Spec construction poised for comeback?

Posted by on July 13th, 2017

With the rising price of existing starter homes, one segment of the new construction marketplace may be poised to take off at a pace not seen since the days following World War II.

By the end of the 1940s, America had essentially ceased building homes – diverting usable materials to support the war effort. The demand for affordable homes created by the returning soldiers fueled the new “spec” home industry.

“Spec” is another name for “speculative” construction, building new homes for sale with no particular buyer in mind.

In the 1950s and 1960s, many builders turned out thousands of simple, mass-produced homes at an affordable cost. Most sold and the builders turned a tidy profit.

Insert Millennials into the equation in place of GIs. Today, there are at least 30 million potential buyers younger than 36 looking to settle down. And it’s not just younger buyers. A lot of Baby Boomers and Gen-Xers are also interested in smaller, functional homes.

With mortgage rates still hovering at historic lows, these people aren’t so much interested buying a newly constructed home as they are in just plain buying a home. But the supply of existing affordable homes is simply not enough.

Is it time for a spec building boom to take up the challenge?

It’s not that simple. At the lower end of the new home market, timing is more crucial than ever.

The benefit of spec is the fast conversion cycle, but builders have to balance the ongoing demand with the risk they are willing to take to make a profit.

Facing high regulatory, labor, land and lumber costs, it’s hard to resist the relative stability of mid-level and luxury homes, and enter the more guess-oriented realm of spec.

Even with a pro-growth administration, any slight dip in the economy or small increase in mortgage rates could cut into the demand that currently makes spec building pencil out.

It’s one thing not having enough homes to sell, but for builders, the worse problem is having too many homes under construction or finished when the market turns.

For now, supply is still constrained, and homebuyer demand is more than strong – it’s becoming overwhelming.