One ferocious head—especially for private home builders whose capital structure prevents them from writing down land valuations simply to sell homes profitably at a lower assigned lot cost—is the amount of real out-of-one's-pocket dollars a builder originally agreed to pay for land, and still owes on it. A separate but equally venomous set of fangs would consist of corporate overheads, which tend inefficiently to pile infrastructure cost into a home and choke out any gross margin at prices buyers can afford.
Third, and perhaps most lethal of all, is the specter of a new home's failure to get a home buyer's pulse to quicken. Homeownership may still lie at the center of the American Dream, but a binder full of new warranties won't necessarily do the job against 4 million or 5 million foreclosure sales expected to pass through the pipeline over the next couple of years. New, we find after all, must be synonymous with exciting. Part of that excitement needs to be the sticker price, and part of it has to come from the je ne sais quoi factor that comes from a look, feel, and function that a new home can offer that a used one can't.
The story of Shea Homes' introduction of its Spaces brand in the waning weeks of 2009 takes dead aim at home buying's generation next of entry-level singles and couples ages 25 to 40. It's the story of slaying this nasty three-headed monster and moving toward redemption.
You could say that the present and the future provide equal impetus for the Spaces plan, which has both defensive and offensive purpose. The huge motivator of the moment is pulling lots through the downturn. But the 10 times more huge urgency of the future is connecting with the Gen Y buyer, a buyer 77 million strong with a hankering for something, well, new and different.
“Near term, it's how you work through land that's deflated in value, and deal with that supply side issue when the only appreciable demand is at the lower price point,” says Shea Homes CEO Bert Selva. “Long term, Spaces is about the collision of the need for affordability with the demographics and the psychographics of the younger buyer who doesn't want a stripped down, smaller version of what has been selling for the past couple of decades.”
SECRET PROJECT Just unveiled after being under tight wraps for months of development, the project has achieved instantaneous phenomenon status among home building executives, both public and private. Right up to the chief executive level at rival big builders, they're doing everything from spying the models to dialing Selva direct, to inquire about Spaces' design and process specifications, to offer verbal high fives, and to wish the project well. For in home building, no product stays a secret for long.
Selva expects that after a bit of a ramp up in the next year or two, Spaces will represent in the neighborhood of one in five of Shea's total unit volume, including its active lifestyle Trilogy brand.
“By the time we're balanced on all of this, we'll have about 15 to 25 percent Spaces, 50 percent Shea Homes houses, and 25 to 30 percent Trilogy homes,” says Selva. The quick math is that 20 percent of Shea's 2008 closings would be approximately 645 homes. That's a better than $130 million business. Quite a juggernaut, starting from square one in 2009.
Today, two communities are selling the Spaces brand homes—one in Southern California's Inland Empire community of Avonlea in Corona and another in Northern California, east of Oakland in Oakley—and two more communities in Arizona (Gilbert) and the Denver area (Reunion) are set to start marketing. To add a note of urgency and up the stakes, Congress' passage in early November 2009 of the extension and expansion of home buyer tax credits through April 30, 2010—with an extra 60 days to June 30 added on to get to the closing table—means that Shea will push speculative home building at this entry-level point, which should give Spaces momentum right out of the gate.
By and large, from the time of post-World War II Bill Levitt homes to today's KB Home Open Series—which trades off variability and square footage in exchange for getting its buyers into homeownership—it seems that economic necessity has been the mother of production home building's greatest inventions, and that they're almost invariably that blend of one part inspiration and two parts perspiration.
Learn more about markets featured in this article: Denver, CO.