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Building Market Intelligence Q4 2013


Table of Contents


Housing Bargains Harder to Find


New Home Rising


Huge Geographic Differences


Washington, DC Area Economy: Navigating the Shutdown and the Sequester


Don’t Flip Out: Beware the Risk of Artificial Appreciation


The Florida Opportunity


A Strategy to Navigate the Housing Cycle


About John Burns Real Estate Consulting

Housing Bargains Harder to Find BY JOHN BURNS, CEO

It is hard to say that housing is still a great deal. While mortgage rates remain near historical lows, home prices have come back strong. Thanks to strong price appreciation, the ratio of Median Home Price / Median Household Income now exceeds historical averages (since 1981) in 20 of the top 21 housing markets. See the chart below. While we remain optimistic on the future of home prices and housing construction, our optimism is founded more on assumed low mortgage rates, solid economic growth, and low new home supply than it is on household income growth and solid demographics.

Price-to-Income Ratios Below historical average

Above historical average

Source: John Burns Real Estate Consulting, LLC (Published Oct. 2013)


Atlanta, GA


Chicago, IL (MDiv)


Las Vegas, NV


Raleigh-Cary, NC


Dallas-Fort Worth, TX (MSA) Charlotte, NC-SC




Houston, TX Orlando, FL


Minneapolis, MN-WI


Phoenix, AZ


Austin, TX


United States


Riverside-San Bernardino, CA


Washington, DC (MSA)


3.5 3.1 3.5 3.0 3.1


Denver, CO


Seattle, WA (MDiv) Portland, OR-WA Los Angeles, CA (MDiv)


San Francisco, CA (MDiv) San Diego, CA


Orange County, CA (MDiv)


Current Average



Tampa, FL

Historical Average


3.1 3.0 3.4 3.8 3.7 4.5 4.3 4.5 5.8




7.9 11.1



7.6 8.6







New Home Rising The premium for new homes is abnormally high. From our work in various markets, we have seen new home prices quickly escalate and outpace appreciation in the resale market in these same areas. These rapid price increases are leading to a larger new home price premium over comparable area resale homes.

$480,000 $440,000

2% Today



RESALE 10 Years Old

2003 built in



Per Year Price Premium

vs Similar square footage & lot size.

NEW HOME built in


The new home price premium is typically 1.0% to 1.5% for every year of age difference over comparable, but older area resales, which is generally attributable to newer floorplan designs, exterior elevations, and home features. However, with the recent push in new home prices, we are seeing this premium increasing to 2.0% to 2.5% for every year of age difference over New Home Price Premium comparable area resale homes. per every year of age difference

2.0% to 2.5%

With limited supply and elevated investor purchasing activity in the resale market, new home builders are benefiting from the spillover of demand for housing with the ability to provide homes and increase prices faster than their respective resale market.


Huge Geographic Differences SEATTLE EXPANDS OUTWARD. Homebuilding is pushing out of King County. New home and lot prices in South Snohomish have soared over the last 12 months, and homebuilders are showing an increased appetite for land south of Seattle in Pierce County. As evidence, consider that Tehaleh in Bonney Lake, by Newland Communities, is now the best-selling masterplan in the metro area. NORTHERN CALIFORNIA IN STICKER SHOCK. New home prices may have risen too much in the Bay Area, where consumers have pulled back due to sticker shock. While sales are still strong and price increases still common, rising mortgage rates and the remarkable appreciation of the last year-plus has left many potential buyers behind. Though the most desirable new home communities can simply move down their interest list with each new release, a general slowdown in appreciation is inevitable. VEGAS SHOWING SOME RATE SENSITIVITY. With most of the land around Vegas owned by the government, Las Vegas land supplies remain limited, and builders continue to search for finished lots. Prices for land continue to rise with public homebuilders dominating the Las Vegas market and aggressively bidding on residential land. In the last few weeks, we are starting to see a little pullback with rising cancellations.


Rapidly rising prices in Coastal Southern California markets are pushing more buyers back into the more affordable inland markets of Riverside and San Bernardino Counties, where sales are surging. Sales rates of 6 to 8 sales per project per month are common in A markets like Corona and Eastvale. Land prices are skyrocketing in the close-in markets, rising over 25% in just the last six months.

ORANGE COUNTY SUPPLY IS RISING. The birthplace of large-scale small-lot masterplans is exploding, with a plethora of new home communities recently opening. Sales are strong and driven by a significant number of foreign buyers who are moving in. like Corona and Eastvale. Land prices are skyrocketing in the close-in markets, rising over 25% in just the last six months. PHOENIX TEMPERATURE COOLING.

