Surging prices have almost closed off the new-home market to young buyers such as Brandon and Quincey Lindemann. But the Denver-area couple has found a way in.
The Lindemanns paid $350,000 in October for a three-bedroom house at Tri Pointe Group Inc.’s Terrain, a new Castle Rock, Colo., community designed for first-time buyers. While the home has press-board kitchen counters and a yard too small for the children the Lindemanns plan to have, it’s almost 30 percent cheaper than the average for a new house in the area.
“We were willing to sacrifice some luxury to have some solid equity in a home,” said Brandon Lindemann, 25, an auto-repair shop manager who plans to install tile flooring himself. “We couldn’t afford much more than the basic, but I’m a pretty big do-it-myself person.”
Following the success this year of D.R. Horton Inc.’s low-cost Express brand, national firms including Tri Pointe, Taylor Morrison Home Corp. and Meritage Homes Corp. are testing cheaper offerings in markets from Colorado to Florida to California. Builders had shifted away from entry-level buyers following the housing crash and instead focused on developing larger, more-profitable homes during the recovery that began in 2012 amid an increase in land and labor costs.
“The recovery in the move-up segment is getting long in the tooth — there are only so many buyers who can pay $400,000 and above,” said Drew Reading, a homebuilding analyst for Bloomberg Intelligence. “The main concern in 2016 and beyond is that affordability is becoming a bigger issue.”
The push to build bigger may be slowing. The median size of a new single-family home was 2,445 square feet in the third quarter, little changed from a year earlier, after rising 17 percent over six years from a low in 2008, according to an analysis of U.S. Census Bureau data by Robert Dietz, an economist with the National Association of Home Builders.
D.R. Horton, the nation’s largest builder, now collects 14 percent of its revenue from its Express brand, which it started last year and plans to expand in 2016 to most of its 79 markets. LGI Homes Inc., a Texas-based builder of entry-level houses that became a public company two years ago, has been the best-performing homebuilder stock this year. It reported an 88 percent increase in revenue in the third quarter from a year earlier.
“When D.R. Horton first announced that it was going to go after the entry level portion of the market, a lot of other builders wanted to wait and see how it turned out,” Brad Hunter, chief economist for housing-research firm Metrostudy, said in a phone interview. “Now that they’ve seen the concept proven, they’re figuring out their own way to provide a home that’s more affordable.”
New homes in the U.S. sold at a slower pace than projected in November. Sales rose 4.3 percent to a 490,000 annualized pace following a 470,000 rate in October, according to the Commerce Department. The median estimate of economists surveyed by Bloomberg called for a 505,000 pace, and purchases in the prior three months were revised lower.
Most builders continue to chase larger profit margins by catering to move-up and luxury buyers. Large builders such as Lennar Corp. and PulteGroup Inc. continue to focus on wealthier customers rather than first-time homeowners.
“Most builders say land prices are so expensive it doesn’t pencil out,” said Alex Barron, an analyst with Housing Research Center in El Paso, Texas.
While PulteGroup isn’t pushing into the entry-level market, it is going after affluent millennials by building homes in close-in suburbs near Boston, San Francisco, Atlanta and Washington, said Mary Rachide, the company’s vice president of strategy. One condominium project near a subway station in Fairfax, Va., for instance, has a starting price of $539,990.
Tri Pointe, which built the Lindemanns’ home, plans to increase its share of first-time buyer properties to 40 percent from about 35 percent now, according to Chief Operating Officer Tom Mitchell.
“It’s good to see demand back in the marketplace — it gets builders to be creative and come up with ways to meet that demand,” Mitchell said.
