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.
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.
- 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.
- Millennials also will be ready to create households in the next decade.
- Millennials have delayed having children, but that delay is set to reverse, which is another contributing factor to more household formations.
- 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.
- Entry-level purchases are being fueled by first-time buyers.
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.