For mil­len­ni­als, 2BR, 1BA, no frills—but it’s af­ford­able

▶▶Builders trim home sizes and cut prices to ap­peal to mil­len­ni­als ▶▶“We were will­ing to sac­ri­fice some lux­ury to have some solid eq­uity”

Bloomberg Businessweek (Asia) - - Contents - −Prashant Gopal

Soaring prices have al­most closed off the new-home mar­ket to young buy­ers like 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’s Ter­rain, a new com­mu­nity in Cas­tle Rock, Colo., de­signed for first-time buy­ers. While the home has par­ti­cle­board kitchen cab­i­nets and the yard is too small for the chil­dren the Lin­de­manns plan to have, it’s al­most 30 per­cent cheaper than the av­er­age new house in the area. “We were will­ing to sac­ri­fice some lux­ury to have some solid eq­uity in a home,” says Bran­don, 25, an auto-re­pair­shop 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.”

Tri Pointe, Tay­lor Mor­ri­son Home, Mer­itage Homes, and other home­builders are test­ing cheaper of­fer­ings in mar­kets across the coun­try. D.R. Hor­ton, the na­tion’s largest builder, now col­lects 14 per­cent of its rev­enue from its low-cost Ex­press Homes brand, which it started in 2014 and plans to ex­pand to most of its 79 mar­kets this year. Tex­as­based LGI Homes, which spe­cial­izes in en­try-level houses, had the best-per­form­ing stock among builders in 2015, up 63 per­cent. “When D.R. Hor­ton first an­nounced 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,” says Brad Hunter, chief econ­o­mist for hous­ing-re­search com­pany Met­ros­tudy. “Now they’ve seen the con­cept proven, they’re fig­ur­ing out their own way to pro­vide a home that’s more af­ford­able.”

Few builders tar­get the low­est price ranges, be­cause com­mu­ni­ties with those types of homes are the most vul­ner­a­ble in a down­turn. Mer­itage has been ex­pand­ing a seg­ment it calls en­try-level-plus, which starts in the low $200,000s in the Hous­ton area. D.R. Hor­ton’s Ex­press brand and LGI have an av­er­age price of about $190,000 across their U.S. mar­kets.

Com­pa­nies such as Len­nar and Pul­te­Group con­tinue to fo­cus on homes for move-up and lux­ury buy­ers, which are more prof­itable. “Most

builders say land prices are so ex­pen­sive” that putting up low-cost homes isn’t worth­while, says Alex Bar­ron, an an­a­lyst with the Hous­ing Re­search Cen­ter in El Paso. While Pul­te­Group isn’t push­ing into the en­trylevel mar­ket, it’s go­ing af­ter af­flu­ent mil­len­ni­als by build­ing homes in close-in sub­urbs near Bos­ton, San Francisco, At­lanta, and Wash­ing­ton, says Mary Rachide, the com­pany’s vice pres­i­dent for strat­egy. One con­do­minium project near a sub­way sta­tion in Fair­fax, Va., has a start­ing price of $539,990 for a two-bed­room apart­ment.

Yet the con­di­tions that have helped hous­ing re­cover since 2012 are chang­ing. Prices are climb­ing, putting more homes out of reach. The S&P/ Case-Shiller Home Price in­dex of ex­ist­ing-home val­ues in 20 U.S. cities rose 5.5 per­cent in Oc­to­ber from a year ear­lier, ac­cord­ing to data re­leased Dec. 28. All 20 cities in the in­dex showed an in­crease from the pre­vi­ous year, led by gains of more than 10 per­cent in San Francisco, Den­ver, and Port­land, Ore. “There are only so many buy­ers who can pay $400,000 and above,” says Drew Read­ing, a home­build­ing an­a­lyst for Bloomberg In­tel­li­gence. And the Fed­eral Re­serve has be­gun rais­ing in­ter­est rates for the first time in seven years, a move that’s al­ready nudged the av­er­age rate for a 30-year mort­gage to more than 4 per­cent for the first time since July. “Home-price ap­pre­ci­a­tion has got­ten to the point where, if in­ter­est rates start mov­ing up sig­nif­i­cantly, there’s go­ing to be greater de­mand for the lower price point,” says Brent An­der­son, a Mer­itage spokesman.

Tri Pointe, which built the Lin­de­manns’ home, plans to in­crease the share of first-time-buyer prop­er­ties in its mix to 40 per­cent from about 35 per­cent now, ac­cord­ing to Chief Op­er­at­ing Of­fi­cer Tom Mitchell. The com­pany has ex­panded its of­fer­ings in Den­ver, Las Vegas, and Phoenix, in ad­di­tion to its en­try-level com­mu­ni­ties in Cal­i­for­nia re­gions in­clud­ing the In­land Em­pire and Con­tra Costa County. “When we can find the land and cre­ate the prod­uct to de­liver af­ford­able price points, they are sell­ing,” Mitchell says.

All eight com­mu­ni­ties Mer­itage plans to open next year in the Hous­ton area will be in the en­try-level-plus cat­e­gory, partly be­cause lower oil prices have al­ready cut into sales in the high­er­priced seg­ments, says Steve Hard­ing, pres­i­dent of the di­vi­sion. The homes are $50,000 to $100,000 cheaper than the com­pany’s typ­i­cal prop­er­ties in the Hous­ton mar­ket, be­cause they’re smaller. De­sign­ers re­moved fire­places and the stan­dard mud­room off the garage and put ma­sonry only on the front of a home, Hard­ing says. The cost of the land for one com­mu­nity was lower be­cause it’s on the less con­ve­nient side of a bridge.

In Den­ver, one of the na­tion’s fastest-grow­ing mar­kets, buy­ers are run­ning out of op­tions. The Lin­de­manns say they con­sid­ered buy­ing an ex­ist­ing home but were scared off by sto­ries of bid­ding wars with dozens of of­fers. “We were tired of pay­ing rent,” Bran­don says. “When we have kids, we can get the dream house with a big back­yard, at a time when we’re making a whole lot more money.”

The bot­tom line As prices and mort­gage rates rise, builders are offering homes start­ing in the $200,000 range to lure young buy­ers.

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