Tag Archives: builders

Argument: “Why more McMansions are bad news for first-time home buyers”

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McMansions may be good for builders but not so much for people looking to purchase their first house:

Home building has been steadily picking up this past year after taking a sharp nosedive during the recession, although production is still far below historical norms. Orr said home builders are moving forward with cautious optimism, being wary of their pre-recession mistake of overbuilding.

So to help make up for the slowdown, builders are now making homes larger once again. Bigger homes means bigger sales revenue — and for only a minimal bump in construction costs, Orr said.

The trend has been to the detriment of first-time and lower-income buyers, who are finding both the new and existing home markets offer them very few options today.

“They (home builders) have kind of abandoned that sector,” Orr said.

The existing home market nationwide — but particularly in Phoenix — has been facing a chronic shortage of homes for sale, and the problem is most severe in price ranges below $200,000.

Many buyers have thus turned to new construction out of frustration. But given the sharp price hikes of new homes recently, lower-income buyers aren’t finding the same relief, Orr said.

In other words, builders can make more money on the bigger homes for those who still have money to play with. But is this just about builders? I wonder if there are two other things going on here:

1. The article hints at a depressed existing house market, suggesting that there isn’t enough movement in the housing market for these older smaller homes, what might be called “starter homes,” to become available in large numbers.

2. In addition to not much existing inventory opening up, perhaps there simply aren’t enough buyers for smaller houses for builders to take notice. What numbers are we talking about – how many first-time home buyers in the Phoenix are not able to find a home they want? This reminds me of recent data from the Chicago area: while housing starts may be up a large percent, the housing market is still not operating at normal.

That all said, if people want to get into purchasing a home can’t do so or are delayed, this could contribute to more long-term problems for the US housing market.

McMansions vs. trees in Bethesda, Maryland

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Here is how the community of Bethesda, Maryland is planning to save trees from an onslaught of McMansions:

County Executive Isiah Leggett last year introduced a Tree Canopy Conservation bill that would force private property owners in small lots to pay a still-to-be-determined fee for lost canopy into a fund that Montgomery would then use to plant new trees.

Now, the County Council is wrangling with both sides to find a compromise.

Members of the building industry say the county shouldn’t legislate tree protection on private property, that they already avoid removing trees because of associated costs and that existing stormwater management requirements make protecting trees extremely difficult.

Some conservationists say the bill doesn’t go far enough, that replacing mature trees with new ones still takes away from the canopy, which everybody agrees is important for environmental and economic reasons.

Sounds like a typical suburban debate: should green interests or building/economic interests win out? The article doesn’t say this but I imagine there might be some old-timer versus newcomer aspects to this debate. If you have lived in the suburb for some time, trees are a good thing. They are not only green, they look better, suggest neighborhoods have stability, and contribute to higher housing values. If you are a builder or involved in real estate or want to move into places like Bethesda, you might want to pay less attention to trees and introduce new housing options.

One interesting note in the debate: there was some conversation about what percentage of tree canopy is desirable in a community. One pro-housing advocate suggested Bethesda already has more tree cover than much of the county. Just how much tree cover is necessary? Is a certain percentage related to housing values?

Trying to save a Sears home in Oakbrook Terrace

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Historic preservation is a common topic in older suburbs and one effort in Oakbrook Terrace features a more unusual Sears home:

The city purchased the house of the late longtime city clerk Lorraine Fik in 2008 with plans to demolish it to create a retention pond when it builds a new police station east of city hall. That work is expected to start this summer.

Saving the house, located across from city hall at 17W245 16th St., would require the city to provide water retention by other means, such as under the police station — a more costly option.

The move to preserve the house began after the recently formed historical society contacted architectural historian Rebecca Hunter of Elgin, who found proof of the home’s authenticity in the markings on the basement floor joists. The prefabricated home was built by Lorraine Fik’s husband, Edward, around 1950, and Lorraine had her clerk’s office in the basement until the city got a building of its own.

Kelly Fik, Lorraine’s youngest son, provided the historical society with photos of the house being delivered by truck and read a letter from the Fik family at Tuesday’s city council meeting.

These mail order Sears homes were produced in the early 1900s. Here are some more examples of Sears homes from the Chicago suburbs. On one hand, such homes are unusual and prior to the post-World War II era, mass produced homes were more rare. The era of the large-scale builder had not yet arrived. On the other hand, the homes don’t appear to be too unusual. Why save these homes just because they happened to come through a catalog over other homes built in the same era?

Another note: it is interesting to look at some of these examples and see how people have altered the Sears homes over the years.

