Housing is making a big comeback. The numbers are hard to argue with. For years, we've built fewer homes than are needed to keep up with population growth, soaking up excess inventory from last decade's bubble and then some. Now, homebuilders have the wind at their back as construction booms. Housing starts are up more than 30% year over year.
But don't take my word for it. Here's what eight CEOs of the nation's biggest homebuilders said in conference calls that took place in the last three months.
Stuart Miller, CEO, Lennar (NYSE: LEN):
While production continues to lag the need, we are experiencing supply shortages against a growing demand. While some have argued that increased demand is being driven by low interest rates, we believe that it's being driven by a generally improving economy, driving household formation and a decoupling of households under one roof. New families are seeking to find independent shelter. Where attractive financing is available and obtainable, households seek for-sale product. But in the absence of a for-sale option, they seek rentals. But that just increases demand for rentals and drives up the rental rates, making for-sale monthly payments even more attractive. The bottom line is that there are too few dwellings for a growing population and for normalized household formation.
Larry Nicholson, CEO, Ryland Group:
Not a lot has been keeping me up at night. The interest rate thing ... as long as the economy continues to move forward on solid ground, I think we are fine. A year ago I was worried about Fannie and Freddie, but today I am not. There is mortgage availability. So I am not real concerned with a whole lot right now. I think that pricing will continue to move up. If you look at peak-to-trough pricing and you look at where we are today, we still got room to move. So I think there is a lot of things still playing to our favor today.
We're dramatically improving our margins. We think we're in a wonderful position. There is a shortage of finished homes on the marketplace. So not only with our good inventory of specs that we consistently have maintained in this company, we will continue to push price as well as volume. Clearly we've said before, our goal is, improve the bottom line better than we improve the top line. But nevertheless, we are in a position where we can do both.
Let me address the recent concerns many have raised regarding the recent uptick in mortgage rates and its potential impact on housing. In my view, there is no question that housing dynamics are significantly better than they were a year ago. At the same time, in my view, we are still in the early innings of a recovery that is continuing to accelerate. The positive factors underpinning the current housing recovery remain fully in place and will continue to drive favorable market fundamentals.
There is substantial pent-up demand driven by population growth, job growth, an increase in household formation and record affordability. At the same time, in most areas of the country, there is a shortage of supply and monthly mortgage payments for a typical home are lower than rent; further reinforcing the appeal of homeownership. Despite the recent rise in rates, affordability is still at extraordinary levels, and demand is significantly outpacing supply in every market we serve. Anecdotally, we are hearing from the sales floor that the uptick in rates has actually created an increased sense of urgency, as buyers don't want to miss out on this incredible opportunity.
So I think that the United States is in a unique place where it's a safe haven for capital. As we look around the world, there's not a lot of safe havens. And so housing benefits from the pent-up demand. It benefits from the low interest rates. And the home value and the affordability, as you know that the affordability is well imbalanced, and there seems to be room to run between the cost and what the affordability index would anticipate. And so I think the industry is working hard to expand to meet the demand and the needs of the buyer. We're creating jobs, which is great for our country. We're helping the GDP, which is certainly lacking in many areas. So I think the aggregate impact of providing housing and value is working out very well for everyone.
In a number of communities across the country, demand has been so strong that we have taken action to slow the overall pace of sales. While I would expect that everyone listening to the call today is aware of builders taking such action in Phoenix, Tampa and Washington D.C., we are now seeing this in cities as diverse as Austin, Cleveland and Seattle. In fact, while it's tough to get precise data, a recent survey of our division president suggests that we have taken steps to purposefully slow sales to varying degrees in 25% or more of our communities. I am sure that most of you know the answer, but why would we limit sales? Given the lack of land development during the 6 years of housing market downturn, finished lots in the better submarkets are scarce. Accelerating sales pace means that we sellout a neighborhood sooner and have to look to the next community which may not have been developed yet. Although less of an influence, labor constraints in certain markets can also make it prudent to meter the sales pace to help ensure build times are not extended too far into the future.
In the majority of the situations, we have been able to raise our home prices more than the construction costs have increased, thereby increasing gross margin. Southern and Northern California, as well as Phoenix, certainly have many communities that fall into that category. In other markets, we've been able to raise prices -- home prices equal to construction cost increases. Houston and Dallas are examples of that. And finally in some markets, the construction cost increases have actually risen ahead of our community home price increases. This is in a minority of the markets, but Minneapolis comes to mind in this category. Fortunately, home prices are gaining momentum here as well. In the aggregate, our home price increases have more than offset any increases in construction costs that we have seen to date, helping contribute to our gross margin increase.
Ara Hovnanian, CEO, Hovnanian:
While the housing market is clearly recovering, we have not yet reached the level of the previous lows of 1 million starts. All of the excess production of mid-decade has now been wiped out by the deficit production plus a little. In fact, on Slide 26, we show the excess starts from the last decade and stack them -- excess above the average, stack them on top of the deficit reduction of the last 5 years, and what you see is that the -- we are still far below the average production for the decade. As has often happened, the market has overcorrected, and on -- in this case, on the downside. In addition, like the '70s, most demographers are projecting higher housing needs this particular decade, based on population and household growth. The Harvard Joint Center for Housing Studies, Moody's and others, are projecting housing starts between 1.6 million and 1.9 million new home starts per year for the entire decade. This exacerbates the current underproduction issues.
Steve Hilton, CEO, Meritage Homes:
As much as prices have gone up, affordability is still at a historic low, of course a lot of that is because of interest rates. Sooner or later rates are going to go up, and so we have to be mindful that and I think we are, and that's why we are focused on more A&B locations than going into the outer markets. I think the thing that people aren't really talking a lot about is that the entry level business, at least from my vantage point, really has been recovered to the degree that the mover market is and the interest and see what happens out there, but affordability is one metric to watch, and we still feel very good about it.
Hat tip to SeekingAlpha.com for providing conference call transcripts.
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