Pricing growth dampens new-home demand, but the hesitance is more an indication of fear than a lack of desire among entry-level buyers.
A basic lesson in economics teaches that levels of supply and demand point clearly to what prices consumers can expect before they even look at a price tag. When the desire to own a product is high, people are willing to pay a higher price-—but our Demand Index (and closings in many markets across the country) exposes a limit to this logic.
The American dream of owning a home is still very much alive—results of Gallup’s Economy and Personal Finance Survey revealed that seven in 10 non-homeowning adults aged 18 to 29 hope to own a home in the next 10 years. More significantly, 35 percent to 40 percent of non-homeowning adults of any age group who make less than $50,000 annually also hope to buy a home in the future.
The rising cost of land, however—even in markets where lot supply isn’t as tight—directly affects prices builders charge for a new home. Yes, that’s basic economics, but for the post-recession, non-homeowning American, the desire to own a home is trumped by a deep-seated fear of losing everything—a possibility the recession proved be a reality. Taking out a loan to buy a home beyond one’s means feels more like Russian roulette than applying for a mortgage right now.
Across Metrostudy’s 32 markets, the average score for new-home demand in December was 5.9, a marginal increase from November. In Phoenix, Central California, and Central Florida, traffic is still positive, but buyers are unwilling to commit, and pricing growth is pushing them to resale. For this reason, new-home demand scores in these markets keep the average down, but they are in a better state than Rio Grande or Albuquerque, where low scores reflect weak employment markets and, despite flat prices, people aren’t buying.
We asked Metrostudy’s regional directors to share what kind of new-home product is most in demand in their markets, and move-up and elite/luxury homes were called out most. While some economists have hypothesized that 2015 will be the year entry-level buyers trickle into the market and form new households, our commentary indicates that affordability is a major issue, and it’s questionable as to whether buyers will even attempt to clear it.
According to Tampa regional director Tony Polito, the city “needs to reignite the first-time buyer profile or develop additional product for active adult buyer segments.” Job growth in the market has been poor since June, and demand is centered in the elite/move-up market. Despite solid employment in San Diego and wage growth in Houston, the story is similar: Demand is in the move-up/elite market, and supply of affordable first-time product is limited. Houston regional director Scott Davis says a big run-up in pricing has pushed product lines up to the next pricing category, based on land cost and construction cost increases.
The share of Americans who self-identify as middle class has never been so low, according to the Pew Research Center, and the share who consider themselves lower or lower-middle class increased to 40 percent in 2014. It seems fair to say that the majority of markets are missing an opportunity by developing product that only the 15 percent of Americans who identify themselves as upper class can afford.
It’s a Catch-22—builders know they can close if they build product for older generations and upper class Americans, but they exclude the bank of potential entry-level buyers; if builders produce entry-level product but out-price their buyer, then they risk operating at a loss.