Tag Archives: builders

The reasons behind and consequences of the possible extinction of the starter home

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Why are fewer builders constructing smaller starter homes that first came to prominence after World War II?

It’s several things. Land is too expensive to put the more modest house on it. Municipalities’ fees are another reason. And then there’s this phenomenon: Entry-level buyers just don’t want a starter home — they want something fancier…

From the time that high-production builders gained traction in the ’40s and ’50s and into the last part of the last decade, they were able to access inexpensive land and get labor and materials in ways that allowed them to produce an accessible and affordable entry-level home. But the Great Recession didn’t cause land to decline in value the way that houses did, and the lots aren’t widely available. When they are available, there are multiple bidders for them, which pushes the price up. Builders also downsized during the recession, and they don’t have the same capacity to build in volume that they once had. Today, if you’re building a $300,000 or $400,000 house, you’re going to make more money than if you were building two or three $150,000 houses.

Some of the sticker shock for buyers of entry-level homes comes from the local entitlement and permit fees that effectively ward off entry-level neighborhoods from established communities. These fees get baked into the cost and may add 20 to 25 percent to the cost of the home, for schools, infrastructure and support services. Municipalities seem to be doing everything they can to prevent lower-cost housing from being developed. They want property values and, in turn, property taxes, to be higher…

The startup of household formations is lagging the generation earlier by a few years. They’re becoming couples later and having children later. In some seismic way, we’re seeing that age group that we call the millennials buying their first homes at age 35, 36, 37. Because that generation grew up in what are really the nicest homes that ever existed in any society, they’re not going to want to go back to a very modest first home that will set them back, in terms of what they’re used to. They have a whole different mindset about that than we did. Certainly, some percentage of this group is going to want (the simple starter), but most will want what they’ve become used to — even in student housing, it’s like major apartment amenities. “Modest” is not what they have in mind.

It sounds like there are issues on both the supply and demand sides:

1. Consumers now expect more from their first homes. With demographic shifts (later marriage and kids) plus higher standards of living over time, homebuyers want more. This is something that also works against downsizing arguments: once people have a standard (and in this case, it comes from their earlier years and not even from something they have owned yet), it is hard to step back from those features.

2. Builders just can’t make as much money off of starter homes. Land is more valuable – think of all those suburbs that have expanded in recent decades – and fees have gone up so they need to construct more expensive homes to make up the difference. How many established communities, particularly wealthier ones, want cheaper starter homes constructed which might lower their own housing values as well as contribute more children to the school system and possibly require more funding?

A few side effects that might emerge:

1. Those who do want starter homes will likely have to go to less wealthy and older communities with older housing stocks.

2. This might limit particular groups, such as lower-income workers, from buying a home as they will have a harder time making the leap to a more expensive new home.

3. This could keep rental prices higher if people have to save larger amounts for more expensive first homes.

4. Those same communities that want to protect their housing values may find they have precious few places for people they might want in the community – such as recent college graduates or downsizing older adults – to own homes.

Public homebuilders increase their Chicago area market share in the last 15 years

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What kinds of firms have built homes in the Chicago region has changed quite a bit in the last 15 or so years:

Public companies accounted for nearly 60 percent of the contracts for new homes in the Chicago market last year, up from 54 percent last year and well above the 11 percent market share they held in 1999, according to Tracy Cross & Associates, a Schaumburg-based consulting firm.

The top five builders in the Chicago area all were public companies, led by D.R. Horton of Fort Worth, Texas, with 517 local contracts signed last year.

The growth of public companies partly at the expense of private builders—a trend playing out in many markets across the country—will likely continue for the next few years until conventional banks grow more willing to finance land purchases and development, said Tony Avila, chief executive of Builder Advisor Group, a San Francisco firm that advises and raises capital for homebuilders.

Many private builders rely more on banks, which have clamped down on financing home construction since the financial crisis, while public companies have other options, such as issuing bonds or shares, Avila said.

Quite an increase since 1999. This reminds me of the shift from really small builders – often just a few homes a year – before World War II to the larger-scale construction afterward (often said to be illustrated by Levitt and Sons). Then (big housing need, new innovations) and now (economic crisis leading to new lending guidelines), broader economic and social conditions contributed to these changes.

With that said, how does this affect the average homebuyer and resident? Large-scale firms may offer economy of scale and therefore lower prices but they also might have fewer options in their housing designs and interiors and be able to construct larger developments, contributing to sprawl. Does the quality increase? Do homebuyers have a better experience in one versus the other?

Florida vacation home McMansion built on the wrong lot

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I’ve seen this story in a number of places but only some are calling it a McMansion: a large Florida vacation home was built one lot over from its correct location.

Their three-story vacation rental house with an estimated construction value of $680,000 actually sits on the lot next to the one they own in the gated Ocean Hammock resort community.

