December 1, 2019

New home sector grids for ramped-up production, disruption


2019 NETAR President

OK, so the nation’s largest home builder – D.R. Horton – is developing homes in the Piney Flats area, and reportedly picking up lots in other locations. The Tri-Cities has historical been a spec-home market – one where the norm was custom homes. Horton’s success is not custom or luxury homes but affordable housing. The business model they have captured – especially in submarkets like the Tri-Cities – focuses on lower-priced buyers.

Here is the background. Early in the recovery, Horton focused on lower-priced homes while most other builders went higher. It worked. Horton grew, and grew, and grew. It expanded its geographic reach, acquired suppliers and secured a high market share. Now its edge on costs lets it deliver homes at an average 19% discount to what other builders offer.

Horton isn’t the only busy builder in the Tri-Cities. Currently, almost all the local builders are working at capacity. Some have added a lower-priced home that appeals to seniors and the younger entry-level buyers to their product line. That buyer niche commands a lot of demand that until now was not being met. 

The local new home industry is doing well these days, but its recovery from the recession has been slow and continues to lag the rest of the housing industry. This lag is not just a local issue. Nationwide, not enough new homes were added during the recovery to sustain a healthy inventory balance.

An example? New home sales peaked at 1,201 in 2006. Since then sales have declined. The new home market bottomed in 2012 with 244 sales. Last year, there were 396 new homes compared to a little more than 6,500 resales.

According to the housing economics, one new home is typically built for every six existing home sales. Since the existing housing market’s recover to pre-recession levels in 2013, there were 33,697 resales as of last year according to the Northeast Tennessee Association of Realtors® (NETAR) Trends Report.

So, if the typical economic multiplier had worked as it has in past recoveries, those resales should have generated a little over 5,600 new homes. However, there were only 1,806 new home sales during that six-year period, and there wasn’t a surplus of vacant new homes sitting on the market.

The ramp-up in new home construction is good news for the local housing market. More new home sales will put more existing homes onto the market and ease the super tight inventory. Plus, expansion of new homes inventory tends to increase the value of existing homes.

Yes, more entry-level, lower-price new homes will a disrupter in some ways, but don’t expect D.R. Horton to put down long-term roots unless the demand remains strong. Their research identified unmet demand in this market, and their business model is to meet that demand then move on. Their current subdivision in Piney Flats is for 200 new homes that will be rolled out at a 50-homes-per-year pace. That number is fewer new homes in four years than all of the new home sales last year. 

New home demand is typically driven by an increasing population or a big job market expansion. Those two demand drivers are absent in the local market. That seems to say what’s being experienced now is a market reaction to pent-up demand for low-priced new homes that appeal to seniors scaling back and Millennials looking for a starter new home.

If there is a quality issue, it will create an opportunity for builders to explain the benefits of custom construction standards vs. economy standards, then let the consumer choose. Afterall, that is what a free market is about, and real estate is one of the free-market stalwarts.

NETAR is the voice for real estate in Northeast Tennessee. It’s the largest trade association in Northeast Tennessee, Southwest Virginia region representing over 1,300 members and 100 affiliates involved in all aspects of the residential and commercial real estate industries. Pending sales, monthly Trends Reports, and the regional market analytics can be found on the NETAR websites at .