Being informed and having the capacity to use the data in the right way is key to finding a formula that works, or even better, that profits. For years the top public builders have been analyzing entry-level buyers to come up with an approach that not only delivers the right product to this in-demand demographic, but that also affords them a decent margin.

In a special report on this opportunity, Drew Reading, U.S. homebuilding analyst at Bloomberg Intelligence, studies the factors leading to how each builder created their custom strategy. “There has been a proof of concept from D.R. Horton and LGI. We have seen success there,” he says. “D.R. Horton will be interesting to watch and has garnered an early-mover advantage in the space.”

It’s becoming a very crowded market, with most builders trying their hand at a product geared toward entry-level buyers. D.R. Horton is offering Express Homes, which became 27% of its total homes sold in 2016, a 30% increase from the previous year.

Bloomberg Intelligence

Lennar is targeting more affordable markets with its entry-level product and will maintain about 28% of its focus on that demographic. Pulte also was close to 30% of closings from first-time buyers. Pulte saw an increase in the price for its first-time buyers by 8% to $283,000. Meritage has an aggressive strategy to target entry-level buyers for 40% of closings, while trying to maintain its average 20% margin.

MDC is taking a different approach with its ‘Seasons’ product line by streamlining processes and cycle times to improve returns. William Lyon Homes is active in entry level and is also seeking land purchases to further activate this buyer.

These unique and custom approaches are based on the following data that Reading pulled together in this more detailed report. He points out that these builders will have their challenges, including the rapidly rising land and regulatory costs, so home builders have to have unique approaches to provide low-priced homes.

  1. The majority of these buyers will be millennials. They are now reaching the average first-time home buying age—33 years old, according to this report by Zillow.
  2. Millennials also will be ready to create households in the next decade.
  3. Millennials have delayed having children, but that delay is set to reverse, which is another contributing factor to more household formations.
  4. This group of entry-level buyers is at a high level of employment, 77.5%.
    In the past income was rising only 1.6%, but now is topping 5.5%, which will lead renters into a position to make a down payment.
  5. Entry-level purchases are being fueled by first-time buyers.
The share of homes less than 1,800 SF has been declining for years.
Bloomberg Intelligence The share of homes less than 1,800 SF has been declining for years.
  • Mortgages are opening up standards to make it easier for first-time buyers to be approved.
  • Inventory for entry-level homes is low, but more builders are entering or focusing more attention on this market.
  • The availability of homes with less than 1,800 square feet has plummeted, reaching a low of 16%.
  • The availability of resale will not meet these demands because they are either locked in negative equity or have been turned into rentals.
  • Townhome construction is at an all-time high increase of 29% in response to the high land costs and community preferences of entry-level buyers.
  • Buyers will continue to be hesitant because of rising rates.
  • Debt continues to be a large impediment for first time buyers.
    Bloomberg Intelligence Debt continues to be a large impediment for first time buyers.
  • Student debt and auto debt are cited as one of the limiting challenges when it comes to buying a home.
  • Lot price increases are a barrier for builders to offer entry-level priced homes.
  • Regulation costs have increased 30% since 2011 according to NAHB, which adds costs to the home and needed resources to the builder.
  • Some builders are capitalizing on the for-rent segment.
  • Single-family homes are becoming a desired rental product.
  • Reading states that the focus has obviously been on the move-up market for the past few years because it represented the best growth opportunity for publicly traded companies. The critical moment in each builder’s exploration was how they dissected the available data to create their strategy.

    Reading is working with Hanley Wood’s Metrostudy for an event on March 7, where he will focus on macro environment improvements and what the lack of inventory means to investors who want to explore opportunities in the U.S. housing market. During the event with Bloomberg, Reading also will give a short presentation on entry-level builders to the attending investors.