Bloomberg Businessweek (Europe)

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”

- −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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