Area builders offer perspectives on the year ahead.
We have something of a tradition here at BUILD Des Moines. Every January we give local professionals the opportunity to share their predictions for the year ahead.
Economists and national experts offer varying perspectives on the current market; predictions range from “sluggish” to “solidly moderate growth,” whatever that is. Nearly every economist predicts a recession in the next three years, but few can offer advice on what may or may not trigger that downturn.
None of us has a crystal ball or a DeLorean that can travel through time and give us a peek at the future. But years of experience, an eye for trends, and an understanding of the local economy are pretty reliable resources when it comes to predictions.
Each of the professionals we talked to has just that.
You’ll hear from a number of builders and developers who’ve been involved in the construction industry in central Iowa for an average of 20-plus years. As owners or leaders of their own companies, their success depends in part on their ability to judge the market and to adapt accordingly.
Here is what they see for 2020.
After nearly 30 years in the industry, Accurate Development’s Kevin Johnson recognizes that, as he explains it, “People buy houses when they feel good. If they don’t feel good—about the economy, their job situation, whatever—they aren’t buying houses.”
Right now, Johnson says potential buyers seem to be pretty optimistic. “I see nothing to indicate a major downturn in 2020. The market’s strong, unemployment is low, the economy is good.”
Any election year tends to bring a slight dip in the market as investors attempt to anticipate changes, Johnson adds, so a slowdown late in the year would be normal.
“If the economy stays strong, I wouldn’t expect the election to have a dramatic effect. No matter who wins the election, if things are going well when you enter office, why would you change things?”
He says a Democrat win in the Presidential race is somewhat of a concern because the candidates’ proposals are significantly different and more costly than current policies. “The two parties always propose change, but the Democrats this year seem to be talking radical changes, which would have huge effects on the economy. We’d have to wait and see how much of that they try to push through, but that could definitely affect the economy in 2021,” he believes.
Although material prices and labor are ongoing factors in home prices, Johnson believes labor may be a greater concern. “There’s pressure nationally to get prices for commodity items under control, and builder confidence is up, which helps,” he says. “But labor prices continue their steady increase. Every trade would hire more if there were more workers to hire.”
Lot prices also remain an issue. “There isn’t an abundance of lower-priced lots, which continues to result in high-end homes sitting on the market longer and, ultimately, a shortage of entry-level and mid-range homes available, and that’s where most buyers are right now,” he explains.
Around central Iowa, however, Johnson believes 2020 will experience more of the same, steady growth we’ve seen over the past several years.
“The economy is in a good position, with interest rates continuing at historic lows,” says Genesis Homes’ Wade Hiner. “But there’s no question tariffs have had an effect on prices and the home construction industry.”
Hiner says recent trade deals have largely impacted material costs, which has presented challenges for builders. “In order to keep prices at a level the market demands, we’re unable to raise prices equivalent to the additional price we’re paying suppliers,” he says. “I’m hopeful 2020 will see trade discussions come to a close without the tariffs, and prices may level off.”
He says that while it’s true elections always produce at least some blip in the market, they are not something most builders forecast around. “Right now we’re forecasting for 2021, so while the election is a topic in that conversation, it’s anyone’s guess how it will affect things. If the economy remains strong when the election happens, I would anticipate little change, no matter which administration is in control.”
Nationally, housing inventories remain lower than demand, but Hiner sees improvement in this area. He says planned communities that offer a mix of residential and commercial and community space remain popular with home buyers, but finding municipalities to support this concept—and enough land to accomplish it—also remains a challenge for developers.
“Inventory overall has been low in the Des Moines area since the correction in 2008, but we’re seeing growth, partly as a result of greater competition,” Hiner notes.
The strong economy has actually become something of a two-edged sword for home builders.
“We want low unemployment; that means buyers are out there looking for homes. But we need more workers,” he says. “We continue to advocate for and appreciate those who are leading the way by encouraging young people to enter any of the trades.”
He explains, “We have to just keep doing our jobs, building quality homes at a price the market demands. Now is definitely the time to buy a home. But without people to swing a hammer, we can’t do that.”
As home buyers continue to demand new homes at $300,000 or below, Jenna Kimberley of Kimberley Development says developers will need to seek new ways to meet that demand.
“It’s a unique situation. Municipalities are typically not allowing smaller lots, which is what the market needs right now since development costs continue to rise. The zoning and stormwater regulations make it extremely difficult to meet the price point buyers are looking for.”
She says 25% of the price of a new home used to be land-related costs. Now that cost is closer to 30%, which drives up the price of the home or reduces the amenities builders can offer.
Because the majority of buyers are in the midrange market, inventory levels in that range will continue to remain low while homes over $400,000 are sitting for as long as six months.
“I don’t see that situation changing in the year ahead,” she says. “But builders and developers will continue negotiating with municipalities to get those regulations in line with what the market demands.”
While some local communities are beginning to recognize the changing needs of both developers and homeowners, the cost of development and the struggle with regulation will remain an ongoing challenge for builders in the years ahead.
Kimberley doesn’t anticipate the November elections will have a major long-term effect on the housing industry however.
