Monday, November 23, 2009

The future of new housing is -- foggy?

It seems that one of the most important lessons that the country’s builders learned from the past downturns was to immediately react when the market turned with generous incentives, price cuts and, over time, a dramatically scaled-down industry with simplified product lines that are now affordable to almost 60% of potential buyers.

As of September 2009, this slash-and-burn strategy has sent new home inventory down to its lowest level in 14 years, which would sell in just 7.5 months. And in spite of brutal competition from the existing home market – in which 30% of sales are for distressed properties – new home prices seem to have stabilized at just under $205,000, although that could be the result of buyers taking advantage of tax credits that were recently extended until April of 2010.

Since the U.S. population and related demand for housing continues to increase no matter the economic climate, when the economy improves and people decide they no longer want to live with roommates or their parents, it is clear that a dormant industry will be revived, as we’ll need 1.3 million housing units each year just to keep up.

What’s not so clear is how fast this rebound will occur and, more importantly, how future new home communities will be shaped, marketed and sold.

Over the past 30+ years, most of the new homebuilding activity was to follow the demands and tastes of the 78-million-strong Baby Boomer generation, from starter homes and move-up housing to vacation homes, retirement communities and even condominiums in urban locations.

But according to a series of presentations at the ULI Fall Conference & Urban Expo last month in San Francisco, demographic changes in the U.S. will force many builders and developers to change how they build for a population that is getting increasingly grayer (older) and browner (more diversified).

In addition, the 70-million-strong Generation Y, having largely grown up in quiet suburbs requiring cars to run simple errands, have morphed into a gadget-obsessed cohort whose penchant for urban-oriented, walkable communities and cynicism for traditional marketing techniques will require an entirely new skill set from an industry that has long relied on precedent in the hopes that each new rebound will be much like the last.

Maybe not this time.

For one thing, according to Reach Advisors, overly rosy demographic projections of the past were used to justify multiple years of over-supply for empty-nester projects in urban areas (especially high-rise condos), vacation homes and traditional retirement communities at a time when many Baby Boomers prefer to age in place.

Moreover, even if they want to trade down to a smaller home in an active adult community, today’s over-55 homeowners are sitting on a huge supply of large homes in suburban areas against a backdrop of potential buyers that’s not just smaller, but less interested in this type of car-centric community. When many Gen-X buyers do trade up, they’re placing an economic priority on community characteristics (such as a mix of uses and population and access to transit options) rather than a large home with a premium lot.

But it’s really the Generation Y cohort – with three times the population of Generation X -- that will foster in the biggest changes to the building industry as these ‘echo boomers’ began to enter the workforce, create their own households and bring their own, separate demands to builders of homes and apartments.

For one thing, the gender gap that existed just a generation ago – in which men earned more college degrees and more money for the same job – has almost completed a polar shift, giving many women control of the household finances and home-buying decisions.

In addition, accompanying more education for Gen-Y households has been a delay in marriage and having children, thus changing both the timing and type of demand for housing needs. Most importantly, however, with today’s Gen Y woman being more fiscally conservative than her male counterpart, builders will have to change how they merchandise and model their product to appeal to this new reality.

Fortunately, there’s another reality that will allow the industry to adapt to these echo boomers: this shift will not be seen in weeks or months, but years and even decades.

Sunday, November 22, 2009

Orange County Update & Forecast

According to the latest data from Hanley Wood (and included in my presentation at the BIS '09 "Town Square", which you can find here), new home sales in Orange County in Sep. 2009 were the same as in 2008, which could mean that we've hit bottom in new home sales for this area. Still, YTD sales are down by 23% to 1,242 units.

Absorption, although averaging a still-anemic 1.42 sales per month, are up by 37% over Sep. of 2008, and YTD they're running at 1.63 per project. Can rates remain in the low double digits, and median prices are starting to rebound, hitting $584,000 for September and $521,000 for 2009 YTD. Value ratios, however, continue to fall, declining by 6.5% to $276 per square foot.

At current sales rates, the total number of units in current and future phases would take nearly 3 years to sell, although this total is down by 20% from the same time of 2008. The bigger story, however, is for standing inventory, which although rising by 9% to 156 units, would take just 1.44 months to sell. See below for a summary table of stats for Orange County:

Category

9/09

% YOY

2009 YTD

% YOY

Net Sales

108

0%

1,242

-23.4%

Absorption

1.42

36.8%

1.63

1.2%

Can. Rate

11.5%

D-18.2%

12.5%

D-13.7%

Median Price

$584k

23.5%

$521k

4.2%

SFD Price

$783k

-10.7%

$808k

-9.1%

Median $/SF

$276

-6.5%

$285

-4.7%

SFD $/SF

$267

-10.7%

$280

-7.8%

Inventory

3,563

-20.5%

-

-

Months Inv.

32.99

D-41.5

-

-

Standing Inv.

156

9.1%

-

-

Months SI

1.44

U-1.32

-

-





Looking ahead to 2010, population growth should come in at 0.9%, with the unemployment rate continued to rise to nearly 10% as employers continue to shed jobs. Still, the decline in non-farm employment of 2% will be less than half of what it's expected to total in 2009, or -4.8%.

Housing permits countywide should come in at just under 1,300 units in 2009, rising to 1,375 in 2010. New home sales are estimate to total 1,543 for 2009, with a median single-family home price of $715,000. These forecasts are summarized in the table below:

Category

2009

2010

Population

1.0%

0.9%

Non-Farm Employment

1,413m

1,384m

Annual Change NFE

-4.8%

-2.0%

Unemployment Rate

8.8%

9.7%

Personal Income

-3.5%

-0.1%

Housing Permits

1,295

1,375

Non-Res. Permits

$867m

$830m

Ann. New Home Sales

1,543

-

New SF Home Price

$715k

-

L.A./Ventura Update & Forecast

According to the latest data from Hanley Wood (and included in my presentation at the BIS '09 "Town Square", which you can find here), new home sales in the L.A/Ventura region are definitely seeming to stabilize, rising by 1.3% between Jan-Sep 2008 and the same period of 2009. For September alone, net sales rose by nearly 19% over the same time of 2008, although that bump could also be due to buyers trying to nab tax credits they thought were expiring at the end of November.

