What we can learn from the resilient Southeast housing market
Following previous recessions, housing could always be counted on to lead the nation’s economy back to prosperity. That didn’t happen in the housing recovery following the Great Recession.
New residential construction has continued to advance year after year. But the pace has been slower than usual. And several years into the recovery, annual production remains below where many industry analysts would like to see it to meet the needs of the nation’s growing population.
To gain the home-builder perspective on the industry’s relatively lackluster performance, Fannie Mae Chief Economist Doug Duncan invited Charles Schetter, CEO of Atlanta-based Smith Douglas Homes, to address Fannie Mae employees at the company’s headquarters in Washington, DC.
“In the forecasting space, one of the things we’ve found challenging is why the supply-response function has not seemed to operate normally post-crisis,” Duncan says. “I thought he might be a good person to address that.”
Schetter notes that the inventory of homes for sale has been low in the Atlanta market, as it has been in many parts of the country.
At the time of his presentation in December, the metropolitan area’s resale market had dwindled to a 3.3-month supply. That’s about half of what it ought to be to keep the market in equilibrium. And judging from his own experience in the housing industry, he has a pretty good idea of some of the things that have been holding builders back.
“Housing is a great driver for the economy and it hasn’t been showing up,” he says. “Because of the depth and severity of the downturn, our trade partners – basically local small businesses like Joe Plumbing and Bob’s Electrical – got decimated. Those that have survived are now very cautious. Many of them are older and don’t want to put themselves at risk as we move through this cycle. They are careful about adding new capacity.”
Barriers to Growth
Schetter says he has seen estimates that, as a result, the trade base is currently only half or two-thirds of what the industry needs to support true underlying housing demand.
“This has kept us from overbuilding, but we’re just not putting the punch into the market,” he says.
He has similar things to say about the availability of affordable land and credit. Both are crucial for builders. Regulatory repercussions of the downturn have been hard on small builders seeking bank financing. If they don’t have at least $20 million in revenue, he says, lenders don’t want to bother with them. Their only recourse then is seeking support from family and small investors.
And local building fees have grown into a perennial problem. “Every time you add $1,000 in fees, then you are having an impact on the elasticity of the price-conscious buyer.” He cites California as an example, where the land entitlement process can drag on for seven years.
Building in the Southeast
Schetter observes that building in the Southeast region affords some advantages over other, higher-priced parts of the country.
“The markets in the 10-state Southeast region are more like each other than different,” says Schetter. “It’s a very cohesive market.”
But even in the Southeast – where researcher John Burns expects 1.5 to four times faster growth than in other regions – the markets are competitive and builders need to keep an eye on overhead. Smith Douglas keeps construction on a tight schedule and aims at coming in with a price that’s 10 percent under the competition. It also presells 80 percent of the homes it builds. That helps reduce the costs of carrying unsold inventory.
Considering Younger and Older Buyers
Schetter also carefully watches the unfolding demographics of the housing market. His customers today have average household incomes of about $60,000. First-time buyers account for 60 percent of sales. Homes are selling for an average $100 per-square-foot. They average 2,200 square feet in size.
“Growing families are a mainstay of the business,” he says. “Only 15 percent of buyers are empty nesters and retirees.”
But Schetter notes that the share of older buyers will grow as more Baby Boomers retire. A new study from Harvard University’s Joint Center for Housing Studies confirms that view. Over the next 20 years, the Joint Center expects the population aged 65 and over to grow from 48 million to 79 million. They will account for 20 percent of the U.S. population. And by 2035, adults who are 65 and older will head one out of every three American households.
For home builders, this means preparing to increase the accessibility of their homes for those with minor disabilities related to aging.
Among the most common “universal design” elements to meet this growing demand are zero-step entrances into the home, single-floor living, wide halls and doorways that can accommodate wheelchairs, reachable electrical controls, and lever-style handles on faucets and doors. Builders still have a ways to go. According to the Joint Center report, “only 1 percent of the current housing stock offers all five of these features.”
Schetter plans to stay ahead of this curve too, building more homes with accommodations for elderly and disabled residents.
The lesson he’d pass along to his peers? Know your market and know your customer and build accordingly.