46 million people moved during the pandemic, creating both challenges and opportunities for builders
By Patrick Duffy
In the 12 months ending in February 2022, nearly one out of seven Americans moved to a different zip code — often to another state — putting incredible pressure on the nation’s housing market to meet demand. This striking number comes from an analysis of Equifax consumer credit reports by Moody’s Analytics, which concludes that 46 million of us moved as the historical links between geography and the workplace were sliced due to the rise of work-from-home arrangements and other factors.
In many cases, those moving were attracted to those states offering more affordable housing, better weather, less traffic and lower taxes such as Texas, Florida and North Carolina. But because the housing market can only add so much new supply in a given time period, these swarms of new households bid up the prices for not just homes for sale and rent, but also the costs of land, labor and materials for each new housing unit.
For two years or so, lower mortgage rates helped to remove the sting of higher home prices, and also allowed many new homeowners to swap high-density apartments for single-family homes away from major cities. It wasn’t too long ago, in the first quarter of 2020, when the NAHB/Wells Fargo Home Opportunity Index (HOU) stood at 66.0, meaning that a family earning the median income in an area could afford two-thirds of the homes sold. Fast-forward two years later, and that index, although better than the previous quarter, stood at 56.9, which was about what it was in early 2018.
This rapid change is certainly not news to home builders, whose confidence levels on the NAHB Housing Market Index descended from 67 in June to 55 in July, which was not just a two-year low but also the second-sharpest monthly drop in the history of the index. The sub-index for buyer traffic fell from 48 to 37, the lowest since May of 2020.
If you ask builders today what’s happening in their markets, responses vary from slower but manageable traffic and sales activity to notable price cuts to get rid of standing inventory as soon as possible. For the larger public builders, given the sharp jump in their pre-tax profit margins in early 2022 and healthier balance sheets, not only will they be able to better manage the fall-out, but may also start opportunistically shopping around for some interesting acquisitions. Not surprisingly, builders have further cut back on housing starts, which were down 6.3 percent in June year-on-year for all new homes and 8.1 percent for single-family homes.
However, there is a growing trend in the building industry which may help builders navigate a downturn in homes for sale much better than they were able to do in the aftermath of The Great Recession: new single-family homes classified as build-for-rent, or BFR. Not only do these communities allow builders to continue meeting the demand for households migrating from the coasts, but keep their operations humming as they partner with BFR experts, launch their own BFR divisions or sell the entire community at once to institutional investors. Some recent estimates put the share of new land acquisitions for proposed BFR communities as high as 10 percent of the total market.
Although most of these build-to-rent communities attempt to emulate for-sale single-family neighborhoods, some construct the same square footages found in traditional multifamily units (such as one or two bedrooms) but build out instead of up in what are dubbed “horizontal apartments.” These are most common in areas with relatively lower land values and room to grow, which according to RentCafe include Phoenix, Columbus (Ohio), Dallas, Houston, California’s Inland Empire and Las Vegas.
However, no matter whether new housing is for sale or for rent, even with higher interest rates there remains a substantial backlog of units to meet pent-up demand. According to UpForGrowth, this backlog of needed housing more than doubled from 2012 to 2019 to 3.79 million units. Also, between 2012 and 2019, the number of metro areas experiencing underproduction of homes rose from 100 to 169. For those builders who are able to pivot based on location, product type and type of tenancy, there is no question that the theoretical demand side of the equation remains robust.