Tag Archives: housing industry

Baby Boomers want to downsize from McMansions but still want the amenities

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Even if more people are interested in smaller houses, will they be willing to forgo the amenities of larger houses? This article suggests the Baby Boomers going to Florida want to go smaller but still want features:

The baby boomers who invented the “McMansion” now say they want to scale down, while still having everything just so. For boomers beginning to trickle into Florida, this means medium-size, maintenance-free retirement homes that still feel spacious, especially when it comes to storing all their stuff.

Builders who study what this generation wants have come up with innovations like “snore rooms” to preserve bedtime peace and “technology centers” to keep them connected. Behind a yen for such marketing frills is a solid demand for costly amenities: spas, fitness centers and dedicated golf cart paths to nearby shopping…

This generation, famous for saying one thing and doing another, promises to keep it up as its members age. Boomers say they intend to downsize, but appear to change their minds once they see what their dollars will buy in a post-recession Florida…

Inside, the standard villa layout has been refined to boost the coolness factor boomers crave. Generous windows, some of them bays and bump-outs, flood the rooms with natural light. Tiny foyers feature the elegant architectural detail of a stately manor, and lead immediately into wide, off-center angles of open-planned space. Pocket doors allow one- or two-bedroom guest suites to close off from the rest of the living area, so grandchildren can nap or play.

Custom options include a cocktail pool, or “spool” — bigger than a spa, smaller than a pool — and a shared office with his-and-her workspaces for boomer couples telecommuting from home.

Several factors are at play here:

1. Housing is relatively cheap in Florida, particularly if retirees are coming from New York, Washington, Boston, and to a lesser extent, Chicago. Perhaps these retirees can’t resist getting the “best deal” when they realize they have the money to buy a little more?

2. What people expect in retirement. It sounds like these retirees expect a certain standard of living when they move to Florida. If they had fewer choices or less money, what would they ask for? Overall, these retirees have the money and the wherewithal to pick up and leave for Florida.

3. This is big business. Companies like Dell Webb need retirees to buy their homes so they are going to offer what people want.

In these cases, it sounds like buying less (particularly in square footage) doesn’t necessarily mean buying less.

Big home builders in trouble during market downturn, adopting new strategies

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The Wall Street Journal reports on the financial troubles of several big builders and the new strategies others are adopting to push forward:

“The market is not deep enough or big enough to support all the builders,” said Alex Barron, a founder and analyst with the Housing Research Center, an independent research firm in El Paso, Texas. “There needs to be some consolidation. I don’t think that means [mergers or acquisitions]. I just think that means there has to be a shakeout.”

Mr. Barron declined to speculate about any specific companies. But two operators that other analysts are watching closely are Hovnanian Enterprises Inc. and Beazer Homes USA Inc. Some analysts believe both companies are running low on cash. Both companies have seen their stock prices decline nearly 60% so far this year—making them the sector’s biggest decliners—and both have traded below $2 a share…

Both Lennar Corp. and Toll Brothers, for example, are working out distressed real-estate loans, a move that is being cheered by many industry analysts. Toll, long known as the builder of suburban McMansions, has expanded into urban areas building condominiums, which continue to be some of its strongest performers.

Hovnanian’s strategy is to keep acquiring land lots and keep building a broad variety of homes. In the second quarter, it spent some $125 million of cash to purchase about 1,440 lots and to develop land.

I’ve wondered before if these new strategies might change the image of some of these builders who built many large suburban homes in recent years.

It would be interesting to consider what the housing industry would look like if a prolonged downturn forced these big builders out of business. Are there some regional builders who could then step into the gap? Would we have a return to smaller builders a la the pre-Levittown days?

Just how costly is a green, customized home?

