2015’S New Geography of the Housing Recovery

By almost any standard, 2014 has been a disappointment for home builders. As of October, starts were up only 2 percent compared with 2013; sales volume rose about 7 percent; and home prices ticked up roughly 5 percent, according to Metrostudy.

On the surface, home builders looked like the victims of these trends, but Dave Goldberg, an analyst for UBS in New York, thinks they also played an active role in their own loss of momentum. Aside from some moves like Miami-based Lennar Corp.’s increasing realtor sales commissions and Fort Worth, Texas–based D.R. Horton’s push into the entry-level market, many big builders seemed bent on pushing the line on pricing and location.

“Sales have been disappointing,” Goldberg says. “Builders have chosen to stay in A and B locations. They haven’t expanded their land positions into more peripheral areas. For the most part, the disappointing sales paces have been met with, ‘That’s OK, we’re not going to cut prices.’” Possibly as soon as 2015, Goldberg says he expects things to change. “I believe the volume comes in 2015, 2016, and 2017. I believe it comes from C and D locations.”

Metrostudy chief economist Brad Hunter, who projects a 15 percent increase in starts and sales volume in 2015, already sees builders pushing to farther-out locations. If the market does increase in 2015, high-volume builders are positioned to capture that growth, at least early on. In 2014, it seemed like a public builder bought a smaller operator on monthly basis, if not more often. That trend should continue.

“You will see publics who desperately need land to keep their engines running buying the smaller guys that are going to offer them a whole bunch of lots,” says Doug Yearley, CEO of Horsham, Pa.–based Toll Brothers.

Others agree. “I think big builders are looking for better ways to get positioned within markets or go to markets they have not been in,” says Stephen East, partner and senior managing director of ISI Housing Research in New York. Without access to capital, many smaller builders have decided to exit and sell to competitors who want to move into their markets or pick up a large share. “You see private guys that got through the downturn and they’re monetizing,” East adds. “They wanted to monetize before but haven’t been able to.”

To capture more ground in 2015, smaller builders need to find ways to snare more lots. In Goldberg’s vision of a recovery that extends beyond A and B locations, this happens as the playing field widens for smaller builders.

“If recovery goes to peripheral locations and lending loosens up, I don’t think the big builders’ land positions crowd out the small guys,” he says. “If it stays concentrated, it’s harder for the smaller guys to stick around. The advantage of paying up to corner land in better locations starts to diminish if it becomes more volume oriented and moves into markets with less land constraints.”

Metrostudy’s outlook for 2015—highlights of which are depicted on the following pages—shows the most growth potential in markets where builders are pushing past A and B locations.

Florida markets occupy four of the top 10 slots on this list. The legendary retiree community in central Florida, The Villages, has the highest overall rating—96—meaning that the outlook for demand and overall market conditions are extremely favorable. The massive master planned community is so large and influential that it’s considered its own “market.” The No. 2 market, Orlando-Kissimmee-Sanford, should continue to grow rapidly in 2015 amid improving job markets. Raleigh, N.C., is poised to continue its expansion as builders further broaden their offerings, and Austin, Texas, and Salt Lake City will remain robust. Based on market studies we’ve completed in Denver lately, more communities will open there next year.

The top market as measured by new-home sales is Houston. High oil prices have goosed the local economy for years. The outlook is for another large gain in 2015, despite the recent decline in oil prices. If the oil price decline turns out to be a sustained correction, then the Houston housing market could suffer. Riverside, Calif., also is experiencing a resurgence after some tough years during the downturn, and it will continue to rebound in 2015. Dallas has not slowed down, despite labor shortages, and also will push forward in 2015.

- By Les Shaver. This article was originally published in BUILDER November 2014.