I recently attended and spoke at the IMN Real Estate Private Equity Land and Homebuilding Conference in Las Vegas this past week and wanted to relay some of my thoughts and takeaways from the conference.
After a long and grueling two-day conference (especially if you have ADD) I managed to pay attention to most of the panels and got some interesting insights and I wanted to discuss the challenges and opportunities for the homebuilding industry.
Among the attendees and speakers were Toll Brothers, Meyers Research, GTIS Partners, to name a few, and they all seemed bullish on the industry in general but the main challenge is the cost of affordable land and the lack of affordable/quality labor. Here were some of the main talking points and things to look out for on a macro level:
Home Mortgage Interest Deduction:
The main concern for the macro outlook of the homebuilding industry is the tax reform on the horizon for this administration. The concern is the all-important mortgage interest deduction which allows for home buyers to write off their mortgage interest as an itemized deduction. Historically, this deduction has been an incentive for buyers as they end up getting a hefty refund once they write off their mortgage interest on their tax returns.
Will it stay or will it go? It’s tough to say knowing this administration but everyone seems confident it will be one of the deductions to stay as it is a big incentive for the real estate industry and homebuilding (as you know, DT hails from the real estate industry). With potentially rising interest rates and coupled with a loss of this benefit could be detrimental to the industry and could present problems for the currently robust activity of homebuilding. It seems to be the consensus that it will stay because it is a huge stimulus for homebuilding and the economy in general but common sense has seemed to be lacking with this administration from time to time. You would hope that an economy first president would keep this deduction as it is a huge incentive for middle-class homeownership.
The risk here is with both the cost of capital for construction lending and a number of buyers getting mortgage financing as end buyers. Rising rates could present a problem for both. The rates could potentially rise up to a 100 basis points since 2016 and this will have a huge effect on home ownership and refinance opportunities. Also, everybody is unsure what Trump will do with the Fed Chair and if Janet Yelen will remain or if he will replace her with a more hawkish fed chair. If it is indeed the latter then it could present another problem for the industry on a macro level as rates will be too high and increase the cost of homeownership along with building costs. This is something to keep an eye on!
Most core markets have seen a consistent inflow of foreign capital that continues to enter their markets. The US and its primary and gateway cities are seen as a safe haven for foreign investment as the U.S. economy is really looking pretty robust right now, particularly in the job market, and the rest of the world is lagging behind. Therefore, demand is still strong in most of the core areas and competition for assets remains strong.
Cost of Land:
This was another main talking point at the conference. Where is all the affordable land that can make a deal work and pencil out on a conservative basis? Gregg Zeigler of Toll Brothers said they are paying upwards of 45% of the land cost in a development project in markets like California (compared to an industry standard of 25% in most markets) because there a lack of opportunities unless you are paying a premium. Because of this, they are also getting creative with their deal structures by doing deals with option contracts on land or JV with the owners of their targeted development sites and other strategic partners. This is a risk diversification strategy as they do not want to be caught with their pants down if there is a potential slowdown or event that causes demand to ease on the home buyer side.
What markets present opportunity:
As a final point, there seems to a bullish outlook for the homebuilding stocks and industries. Geographically, attendees were less excited about opportunities in the Midwest and potentially overbuilt markets like Houston. Otherwise, there seems to be a robust outlook for most coastal cities and well located urban infill sites in primary and gateway cities.
It was a great honor to speak about our land entitlement strategies in Philadelphia. I am looking forward to next year in Las Vegas and doing it all over again!
PS: Prayers for the victims of the Las Vegas tragedy, I was lucky to leave the day before this horrific event, please donate to the victims families here