Builders will focus on smaller projects, hedge their bets in a housing sector marked by a disciplined pace of growth
By Steve Magee
As 2016 nears its end and we begin a new year, all signs point to a continued housing recovery, albeit at a pace similar to what we have seen over the past several months. Fundamentals are expected to remain strong, notwithstanding any unpredictable, large scale events that might seriously impact the housing arena. Here are some of the trends we will likely see in the homebuilding sector as we move into 2017.
2017 Housing Starts on Track with 2016
With growth in the building arena still occurring at a decent pace, it is likely that the number of housing starts next year will mirror what we experienced this year. Home prices still remain about $50,000 below pre-recession highs. Employment appears to be growing across the country, yet income growth isn’t keeping pace. The homebuilding industry shows some strength, but also some weakness, mirroring the economic factors that drive demand.
Expect More of Today’s Renters to Buy Next Year
The rental marketplace has experienced exponential growth over the past few years, with a variety of factors at play. The recession not only halted, but retracted, expansion in the for-sale housing marketplace, while employment plummeted and the country experienced some of the worst economic conditions since the Great Depression. With new home financing inaccessible to many, along with a number of consumers priced outside the for-sale arena, demand for rentals surged during the economic breakdown. Yet even with our current recovery already years in the making, and employment now at healthy levels, the lack of income growth has kept many from buying. Thus, demand for apartments has continued to climb extensively, but not without consequence. Rental rates are now at an all-time high and the scale is beginning to tip. It is starting to make more sense for many of today’s renters to purchase homes. We will likely see some of these renters become buyers in 2017 and in the years following.
Builders to Focus on Smaller Positions
Many of the country’s reputable builders are making a move towards smaller land and lot positions. Recognizing the confluence of many of the economic indicators mentioned here, some strong and some soft, the move of builders towards smaller holdings is notable in that it allows builders to be strategically positioned in terms of both lot supply and housing inventory. Smaller positions and shorter lifespan engagements provide builders with more flexibility and reduced risk of getting caught midstream in a bubble or down cycle.
Developers, Builders Still Trying to Figure Out How to Deliver Housing to Millennials
As the largest generation since the Boomers, and one now seemingly ripe for first-time home purchases, Millennials are a key focus for developers and builders. However, building leaders are still trying to figure out how many Millennials will enter the for-sale market and at what point in time. Issues of concern are the number of Millennials still renting, the determination of what this demographic finds most important in a home, and challenges with building entry-level homes at affordable price points to serve this younger generation. These challenges are still being explored, creating a lively debate showcasing varied opinions within the industry.
One solution we may see more of is the development of homes of reduced square footage as well as the increased delivery of smaller “jewelry box communities” featuring a reduced number of home sites. With larger master-planned communities being pressured by land constraints and complex approval processes, these smaller communities are likely to become more commonplace as they are easier to build. In terms of amenities, younger Millennials want their homes to include “smart” tech-ready features, energy efficient fixtures and appliances, and an urban feel with nearby shops, schools, entertainment, and outdoor areas all accessible to walk to and explore.
Our Overall Forecast: Mostly Mild with Some Sunshine
Overall, builders and developers should remain optimistic about what’s to come in 2017. According to the NAHB’s Housing Index, 63 percent of builders feel confident going into the next two years. With more than 600,000 homes expected to sell in 2016, these numbers should stay the same, or run slightly higher, in 2017. Job growth is expected to continue at a fair pace, and mortgage rates should remain relatively low. We will most likely see a leaning towards smaller and smarter affordable housing with the intent to lure the many first-time homebuyers and Millennials expected to enter the for-sale market as rental rates soar.
Steve Magee is Executive Vice President of Land for iStar, a developer of large-scale master-planned communities designed to meet the needs of today’s diverse set of homebuyers. He may be reached at SMagee@iStar.com.