During this year’s PCBC in San Diego, I was fortunate enough
to moderate a panel of experts on the elusive first-time home buyer.
The purpose of the panel was to discuss the
challenges in building, selling and financing starter homes for the often
Millennial buyer and what we in the industry are doing to adapt to this
important cohort.
Importantly, although the percentage of first-time home
buyers has recently risen by a few percentage points from where it was a year
ago, for most builders of new homes it’s a different story. Whereas the share of new home sales versus
the overall market has traditionally ranged from 15 to 20 percent, today it’s
about half that, and unless that capture rate
rebounds closer to historical norms, new home starts will remain
subdued. Moreover, given that 2.5 to 3.0
times today’s national median household income would allow a sale price of
about $140,000 to $160,000, it’s easy to see why building that starter home has
become so problematic.
On the product side, certainly the biggest problem to be
resolved is managing the cost in terms of land, entitlements, labor, supplies
and carrying costs, but many of those expenses are not in the builder’s control,
which makes building entry-level homes even riskier.
City planning departments, which might have
envisioned acres of single-family homes on generous-sized lots a decade or two
ago in their mandated housing elements, are often inflexible and slow to adapt
to the changing marketplace, and yet accept no responsibility for their
negative impact on the potential housing supply.
Moreover, while building higher-density PUDs or condominiums
can be a great theoretical solution, the toxic mix of paranoid neighborhood
NIMBYs, opportunistic construction defect attorneys and buyers’ dislike of HOA
fees – coupled with a fundamental misunderstanding of their benefits – often
make such projects easier to build as apartments.
Still, there are some builders who have dipped their toes
into this market with great success.
D.R. Horton’s Express Homes division was launched in the spring of 2014
and, along with their Regent Homes division (which is oriented towards a similar
buyer), accounted for five percent of sales that first year.
By the second quarter of 2015, the capture rate of these
entry-level homes versus the entire company had more than tripled to 18 percent
(although given the average closing price of $179,000, the revenue capture rate
was just eight percent). Nonetheless,
even with lower margins and a faster production schedule, the economies of
scale enjoyed by a builder of Horton’s size can not only make such projects
profitable, but introduce the builder’s name to a family who might be upgrading
to their larger floor plans in the future.
LGI Homes, another Texas-based builder which began
operations in 2003 and has sold over 9,000 homes, has oriented its entire
business strategy towards the entry-level home buyer in nine different states.
This strategy seems to be working, with the
company announcing an all-time record for monthly closings in June 2015, and
also reporting that sales in the first half of the year were up one-third over
2014 levels.
So what is the secret to LGI’s success? They stick to their knitting by relentlessly
focusing on existing renters in apartments or single-family homes who don’t
know they can afford a new home. This
starts on their company Web site, in which plans at specific communities don’t
list a sales price. Instead, they list
what the monthly P&I payment would be based on an FHA loan with 3.5 percent
down at current interest rates. They
then translate this same information into printed flyers that they mail out to
renters within 30 miles of each project, and make sure they’re ready to greet
potential buyers with sales offices that are open 12 hours each day, seven days
a week.
It’s in these sales offices that most of the hand-holding
begins, starting with free credit counseling for potential buyers who thought
they were permanently priced out of the housing market.
LGI also builds in areas on the urban
periphery which is technically considered rural by the USDA, which then makes
some buyers eligible for their no money down mortgage programs.
For final peace of mind, LGI warranties its
homes for 10 years and includes full kitchen appliance packages, fencing and
landscaping.
Finally, LGI also has a robust Web site which is
comprehensive and easy to navigate. In a
world in which a poorly constructed Web site is a company’s perceived digital
strategy, you can’t blame the Millennials if and when they opt to look
elsewhere.
