While affordability concerns have resulted in deceleration in some areas, opportunities still abound for homebuilders willing to adapt.
By ALI WOLF
There has been a lot said about a slowdown in the housing market recently. The sensationalized headlines forget to mention where we are coming from; in June and July, new home sales are up eight percent year-over-year. When you hear about slower sales volume, it is important to remember that slowing is not the same as slow. I sifted through the data and highlighted differences below.
Year-to-date new home contract statistics through June showed that 53 of the 100 markets tracked in Zonda saw activity that was either the same or higher than last year. Affordability appears to be the biggest driver of the deceleration:
- Among the least affordable housing markets in the country, Los Angeles, Seattle, New York, Miami, and Sacramento had fewer new home contracts year-to-date. Of these markets, 70 percent have less than five percent of the active projects below $300,000, while 40 percent have zero projects under that threshold.
- Looking at the actively selling new homes in the Los Angeles/Orange County metro, communities priced under $850,000 sold an average of 3.4 homes per month over the past three months. Of the new home supply, 48 percent of the communities are priced above $850,000 with an average sales rate of 2.2 homes per month.
- Sacramento is still an affordable alternative to the Bay Area, but with the average detached home list price at roughly $500,000, there are signs of buyer fatigue.
Markets still accelerating:
- Of the relatively expensive markets, San Diego, Las Vegas, San Francisco, and San Jose saw year-to- date contracts higher than last year. San Jose and San Diego had more active projects in June 2018 compared to June 2017, up eight percent and 17 percent. In Northern California, the median household income may underplay the actual earnings, since some buyers have stock options and other monetary benefits not included in their base salary.
- Tampa, Orlando, and Houston have between 50 percent and 60 percent of all the active projects below $300,000. These markets saw an uptick in contract activity over last year.
Where do we go from here?
Cost challenges (land, labor, tariffs, mortgage rates, etc.) will be increasingly difficult to mitigate. Here are approaches to consider:
- Be strategic. There has not been an overnight change in demand, but as prices rise and incomes are stretched, buyers are becoming increasingly picky. This will force the industry to focus more on community and product strategy.
- Play up your strengths. The resale market is a great entry point for cost-constrained buyers, but offers a less desirable product. The new home market needs to play up desirable floor plans, cost savings from energy efficiency, and the ability to customize.
- Reconsider price appreciation expectations. The latest data from Zillow showed 14 percent of all listings in June dropped prices. These cuts were concentrated in high-cost markets for the highest price points. As headlines address a slowing in prices, remember that the Case-Shiller Home Price Index has posted 73 straight months of year-over-year gains. Sellers may need to get realistic with their pricing if homes aren’t selling as quickly as they’d like.
- Keep in mind that the next recession will be different than the last. The Meyers Research team has done extensive research on the recessions over the past 50 years. The restrictions put in place during the Great Recession have kept consumer and mortgage fundamentals in good health. While risks are undoubtedly higher than 12 months ago, when a recession hits, it will be different from the last one.
There are challenges, and the “build it and they will come” strategy will not be as easy as it has been in the past. Our industry will need to adapt to the affordability challenges and changing consumer preferences, but opportunities still exist.
Ali Wolf is the Director of Economic Research at Meyers Research. She may be reached at firstname.lastname@example.org