Walton COO Kate Kaminski featured in Nasdaq Trade Talks Newsletter
Kaminski answers questions about today’s U.S. housing market
What’s the biggest trend shaping the U.S. housing market today?
|U.S. public new homebuilders continue to expand market share in the current economic environment as a result of the lock-in effect rising mortgage rates are having on the resale home market. Today, new homebuilders represent approximately 30% of home sales, which is up about 20% from industry norms. As new homebuilders focus on delivering record levels of new home inventory, they need a pipeline of land to put new communities on the ground and develop lots.
The challenge homebuilders face is they are not allowed to buy long term land that is not cash flowing within 24 months, which is a change brought about from the Great Recession. This creates a tug-of-war where builders need land to build homes but cannot buy enough supply to meet their long-term goals.
The solution builders are using is off balance sheet financing options that meet their need for just-in-time inventory solutions. This allows builders to defer as much of their land cost for as long as possible. Some builders are also looking to defer land development costs where possible.
This allows builders to remain more liquid and deploy capital for other income generating activities, especially what they are best at…building and selling homes. This continues to be apparent in the financial statements of builders, with the share of lots owned trending down in recent years to protect their balance sheets. Only 37% of total lots were owned in Q3 2023, meaning 63% were under optioned/controlled.
What’s the biggest challenge facing the U.S. housing market?
|The U.S. housing market has seen a significant number of ups and downs in the last few years between interest rates, labor and materials shortages, and other factors. I strongly believe there are two primary challenges facing the U.S. housing market that we must focus on as an industry: the first being the lack of developable land supply and the second being the lack of affordable housing.
Landowners and the building industry continue to face challenges with land use policies and approvals, impact fees and the cost of infrastructure required to service new home construction.
There is a significant amount of advocacy surrounding these issues from the industry, but reform right across the country is needed to ensure we are approving land supply that lends to affordability. Most young Americans are concerned today that they will not be able to afford to buy a new home.
The new homebuilding industry is working to combat this by building homes as efficiently as possible, driving the price of new homes as low as possible, however all the inputs, including the cost of the land, costs for obtaining entitlements, development costs and fees, materials and construction costs all make up the end sale price. If we can work with jurisdictions to enact responsible development policy and standards, this should help open up supply of new community development.
Which area of the housing market do you feel there is too little optimism?
|There is so much opportunity for the economy as a whole with the Millennial and Gen Z generations growing up, getting jobs and forming households, this is surely going to have a significant impact on housing demand. Everyone talks doom and gloom surrounding current market topics like interest rates, which of course has a tremendous impact on what people can afford, but it looks like we are heading in the right direction with rate cuts projected to start this year.
With that, in 2022 alone, there were more than 80 million millennials between the ages of 22 and 39 entering their home-buying years, which provided an above-average housing demand forecast. Gen Z’s population is even larger, with over 89 million people under the age of 22 (as of 2022). Not to mention the significant transfer of wealth that is projected to occur from the Baby Boomers to their children.
As these two demographic groups enter their prime home buying years, demand for new home inventory is going to skyrocket. We already have a shortage of single-family housing supply as a result of the underbuilding that occurred in the decade after the great recession, estimated to be 6.5 million units, that has still not been caught up. As a result, we are very bullish on the opportunity for new home building, especially for affordable homes over the next decade plus.