“We are in total disbelief, just amazed this could happen,” said Mark Voss, who owns a property management and real estate company in central Missouri. “We may have moved (to Ocean Hammock) someday. But, with this headache and grief, we’re not so sure. The Midwest is looking pretty good right now.”

The Voss’s builder, Keystone Homes, which is based in Ormond Beach but builds primarily in Flagler County, has contacted the two lot owners and other parties and is trying to negotiate a settlement, said Robbie Richmond, company vice president…

The house has five bedrooms and 5.5 bathrooms. It also includes a home theater, game room and screened-in pool.

The builder and owner say the initial survey of the land for construction is at fault. On one hand, this story is getting headlines because it seems like an egregious mistake, perhaps the builder version of the doctors who perform surgery on the wrong arm or leg. On the other hand, one lot over is not actually that much land and the article notes that there are about 10 vacant lots in a row without any distinguishing features.

Boing Boing likely claimed the home is a McMansion – which appears to have some validity – to help draw readers.

Cutoff price for luxury home differs by region

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A new survey suggests the point at which an expensive home becomes a luxury home differs by region:

But the starting point for making such a judgment, the price, seems to vary significantly by region. The price tag for a luxury home is perceived to start at $1 million in the Northeastern, Pacific and mountain states (Montana, Colorado, Utah, et al.). But in the Midwest and South, consumers’ notions of luxury begins at $500,000, according to a survey by Realtor.com.

By the way, sales of those million-dollar homes are doing rather well nationally, but a major player in homebuilding is taking an unexpected turn — one that speaks of the real estate world of long ago.

D.R. Horton Inc. is rolling out a new division that plans to appeal to the bare-bones, nothin’ fancy, first-time buyer. Its Express Homes line, to be built initially in Southern and Western states, will range from $120,000 to $150,000. And what you’ll see at these developments is what you’ll get — there won’t be any upgraded features, no optional finishes.

Horton CEO Donald Tomnitz told the Fort Worth Star-Telegram that the company believes the next segment of the real estate market recovery will be led by entry-level buyers, presumably older ones.

The regional differences in price could be due to a variety of factors. It might be linked to relative income levels. It could be tied to housing inventory – less room might lead to higher prices overall. Or, there might be differences in home styles and expectations. The mountain states seem to stick out in amongst these regions as they often have plenty of space and prices aren’t as high as the Northeast or Pacific Coast. However, perhaps there are plenty of luxury mountain homes, whether they are vacation or resort homes.

It would be interesting to know exactly in which markets D.R. Horton intends to build these cheaper homes. Given the need for affordable housing in many areas of the United States plus the need for more good housing at the bottom end of the market, I imagine there could be a market for such homes. Yet, these homes probably can’t be built everywhere as neighbors in more expensive homes would view cheaper homes as threats to their property values.

Chicago area homebuilders, buyers expanding into cheaper Indiana

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Some homebuilders and homebuyers are seeking out locations in northwest Indiana that are still within the Chicago region but offer lower costs:

Casting aside long commutes, higher home prices and often mind-boggling property taxes, some Illinois residents are branding themselves as Hoosiers, and more Chicago-area builders are thinking of expanding into Lake County, Ind., to capture that business. Their arrival will change a housing market dominated by local companies for generations and prompt municipalities to act to make sure the growth comes on their own terms.

Three years ago, the region caught the attention of D.R. Horton, the nation’s largest homebuilder by revenue, and it began buying lots in established subdivisions and building homes. Finding success, the Fort Worth, Texas-based company this spring is seeking the zoning necessary for it to move forward with a deal to acquire about 90 acres of former farmland on the east side of Interstate 65 in Crown Point for a 200-home subdivision…

Between 2007 and 2011, a net total of more than 5,600 people relocated from Cook County to Lake County, Ind., according to census figures. More than 55,000 residents of the northwest Indiana county worked in Cook County in 2012, according to state figures obtained by Metrostudy, a housing consulting firm.

Commuting may become easier in years to come. Last week, Illinois and Indiana signed an agreement regarding the development of a 47-mile toll road, the Illiana Expressway, that would connect I-65 near Lowell, Ind., to Interstate 55 near Wilmington.

A few quick thoughts:

1. As the article notes, this might require Illinois residents to rethink their stereotypes of Hoosiers. I enjoyed living in the South Bend area during graduate school but I do remember being struck by the number of people who drove pickup trucks and smoked when I first moved there.

2. There are certain areas of the Chicago region that still have plenty of room for growth: northwest Indiana as well as south and southwest of Chicago in Illinois (roughly between Plainfield and Chicago Heights).

3. This article focuses on areas further in Indiana like Crown Point. According to Google Maps, driving from Crown Point to State and Madison in Chicago is just over 47 miles. That is quite a trip.