The white-hot land market in Phoenix may be cooling off. Homebuilders in the A markets are pausing to carefully consider land prices, after 12 months of rapidly escalating prices. Builders are still pursuing deals but are mindful of the impact of rising mortgage rates and price increases on price sensitive buyers. With temperatures over 100 degrees, it is tough to ascertain true demand in Phoenix right now.



Entry-level buyers are struggling more here than other places, but that is always the case in Texas. The strongest economies in the country just seem to keep getting stronger, with a notable increase in license plates from other states. The continued economic growth and relocation demand has pushed land, lot and home prices to all-time highs. Apartment construction is booming. Houston is now the largest housing market in the country. In Austin, finished lots in A markets such as Cedar Park and west Austin are becoming more challenging to find, and residential development is migrating northward and westward into regions that had historically been considered B submarkets.

The US housing market can no longer be painted with one brush, as the housing recovery is playing out very differently across the country. Here are some anecdotes gleaned from our consulting team: MIDWEST COMING BACK TO LIFE. Once the Midwest thawed out in April, the housing market thawed out as well. Job growth continues to improve, as do sale volumes. Pricing improvement is right around the corner. Builders in both Minneapolis and Chicago are now running out of desirable lots and are seeking viable development opportunities.

DC MOVING SOUTH AND WEST. New home sales have remained fairly steady since the March 1 start of sequestration. The sequestration impact has been less than expected with buyers still purchasing homes but choosing smaller units or spending less on options and upgrades. Entry-level builders in particular are working closely with buyers who think they may be impacted by budget cuts. Land inventories in the Washington, DC metro area are limited, and the market is expanding southward and westward.


The Atlanta housing recovery has officially begun this year, as soaring demand continues in the popular Golden Triangle of North Atlanta. Supply constraints in the north are driving up lot values, especially as the market begins to shift from distressed lot transactions in exurban sprawls to new development within core A and B submarkets. Foreclosure buyers have been big contributors to the recovery.

NORTH CAROLINA SLOWS AFTER SURGE. After a strong Spring housing surge, growing builder competition and a lack of fundamental economic growth are tempering local housing market recoveries. Dwindling lot supplies have also put pressure on builders to get ahead of the pipeline and self-develop communities to maintain volumes.


Investors, investors, and investors. From Russia to China to the UK to Brazil, Florida is attracting investors from all over the world. Domestically, the institutional single-family renters are competing with local flippers, too. Good finished lots are now at peak prices in several markets. The active adult/retiree markets continue to experience strong growth. 5

Washington, DC Area Economy

Navigating the Shutdown and the Sequester





10.0 8.0 6.0 4.0


































2.0 FEB

The financial impact on the region’s economy from the government shutdown is not yet known, but even the threat of a shutdown affected sales at new home communities throughout the region in September. Our JBREC Builder’s Survey reports that Washington metro sales per community were down 27% from August to September; consumers were spooked due to the uncertainty about the shutdown. Prices also softened around the DC region with 22% of builders reporting net price increases in September compared to 47% in August. Communities in submarkets that are popular with employees of the Defense Department and other government agencies were clearly more affected than those communities in other submarkets that serve many high-tech and private sector employees. Be assured though, all local regions were affected by the shutdown to some degree.

Regional job numbers show that jobs lost to the Sequester and federal downsizing are slowing the pace of employment recovery in the Washington MSA. This federal downsizing has been underway since May 2011, well before the Sequester went into effect in March 2013. In January 2011, there was a 3.5-point spread between the 9.8% national unemployment rate and the 6.3% Washington MSA unemployment rate. As of July 2013, that spread is only 2.0 points with the national rate at 7.7% and the Washington MSA rate at 5.7%.


Government Shutdown Had a Big Impact in September

Sequester 2013


As a 19-year veteran of the Washington, DC housing market and head of a DCbased consulting practice, I have plenty of experience dealing with the federal government’s impact on the local housing market. With federal government employment and spending making up 37% of the local economy, the Washington region normally enjoys resilience to national economic volatility. Sometimes though, we face a disadvantage with our government “company-town” status. Sequester 2013 and the federal government shutdown had the potential to significantly slow the economic recovery.

The Washington Post reported that nearly 700,000 employees were affected by the furloughs, and the cost to the region would be approximately $200 million per day in lost wages and tax revenue. Many expect that home sales will suffer even more in October as a result of the 16-day shutdown as the furlough’s effects ripple through the economy. You can expect the inventory of listed resale homes to rise, easing pressure on home prices. But, new home builders will see fewer buyers as more housing options become available in the resale market.


