Just how much impact government spending cuts under sequestration will have on home building depends on who you talk to. Even in the Washington, D.C., area, where government employees abound and the cuts are expected to be most significant, builders give different answers to the question.
Last weekend, home builder Robert Wormald spent a lot of time talking to some of the hundreds of buyers who trekked through Wormald Homes’ models during its annual spring sales event, and the experience left him worried that sequestration’s spending cuts will impact his business.
“A lot of them said they were waiting to see whether they are going to have a job or not” before committing to buying a new home, recalled Wormald, a Frederick, Md.–based builder, who also builds in Pennsylvania and Virginia. The potential impact of sequestration was clearly on the minds of home shoppers. “It was a recurring discussion.”
That gives Wormald cause to worry, since he estimates nearly half of his buyers are employed by the federal government. His sales were brisk in the fall, but then tapered off in February, when they should have been goosed by the spring selling season.
“I was writing no less than three contracts a week, starting in October,” he said. “Last month it was two a week and some of my communities wrote no contracts at all.”
Meanwhile, over in Virginia, where sales have been brisker and buyers tend to be wealthier, Steven B. Alloy, president of Stanley Martin Homes, called sequestration a “non-issue. Sequestration is not a shock to anybody,” he said.
And it hasn’t impacted Stanley Martin’s recent record sales numbers. “In November and January and February, sales exploded. So we are not feeling the impact. We are raising prices, if not every week, certainly every month.”
And the same is happening with his competitors’ sales as well, he said: “Anybody you talk to in this market says their sales are fantastic.”
The fact is, it's still unclear as to how much, or even if, the spending cuts will thwart the recent housing rebound. Much depends on how long the cuts remain in place. But in a business where perception can become reality if potential home buyers get spooked, it appears that most home builders aren’t bringing up the issue with customers, according to housing analyst Stephen East, senior managing director of ISI Home Building Research. East recently toured a number of Washington, D.C.–area communities looking for signs of impact.
“Of more than two dozen communities visited, we encountered two contract cancellations and three pending sales as a result of the sequester,” East reports. “After meeting with industry contacts, we believe management teams have elected to withhold their sequester reservations from sales forces,” East wrote.
He suggested that sales continue to be good because there are low existing home inventories in the D.C. area, and the reality of the sequestration hasn’t really hit home buyers yet. Many are numbed from the series of recent “histrionics” related to looming fiscal crises that didn’t happen.
The reality of sequestration will eventually impact home buying, said East, and, depending on how long it continues, it could “have a snowball effect on consumer confidence and home buying activities.” It also could cause cancellation of contracts for homes that are ordered but not delivered.
Sequestration could also have impact for builders beyond home sales. Getting homes to closing could be delayed. The FHA has said furlough days could impact endorsement and claim time frames for home loans. Builders who use USDA rural home loans could also see slower processing.
HUD programs related to housing will also be affected by sequestration And home builders who target their product to buyers in the military are also expecting some impact, as defense department cuts take hold.
“We are concerned about sequestration because it is supposed to furlough the folks who are civilians [working at Fort Bragg and Camp Lejeune] by 320%,” says Jack Rostetter, CEO of Fayetteville, N.C.–based H&H Homes. “We are watching it closely to see how it impacts local sales.
But unlike home builders in the Washington, D.C., area, builders in military towns are used to the uncertainty of government jobs. Even before sequestration, unrelated personnel cuts had started in the Fayetteville area, said Rostetter. “Foreclosures are going up and there are significant numbers of existing homes hitting the market.”
H&H has been diversifying beyond military towns to help insulate it from government cuts. While building was booming in the Fayetteville area, when housing was crashing everywhere else, H&H began moving into other markets that don’t rely on defense spending, including Pinehurst, N.C., and, soon, Raleigh, N.C.
Business has been good. “People have started to get jobs and they are starting to believe in those jobs,” he said. “They have made life adjustments, paid off debt. They are going out and getting consumer loans again.”
Rostetter doesn't think the sequestration's impact will be huge on a national scale as long as it doesn't cause consumer confidence to falter.
“If sequestration doesn't cause a real impact [on confidence] or the global economy doesn't crash, I think we will be fine,” said Rostetter.
Gray Hawk Homes in Columbus, Ga., also has benefited from the ramp-up of military jobs in recent years at nearby Fort Benning. But Gray Hawk’s president, Dave Erickson, is mindful that his military business, with or without sequestration, is likely to shrink as the United States winds down its wars in the Middle East.
“If you are going to be a realist, the military budget is going to get smaller,” said Erickson. “The changes with sequestration are a little more abrupt. The reality is I need to be managing and watchful.”
And diversified. Erickson is doubling down in his other home building market, which has no ties to the military: Des Moines, Iowa.
Teresa Burney is a senior editor for Builder magazine.