Last year, many economists predicted that 2015 would be a turnaround year for first-time buyers, who would be encouraged to enter the market due to stable job growth and the return of mortgage options that allow buyers to put as little as 3% down on a home. However, that prediction has largely fallen flat: First-time buyers accounted for 31% of all existing home purchases in October 2015, up only slightly from 29% in October 2014, according to the National Association of Realtors. It’s an ongoing sluggishness among both first-time buyers and a portion of entry-level buyers that can be largely attributed to one key factor: affordability.
Demand for new homes is strong across all buyer segments, and demand scores from Metrostudy regional directors show positive gains year over year. The average score for new-home demand across all markets increased more than 10% in November to a score of 6.47, compared with 5.86 in November 2014. However, while higher demand increases production, builders are still missing the mark for potential buyers who would like to purchase a home but cannot afford the product that builders are selling.
The reasons for the lack of lower-priced housing vary by region, but are mostly due to the usual suspects.
In Chicago, construction costs are the biggest impediment, while tight lot inventory and high property values continue to plague markets like Seattle, Denver, Northern California, Salt Lake City, and South Florida. According to regional director David Cobb, “New-home prices remain well out of reach for many buyers, with the median new single-family detached home sales price [in South Florida] now at $517,000.”
Inclement weather during the second quarter has had an ongoing impact on construction times in markets including Atlanta, Dallas-Fort Worth, Houston, Phoenix-Tucson, and Raleigh-Durham, N.C. “Builders have moved away from entry-level product for two reasons: they can’t find land that will support the pricing, and home construction times have increased so quickly that builders can’t get the quick turn times they need to make [lower-priced] entry-level work,” reports Phoenix-Tucson regional director Rachel Cantor. Due to these constraints, most builders are concentrating on the development of homes in the second and third move-up space.
D.R. Horton’s Express and Ryan Home’s new “Simply Ryan” brand are two primary examples of how some builders are trying to serve entry-level and first-time buyers with lower budgets. Both recently expanded their lines to Northern Virginia, which is known for high home prices due to the proximity to jobs. “Each of these [brands is] designed to accommodate the first-time buyer by implementing such strategies as marketing by monthly payment and minimizing option choices,” says Northern Virginia regional director Ben Sage.
Low-budget buyers can afford to purchase detached homes in lower-demand markets like Indianapolis, but townhomes or condos are the most viable option elsewhere. “Density has been the historical solution to accommodate buyers [with lower price points],” notes Sage. But even townhomes have become too expensive for some buyers in markets like Charlotte, N.C., where townhome prices have increased by double-digit percentage points year over year. This is likely also the case in the New Jersey-New York suburbs, where condo and townhome projects are receiving increased interest from first-time buyers, but traffic isn’t converting into sales.
Many Texas markets are seeing a move to smaller lots and increased density. The sales pace is slow for price points above $400,000 in Austin, so builders are relying on condo regime platting to develop a volume of new “skinny” products (25 feet to 35 feet) that stay closer to lower price points. Builders in Dallas-Fort Worth also are contemplating higher-density lots and product, although this is more of a self-serving attempt to ease their own affordability issues in the face of “exorbitant” land prices. Still, regional director Paige Shipp says builders will need to cut through red tape in that market: “Municipalities object to density as it is perceived as a burden to infrastructure and schools, rather than a solution for the entry-level and first-time buyer.”
“Dream” Still Out of Reach
In higher-value markets, only first-time and entry-level buyers with high budgets are able to buy. According to Philadelphia regional director Quita Syhapanya, “Builders can’t find the margins they need marketing to [first-time and entry-level buyers with low price points], so they continue to market, sell, and build for the move-up buyers.”
And while high-density projects might be able to meet the budget of some buyers, townhomes and condos still do not provide the American dream-style home reinforced by popular media. In this vein, D.R. Horton and Ryan are providing a real solution for the many buyers who want a traditional, detached home within their means. If builders try to create a new narrative for townhomes and employ the same strategies of master planned communities to high-density projects, they might find the golden ticket for renters to stop the standoff and enter the market.