Buyers today are also more serious, as evidenced by the sharp drop in cancellation rates to the low double digits versus 26% in Sep. of 2008 and just 9% for the first 9 months of 2009.

Overall new home prices continue to drop, with a median of $421,000 in Sep. 2009, or $332 per square foot. For single-family homes alone, however, prices actually rose by 15% to $614,000 during Sept. 2009, although YTD they're still down by nearly 11% to the low $400,000s.

Although total new home inventory -- those units currently available for sale as well as those planned in future phases -- would still take 3 years to absorb at current sales rates, completed inventory, although rising by 18% over the past year, stands at just 6.51 months, which is very close to market equilibrium.

For more information on current conditions for other counties of Southern California, click here for the entire presentation. A summary table is included below:

Category

9/09

% YOY

2009 YTD

% YOY

Net Sales

282

18.5%

3,362

1.3%

Absorption

1.44

46.3%

1.77

22.4%

Can. Rate

11.3%

D-26.1%

9.0%

D-20.9%

Median Price

$421k

-6.8%

$420k

-10.7%

SFD Price

$614k

14.9%

$423k

-10.7%

Median $/SF

$332

22.8%

$320

11.9%

SFD $/SF

$234

12.2%

$178

-12.4%

Inventory

10,212

-20%

-

-

Months Inv.

36.21

D-53.60

-

-

Standing Inv.

1,836

17.8%

-

-

Months SI

6.51

D-6.55

-

-


Looking ahead to 2010 and according to the LAEDC, although population in L.A. County will continue to increase given its enormous base, the employment picture is a bit different. During 2009 the county will lose 4.1% of its non-farm jobs base, and although the pain will continue in 2010, it will be half as bad, or 2.0%. This, of course, will continue to be a drag on housing demand until at least 2012 as the unemployment rate rises to approach 13% in 2010.

Inflation, which is now under control due to temporary deflationary influences in the marketplace, will re-emerge to 1.6% in 2010 but certainly be kept under control by stagnant demand for all but the necessities of life.

Housing permits are estimated to total 6,465 units in 2009 and rise slightly to 6,855 in 2010, but the commercial sector will be under great pressure, with non-residential permits falling below $2.4 billion.

According to projections I just completed for Hanley Wood's latest LA/Ventura Market Monitor, annual new home sales will total 4,000 units in 2009 and rise by about 15% in 2010 to 4,500 homes. Prices, which seem to have bottomed out this year, will end at $420,000 and rise by 5% next year to $440,000. See table below for summaries on these forecasts, and for the complete presentation, click here.

Category

2009

2010

Population

0.8%

0.7%

Non-Farm Employment

3,902m

3,823m

Annual Change NFE

-4.1%

-2.0%

Unemployment Rate

11.7%

12.8%

Personal Income

-1.6%

1.0%

CPI Change

-0.7%

1.6%

Housing Permits

6,465

6,855

Non-Res. Permits

$2,470m

$2,370m

Ann. New Home Sales

4,000

4,600

New SF Home Price

$420k

$440k

Friday, November 20, 2009

November column for "Builder & Developer" magazine now online

My column for the November issue of Builder & Developer magazine -- celebrating the 20th anniversary of the title -- is now online. In this issue, I wanted to explore how the future of how we use cars will impact new developments of all types. An excerpt:

Ask any architect of a high-density development what the biggest challenge is to make the overall design work, and he (or she) will probably answer “parking.” Whether we’re talking about condominiums, apartments or a project which mixes residential with retail and office uses, poorly designed parking can doom an entire project.

What’s more, given the rise of transit-oriented developments in other infill projects in multiple cities throughout the U.S., introducing new ways to address the parking conundrum is becoming one of the most important issues in the Green building movement...
Fortunately, there are three major trends that will vastly improve not only how developers address parking, but can also increase building densities – and therefore potential revenues...

There are also a number of other columns for this special issue of the magazine, discussing a variety of green issues as well as looking back on the last 20 years. For a table of contents on these articles, click here.

Design-Plan-Build Presentation now online

Along with KTGY's Damian Taitano and Simmetec USA's Bill Larson, the "Design-Plan-Build" session at the BIS '09 show in Long Beach went very well. If you missed it, you can still find a copy of my presentation on current trends -- along with best-selling projects in various counties of Southern California -- here.

Commercial REOs and CRE 2010 forecast

We had a great turn-out this morning for the BIS '09 session on Residential, Commercial and REO Forecasts. But fear not -- if you missed my presentation on what lies ahead for national commercial markets, you can still find it here.

Southern California housing update & economic forecast

If you missed my presentation for the Town Square at the 2009 Building Industry Show in Long Beach, you can find it here.

Friday, November 6, 2009

The mantra at ULI this week: prepare for major change

I'll blog about this in more detail next week, but the major trend at this year's ULI Fall Meeting & Urban Expo is about preparing for change. We're not talking about minor changes in terms of architecture or product mix -- we're talking about significant changes due to demographic shifts in the U.S. population between now and 2050. Besides getting older, the U.S. will also get browner, as the birth rates for the Caucasian population is not high enough to replace itself.

There have been some very interesting sessions this week, into which I hope to delve into more closely next week.