Average new house size expected to drop to 2,150 square feet by 2015

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A short report on McMansions links to a National Association of Home Builders survey that suggests building professionals believe the square footage of the average new American house will fall by 2015:

Respondents expect the average, new single-family detached home in 2015 to be about 2,152 square feet, 10 percent smaller than the average size of single-family homes started in the first three quarters of 2010. Overall, 63 percent of respondents expect the average size of new homes in 2015 to be somewhere between 2,000 square feet and 2,399 square feet, 22 percent expect it to be between 2,400 square feet and 2,999 square feet, while 13 percent expect it to only be 1,600 square feet to 1,999 square feet (Figure 2).

Figure 2. Average Home Size in 2015

Data from the Census Bureau indicates that the average size of single-family homes completed peaked in 2007, at 2,521 square feet, was virtually unchanged in 2008, and then declined in 2009 to 2,438 square feet. Preliminary data for 2010 shows a further decline, down to 2,377 square feet. Although part of the recent drop in average home size may indeed be temporary due to hard economic times, a number of factors lead building professionals to expect home size declines in the long-run: consumers are focused on lowering the cost of heating and cooling their homes; they no longer have sizeable equity in their current homes to finance a much larger one; diminished expectations for house price appreciation has reduced demand for extra square footage in order to achieve appreciation on a larger base; demographics, 29 percent of the US population will be 55+ in the year 2020, demanding smaller homes; and strict mortgage underwriting for the foreseeable future. Combined, these factors will weigh on the consumer to purchase homes based on need more than want.

My interpretation of this is that a majority of builders think new homes in 2015 will be slightly smaller than new homes of today. Additionally, 23% still believe new homes will be larger than 2,400 square feet. Interestingly, there is not reported evidence of whether building professionals think these smaller new homes of the future will be cheaper.

And here is where square footage will be dropped from these future houses:

To save on square footage, the living room is high on the endangered list – 52 percent of builders expect it to be merged with other spaces in the home by 2015 and 30 percent said it will vanish entirely.

“As an overall share of total floor space, 54 percent of builders said the family room is likely to increase,” said Rose Quint, NAHB’s assistant vice president for survey research. “That makes it the only area of the home likely to get bigger.”

In addition, the relative size of the entry foyer and dining room are likely to be diminished by 2015. However, opinions were fairly evenly divided on the fate of the kitchen, master bedroom and bath and mudroom, she said.

The survey methodology is also worth noting – it was sent to a lot of interested parties but the response rate was under 10%:

NAHB’s The New Home in 2015 survey was sent electronically to 3,019 builders, designers, architects, manufacturers, and marketing specialists. The sample was stratified by region of the country (to be proportional to housing starts in each of the four Census regions) and, among builders, by their number of units started.

A total of 238 responses were received, of which 30 percent came from single-family builders, 19 percent from architects, 26 percent from designers, 7 percent from manufacturers, and 18 percent from “other” building industry professionals.

At first glance, this suggests to me that the findings are quite untrustworthy.

Bill Levitt only allowed open housing in Levittowns after MLK was killed

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The several Levittowns built in the 1950s were often viewed as model suburban communities. However, they had a darker legacy as the builders, the Levitt family, would not sell homes to blacks. The book Levittown: Two Families, One Tycoon, and the Fight for Civil Rights in America’s Legendary Suburb recounts the hostility the first black family to move into Levittown, Pennsylvania in 1958 faced. The epilogue to the book (p.194-195) includes this description of how Bill Levitt finally agreed to open housing:

Levitt remained on as president of the company for about six months, however, and had one last unexpected order of business before he left for good. It began on April 4, 1968, when Martin Luther King was assassinated in Memphis, Tennessee. Six days later, a small story on page four of the Wall Street Journal bore the headline, Levitt & Sons Starts ‘Open Housing’ Policy as King ‘Memorial.’ The Journal reported that the proposal had been “drawn up by the Levitt management and approved ITT,” though failed to specify whether it had originated with Bill Levitt himself. Nevertheless, the announcement was viewed as a stunning admission of his past racist policies and the mark of sweeping changes to come. “Open housing was one of Dr. King’s greatest hopes,” said Levitt, “our action is a memorial to him.”

African-Americans were already living in his three Levittown communities, but Levitt & Sons now had eighteen communities being constructed around the world, from Illinois to France, and the new policy would ensure open housing in each. “It is high time that we take this stand,” Levitt said.

The company took out a full-page advertisement in cities including Washington, D.C., New York, Philadelphia, Baltimore, and Chicago to announce the plan as well. At the top of the ad was a large picture of Martin Luther King. Underneath the photo was the headline Levitt Pays Tribute to Dr. King in Deed – Not Empty Phrases. The ad continued, “This Company has adopted a new policy – effective at once – eliminating segregation any place it builds…We ask all our colleagues to adopt a similar policy without delay. The forces of bigotry and prejudice must not be permitted to prevail any longer, and we urge all builders – large and small alike – to do their part in making America once again the ideal of the world.”

