The Future May Still Be Bright

Another year of high risks and higher rewards

By Christine Rombouts

Home builders in Orange County recently had the opportunity to hear predictions from two real estate experts at the annual BIA outlook conference, held in March in Irvine, CA. Ted McKibbin, President of U.S. Land and Housing at Brookfield Properties, and John Burns, CEO of John Burns Real Estate Consulting, provided valuable insights and discussed important industry issues. Builder.Media was a proud sponsor of the well-attended event.

What did these two experts have to say? Plenty and it all bodes well for homebuilders, despite supply chain issues, land and labor shortages and the war in Ukraine. The main reason for the bullish outlook is tighter-than-expected inventory levels, low interest rates and larger buyer pools.

McKibbin indicated that he expects the next 12 months to be “very bullish” for the land and construction business. He discussed several factors that will contribute to robust home sales including: low resale supply, low interest rates, millennials entering the market for the first time, recovery of the job market, increases in FHA limits that will expand the buyer pool, superior quality in design and the digital evolution of the sales and marketing experience.

Burns echoed these statements and said that the homebuilding industry is looking at another year of high risks, but high rewards. He said that much of this boom is being driven by investors because real estate is such an attractive option, especially compared to other investments. 

“We have pivoted into an investor-driven housing boom. Approximately 32% of all sales according to our research is coming from investors. What will investors and consumers do with their cash investments in a low-rate and inflationary world? Buy real estate,” Burns said. “We are in the midst of a housing boom, at least until the next recession, especially since consumers can borrow against the rates of inflation and the economy continues to grow.”

In the long term, rising mortgage rates could slow down the housing market. After all, each uptick in mortgage rates prices out some buyers from the market. But the short-term impact is the opposite: worried that rates will continue to surge, more homebuyers plunge into the market.

“Rates have ticked up, but they’re still lower than the historic norm. So it has increased buyer urgency. It’s the fear of future higher mortgage rates and the fear of future higher prices,” Burns said.

Supply chain issues and material shortages will continue to plague homebuilders, according to Burns. Almost every material used in the construction process is up 10 percent or more. Supply constraints coupled with rising materials prices and shipping costs are forcing a growing number of homebuilders to cope with longer lead times, seek alternative supply sources and increase their prices in an effort to protect profit margins. 

Burns did say that despite these woes, the publicly-traded homebuilders have proven strong. “While all builders struggled mightily with supply chain issues last year, the publicly-traded builders had an awesome financial year. Their balance sheets are the strongest I have ever seen.”

Many markets in the nation have seen tremendous increases in values and Burns says that every market in the country is overpriced. His studies show which homebuilders have pushed their prices per square foot the most in the last year: 1—Phoenix, 2—Seattle, 3—Austin, 4—Nashville and 5—Jacksonville.

McKibbin talked about how the “build for rent” (BFR) is a new booming asset class. He said that public builders are also pursuing single-family rental and build-for-rent despite a hot for-sale market. They are building entire communities for rental operators, selling one-off homes to operators, or building, renting and then selling the homes themselves.

Build-for-rent developers are buying plenty of land and they expect this trend to continue. According to Burns: “Build-for-rent operators are actively buying land across the country, according to our Residential Land Broker Survey. Many of these BFR operators are competing for the same lots both public and private builders are also bidding for, particularly on higher density parcels,” said Burns. “The build-for-rent share of land purchased has grown over the course of the last couple years, as a flood of capital and rising single-family rents drive demand for development sites. Based on the build-for-rent consulting assignments we’ve completed in the last four years, and a surge in long-established apartment developers now subscribing to our research, we are highly confident that supply will increase dramatically.”

Burns also addressed the long-term changes that Covid has created. As Covid restrictions ease and the great resignation continues (and perhaps even accelerates), more companies are opting to allow permanent work from home in order to keep their talented people. As a result, buyers and renters will continue to move to desirable areas where they can get more livable space for their money.

Here are a few other takeaways:

  • Homebuilders will feel the impacts of regional shifts towards the suburbs.
  • Builders will want to offer different lot sizes and floor plans within the same neighborhoods, especially smaller options that are more attainable.
  • Builders will have to overcome the challenges of targeting new buyer profiles that appeal to broader segments. 
  • Smart home vs simple home building is critical to success.
  • Homebuilders will need to address the rising millennial market – and how to meet their needs.

Burns expects the real estate market to remain hot in the foreseeable future, especially because there are far more buyers than supply. He also expects that building material supply bottlenecks are starting to ease. Despite rising interest rates and other challenges, the future looks bright!

Christine Rombouts is a publicist with NewGround PR and Marketing and the former editor of Builder and Developer. She can be reached at crombouts@newgroundco.com.

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