"I've never seen anything like this in 30 years" said a real estate agent at a recent showing of an upscale suburban house in a trendy San Francisco Bay Area neighborhood. "Inventory was reduced by 50% in 2011, and reduced again in 2012. Now there's multiple bids for most properties."
Several things are driving this stampede: historically low interest rates, new job growth in California, very little legacy inventory for sale, and almost no new residential inventory for sale. In fact, if a person's credit is good, it is actually cheaper to buy than rent in 98% of U.S. metro areas. The housing affordability index is near all-time highs.
My focus today is on the new builder IPO, Tri Pointe Homes (NYSE:TPH). They build upper-tier residential communities exclusively in California and Colorado. A little background on the company: it has no legacy issues or distressed assets from the housing crisis; is backed by Starwood Capital, and managed by the former executive team of William Lyon Homes. Tri Pointe's markets are punctuated by low inventory, strong demand, and rising prices.
Its growth between 2011 and 2013 has been dramatic.
|Year||2011||2012||2013 est.||1H2014 est.|
|Home Completions||36||144||355||377 (6 mos.)|
|Revenues||$13.5 ML||$77.5 ML||$207.5 ML||$216 ML|
|Average Sales Price||$375K||$538K||$585K||$573K|
Here's what Real estate agents in the latest (April, 2013) Credit Suisse survey say about the geographies Tri Pointe is building in.
"The shortage of inventory has caused an outrageous number of multiple offers to be presented." (Los Angeles) …"Inventory is very low. It's less than 30 days now. (San Diego)… "We don't have any properties for sale. Good for urgency, traffic, and pricing, but it's tough to convert to actual sales" (Inland Empire, Ca)…. "We're still experiencing very low inventory across all price ranges with multiple offers and bidding wars driving pricing up substantially." (San Francisco)..."My listings are getting bombarded with showings immediately after going on the market, and are under contract in hours, not days after listing. Inventory is really very low…Buyers are going nuts looking for something to buy (Denver)
Tri Pointe keeps very tight control over its inventories. Their communities have a long waiting-list and sell-out quickly. I estimate the company has enough lots in CA and CO to last them for two years through mid-2015. Their goal is to eventually build a 1,000 new homes per year. Tri Pointe's gross margins have steadily risen to 20% in the recent quarter. A good rubric to compare them with would be a young Toll Brothers - in both quality and execution.
Tri Pointe debuted on January 31, 2013 and is currently trading about a dollar below its IPO price of $17.00. The recent sudden rise in short term interest rates - coupled with a perceived summer slowdown - may have been what knocked the stock down 20% in May, but I think the shares will re-accelerate at the end of summer when it becomes apparent that there has been no slowdown in the CA residential real estate market.