Churning Among Top Ten Builders

June 20, 2014

The 2013 ranking and composition of the top ten publicly-traded builders changed as Hanley-Wood released its BUILDER 100 of 2013 builder closings. The previously stable order changed the ranking of the second and third largest builders, and one new entry broke through in 2013.

2013 BUILDER 100

We estimated the 2013 big builder share earlier in the year based on SEC 10K filings. BUILDER reported the 2013 builder closings and reconciled the differences for firms whose fiscal years do not align with the calendar year. Taylor Morrison broke into the 2013 top ten, and the 2013 top ten captured a 25.4% share of the new home sales market. Lennar jumped to number two ahead of Pulte. MDC dropped a notch out of the top ten, and Ryland moved ahead of Hovnanian to six as Beazer fell to ten.

During the Great Recession, there was concern among small builders that the large national builders would capture a much larger share of the homebuilding industry, primarily through acquisitions of firms and land in newly expanding markets. Large builders have used their access to the credit markets to acquire land and achieve economies of scale in building material purchases. Large builders continue to enter new markets and expand in growing markets, with the very recent example of D.R. Horton acquiring a top Atlanta builder.

However, as throughout the industry, firms move ahead at different speeds with strategies fit to meet their business plans. The result is that the top ten share has changed very little over the past four years. While that share fluctuated within a narrow range, the composition of the top ten changed in 2013.


Mixed Signals from Housing

June 17, 2014

Census and HUD reported a decline in May housing starts and permits, but the headline numbers do not tell the whole story. First, the driver in the declines in both starts and permits was multifamily apartment construction, which was down to 376,000 starts (-7.6%) and to 372,000 permits (-19.5%). But the three-month moving average for multifamily starts is still the best since February 2006 and the decline is more the result of an extraordinarily high April. The same trend was evident in the multifamily permits, which adjusted downward after scoring a seven year high in April.

Second, single-family permits were up 3.7% to 619,000 (seasonally-adjusted annual rate), the highest since November 2013 and roughly equivalent to the output for all of 2013. The increase in single-family permits was true for all four regions adding support to the continued modest single-family expansion forecasted by NAHB.

The decline in single-family starts is likely a combination of factors including general conservative behavior of the builders that remains after a six year decline in housing production. Builders also continue to find low supplies of developed lots and construction crews. The supply chain difficulties have caused builders to postpone and lengthen construction schedules.

The number of single-family homes under construction has remained relatively steady at 340,000 for the past six months and the number completed just above 600,000 for the same period. The steadiness is evidence of builders continued conservative approach to adding inventory and the builders’ read of the same conservative nature of potential home buyers. As the economy continues to expand, consumer confidence in housing will return and the housing market will continue its modest expansion.

 

Single-family Homes Under-Construction and Completed


Builders Sentiment Recovers

June 16, 2014

The NAHB/Wells Fargo Housing Market Index for June rose four points to 49, just shy of the 50 mark indicating at least as much optimism as pessimism among single-family home builders. The index dipped 10 points to 46 in February from a sustained above-50 mark for 8 months and remained near there for 4 months.

Builders are beginning to see customer confidence return but buyers do remain hesitant until their jobs are more secure and their home equity improves enough to make a down payment on a new home. The 4-month consecutive 200,000+ monthly increase in national job formations has and will continue to help consumes believe the economic recovery for the nation and for them individually will continue.

Builders remain cautious because of the consumers’ caution and because construction crews are difficult to find and keep. Builders will add homes when they are most secure that the home can be completed on time and that a buyer will be ready and able to purchase.

The June recovery was evident in all three components. The current sales index increased 6 points to 54, the expected sales for the next 6 months increase 3 points to 59 from a one point downwardly revised 56, and the traffic index increased 3 points to 36 from a 2-point upwardly revised May of 33. The three-month average regional indexes were mixed with the Northeast and South up one point to 34 and 49 respectively, the Midwest down one point to 46 and the West even at 47.

June HMI


Eye on the Economy: Slow Progress after a Tough Quarter

June 12, 2014

The overall economy slowed at the start of 2014, which took a toll on housing and economic activity. According to the Bureau of Economic of Analysis, real GDP contracted at a 1% seasonally adjusted annual rate during the first quarter. Growth would have been slightly positive absent a decline in business inventory investment. However, this drawdown sets the stage for more stable growth for the rest of 2014.