4. How much does the presence of Gary affect the willingness of people to move to northwest Indiana? Despite efforts to revive Gary, it still has a negative reputation. Imagine Gary and the surrounding area were nicer suburbs – how many people might want to live that close to Chicago as well as be near the shores of Lake Michigan? Instead, there is a community known for industry, depopulation, and a poor quality of life.

Big builders making custom houses

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This might just be a trend: the Wall Street Journal reports on big builders offering custom big homes:

A number of big home builders are now getting into the custom-home game — an area that was once almost entirely the province of boutique builders. Companies such as John Laing Homes, Toll Brothers Inc. and K. Hovnanian Homes are all venturing into a field that takes more time, patience and hand-holding than production building.

The reason is simple: Custom-home building is more profitable for builders. And — in this tough market — it also carries less risk: Builders avoid the carrying costs of land, taxes and other monthly expenses that can come with speculative building. Because custom building caters to the upper end of the market, it’s doing better than production building right now, says Steve Melman, an economist with the National Association of Home Builders. Although home building of all types is stagnating, he says that the custom share of the market tends to go up during down times, while production building peaks during boom times. In 2007, the custom share of the market was 24%. In 2005, during the peak of the boom, the custom share was 19%.

The big attraction for home buyers is the price: Consumers usually pay less when they buy a home from a big builder than they do from a small one. Big builders benefit from economies of scale in buying materials and have developed efficient systems for negotiating with and scheduling contractors. So even though they charge more per square foot for a custom home than they do for a mass-produced one, big builders can usually undercut the price of their smaller competitors.

Custom homes come in two forms, though both are built on an owner’s lot rather than a builder’s. True custom homes are built to an owner’s specifications; so-called “semicustom” homes evolve from a builder’s predrawn plans. Though big builders have long built “semi-custom” homes on their own lots, most only recently began to seek out customers who want to build on lots they already own.

Three thoughts:

1. While these may be custom homes, can’t these run into the issue of still being viewed as mass-produced? Where is the line between economies of scale and something truly custom?

2. Money is a big factor here: the homeowner can get a cheaper custom house and the builder can make more money with less risk. What is there to lose (except perhaps #1)?

3. I bet architects would want in on this. Architects don’t design most new houses in the United States, but they might argue builders even at the custom level still can’t quite create interesting homes (meaning truly custom) or ones that are truly built around the interests of the homeowners.

Homebuyers don’t want “the same old McMansion”

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Here some evidence that “the same old McMansion” is outdated and needs some new features:

New home buyers are coming back, but they don’t want the same old McMansion. They want a house they can use.

That means a “great room” where everyone can gather – and a spalike bathroom to escape from the crowd.

But usefulness also extends to lots of storage space for big-box buys. It means “drop-off zones” for recharging smartphones and pet-friendly “puppy showers.” It means a home office actually designed for work and media centers made for play. It means big closets and little nooks…

According to experts, today’s home buyers are much more budget conscious, a natural consequence of the recession. They demand more value per square foot. They’re not interested in rooms they will rarely use such as a formal dining room. Most of all, home buyers want a house that “works” for them.

“McMansions put a huge percentage (of square footage) into hallways and formal spaces that are used infrequently,” Lake said. “It adds up to a lot of square footage. We’re building homes with 1,000 less square feet but every room feels bigger because the house isn’t so cut up.”

As the article notes toward the end, these are not necessarily smaller homes. In fact, my interpretation here is that these are McMansions with different features. What counts for luxury today versus twenty years ago has changed: buyers want to see how to use their space rather than simply have large spaces, they want luxurious bathrooms, and they want exciting kitchens and great rooms. I’m guessing builders don’t mind these changes too much – they can work against the McMansion image (customize the luxury items!) and still sell expensive homes at high prices.

The question in the long run is whether these interior design changes are enough to stop these homes from acquiring the McMansion label.

Wealthy homebuyers don’t want McMansions; they want large, expensive homes with custom finishes

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Wealthy homebuyers may not just want McMansions; they are also willing to pay for interior upgrades.

So long McMansion, hello lifestyle. These days buyers who can afford to pay millions of dollars for a house expect plenty of room for living, but they also expect rooms that fit the way they live…

Granite, marble and hardwoods are expected, but homes in that price range have to offer comfort and livability “beyond the finishes,” said Fridrich & Clark Realtor Richard Bryan…

The 6,500-square-foot home, created as a rustic retreat, balances livability and fine design in a way that Allen believes is becoming a requirement for luxury homes…

The house features an infinity pool, a hot tub and lush landscaping. An open floor plan is designed for entertaining, as are the two outdoor kitchens and three expansive covered porches. The home will be sold with custom furniture and drapes, lighting fixtures and potted plants.

Hidden features, out of sight or at least not readily noticeable, enhance the home’s livability.

