Publicly traded homebuilders with substantial local operations in Orange County are coming off one of their best years in recent memory, both locally and across the nation.
There’s still plenty of issues facing the builders, with rising interest rates, home affordability and the migration of buyers to less expensive markets acting as potential headwinds.
The following are a summary of comments from a trio of homebuilding execs discussing those issues made during their most recent earnings calls with analysts. Comments are edited for clarity.
Affordability Push
Demand for new homes “continue to outstrip supply in our markets during the quarter, a dynamic that is carried into 2022,” Doug Bauer, chief executive of Tri Pointe Group Inc. (NYSE: TPH), told analysts last month.
Buyers are exhibiting “a strong sense of urgency to own a home,” said Bauer, whose company’s main operations are based in Irvine, though the company moved its headquarters designation from OC to Nevada last year.
The increased demand is “driven by strong demographics in migration to lower-cost markets and an overall change in attitude toward homeownership, brought about by the pandemic,” he said.
Tri Pointe ranks No. 8 on this week’s homebuilder list (see page 25) with 193 area sales, down about 16% year-over-year in OC.
To capitalize on the changing demographics, the company’s been aiming to build in more affordable SoCal markets than OC such as the Inland Empire, Bauer said.
The inland communities in SoCal “demonstrate our key focus on developing a mix of entry-level and first-mover product in core submarkets,” he said.
“Despite rising home prices, our median sales price of single-family homes in the fourth quarter in California was $599,000, compared to the state’s median single family existing home price of approximately $797,000,” he said.
Migration Patterns
Toll Brothers Inc. (NYSE: TOL) ranks No. 3 on the Business Journal’s list of largest homebuilders, with 329 sales in OC last year. That’s an increase of 60% year-over-year for the Fort Washington, Pa.-based firm.
The country’s largest luxury homebuilder has been particularly active in Lake Forest in recent years. A nearly 600-home project at the city’s former Nakase Nursery site called The Meadows is now in the early stages of sales.
Chief Executive Douglas Yearley is still bullish on markets like OC, but takes note of population migration patterns, particularly in California, he said.
Migration trends “exist from California to Austin, and California to Reno and Las Vegas and Phoenix,” Yearley said. “I think those trends are real.”
Before the pandemic, “people were leaving the Northeast, chasing the sunshine, chasing the jobs, chasing the lifestyle, chasing affordability and the same thing [was happening in] the West, in the expensive state of California.”
Those “migration trends existed before COVID, and they have accelerated,” he said.
Still, “we’re doing really well in California,” Yearley said. “It’s 40 million people and if half a million decide to leave, we’ve still got ourselves 39.5 million who want to stay there and pay the price to enjoy the Pacific Ocean.”
Interest Hike Interest
Scottsdale, Ariz.-based Taylor Morrison Home Corp. (NYSE: TMHC) last month passed the two-year mark of its $2.5 billion acquisition of Newport Beach’s William Lyon Homes. It ranked No. 7 on this year’s homebuilder list with 204 sales, thanks in part to Lyon’s backlog of projects in Irvine and other local areas.
Interest rate hikes, and their impact on company sales, are being closely monitored by Chief Executive Sheryl Palmer.
“We’ve done a great deal of surveys with our shoppers to understand how they feel about the moving rate environment,” she said in early February.
“We’ve learned a few things. One, the percentage of shoppers that expect to pay cash [when rates jump] is significantly higher … our [pool of] cash buyers has moved up more than 50%,” she said.
Still, the “surprising stat [from the survey] was the high point of interest rates that would affect their search was very healthy—until you got to 7%,” Palmer said.
A 30-year fixed mortgage rate now runs around 4.6%.
“I think what we have to remember is the migration patterns,” she said. “We’re seeing [buyers] from California, New York, New Jersey [move into more affordable areas], so the optics on affordability is very, very different,” she said.
Also, when “you look at what the average consumer today has as equity in their existing home, this is an advantage for the move-up buyer or active adult buyers,” she said, noting industry data showing the average amount of equity is $302,000 per household.
“When you can bring that to the table it really helps you offset any increase in interest rates.”