An example of improved economic news from the second quarter was the May employment report. According to the Bureau of Labor Statistics, payroll employment improved by 217,000 for the month. In fact, the month of May was the first time that total employment (138.365 million) surpassed the prior pre-recession peak. Of course, given population growth, the economy continues to suffer from a lack of jobs, which in turn is holding back housing demand.

Home builders and remodelers have added 106,000 jobs in the last 12 months. The seasonally adjusted construction sector unemployment rate now stands at 8.9%, down from 11.2% a year ago and 22% at the post-recession peak. Labor data from April indicate that the number of open construction sector jobs, which has been elevated for the last two years as construction expanded, has declined over the start of 2014 to a count of 94,000. Nonetheless, the open rate remains higher than any period prior to 2013.

In addition to labor shortages, an important industry headwind remains the lack of building lots. A recent NAHB survey indicates that 59% of builders report low or very low lot supplies in their market. This is the highest rate of “low” responses since the question was first posed in 1997 and is notable given that housing starts remain below normal levels of market production. NAHB surveys continue to suggest relatively tighter conditions for land acquisition and development loans (in contrast to construction loans) used to finance lot development, although recent FDIC data suggests that lending is increasing. For example, over the last four quarters the stock of residential AD&C loans has increased by 12%.

Overall, the housing market continues to improve, but progress is slow going. The NAHB/First American Leading Markets Index remained at .88 for the nation from May to June but was up 6 points from .82 in June 2013. The index measures progress back to and beyond normal economic and housing markets for 351 metropolitan areas. Three of 10 metros did see a monthly increase in their individual indexes and 83% have seen an increase in the past year.

Markets already past their last level of normal are concentrated in energy-producing markets and were more stable. At the other end of the spectrum, markets still only two-thirds of the way back to normal are the industrial Midwest or in the sand states most harmed by the boom and bust. Their slow progress is primarily the result of the slow single-family housing market. Single-family housing permits are only at 43% of their last normal market in the early 2000s.

Recent Federal Reserve data also reflect the progress in housing in recent years. According to the Flow of Funds data, home owner equity has reached a level last experienced in 2007. In the last quarter, home owner equity grew by $795 billion.

Despite low interest rates, housing demand has lagged in 2014. For example, the National Association of Realtors Pending Home Sales Index is down 9% on a year-over-year basis. However, new home sales have fared better than existing home sales in recent months. According to the Federal Housing Finance Agency, the average effective interest rate on new home sales was 4.33% in April.

Construction spending grew in April by a slight 0.1%. Single-family spending was up 1.3%, and multifamily increased 2.7% month over month. The relatively strong performance by the multifamily sector is consistent with the most recent NAHB Multifamily Production Index, which increased three points to 53 during the first quarter. This marks the ninth consecutive quarter of a reading above 50. Readings above a level of 50 indicate that more respondents report improving conditions than don’t. Market absorption data for rental and for-sale multifamily remained strong at the start of 2014 as well.

In analysis news, NAHB economists recently published membership census data investigating the characteristics of builder members. And a new tool was made available that allows access to the latest Census data by geographic areas that are consistent with local home builder association jurisdictions or market area.


Construction Job Openings Decline

June 10, 2014

The number of open, unfilled construction sector jobs continued to decline as housing construction softened during the first quarter.

According to the BLS Job Openings and Labor Turnover Survey (JOLTS), the number of open construction sector jobs declined on a seasonally adjusted basis from an upwardly revised count of 116,000 in March to 94,000 in April. This is the first month below 100,000 open positions in construction since April of 2013. Winter conditions and other factors slowed the growth of home construction in recent months, and this likely reduced the number of jobs offered by builders and remodelers.

On a three-month moving average basis, the open position rate for the construction sector fell to 1.83% for the month of April, continuing a decline begun in December. While the open rate has declined somewhat in recent months, the rate of open jobs in construction remains above any rate witnessed after the recession and prior to 2013.

constr labor market

Monthly gross hiring in construction increased somewhat, rising on a seasonally adjusted basis from 257,000 to 278,000 from March to April. Over the same period, the hiring rate, as measured on a 3-month moving average basis, was effectively unchanged at 4.6% for April.

