Why Home-Builder Optimism is Rising

SAN DIEGO—The mood at the recent PCBC here was decidedly more upbeat than at January's NAHB show, and it has a lot to do with Millennials, Associated Bank's SVP/Chicago market manager Jim Pape tells GlobeSt.com. Pape, whose Midwest-based team provides financing for a variety of CRE projects, attended the conference and spoke with us exclusively about the trends he noticed there.

GlobeSt.com: What industry trends did you notice during PCBC?

Pape: At the NAHB show in January, there was more of a wait-and-see attitude, mainly because the Millennials weren't buying homes. This was my first time at PCBC, and in talking to several home builders, I felt that it was more of an upbeat meeting. Home builders are starting to see some sales—nothing drastic, but the second half of this year should be more positive than the first, and 2016 will be a good year. The key is if the Millennials start buying, we'll see more opportunities and sales. We're seeing more sales to empty-nesters, so higher-priced units are doing well, but we are starting to see more affordable units selling to Millennials in the 25-to-35-year-old age range.

I'm noticing areas that were definitely slower, primarily in the Midwest, experience some upbeats, and that's where we're focusing. I was very pleasantly surprised. We'll not see a tremendous year like you would have had in 2004 or 2005, but we're starting to see a stronger year. After the NAHB show, I would have said we're at the end of the first inning, but now I'd say we're in the second or third inning, which is positive.

Some concerns are the cost of goods is continuing to rise and where interest rates are going to go. That might be a reason why some of the Millennials are now starting to look at buying instead of continuing to rent. If interest rates start going up, now may be a good time to buy.

Also, because of the California drought situation, we noticed a lot more green, water-saving products and a lot of talk among builders about the drought. We don't have that issue at this time in the Midwest, but in California there were a lot of people interested in that.

GlobeSt.com: Which specific topics covered during the conference did you find most interesting?

Pape: The main session we went to involved land-financing groups, where you could go and meet the people who have the money: the banks, equity partners and mezzanine lenders. It was interesting to talk to them from my side. It's interesting to see where the home builders are getting their money. There were not many big surprises—they're still using a lot of their own cash and not using a lot of bank finance for land funds at this time, but we think that's going to pick up in the second half and in 2016. There will be more opportunity for sales, and they will be looking to buy more land. They have been buying land since last year and thought 2015 was going to be stronger than it was; now that they're seeing some uptick in sales, they will probably go out and start making more investments to create more land funds.

GlobeSt.com: What trends are you noticing in home-building finance?

Pape: In the Midwest, we're still seeing public home builders in the process of getting approvals on closing. It's still a lot of smaller products; there are not a lot of subdivisions in the Midwest, so we're still seeing as few as 10 to 12 units to as many as 60 to 70 units. I think that trend will pick up; there will be more infill, which means prices are higher, and usually infills are being bought by empty-nesters or second-home buyers because the price points are higher. With Millennials, the pricing is going up and there will be more larger tracts being put under contract.

GlobeSt.com: What else should our readers know about this year's PCBC?

Pape: It was a very positive conference compared to the national home-builders' show. There's confidence, but there's still a question of what's going on.