Why Home-Builders Have a Bifurcated Philosophy

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SAN DIEGO—Both high-end homes and “price-point” homes are on the agenda for home-builders, Woodbridge Pacific Group's CIO Andrew Murphy tells GlobeSt.com. Murphy will be speaking at IMN's 3^rd Annual Real Estate Private Equity Forum on Land & Homebuilding (West) in Las Vegas October 14-15. We spoke exclusively with him about what the conference will hold for attendees, trends he is noticing in the home-building industry and challenges in land acquisition.

GlobeSt.com: What will attendees of the private-equity forum gain from it?

Murphy: The IMN conferences I've attended bring together industry professionals that are currently investing capital and operating companies in the sector. When I'm interested in a particular investment or business line, I'm always interested to hear what other professionals are thinking about the same topic. I don't always agree with their opinions, but their observations help me refine my own thinking on the topic. While I also appreciate the views of the consultants to the industry, and we hire and employ many of them, at these conferences I'm more interested in the people who are making investments with committed capital and are staking their professional careers and livelihood on their judgment and decisions. Additionally, at the land and home-building conference, it's helpful to hear what people are experiencing in other parts of the country, since trends can start small and even start regionally before they become nationwide phenomena.

GlobeSt.com: What are some trends you are noticing in the home-building industry?

Murphy: Home-building activity generally reflects the job creation and demographic trends in the country, albeit on a regional basis. The big national trends affecting us now are that 1) the economy is growing and adding jobs, and 2) the three big demographic waves of the Baby Boomers, the Millennials and the recent immigrants are all influencing the market. Regarding the economy, over the last 10 years the US economy has added just below 8 million jobs, while more than 33 million Americans have graduated from high school. In non-recession years, the economy has added a similar number of jobs to high-school graduates, but we're still backfilling for the job losses we suffered. Accordingly, the better locations and strong job centers have recovered nicely and are approaching peak pricing, while the more distant commuter markets and less robust job markets are still in a very early portion of their home-building recovery.

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Regarding the demographic trends, the Baby Boomers are now in their mid-50s up to 70 and are no longer seeking move-up housing for growing families (other than for multigenerational living). Bigger is not necessarily better, but rather, high-quality homes in great locations featuring modern efficiencies are attractive to this group. The Millennials have been hit hard by the limited opportunities offered in the recent economy. However, as they are entering their 30s, they are becoming buyers, and a lot of the forecast of their demise as homeowners were sensationalized since they just couldn't afford to get into the housing market—but they are now. Lastly, the recent immigrants are historically interested in homeownership by their second decade or second generation here. Regardless of the measurement, they are driving housing demand, and builders have to pay attention to where they are and which places and products attract them.

GlobeSt.com: What do you find challenging about land acquisition?

Murphy: As I look at the economic and demographic factors, it drives me toward a focus on higher-end, well-located projects for Baby Boomers, with a keen eye on the progress of the Millennials and niche opportunities for the recent immigrants. That leads us to look for close-in locations, which are few and far between, very expensive and often with some challenging site or approval conditions. We've been successful in finding these opportunities, and since we're comfortable with higher-end-production product, it's a natural fit for us. During the downturn, very few people were actively developing land, and while there are a lot of “old maps” that still exist, the improved close-in properties are rare. We're comfortable with both land development and home-building, so that helps us with these more difficult sites. We're also looking at closer-in “price-point”-driven housing that can appeal to Millennials who want to get into the market. In those cases, the higher densities create product and site-design challenges in order to meet the density and affordability that can satisfy that demographic. The last land-acquisition challenge is that everyone remembers the recent downturn, and while we need to be mindful of that, we also need to keep our eyes open for opportunities that are supported by economic and demographic trends, since the same value proposition that struggled in 2008 could be the big winner in 2017. There's a good reason to have a small rearview mirror and a big windshield.

GlobeSt.com: What else should our readers-know about the homebuilding industry?

Murphy: The home-building industry has always been one of the primary cylinders that drivers a growing economy during an expansion. At its current levels, the industry is still 40% below its long-term trend of production and economic activity—it has a long way to go to reach its trend level, let alone its peak level. Low interest rates and reset affordability have helped in the last few years, and now I think we as an industry are positioned for growth that is driven by the health and vitality of recovered household balance sheets and confidence. We should see strong and consistent returns from home-building in the foreseeable future.