowdown in the BFR sector in recent months \u201cbecause it\u2019s harder to get deals done with the changing cost of capital.\u201d Still, he said Shoreham Capital has remained productive, \u201cstill able to get things done because we&#8217;re very focused on location, and we\u2019re in this for the long-term.\u201d&nbsp;<\/p>\n<p>\u201cWhether rates stay high and there\u2019s more demand because of a lack of housing affordability, or rates go down and it makes our [BFR] projects easier to pencil out [because lower rates equal lower development costs], we think it will be a growing segment over the next five to 10 years, regardless,\u201d Faron said. \u201cThere\u2019s more demand [for single-family homes] than supply.<\/p>\n<p>\u201cThat&#8217;s honestly why a lot of institutional investors are continuing to like this segment \u2026 [because it] is agnostic with respect to what\u2019s happening with rates.\u201d<\/p>\n<p><br \/>\n<br \/><a href=\"https:\/\/www.housingwire.com\/articles\/homebuilders-are-at-max-capacity-and-the-housing-shortage-keeps-widening\/\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Aerial drone inspection of Lennar&#8217;s Westview housing development Miami, Florida. Taken by Felix Mizioznikov. Everywhere you look there seems to be bad news for the existing-home market \u2014 interest rates remain north of 7% and the median home price\u00a0nears record levels\u00a0at more than $410,000 as of June. The dynamics creating that dour landscape for perspective [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":4398,"comment_status":"","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[33,1],"tags":[],"_links":{"self":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/posts\/4425"}],"collection":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/comments?post=4425"}],"version-history":[{"count":0,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/posts\/4425\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/media\/4398"}],"wp:attachment":[{"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/media?parent=4425"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/categories?post=4425"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/frankbuysphilly.com\/wp-json\/wp\/v2\/tags?post=4425"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}