Since the recession, big homes have become an ever-bigger share of the U.S. housing market. People who already own a house and want to trade up now account for 85 percent of new-home buyers, compared with 70 percent historically, according to the National Association of Home Builders. Such "move-up" houses are not only bigger but typically more profitable for builders. The result is that big houses are now bigger than ever.
But the trend might break builders’ backs.
The issue is that builders are starting to price themselves out of the market. As you can see from the chart below, the median price of a new home is about $50,000 higher than pre-recession levels. That’s making new homes unaffordable for a growing number of potential buyers, who can find cheaper alternatives in pre-owned homes.
Meanwhile, costs have shot up for homebuilders, particularly labor. Fifty-seven percent of builders reported subcontractor shortages in the 12 months prior to a NAHB report in June, up from 25 percent in 2012. Higher labor costs caused 61 percent of builders to raise their prices on homes in that same period. But with prices already so high, builders are having a harder time passing their higher costs on to buyers.
They'd be better off widening their pool of potential customers: With 3.2 million people in need of housing as of October, according to consultancy PwC, there’s plenty of room for builders down-market -- in contrast to the high end, which is saturated with builders, according to Bloomberg Intelligence analyst Drew Reading. D.R. Horton and LGI Homes are among the few builders targeting entry-level buyers, and they’ve thrived this year, with their stocks outperforming North America peers of similar size.
Meritage Homes, at least, is catching on: While it mostly builds move-up houses, it plans to make "entry-level plus" houses -- entry-level homes with slightly better amenity packages -- 35 percent of its business by 2018, up from 20 percent now.
Townhouses are another good option for builders, as they spread building costs over more units -- extra units that generate extra revenue. Townhouses, condos and co-ops are attractive to millennial buyers and others looking to be in commuting distance from cities with strong labor markets. Real-estate experts surveyed by PwC recently found that new housing in densely populated areas offered the best residential development and investment prospects in 2016.
In the third quarter of 2015, building starts of single-family attached housing (townhouses or row houses) were up 30 percent from a year ago, according to the NAHB, the fastest growth since 2007. Condos and co-ops make up a smaller share of the housing market than they once did, so they also have room for growth. And builders could always get creative: Think tiny houses or maybe even communal living spaces.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Rani Molla in New York at firstname.lastname@example.org
To contact the editor responsible for this story:
Mark Gongloff at email@example.com