“Elections typically cause a knee-jerk reaction, but over the long term they don’t have a significant effect. Trade agreements, especially the U.S.-China agreement, are much more significant. A positive result there can really help the market.”
In general, Kimberley says, “You can ask a dozen economists what they think will happen with interest rates and markets, and you’ll get a different answer from each one. No one can really predict what’s ahead. As a company, we look at the trends and the overall economic situation, and then we continue to adapt to meet those demands as best we can.”
Like most local builders, Kirk Mickelsen of KRM Development anticipates 2020 to bring more of what the home construction industry saw for 2019. With Des Moines’ strong economy and the national picture looking similar, he says political and business leaders have no reason to make major changes. “With the election this year, Republicans are going to do everything they can to keep the economy strong,” he says. “That’s what they’re running on, so I don’t anticipate any increases in interest rates or major policy changes that would affect mortgage rates.”
Tariffs from 2019’s trade agreements have resulted in some increases in material costs. But Mickelsen says those were not dramatic. “Mostly, the price increases we’ve seen on materials have been the result of typical rising prices across the board. Hopefully, trade agreements in 2020 will eliminate those tariffs and bring some of those material prices back down.”
Despite the lack of skilled labor in most of the trades, Mickelsen says construction schedules have remained consistent, and he expects that to hold true in the coming year. “Des Moines has remained strong. Our subs seem able to keep good help and keep up with established time frames, although they can always use more skilled employees.”
He adds that lot availability and home inventory have been reasonably steady over the past couple of years and should continue that trend. “We’re able to find lots available at a variety of price points to meet our needs. But the market could certainly use more of the smaller, lower-priced lots. The developments that do offer those seem to be controlled by a smaller number of developers who want builders to commit to a larger number of lots. It’s difficult for a builder to find one or two lots for individual buyers.”
Overall, he believes 2020 will be a good year for the home construction market locally. “We’re fortunate in Des Moines that the market hasn’t been overbuilt,” he says. “Builders and developers have done a good job of maintaining a consistent inventory. There isn’t an overabundance of homes on the market, so we can go into 2020 feeling confident that buyers will be available for homes as they come on the market.”
With several decades of home construction experience under his belt, Ted Grob, owner of Savannah Homes, has seen some significant highs and lows in the industry. For 2020, Grob offers a pretty straight-forward view.
“I see more of the same really. Interest rates aren’t going to move much in an election year, so that won’t have a huge impact on sales.”
He says the election could affect the overall economy: “It appears to me that three parts of the market are already in a recession: apartments, high-priced homes, and high-priced lots. Depending on the outcome of the election, the entire economy could tank.”
Those late-year economic fluctuations aside, Grob doesn’t anticipate dramatic swings in the housing industry as a whole. Instead, he sees a continued need in the same area we have always had: entry-level housing.
“In almost any community, the greatest need is for entry-level homes. Because there seems to be an oversupply of high-priced lots in central Iowa, I think development of those will slow down. We may even see price reductions on existing lots in that market.”
He adds that those higher priced homes will continue to stay on the market longer, as there are fewer buyers at that price point.
Grob believes the skilled labor situation has an indirect effect on his business. “Our subcontractors struggle to find more workers. Based on our own hiring history, there appears to be a shortage of painters and trim carpenters at reasonable prices,” he says.
In addition, Grob anticipates material prices to increase the typical 3-5%, though that should not have a noticeable effect on home prices.
Because Savannah Homes has made entry-level housing its focus since the company began in the 1980s, the company has always had a ready market. The challenge continues to be meeting that price point.
“Our success starts with what we pay for lots,” Grob says. As prices continue to rise and communities put additional requirements on developments, he believes it gets harder and harder to provide homes at the lower end of the spectrum, where the greatest demand is.
“Since the Federal Reserve offered an upbeat view of the economy at its recent meeting, that indicates the Fed doesn’t expect interest rates to rise again for at least another year,” says Kevin McGlothlin of Sundance Homes.
This, combined with fairly level home prices, has given McGlothlin an optimistic outlook for 2020.
“I see a slight gain in the increase of home costs, but not anything that would indicate a large jump in prices. The cost of purchasing land for development and the costs that go into the actual development of the ground are surging prices higher and higher in the long run,” he says.
These costs have resulted in longer inventories for higher-priced homes, but the local market remains competitive.
“The more competitive it is is based on the quality of the home,” says McGlothlin. “The better the quality, the less time a home stays on the market. And even though we have a large inventory of new construction, we are still seeing new construction selling better than resale in some areas.”
He adds that cost of land continues to make things difficult.
“The biggest demand is lots at an affordable level, no matter what the community. The cost of land makes it difficult for clients to build a new home with the finishes they desire,” he explains.
Lack of skilled labor affects that cost as well.
“Building is growing at a faster rate than we are getting men and women into apprenticeship programs,” McGlothlin says. “This past spring’s Build My Future event made it apparent that all ranges of trades are desperate for young people to enter their fields.”
On top of that, he says, the effect of the tariff increases is trickling down to the trades and increasing costs.
“We’re just now seeing the tariff increases implemented in several of the trades. This is going to make a large impact on what you can build for the price per square foot. We traditionally see a small increase in home prices each year, but I think this will have a larger impact than our market is hoping for.”