This week brought plenty of good news for home builders. The National Association of Home Builders reported Tuesday that builder confidence nationally was at its highest level since June 2006. On Wednesday, the Census Bureau said national housing starts rose 15 percent in September, their highest rate since July 2008, and housing permits went up 11.6 percent last month.
I spoke with Doug Smith, president and CEO of Miller and Smith, the third largest private home builder in the Washington metropolitan area, to gauge how the national trends compared to what he is seeing in the region. Miller and Smith has been building homes in the region since 1964 and was one of the few home builders to survive the economic downturn. Below is an edited transcript of our conversation:
How does the Washington market compare to the national one?
I think Washington was on the front edge of that change in [builder] confidence. We were one of the first markets into the downturn, and we were probably one of the first markets out of the downturn. The thing that really changed it was consumer confidence changed in metro D.C. You have low unemployment rate, you’ve got good job growth, and there’s low interest rates on mortgages so the last thing that had to happen was the consumer feeling confident. And I think they got off the sidelines in 2012 and started buying houses again. Our sales are up 33 percent over last year. We’re happy. We’re selling a house a day right now. It’s about time.
Where are you building?
Miller and Smith is an entry level and one step up [builder] so we’re more in suburban counties like Loudoun County, Prince William County, upper Montgomery County, the 270 corridor. As job growth has happened or people feel more confident in their ability to keep their existing jobs, that’s where we’re seeing people moving out of apartments and buying homes on the entry-level side. Or they’re moving up, maybe they bought a town house and now they’re buying a single-family house.
In this recovery what happened is the entry-level buyer was the first one in as interest rates got really low. They’re really the first ones to start buying. . . . It trickles up, and those people that they buy from go, ‘Okay, now I can buy that single-family house that I wanted to purchase.’ We’re seeing good movement there.
Is there a difference between Maryland and Virginia?
We’re seeing, because job growth has been stronger in Virginia and they moved through their REOs faster, we’re seeing increased demand in Virginia. But what I think has turned now is Maryland. Maryland was about six months behind but now Maryland is there as well. We’re seeing good things happening in Maryland.
Has the type of homes you are building changed?
Actually, during the downturn, it forced us to re-evaluate our product and we did two things: The size of the homes has gotten a little smaller to reach an affordability factor and the features of the home are different. People want a much more open floor plan than they wanted before. There’s some flexibility in how you use rooms because people think they are going to live in their houses longer, too.
What are people giving up in their homes?
There are two things: The living room is officially a room that is not used any more. Those have been taken out of houses so that frees up some space.
No more living rooms?
Unless it’s a much bigger home.
What about dining rooms?
Yes, yes, you have a dining room. In smaller houses where you have a much more wide open floor plan where it all flows together, the dining, kitchen and family room are all together. The dining room is still an important part. That separate eating area is still very important. When you talk to [home buyers], they want it for the Thanksgivings, the Christmases, the big family occasions.
What else are they giving up?
The sizes of master suites have gotten smaller. You used to have a master bedroom with a sitting room and a cavernous bathroom. As houses have gotten smaller, the sizes of some of those rooms have gotten more realistic as well.
What we’re seeing in our home buyers they are finishing off that basement. The basement isn’t an area of the house that was finished off. But now as they buy their house perhaps part of it because they’re older, some of our buyers they saved more money so they’re able to put more down on their house, but they see that basement as additional living space so they finish that off right away and put that in the mortgage. Because mortgage rates are so low, you can get your basement finished and you’re borrowing at 3½ percent. That’s a pretty good deal.
Going back for a minute to the NAHB builders’ confidence survey, the national number is 41, which is the strongest level since June 2006. But anything below 50 is still considered poor rather than good. Where would you put builder confidence in the Washington metro area?
It’s in the high 50s. Washington is probably the strongest market in the country. I participate in a national survey with an analyst that looks at all the markets. Washington, D.C. is the healthiest market in the country. Builders within the Washington area self-rank it in the high 50s.
Many home builders were forced out of business during the economic downturn. How was Miller and Smith able to survive?
We’re a company that’s been around almost 50 years. We know this is a cyclical business and we keep a lot of capital in order to make it through these downturns. Now no one projected the downturn as bad as it was going to be, but because we were well capitalized going into the downturn it helped us. It enabled us to survive it and capitalize on it because we’ve been able to get some favorable land deals because we had that capital.
What’s your biggest concern about the market going forward?
I guess my biggest concern might be what happens when rates start going up again. They say we’re in a low interest rate environment for the next three years and so if they change that policy, what does that do to this upside? But I think there’s enough positive momentum in other parts of the economy that I’m feeling that we’ve hit bottom and we’ve got two or three good years ahead of us.
One thing that we’re seeing, it goes back to the health of the market, consumers during the downturn were hesitant to buy a house until they had sold their existing house. They’re much more receptive now to writing a contract and they have confidence that they’re going to be able to sell their house.