One of the most perplexing aspects of the new housing market is the outlook for entry-level new home demand. Most builders have given up on serving the entry-level niche because it is so difficult to build profitably in a price range that is attainable for people who are in the middle class (or even upper-middle). The unanswered question is: will this segment ever come back, and if so, to what degree, and when?
A key group that has been conspicuously absent from the entry level housing market is Generation Y. There is general agreement that there are millions of "pent-up households," because so many Millennials are living with their parents, and delaying getting married and starting their own families. The question is whether it is a "delay," or a "cancellation." I believe the answer is: both. There are Gen Y'ers who will get married, but in their 30s instead of in their 20s, some of whom have deferred having children, and others of whom will choose never to have children. My analysis suggests that the "deferrals" will outnumber the "cancellations," and that the implication is that the pent-up demand is real, and will emerge gradually over the next several years. We are already starting to see marriage rates rising (slightly) and births are rising as well.
New data from the Census Bureau suggests that the household formation rate, which had been running at extremely low levels close to 500,000 a year (a direct effect of the doubling-up, not only with parents, but with roommates), has risen to 1.4 million per year. There is also confounding evidence suggesting that the majority of the increase in household formations has NOT consisted of Millennials. Surprisingly, it appears that BOOMERS have accounted for most of the increase, partly due to a rebound from unusually low divorce rates (unhappy couples stayed together longer for economic reasons when the economy was weak), but more because population growth is fastest in the 55+ age cohort, and that age cohort has smaller households on average.
One more factor: attitudes among twenty-somethings regarding home ownership versus rental living are vastly different than they were in previous generations. The question in this instance is: is this changing now that more Millennials are getting married, and/or, will it change in the future? There certainly are logical reasons why young parents would want to live in the suburbs, namely: higher-quality public schools than in the urban areas, a greater sense of safety, and more open space. Attitudes appear to be shifting already. Data on new-home purchase money mortgages confirm that first-time homebuyers are re-entering the market. Data from AEI and Barclays Research shows that first-time home buyer loans are up 17% year-over-year based upon the last twelve months ending in November 2015. The data show a steady upward climb in these loans throughout all of 2015 after having been completely flat in 2014.
Confirmation can also be found by simply taking note of the success of DR Horton's Express Homes brand, which has gone from being 10% of the parent company's unit sales one year ago to 20% today. LGI Homes is hitting the highest level of sales in its history. Both of these builders target the needs of the entry level buyer, and offer homes that many of them can afford. KB Home and Meritage have established a good track record in this arena as well. Recent shifts have also inspired builders such as Taylor Morrison Home Corp. and Tri Pointe Homes to test offerings that are priced lower than they typically have built.
The re-entry of the entry-level buyer has begun, but this group's next moves will be gradual. Income challenges remain, and there are still relatively few new home developments who target this group.
As we watch this trend unfold, we should bear one thing in mind: entry-level no longer equates to "first-time." First-time home buyers generally lack the income or the savings needed to buy a new home, so the resale market is their best bet, particularly since the spread between resale homes and new homes is now as high as 30% in many markets. Once they have bought a starter home and traded up out of that one into a larger (used) home, many of them will have developed sufficient equity to buy one of the lower-priced new homes.
