Atlanta, the former #1 New Home Market, remains a barometer for the Nation. Moderation is the trend in Atlanta. Year to year new home growth has dropped from 15% in 2016 to 8% in 2017, and to our projected 3% to 5% in 2018. We see the same moderation in growth across all of our 18 Southeastern markets and in the top 10 US new home markets. (Top 10 Trend chart) The growth rate trends for the top 10 cities look almost the same when shown together. We experienced the housing collapse of 2006 through 2009. Then we lived through the tax credit bounce in 2010 followed by the post-tax credit decline. Then from 2012 to 2015, all markets experienced a burst in new home sales activity. The top 10 markets saw year to year growth rates of 27% to 72%.
After 2015, moderation set in and growth rates for the top 10 decreased to a range of 8% and 16%. Continued moderation is our forecast.
Why the Moderation?
The positive growth of 2012 -2015 was a product of cheap legacy lots and extremely low levels of high-quality resale competition. As the distressed lot inventory dried up and the industry began to develop again, we discovered that development costs had risen far beyond inflation. Robert Dietz has estimated that those costs have risen an average of 30% over the last 5 years. (footnote) In Atlanta, development costs are up 60% on a typical Single Family detached lot.
Compounding this problem is the added squeeze from the increase of high-quality resale competition. If you did not have to sell your personal home from 2010-1014, you did not because most real estate was underwater. Prices bottomed nationally in 2012, and by 2014-2015 existing home owners were finally able to begin to sell. We are a victim of our own past successes — All of the hundreds of thousands of new homes that we built and sold as an industry over the last 20 years are providing very stiff competition for today’s new homes. These homes are not obsolete. Most are more highly amenitized than we can produce today, have been updated, and are in better locations. Robert Dietz refers to this as “a disconnect between the prices of new homes and existing homes.” So, the reasons for the national new home moderation? No more cheap lots, and increased resale competition.
What do we do? Drive ‘til you qualify, Build Smaller.
As we approach a hard price ceiling compounded by limited income growth and increasing mortgage rates, how is the market coping? Essentially there are only two paths. Option 1 – Push farther out from the core counties where there are still some distressed lots available. Option 2 – Stay closer in and build smaller. We are seeing both happen across the country. Our focus here will be Option 1.
Moving Farther Out
As the supply of distressed lots disappear in our core areas, we are seeing a migration farther out from city centers. In fact, several of the core counties in Atlanta were down in new home sales in 2017 for the first time since we bottomed in 2009. The six core counties of Metro Atlanta have actually been losing market share to the outer counties since they began running out of distressed lots in 2013/2015.
Who are these buyers choosing to move father out because of price?
There was an erroneous assumption in our industry that this would be former apartment renters turning into first time buyers. Headlines have been all too frequent over the past four years proclaiming that first time buyers were going to rescue our industry by forsaking apartments and moving out to the periphery to buy. As you can see from our New Home Buyer Survey data, I was seeing something completely different. First time buyers began to drop off dramatically after 2013.
It is not a coincidence that this happened as we were also running out of cheap lots. First time buyer demand is highly elastic and rises and falls directly related to price. However, in 2016, I thought I was being proven wrong. One of the fastest selling communities in Atlanta for 2015/2016 was 54 miles from downtown, priced from the $180,000s and built on left over distressed lots. While the price point screamed first time buyers, my demographic data said otherwise. Luckily, this was a long-time customer, prompting a phone call. The answer? The community was originally marketed as a starter home community. It was quickly discovered that all of the interested buyers were not of the first-time variety, but were instead empty nesters. There was never even an attempt to market the community as active adult! The product was switched from two story to ranch, and the rest is history. What we uncovered was tremendous pent up demand for lower price Active Adult housing opportunities in non-core areas. We now refer to this community as Atlanta’s first Triple A, or Accidental Active Adult Community.
It is no secret that some of the bestselling communities around the country are the Age Restricted Active Adult Master Planned Communities. Kolter, Dell Web and others have tapped into this market with prices ranging from the mid $300,000s and up. The secret is that there is possibly an even deeper market for lower priced Active Adult communities in these same outlying areas.
How Long Can We Keep Pushing Out?
Price sells, and this is the driving force behind our push farther out. As long as there are still distressed lots available, we should see this continue. The average lot price today in the Core Atlanta counties has risen to $84,000. The average lot price in the outer counties is also rising but is still nearly $50,000 less at $35,000. This is still well below replacement cost. What happens when all of the distressed lots are gone? Simple economics: Prices will rise, and demand will fall. How do we continue to meet demand at lower prices? Short of a miraculous drop in development costs across the country, we may have to begin to think outside the box. For example, we are working with several clients to develop new product that would continue to reach the lower price point active adult buyer on newly developed lots. The houses will be smaller, and in most cases only offer a one car garage. However, the goal is to offer the all-important active adult features of maintenance free, turn key living at a price well below the traditional master planned active adult communities. Back to simple economics – There are far more potential buyers at $250,000 than at $350,000 or higher. This new active adult product is just coming out of the ground now in the southeast. We will see in the coming months how the market will respond.