Advanced technology and the entrance of millennial buyers into the market are fueling market growth
By RICK BECHTEL
It is still a good time to build homes. Residential builders surveying the construction landscape predict more business over the coming two years, grounding their optimism in expectations of steady interest rates and sustained demand. Despite signs that the cycles for residential real estate and interest rates are in their late stages, industry execs believe that in the near-term, conditions will remain favorable for homebuilding and construction lending.
In April, construction and building professionals offered their outlook for the industry in a TD Bank survey conducted at the Atlantic Builders Convention, in Atlantic City, N.J. Two-thirds of respondents (67 percent) say they expect construction volume to increase in the next two years, down slightly from 76 percent who said the same last year.
Alongside this confidence, builders say the potential for rising interest rates stands as the greatest threat to business in the coming year. They also regard the growth of smart technology and artificial intelligence in home construction as the biggest industry trend They also identify starter homes for millennial buyers as comprising most of their business.
What is keeping builders up at night? Interest rates
Even though interest rates have remained static thus far in 2019, they still loom at the top-of-mind for construction execs. More than a quarter of attendees (28 percent) ranked interest rates as the highest risk to business in the coming year—above all categories, including a labor shortage, falling demand, inflation, and impact from tariffs.
The industry has one eye trained on rates because builders know that even a relatively small move can have an outsized impact on volume, affordability, and buyers’ intentions. While consumer confidence reflects still- strong economic and employment numbers, fallout from the stock market swoon over the final three months of 2018 showed that a prevailing calm can shift rapidly to anxiety for lenders, builders, and homebuyers.
Still, the low-rate environment persists, and the Federal Reserve has signaled that it does not plan to raise interest rates this year. In this setting, some buyers may want look beyond a typical construction ARM to programs that let them lock in their interest rate at the start of the construction with a 30-year fixed-rate mortgage. Prospective buyers should speak with a mortgage loan officer to determine which option may be the best fit for them.
Of Low Inventory and High Tech
Builders are also faring well in the current low-inventory environment. In March, just 3.9 months of inventory sat on the market, according to data from the National Association of Realtors. In general, six months of unsold inventory signals a balanced market; low inventory pushes up prices.
Of those polled in the survey, 45 percent say that business has grown in the low-inventory environment, compared to the 16 percent who say it has declined, which was similar to last year.
As new homes are built, more buyers expect them to come outfitted with the latest technology. They increasingly demand the kind of smart technology that can unlock doors, flip on lights, turn up the heat, and switch off appliances remotely, shifting elements such as NEST thermostats and Cat-6 cable wiring from fancy extra features to basic necessities.
Construction execs voted smart tech (at 29 percent) as the homebuilding trend positioned for the most growth in 2019. This evolution has pushed builders who may have been vaguely aware of home tech to now be fully on board with it, regularly installing these products in homes and helping buyers to understand their various capabilities and benefits.
This trend extends to the mortgage application process. Lenders are introducing technology designed to automate, accelerate, and simplify the steps required to qualify and secure a home loan.
Demand From Millennials Drives Business
Builders say that constructing starter homes for Millennial buyers has become the largest segment of their business. Given the enormous generation’s buying practices, this group’s influence and purchasing volume should only grow.
Millennials have only begun to wade into homebuying waters, as many enjoy renting. Multifamily builders have successfully addressed the pain points of renting for those who are time- stressed, want to live in city centers, and change jobs frequently.
Still, builders and lenders expect many millennials to pursue buying a single-family home as they age into the next stage of life and begin to put down roots.
Many construction execs acknowledge how market conditions for building homes are nearing the cycle’s end, but nevertheless feel confident that business should remain strong, bolstered by prospective buyers’ response to positive signals from the economy and job market.
No doubt, builders and lenders alike will continue to monitor the market cycle as both pursue innovative approaches to their businesses.
Rick Bechtel is the Head of US Residential Lending at TD Bank. He is based in Mt. Laurel, NJ.