If you're thinking about buying a newly built house in the near future, brace yourself, because the price tag is likely to go up, significantly up, in the near term.
That's according to economist Bradley Hunter, who says a confluence of factors is likely to push the costs of residential construction up 10 to 15 percent in many markets around the U.S. But he says there's a limit to how much of a price pop the market can bear, so he expects the situation to settle down in the next year.
In an edited interview, the chief economist for Metrostudy, a data firm that closely tracks the homebuilding business, discussed how builders are navigating the still-treacherous waters of the housing market recovery:
Q: You recently predicted that newly built homes, overall, could see a 9 percent price spike by the end of this year, and higher elsewhere. What's causing this?
A: Here's what's happening. Land values are going up very fast right now in prime locations, what we call the "A" locations. In the best A (and B) markets, we expect prices to rise by 11 percent to 15 percent. Builders are desperate to buy lots, which in some cases are 30 percent to 50 percent higher than last year.
Even though we have well over a million vacant lots in major markets nationwide, most of them are not in the A locations or B locations. Many would be considered in D or F locations, which are too far away from jobs and retail and services that people want to live near. As you move closer to the center city, that's where people want to buy homes.
Also, builders' actions now are being driven by extreme cost pressures in materials and labor.
Q: So does that mean that the exurban subdivision — the often-huge kind that builders a decade ago were building in the far, far burbs — isn't on anybody's drawing boards?
A: To a large degree, that's correct. Suburban subdivisions are still very much alive, exurban not so much. Exurban — meaning if it's a long commute and too far to justify that commute and there are no services around — that new, master-planned community that got developed in 2005 is not being developed today.
Q: But to get back to prices, you think there's going to be some relief in the coming year?
A: I think the builders are going to have to come to grips with a new affordability mentality. They're going to have to reckon with these forces — rising mortgage interest rates, mainly — that are going to limit how much they can raise prices.
That's why 10 percent to 15 percent price increases will become 3 to 6 percent pretty soon — in six to 12 months. It depends on when mortgage rates move higher. If they go up, say, by 2 percent or 3 percent, it will have a noticeable impact on what people can afford and therefore on what builders are offering.
The primary effect is going to be on price rather than volume — the number of homes being built is destined to go higher, no matter what, because of pent-up demand, more households being formed, more job growth, more families getting their own homes.
Q: Does that mean that, with the potential of higher mortgage rates on the horizon, which typically hit first-time buyers hardest, builders are going to shift away from homes for them, and focus instead on move-up, more affluent buyers?
A: It's very tricky for the builders. They're making decisions today to buy lots that they'll build on in 2014 and 2015, and they're going to be forced to lock in their costs and not know how much of a price increase they can afford.
That, to an extent, has always been true in homebuilding, but what makes it more treacherous is the current environment where lot prices have been moving up at extraordinary rates — as I said, sometimes 50 percent in a year.
Q: The piece of this alleged housing market recovery picture that doesn't seem to fit — for me, anyway — is employment, which is improving, but only slowly. Don't we need to have more jobs in order for people to buy more houses?
A: There's a fascinating dichotomy in housing between what I call the haves and the have-nots.
The majority of the homebuilding that's taking place is for the haves, who never lost their jobs or maybe had a short period of job trouble, who managed to keep their credit spotless and had money in the bank. They have cash and can make the larger down payments that they need to get a mortgage and get good rates.
That whole group is able to buy what they want.
The have-nots are struggling with black marks on their credit — maybe they've been through a short sale or a foreclosure, or they don't have savings. Those situations are definitely impinging on the entry-level buyer position.
In terms of jobs, the market splits that way too. The haves are confident (and buying houses), and the have-nots are not. We're going to need steady, fast job growth to bring down the unemployment rate and support the entire market, not just the higher end of the market. The lower end, right now, is entirely supported by the investors.
It's probably going to unfold this way: People who can't afford to buy this year are going to rent. As the job market regains momentum, they'll say, I've saved up money and I will buy.
The threat to that, though, is that mortgage rate increases will keep increasing their monthly payment. These concerns about employment are valid — the situation is dicey.