The ancient Roman poet Horace once said that “This was my prayer: an adequate portion of land with a garden and a spring of water and a small wood to complete the picture.” That may be the desire of many who look to build their ultimate home on a desired piece of property sought out with care and great discernment. How that comes to fruition is another matter entirely.
The most notable “new face” is D. R. Horton, the nation’s largest homebuilder. Horton began building homes in southwestern PA last year and is expanding quickly in 2024. Its arrival in the Pittsburgh market marks the sharpest challenge to long-time market leader NVR Inc., which has built as many as 40 percent of the new homes started in recent years in Pittsburgh through its Ryan Homes and Heartland Custom Homes brands. Like its other national rivals, Horton does not expect to dabble in a new market. Horton’s entry in Pittsburgh shows confidence in the opportunities for new construction that has not been demonstrated in decades.
D. R. Horton is not the only new entrant to the market. Foxlane Homes, based in suburban Philadelphia, began building homes in Pittsburgh during the second half of 2021 and has opened new communities in 2022 and 2023. DRB Homes, formerly known as Dan Ryan Builders, regained its footing in 2023 after slowing its new construction activity during the pandemic. And NVR maintained its dominant position in the market by starting more homes in 2023 than in 2022.
The impetus for this increased interest in the Pittsburgh market may have less to do with the characteristics of Western PA and its economy than with the growing recognition that more new construction is the best solution to the problem of housing affordability in the U.S. Builders in Pittsburgh have stayed with the recipe that produced survival and success since the Great Recession. That recipe has yielded fewer houses than there has been demand for purchase, creating higher prices and better margins for the builders. New entrants and new approaches are bringing changes to the recipe for success in Pittsburgh. Those changes have the potential to unlock home ownership for buyers who have been locked out of the market and to uplift communities that have seen little new development since the Baby Boomers were children.
The Recipe for Success
When it comes to new construction, there is no single recipe for success. There are homebuilders across a broad spectrum of approaches that are successful. But for the most part, builders in metro Pittsburgh have hewed closely to the conventional wisdom that buyers are willing to pay for new construction that is in the best school districts.
While some of the best Pittsburgh school districts are mostly built out – Mount Lebanon, Upper St. Clair, Fox Chapel, and Hampton Township are examples – those districts that are up and coming reflect that combination of developable land and high rankings. Since 2010, a dozen municipalities have seen more than 1,000 units of new single-family construction. What they have in common is a highly-ranked school district, including North Allegheny, Peters Township, Canon McMillan, Seneca Valley, Mars Area, Pine-Richland, and South Fayette Township school districts. The exception to the rule is the City of Pittsburgh; however, a larger share of buyers in the city do not have children and those that do have demonstrated a much greater propensity to make use of private schools.
This orientation towards school districts is an application of the real estate mantra “location, location, location.” In the case of empty nesters or homeowners without children, that may mean proximity to lifestyle amenities or transportation. But, in the case of young families, location is all about school districts.
One of the bigger problems with the conventional recipe for new construction is that it relies on third-party developers to buy land and prepare lots for sale to builders. One of Pittsburgh’s weaknesses has been the erosion of its developer base over the past 20 years. An unusual share of Pittsburgh’s suburban developers are Baby Boomers. Those owners began retiring or became more risk averse in the mid-2000s, coinciding with a period when development costs rose sharply. The financial crisis that followed in 2008 brought about lending regulations that made borrowing more difficult and expensive for developers. And other regulations have been piled onto land development during the past decade. The upshot is fewer and fewer lots.
“It’s more difficult to find land than ever. Once land goes on Multi-List, it’s picked over immediately,” says Darlene Hunter, vice president of new construction for Howard Hanna Real Estate Services. “I think that’s especially true for the smaller builders. They don’t need a hundred acres. They need smaller infill sites. These aren’t all small companies either; they are just not production builders. There’s no way to do what we used to do, when a piece of the development would go for the production builders and another piece would be for the custom builders.”
The development process Hunter describes was used in many of the communities that were developed over the past 30 years, especially in the higher volume projects that met the demand for new homes in rapidly growing markets, such as Cranberry Township and the far North Hills in the 1990s or in South Fayette Township and northern Washington County in the 2000s. As development costs went higher and financing conditions became tighter, developers could no longer have the patience to wait five years or more for custom builders to take down enough lots to keep the bank happy. Developers shifted their business model towards production-oriented builders, which were also very successful sales organizations.
The more challenging development economics have also made it more difficult for the developer/builder to find new opportunities.
“The bulk of our business is from purchasing and developing land, and building new homes in those developments,” explains Jason Korna, vice president of residential for Kacin Companies. “I wouldn’t say there’s more opportunity or less opportunity, but the cost of land in certain areas and the cost of the development work itself makes it more challenging to develop. There are still plenty of opportunities, but it is a matter of making the numbers work.”
Kacin, which is wrapping up Hillstone Village in Murrysville and opening a new phase of North Meadows in Washington Township, is working on a new land development in Hempfield Township. Corna says the market demand in those parts of Westmoreland County justify the investment.