Two trends in the construction sector are worth noting. First, the layoff rate for the sector (graphed above as a 12-month moving average) has continued to fall. Second, the sector hiring rate has fallen noticeably since the fall of 2013. The trend lines over the last two years – a falling hiring rate, an elevated open rate, and a declining layoff rate – are consistent with some construction firms having trouble contracting with workers for specific projects.

It is also worth noting that, on a seasonally adjusted basis, the construction sector unemployment rate stands at 8.9% for May, down from 11.2% a year ago. Construction sector unemployment peaked at 22% (seasonally adjusted basis) in February 2010.

Monthly employment data for May 2014 (the employment count data from the BLS establishment survey are published one month ahead of the JOLTS data) indicate that total employment in home building stands at 2.259 million, broken down as 656,000 builders and 1.602 million residential specialty trade contractors.

res construction employment

Over the last year the home building sector has added 106,000 jobs. Since the point of peak decline of home building employment, when total job losses for the industry stood at 1.466 million, 274,800 positions have been added to the residential construction sector. As of May, over the last six months the home building and remodeling industry has added on average more than 8,000 jobs per month.

For the economy as a whole, the March JOLTS data indicate that the hiring rate was constant at 3.4% of total employment. The hiring rate has been in the 3.1% to 3.4% range since January 2011. The overall job openings rate (3.1%) ticked up out of the 2.7% to 2.9% range it has been in since the start of 2013. This may represent good news for future job creation after a tough winter.


Apartment Absorption Rates at the Start of 2014

June 9, 2014

Absorption rates for new rental and for-sale multifamily homes were roughly unchanged at the start of 2014, which is consistent with ongoing strong demand for multifamily construction.

According to NAHB analysis of data from the Census Bureau and Department of Housing and Urban Development Survey of Market Absorption of Apartments (SOMA), completions of privately financed, unsubsidized, unfurnished rental apartments in buildings with five or more units were up during 2013. A total of 132,600 such apartments were completed for these four quarters, compared to 104,500 a year earlier.

Non-seasonally adjusted three-month absorption rates (units rented after construction of the property is complete) for fourth quarter completions (rented during the first quarter of 2014) were effectively unchanged at 60% compared to 58% a year earlier. Absorption rates for rental apartments rose coming out of the recession but established a more stable range since 2011.

4q_1q14 absorp_apts

In contrast, condo and co-op completions remain at historically low levels, with 2,100 for-sale multifamily homes completed during the fourth quarter of 2013. The 3-month absorption rate for for-sale multifamily dipped for condos completed at the end of 2013 and sold during the first quarter of 2014, falling to 71%.

4q_1q14 absorp_condo

The SOMA data also reveal that for properties with five or more units approximately 15,000 Low-Income Housing Tax Credit or other federally subsidized units were completed in the fourth quarter of 2013. This is up from the 8,500 such units completed a year prior. The affordable share, LIHTC and other subsidized units, of multifamily completions was 30% for fourth quarter completions.

4q13 MF completions  by type


Profile of NAHB’s Builder Members

June 9, 2014

NAHB conducts an annual census of its builder and associate members in order to better understand the composition and characteristics of its membership. The census collects company as well as demographic information. This blog entry summarizes findings from the 2013 Builder member census, with a more extensive article available here. A later entry will summarize findings from the 2013 Associate member census.

Over half of NAHB’s builder members in 2013 were single-family builders (58%), and about a quarter were residential remodelers (24%). Far smaller shares were involved with multifamily building or commercial remodeling (5% each), and commercial building or land development (4% each). Less than half of 1% were manufacturers of modular/panelized/log homes.

Builder Primary Activity

 

About half of builder members had 4 or fewer employees in 2013 (54%). The median number of employees was 4 and the average 11. Only 3 percent of builder members reported having 50 employees or more.

Employees

 

In 2013, builders started an average of 43 units (up from 30 units in 2012), while the median number of units started rose to 5 (from 4 in 2012). The majority (60%) of builders started between 1 and 10 units, while only 8% started 100 units or more. Median revenue among builder members rose to $1.8 million in 2013, a 65% increase compared to 2012.   From 2008 to 2011, builders’ median revenue remained largely unchanged at around $900,000.

The median builder is 56 years old; the vast majority are male (93%), White (97%), and non-Hispanic/Latino (98%).


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