A new home development in California. Photographer: Jonathan Alcorn/Bloomberg
Bloomberg
Home builders are feeling much happier just in the last couple of weeks. Following a decline in sales of 50% to 60% (80% in some cases), many homebuilders are seeing a significant pickup in sales paces. Our research at RCLCO shows that between the first half of April and the first half of May, many master-planned communities (“MPCs”) are seeing a rebound in sales paces of 30% to 40% with some up as much as 80% from the bottom.
Centralized sales and marketing, and community-wide engagement with prospects and residents seems to help. New-home neighborhoods that are part of a larger MPC have been reporting better business results than stand-alone builder subdivisions.
Not all communities are seeing the upswing, and there certainly could be another dip before the crisis is over, but builders and community developers are doggedly updating their strategies to hopefully realize a strong recovery in the next year or two. “Cautiously optimistic” is a term we are frequently hearing from builders these days.
What’s behind the sudden upturn? Unlike in the 2006-2009 downturn, which was driven by an overbuilt housing market, we went into the current recession with a shortage of new homes. New home construction was running 25% below demand prior to this crisis, which means that there is little if any danger of creating an excess housing supply or sharply declining new home prices this time around.
Land Developers Emphasize Healthy And Engaged Communities
Developers of master-planned communities have managed to support the sales paces of their participating builders by engaging residents, through activities including online classes, online storytime for kids, virtual drink and recipe swaps, front porch photography, front porch time, “teddy bear hunting” in windows of the homes, coordination of food delivery at community centers, and the like. Master-planned communities are able to produce centralized online-focused marketing, online-focused customer engagement, as well as online-focused resident interaction.
In past recessions and economic uncertainty, we have observed a “flight to quality” that has benefited MPCs, with consumers investing in communities that have proven to hold their value over their subdivision counterparts. In the current downturn, which includes not only economic uncertainty but also health insecurity, there could similarly be a “flight to safety” trend on top of the expected “flight to quality” behavior recorded in past downturns that could provide additional demand drivers for MPCs and the suburbs in general.
Although the number of “virtual buyers,” i.e. buyers purchasing a home sight unseen, is still small, it has increased substantially, with realtors and community sales agents utilizing virtual home tours as well as drone videos of community amenities and features to facilitate sales. Online traffic is up across the board, with some communities citing +/- 1000% increases in web traffic since the pandemic began. Foot traffic is still substantially down, although it is beginning to return in some areas as stay at home orders loosen. Physical traffic in the last two weeks of April was up about 15% to 20% over the first two weeks. In the meantime, those MPCs with more advanced tech features (virtual tours, community apps, etc.) to facilitate home sales are having the most success. Much of the “sight unseen” virtual purchases are from households located in hard-hit areas like New York that are moving to less dense and more affordable places like Florida and South Carolina, which were “locked down” until recently, but have seen far fewer Covid-19 cases.
Builders Are Holding The Course
Builder inventories were low going into this slowdown, which means builders are not being forced to slash prices. Economists at Zillow, Fannie Mae, Moody’s and others have been forecasting declines in home prices (modest ones) for 2020, but our surveys of new home communities reveal very little in the way of price reductions so far. That said, builders are getting more creative with incentives, offering discounted pricing on speculative homes to minimize inventory overhang by mid-summer and improve their balance sheets. Builder incentives, which were very small to begin with, have increased by about 50%, with some builders packaging ‘homesites of the week’ with additional discounts.
So far, none of the surveyed MPCs report builders backing out of land contracts, though some have asked to push lot takedowns to later in the year. This reflects positively on the sustained level of confidence in the long-term outlook for home demand as well as home prices. Discussions with our builder clients reveal some silver linings:
► The current situation could shift consumer preferences toward larger homes; being stuck inside may influence buyers to seek larger homes with more space.
► Communities in Florida and the Carolinas that get significant sales from New York and other areas in the northeast can anticipate an increase in sales from buyers motivated to get out of the higher-density areas.
