To use a phrase coined by Lewis Carroll in the notable novel “Alice’s Adventures in Wonderland” to his young protagonist Alice, things are getting “curiouser and curiouser,” not just through the “Looking Glass,” but also in the residential construction industry. After rebounding from the COVID pandemic’s supply chain disruptions, historically high demand and low building supplies, home builders and buyers are being buffeted by four new forces that have both sides of the business proposition— the builder and the buyer— recalculating their strategies.
What This Means for You——The average homebuyer is experiencing “buyer’s remorse” without actually buying a home! With mortgage rates climbing and low housing inventory being snapped up by cash-rich investors in record numbers, first-time buyers may be forced to sit and wait.
Increasing mortgage rates are encouraging many existing homeowners to “stay put” in homes that were financed when rates were historically low. This means home improvements are now on many families’ TO-DO lists. For great new home improvement product ideas, click here.
Mega-Trend: Investors with Cash Buying Millions of Homes
Never has the phrase “cash is king” meant more than in the current state of residential real estate. Starting after the “Great Recession” of 2008, and picking up steam during the COVID pandemic, investors began buying homes in record numbers throughout the United States. In markets such as Dallas-Fort Worth, where job growth is strong and the influx of new residents seems to continue unabated, this trend is complicating the plans of both homebuyers and builders.
According to several reports, including this from the Dallas Morning News, “The most recent numbers from the fourth quarter (2022) show investors owned 26% of all homes in Dallas-Plano-Irving and 30% in Fort Worth-Arlington, versus 25% nationally. If you put a home on the market today, chances are a company will try to buy it rather than someone looking to move in.”
Brent Smith, DFW Residential Sales Manager for Acme Brick, notes, “During the COVID boom, the impact of investors doing what investors do was negligible. Whatever a homeowner did with his or her property, the offers were going to be there. All that has changed.
“Homeowners and even developers are seriously considering the offers to buy from investors, despite the higher mortgages that that will likely follow. This has the effect of making builders the only game in town. This trend is problematic for the entire builder/buyer ecosystem because existing homeowners most likely purchased their home with record-low mortgage rates (3 to 4%) and if they sell, they will be forced to assume much higher rates.
“This has encouraged investors to make cash offers on an entire subdivision or master-planned community. Importantly, these offers are not contingent on financing or traditional mortgages. Some of these investor deals are based on minimum renovation and quick “flips” of the properties of smaller buyers. For companies with large portfolios the practice is widely called “build to rent” and this trend will also affect the traditional volume builders and their customers – typically young buyers. This activity will remain strong in 2023.”
This trend is also affecting the commissions that were traditionally earned by real estate brokers. The Dallas Morning News notes, “Many investors attract sellers through promises of fast, easy transactions and cash offers. Frank Obringer, who manages Coldwell Banker Realty’s Plano office, argues those sellers are missing out on getting the most for their money by not working with agents who would market their home to as many people as possible and help them make the necessary upgrades to their home ahead of listing.”
A Recent Trend: Spec and Release
Another interesting trend in residential construction involves volume builders using a “spec home strategy” to control building costs.
Acme’s Brent Smith opines, “Based on my conversations with many of our customers, most volume builders expect to pull back about 30% this year, and build based on a ‘spec and release’ program. This means they will build ‘spec’ homes, managing the costs for this build, then they release them for sale. The builder will put whatever it can profitably into the build and then sell the home as it is. It’s cost control for them because they know the profit margins in this process.
“With the supply chain disruptions during COVID, costs exploded, and builders rightfully passed these on to the buyers, resulting in higher home prices. Unfortunately, this meant that fewer people were qualified. Of course, time will tell if buyers accept this ‘take it or leave it’ approach. My personal guess is that this trend will not continue for very long.”
High Income Buyers: A Bright Spot for Builders
The buyers of “starter” homes, constructed by volume builders, are dramatically impacted by rising mortgage rates. However, this challenge does not seem to be experienced by builders of custom homes ($600,000 to $2 million) and their customers.
Smith notes, “The builders of custom and semi-custom homes are seeing more foot traffic, and their sales could be bigger in 2023 than they were the previous year. Many of the people wealthy enough to buy this size of home are not tied to an office, so remote work is a consideration for them. Plus, typically, this buyer can pay cash or afford to make down payments of 50% of the price of the home.
“In the area where I work, it’s interesting that many of these builders are moving out of Dallas and Fort Worth proper and are moving into smaller communities or rural areas because there are no homeowner associations, deed restrictions and covenants.”
Supply Chain Disruptions Are Easing
For the building materials industries such as brick, lumber, plumbing, electrical and roofing products, along with the home appliance industries, the supply chain disruptions caused by worker’s concerns about COVID are easing. Companies such as Acme Brick have seen inventories increase and shipping delays mitigated, if not completely solved. This has enabled builders to better manage projects and buyers to make quicker decisions.
“There was a time in the not-too-distant past where we were struggling to get products manufactured and out the door to our customers,” Smith said. “Now, our challenge involves overcoming labor shortages. As with our builder customers, we are constantly looking for skilled professionals who have knowledge in the brick-making process.”
Since its founding in 1891, Acme Brick has placed a premium value on its associates. If you’re looking for a place to grow professionally in the dynamic building construction materials field, click here and let’s talk about the future.