KGCI: Real Estate on Air - How Home Builders Are Feeling In This Market

Episode Date: June 18, 2024

And welcome to another edition of the nerdy agent podcast. They had to have me add that. So much better. I'm your host, Luke Pederson, with my brothers and fellow nerds, Josh and AJ. Today we are going to discuss all things builders, builder confidence, what it's looking like in the Twin Cities area specifically, because that's where we sell real estate and what the current market's like looking for builders. To start, explain to the listeners, how we track builder confidence,

what it is where they can find that and what it means. Yeah, so we've been. We talked about a couple of different podcasts, so we're not going to go way into the index again, but there's a Home Builder Confidence Index that gets released on a monthly basis. It includes a number of different questions that are asked of builders nationwide that kind of gets summed up into a based on the way they respond, get something to a 1 to 100 score. So then we have an ongoing metric that shows us on a 1 to 100 scale how confident builders are over time. So it's a really cool thing to be tracking because, as we'll talk about in a little bit here,

home builder confidence leads to certain behavior changes that lead to impacts to both supply and demand, but also little arbitrage pockets for buyers. And yeah, it's just a really important measure to track. I know we're not going to go super in depth into the index, but what's it looking like right now compared to where it was in the last couple of years? Just so people know. And months. I mean, what's interesting here is what's funny is looking at this chart, if you can say, it on there, probably not.

You just tell off the white sheet of paper. But you guys, you know what's funny is that are the builders getting less confident or are they just really freaking cold? Because it looks like last year the same thing. It's kind of a similar trend to the Minnesota market, right? It really is. Give the people some numbers. Well, granted, okay, so like back in 2021, the builders were very happy, go lucky because the rates were so good. So, you know, the money was essentially close to free.

So they said flip a coin. Yeah, right. Oh, yeah. I had a flip a coin situation. That was a fun one where there was getting multiple offers with builders. There was all sorts of stuff. They were paying out much less in commissions because they didn't really need to pay out as much to get buyers in the door. They didn't have to offer incentives. They didn't have to negotiate. The index was around, you know, in the 80s. So this index goes to 100. So they were 85% of the top. Which is like the top we'd seen. Yeah, right. And slowly as rates, you know, got worse. And again, seasonality. crept in from, you know, the end of 2021 to the end of 2022, the index went from 84 to 31, with a large drop around the end of the summer of 2022 when we did see those high rate increases. Now, we saw another seasonally more confident set of builders this year even, but we didn't see it creep back up to those previous highs, you know, so it only got up to 56 this year in July. And now it's tapering back off into the winter. But one thing to note is right now it's at 34 for November.

If you look at November 2020, it was at 33. So they're actually one point more confident than they were last year. So while it is going down, it will be interesting to see when December comes out. And we don't have this chart any further back than this. But I would imagine that typically December is the bottom of the year. It's confusing to me. This chart makes it seem like building. have a very short-handed mindset.

Like in December right now, if I was a builder, I would actually be, I feel like I'd be predicting that June, July, are going to be better months this year for me, May, June, July, 2024 than they were in 2023. So my confidence right now would actually be pretty decent. It's more reactive. Because the rates are moving in the correct direction.

Well, and I think a good thing, maybe you guys know the answer to this, but what are the questions that lead to this index score? That would be interesting to look into because they might be more Luke related to are you giving concessions on spec homes right now? How long is it taking your spec homes to sell? Are you confident in selling your spec home? You know, like stuff that's already done rather than how many starts are you doing? Because if you're starting.

You would theoretically they'd be starting a bunch right now theoretically. But behaviorally, at least from what I've seen, the builders tend to be a little bit more reactive just based off of all of the fears that are. still out there, you know, since 2008 with the market that we're in, builders have had pretty bad moments in the last 20 years that have caused them to be a little bit more skittish, it seems, right? So right now, we're seeing it too. I mean, like end of year numbers for builders, I don't think are going to be as impressive. I mean, Lenar actually had a pretty good quarter last quarter, but with what they're doing right now, you can see there's a lot of fear in the thing. They're trying to get rid of homes. And I think.

