These Homebuilders Look to the Sun Belt for a US Housing Recovery

Article originally posted on CoStar on August 20, 2024

From Florida to Texas to Arizona, some homebuilders are betting that the long-term lure of the Sun Belt can overcome even elevated mortgage rates and new concerns of a recession.

With its warm climates, robust job growth and in some cases favorable tax laws, the Sun Belt traditionally has been a destination for young families and retirees. But this region covering parts or all of 18 states in the U.S. Southeast and Southwest is gathering more attention from some homebuilders — from giant D.R. Horton to privately held GL Homes — now because it could be a bellwether of a broader housing recovery after several years of sluggishness.

Nationwide, housing starts and new home sales have fallen short of analysts’ expectations in recent months as mortgage rates near 7% have caused some potential buyers to back off. To boost sales, builders are offering buyer incentives, such as mortgage-rate buy-downs, using profits from sales to lower interest rates and buyers’ monthly payments.

More recently, a weaker-than-expected July jobs report, the highest unemployment rate since 2021 and still-persistent inflation are leading to what CoStar economists write are signs of U.S. economic exhaustion. But builders and housing market analysts say Sun Belt demand can withstand the economic headwinds, partly due to solid demographics and a shortage of 2 million to 3 million housing units caused by a dearth of construction during the Great Recession and the COVID-19 pandemic.

“The Sun Belt has a strong in-flow of consumers from other parts of the country,” Sean Salter, a real estate researcher and finance professor at Middle Tennessee State University, told CoStar News in an interview. “Builders are realizing that’s not going to change in the next five years.”

He noted that residents of higher-priced areas such as Northern California and the Northeast can sell their homes and pay cash in Texas, Tennessee, Florida and other Sun Belt states. These buyers, by not requiring a mortgage or needing only a small loan, aren’t as sensitive to interest rates, Salter said.

Not all homebuilders are betting on the region. The Sun Belt has drawbacks that include extreme heat in summer that some say could worsen with climate change, and high insurance costs, particularly in Florida and other storm-prone areas.

Even so, while housing analyst Jack McCabe, head of McCabe Research & Consulting, expects the U.S. to enter a recession that will lead to a housing downturn, he said some of the Sun Belt housing projects in the planning stages may avoid the worst of the slide and be ready once the economy and the housing market show signs of recovery.

“They may hit it just right,” McCabe told CoStar News. “Those that already have subdivisions underway are going to take some hits.”

Homebuilders are targeting the Dallas-Fort Worth area to satisfy the burgeoning demand for houses in the nation’s fourth-largest and fastest-growing metropolitan area.

Dallas-based Realty Capital recently bought 309 acres in Mansfield, Texas, for more than 600 single-family houses. Centurion American Development Group, a Dallas-area residential developer, bought a 1,050-acre tract this summer for thousands of single-family houses in the city of Pilot Point.

Centurian and a company tied to D.R. Horton, the nation’s largest U.S. homebuilder by sales last year, are part of a development group planning 750 houses on 241 acres in Celina, Texas, about 40 miles north of Dallas. Celina’s 2023 population of 43,317 increased by 27% from the prior year, the biggest percentage gain in the country, according to the latest figures from the U.S. Census Bureau.

Another suburb north of Dallas, Frisco, has attracted thousands of residents in recent years, along with headquarters for the NFL’s Dallas Cowboys and the PGA Tour of America. Dallas-Fort Worth added nearly 152,600 residents between 2022 and 2023, more than any other U.S. metropolitan area, according to the Census.

“Celina is kind of what Frisco used to be,” Rex Glendenning, a broker in the 241-acre deal, said in an interview. “I think this project is well-positioned for success.”

This summer, Howard Hughes Holdings CEO David O’Reilly told CNBC that his development firm is bullish on Sun Belt states Arizona, Texas and Nevada and that recent reports of sagging U.S. home sales are misleading. The government tends to revise the data higher in subsequent months, but the initial negative impression remains and offers a misleading account of a market in trouble, he said.

He reiterated those comments on a conference call with investors last month, adding that consumers find new houses are a better alternative to existing residences.

“Together with attractive builder incentives, including mortgage rate buy-downs, monthly payments on new homes are simply more attractive to homebuyers,” he said on the call. “New homes offer superior-built quality, require less upkeep, have lower insurance costs and provide higher building efficiency, all keeping costs lower.”

Meanwhile, Meritage Homes, the fifth-largest public U.S. homebuilder last year, is planning a development of more than 600 residences in Goodyear, Arizona, nearly 20 miles west of downtown Phoenix. Metropolitan Phoenix was the eighth-fastest growing area in the U.S., adding more than 49,200 residents between mid-2022 and mid-2023, according to the Census figures.

In Charlotte, North Carolina, developer Crescent Communities said The River District could have as many as 2,300 single-family houses in the coming years. Crescent tapped four homebuilders, including Toll Brothers, to build the first 260 homes in the 1,400-acre, master-planned development.

Already active in Florida, Georgia and the Carolinas, Kolter Homes is eyeing opportunities in Alabama and Tennessee, according to John Manrique, the builder’s senior vice president of marketing. A growing customer base for Kolter is the “halfbacks” — retirees who moved south from Washington, D.C., or the Northeast but realize they want to enjoy the seasons so they move again, halfway back to where they lived originally.

The Southeast is “where people want to be,” Manrique told CoStar News.

Emerging suburban markets in Florida also remain a top target of homebuilders, even with the southeast portion of the peninsula running out of large tracts of land.

Developer BTI Partners has more than 12,000 acres scattered across the Sunshine State, mostly near Orlando and Jacksonville, with housing planned for much of that land, the company said.

“There’s a lot of pressure for new housing,” Noah Breakstone, CEO of BTI, said in an interview. “Housing is a very simple formula. When you have job growth and population growth, you have housing growth.”

Farther south, GL Homes has focused on St. Lucie County, about 45 minutes north of Palm Beach, with the 4,000-acre, master-planned Riverland development, and the builder recently announced plans for roughly 1,100 more homes in the area.

Port St. Lucie’s population of about 245,000 grew by more than 13,000 residents from mid-2022 to mid-2023, making it the fifth fastest-growing city in the nation, Census figures show, and new shops, restaurants and other growth have followed. The city is positioned between West Palm Beach and Orlando, providing access to two international airports.

“It is more affordable and has less congestion than South Florida,” Marcie DePlaza, chief operating officer for GL, said in an email.

On the state’s west coast, GL has entered Pasco County, north of Tampa, and said it could build as many as 1,500 more residences in that area. Pasco is desirable for some of the same reasons as St. Lucie.

Unlike some publicly held builders, GL said it doesn’t have to offer incentives. GL, based in Sunrise, Florida, primarily targets luxury buyers and retiring baby boomers, two groups that typically don’t need mortgage rate buy-downs because they already have personal wealth, substantial equity in their existing homes, or both, the company said.

Still, even a small rate cut can have a dramatic effect on the overall housing market. Analysts expect the Federal Reserve to cut interest rates in September, helping nudge consumers who may have been reluctant to buy previously, according to DePlaza. She said even an economic downtown is manageable.

“Homebuilders, like any industry, are always concerned about a recession,” she said. “Of course, it can negatively impact our business, but we are very nimble and can always make adjustments. Housing inventory is still very low, and with rates coming down, we still feel positive about the future.”