I posted a thought on spec homes yesterday.
It made me dig a little deeper. This article is from May, but nothing has changed since
Levitt & Sons pioneered the mass production of single-family homes in the wake of World War II and rode the resulting wave of speculative development for decades after. Then it went bust in the housing crash. It lived and died by the spec home, and it was not alone.
Substitute the word millennials for GIs above: This is now.
“There’s very strong demand for specs, but it’s not because people want a spec-finished home. It’s because they want an entry-level home,” says Alan Ratner, director of home building research at Zelman and Associates, noting that many of the companies that build at that price point make the numbers work by building spec.
LGI Homes, which targets the entry-level market with a 100% inventory strategy and an average home price of $208,000, saw great success in 2016 with its quick-delivery homes
According to Zillow, inventory has been falling year over year nationwide every month for two years.
For Tempe, Ariz.–based Fulton Homes, No. 82 on the Builder 100, spec building has always been roughly one-third of its sales. Dennis Webb, Fulton’s vice president of operations, says as a private company it’s easier to commit to inventory homes, while national builders largely can’t tie up their balance sheets.
As long as spec homes sell before construction is finished, the strategy is accretive to the business from a cash flow perspective, says Laing.
With a 100% inventory, or “spec” strategy being used, my specific concern on my previous post is gone. Knowing this though, there are definitely additional risks involved, many/most of which are discussed in article.
It also mentions that the rate of building specs (among home builders in general) is likely to increase due to the high demand and overall lead times for housing construction.
Anyway, one question answered, several more raised.