A sold sign stands in front of a home still under construction in West Des Moines, Iowa. Demand continues to outpace new construction nationwide. (AP Photo/Charlie Neibergall)
ASSOCIATED PRESS
When mortgage rates went up from the 3%’s to nearly 5% in the second half of 2018, builders felt a pinch from lower sales. Now that mortgage rates have come back down again, many home shoppers are feeling like they now have a second chance to buy a home and lock in a rate at generational lows.
But builders aren’t taking the market’s improvement for granted. Large homebuilding companies have been gearing up for the past several years to bring homes to market that target first-time home buyers.
“Normally the first-time homebuyer group leads the pack in a housing recovery, and the move-up group fills in later,” said Jeff Mezger, CEO of KB Home. “This time around, it was flipped; the millennials delayed buying for a decade, and the industry was fed by the move-up segment. Now, we’re finally starting to see a normal housing recovery.”
KB Home has always focused heavily on the first-time homebuyer audience, so this is nothing new to them, but the first-time segment is growing rapidly for that company. Mezger noted that 55% of KB’s new home deliveries in the second quarter of 2019 were to first-time home buyers, which is the highest percentage in a decade (KB had been tracking 50%-52% for a long time). Mezger attributes some of their success in attracting first-time homebuyers to KB Home’s built-to-order business model which allows more personalization than some other builders.
But what about all the talk about the millennials not being willing or able to start a household and buy a home? Millennials had indeed delayed forming their own households, getting married, and having children, but now they are entering a new phase of life and are heading into the home buying market in large numbers. Most builders are adding homes with lower square footages in order to make sure they have something that is affordable to this group.
D.R. Horton, the largest homebuilder in America, has pushed the envelope with regard to building homes that first-time homebuyers could afford. They have offered homes in the sub-$200,000 range through their Express Homes brand for five years now. Their success stimulated other homebuilders to start building smaller, more price-effective homes. Very few can compete and be profitable at that price point, particularly with lot and land prices at levels near the bubble peak, but many are nonetheless reaching lower price points than they had historically done.
The shift in homebuilder offerings is being referred to by industry watchers as the “pivot.” Nothing changes extremely quickly in the homebuilding industry, but the pivot toward more affordable offerings is happening quickly by homebuilding industry standards.
Of course “affordable” means different things to different builders. Even the high-end production builder Toll Brothers is shifting the product mix to serve the older millennials. Toll Brothers has historically had an average home price that is more than double that of the other public homebuilders. But Fred Cooper, Senior Vice President at Toll said:
“In markets such as Jacksonville, Boise, Reno, and many others we have had great success with product in the $350-$450,000 range. We are offering similarly priced product in Phoenix and recently acquired a home builder in Atlanta who offers home in that price range along with other, higher priced product.”
Cooper at Toll Brothers also noted that millennial couples are getting into homeownership later than previous generations, and that, as a result, they have ten to twenty years’ worth of work (and income) behind them by the time they make a home purchase.
Toll is selling homes at The Crossings at Meridian in the Phoenix market at base prices starting in the low $300,000s. That is still steep for the vast majority of first-time homebuyers, but it is representative of the shift that is occurring among homebuilders and their offerings.
Mezger noted in this interview that Las Vegas continues to be a very strong market for KB Home, and that San Antonio and Houston are strong as well. “It’s all about jobs and affordability,” he added. California is known for its high home prices and affordability concerns, but KB Home has met this head-on with their newest product offerings. At their Autumn Winds community in Riverside County, one of their most popular home designs is 1,593 square feet detached single-family home, currently priced in the low $330,000s, which is very affordable by southern California standards.
In closing, Mezger also noted that “the millennial buyer lost a decade, but now we are seeing demand starting from Generation Z, who are now entering home-buying age, so there is another wave of first-time homebuyer demand on the way.”
The smart builders are studying and getting ready to handle both Gen Y and Gen Z. In a few years, both groups will be visiting the builders’ sales centers at the same time. By then, a large proportion of buyers will be visiting virtual sales centers instead of physical ones.