Six months ago we asked Bob Toll, the executive chairman of Toll Brothers, how he saw the market recovery playing out. Back then the home building market was clearly improving, but the extent and path of the recovery were hazy. He predicted strong demand, very limited supply, and almost shockingly he projected that prices would double in two years. Toll, who brings a perspective honed by several downturns, is on target so far.
“I see tremendous demand, and this [produces] an obvious result,” said Toll. “The supply won’t be there, because it takes, on average, four years to get a community cooking. And it is only going to take four months for demand to go up another 8 to 10 percent. When you have this demand bumping up against limited supply—and it is not limited supply, it is almost no supply—you are going to see a tremendous increase in pricing and increases in pricing begets increasing demand. I think you are going to see prices double within two years. That may seem a little lofty, but it seemed lofty in ’74, and it happened. It seemed lofty in ’80, but it happened. It happened in ’88 through ’92. It happened in ’99, and it is going to happen again.”
Nationally, home prices rose 8.1 percent in January. The inventory of new homes and existing homes on the market remains low. The early winners in this market recovery are the biggest builders—those with lots, access to capital, and an ability to help their buyers secure mortgages. Next month within the pages of Professional Builder, we will take the wraps off the 2013 edition of our annual Housing Giants list. That list, which will comprise the 200 biggest builders, will help quantify the extent of the upturn in terms of revenue gains during the second half of 2012.
We already know that the top five public builders and the top five private builders saw gains of at least 30 percent in 2012. The real question is how large were the gains for builders ranked No. 50, 100, or 150. Their revenue increases likely will be less robust. That is why a major theme in our 28 pages of coverage for Housing Giants will put a spotlight on those companies who are doing the best job of earning profits. In an environment with strong demand and rising prices, the focus this year should be on how best to increase margins and profitability for every home built.
During a market upturn, the tendency is to sell quickly and move on to the next sale. Our contributing editor, Noelle Tarabulski, of Builder Consulting Group, cautions builders that now is the time when much more diligence is required for developing market comps and for eliminating the risk of pricing your product too low. Hyper-local factors will determine whether prices will double in your local area. But in any case, now is the time to make the most of each sale.