Reprint from November TAR Scorecard
By all accounts, 2016 will be a pivotal year for housing. For developers, their land deals will set the pace for new home construction over the next two to five years. For the resale market, there are still too many distressed properties.
“We do not have the luxury of a big lot supply going forward. That is the biggest challenge in the new housing market. Even if we stay flat, we basically need 2,500 lots per year,” said Will White, Land Advisors’ Tucson manager. “So we are at a crossroads, realizing that new lots could go negative in 2017.”
“Remember, the Tucson region went to negative job growth for an extended period. For 2016, we’re looking at 1.4% job growth, and 2% for 2017 to 2019,” added Ginger Kneup, Bright Future Real Estate Research. “The economic forces to bring developers back into the market are all coming together next year. The question is will they be proactive or reactive?”
Kneup and White presented their annual forecast this month called 2016 At the Crossroads. The future of the Tucson land and housing market. They focused on housing supply - demand concerns and how that imbalance will affect the market.
Since 1995, the region has absorbed an average 27,000 lots every 5 years, said White. To keep pace, builders face three major decisions. In undeveloped sectors, infrastructure is lacking and expensive. Once land is acquired, it can take up to 24 months to get a house to market. Sunk costs are rising or land, regulatory fees, materials and labor. And market share is maintained only by getting more land.
“To start a new community from scratch will be a challenge. So do builders buy land now or later? In this market, five builders do 80% of the business,” said White. “Where will they find inventory? For a community of one million population, there are very limited growth opportunities.”
From the demand-side perspective, Kneup emphasized that foreclosures and resales overall need to “get healthy. Distress continues to hold back the market.” Distressed sales have a 14% market share, down about 5% annually. The normal level should be in the range of 3.5%, Kneup said.
For the last five years, new home market share has been stuck at about 10%.
Builders have had great success in the move - up market, yet prices are a 40% to 50% premium over resale. To capture more sales, builders could re-evaluate their designs. Can they replicate their success in the move -up market at a lower price point?
“What they have control over is product: innovative, flexible multi-gene ration floorplans. Millennials put off home ownership but if you deliver more relevant product for that generation, it will get Millennials excited about buying,” she said.
“That is the biggest challenge, not easy to deliver. Can we build what they want where they want at the right price?”
Click here for full November TAR Scorecard