Florida Home Building & Construction – All Building is Local

The tides in Nova Scotia’s Bay of Fundy are the most extreme in the world with a 56 foot variance between high and low. Consequently, Canadian fishermen value how well the ship’s captain knows each and every prominence and tributary.

Likewise, America’s home builders, who all rode to historic highs buoyed by record-low interest rates, must now rely upon experience and local market knowledge.

As the national home builders respond to quarterly Wall Street expectations and set policy from remote corporate headquarters, the savvy local builder can secure success for the years to come by taking the longer view of the present opportunities.

Ebb Tide
Most key housing statistical indicators have declined, some significantly. In 2006, permits for new single-family homes fell sharply from 2005 levels.

National

National year-over-year starts slipped 18%+ from 2005 levels with Florida falling more steeply at 29% off the records set in 2005. Even so, Florida remains the country’s second leading state in permits for new homes.

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Technical Overhang – the investor

When equity and debt markets are affected by funds flowing into or out of one asset class over another, one would say the forces at work are “technical” rather than “fundamental.”

One significant “technical” factor in Florida’s home building market is the influence of investors purchasing homes for re-sale. Long active in Florida real estate, their prominence escalated over the past three years, substantially in some markets.

This technical factor artificially inflated the volume of homes sold, particularly in 2004-2005, and is now artificially depressing sales volumes 2006-2007 sales. This legacy leaves a “technical” overhang of homes available for sale competing with new construction.

Solid Fundamentals – a different story

Attractive Interest Rates
Thirty-year fixed home loans ticked up 50 basis points to 6.28% in 2006, rising from historic lows of 5.8% in 2004 and 2005. Even with this increase, 2006 still recorded the third lowest interest rate over the past 25 years, and stands 250 basis points below the 25-year average. Present interest rates remain fundamentally friendly for the home building industry.

Solid Job Creation
U.S. job creation, a bellwether corollary to new home permits, is strong with 1.8 million net new jobs created in 2006. Florida stands as one of the leading employment states in America, creating 212,000 net new jobs in 2006.

Aging population
The first baby boomers turn 65 in 2008, officially beginning the retirement phase of this demographic phenomenon. There are twenty million Americans in the 50 to 55 age bracket meaning every day 11,000 people turn 55 and will continue to do so for the next ten years and beyond. Hence the ‘retire to Florida’ movement is just beginning.

Exchange rates
The dollar is trading against five-year lows for both the Pound Sterling and the Euro. During the past five years, the weakening dollar depreciated 35% against the Euro and 29% against the Pound Sterling favoring international buyers purchasing vacation homes in Florida.

Conclusion
Ultimately, technical factors wash through the market and recede from prominence while fundamental factors determine long-term future trends. All of the key fundamentals favor a robust home building market in Florida.

Given the long entitlement process in Florida, the decisions a builder makes today will impact their financial performance years from now. Those with deep local market knowledge are positioning themselves for future success today.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Poole

Investment Banking
mpoole@pcecompanies.com
Orlando Office

407-621-2100 (main)
407-621-2112 (direct)
407-621-2199 (fax)