(Written by Ray Gee – NMHBA President – Originally published in the October 2014 Housing Journal)

Challenges/Opportunities Face Custom Builders in New Mexico

As I near the end of my term as President of NMHBA, I’d like to update you on the condition of NMHBA in three areas. The first is the Leadership Ladder. We have filled the position of Secretary Treasurer for 2014 with the appointment of Pat Bellestri-Martinez and she has already contributed positively during our Senior Officer meetings.

Also, Steve Hale has agreed to run for the Secretary Treasurer position for 2015. So, for the first time in a few years, the Leadership Ladder is complete.

The second area is our financial health. As some of you may remember, we developed a 5-year Cash Flow Projection spreadsheet in 2013. That tool was essential in evaluating the ongoing depletion of cash reserves. We have updated the spreadsheet and are now utilizing it during our budget preparations to project five years out from the current budget year. The assumptions used in the projections have also been updated and are generally more conservative than those initially used. None the less, the projected outlook is considerably better than that in 2013. It now shows NMHBA reaching break even early in 2016 and thus halting the depletion of cash reserves.

The third area is membership. Through the first nine months of our fiscal year, our membership has grown at a rate of 3%. When evaluated year/year from July to July, the growth rate is about 3.5%. We are currently assuming a 3.5 % growth in membership for the 2014 fiscal year, as well as for 2015. At the recent NAHB Fall Board meeting it was announced that the national growth rate was about 3.6%. That rate is lower than NAHB had budgeted, and our current assumption of 3.5% is less than the 5% we had originally budgeted for 2015.

This slow growth in membership causes me great concern. When I was initially interviewed by the Nominating Committee in 2012, I expressed my concern about the future of our industry for small custom builders. Two and half years later, New Mexico’s small custom builders still are not recovering from the recession. I think there are a lot of possible reasons for this, but lack of affordability is one of the most important.

Building science and sustainability are improving the way we build houses, but they also add cost to the product. The costs of material and labor are also rising and have risen dramatically in areas where recovery has taken hold. The use of building codes to accomplish public policy goals can also add to the cost.

The cost of being in business is going up. Compliance requirements with federal regulations have been steadily increasing and all indications are that they will escalate even more in the near future. Proposed regulation of silica will have a profound cost impact on the construction industry.

All of the above add cost at the same time that income inequality is increasing and wage growth has been essentially flat for 30 years. New job creation is generally considered to be at the lower end of the wage scale, so even falling unemployment does not mean a growing market that can afford new homes. It seems likely that these trends have been going on for quite some time, but the sub-prime lending and mortgage debacle allowed them to remain hidden until the crash. Demographic changes are also altering the market for new homes. Millennials are said to be delaying family formation and home purchases. They are also renting rather than buying in order to stay flexible for relocation purposes. Another demographic factor is that Generation X is considerably smaller than the Boomer generation and they reached prime home buying age during the recession. Even if the economy recovers, the number of potential buyers will not match that of the Boomers until Generation Y buyers hit the market.

There is a legitimate question here in New Mexico about whether we are seeing the typical lag in recovery that we are familiar with or whether the lack of recovery is due to some of the factors mentioned above. As a state, we are not competing favorably with our neighboring states and new jobs and businesses are in short supply. Many of our rural counties are seeing population loss and our larger cities may lack the infrastructure and amenities that demographers say are needed to support growth.

The impact of a shrinking market, along with rising costs and lowered affordability, is likely to lead to further consolidation of the building industry, where fewer companies produce an ever higher percentage of new homes. High-volume builders may be the only companies able to meet the challenges of affordability. Small custom builders, by the very nature of what they build, must charge more for their homes than high volume production builders. So, if current trends don’t change, it seems likely that small builders will see a declining market. However, there also appears, at least anecdotally, to be a reduction in the number of young, new builders entering the market. As many older builders retire, the number of remaining builders may stay well balanced to demand in a declining market, but somewhere down the line we could see the end of the era of small custom builders.

Of course, there are other markets where small builders may thrive. Remodeling is one and a growing need for aging-in-place housing is another. Rising demand, especially with shrinking inventory, and rising wages could also reverse some of the trends noted. As building science and technology continue to improve housing amenities, dissatisfaction with older inventory will drive demand for new housing. A new study is being conducted in Portland, Oregon and early results are indicating that even adults under the age of 25 still prefer single family detached housing. These results, if confirmed, may signal a change to some of the demographic information we have been hearing for the last several years.

I believe that the key to the future shape of the housing industry will be affordability. We are facing great challenges, but within great challenges are great opportunities. Builders are expert at problem solving and overcoming challenges, so I remain hopeful for our shared future.

As mentioned above, I’m nearing the end of my term as President of NMHBA. It has been a real honor and privilege to serve you, the members, in that capacity. I also want to thank my fellow officers, the entire staff, and all committee chairs and members for all of their hard work this year. Without that work, your association would not function as successfully as it does and I urge you to get, or stay, involved.