Dive Brief:
- Revenues at publicly traded homebuilders are expected to rise by more than 10% in the next year as average gross margins surpass 20% and the industry continues to consolidate, according to a new report from Moody’s.
- Low unemployment and reduced interest rates, however, could risk a bubble with the effect of lowering consumer confidence and causing homebuying activity to scale back. Housing starts and new-home sales are 17% below historical levels.
- Still, the agency was positive in its outlook for builders, noting that the post-recession recovery has yielded the third-longest period of economic growth since World War II. Strong employment activity, rising household income and wages, and healthy consumer confidence are all drivers.
Dive Insight:
Although Moody’s is optimistic about the potential for the homebuilding industry over the next 12 to 18 months, its report highlights a selection of risk factors that have contributed to recent downward trends in other key market indicators.
Those factors include limited supplies of skilled labor and finished lots, restrictive mortgage lending, uncertainty around housing finance reform and volatility in the broader global economy. Additionally, Moody’s notes that the extent of the housing market’s post-recession expansion — six years — could be another cause for concern.
The continuing shortage of available lots and labor drove down builders’ outlook on future market conditions this month, according to an index kept by the National Association of Home Builders and Wells Fargo. Still, June’s reading of 67 is well above the breakeven threshold of 50 and could be read as a correction from a spike in March, when the index reached its highest level since June 2005.
Tight for-sale inventory conditions amid strong demand have caused volatility in existing and pending home sales. Although new-home sales have trended upward, access to lots and labor as well as increases in material prices have challenged single-family starts activity.
The incoming millennial buyers could offer another injection of activity. Moody’s notes that the generation’s average age is 28, while the average age of first-time buyers is 32. Builders should keep an eye on this group as a growing source of demand for new and existing homes —and many are already offering products at lower price points and with smaller footprints to reach them.
The big builders are so far benefiting from rising home prices and, in turn, they are vying for creative solutions to address the needs of price-sensitive first-time buyers. The six homebuilders to make this year’s Fortune 500 ranking have all indicated an increase in sales to or growing interest in the segment.