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You can find plenty of opinions about the long-term costliness of the typical suburban McMansion (waste of resources, dependence on automobiles, etc.) but I’ve often wondered whether the alternatives, a smaller customized home or a greener home, are really cheaper. And if American home buyers seem pretty motivated about cost, how would this affect whether these would purchase these alternatives? Here is an anecdote about building a green, customized home that suggests they can be costly:

As readers of Green House know, we started our journey to a right-sized, energy-efficient home in Falls Church, VA., nearly three years ago after selling a McMansion a few miles away. We never expected it would take so long or cost so much…

We’re acclimating. A modern home in a traditional neighborhood brings lots of stares, especially when you haven’t had a chance to order shades for the 16-foot wide, 10-foot tall sliding glass doors to your living room. Cars slow down as they go by, and walkers sometimes wave. We wave back, even if we have no idea who they are…

We’re preparing paperwork to have the house certified by the U.S. Green Building Council and the National Association of Home Builders. We’re shooting for the top rating, but having gone through the exhausting process of building a custom home, we’re all too aware of Murphy’s Law.

I wish the story was more clear about the cost of the building the home plus the utilities. Just because the home is smaller and more energy-efficient does not necessarily mean that it will be cheaper up-front. Is this like purchasing a hybrid car where you have to operate the car for a certain number of years before you realize the gas savings because of the premium for the car?

It looks like a nice house from the pictures posted with the story. But why exactly did they design a “modern home in a traditional neighborhood”? What happened to trying to fit into an existing architectural milieu?

Can we expect a multi-family housing construction boom soon?

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Most housing news these days is bad: dropping prices, foreclosures working their way through the system, and a sales slowdown that might continue for some time. But some analysts suggest there may soon be a construction boom in multi-family housing:

But for now, you can see from this chart that overall home building did, indeed, boom during the bubble. Multi-family home building, however, remained pretty consistent between 250,000 and 300,000 structures per year throughout the bubble and declined in late-2009. Single-family building, on the other hand, grew to a rate of about one million homes per year in the mid-1990s to peak close to the rate of two million per year in early 2006. Then, of course, construction plummeted…

From all of this, we can conclude a few things. First, before long, residential construction will have to rise. Although vacancies are high currently, household formation should experience a boom as the economy adds jobs. With it, those vacancies will decline and new homes will be necessary to accommodate the growing population.

Moreover, both reasons for the decline in the rate of household formation indicate a need for more rentals. Young adults who are finally able to move out of their parents’ homes will mostly rent first. They’ll have short credit histories, relatively low wages, and little savings for a down payment. That combination that doesn’t usually spell mortgage approval when underwriting is strict. And those who are living with relatives or friends because they have been unemployed for an extended period will also likely need to rent at first. They might have experienced financial troubles affecting their credit histories, their new wages will often be lower than what they earned before being laid off, and they may have little savings for a down payment if they needed to rely on that money when unemployed. Additionally, all of those millions of Americans who defaulted on their mortgages will have no choice but to rent for quite a while. Banks certainly won’t give them a new mortgage for at least several years.

Now add this into the fact that multi-family construction remained constant during the boom, while single-family construction rose. This could translate into a coming mismatch between the types of housing units available and the specific housing demand that will rise. For the reasons just described, going forward the home ownership rate should fall to and remain at or even below its historical norm, while renting becomes more common. This implies two outcomes. Some single-family homes will need to be converted to rentals and additional multi-family structures need to be built.

The argument here is that the housing slowdown is really about single-family homes since changes in demand, driven by demographic trends including the slowing of household formation, mean that there are not enough multi-family, rental housing units and so we will soon have more multi-family housing construction.

There could be some people who might work against this trend. Recent advertisements from the National Association of Realtors suggest they want to promote single-family homes and homeownership. I wonder how quickly the housing industry could shift to building more rental units even if this is overwhelmingly what consumers desire and would developers and builders reach the profits they want from constructing multi-family units? Additionally, how many suburban communities would approve more multi-family and rental housing that might mar their single-family home character?

California housing forecast includes fewer McMansions, depressed construction industry

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Several researchers from UCLA suggest California housing industry will experience some changes in the next few years including a construction industry that will need years to recover:

UCLA forecasters have seen the future of California’s housing market, and it looks like this: more apartments near the coast, fewer McMansions in the desert…

That’s bad news for the state economy, however, for two reasons. One is that construction of multifamily homes requires less labor than construction of single-family homes. Second, areas such as the Inland Empire and Central Valley that were hit hardest by the housing bust won’t get a construction boom to help pull them out of the economic doldrums.

