New-home permits are down, inventory is low, desirable lots and close-in raw land is scarce, and financing is expensive, when it is available at all.
Those are the good news-bad news findings of the just-completed second-quarter 2014 reports by two of the Charlotte new housing market’s leading data and analytics firms: Metrostudy and Market Opportunity Research Enterprises.
The findings of both companies indicate demand is likely to remain strong, but developers and builders are having trouble keeping up with it.
And that does not bode well for a longer-term recovery.
“Charlotte’s quarterly starts were fairly strong; that’s a good thing,” said Bill Miley, Charlotte manager for Metrostudy, which is owned Hanley Wood LLC, a Washington, D.C.-based real estate media and analytics firm. “Closings are up and prices are rising.
“But we are just running out of houses. A house has to be finished to close, and builders can’t get ’em finished fast enough. That means the value goes up and you can charge more for a house. But it hurts the volume of closings.”
The Metrostudy findings and Miley’s analysis, completed last week, were seconded by the Rocky Mount-based Market Opportunity Research Enterprises report, which was also finalized last week.
Figures from Market Opportunity owner Bernard Helm – all based on comparing second quarter ’14 findings with the same quarter last year – indicate that closings of all new homes were up 8.2 percent, to 2,225, contrasted by resale homes, which were up only 1.7 percent, to 8,005.
“That is a change from where we were last year, when resales were so strong,” Helm said.
Sales of new single-family detached houses are even more robust, Helm said, up by 10.2 percent, to 2,040.
“It has taken the builders a long time to get going; to get their supply-chain up and running. But. . . .”
Helm followed his “but” by reporting that building permits for new single-family homes – an indicator for near-future activity – were down 6.1 percent, to 2,432, a phenomenon matched by a Mecklenburg Times count of Mecklenburg County permits.
Sales of lots, another market forecast indicating figure, were off even more, by 14.25 percent, to 1,978, Helm said.
Helm said those are new phenomena that he didn’t expect, and doesn’t yet know what to think of their implications.
“I have my theories, but for now I am going to watch that pair of numbers for another quarter before I express my opinion,” Helm said.
Looking deep, hoping long
Helm was reluctant to share his deeper analyses and submarket figures, saying he needed to share them with his “paying customers” before discussing them publicly.
Miley, however, went into more detail about the Metrostudy report, which is even rosier, putting new-home closings up 18.7 percent in a second quarter-to-second quarter comparison.
Compared with the first quarter of this year, the second quarter closings rose by 13.7 percent, but Miley said that comparison is not as telling.
“There was a lot of talk about the (wet and cold) weather in the first quarter holding things up, and you just expect the second quarter to be better” because buyers are more active in the spring and early summer.
New housing starts rose even further in the second quarter-to-second quarter comparison, by 8.2 percent, to 2,448.
But Miley, whose study is based predominantly on sending teams of reporters into the field to count homes in active subdivisions throughout nine of the Charlotte market’s 10 counties – said his biggest worry is low inventory of finished but unoccupied homes, houses that are ready to live in but have not closed.
“We don’t count the sold signs,” Miley said. “We count the finished, vacant houses that have no evidence of anyone living there.”
That inventory, Miley said, is down to 1.5 months of supply, and equilibrium is 2.5 to three months. That means prices are up, but that closings are likely to be down in the near future, which could put a dent in hopes of a sustained residential construction recovery.
Miley said he is also concerned about falling inventory of developed lots and a scarcity of raw land in areas where homebuyers want to live – a phenomenon that has been building since the market began two years ago to show signs of new life after the recession.
With 30 months of lot supply being equilibrium, supply has dropped from 99 months in the second quarter of 2011 to 69 months the following second quarter, to 45 months in 2013 and finally to 33 months in the most recently completed quarter.
“By the end of the year, we will be within equilibrium,” Miley said.
“But that is not the real story, because those numbers include all those lots way out in Lincoln, Stanly and Rowan (counties), where all those subdivisions were developed in 2007. Builders gave them back to the developers, and developers gave them back to the banks. Nobody now wants to buy out there. The last thing builders want to do is put inventory in and not sell it.”
All that means, Miley said, that the months of lot supply is even lower in places where developers want to develop and builders want to build, with the lowest being in Cabarrus County, at 1 month.
To make things worse, developable raw land in those same desirable locations is getting scarcer, and more expensive, resulting in more expensive developed lots and costlier houses.
“Everything is under contract,” Miley said. “When we point a customer to good raw land, they come back to us and tell us someone else already has it under contract.”
When developers do find unpromised land, it’s often as expensive as during the boom years.
“Farmer Bob ain’t no fool, so land prices are back up where we were in 2006,” Miley said.
“If land is about $75,000 to $80,000 per acre raw, that results in developed lots that are $75,000 to $100,000, which means the house has to sell for $300,000 or more. So as builders run out of lots, replacement lots are lot higher, resulting in some sticker shock among buyers.”
Finally, securing ready financing for development is also jacking up the price of lots and homes as builders and developers have to seek loans from nontraditional sources.
“A lot of banks still own those old, abandoned subdivisions, and they just have no appetite for development and building loans,” Miley said.
“So the only people (developers) can turn to is the hedge funds – ABC Investment Firm of New York. They’re willing to supply money, but they expect a high return. I don’t want to say that’s going to end up biting us, but it is a significant concern.”
Development north and south
Among the market’s counties, Mecklenburg still accounts for more homebuilding than any other with 38 percent of the second-quarter starts, the Metrostudy report says.
“But if you look back eight years, that used to be above 50 (percent), before Union (County) and South Carolina came of age,” Miley said.
Among submarkets, the Fort Mill area of York County, S.C., and the northern peninsula of Lancaster remain the hottest in Charlotte with 26 percent of the starts in the second quarter, the Metrostudy report says.
But Mecklenburg, or at least north Meck, is still hanging in there, coming in second place in terms of starts with 22 percent.