BY DAN FULTON, Senior Vice President



While slow, economic growth is steady as the private sector gains are offsetting the public sector losses. From July 2012 to July 2013, the Washington MSA added approximately 46,700 private sector jobs and 10,800 state and local government jobs. The size of the federal workforce decreased by 7,600 jobs during that same time for a net gain of nearly 50,000 jobs. That growth will continue to be tempered

In conclusion, the DC region has already been hammered by the federal government shutdown and the debt ceiling crisis and it looks like we’ll do it all over again in early 2014. Of some comfort though, Fairfax and Loudoun counties, which are two of the strongest and most popular housing markets, will fare much better than the markets that are more dependent on the federal government.


as the federal government’s expenditures (employment and procurement) shrink from 37% of the local economy in 2012 to 29% in 2017. These projections are made by George Mason University’s Center for Regional Analysis.


40.0 30.0 20.0 10.8






-10.0 -20.0


Submarkets that are heavily influenced by government employment Submarkets are influenced by high-tech and other private sector employment

Maryland’s I-270 Corridor: Closures at National Institutes of Health and Bethesda Naval Hospital

Washington, DC: Federally funded city shuts down many city services along with federal jobs

Anne Arundel County, MD: Home to Social Security Administration, Fort Meade, National Security Agency

Loudoun County, VA: Bedroom community for Dulles Corridor employers, which are largely high-tech and professional services

Fairfax County, VA: Large private-sector employment base

Prince George’s County, MD: Major bedroom community for District’s government employees Virginia’s I-95 Corridor: Major bedroom community for Pentagon and District employees

Washington, DC Area Economy7

Don’t Flip Out Beware the Risk of Artificial Appreciation BY CHRIS CAGAN, Vice President

Flipping is back! Home price appreciation has been so rampant, particularly in California and Florida, that flippers and get-rich-quick scam artists are flourishing again. Just as in the mania of 2004-06a, flippers make money when the party is raging, but inevitably, someone loses when the party is busted. We are advising our clients in areas with a high percentage of flippers to take into account the risk of artificial price appreciation. Using a wide range of articles on flipping from across the nation, I looked at the initial prices paid, amounts invested in repairs and improvements, and selling prices for this anecdotal set of flipped houses. The average net profit after allowing for expenses sometimes the property was a major fixer, sometimes the repairs were cosmetic - was 32%. While successful flips are more likely to be reported than unsuccessful ones, the profits described to the public wildly surpass the reality of the recovering market. Flipping has moved beyond a segment of professionals working with undervalued and distressed properties; seminars, tours, and television shows encourage people to invest with flippers or to flip homes themselves. As in the boom of the previous decade, many people see easy money to be made. The perceived gains from flipping are exaggerated in a market where prices are rising at 10% per year. A profit of 30% means that the flipper has quickly identified, produced, and extracted a previously unnoticed 30% value opportunity. If overall prices have risen 5%, the flipper has been 25% smarter than the market. Such extreme, beat-the-market gains can sometimes be made by expert investors willing to take risks, such


as those who recognized the over-depressed level of distressed home prices in 2012. But not everyone is that sharp or fortunate. Smart investors will realize there is more risk in investing now, given the degree prices have risen due to flippers. Today, the fundamentals for continued price appreciation are very good in the majority of markets. However, do not assume that recent successes will continue forever, and be cognizant of the fact that artificial demand - flippers flipping to other flippers is the ultimate artificial demand - can distort your market.

The Florida


Opportunity Orlando

BY LESLEY DEUTCH, Senior Vice President

As a native Floridian and consultant to the real estate industry for over 18 years (eight of them on Wall Street and the rest here in Florida), I am keenly aware of the unique qualities of the state’s distinct metropolitan areas. In recent months, I have traveled the state assessing potential and existing residential developments and investments.



Here’s a summary of the opportunities I see on Florida’s real estate landscape: ORLANDO: Foreign nationals, diverse income base, short-term rentals


• I nvestors represent 43.4% of resale activity in Orlando. Many of these are foreign buyers coming from South America, Europe, China, and Russia. % OF INVESTOR SALES TO TOTAL SALES 50% 40% 30% 20% 10% 0%


• W  e are projecting annual population growth in the 2.0% to 3.5% range in Naples, Fort Myers, and Sarasota, where the median age is 48.4 years. • N  aples will benefit from its status as a premier retirement destination with upscale housing. Fort Myers is typically considered the lower cost alternative to Naples, but some submarkets such as Bonita Beach and Estero are gaining in popularity and established status, resulting in rising home prices. Sarasota is poised for strong growth in the future, with an established cultural base, a wide range of housing, proximity to Tampa, and some available land. SOUTHEAST FLORIDA: Infill opportunities, foreign buyers


1999 1998

2001 2000

2003 2002

2005 2004

2007 2006

2009 2008

2011 2010


• O  rlando’s economy is growing rapidly, which is also driving primary buyers to the housing market. Submarkets like Horizons West and Lake Nona are booming, due in part to growth in the tourism and medical industries.