This means “there is an even larger structural unemployment problem in California than we originally thought,” Nickelsburg wrote in the forecast. “Not only do we have excess construction, real estate and support skills, but some of those that will be demanded will be in the wrong geography.”

California won’t start adding a significant number of building permits until 2013, forecasters say, which is one of the reasons the state’s unemployment rate will stay above 10% until the middle of that year. Nonfarm employment in the state won’t return to pre-recession levels until 2014, and construction employment won’t reach those levels until at least 2021.

The demographic shifts and move away from McMansions have been predicted elsewhere but the longer-term impact of a troubled construction industry has sort of flown under the radar. I wonder how much of the current unemployment troubles in the US are the result of the lack of home construction, i.e., what percent of the unemployed are construction workers? Where do construction workers end up working in a prolonged housing industry slump?

All of this is a reminder that the housing crisis which helped lead to the economic crisis is a longer-term issue. Lower housing prices don’t just influence homeowners who wish they could sell or get a return on their home or large lending institutions who lost a lot of money – millions of construction workers are under- or unemployed and communities can no longer rely on quick single-family home construction to help revive their economies.

A possible future of McMaisonettes

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At the end of a review of Harvard’s Joint Centre for Housing Studies 2011 “State of the Nation’s Housing,” a commentator speculates on the near future for American housing:

But if there is a rebound, the JCHS analysis of American demography suggests where things will be most bouncy. At one end of the age spectrum, there will be pent-up demand from younger adults who have deferred setting up on their own because of economic and financial constraints. At the other end, the ageing of the baby-boomer generation will mean an increase in sales of homes by older people looking to downsize into smaller residences. That, and the limitations on mortgage financing, indicates that a revival in housing construction will focus on smaller houses. Fewer McMansions, in other words, and more McMaisonettes.

And I’m left waiting for the next paragraph which will then provide an explanation of future McMaisonettes. Because there is a “Mc-” prefix attached to the term maisonette, defined as a “small house” (also “an apartment often on two floors”), I assume this refers to the mass produced nature of these small homes. This is typically not complementary as critics suggests McMansions either all look the same or they mix-and-match authentic architectural themes or motifs into an mishmash. So will smaller homes be regarded as better because are more within people’s economic reach and are less wasteful or will they be knocked for their mass-produced nature just like McMansions?

With banks and lending institutions owning so many homes, housing values will be lower for several years

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Foreclosures are not just an immediate problem; the New York Times reports that the number of foreclosed homes now owned by banks and mortgage lenders are likely to depress the housing values for years to come:

All told, [banks and mortgage lenders] own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months…

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.

Not good news for those who want to sell a home in the near future. It is interesting that we now hear very little about this at a policy level. There are certainly other important pressing issues in the world (jobs, gas prices, military actions, Republican candidates for President?) but housing values affect a lot of people.

At the same time, I have heard and seen new advertisements from the National Association of Realtors. I wonder why they are running these ads now: are they worried that more people will rent rather than buy? Is there an uptick in the number of people who are trying to combat lower housing values by selling the home on their own? Do they feel that there might soon be changes in public policies, perhaps through measures like limiting or getting rid of the mortgage-interest deduction, that would limit the government’s promotion of homeownership? And interestingly, these advertisements have stressed that homeownership helps create jobs.

Attempting to set up an American style home lending system in Russia

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Housing and mortgage industries can be quite different across countries. While many Americans might be quite used to our system (even though the system of 30 year mortgages we know now was a product of the mid-twentieth century), what happens when you try to apply the American system to another context? A sociologist looked at how this worked out in Russia after the collapse of the Soviet Union:

The new government tried to create a housing market by replicating the American housing system, essentially using the Federal National Mortgage Association, or Fannie Mae, as a template to encourage Russians to take out mortgage loans.

“This was all designed by USAID, one of their biggest foreign aid programs ever,” Zavisca said. “It was an American model of what a housing market is: home ownership and securitized mortgages.”

Supposedly all of that privatized housing and wealth would spur the natural development of a housing market. Those who felt they had more housing than they needed would look to trade down and use the leftover money for other things. The private sector would emerge to produce housing for those who had been left out.

“That didn’t really happen,” Zavisca said.

