Its time to exercise the discipline in our acquisitions to skillfully take the checkered flag……..

“What inning are we in?”  It is difficult to answer that question, mainly because it’s the wrong sports metaphor.  A better analogy than baseball is Formula One, where we’re about a third of the way around the track…and we are rapidly approaching the first major hairpin turn.  That turn naturally will slow forward speed.  If you go too fast, you might wipe out and then you’re out of the race. Slow, careful, precise maneuvering will be the key to winning.

Some observers in the year 2010 thought people were overpaying for lots and “A” rated land parcels. This turned out not to be true, and everybody that bought land and lots during that period is glad they did.  Now, three years later there is again concerned about prices builders and other participants are paying for land and lots.

2012/2013 was a period of extremely rapid increases in home prices; that was the straightaway…then what represents the approaching hairpin turn? Overconfidence.  A skilled driver knows that speed alone doesn’t win a race.  You have to know how to slow down to go fast.  In other words, don’t buy the land if it “pencils” ONLY with a continuing and accelerating rate of price escalation.

Developers and builders that go into the hairpin turn having overpaid for lots and land will find themselves with a white-knuckle grip on the steering wheel in the next 18 months.

New home prices have been increasing by 10% to 15% annually in many markets around the country and as high as 20-25% (within same project)!!  In 2014,  expect the rate of home price escalation to be half as fast as in ‘13.  As a national average, look for roughly 6% same-project increases (some places will slow from 20% to 10%, or lower…).

Acquisition pro-formas should build this kind of thinking into their assumptions, in order to avoid fishtailing in ’15 and ‘16.  When the back end gets loose, it’s hard to straighten out again.

The slowdown in price escalations will stem from two factors: rising mortgage rates and more competition from relatively affordable existing homes (wider price gap).  Once mortgage rates get to 6%, payment-to-income ratios will go above the long-term average.  Also keep in mind that even though 6% is a historically low mortgage rate, the important variable is the change in monthly payments. Going from the recent low of 3.5% to a somewhat more representative 6% rate means a decline in buying power from $200,000 to $140,000.  While we are not calling for a decline in absolute home prices, a slowdown in the rate of increase is certain.

Builder developers are frantically bidding against each other for lots driving not only “A” lots but now “B” lots back up to peak prices in some areas.  Acquisitions personnel are now openly admitting that they are building in escalations in order to make the land buys pencil out (they were not willing to admit this 18 months ago).

The good news for builders and consumers alike is that more lots are being developed now.  The pace of new lot development is up 60% from one year ago, according to the ongoing research from our national field offices.  Steps are being taken now to address the lot shortage for 2015.  AD&C lending is just starting to pick up once again, particularly for developers with proven track records.

Track records.  That brings us back to our new metaphor.  It’s obvious now:  the participant who manages the entrance to the curve the most skillfully will take the checkered flag.

Posted in National Housing Market | Posted on 09-09-2013 | Written by Brad Hunter