This story was originally published in Builder.
A new wall of worry for a housing market enduring a whiplash-effect of interest rate spikes on top of home prices already disconnected from household income baselines, on top of the after-effects of mortgage interest deduction and property tax caps.
Those forces and factors weigh on the current market. Many experts expect that economic and demographic fundamentals--as strong and as full of momentum as they are--might soon neutralize and overcome those whiplash-effects, moving structural housing market demand into positive growth during and even after 2019.
Capital investment sentiment--at least according to some residential developers--now seems to have been caught up in the back draft at a moment developers need its resources to replenish a diminishing supply of more affordably-priced improved home sites.
At last week's Zelman & Associates Annual Housing Summit in Boston, The current installment of The Z Report noted a strong negative view of housing's outlook from part of the real estate ecosystem residential developers and builders can ill-afford to lose conviction or keel, especially when the need to bring more affordable lots and products and communities online is more critical than ever. According to The Z Report:
"From our perspective, investors' tone at the conference was as downbeat as we can recall since the cycle began, including the taper tantrum."
That view came from the horse's mouth, from investors attending the event.
The flip side of that perspective emerged this week during conversations with residential developers who're saying it's getting harder lately to access capital on affordable terms to continue to do what they do, which is to bring more building lots and community tracts online for builders.
"If we can't get the investment we need now--at rates and terms that will pencil in our markets--we're not going to have the supply of more affordable home sites the market needs over the next couple of years," one Carolinas-based developer of 55+ residential communities told us this week. "Master planned developers everywhere are encountering this issue."
We started to hear of investor hesitancy around longer-horizon commitments in residential real estate at the end of June. At that time, growing investment misgivings around capital put in place where entitlement risk and other barriers to visibility are a factor emerged as fissures in what had been fairly robust, across-the-board appetite for residential real estate placements.
Now, particularly as large home builders--the biggest customers of residential developers' forward pipeline of lots and neighborhoods--encounter what's becoming an unnerving stress test of market softness for housing's eight-year recovery fundamentals, they're checking up on their own land acquisition plans.
Even as sales and demand momentum for lower-priced new homes and communities continues unabated, questions around higher interest rates' ultimate impact on monthly payment tolerance levels have served to curb the enthusiasm of both home builder land acquisition pros and the Wall Street capital investment crowd.
This, of course, will self-fulfill as a prophesied outcome. Forward investment in fewer less-expensive lots will constrain supply of those lots, further pressuring prices on the very land that would begin bridging the gap between incomes and home prices. This will create two negatives, further squeezed margins, and even higher average selling price tags, suppressing demand by pricing out would-be buyers.
A vicious circle at a time the business has reached a moment of truth around "bending the cost curve" to make more housing more accessible, attainable, and affordable to more of America's working households.
This story was originally published in Builder.
