In the big real estate debate of 2005–whether the bubble will burst or the air escape gradually–the largest U.S. home builders all appear to be in the latter camp.
At the New York Society of Security Analysts’ 9th annual home-building industry conference in Manhattan earlier this month, analysts and chief executives of large public builders such as Toll Brothers Inc., Beazer Homes USA and Standard Pacific Corp. all said that while they anticipate slightly slower building activity in 2006, the housing market will remain fundamentally strong.
“I think there’s truth to reports that markets are not as robust as last year or the year before,” said Toll Brothers chief executive Robert Toll.
But any slowdown has to be put in perspective, he added. For the last two years, home building activity has been off the charts, as interest rates have remained at their lowest levels since the ’60s.
In the decade prior to the last two years, business was already “pretty spectacular,” Toll said. The market appears to be returning to “that kind of pace, versus the pace of the last two years.”
Home building now and into 2006 should be “back to more normalized levels,” said Ian J. McCarthy, chief executive of Beazer Homes USA.
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The prediction seems to be supported by recent data. Late last month, reports showed that new-home sales increased 13 percent in October from the prior month to a seasonally adjusted annualized pace of 1.424 million, possibly in part due to hurricane-related rebuilding activity.
But in support of the view that housing activity overall is flattening out, the pace of home price appreciation slowed, with the median new home sale price up just 0.9 percent in October to $231,300 from $229,200 a year earlier. And existing home sales dropped 2.7 percent in October to 7.09 million from September’s revised 7.29 million annual pace.
Further boosting the home builders’ somewhat-muted-but-still-positive expectations for construction activity in 2006, the key employment report showed that 215,000 jobs were gained nationally in November, almost exactly what economists had been expecting.
The report crowned a week of solid numbers, which showed the economy remains on a solid footing. What’s more, the construction sector accounted for 37,000 of the jobs gained.
Going into next year, new home sales are likely to settle in to a 1.1 million to 1.2 million annual pace, just a touch below where they have been this year, said Tim Sullivan, president of Sullivan Group Real Estate Advisors, at the conference.
There’s likely to be “some volume reduction” in terms of builder activity in 2006, as well as slower home price appreciation, he said.
Builders might actually “have to work for sales,” he said. But overall, such moderation is “healthy,” he added.
Builders indicated that they remain defensively positioned. They are trying to control costs in every area, from using more options on land to negotiating directly with suppliers and eliminating middlemen.
David Keller, chief financial officer for builder Technical Olympic USA Inc., said the firm even switched from costly blue and red business cards to cheaper plain vanilla ones.
But even though the builders’ optimism could be described as cautious, they all said that a modest downturn wouldn’t really hurt their bottom lines.
Given the advantages the large public builders have now over smaller builders in terms of ability to negotiate for land and financing advantages, “we can still take market share,” McCarthy of Beazer Homes said, “even in a downturn.”