The Year Ahead for Local Homebuilding

By Rick Koze

Having built exclusively in the Lehigh Valley for 50 years, Kay Builders has a pretty good handle on local market conditions for new home construction.   By most measures, conditions in the Lehigh Valley home building market were once again challenging in 2011. Although total sales for 2011 were slightly lower than 2010 as a result of the boost given to housing from the first time homebuyer tax credit of early 2010, sales for the last quarter of 2011 were 10-15% higher than the last part of 2010.  We expect this trend to continue into 2012.

Most of the home building activity in 2011 was in the $150,000 to $250,000 price range, but as of late, the single home market in the $250,000 to $400,000 range has shown good activity.  There are several reasons for this: First, many of the higher quality foreclosures that were depressing the market have been absorbed and those trying to sell homes in good areas are now able to get reasonable prices when they list their homes. Second, this market, typically known as the move up buyer market, should continue to recover through 2012. And finally, the inventory of quality single home lots has steadily declined which means those builders still operating are starting to see higher sales levels from the move up buyer market.

The multi-family sector of the market continues to be hampered by challenges in obtaining mortgage financing. The younger population–which typically gravitates toward townhomes– tends to have higher debt levels, less down payment money saved and higher unemployment rates because of where they are in their economic lifecycle. The good news here is that unemployment seems to be steadily declining, household income is trending up and many people have focused on cutting their costs and reducing debt levels. This should continue to positively impact townhome sales in 2012.

At its Laurel Field and Trio Field townhome communities, Kay Builders has partnered with certain lenders to create some unique financing programs. One such program–which has been particularly popular–is the 5% down, no PMI (Private Mortgage Insurance) program. FHA programs, with a 3.5% minimum down payment, continue to be most popular, but increases in FHA monthly PMI rates have pushed many customers to the no PMI program.

Perhaps the most important advice for younger buyers is to stay focused on improving your credit score. Kay Builders has also partnered with a credit improvement company and will pay for its customers who have lower credit scores to enroll in a credit improvement program. The credit score is based on a quite complex algorithm so these credit experts can guide the customer to take certain actions, which are often quite simple, to improve scores. Such programs can often yield significant results in a matter of one or two months.

Another factor that bodes well for sales of new townhomes in 2012 is the continual rise in apartment rental rates. Rental rates have increased approximately 5% in each of the past two years and should do so again this year. This, coupled with all-time low mortgage rates, has significantly increased townhome affordability.  We use a program to show the customer the comparison and the results are often surprising.

The last segment of the market, called “move down buyers,” continues to be a bright spot that should improve further in 2012.  This market represents buyers that want to sell larger homes to move into smaller, low maintenance, first-floor living homes. These customers have been the most consistent buyers at Kay Builders’ communities. Move down market buyers tend to have more equity in their homes because they have been in them for longer periods and they can sell at lower prices if necessary. The improving resale market will help, but even more important is that improving stock market conditions have bolstered shaky retirement accounts, making these customers more likely to move.

There are a host of uncertain macroeconomic issues that will determine if 2012 is a break out year for new home building locally. The uncertainty surrounding the election can sometimes be a limiting factor, but the continual improving health of the economy is vital to a true rebound.    We advise our prospective buyers not to wait. Rates are at an all-time low, construction costs are beginning to increase–which means builders will have to raise prices–and a renewed recession with lower home prices appears to be a more remote possibility.

Building a new home is a lifestyle decision and even though you may be selling an existing home for less than you want, you will be buying a new, lower maintenance home with all of the modern amenities at an equally low price.

Rick Koze is President of Kay Builders, Inc., a family-owned Lehigh Valley based business.  A graduate of Emmaus High School, Koze holds a B.A. in Economics from Yale University.  He has more than 15 years experience working with Fortune 500 companies.

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