A speedbump. A hiccup. A slight pause. A small slow down. At the Fall Meeting of the Urban Land Institute last week in Boston, the narrative was consistent. Ten years into the recovery from the Great Recession, the talk in the community development and home-building world is about a housing market slowdown. John Burns, President of John Burns Real Estate Consulting (JBREC), one of the preeminent and most trusted advisors on the economy, housing market and consumer sentiment, calls it a “hiccup,” driven largely by affordability.
Burns shared statistics for 11 of the last 12 housing downturns demonstrating that they were all driven by one of these factors: speculative inventory fueled by debt, government spending cuts (typically military), leveraged buy-outs, or the crash of tech stocks. This time, and although the exact timing of his prediction is a little squishy, the factors driving it are the delayed age of first-time home ownership—in 2006, the average first-time homebuyer was 31; in 2016, it was 36—and lack of housing that is affordable for those who are looking to buy. He supports his second assertion with some compelling data points:
- JBREC surveyed 8,300 home shoppers earlier this year and asked how a 1 percent increase in mortgage rates would affect their decision to move.
- 40 percent said they would still move
- 60 percent said they would likely or definitely not move
- The supply of affordable new homes is becoming critical, with a $70,000 price gap on average nationwide between the cost of a new home and a resale home. This used to hover at about $20,000. The relative newness of much of the resale stock makes it a lot more affordable competition with new homes.
- 11 of 19 public builders now have average prices over $400,000. LGI Homes is the only builder on that list building homes at an average price less than $300,000—$231,000 on average—which leaves plenty of space for others to come in and also meet this growing need.
- Price appreciation since the last cycle is off the charts in some markets, with Denver leading the way at 73 percent, and many more well over 50 percent.
But is “affordability’ the right answer?
Certainly, it’s part of the answer, but I don’t believe, as one speaker from a large bank that finances home builders claimed, that “houses will get a lot more square, with fewer windows.” That’s the easy answer, but not one home shoppers in the market today will accept. Demographics support the fact the bulk of new home shoppers today are either under 40 years of age or over 55. Neither group has shown tendencies to cram themselves in a home just for the sake of buying a new home if it doesn’t fit their needs.
The younger group are millennials, and while there is no “one size fits all” description of any generation, this group is characterized by a love of experiences over stuff. They grew up in the sharing economy and saw their parents get decimated in the downturn, so few of them see the benefit of making the same mistake, especially if their only choice in a new home doesn’t live the way they want to. At the other end of the spectrum, boomers face different issues. The first is finding a move-up buyer who wants and can afford the home they are sitting on, to unlock their equity and enable them to purchase a new home. Second, the next home they buy may be their last, making it unlikely they will get too excited about a square box without windows.
The JBREC outlook for the next few quarters should be taken as motivation to move beyond the lowest common denominator of “affordable” housing, not as a sign that the sky is falling. They are projecting slower new home price appreciation; flat sales rates; lower construction volumes primarily due to affordability issues, with the side note that culturally, the new home construction industry is focused on building move-up housing, a product type not in demand today; and a pivot to lower price points.
If builders rush to build for “affordability”, this usually means stripping down existing plans, reducing architectural character, and so on. The danger here is a plethora of new home product that starts to look and live the same. The cost of land doesn’t seem to be coming down, and community developers must still make the upfront investment in infrastructure, community character, neighborhood mix, and amenities to give buyers a reason to buy new. Builders who all offer the same affordable homes can quickly turn one community into the next, slowing down their land absorption and pinching the capital developers can invest in creating great places.
So, if rushing to the easy bare-bones affordable approach isn’t the solution, what is? I prefer “attainability” to “affordable” because it honors the aspiration, the dream, the pride of new homeownership and elevates what we do every day up from being just a commodity or “house by the pound.” People will buy new homes if we give them a reason to aspire to that, and a home that improves their quality of life in ways that matter most, to them. Perhaps they will be forced to spend less on them than in the past, but in such a challenge lies the fuel of innovation.
Think About Customer-centric Attainability
- Do things in smaller chunks. Apply a finer grain detail to plan changes, and ask buyers what they value, then respond, versus pushing volumes of the same product to market. Your only hope if you miss the mark then is to sit and wait or cut prices further in a competitive market awash in homes that are all the same.
- Find your “why” – and build to it. Resist the temptation to just cut corners and put more of the same on the market. Carve out a position for your business that is different, defensible, unique, and that home buyers can experience. Maybe it’s one thing you offer, by knowing you can trade-off other things in the home that buyers don’t place value on. But that one thing is there. All the time. And it’s what your buyers care about and will place value on.
- Listen to buyers – they may have some simple answers to what matters to them, and what they can live without. If done right, what you may think is unacceptable to them may be exactly what is needed. Well-designed smaller homes, sited thoughtfully, will be preferred over the same beige box—always.
- Work together. Developers and homebuilders. Architects and homebuilders. Planners and researchers. These are some of the biggest, most creative brains in this business, and now is the time to take risks together—whether via creative financing terms or shared new product design and experimentation. Getting in the ring together can only mean a shared commitment to new results.
Teri Slavik-Tsuyuki is the principal of tst ink, bringing a customer-focused “how might we?” approach to creating communities and brands that connect and engage with how people want to live their lives. http://www.tst-ink.com/