TAMPA: Price sensitive buyers, lacking active adult communities • A  pproximately 86% of Tampa’s new home sales are concentrated in the $200,000−$350,000 range. There is opportunity for differentiation of product in that range. • T  he tight price range is due to Tampa’s local industries. Back-office and service-center jobs drive the local economy, which in turn should drive housing demand, but within a tight price range. • W  ith three age-restricted communities clustered in one submarket of Tampa, there is opportunity for more geographic and product segmentation.

• M  inimal land to develop because the Everglades start about 25 miles inland−unentitled land, golf courses, infill condos. and townhomes are experiencing strong activity. • S  outh Florida is also the gateway to the US for those from South America. The condominium market up and down the coastline is booming with foreign investors, and the single-family markets are benefiting as well. JACKSONVILLE: Niche markets • J acksonville has a large number of masterplanned communities, which typically command a premium over smaller developments. This premium left out the affordable buyer, which delayed Jacksonville’s housing market recovery. • J acksonville’s housing market is improving, and some submarkets are experiencing stronger growth than others, such as Southeast Jacksonville and St. Augustine.


A Strategy to Navigate the Housing Cycle The housing cycle is usually long and has five major stages, which are shown below. I began consulting to real estate executives’ right before a downturn that began in 1990 and ended in 1995. The subsequent expansion lasted 10 years. After 22 years of observing this cycle and studying past cycles, here is the best general advice I can muster for managing in the cyclical home building business. BY JOHN BURNS, CEO

Finance Strategy

Land Developer Strategy

Home Builder Strategy

Stage 1: The Bottom Cash is king. If public, consider taking yourself private. Start a new company if you can.

Stage 1: The Bottom At the bottom, we suggest that you make long-term land investments by buying large assets with cash. Consider buying on the peripheral areas at steep discounts and with your own money so that debt and equity service is not a factor. This is a contrarian view, which is why it is a good view. Opportunity funds want 2-5 year returns and will be buying land in better locations. We suggest being very aggressive here, and avoid generating significant short term expenses such as interest payments or option payments. In most downturns, you can buy fully entitled land from the banks at less than the cost of the improvements that are already in place. If you are like most and can’t bear to think beyond 5 years, don’t plan on making much money from market appreciation.

Stage 1: The Bottom If you bought land in an outlying area, sit back and wait for the market expansion to head your direction. Focus your home building efforts on good locations, and on perfecting an operating company that is efficient and profitable without the benefit of price appreciation. Valueoriented detached homes sell best.

Stage 2: The Beginning At the beginning of the up cycle, secure long-term financing that won’t mature anytime soon. Throughout the up cycle, continue to push financing maturities out and use multiple sources of capital, from multiple industries (banks, pension funds, offshore, etc.). Don’t pay the expenses associated with land banking or option payments unless you are truly so efficient that you can make a great return while doing so. Stage 3: Nearing the Peak Consider selling your company because growth-oriented firms tend to overpay for land and companies during this part of the cycle. You might also want to pay yourself a lot of money by going public, although you will certainly create a lot of expenses and headaches if you choose that route. If you are not a seller, stick others with the downside risk by using joint ventures or off balancesheet financing. JV capital will be plentiful. Restructure all of your lots to be based on rolling option takedowns. This expense might cost 12% - 15% per year, which is why we recommend this strategy at this stage of the cycle rather than throughout the cycle. Refinance with more expensive non-recourse debt. Stage 4: The Early Decline Look around. Are competitive levels and/ or affordability levels worse than usual? If so, you can count on the downturn being prolonged. Pay down your shortterm debt obligations and build up cash reserves by selling your homes and land as quickly as possible, even at a loss, because the loss will be greater later. Many believe that losing money is somehow a sign of failure and disastrous to the balance sheet. They are wrong. This is a cyclical business. Recovering as much of the cash that you have already spent is what matters. Hire a great tax advisor too. Stage 5: The Steep Decline All of your preparation should have paid off. While this isn’t fun for you, it is worse for others. Pay off all of the debt you are obligated to pay.


