Strong market revives spec home sales
High demand gives builders faith home buyers will be around
Home buyers across the country are scrambling for properties, and real estate professionals are begging for more houses to be built to answer the high demand.
Under these conditions, you might suspect that developers would be more inclined to build a house even before a buyer has purchased it.
Indeed, some builders have increased their production of “speculative” or “spec” houses, which are fully or partially built without a purchase contract in place. Still, that’s not the case with others – the strategy around spec houses varies, according to market conditions and builder preferences.
“A few years ago, it was too risky for builders to build spec houses, but right now, builders are extremely bullish on the housing market,” says Tim Costello, founder and chief executive of Builder Homesite Inc., the parent company of Builders Digital Experience and NewHomeSource.com, a builder-marketing business based in Austin. “They’re selling everything they can build and making lots of money, so their risk profile has changed.”
In different market cycles, spec homes – which are sometimes labeled “immediate delivery,” “move-in ready” or “immediate occupancy” houses – can be a burden on builders if they languish on the market, because they’ve paid to construct the house and continue to pay financing costs and utilities.
When builders are eager to sell a spec house, buyers occasionally get a bargain. But in today’s hot housing market, this is rarely the case, with most houses selling fast.
“Right now, we’re seeing most of the builders in our area building houses as fast as the lots are developed,” said Lind Goodman, a sales manager for BSI Builder Services, a division of the Allen Tate Co. in Charlotte. “Resale inventory is so low, and builders can’t build houses as fast as they are selling, particularly at the lower-end prices.”
––– Home buyers in a hurry to move are the most likely candidates for a spec house, but sometimes spec buyers are simply tired of competing for limited resale houses in their area.
“Buyers who choose spec houses today are usually doing this because of timing,” Goodman said. “Sometimes they are relocating and want to move to their permanent home right away. Sometimes people put their house on the market, and it sells faster than they expected. They only want to move once rather than go into temporary housing while they wait for a house to be built.”
Although choosing personalized features is a pleasure for many buyers of new construction, Goodman said: “Lots of people like not having to pick everything, and they’re happy to go with the choices the builder has made for their house. They’re still getting a new house, and typically it has the most popular upgrades for that price and neighborhood.”
Regina and Ted Solomon and their three children, ages 10, 13 and 15, recently moved into a spec house at Meadowbrook Farm in Leesburg, Virginia that was built by Van Metre Homes. They opted for a spec house because of its lot and location within the community. The Solomons, who’d already lived in the area, looked at resale houses two years ago and hadn’t found anything they liked. This time, Regina Solomon found a house when they weren’t seriously looking.
“I popped into Meadowbrook Farm on a whim and was immediately attracted to the house, and especially the lot, which is next to a common area where the kids can play,” Regina Solomon said. “If the house hadn’t been ready, I might not have been as willing to make a quick decision.”
She said she saw the house on a Tuesday, brought her family and bought it the following Saturday.
“The house just matched everything we wanted,” she said. “They did a great job putting in the finishes I would have chosen anyway. I actually think they chose a higher quality of items than I might have picked if I had to sit and choose everything with a price list in front of me.”
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Van Metre Homes, a North- ern Virginia builder, has increased the number of spec houses it builds in response to the critical need for houses in Loudoun and Fairfax counties, said Brian Davidson, group president for the firm’s new homes division in Stone Ridge, Virginia.
“Building more spec homes allows us to reach people who would be looking at resales because they want to move quickly rather than wait six months or longer for a home to be built,” Davidson said. “We particularly want to have houses ready for the busy spring housing market and the fall housing market.”
About 37 percent of Van Metre’s sales last year were move-in ready houses, compared with 31 percent in 2016.
Data from the U.S. Census Bureau show that about 35 percent of newly built homes sold in December were com- pleted when they were purchased, an increase over the 33 percent sold in December 2016. However, the definition of a “spec house” varies.
“Some builders start homes by pouring the foundation and then build very slowly while waiting for a buyer,” Costello said. “A true spec home is one that is built and can be moved into tomorrow.”
The National Association of Home Builders (NAHB) in Washington tracks “spec houses” as all houses that are sold with the land and house, which includes homes under construction while under contract, as well as completed homes.
“The challenge for builders, even if they would like to build more spec homes, is that they face what we call the ‘five L’s’: Labor, lots, lending, lumber and local regulations,” said Robert Dietz, the NAHB’s chief economist.