It is unfortunate it took so long for Levitt & Sons to make this move. In the meantime, blacks were denied the opportunity to live in communities that were seen by some, including the Levitts, as the epitome of the American Dream.

The story in the book is fascinating. The Myers family, Bill, Daisy, and two kids, moved into the suburb in 1957 and were immediately faced with mobs, harassment, actions from the KKK, burning crosses, and indifferent local police. That all of this could happen in the northern suburb, one close to Trenton and not too far from Philadelphia, might surprise some. At the same time, such situations were not uncommon – the actions here reminded me of the Cicero, Illinois incident in 1951 when a black family moved to an apartment in the suburb just outside of Chicago.

Tradeoff between making a stricter energy code for new homes and higher costs for buyers

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While there is growing interest in more energy efficient homes, this doesn’t come without an upfront cost. This is illustrated by the debate in Illinois about how much new energy standards might add to the costs of new homes:

A new statewide building energy code that takes effect Jan. 1 strives to make homes more comfortable and residential energy bills less costly by making the building’s “envelope” tighter. The adoption of a substantial amount of the International Energy Conservation Code for homes puts Illinois at the forefront of such efforts among states.

But the updates to the building energy code, required by state law every three years, have not been without controversy. While proponents say the changes will increase the cost of a new home from $958 to $1,775 in Illinois, or about $1,500 in the Chicago area, detractors of the new rules peg that Chicago-area cost increase at $4,600, a sum they say will price some first-time buyers out of the market…

The changes won’t be obvious, and even the code’s proponents agree the upgrades in energy efficiency won’t be as easy to market to consumers as, say, granite countertops and crown molding.

They include upgraded insulation in attics and basements, more energy-efficient windows, upgraded bathroom vent fans, the use of some high-efficiency lights, insulated hot water lines to kitchens and air sealing around furnaces…

Supporters of the changes say consumers living in a Chicago-area home of 2,400 square feet with a basement should save an estimated $350 a year on their energy costs, compared with the current building regulations.

If these estimates about savings each year are correct, these code changes would be worthwhile over the the full lifetime of a home. However, how many homebuyers take this long perspective? In a mobile country, how many would be willing to pay upfront for costs from which they may not personally benefit?

This seems like the classic dilemma about a number of green products in the United States: will people pay upfront for savings down the road? It will be interesting to see how builders try to sell these code upgrades , massage the price points of home to account for these new costs, and also try to appeal to greener buyers overall.

Toll Brothers experiences strong growth

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Toll Brothers, known for their construction of large homes (McMansions to critics), recently reported strong growth:

The company hasn’t figured out some amazing new way to build houses more efficiently and get more money out of every house built; instead, it is just building more. A lot more. Compared with a year ago, revenues were up 48 percent, and the number of homes built rose 44 percent to 1,088. Toll Brothers’ gross margin—which measures revenue from sales—was 24.6 percent in this quarter compared with 24.2 percent in the fourth quarter of 2011.

The full year was successful for the company as well. Its net income was $478.1 million compared with $39.8 million last year. Pre-tax net income shows a more stark story of decline and recovery: for this year it came in at $112.9 million versus a pre-tax loss of $29.4 million in 2011.

One figure that most directly shows this significant increase in building activity is the company’s “net contracts per community,” which is comparable to what retailers report as “same-store sales.” This measure shows how much Toll Brothers is building in the areas in which it already operates. As such, it directly reflects the increasing demand for homes, as opposed to the company’s expansion into new markets. Net contracts per community were up 33 percent from the fourth quarter of last year and 60 percent from this fiscal year to last, the highest yearly gain for the company since 2006 and the highest quarterly increase since 2005.

The housing market may still be lagging but this Toll Brothers data suggests the demand for larger homes has increased in the last year. See more of the financial details here.

Report says green housing market expected to grow rapidly

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A recent report says the green housing market in the United States is expected to rapidly grow in the coming years:

Regardless, a new report says the value of green residential and non-residential buildings in the United States is rapidly accelerating from only $10 billion in 2005.

McGraw-Hill Construction’s 2013 Dodge Construction Green Outlook says the value could reach $106 billion next year and go as high as $248 billion by 2016.

Based on the forecast for construction of single-family homes, the residential portion of U.S. green building could reach $116 billion by 2016, the report says.

Green building is a bright spot in a still-shaky economy, added the report, which was released Nov. 15.

A green structure is defined as one built to Leadership in Energy and Environmental Design, or LEED, standards, or one that is energy- and water-efficient while improving indoor environmental quality.

So there is at least one bright spot in the housing market. The demand for green homes could grow and I suspect builders might be able to charge a premium for these homes. There could be several areas in which builders could up the price: more expensive materials, the energy efficiency and savings of the home over the years, the special design a green home might require, and the status that comes with owning a green home. The example home in the story illustrates this: it is a 3,100 square foot home that will cost around a million dollars.