Stage 2: The Beginning Buy land in the next cities that will become the great locations as the market expands. Continue making the long-term land investments discussed above. Underwrite aggressively if needed because your downside is limited. Raise money from diversified companies with long-term horizons, such as pension funds and insurance companies. Stage 3: Nearing the Peak At this stage, the risk is highest and so is the short-term return. In this last cycle, “Stage 3: Nearing the Peak” lasted for years. You never know for sure when the end of an expansion will occur. Implement an “Asset Light” strategy where you only own the land you need to fund operations, but have plenty of options with well-capitalized land developers and partners so you won’t run out of land during a downturn. Concentrate on locations where there are fewer home builders. Shed any high-density attached projects because the builder demand will be high today, but the consumer demand will be low tomorrow. Stage 4: The Early Decline Sell your land. Early on, there will be plenty of optimists willing to buy it from you at a perceived discount. Cultivate your banking relationships, because they will be the land sellers of the future. Stage 5: The Steep Decline Advise the banks. Help them decide what to do.

Stage 2: The Beginning Put some cash back into the business to improve efficiency, and begin pulling some cash out of the business to diversify your investments and improve liquidity. Grow your business slowly with an emphasis on diversifying into new geographies or product types. Hire the right people and structure their compensation to align their incentives with yours over the very long-term. Stage 3: Nearing the Peak Put even more money into process efficiency. Build more cost-effectively than your competitors. Avoid mid-rise and high-rise construction unless you are experienced at it and underwrite it with the additional risk it deserves. Avoid land development for the same reasons. Stage 4: The Early Decline Develop a site-specific strategy to generate cash. This will not be possible at some communities, which should be halted. As one CEO executive told me, “The downturns are always longer and more painful than people think they will be.” Stage 5: The Steep Decline Build homes for troubled banks and equity partners in a structure that provides them most of the upside and, more importantly, protects you from any downside.

Debt & Equity Strategy Stage 1: The Bottom Lend and invest aggressively. The downside is limited and most of your competitors will be still questioning the business after the losses they just sustained. Stage 2: The Beginning Keep lending and investing aggressively. Stage 3: Nearing the Peak Sell or syndicate your investments to other institutions. Syndications or participations are a great way to maintain your builder and developer relationships while reducing your risk. Consider a hedging strategy that will be expensive but will be worth it if the market corrects. Stage 4: The Early Decline Sell your worst loans to other banks. Use renegotiations due to covenant violations to reduce your exposure. Keep a small percentage of the debt to your favorite clients. Staff your Special Assets Department early with experienced building industry executives - not just bankers - and incent them to act quickly. Raise some money for the future, but don’t spend it. Stage 5: The Steep Decline Take your lumps. Demand all that you deserve, but don’t push your borrower into bankruptcy. If you do, the lawyers will get rich and customers won’t buy their homes or lots. Hire outside expertise to provide independent analysis to the loan syndication group because you’ll rarely be able to reach consensus. Once you see stability in the market, buy back the loans from the other banks and start planning your expansion strategy.

Stage 3: Nearing the Peak

Stage 4: The Early Decline

Stage 2: The Beginning

Stage 1: The Bottom

Stage 5: The Steep Decline


Housing Cycle Risk Index™ Index™: Our index of housing demand, supply and affordability fundamentals has foretold home price appreciation and depreciation by 1-3 years.

We are a leading US real estate research firm offering published research, custom consulting, and advisory services with a laser-sharp focus on the housing industry. We provide clarity and direction in the age of information overload to help our clients make better decisions in their business pursuits. Our team of more than 35 experienced housing analysts is heavily networked with builders, developers, and investors and is generating new relationships across the country everyday.

Burns Home Value Index™: Our home price index is 5 months more current than Case-Shiller and helped investors make decisions months ahead of the price increases that happened mid-year 2012. Burns Finished Lot Value Index™: Our land value index helps investors understand home builder market value in relation to book value. Burns Affordability Index™: Our index is the only measure that allows you to compare affordability across geographies over time.


>> Strategic direction & planning >> Home builder operations & assessment >> Demand analysis >> Consumer research & focus groups >> Economic analysis & forecasting >> Litigation support & expert witness >> Financial modeling >> Project & product positioning

Consulting Studies


>> H  ome builder, regional, metro market, apartment, and building product manufacturer analysis & forecast >> Exclusive client events >> Public builder call summaries >> Weekly insight >> Presentations & webinars >> Consumer research >> Proprietary surveys











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