Conditions look favorable for home builders in 2017
Wednesday, January 11, 2017
Homeownership remains an elusive dream for many Americans, and probably will remain so at least for the foreseeable future. For others, however, an improving economy and job market are bringing the purchase of a home within reach.
Recent industry studies indicate that a sizable proportion of those prospective buyers prefer new construction. That cadre is coming along at a time when market and other conditions are projected to be more favorable toward builders as the year progresses.
Although sales of new and existing homes rose in October and November, homeownership remains at its lowest level in 20 years. According to a survey conducted in November by the Pew Research Center, 72 percent of current renters say they would like to buy a home some time in the future but at present are unwilling or unable because of financial obstacles, limited availability of affordable and/or desirable properties, or life-stage issues.
The study cites several trends that are making becoming a homeowner more challenging, including more stringent lending standards, rebounding home prices and a decline in financial assets, especially among groups that historically have comprised first-time homebuyers — particularly young adults, blacks and Hispanics.
More than half of the respondents (52 percent) said they could not at present afford the down payment to purchase a home. Analysis conducted by real estate website Trulia finds it is getting harder to buy a starter home due lack of inventory (down 9.1 percent from a year ago) and an increase in the amount of income needed for a home purchase.
Among more affluent prospective buyers, the situation is quite different. Loan approvals are up substantially for those who can qualify, and earnings have been rising faster for them than for middle- and lower-income workers. Moreover, as reported by ATTOM Data Solutions last week, buying a home is now more affordable than renting in two-thirds of the nation's housing markets.
Since millennials now make up half of active homebuyers, rising rents and life-stage events — such a getting married and starting a family — are increasing the incentive to buy rather than rent. These buyers face a different set of challenges, including rising prices in the most desirable neighborhoods, competition from other prospective buyers and a shortage of properties of the type or in the location they prefer.
The latter trend is most likely to benefit home builders in the year ahead. A separate Pew study of home values found that increased market value of their homes has not altered most homeowners' financial outlook. Most do not anticipate selling their home in the near future, but instead are using the additional equity to make improvements or pay off debt.
Demand for new construction is likely to grow. In addition, the Zillow Group's recent report, "Consumer Home Owner Trends 2016," states that younger buyers (50 percent of millennials and 54 percent of Gen Xers) are "considerably more likely to consider newly built property." They also are more likely to earn $75,000 a year or more, and thus can afford new homes.
As other studies have shown, these younger buyers would much rather pay a somewhat higher price for a home that is "move-in ready" and includes the amenities and design they want than purchase a "fixer-upper."
Builders have been challenged in recent years to meet the demand for new construction. They are hopeful, however, that the new pro-business, anti-regulatory Trump administration will help to alleviate some of the problems that have held them back, including project delays and increased costs.
The National Association of Home Builders announced builder confidence was up seven points post-election on its monthly Housing Market Index. Also promising is the overall economic and employment outlook for the coming year, noted NAHB Chief Economist Robert Dietz. However, he cautioned, "At the same time, builders remain sensitive to rising mortgage rates and continue to deal with shortages of lots and labor."
Barring some unforeseen setback, though, market and business conditions should favor home builders in most areas of the country.
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