Rain gardens that capture water for use in watering the lawn are popular in Nashville’s neighborhoods. Allen took the concept further and installed an underground cistern that collects thousands of gallons of rainwater.

When I saw the headline for the article, I thought it was about people not buying large houses but buying smaller houses with nicer features. In other words, the money that once went for more square footage would instead go for nicer features.

However, the story is about wealthy people still buying big houses but with custom finishes or new kinds of features. Does it matter much if instead of buying an 8,000 square foot home, someone purchases a 6,500 square foot home and stuffs it to the gills with add-on options? Does having a rain garden make the large and expensive house more palatable?

I suspect builders would like this quite a bit. No builder wants to be known for constructing McMansions, mass produced large houses. If they can offer plenty of custom features, they can still make a lot of profit and escape claims they are simply building cavernous homes. This echoes the techniques used by big builders like Toll Brothers; they don’t make McMansions, they make luxury homes.

CNN says “McMansions are making a comeback” but the data is limited

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CNN reports that McMansions just may be on the way back:

During the past three years, the average size of new homes has grown significantly, according to a Census Bureau report released Monday. In 2012, the median home in the U.S. hit an all-time record of 2,306 square feet, up 8% from 2009.

During the recession, Americans downsized and the average new home shrunk in size by 6% over two years to 2,135 square feet. At the time, many industry experts said the days of the McMansion were over.

The shrinkage was supposed to indicate that a new era had begun, with young buyers seeking to live closer to urban cores and settling for smaller places and baby boomers downsizing after their kids had flown the nest.

But it wasn’t that consumers wanted less space, many just couldn’t afford more, said Jeffry Roos, a regional president for home builder Lennar. And now that the economy is improving, they’re demanding bigger homes again, he said.

This is what I suspected might happen: once the housing market picked up again, some Americans would go back to buying bigger houses. But, this article has a few problems as it relies on (1) the median home size and (2) talking to several large builders.

Regarding home size: the figures cited more often is the average home size. The average size for new houses went from roughly 900 square feet in 1950 to nearly 2,500 in the mid-2000s. The median home size might be more accurate as the extra big homes can’t skew the data as much but the average is used more often. Also, the median hasn’t changed all that much in the last few years – this is only a difference of 150 square feet, a 12×12 room. Why can’t we see figure about the number of big homes that have or have not been built rather than relying on these overall figures that are a snapshot of a varied housing industry?

Relying on just a few large builders also does not reveal the big picture. The builders cited, particularly Toll Brothers, are big players but the housing market has a lot of different builders and developers. Overall, how are lots of different builders feeling about big houses? Are they actually building these bigger houses? What do real estate experts say? The news for Toll Brothers has looked good recently but there is more to the big house market than just Toll Brothers.

This seems like an article that would benefit from better data and also may not really be able to be written until some more time has passed and the trend is more clear. In the meantime, simply invoking the term McMansion and discussing a possible trend is apparently enough…

UPDATE 6/5/13: As the CNN story is repeated across the web, there is some confusion. For example, look at how this retelling mixes the idea of an average or median:

A new Census Bureau report says the average size of a new home has grown eight percent in the last three years, up to a record 2,300 sq. ft. in 2012…

According to the National Association of Homebuilders, buyers prefer a median home size of just over 2,200 feet, in line with the Census average.

Two different figures for the “middle” size mean two different things…

New buyers looking for luxury amenities rather than giant homes still focused on consumption?

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More home buyers today may be choosing amenities over big houses:

Oversized McMansions are history. Instead of big houses with rooms that might seldom — if ever — be used, builders are offering luxury amenities that add to comfort and enjoyment for years to come.

How about a Woman Cave? Other innovations include separate suites for in-laws or “boomerang” children who return home for a time after college or maybe a divorce, luxury walk-in closets and gourmet kitchens that make even a microwave dinner feel special.

“Two things sell homes — baths and kitchens,” said Peder Jensen, director of sales for Nashville’s Jones Co., which recently introduced the Woman Cave…

In addition to lots of granite, Dock Street offers kitchens with double ovens and gas cooktops. Master closets have a California Closet organizer.

“It’s sexy to have a nice master closet,” said Dan Kingsbury, project manager and principal broker at Tollgate Village. “It adds a ‘wow’ factor.”…

“Years ago it was all about square footage. The more the better. Now people want to downsize but upgrade,” he said.

Critics of McMansions have argued for years that the homes are more about being impressive rather than being useful. Additionally, McMansions have been viewed as symbols of excessive consumption. Yet, do these smaller homes with upgraded amenities really get away from this? While the amenities might be more understated and more functional, these amenities are likely not cheap and builders and developers can boost their profits on all sorts of upgrades. In the end, aren’t both the McMansions and upgraded amenities still about consumption, whether it is directed at visitors and possible buyers versus turned in on the homeowners themselves?