think it's just a reality that they always look at things pretty immediately like any other large corporation does. But then they probably forecast out into the future, but they're not going to bet the farm on, well, I guess I'm going to hope rates come down and I hope buyers come back and I hope that because they've kept doing that and then they find themselves in the same position there right now, right? They got more confident in the summer. They said, well, this is going to continue. So let's build up some specs. And now they're going, oh, shoot, we have way too many specs. But every single winter that happens to them. I know. So they probably, should have been more thoughtful about how they were building out, but it's kind of position they're in

right now. It's also, I would be curious to hear which builders get included in this as well, because if I'm a custom home builder right now and you're looking at 7% interest rates and you're building half the number of homes that you normally would, like a buyer has to come to you and want to build a house with you, right? So it's a little different. Lenar's making very small changes most of the time. So I don't even think when rates got really, really good that they're like, let's build a million homes now. But they operate on thin, thin margins. So a small change for Lenar actually has a significant impact on their business because their margin rates are so different.

So if you're dropping price or you're taking huge concessions on rates, you go from being really profitable to being, oh, shoot, we're kind of getting close to tipping upside down. For sure. I do think the other thing that you have to factor in is when a builder is building a development with just their homes in it. there's a lot more thought placed on making sure that you're not cutting prices at the end too much for the rest of the consumers that already built with you because your reputation matters a ton. Yeah, that's one of the most important points that I think we can make right now because what we're seeing is the builders are offering crazy rates right now, right? The bigger builders specifically, but when they're building these communities out, like Lanar's got 499 rates on pretty much every development right now that you're buying that. There's seven six arms, I think.

But they're offering. I'm trying to make sure we're clarifying. Yes, but you can get into a home with a 4.99% interest rate. And the reason they're doing that is because they don't want to take on price. They'd rather pay down your rate because then they can essentially keep the price of the community at a higher level, right? So if they, instead of taking a $35,000 hit on price in order to fund these lower interest rates or whatever they're having to take, you know, what points they're paying, etc. They're just saying, I'll pay that on the rate, but I don't want the purchase prices to come down because I need to keep my purchase prices at a level where the other homeowners in this community feel good about what they paid. And because then if things get better in the spring, the next person coming in isn't going to go, well, that one's sold for this.

I'm not going to pay this for it. Can I wrap a bow on this with a micro case study that I just had happened to me? Yes. So I have a client who will not be named and a national builder who also won't be named. But a situation was home is pending under contract. Another home across the street's active. The pending home went under contract in March with a buyer, right? It was not built yet.

So it was due to be completed sometime in November. My client saw the exact same floor plan across the street. I bet the lot premium difference was maybe $10,000, $20,000, right? So the pending home was worth $10 to $20,000. more in national builders mind, right? So the price of the one that was pending finally closed right before we closed and we got under contract on that house at $877,000. Was the other one across the street as Speck House? Yes.

Correct. Okay. So spec homes completed. We go under contract while that's pending. Like I said, we saw that it closed, $87,000. The price of the spec home that my clients purchased started, I think at 8,000. $869,000, drop, drop, drop, drop, drop, drop, drop, drop, drop. We went under contract at $795,000.

And the closing cost incentive that we got, I want to say, was worth about $50,000. So we got a $5.625 rate for 30 years. So it was a 30-year fixed. And the agent, once we went under contract to this point, called me and said, would you be okay if I just cancel the listing and don't market sold with you on there on the MLS? I don't want to make everybody else mad and I don't want to screw up all the appraisals for everybody in the neighborhood. And I said, well, you're lucky it's me.

I really don't care about the stats, but I'm very happy that that's what you're thinking about doing because that means my client got an absolutely ridiculous deal on the house. Point being that seasonality of when you go under contract on new construction, especially in a volatile market, can really have a huge impact on your client's outcome. So my client ends up getting 5, 625, 30 are fixed. Rates were 775 when they got that deal. And they're $80,000 below what the other houses.

So they might be up 60,000 in equity. And they're only 10% down. Or the other houses out $60,000. Exactly. One of the two, right? But we can use that house as a comp now and potentially get rid of the PMI, even though we were at 10% in like six to eight months. So just a super interesting case study on everything that's going on

these builders. But to Josh's point, I think knowing, like a company like Lenar would be an interesting one, we talk about this often. You should know when the year end is for a publicly traded national builder. They will literally do anything they have to do to get you in contract. Yeah, Lenars is November. They end in November. What month did you go under contract? Just so they know. Like if you're looking at a new build, if you're looking at a new build, you went under contract on that one in November. Well, they'll want to close on November 30th. They will. When did your buyers? October, I think. It was in October.

