By Callan Smith | Rose Law Group Reporter
The word from a panel of top-homebuilding executives is 2019 isn’t looking as rosy as previous years. They spoke on Friday, before a crowd of 900 industry insiders at the 10th Annual Belfiore Real Estate Consulting AZ DealMakers conference. The largest of its kind in Arizona. The panel was moderated by Jordan Rose, founder and president of Rose Law Group pc.
“I think it’s going to be a choppy year,” said Steven J. Hilton, chairman & CEO of Meritage Homes.
Entry-level product looks like it will do well if there’s enough product to satisfy demand, but the move-up market is going to be a challenge due to cost. Hilton said the target price for an entry-level lot is 40 to 60 thousand, depending on location with 35 to 40 thousand to develop the land, but that cost is going up thirty percent.
“How are we going to make deals pencil. We can’t find the land.”
Alan Jones, Lennar Homes division president, said market slowing was due to a trifecta of issues facing buyers.
A half-point rise interest rates equate to 100 dollars added to a mortgage payment. Then add in the increases in land costs and development, if they go up 50 thousand an acre, which is another 50 to 75 dollars a month. On top of that, there is the five to seven percent in cost increases, adding 50 more dollars. With an excess of 200 dollars added to a mortgage payment, move-up buyers are wary.
“We think it’s a pause,” Jones said when asked about the about the softening Phoenix housing market by Rose.
“When do you think the pause is over?“ Rose said.
“What’s interesting is it had better be a pause because we’ve gotten approval since the merger to buy four thousand home sites, so if it’s not a pause, we’re wrong,” Jones said.
Lennar does expect to have a good selling season, but if interest rates go up all bets are off.
“Some builders have ramped up acquisitions; some have smaller footprints, but builders with larger footprints are feeling the slow down more so than smaller builders,” Michael “Frenchy” IlesCremieux, president Richmond American Homes Phoenix Division, said.
It’s about psychology, with the talk of recession and interest rates going up buyers don’t want to take the chance and are instead waiting it out.
Despite the issues, IlesCremieux said Richmond American is optimistic about the market.
“2018 was a good year for us. We land banked six deals for homebuilders; we bought three deals, one in Tucson, one in Prescott, one in Phoenix. Each deal is a challenge to get it underwritten and make the argument that this is where they should put their capital,” Michael Jesberger, principle of TerraWest Communities, said.
Jesberger had praise for Gov. Ducey and the great job Arizona is doing in sparking the state’s economy.
Not every move up community is suffering. Hilton noted he was out at Morrison Ranch which is a well-located infill move-up community; they’re building houses there as fast as they can sell them. Another move-up community doing well for Meritage is Desert Ridge.
He went on to say he was at what was a successful community for Meritage in Goodyear, where they had been selling 10 to 12 houses a month for many years, but now they are struggling to get three sales a month with significant incentives, more than previously offered.
“I think there is real pain in the move-up market,” Hilton said.
Following the trend of increasing land costs, Lennar focuses on getting the getting the right community in the right location with the right spec level, Jones said.
“It’s not just a matter of going farther and farther out to get cheaper, but you can also look at the right product and the right location at the price that’s appropriate at that location,” Jones said.
Second time move-up was robust in the recovery, but builders didn’t have the entry level at that time, now it’s started to take off, IlesCremieux said, mentioning affordable product lines such as Starlight, Live Now, Seasons and Express.
Builders recognized 14 to 18 months ago there was a vacuum in the market.
“You’re going to see a very robust entry-level market in twenty-nineteen. You’ll naturally see the second time move-ups slowdown because most demand is going to entry level.”
When asked about the upside and the downside of the West Valley, Hilton said it’s about price in hot spots such as south of the I-10, east of the 303 and the South Mountain area.
“If you’re under three hundred thousand the market is hot,” Jesberger said.
It’s not just millennials buying it’s a mix, including baby boomers moving down to entry-level communities.
Boomers are still working, and either can’t or don’t want to buy in an active adult community. They’re not spending as much disposable income on a house that they did years ago. They want their last home to be a new one, and they’re not buying the higher-priced luxury home as they previously had, Hilton said.
The top ten best-selling master plans in the Valley are all FHA range, “and that’s the key. We have about a five-hundred-unit backlog right now, and when we go through it every week, you can tell deal by deal how much buyers struggle with the down payment and closing costs. When you’re in the FHA range you eliminate a lot of that and grab more buyers,” IlesCremieux said.
New Village Homes is looking to reach the affordable price point with its single-family homes for rent and purchase, said Reed Porter, CEO of the company. They have a broad demographic and are focused on the Southeast Valley.
Looking ahead, IlesCremieux predicted Maricopa is going to see increased activity and affordability with Mesa getting more expensive and Gilbert built out.
Costs are a big concern, specifically labor, which has been plaguing builders for some years. Rose asked the panelists their thoughts on the issue.
Lennar has forty-eight active communities, taking a different approach in 2018, they had lotteries in 10 different communities in the Valley to limit sales.
“We had the demand in the communities to only sell six a month. We don’t want to sell you a home we can’t start for two months. The trade situation is real. The thing that needs to happen is we need to make people aware of the tremendous opportunities for young men and woman to go into the trades and have a positive career,” Jones said.
In 2015, Lennar sold four homes in one month in a community, the following month they sold 15. Their trade partners couldn’t keep up delaying delivery of new homes, so they are looking for what Jones called an “even-flow approach.”
“I think we did get some relief when the lumber prices came down, but I think what I’m the most concerned about in this marketplace is the horizontal development costs, because they are completely zonkers, going up through the roof, particularly concrete, but it’s not so much the materials it’s the shortage of contractors,” Hilton said.
“Do you see a fix in that?” Rose said.
“I think it’s going to be a matter of time for the development capacity to catch up or slow down, a lot of communities have gotten delayed with entitlements taking longer and longer, which is backing up,” he responded.
The Meritage has adopted a less more strategy. The company isn’t changing their product but is instead fine-tuning it, driving costs down making it easier for contractors to come to do the job in this price sensitive market.
Porter and New Village Homes are also dealing with increased horizontal development costs and the need to find contractors.
Nearing the end of the discussion Rose asked the panelists to show the crowd what they think the new year would be like with a facial expression. It was a big hit with the audience, who cheered them on.
Of the group, most were positive, one giving a thumbs up, another a winning smile, except Hilton.
“It’s going be a rougher year than it was last year,” he said.