Housing construction declined by 70 percent from 1992 to 2002, the first decade after the Soviet era. The construction industry in Russia has evolved to cater to wealthy and well-to-do middle class clients who could pay with cash, but there is a lack of trust by both contractors and consumers. No one wants to pay up front and wait, or deal with credit.

Unlike Americans who for decades have willingly taken on 30-year mortgages to buy housing, Russians have largely balked at the notion. Even when young families were offered a $10,000 credit, roughly a year’s wages and the equivalent of $60,000 in the U.S., toward the down payment for a house, Zavisca said there was little interest.

“Few Russians are willing to take out mortgages because the risk of foreclosure is unacceptable, and because they view interest payments – which they call overpayments – as unfair. As one Russian put it: ‘To enter into a mortgage is to become a slave for 30 years, with the bank as your master.'”

That hasn’t stopped Russians from going into debt, though. They may be averse to mortgages but they love credit cards, small consumer loans and point-of-purchase store credit.

“In my interviews, people there often compared credit card debt favorably to mortgages, the inverse of here in the U.S., where mortgages are viewed as virtuous and responsible.

“Russia is completely the opposite. It may be a legacy of Soviet entitlement to housing, where housing is viewed as a right to them. Even thought the Soviet government owned the housing, people thought of it as their own and had the right to pass it down to their children, or swap with someone who wanted to trade with you.

“It was a kind of quasi-marketplace. It just wasn’t financialized.”

She said Russians find it odd that Americans call themselves “homeowners” from the day they close on a mortgage loan. For Russians, ownership only begins after all debts are paid off.

This suggests that our system may be more cultural than anything else. It goes beyond just being used to a particular set of economic and financial tools regarding homeownership; these instruments are backed by a particular set of cultural values that sees mortgages, and working hard to reach the point where one can afford a mortgage, as acceptable. The Russians may have a point here: one doesn’t technically own a home until the mortgage is paid and with the high rates of American mobility (moving roughly every 5-6 years on average), many homes are never truly owned.

It would be interesting to hear how Americans, in USAID or elsewhere, explained why this didn’t work in Russia. Have we tried implementing similar policies elsewhere and if so, how did those situations work out?

At least some builders says McMansion may not be dead yet

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Amidst suggestions that McMansions are being “shunned,” McMansions should be subdivided, and homebuyers want denser, walkable communities, at least some builders suggests McMansions may not be dead yet:

Wilson said builders are taking the slow approach toward embracing the younger generation of buyers, who are buying homes and starting families later in life.

“Most builders are still in recovery mode and remain cautious with any revolutionary concepts,” he said. “The one consistent thread is that the buyer continues to shop hard.

“Housing is in a recovery mode, but the consumer is still looking for the best deal he can find.”

Baby boomers set the tone for housing in recent decades, but their influence is starting to wane, Wilson said.

“This is not to say that the McMansion is dead – far from it,” he said, “just that the following generation – the Gen X group – is not as large as the preceding group.”

And most of the millennial or 20-something buyers aren’t yet ready to commit to home ownership – particularly after the decline in values they have witnessed in many areas of the country.

“I’ve heard that some of the new homes in California are getting a lot smaller, but I don’t see how that works around here,” said Jimmy Brownlee, Dallas-Fort Worth regional president for K. Hovnanian Homes. “Our buyers aren’t asking for that. We are trying to open our houses up and give them more light.”

This builder and others (described as “stumped builders” in the headline) sound like they are waiting to see what will happen in the housing market in the near future. Several factors are at play: the state of the economy and the housing industry, regional differences (Dallas vs. California), and generational differences as the Baby Boomers transition to retirement and younger buyers are more skittish.

From this article alone, it sounds like regional differences could play a big role. In places like Kansas City and Texas, house prices never got out of hand in the same way as California, Las Vegas, Florida, and Arizona. Therefore, continuing to build somewhat bigger homes might not be such a stretch, even in a tough housing market.

Also of note in this article is the suggestion that the homes may still be fairly big but they not have all the amenities like granite countertops or a deluxe bathtub. I’ve suggested before that smaller homes may not necessarily be cheaper, possibly due to more upscale furnishings or due to a more desirable urban/denser location.