Real Estate and Construction

Is Treasure Valley homebuilding headed for a slowdown?

Homebuilders have reveled in the rejuvenated construction market. But sales have leveled off this year. Experts differ on what comes next.

zkyle@idahostatesman.comJune 18, 2014 

See mortgage rates in Ada and Canyon counties

Last year was a good year for industries that depend on the building and selling of houses in the Treasure Valley. Median home prices rose 14 percent in Ada County and 27 percent in Canyon County. More homes sold in the Valley than in any year since the Great Recession, with sales up 16 percent in Ada County and nearly 8 percent in Canyon.

But with sales flattening in the first four months of 2014, Valley housing experts wonder what will happen next. Will the market resume growth or begin to decline?

Business remains strong for Brighton Homes, which is on pace to build 230 homes in 2014 after building 157 last year. President Lars Hansen says Brighton houses sell for an average of about $350,000.

The slowdown doesn't bother him. Hanson says he expected it. Prices are close to their true values, not post-recession bargains or bubble-inflated peaks, he says.

"I didn't like to see the run-up that we had," he says. "I knew [a slower period] was coming. We had a return to normal values."

But at least one market watcher says trouble lurks.

Jere Webb, associate broker at Downs Realty in Eagle, expects sales and prices to fall in the coming months. He points to rising interest rates, overproduction in homes priced at less than $200,000 and declining pending sales.

"Right now, there's a realization on the part of many agents that there are storm clouds looming," Webb says.

OVERZEALOUS BUILDERS?

Valley homebuilders have been in comeback mode for the past three years.

The leading Valley homebuilder by volume, CBH Homes of Meridian, saw its number of homes built fall 83 percent from 2005 to 2011. CBH laid off half of its 100 workers.

In March, owner Corey Barton told the Statesman that his company had rehired 10 people and was on pace to build 950 homes in 2014, a 31 percent increase from 2013.

CBH, Meridian-based Hubble Homes and other large builders targeting the sub-$200,000 market for new construction might be building their way into an oversupply problem, Webb says.

Homebuyers are snapping up affordable used homes, which in May sold for 18 percent less per square foot than new ones in Ada County and 6 percent less in Canyon County, Webb says. In Ada County, resale homes priced under $200,000 typically sell in four months or less. In Canyon, they sell in eight months or less.

But where the Valley has a shortage of resale homes at that price range, it's awash in newly built homes, according to Intermountain Multiple Listing Service data.

Ada County has a 20-month supply of newly built homes between $120,000 and $159,000 at the current sales pace, Webb says. Canyon County has a nine-month supply. Inventories of seven months or more can't sustain current construction, Webb says.

"Those builders should really look at these numbers carefully and realize they are heading into dangerous waters," he says.

Barton disagrees. "We are not seeing it on the new construction side," he says in an email. "Based on our reporting we are showing a 2.5 months' supply in Ada County and 1.5 months' supply in Canyon County. That is well below a typical market equilibrium of 3.5 to 5 months' supply of new homes."

Brighton's Hansen, however, says there is an oversupply that could stymie construction.

"The oversupply could last through the end of the year, but builders in that price point are prepared for that," Hansen says. "They have to be. These are smart people."

He says new homes in the Boise area are selling for about $30,000 more than is ideal for a 1,400-square-foot home. Young buyers might be more interested in fixer-uppers than in the subdivision-type homes dominating the sub-$200,000 market, he says.

"What do young families do?" Hansen says. "There could be positives, like revitalizations of older neighborhoods, areas closer to towns and services. There could be a market to invest in homes with the mindset of preparing them for newer homebuyers in older communities."

HESITANCY OVER RISING RATES

Rising interest rates contribute to the hazy outlook. During the height of the housing crisis, the Federal Reserve propped up the market by creating money that flooded lending industries. Interest rates for 30-year mortgages fell from 6 percent in 2008 to a record-low 3.35 percent in 2012, so homebuyers could get more square footage without paying more.

But rates rose by about a point, to 4.34 percent, in April as the Fed began to curb its money creation.

A home sold in Ada County at the median price and 3 percent down cost $805 per month last year. Today, with mortgage rates and home prices climbing, it costs $1,005. In Canyon County, the median has climbed from $538 to $612.

Webb says home sales will be suppressed if interest rates inch higher. "I see the effect as like pouring cold water on the fire," he says.

The National Association of Realtors predicts the average rate will climb to 5.5 percent by 2015.

Jeff Thompson, owner of Eagle-based Thompson Homes, says buyers expecting a rate hike might buy soon to lock in at a lower rate. That could stimulate sales.

"If the rate jumps a percentage point it spooks people, because it modifies their ability to buy the size of house they want," Thompson says (see "The Shifting Rate," page 25). "But in the short term, some think, 'I better get on the bandwagon now, because the interest rates are rising.' It can have that positive effect."

The interest rate could rise further if Congress passes a bill that would replace Fannie Mae and Freddie Mac, the federally chartered mortgage-buying companies, with another backstop for the secondary lending industry, says Dee Carter, regional manager for Zions Bank's home financing division covering Western Idaho.

Idaho Republican Sen. Mike Crapo backs a bill that would replace Fannie and Freddie with private investors who would assume a portion of the lending risks that taxpayers now bear.

A PENDING DECLINE?

The number of homes sold in Ada County in the first four months of 2014 is nearly identical to last year's sales in the same period, suggesting the county is on pace to surpass 8,000 sales for the second straight year, Webb says.

Canyon County's year-over-year sales have increased at least 10 percent each month in 2014, placing the market on a pace to improve on its 2013 total of 3,245.

But the growth isn't sustainable, because fewer homes are in the closing process now than a year ago, Webb says. Year-over-year pending sales are down 8 percent to 15 percent in each month in 2014.

"Unless there's a tremendous reversal in the coming months, we'll hit something more like 2012 numbers where sales drop into the 7,000s" for Ada County, he says.

Over the long term, however, sales will eventually increase to match the rising population, says Tim Bundgard, president and CEO of Pioneer Title Co. in Boise. It's a matter of when.

The 11,639 homes sold in Ada and Canyon counties in 2013 were only slightly more than the number sold in 2003 despite a 23 percent population growth, he says. All of those additional people - some of whom presumably found work as the state's unemployment rate dropped from 8 percent to 5 percent - still want to have the backyard and garage and picket fence that their parents owned, he says.

"There's a good case to be made that the population base can support an increase in home sales," Bundgard says. "There's a lot of buyers out there sitting on the sidelines."

Zach Kyle: 377-6464, Twitter: @IDS_zachkyle

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