Pent up demand vs. pent up supply, the barriers to entry-level are the big theme of 2016's housing year ahead.

The home builder story of 2015: Pent-up demand, such that it is, is where there's pent-up supply. But pent-up supply, contrary to what many think, is not just a labor capacity issue.

At any rate, call the plot-line for 2016's continued painstaking upward recovery trajectory "barriers to entry-level." Including, as we see from Zillow here, the matter of the down payment barrier. Zillow economists eye upward-spiraling rents as a governor among households that want to move across from renting to owning. Here's what down payments--the 20% median amount buyers ante up in their new and existing home purchases--have done during the first stretch of housing's recovery across these major markets.

Zillow looks at down payment increases in the past three years for major markets, and the U.S. nationally.

What triggers do home builders and their finance arms and partners have to mitigate the down payment impediment?

  • Buy land smart, with a low lot cost basis
  • Design and develop value-engineered homes with low--below $50s--cost per square foot plans
  • Secure trade partners based on consistent take-downs, even-production, starts, completions, and forward visibility on volume and pace
  • Install production management and customer care people and processes that secure quality at all operational levels and a favorable buyer experience before, during, and at the service level after each sale
  • Market heavily to renters who are paying inordinate amounts of their monthly incomes currently, and subject to rent increases at renewal
  • Lobby policymakers to further "open the credit box" to qualify good-risk borrowers despite lower down payments, and higher-LTVs
  • Pray

What becomes quickly evident is this. You can't do that without being that. In other words, to meet demand in the entry-level market, a home builder needs to be good at meeting demand in the entry-level market, not shifting gears or changing strategies to get at an opportunity; it has to be part of the DNA of the business model--from the front-end of land investment to the back-end of customer care and satisfaction.

Few big companies--maybe Lennar, Pulte, NVR, and the former Ryland (now CalAtlantic)--offer diversified, low-to-high-end products and price points in their community spectrum, and can wheel seamlessly into greater emphasis on entry-level.

Two big builders who made the investment decisions (on land), set their field processes to "go" 24 months ago, and laid out a trade partner program that gives subcontractor crews the forward-visibility to budget their businesses and allocate resources accordingly, promoted their first-time buyer/entry-level price point offerings among frustrated renters motivated to move into homeownership, and fine-tuned their processes are, of course, D.R. Horton and LGI Homes.

On the surface of it, you'd say that that below $200k price-point is where the opportunity lies. If you buy lots, secure labor, design and complete homes, and delight buyers (and make a profit) at that price-point, it's a proven opportunity. But it's one of those don't-try-this-at-home feats for many home builders who don't have either the land strategy nor the infrastructure nor the CRM systems to work that magic.

To do it, you've got to be it. But that's where the action is going to be in 2016.