FOR IMMEDIATE RELEASE
Date 2/2/06

Contact: Matt Derrick
(816) 942-8800, ext. 213

Forecast Shows Strong Year Ahead for Kansas City Housing Construction
Rising mortgage rates, changing demographics pose challenges

Despite changing demographics, rising mortgage rates and historical high new-home inventories posing challenges for metropolitan Kansas City home builders, prospects are good for another strong year for new-home construction, according to a panel of housing and economic experts at the 2006 Housing Forecast presented Thursday by the Home Builders Association of Greater Kansas City. More than 425 housing professionals attended the forecast event at the Sheraton Overland Park Hotel.

The forecast shows that any cool down in the red-hot housing market will be slight, with housing starts and permits continuing to rank among historic highs. Dan Whitney, president of housing market research firm LandMarketing, forecasts 12,486 housing starts in the nine-country metropolitan area in 2006, a 5 percent decline from 2005. That total would rank as the fourth-best on record for housing starts in the metro area.

That would also put metropolitan Kansas City on par or ahead of national trends for new-home construction. Frank Lenk, chief economist for the Mid-America Regional Council, said national forecasts show single-family new-home construction to declining at an annual rate of 5 to 10 percent by the end of 2007, falling from 2.1 million units to 1.7 million units. The decline in new-home construction will be lead largely by an increase in mortgage rates, with 30-year conventional mortgage rates approaching 8 percent by the end of 2007.

Whitney said the hot spots for new-home planning and development include many locations where current development is taking place, including Spring Hill and Gardner and western Lenexa and Shawnee in Johnson County; western Wyandotte County; Independence and Lee’s Summit in Jackson County; northern Cass County; Platte City and the Barry Road corridor in Platte County; central Clay County; and Downtown Kansas City, Mo.

Whitney said one of the biggest challenges facing the home-building industry is a rise in finished unoccupied homes. During the fourth quarter of 2005, his company tracked 3,750 finished unoccupied homes, a 37.7 percent increase from 2004. New-home starts outpaced closings in all metro counties last year except Miami County.

Whitney said the oversupply has been caused by a number of factors, including trends toward bigger homes and price escalation exacerbated by rising land prices, material costs, municipal fees and increased design standards. Other factors include changes in demographics, an acceleration in the buying process caused by low mortgage rates and a decrease in home equity due to higher discretionary spending.

“There is an oversupply of homes but it is not a concentrated oversupply, it is very broad and widespread,” Whitney said. “Yet we also still see success stories in every area where there is an oversupply.”

Lenk said the slowdown in housing starts prompted by supply issues and rising mortgage rates will translate into a slight decrease in construction employment. “We show construction employment as flat during the last year. We expect a slight decline in construction employment in 2006 and 2007 as higher interest rates impact the home-building industry.”

Despite the slight decline in new-home construction, Lenk expects the overall metro economy to fare well during the next two-year cycle. “We expect this year to start out very strong, then slow down later in the year for an average growth of about 3 percent.” That compares with a projected national economic growth rate of 3.5 percent.

In terms of the future of Housing in Kansas City, the panelists agreed that changing demographics will play a larger role in housing trends. Kansas City household are getting smaller, with an average of just 2.5 persons per household and traditional families consisting of two parents with children account for fewer than one-quarter of local households, according HBA Executive Vice President/CEO Tim Underwood.

“ We have seen the local housing market change significantly in the last few years, yet the market will need to continue to adapt to meet the supply and demand created by changing demographics,” Underwood said. “Over half the households in metropolitan Kansas City are two persons or less, which raises the question of what the market is for the larger homes that currently dominate the market.”

One way the market is changing is through the introduction of alternative housing styles and diverse development patterns. Many consumers, especially younger buyers, tend to look for other community features such as mixed-use developments that combine residential with retail and office; traditional neighborhoods based on the town center concept; and infill projects in older communities and neighborhoods closer to the urban core and first-ring suburbs. While single-family detached homes will remain the most popular housing choice, multi-family for sales homes including townhomes, condominiums and lofts are gaining popularity for buyers concerned about rising home prices.

“ We have seen a lot more townhomes, and we have actually increased the percentage in some of the lower price ranges because of those townhomes,” Whitney said. “They have done very well for a select group of buyers.”
Edsel Charles, president of housing research firm MarketGraphics, told the audience that as market conditions change, home builders will need to adapt by offering different products, using alternative building techniques and adopting creative marketing concepts. “Unbelievable changes are coming, and we’re not ready for it. We have to learn what these new buyers want and find new creative ways to reach them.”

Charles pointed toward rising demand for custom home products and age-50 plus housing as essential elements of the future housing market. These groups have specific demands for new homes that are not being met by many current home styles and floor plans.

Underwood said municipalities, the home-building industry and the public need to work together to expand housing choices.

“The reason you are seeing more of these projects is demographics, Underwood said. “There are growing numbers of homebuyers who are looking for something different. We need to make these changes because that is what the market demands.”

Presentations from the 2004 Housing Forecast (Adobe PDF):
Presentation by HBA Executive Vice President CEO/Tim Underwood
Presentation by Mid-America Regional Council Chief Economist Frank Lenk
Presentation by LandMarketing President Dan Whitney

The Home Builders Association (HBA) of Greater Kansas City is the voice of the housing industry and the source for housing information. Comprising more than 1,000 member companies, the HBA represents an industry that contributes more than 2.5 billion dollars to the Kansas City economy and supports more than 36,000 jobs in the Greater Kansas City metropolitan area.

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