The U.S. population continues to increase. Annual household
growth is expected to rise by an average of more than 1.5 million for the 2009 to
2012 period. Affordability is at its highest levels since the 1970s. Mortgage
rates are lower than when even our grandfathers would remember.
But there's a serious threat right now to meeting future
demand. In many markets, the collar has rapidly tightened on builders who've
been looking to fund their next project. Home builders who do find the bank or
private or institutional equity source that will talk with them are
encountering new, different and more stringent requirements: — more cash
equity, additional collateral, guarantor support, additional loan fees, higher
interest rates or higher returns.
Specifically, in the Clay County, Missouri area in 2006
there were 749 new construction homes sold. In 2009 that number had dwindled
all the way down to 307 new construction homes sold. Oh sure, a good case could
be made because the market is down, but in 2008 and 2009 many of the home
builders were having a very difficult time arranging financing. This is ultimately
what drove them out of the business or put them under!
As we move into 2010, there are only a handful of builders
that have survived and they’re simply not able to keep up with demand. The
chart below shows the steep decline in New Homes availability in the Kansas City area.
If you currently own a home right now, this could actually be good news for the value of your home. Since there are fewer new homes available in Kansas City, more buyers will be forced to purchase a "resale" home when they're ready to buy. In previous years, if you owned a home in certain price ranges you were competing directly with new home builders in Kansas City. This new home construction depressed the sales value of resales.
I personally work with several Kansas City home builders and because of these shortages in inventory, they're seeing huge increases in the showing activity of their current spec homes. I'm also seeing several of them begin to actually raise their home prices or at least hold tight to their asking price. Uneducated buyers still think builders should be willing to negotiate and are shocked when the builder counters with a full price offer and won't bow to their other demands, but they don't understand it's simple economics of supply and demand. When supply is short and demand is high, prices will begin to rise and the builder is holding the better hand.
The biggest problem for selling new construction homes is that here in Kansas City we're used to driving around to several new homes communities and personally touring 8-12 homes per subdivision. That's just not possible now. Many builders that had 3-5 spec homes per subdivision, now only have one home they use as the model. If buyers can't see what the home looks like finished, they're not interested. We've become an instant society and buyers want it now. They're not willing to wait 6 months to get the home of their dreams.
The biggest problem for builders is getting financing. Many of them are actually limited, not by the number of homes they can sell, but by the number of homes they can build at one time. Banks will actually put a limit on the number of loans they'll do for one builder to limit their risk, but because they're limiting them, it makes it much harder to make a respectable living building homes. It's a catch 22.
It will be interesting to see what happens as we move into the Spring of 1020 in Kansas City.
