The hot and humid Miami weather didn’t stop a lively mix of homebuilders, land developers, and capital sources from being fully engaged with the all of the topics covered at IMN Miami. The key reoccurring theme throughout the day was the remaining runway in the current recovery—when does the market weaken? Our team critiqued this topic, and also dove into desirable geographies, construction costs, interest rates, the rental industry, and more.
Ali Wolf, Director, Economic Research
We are now in the second longest economic recovery on record and inflation is on the rise. The good news is that disposable income is at an all-time high and the 10-year bond is still below 3%. The not-so-good news is that rents and mortgage rates are inching up. Debt is also up, and while this is not not necessarily bad, the higher interest rates are a warning sign. Tracking mortgage, auto loans, and consumer debt delinquencies also give early warning signs, but there’s nothing to be worried about yet.
Steve LaTerra, Managing Director
Steve asked the room, “How do private builders compete against public builders?” Builders such as Van Metre Homes have created panelization plants to reduce cycle times, and McGuinn Homes has created deeper capital relationships.
The second major question was, “Which geographies are desirable?” Since the answer depends on both job growth and limited entitlement difficulties, California does not make the cut. Instead, Steve said to look to the area that falls between urban and suburban zones and stay away from nationals.
Moderated by Tim Sullivan, Managing Principal
The origins of the Single Family Rental (SFR) industry came from investors’ desire to buy assets at a deep discount. Nobody was sure the space would work, and the fallback strategy was to sell the rental homes to the renters or other buyers, but now institutional capital accepts SFR. The “older” age of many of the SFR homes (1960 to 1990) requires more maintenance and capex reserves which is costlier to own, driving down yields. This was the “miss” when many investors got into the space in 2008-2010. Yields are now at 5.6 to 5.9% (they were 50% plus higher in the early days) and price appreciation has been solid. The “fix-and-flip” concept still works in lower priced markets (where homes are priced under $200k). Lenders in the space may loan from $20k to $40k per month to fix-and-flip operators (per Matt Neisser of Lending One). Some investment groups are buying new homes from homebuilders, which can help the homebuilder move inventory faster.
The most solid markets for SFRs include: Jacksonville, Raleigh Durham, Orlando, Tampa, and Atlanta.
Our top tips and tricks for SFRs:
Moderated by Jeff Meyers, President
Homeownership
Homeownership rates have not yet hit their peak and will remain fairly flat. Prices are now back to the previous peak in other markets, which makes things challenging as rates go up. In terms of starts compared to peaks, we should be at 800K new home sales. The rise of the outer suburbs is key to this growth: Suburbs are growing faster than cities and this will drive our opportunities over the next 10 years.
Relentless Rise In Costs & Home Prices
Costs have been rising across the board for development loans, concrete, and other materials. Home prices have also been rising but have been shielded by low mortgage rates. It’s important to point out that the process to get a mortgage is more difficult now. Millennials are unable to come up with enough down payment and have been relying on assistance from friends and family. We all know that building more housing will help drive down costs, but we still need to know where new starts will come from. Currently, there isn’t any developable land, and we likely won’t get back to the level we had before.
Join Us At The Next IMN
The next IMN will be in Las Vegas on September 24-25, where we will continue the conversation around private equity, debt, and joint venture financing. Register before August 17th to catch the homebuilder early bird registration discount. We hope to see you there!
