September 14, 2019

Spec Housing Could Ease Builder’s Minds

Today, there are at least 45 million potential buyers younger than 40 looking to settle down into their first home.

The demand is greatest at the lowest price points, but the supply of existing affordable homes is simply not enough. It’s not a new problem. Substitute “American GI” for “Millennial” and you had an almost identical situation brewing after World War II.

By the end of the 1940s, America had essentially ceased building homes – diverting usable materials to support the war effort. The demand for affordable homes created by the returning soldiers fueled the new “spec” home industry.

Another name for “speculative” construction, builders built thousands of simple, mass-produced homes for sale from the 1950s to the 1970s.

More spec construction of affordable housing could help relieve today's large home inventory shortage, too. While a spec home is not a good choice for those who are particular about every single detail, it can be a good option for those who wan to enjoy the benefits of a new home without waiting several months, a simpler contract, and an overall lower price.

Spec houses are common at the start of new development, but can also be used to maintain regular income for a building company. Without consistent income, builders may have difficulty borrowing to build more homes. Very few builders have the capital needed up front.

Is it time for a spec building boom to take up the housing shortage challenge? It’s not a simple task. Builders still have to balance demand with the risks they are willing to take to make a profit.

The big difference between now and the booming post-war era are the regulatory burdens, intermittent labor shortages and increased materials costs. Builders say it’s increasingly difficult to make building on spec pencil out.

For builders today, it’s a far worse problem to have too many homes under construction or finished when the market turns. In a more volatile economic climate, even a slight dip in the economy or small increase in mortgage rates could cut into the demand.

To hedge against these risks, many home builders understandably gravitate to speculative construction of higher-end homes.

There are some buyer drawbacks to spec, as well. Past spec neighborhoods earned reputations for being too “cookie cutter.”

True, spec houses are often similar, but builders have developed ways to enhance visible aesthetics. While you may not get to choose every detail, this option can offer excellent value.

Builders probably don’t need to worry about losing money on spec construction today. Affordable supply is near record lows, and the demand is not just great – it’s almost overwhelming.