Some builders and investors also see economic downturns as prime opportunities to purchase land. Some companies buy land that is in the path of growth and sell parcels to builders as they need them. One of the larger entities in this business in Florida is BTI Partners, based in Fort Lauderdale, which owns 1,400 acres in Central Florida that it is preparing to sell to builders for future subdivisions. Alongside a small number of traditional developers, they allow homebuilding companies to follow a land-light strategy and thereby to conserve cash. BTI has said that they are currently looking at additional sites around Florida that they consider good targets for acquisition.
Interviewed MPC developers told us in our most recent survey (end of April/beginning of May) that they believe homebuyer consumer confidence by late April was much more optimistic, despite national consumer confidence surveys from the Conference Board suggesting overall consumer confidence had declined. At least among the top-selling master planned communities, many consumers were reportedly tired of deferring the home-buying decision, and by mid-April, motivated buyers were getting restless and were ready to act. Across surveyed communities, the most significant increase in buying activity is found among move-up buyers and first-time buyers (those with good credit), although there are some communities reporting that these segments of demand are still soft. Some communities in the Southeast targeting retirees from the northeastern U.S. reported solid sales paces, while active adult communities in other areas were lagging.
Some developers attribute demand from move-up buyers to the quarantine, which pushed buyers off the fence in their desire for additional space. They are bracing themselves for the possibility that the late-April-early-May surge could simply be pent-up demand from buyers that were sidelined mid-March to early April rather than a broader trend related to the pandemic. We need to continue to monitor sales before we conclude this recent uptick is sustainable.
Housing Will Be An Engine Of Growth For The Economy
Housing drove the economy into the ditch back in 2006. In this recession, housing is holding up relatively well, considering the incredible job losses. And, fairly soon, housing will be one of the main sectors that will lead the economy back to recovery.
There are differences among these communities in terms of the types of buyers who are driving the bus. The housing market was hurt worst at the extreme ends of the barbell: entry level and luxury. In general, we are now observing that the entry level, though severely challenged by low levels of mortgage availability and high unemployment rates, has been ticking upward in recent weeks. The luxury segment is mixed, with scattered reports of improvement, but a lot of flatline reports as well (consistent with the fact that a lot of this is discretionary buying). The active adult story is also mixed, but generally showing early signs of recovery. The recovery of stocks, and therefore paper wealth and retirees’ 401-Ks, has helped, although it is not a sure bet that the recent upturn in the stock market will continue on its current trajectory.
It is becoming apparent that there are solid opportunities in the housing sector, and money is now lining up to step in where land purchases may be falling out. The best opportunities for strong risk-adjusted return are in geographic areas that have a lot of current distress but solid long-term fundamentals. A tourist/second-home/retiree market like South Florida, for example, is suffering from massive economic disruption, but has solid prospects in the future based upon the age wave that will fuel active-adult demand, low taxes, decent affordability ratios, and shortages of land that will support prices and limit competition.
Keep your eye on the less-densely populated submarkets going forward. It could well be that this health crisis will pave the way for more e-commuters and therefore more remote housing communities. Many white-collar workers and their employers have just learned that working from home can be an effective alternative, and if more people start working from home, then being close to a major urban center may be less important in the future. This could create more development opportunities farther from the urbanized areas. A poll conducted by Harris Poll for Zillow revealed that 75% of Americans working from home due to the outbreak would prefer to continue working from home at least half the time once the crisis is over, and 2/3 of them would be at least “somewhat likely” to consider moving if they had the ability to work from home. (The poll was conducted May 4-6, 2020 among 2,065 U.S. adults aged 18 and older).
How the recent surge in sales, combined with longer-term behavior shifts, play out longer term are still difficult to say, but our best estimates today are that new single-family sales fall by about 40% in the second quarter, will improve over the summer and fall, and will gradually recover back to the early 2020 pace over the course of 2021. That said, there are key variables to watch, including the extent of extensions of foreclosure moratoria, mortgage forbearance, and enhanced unemployment benefits, which, if handled sloppily, could have negative impacts on the housing sector.
The author thanks Gregg Logan for his valuable contributions to this article and the research underlying it.