Highlights from Zelman & Associates’ 10th Annual Housing Summit

Last week, our firm celebrated its 10th Annual Housing Summit – an event that welcomes hundreds of our institutional investor clients and leading industry executives operating across all sectors tied to the housing market. Over the two-day period, interactive panels included thematic discussions with homebuilders, building products manufacturers and distributors, real estate brokers, mortgage lenders, and owners of multi-family and single-family rental portfolios. The holistic discussions left us confident in our positive stance for businesses tied to the single-family housing market and reinforced the benefit of triangulating takeaways across these various sectors.

For homebuilders, those with exposure to hurricane-impacted areas noted a short-term drag on order activity and closing timelines given stress on the labor pipeline. Positively, the majority were optimistic that there would be few lingering impacts in 2018 on either volume or margins, with the overall margin outlook pointing to stability next year. The entry-level recovery is now widely accepted among builders as a source of meaningful multi-year growth. The biggest challenge remained tight labor, although the consensus was that, other than puts and takes by market, the broader backdrop is not getting worse versus the prior year.

Our panel of real estate brokerage CEOs highlighted a solid demand environment but ongoing challenges related to the lack of inventory at affordable price points. To this point, our panel emphasized the need for significantly more new construction geared to this segment as well as product that meets the desires of baby boomers, as many are choosing to “age in place” rather than downsize.

Mortgage panelists provided an encouraging update on credit availability and entry-level affordability, both of which were characterized as favorable and supportive of demand with executives agreeing that the existing credit box is reasonable. However, with shrinking refinance demand driving increased competition and reduced profitability for lenders, panelists discussed the importance of investing in technology to streamline the process and improve efficiency by incorporating greater automation and data verification.

Single-family rental panelists provided an update on post-Hurricane relief efforts in Texas and Florida and highlighted solid fundamental trends driven by sustained renter demand and limited availability of rental homes. In terms of opportunities for future growth, all three panelists pointed to the dual levers of margin expansion from the continued maturation of the business model and opportunities for external growth from traditional acquisition channels, new home purchases directly from homebuilders and through in-house built-to-rent programs.

Building products executives focused in the distribution and contracting business detailed their expectations for a longer-duration recovery. Panelists were upbeat on recent business conditions, but growth continues to be governed by labor shortages across many trades that are not expected to meaningfully ease in spite of active recruiting efforts. Building product manufacturers were optimistic on consumer demand, estimating that the home improvement cycle is still firmly in the middle innings of recovery, supported by the wealth effect from rising home prices. Profit margins have improved from a higher degree of automation in the manufacturing process and productivity from sales and marketing efforts, and further improvement was expected in a rising demand environment for all panelists.

The only panelists offering a cautionary tone were multi-family rental executives. The three large apartment owners participating noted still-healthy revenue growth of approximately 3%, albeit roughly 200 basis points softer than year-ago levels, with suburban locations still outperforming urban due to the disproportionate concentration of new supply in the latter areas. Notably, the pressure from heavy supply was not expected to peak until 2018-20, as panelists pointed to a sizeable pipeline of new development projects waiting to begin construction, with a modest pullback in debt availability offset by foreign and domestic investors willing to accept a lower return on capital.