And note, the opening sentence of the story notes the difference between this green home and McMansions. There seem to be both similarities and differences between this green home and McMansions: it is still expensive and in the midst of sprawl even as it is a greener home, has a modern design, and is located on a one-acre lot.

More builders looking to offer multigenerational homes

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More builders are constructing multigenerational homes:

To be sure, multigenerational living is nothing new. For years people have found creative ways to make space in their house for a friend or relative. The concept is a mainstay in many parts of the world, especially in places where housing is expensive. In the U.S., multigenerational living was relatively common until a suburban building boom helped make housing more affordable.

The Pew Research Center said the trend is on the upswing. Last year almost 17 percent of Americans lived in multigenerational households, including households with parents and adult children, as well as skipped generations with grandparents and grandchildren. That’s up from 12 percent in 1980.

The primary driver in recent years is economic. The recession forced many families to double up to save money, and a tough job market meant that many college grads had to move home. The Pew report showed that the trend actually helped reduce the poverty rate. There’s been a cultural shift, too, in the way of new entrants to the U.S. who are more accustomed to such arrangements.

Stephen Melman, director of Economic Services for the National Association of Home Builders, called it an “underserved market,” and said that a significant portion of these households have the buying power to choose high-quality housing that specifically meets their needs. Future growth of multigenerational households largely depends on the direction of the economy, he said.

Several thoughts on this:

1a. The article hints that the American preference for houses solely for immediate families is an American cultural value (perhaps also helped by relative economic prosperity) as immigrants might be more interested in multigenerational homes. Americans have a tendency toward mobility and weaker extended family ties.

1b. In recent decades, there have been numerous skirmishes in suburbs about how many people can live in a household. Such complaints are commonly directed at immigrants and minorities. So now this would be okay or even desirable if the homeowners are middle- to upper-class whites?

2. The houses mentioned in this article are still quite expensive and cost over $500,000. A multigenerational home might be desirable but how many could afford a new multigenerational home with over 3,500 square feet?

3. It is interesting to note that this article mentions nothing about the possibility of renting out space to people instead of only accommodating family members. Buying a home could be a more attractive prospect if renters helped pay the mortgage. I suspect this is where many suburban neighborhoods would draw the line: family can be trusted but renting out space to people then becomes too much like multi-family housing. Suburban residents think this is linked to transience, a lack of care for the neighborhood, and more unseemly activity.

Hard to get green homes appraised as there is a lack of knowledge, comparables

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Interest in green homes, exemplified by net zero energy homes, may be growing but there is an issue: because there is a lack of comparable homes, appraisals for green homes are more difficult to do:

Last year, single-family green home construction represented 17 percent of the homebuilding market, in effect doubling since 2008, according to a report by McGraw-Hill Construction. Researchers predict that by 2016, green home construction could comprise 29 percent to 38 percent of the market, as builders devote more time to green projects. The share of remodeling projects labeled as green is expected to rise as well…

Appraisers are slowly getting up to speed. Since 2008, almost 4,900 appraisers nationally have participated in 275 courses on green and energy-efficient valuation conducted by the Appraisal Institute trade group. Still, green home appraisals continue to be difficult, in part because there are few comparable sales but also because the building technology is changing. That makes it hard for appraisers to value — and for lenders to accept those higher values — home features that can run the gamut from rain barrels to a tankless water heater to a whole-house geothermal heating system…

In the Chicago area, Midwest Real Estate Data LLC added “green” fields to its multiple listing service so sellers can highlight environmentally friendly features of their homes to potential buyers. The Appraisal Institute created an addendum to appraiser forms to help analyze the value of green features. And lenders are starting to track so-called green mortgages to see if defaults are lower than on traditional home…

To increase the chances that improvements that go above and beyond what’s required by local building codes is correctly valued, experts recommend documenting green features added to a home.

They also urge builders and consumers to consider obtaining third-party certification about the home’s energy efficiency.

Put another way, there is more cultural and economic interest in green homes. People want to both reduce their energy costs but also want homes that are “responsible” and not seen as energy-hogging McMansions. However, it takes some time for the whole market to catch up to the perceived higher values of these new homes. This is the real issue here: while extra money and time may be spent on green features, appraisers aren’t yet “rewarding” builders and homeowners with the increase in housing value they think a more efficient and green-conscious home deserves.

Thinking more broadly about this, I wonder about the motivations of builders who are constructing more green homes. Are they motivated more by wanting to be green or by the knowledge there is a growing market for such homes? Of course, being green and making money can go together and perhaps this is how it should work in a perfect world. But, this might matter for some who are more concerned about being green and who wonder if being green is currently about being trendy which could endanger such causes down the road when the cultural and economic winds change.