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Indy-area homebuilding bouncing back

October 27, 2012

Even as home builders began calling the housing market bottom two years ago, they had to take solace that the market wasn’t getting worse since there were few signs of a strong rebound.

No more.

ahq-building-permits-fever.gifNew-home construction is on track to rise more than 10 percent this year in the nine-county Indianapolis area, and market participants expect improvements in the same percentage range for the next several years.

Builders say sales have picked up, demand is steady, and sale prices are rising. They’re moving to buy raw land again as the market burns off what had been a glut of developed lots.

Nationally, home-builder confidence has risen to a six-year high, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

“It’s good. It should get better,” said Alan Goldsticker, the Indianapolis president for California-based Ryland Homes. “Hopefully, it won’t go crazy.”

He said a slow pace of improvement has quickened this year as buyers move to take advantage of previously-unheard-of-low interest rates.

Builders are on track to put up 4,000 homes this year in the Indianapolis area—a healthy jump, but just a third of the annual new-home total during the housing market peak.

“We’re far from any saturation,” said Goldsticker, a 30-year veteran of the local market. “Demand is there, and at these levels is sustainable.”

That’s not to say there aren’t headwinds for the housing recovery: Materials costs are rising, and credit remains tight for buyers. There’s even talk of a potential shortage of home lots.

The nine-county area still has an inventory of about 16,000 lots ready for new homes, but if the pace of construction continues as the Builders Association of Greater Indianapolis expects, builders will need about double that many in the next five years.

The takeaway for new-home buyers on the sideline waiting: You probably missed the bottom.

“Obviously, we’re on our way up,” said Curtis Rector, founder and president of locally based Arbor Homes, the area’s third-largest home builder by permits filed in 2011. “It’s certainly taken longer than I thought, but we are certainly pleased with the strong bounce back.”

‘Bullish’ outlook

Rector said he’s “very bullish” about the next few years for home builders. He’s calling for a 15-percent jump in new-home construction in 2013, followed by continued strength in the following years.

Privately held Arbor has about 500 lots ready to build and another “couple thousand” in its pipeline, including about 500 it plans to develop in 2013.

There should be enough demand in the market to sustain 10-percent annual gains, Goldsticker said, as interest rates remain at or near historic lows. Another foundation for the market: Many who lost their home to foreclosure are rebuilding their credit and likely will buy again in a few years.

“My guess is, a lot of people will kick themselves a few years down the road if they don’t take advantage of these interest rates and current costs,” Goldsticker said.

Veteran builder Paul Shoopman, president of locally based Shoopman Homes, credits the recovery to a variety of factors, including low interest rates and stabilization of existing-home values, allowing more move-up buyers to sell and move up.

There’s also an emotional element, as the downturn becomes a distant memory.

“Everybody feels better—the last eight months everybody’s had a breath of fresh air,” said Shoopman, who builds homes ranging from entry level to $900,000 custom mansions. “Hopefully, that pattern continues.”

Investors certainly are feeling it. Publicly traded home builders, including local market leaders PulteGroup Inc., headquartered in Michigan, and Beazer Homes USA Inc., based in Atlanta, have seen their share prices soar this year.

Buying land

Locally based M/I Homes has spent more than $10 million this year buying undeveloped land for the first time in four years, said Cliff White, the builder’s Indianapolis-area president.

During the downturn, savvy builders bought hundreds of distressed lots from competitors in foreclosure or banks saddled with unwanted property. Even though those deals are gone, land prices remain much lower than during the housing peak.

In some cases, residential land in Carmel that sold for as much as $75,000 per acre now goes for $40,000; Westfield property has fallen from $35,000 to $20,000. The parcels are owned by developers and often already zoned for homes, White said.

“All of us are seeing a stronger market,” he said. “Right now, the situation is finding developable ground at a cost that still makes sense to purchase.”

Ryland is buying land in areas where it expects demand will push selling prices high enough to offset the rising costs of building. Among the areas: Zionsville, Carmel, Fishers, Noblesville, Greenwood, Plainfield and Brownsburg. The company’s average selling price is about $240,000.

“We don’t try to create demand,” he said. “We try to fill it.”

Buying over renting

In terms of product-type, Goldsticker said new suburban homes haven’t lost their luster for many buyers, though urban infill product including town homes are gaining ground.

He expects some condo developments that were switched to apartments during the downturn may be switched back to for-sale units, giving those seeking a more urban, low-maintenance lifestyle a purchase option.

M/I has focused on the baby-boomer-driven, move-down market: More than 50 percent of its sales this year are single-story ranches, mostly in southern Hamilton County or the Center Grove area of Johnson County.

Their average sale price is about $220,000, up from $210,000 last year, in part because M/I has shifted away from competing for first-time buyers.

Demand from first-time buyers—the backbone of Arbor’s business—should be particularly strong thanks to continued low mortgage rates and growing consumer confidence, Rector said. The company’s average selling price is about $165,000.

“We’re always doing an analysis of cost of home ownership versus renting and, no question, the cost of renting was better for a while,” he said. “Now it’s very affordable, more so than renting, to buy.”

Shoopman has seen improvement in demand for upper-end homes, as some who have tried for years to sell their existing homes are finally getting nibbles from buyers. (Shoopman’s first company was Dura Builders, which he sold to KB Home in 2004. KB left the market in 2007.)

Shoopman is on track to take out permits to build 90 homes this year, up from 76 last year. Their average selling price is $308,000.

As buyers come back at all levels, builders are passing along some materials price increases, White said. Drywall, for instance, is expected to rise about 30 percent in 2013.

Ryland’s lumber costs have risen about $5,000 per house, Goldsticker noted.

Lot shortage?

The central Indiana market will need about 28,000 lots in the next five years if permits continue growing 5 percent to 10 percent per year, said Steve Lains, president of the Builders Association of Greater Indianapolis.

At the moment, there are about 16,000—putting the market pretty close to the equilibrium of a three-year supply.

“We’re right about at the spot where it’s time to make plans to put new lots in the ground,” Lains said. “That said, you can find acute shortage in some areas [including southern Hamilton County].”

The question as builders add lots at a higher cost basis is whether buyers will scoff at higher sale prices.

Lains said that’s the next “speed bump” for a market with reasonably good builder margins. At the moment, he said, “the recovery is positive but not strong enough to support price increase.”

Even if the recovery picks up speed, don’t expect large price hikes, he said. Competition remains fierce among builders thanks to a handful of recent market entrants including Kentucky-based Fischer Homes, Virginia-based Ryan Homes and Texas-based David Weekly Homes.

“We’re still one of the top communities of our size as it relates to affordability,” Lains said.•

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