So even as soon as October, that's not that far into the winter is what I'm saying. No, exactly. You can be out there in October and it still makes sense. And it's for Linar. I mean, D.R. Horton, I haven't looked at them or Pulte. They're all national and publicly traded. They'll want to get under contract or closed. So either one.

So when they do their quarterly earnings call and their year end fiscal call, they want to say, we closed this many new units. For sure they do. And we also have under contract this many right now. So both of those matter a lot. So they will fight very hard for your client to get a great deal. And no one's going to cry boo-hoo for a large publicly traded company. And so when you're trying to arbitrage these situations, there's a lot of opportunity out there to get your client into a favorable outcome.

Yep. I had a client where the same thing happened last year right before November where we just played hardball. We said it's worth this. And we were probably 60,000 below the market. And they said, no, we can't do it. Now we can't do it. now we can't do it. And then on, what was it, November 15th, they're like, if you guys can close by the end of the year,

our fiscal year, end of this month, we'll do it. Like, it just, we held out long enough that we had to, we had like a 10 day close or 12 day closed, but they got it done because it was a loan our home mortgage anyways. And, yeah, I mean, it's just important to know these things. Like, D.R. Horton, it's September is the end of their fiscal. So, like, these different timeframes in quarter ends too, right? Those matter as well. But their quarters don't always end.

at the end of a quarter. You know what I'm saying? Well, the end of those fiscal quarters. Yeah. So December, Jen, Feb for Lenar,

March, April, May. Yeah. So, but if you understand those things, especially for the builders that are most prevalent in your areas, um,

you can play these different roles. And especially right now, you said, I'm, I'm usually a fan of, you know, going with a already existing home. I just like them personally.

But like, right now there's nothing to buy. So if your clients are out there looking to buy and they're going, hey, I want to get into a high, house, hey, I want to get a deal. Hey, I need a better interest rate. It's a really good opportunity to kind of start looking at new construction in a meaningful way because you can kind of check more of their boxes with a lot of these homes, you know, getting a good deal, getting a good price, getting a good

interest rate in ways that you just can't any other way right now. So it sounds like you're both pretty sure on the fact that the end of the year, the end of their fiscal year is a good time to build a house to buy us back home. Do you think in the next six to 12 months, let's say we enter January? I guess I'm speaking more to specs than to be new construction, new builds. Yeah, let's just talk about specs then. Because that's what, I mean, again, depends on the city. If you're in Florida, we have no idea what they do when they build houses. But I would say a majority of the houses they built here are specs in this price point at the 6 to 800, which is like the step up buyer.

It depends. Like during, yes, during the 2020 to 22 time frame, they weren't even doing dirt build. Like you couldn't go in there and be like, I want to build a tailor floor plan on this lot. They were like, we have three tailors being built. right now, you can pick one. Here's all the finishes. We'll call you when the other lots open up. Exactly.

And the big reason why is I think they realized they were probably making about the same amount of profit, whether you dirt built or you bought a spec. Way less time. And they don't have to deal with going to the design center and walking through the whole purchase, like everything that's in the house. It's like it's in there. So we'll tell you what's in there, but you can't change it. So specs, do you think as we enter January as we go into 2024?

What do you expect with them? It's very good. bad, Joe. Very good. I'm not there yet. I'm not there yet. Six months, Luke. Would you say that 2024 is going to be a good time to build a house?

I've been selling a lot of new construction every single year for the past five years. And I think that I think they're great opportunities, especially for the right buyer, right? Yep. As you go through real estate, so for the agents listening, you realize that you end up working with people that are kind of like you. Right. So Luke, you'll probably be at the phase in your career when you're about my age where a lot of your clients and friends have been in their home for five to seven years and now they're thinking about getting something bigger.