“Customer demand is pretty solid, and I do anticipate that demand will increase as we get into the spring and summer,” he says.
“It’s always been difficult to do land development because of the topography that we have, the zoning issues, availability of sewers, mines, and other issues. Now it’s harder,” says Paul Scarmazzi, CEO of Scarmazzi Homes. “Every year there is less available land, so it’s harder to find good land. But the more relevant problem is that the approval process is so much more difficult.”
Scarmazzi Homes is one of a few builders that primarily develops its own lots. Paul Scarmazzi stresses that the local and state approval processes make some desirable properties financially unfeasible to develop.
“Obtaining final stormwater approval through the Department of Environmental Protection has become a protracted process that will dramatically constrain the availability of lots. We’re not going to see market demand go down, but the availability of opportunities to build homes for people will go down,” he continues. “It takes a long time to entitle lots and, if you take a few large projects offline, that makes a material impact on the inventory. The good news is that people that have lots can make hay, but the people that need housing will find less available.”
New land developments that do make sense financially in 2024 will also struggle to find financing. Residential development loans are commercial loans. Commercial real estate is at a cyclical low and lenders are worried about the risk of financing and re-financing commercial properties. Even though residential development results in new homes, rather than new offices or retail shops, those projects are being limited by the same risk aversion.
“We are not shying away from doing development loans for the right person. That person has to have a lending relationship with the bank,” says Ronald Pasic, senior vice president of commercial lending for Nextier Bank. “That’s not just loans, but deposits, wealth management, and the other services that make up a banking relationship.”
Banks are almost universally avoiding new developer customers now. Pasic’s comment about existing relationships is echoed by virtually every banker.
Spicing up the Recipe
The upshot of the time-honored orientation towards a half dozen school districts means that the most desirable land is being developed while less desirable, but more affordable, land is not. It also means that scores of communities in good school districts throughout Western PA have seen little or no new development. That opens a window of opportunity to build more affordable homes.
The window for a more affordable new construction product is wider now than it was a year ago, according to research done by Redfin, an Internet-based residential brokerage and finance provider. Redfin’s research of all homes sold in 2023 found that the median sales price of a house in Pittsburgh jumped 22 percent year-over-year in February 2024, the largest increase of any U.S. city. The median price increase nationwide was 6.5 percent. Redfin also reported that the median price in Pittsburgh was $250,000, well below the national median sale price of $412,000.
Such a steep increase in home values makes new construction, which tends to be higher than the median existing home price, more competitive. The trick to being more competitive will be to be more creative in approaching the market. One of the more creative trends has been an increase in the number of new suburban townhome developments. Townhomes improve the economics by putting more homes on the same amount of land. Where large-scale townhouse development is permitted, the inventory of more affordable homes is increased. Most of the more desirable municipalities have been reluctant to permit higher density on a large scale, so builders are looking at townhomes on random smaller sites.
“We’ve seen builders building 15 townhomes in an infill site,” says Hunter. “That could be on a main road or tucked behind a neighborhood. Financing on a smaller scale is easier to complete and it’s more manageable for a small builder.”
“What I’m seeing is that when land becomes available, the developer is targeting townhouse construction more than single family lots. That seems to be the product line that is more popular,” agrees Tom Hosack, president/CEO of Berkshire Hathaway Home Services The Preferred Realty.
In the traditional single-family detached home market, the more disruptive change to the recipe might be an ambitious new builder in the market. D.R. Horton has demonstrated the will and capability to be just such a builder. Based upon its history and its early results in Pittsburgh, Horton should have a significant impact on the Pittsburgh market because of the breadth of its offerings and its capacity to assemble buildable lots. In less than two years, Horton has been successful at securing unbuilt lots in numerous communities, including those where its chief regional rivals, Ryan Homes, Maronda Homes, and DRB Homes, have been building. Horton has also lined up new development opportunities.
D.R. Horton’s approach to the market is what will cause the most disruption. The nation’s largest homebuilder, Horton builds an inventory of speculative homes, positioning its new construction product as an alternative to existing home inventory as well as other new construction. That is in contrast to most other new construction in metro Pittsburgh.
“Our business model is different from the standard new construction model. In typical new construction, a buyer signs a contract, the builder builds the home, and then closes the sale. We are an inventory builder. We’re going to build the home and then people will buy it and close on it,” explains David Bruckner, director of sales and marketing for D.R Horton. “We are adding inventory to the market immediately, which is one of the reasons why you’ll see the permits increasing. We’re almost competing in the resale market because people can walk into our models and close in 30 to 60 days. There hasn’t been an entry in the market with a builder like this since the housing bubble. We are here to stay, and we are here to make a difference.”
Horton is getting underway shortly on 54 townhouses at McCandless Square, Sunrise Acres in Adams Township, the 70-townhouse Seneca Hills in Jackson Township, Millstone Village in Jefferson Hills, and its own new developments in Moon Township and Plum. The company has said that its goal is to build at least 500 homes per year in Western PA. Bruckner declined to reveal the number of lots under agreement in March, but he noted that Horton’s land acquisitions have positioned it to meet that challenge.
