Homebuilders Adapt to a Crazy Housing Market By Chris Igou, analyst, True Wealth
It wasn't the kind of talk I expected to have at the beach... It was one of those mornings that we surfers wait a long time for in Florida. The waves were head high, the ocean was sheet-glass smooth, and the tide was just right. We get about 10 days like that a year. So I always plan my schedule around them as much as I can. But soon, I found myself distracted. I was talking shop with a fellow surfer between waves... discussing the housing market. His family decided to build a home in a nearby neighborhood last year. But it hadn't gone as planned... "They told us it would take six to eight months," he recalled. "We're now a year out and it's not finished." My wife and I are considering building in the same exact neighborhood. So that wasn't music to my ears. His next statement didn't bode well, either... "We're so over it that we're going to list as soon as it's ready. We signed the contract for $300,000 last year. So at least we'll make a good profit... I hope we can get $415,000 for it." My fellow surfer was so frustrated with the building process that he wanted nothing to do with the home anymore. It was supposed to be a happy experience for him and his family – a new place to build a life. But the reality was much different. And it'd caused him to simply give up on the situation. That might seem like a terrible situation for the housing market. But the truth is that those problems are getting solved right now. And that tells me that the incredible housing boom from 2021 can continue this year. Let me explain... If you've ever had a home built, you know that delays are common. But last year was crazy, even by industry standards. The pandemic led to unprecedented supply-chain headaches. Lumber prices skyrocketed... And essential items like windows, doors, and other materials were difficult to come by. That's exactly what slowed down my fellow surfer's house so much... The builder had to keep pushing back the move-in date because of supply constraints. But while this homeowner's experience has been terrible, those nightmare delays are starting to ease in the rest of the market. He even mentioned it during our conversation... "The thing that's even more frustrating is, houses in the next phase are going up quick... like two to three months! Yet here we are at the one-year mark." I feel for this guy... Delays are one of my big concerns as my wife and I look to potentially build soon. But now, homebuilders are adapting. They need to meet construction time frames they set for buyers. One way of doing that is by not selling a new build until it's fully permitted. In a normal housing market, the permitting process takes two to three months. And it's usually done after the buyer purchases the home. Permitting after the purchase gives the buyer more say over the structure of the home. They can decide to add a garage instead of a fifth bedroom... Or they can turn a half-bath into a full bathroom with a jacuzzi tub. But with so much demand for new homes, permitting was eating up five to six months of the process. That's two to three times as long as you would expect it to take in a normal market. In other words, some buyers were waiting up to six months before a shovel even broke ground on their new homes. Permitting the lot before the sale helps cut down wait times. Buyers have fewer options after they purchase the home... But it's a worthwhile change in today's market. Another way to avoid major backlogs is to only sell a few lots at a time. By limiting new sales until they make headway on already-sold lots, builders can decrease the amount of time it takes to deliver a finished product. This is a strategy that the largest homebuilder in the U.S., D.R. Horton (DHI), is implementing to stay on track. And many other builders are doing the same thing... According to housing-analytics provider Zonda, about 85% of builders are intentionally limiting sales to avoid delays. The local homebuilder that my wife and I are looking to work with is using both of these strategies. It's only putting up a handful of lots for sale at a time. And all of those lots have already gone through the permitting process. I can't say for sure that my fellow surfer bought before this homebuilder made those changes... But it sure sounds like he did. And that's likely why he's seeing newer homes go up much faster than his home. These are just a couple changes coming from homebuilders. But they mean a much better experience for buyers. And it's a sign that last year's epic housing boom can continue in 2022. You might not think that's possible today... But the underlying fundamentals haven't changed. We still have a lot of people chasing a small number of homes. That means this boom still has room to run. Good investing, Chris Igou Further Reading Housing is still booming in the U.S... And a few specific markets will profit the most. It's all thanks to a major demographic shift... Find out where American homeowners are going right here: The New American Migration. The financial media has been worried that a "wave of evictions" could crash the housing market. But one of our favorite ways to gauge the strength of U.S. housing shows us this fear is overblown... Learn more here. |
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