Not only do these communities offer a lot of other folks that are in that same phase of life. So you end up with this nice community feel. But also you get a completed brand new thing. And you don't have to deal with potentially the roof or the siding or the windows or the furnace or the AC or the water heater and all that stuff for several years before you have to fix things. And a lot of times you're in a life stage where you have.

feel like you have less time because you may have young children or you may have like there's a lot of things that we lived in a new construction house when we moved right and it was that was the big thing was like oh yeah I'm just not going to have to worry about stuff and emotionally that feels really really good for the right person um now some people will say it's too cookie cutter it's to this to that and that's not the right situation for those people but I do think 2024 will be similar to the last five years where it's like there will be good opportunities to do that but I think we've talked a lot about these national builders and there's a lot of custom home building going on right now too.

I was just stopped by the one that I have going on in our neighborhood that's starting framing today just to check on those guys. And that's also a, it's a completely different thought, Luke, right? I mean, when the rates were going up, you know, custom building gets to be a little bit more of a, I don't know where we're going to land on the rate because sometimes you can't lock in your final rate up front. Most of the time. You have to pay for it.

You have to pay for it, right? So on these national builds, when I lock in 56525 with this national builder, that's just the, and granted that was a spec, but like you can just say like that's the rate, that's what it's going to be because they'll just account for that in what they're doing up front because like Josh said, they've got their own mortgage companies. One more, one more question to wrap this up just because I'm curious. This is more of a random magic eight ball in the next, let's say 10 years from now. Most of the communities that are currently being built out, the Victoria's, the Shocopies,

those new build areas, they're going to be out of land because they will have built all these houses. how far away do you think the new build community is going to be in 10 years from Minneapolis? In Minnesota. From Minneapolis. Let's keep sprawling. I think it will. I mean, if you look at other major metro.

Look at Delano right now. And you look at other major metro. I'm not far away though. I'm talking. I'm down. I think if you look at major metro areas across the country, we have a much tighter to the city situation than other places. Like a lot of people will commute for an hour to get to work in Chicago.

Chicago is a great example. Atlanta. Seattle and Atlanta and all these other big cities that we're not that far off of from a population perspective. We are fairly densely populated for our state just in one specific area. We only have one airport. Do you ever think about that? It's wild. You go to Florida.

Do you know how many airports are in Florida? Like 13 probably. There's only one in Minnesota. Yeah, it's wild. Because everyone lives within half an hour in airport. Who owns the airport? The Minneapolis Airport Commission. Because that sounds like that would be a nice little business opportunity in five years.

It's probably a government-owned. But either way, right, like, I think you will see in Minnesota, we don't have much space to the east until we're in Wisconsin. Right. So Lake Elmo continues to get built out in there. But to the west, I mean, I thought about that. Like, will land be more valuable in places like St. Bonifaceous? As you go on Highway 7, there's farms for, I was out in May or a listing coming up up there. It's farm, farm, farm, farm, farm.

St. Michael Albertville. They're all going to get built out. Yes. So, and then, Luke, to your question before this, I think. it's important as an agent, right? It's not necessarily like, well, what's the next you're going to look like? It's more so in these moments understanding where the builders are at, right? So right now, confidence is low. When confidence is low, there's arbitrage opportunities for your buyers. Keep on top of that as an agent because that will allow you to follow this stuff

more closely in a way that then you can create value for your clients, right? I had a new consult last week with the referral. He was like, hey, I'm in this town home that's 60-0 square feet. I just had my first baby. We've only been here for three years. We have an interest rate of 4% or 3.7%. So we're not like in a hurry to get out, but I'm not going to be able to stay here. I need more space. The problem is these rates, I don't know what to do. Like, I need to get to a better rate. And really, the only good option in the short term that I had for him was, well, right now the builders are super desperate to get rid of some houses. So, some of the areas that you said you wanted to live in, there are new communities going up.

And right now, there are rate buy downs into the 4.99% range for periods of time. So if you want to go look at some of these houses that check all of the boxes you gave me and give you an advantaged rate, now is a pretty good time to go do it. And I can't guarantee you that in March, that's still going to be an option for you. Right. So know when these little things and pockets of opportunity are happening because that's when you can get out to your clients and start to be able to add that value in a way. way that if I didn't know that the builders were desperate and they were doing these things,

I might not have brought that option up. And I've been like, yeah, it just kind of sucks right now. I guess we'll just wait. You know, so you just got to figure out when that time is. And that's all we have this week on the nerdy agent podcast. And as always, remember, be better.