11th Annual Builder & Developer Luncheon

Experts predict builders and developers will be “cautiously aggressive” in the 2018 market.

Diligent Development and People’s Company sponsored the 11th Annual Builder & Developer Luncheon at West Des Moines’ Hilton Garden Inn, on March 2. A packed crowd enjoyed lunch, networking, and presentations by several professionals who offered national, state, and local perspectives on the year past and the year ahead.

National Outlook

Robert Dietz, Ph.D., Chief Economist and Senior VP for Economics and Housing Policy for the National Association of Home Builders (NAHB), gave the keynote presentation on the national housing and construction outlook, highlighting areas that will be affected by recent tax reforms.

Overall, Dietz offered a cautiously optimistic view of the industry. NAHB economists see the economy growing at a slightly higher rate than in the past several years. However, he did forecast that home prices would drop nationally and even flatten in some of the priciest markets. In addition, he also predicted a likely recession down the road. “The probability of a recession starting in 2018 is pretty low,” he said. “But over the next five years, that’s likely to happen.”

One significant factor affecting that scenario is the Federal Reserve Bank’s anticipated action in the months ahead. “Not only are interest rates expected to be raised three times a year in each of the next two years, but the Fed is reducing its balance sheet on mortgage-backed securities, and this in turn raises interest rates,” he explained.

He suggested the interest rate on a 30-year fixed rate mortgage would rise to 5½%. “This is still historically at the low end, but the fact that it’s rising is affecting millennial buyers and their willingness to take on a mortgage,” he said.

Along with that, the greatest percentage of new homes is too expensive for the majority of potential buyers, and the number of homes staying on the market longer continues to grow. According to Dietz, this is creating a vicious cycle. New homes are too expensive, so homeowners are less likely to move. When they do move, more and more homeowners are opting to rent out their previous home. Ultimately, this means fewer existing homes are on the market, virtually blocking millennials from home buying.

This situation is exacerbated by two existing barriers to growth—the labor shortage and the rise in building material prices, including a 60% rise in softwood prices. “The construction industry lost a million and a half workers during the peak of the recession,” Dietz said. “Only half that number has been brought back into the trades. And the average age of today’s construction industry employee is 41.”

Dietz concluded with some broad statistics, predicting a solid year for Iowa, despite some of those national trends. “Iowa is at 80% of potential housing starts. A lot of that growth potential is dependent on regulation. If you make it easy to develop land, your communities will grow.”

State Perspective

Dave Roederer, Director of the Iowa Department of Management, provided a glimpse of Iowa’s economic situation, noting that the same situation that has challenged Iowa historically continues to be a challenge. “We have a small number of counties serving as home to the bulk of our population base. That means the majority of our tax dollars are rooted in just a handful of counties.”

Although fewer Iowans live in rural areas or work in farming, the majority of our economy is agriculture-dependent, somehow connected to farming, livestock, and other farm-related manufacturing industries. On top of that, “nearly 50% of Iowa’s exports are affected by NAFTA (the North American Free Trade Act),” Roederer said. “Any changes to NAFTA will affect Iowa’s economy.”

The greatest challenges to the state budget are shortages of skilled workers and commodity prices, he said. NAFTA could affect the commodity prices, and Iowa’s ability to develop skilled young people will affect the work force challenge. Roederer predicted, “By 2025 70% of our workforce will require some sort of advanced training beyond high school,” whether it’s a college degree, skilled trade licensing, or another form of advanced training.

Local Market

People’s Company New Construction Specialist Kalen Ludwig concluded the presentations with a look at the local market in 18 central Iowa communities. Check out her full Metro Market Snapshot slideshow.

Of the communities reviewed, Ankeny and Waukee remained in the top spots for growth and new construction. As predicted last year, Bondurant took a leap from its steady growth rate, jumping to third place for 2017. Communities that continued to grow but at a slightly slower rate include Grimes, Pleasant Hill, Norwalk, and Van Meter.

“With two major expansions taking place in Norwalk and bringing more jobs, that community may be poised for even greater growth,” Ludwig said.

Altoona’s commercial development seems to be spurring even more residential growth for that suburb, and Carlisle doubled its growth rate in 2017.

Ludwig also suggested some areas may see leveling of growth in 2018. “Adel may slow a bit as its 7-year tax abatement is scaled back, and Urbandale may be a little overbuilt at this point,” she said.

Perhaps the most dramatic statistic Ludwig presented was the average price of a new home in the metro area. “In 2011 the average price for new construction was $245,000,” she said. “In 2017 it was $349,000.”

As experts have been predicting for several years—and as the NAHB’s Dietz observed—the high price of new homes is a significant factor in growth potential, alongside the cost of building materials, regulatory costs, and the shortage of skilled labor.

“Despite these concerns, we see builders and developers as being cautiously aggressive in 2018,” Ludwig concluded.