Thanks to an improved economy and job growth, the housing market in 2015 pulled out of its doldrums -- sending new housing starts steadily upward.
That said, there are numerous challenges facing the housing industry in 2016.
The housing recovery has been uneven, with most of the growth in the market's high-end. Prices have escalated due to construction labor shortages and increased housing demand (consulting firm PwC estimates 3.2 million people are in need of homes). Additionally, a recent rise in interest rates will soon carry over to mortgage rates -- though that won’t affect home sales as much as other overall costs and access to loans.
Less costly homes are available for potential owners but they require flexibility -- or at least a little elbow grease. Used homes are more than 25 percent cheaper than new ones, making first-time buyers more likely than ever to forgo a new home in exchange for updating an old one. The surge of DIY shows on television are geared toward these buyers.
At its peak in 2004, the homeownership rate was about 70 percent. Now the rate is 63.5 percent, the lowest it's been on record. Those who don’t want to buy -- either because they’re priced out or don’t want to commit to what may seem to be an uncertain and long-term investment -- are increasingly turning to rentals.
Rentals have been a boon for apartment REITS. As you can see in the chart below, apartment REITs have far outpaced other REITS, including home rental REITs (which suffer from lower margins than their apartment counterparts).
Renting an apartment or owning a traditional single-family home aren’t, however, the only options for buyers. Modular homes, shared housing and tiny houses could help meet housing needs, though none of those options are likely to meet every need.
Homebuilders that are thriving are reining in costs by embracing lower-end housing. DR Horton and LGI Homes have been very successful in the entry-level segment, outperforming their North American peers last year.
About 20 percent of Meritage Homes current output are entry-level homes but it plans to raise that share to 35 percent by 2018, with the addition of “entry-level plus” homes (those with better amenities than entry level but still geared toward first-time and low-end buyers). Companies like luxury homebuilder Toll Brothers have suffered by largely catering to the saturated move-up market (meant for people who already own a home and want to move to something bigger or better).
How well builders perform in 2016 and beyond will hinge on how effectively they cater to the overall housing market -- not just the high-end.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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