Mid-Atlantic Home Builder Report on Summer Challenges

August 3, 2016

It appears that summer doldrums fell upon 68 residential home building executives, developers, and private equity investors who responded to our quarterly Sentiment Survey in the second quarter of 2016. Survey respondents, dominated by industry experts from Virginia and Maryland, recently shared their thoughts on the state of their local markets based on 2Q 2016 sales performance.

About 69% of the respondents hold positions of vice president or higher, including 15% who are CEOs, principals, owners, or partners. Broken up by state , 25% were from Maryland, 57% were Virginians, and another 18% responded from elsewhere, including Washington, DC. Please note that many respondents operate in more than one state, and our counts represent the respondent’s office location.

After an optimistic start to 2016, the industry’s sentiment declined in the second quarter as an increasing share of survey respondents reportedly did not meet their 2Q 2016 goals. And, direct material, labor, and regulation cost increases continued to plague the industry.

Only 50% of participants met or exceeded their 2nd quarter sales goals—down from 62% in the previous quarter.

Parsing the results by state, 53% of Maryland respondents met or exceeded their sales goals, and 62% of Virginia respondents did the same in the second quarter. In other states, though, 92% of respondents did not meet their goals, leaving only 8.3% who met or exceeded their goals.

JBREC asked the same question in 2Q 2015, and recent responses indicate a sharp increase in the share of respondents who did not meet their sales goals in 2Q 2016. The year-over-year share increased from 35% to 50% in 2Q 2016.

Slightly more than half of participants—51%—had goals in 2Q 2016 comparable to 2Q 2015.

Rising from only 7% last year, 35% of participants had more aggressive goals in 2Q 2016 vs. 2Q 2015.

The share of respondents with more aggressive goals in 2Q 2016 increased, while the share with less aggressive goals also increased—year over year, but to a lesser degree.

Many of our respondents provided explanations for the differences between their 2Q 2016 and 2Q 2015 sales goals. Changes in community count appear to have affected sales goals most.

Year over year, the majority of respondents saw a 2% to 5% increase in costs.

In addition to the two questions JBREC asks every quarter, we typically ask a final question concerning recent trends in the home building industry. In the second quarter, we asked about the impact of cost increases compared to last year. Almost 44% of our respondents indicate their costs increased somewhat (2% to 5%). But 29% have recently seen significant cost increases of 5% to 10%. The highest increases occurred in Maryland, with 31% reporting significant cost increases.

Our respondents blame cost increases on a variety of reasons. Regulation and code changes affected many of our respondents, particularly outside Maryland and Virginia. Materials and labor dominated the list of cost-increase culprits in Virginia.

Last quarter, about 86% of survey respondents expected to equal or outpace last year’s sales, but in 2Q 2016, 50% did not meet their sales goals.

We also saw market confidence decline from 1Q 2016. Our 2Q 2016 survey confirms what we hear regularly: 2016 is OK, not great.

JBREC thanks all of the respondents for participating, and we look forward to hearing your comments in early October about 3Q 2016.

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