“Horton has enough lots under agreement that we could successfully meet our business plan with acquiring additional land,” he says.
Real estate professionals note that D.R. Horton’s models include smaller, more affordable homes that the builder can complete efficiently and offer to first-time buyers. That slice of the marketplace has been underserved for more than a decade. Bruckner says that Horton intends to meet the demand.
“One of our niches is that first-time buyer home, so we’re absolutely looking at opportunities to compete with the resale market, but with new construction,” he says.
“Horton seems to be filling a need for a lower price point that we haven’t seen in a while. That lower price point was once served by the builder with a pickup truck and a ladder that was pushed out of the market by the banking regulations,” says Hosack. “That’s the big value Horton can bring to the market, in addition to the additional inventory, getting something people can afford.”
“It puts a product in the marketplace for families that are looking for something that is more affordable,” agrees Hunter. “Horton also puts product in the marketplace that people can buy now. With other builders, homeowners have to have their house sold or move a second time while the home is being built. That is a risk for homeowners.”
The increased competition for buildable lots should be an incentive for developers to take on more projects, since they can feel more secure that there will be more buyers for the lots than just a few years ago. The heightened interest in buildable land should also be a stronger incentive to develop new neighborhoods in communities with school districts that are not at the top of the rankings. That could be a game changer if D.R. Horton’s entry into the market drives more development, rather than simply taking market share in a zero-sum game.
It is too early in the year to tell how things will play out, but there is an increase in activity through the first two months of the year. Compared to 2023, construction of new single-family homes was 6.4 percent higher in January and February 2024. During the first two months of this year, builders pulled permits on 414 new homes and 565 new apartment units.
One unexpected trend in new construction is the downturn in business for modular home manufacturing. While the trend in modular, or industrialized, homes has been upward for a decade, there has been a sharp increase in the number of failures among manufacturers. Thus far, this trend has not hit the manufacturing base located in Shippenville, outside Clarion, where there are a cluster of firms that have made Pennsylvania home to the largest number of modular homes made in the U.S.
Manufacturers have succumbed to many of the same problems that have sunk traditional homebuilders, plus a few that are unique to the modular industry.
Among the latter types of problems are manufacturing technology failures, misalignment of HVAC and plumbing systems, supply chain disruptions, and accepting contracts with margins that are too low to cover costs. The latter is often a problem for traditional homebuilders, but the uniqueness of modular construction is that the motivation to keep the production process moving has overridden the need to lift profit margins. When production efficiency is of greater concern than profit margins, the risk of failure grows. Some of the failed modular companies also expanded too rapidly, incurring debt and expenses that weighed down new operations before new sales had a chance to catch up.
Like traditional builders, modular manufacturers also struggled with poor cost estimating and controls, schedule delays and labor shortages, and problems with customer satisfaction that required extensive field re-work or even re-manufacturing. Those fixes generally consumed more than whatever cost advantages were gained by manufacturing instead of traditional construction.
In metro Pittsburgh, modular homes made up a small share of the market, but it was a share that has been growing. One of the growth drivers has been the increase in modular construction within Pittsburgh’s city limits. Modular construction has mostly been employed in the more rural and less affluent areas in the outlying counties surrounding Pittsburgh. As home prices have soared in recent years, and with land costs at a premium inside the city, smaller modular homes have found favor, both with buyers and with the city’s zoning department. Demand for modular homes is likely to continue to increase, given the market conditions, so recovery in modular manufacturing is a necessity. Such a recovery is unlikely to influence the market in 2024.
The recent trend in lower mortgage rates also seems increasingly unlikely to have the impact on the market in 2024 that was hoped for as 2023 ended. Data since the first of the year has renewed concerns about inflation reheating. In its March meeting, the Federal Reserve Bank reiterated its resolve to get inflation back to pre-pandemic levels and was clearer that any cuts to its Fed Funds rate would not happen until mid-year. Mortgage markets showed no reaction to that news, which is an indication that lenders anticipated little reduction in the prime rates this calendar year.
Mortgage rates have been stable since January 1, remaining under seven percent but floating mostly between 6.8 percent and 6.9 percent. A steeper decline in rates was hoped for to motivate existing homeowners who want to sell, thereby adding inventory to the market. Lenders and real estate agents forecast that existing homeowners will become sellers once mortgage rates move to 5.5 percent and below. Based upon where long-term rates are, that is unlikely to occur until well into 2025.
The forecast for new home construction in Pittsburgh is mainly a boring one. Macroeconomic conditions are unlikely to create an incentive for developers and builders to dramatically increase the number of homes built. Mortgage rates have come down, but not enough to increase the supply of homes for sale so that there are more move-up buyers for new homes. The best chance for market disruption, for a new recipe for success, will come from the new entrant to the residential construction market.
Darlene Hunter says it is too early to tell if D.R. Horton will shake up the Pittsburgh housing market but is confident about one outcome. “It sure gives the other builders some competition,” she says. NH