New-Home Construction Turnaround Expected

December 31, 2014

The new-home market has been sluggish overall in 2014, and some analysts are blaming it on builders who haven't courted buyers outside of their typical markets.

Dave Goldberg, an analyst for UBS in New York, points to some exceptions: Lennar Corp. has increased real estate agent sales commissions, and D.R. Horton is making a push into the entry-level market.

But overall, "sales have been disappointing," Goldberg told Builder Online. "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 pace has been met with, 'That's OK, we're not going to cut prices.'"

Goldberg is optimistic that a turnaround will occur within the next three years, and most of the growth likely will be driven from farther-out "C" and "D" locations.

"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.

Does that mean smaller builders will get crowded out as the bigger competitors move into their markets?

"If the recovery goes to peripheral locations and lending loosens up, I don't think the big builders' land positions crowd out the small guys," Goldberg told Builder Online. "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."

While markets such as Houston, Dallas, and Atlanta remain strong hot beds for new-home construction, Metrostudy's outlook for 2015 also shows new-home growth pushing into other markets. Metrostudy ranks the following markets as being the healthiest in 2015 for new-home building:

  1. The Villages, Fla.
  2. Orlando-Kissimmee-Sanford, Fla.
  3. Raleigh, N.C.
  4. Austin-Round Rock, Texas
  5. Salt Lake City
  6. Denver-Aurora-Lakewood, Colo.
  7. Provo-Orem, Utah
  8. Cape Coral-Fort Meyers, Fla.
  9. Naples-Immokalee-Marko Island, Fla.
  10. Phoenix-Mesa-Scottsdale, Ariz.

Source: “2015’s New Geography of the Housing Recovery,” BUILDER (Nov. 7, 2014)