Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.
Homebuyers considering new construction are facing fewer choices. Not in the number of subdivisions, perhaps, but in the number of models and floor plans, according to a new study from two researchers at Johns Hopkins University in Baltimore.
The reason: consolidation in the ranks of homebuilders, which has led to greater volatility in prices, less production and fewer vacant, unsold units, reported Jacob Cosman and Luis Quintero, both of whom are assistant professors in the Hopkins Carey Business School.
Although price swings might keep buyers up at night, it is the lack of production that is driving prices ever higher, not just in the new home sector but also in the resale market, as wannabe owners fight over what few houses are on the market, the research said.
That trend might be easing in places where inventory is growing, turning seller’s markets into buyer’s markets, or at least into more balanced ones.
But a report last week from Freddie Mac said there is nothing on the horizon to indicate that equilibrium will return on a national level.
Thanks to nearly a decade of production that is below what’s needed to keep with pace with demand, the nation’s housing stock is in woefully short supply, Freddie Mac said. And if supply continues to lag, the big secondary mortgage market company added, prices and rents are likely to continue outpacing income, and household formations will fail to realize their potential.
“We estimate that over the next decade, young adults will add about 20 million households — and those households will need a place to live,” said Sam Khaler, Freddie Mac’s chief economist. “Until construction ramps up, housing costs will likely continue rising above income, constricting household formation and preventing homeownership for millions of potential households.”
According to the Johns Hopkins professors, housing market cycles these days are driven more by fluctuations in the volume of houses being built than in variations in prices. “That’s why examining production provides insight into the dynamics of the overall economy,” Cosman said in a press release.
Their, as yet unpublished, 64-page study, a preliminary copy of which has been given to Inman, is out for peer review for inclusion in a future issue of the Review of Economic Studies.
Cosman and Quintero report that the annual value of housing production has declined by $106 billion since the Great Recession, putting a severe crimp in the consumer-driven U.S. economy. In 2016, homebuilding accounted for 11 percent of the nation’s gross domestic product and 16 percent of total personal consumption expenditures, they say.
“A damper on homebuyer options implies a threat to the nation’s general economic health,” the authors say.
For their analysis, Cosman and Qunitero studied both urban and suburban markets in New York, New Jersey, Delaware, Pennsylvania, Maryland and Virginia. And they said that if competition was the same as it was in 2006 before the housing crisis, there would be larger supplies of housing, easing the strain on the resale sector and substantially greater price stability.
But that’s not the case.
In fact, housing production has become concentrated among a relative handful of major national builders, the authors found. In the past, small- and mid-size builders, mostly local firms, built 90 percent of the houses in a given market.
But in the most concentrated third of the markets sampled for the study, two or fewer companies produced “at least” 90 percent of all new homes.
Furthermore, in a recent 10-year period, a single company in Bayonne, New Jersey, built 37 percent of all the new houses. In Centreville, Virginia, another outfit put up 47 percent of all the houses built there.
And in Annapolis, Maryland, a firm which built just 3 percent of the new houses during the 2005-2007 period accounted for 43 percent of all new home production in the 2014-2016 time frame.
Big builders are getting bigger for several reasons. One is that many smaller firms simply went out of business after the 2008 financial crisis, thinning the herd in favor of larger and more financially stable companies. Another was the post-crisis federal stimulus that allowed builders to write-off then-recent losses.
According to the report, the 13 largest firms “reaped a total of $2.4 billion in tax refunds” in 2009 alone. That averages out to “nearly $200 million per company,” it says
But in what some liken to cannibalizing the business, larger builders also are continuing to buy out their smaller competitors and sometimes even their larger ones, all in the name of building market share.
Earlier this month, for example, D.R. Horton, already one of the county’s largest builders, paid $62 million in cash for Raleigh-Durham based Terramor Homes. The deal was the third for Horton recently. In November, it acquired an Indiana-Ohio powerhouse, Westport Homes. And earlier this month, it purchased Des Moines-based Classic Homes.
During that buying spree alone, according to BUILDER, a trade publication, Horton has agreed to lay out about $312 million for builders whose total volume over the proceeding 12 months adds up to about 1,400 homes. That’s “the equivalent of adding a top-40 Builder 100 enterprise to its portfolio,” the online version of the magazine reported.
Of course, big publicly owned builders have several advantages that they sometimes pass on to buyers. They can buy in bulk directly from manufacturers, bypassing middlemen suppliers and saving money. And they can obtain funds at less cost directly from Wall Street as opposed to local banks.
While it is difficult to determine average price changes on a per unit basis, Cosman told Inman, when demand spikes in places where big builders dominate, prices not only spike, but “they spike higher than they would” had more competition been in place to hold prices in check.
Cosman and Qunitero were invited to present their study at the American Real Estate and Urban Economics Association national conference in Washington this spring, where they suggested that future research is needed to dig even deeper into how housing cycles impact the overall economy.
Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.
