Diana Olick | @DianaOlick
Tuesday, 16 May 2017 | 11:31 AM
· During the Great Recession, investors bought hundreds of thousands of “starter homes” and instead of selling them when prices recovered, they turned them into single-family rentals.
· The median price of a newly built home in March was $315,000, significantly higher than the $236,400 median for existing homes.
· Demand for homes is clearly growing among younger buyers.
The largest generation is finally starting to buy houses. The trouble is, there aren’t enough houses for sale to feed their appetite, at least not enough they can afford.
Enter the nation’s recovering homebuilders. They may want to play to this great big audience, but doing that will hurt their bottom lines.
“Since the recovery has really been at the middle end of the market, home prices have gone up and land prices have followed,” said Megan McGrath, managing director at MKM Partners. “So it is very, very hard to make a good profit at a lower price point these days.”
In the wake of the Great Recession, investors both small and institutional swooped in and bought hundreds of thousands of foreclosed properties. The vast majority of those were originally lower-priced so-called starter homes. Some of them were barely a few years old, thanks to the massive boom in construction. Rather than sell them when home prices recovered, investors held onto them, turning them into still lucrative single-family rentals. As a result, there are very few existing starter homes for sale today.
The median price of a newly built home in March was $315,000, significantly higher than the $236,400 median for existing homes. Newly built homes always come at a price premium, but that spread widened significantly during the housing recovery, because builders were focused only on the move-up buyer. Young buyers were sidelined by weak employment, weak wage growth and high levels of student debt. That is now changing, but not dramatically.
“I don’t think anyone’s doing jumping jacks in terms of that lower end of the market, but I do think you’re also seeing … a little slowdown at that middle end, because that’s where the bulk of the recovery has been so far. And so we’ve seen a lot of sales so far in the last four years in that middle end, so you need to find another avenue of growth,” said McGrath.
New homes, lower prices
Big builders are slowly starting to introduce new product lines at lower price points, but they’re by no means starter homes. Only D.R. Horton, which introduced its Express Homes line in 2014 to much criticism, and LGI Homes, have substantial entry-level product.
“Finally they are selling well, so you are seeing everybody start to migrate to those types of homes, but they’re starting,” said John Burns, CEO of John Burns Real Estate Consulting. “People are doing more townhomes in good locations, and they’re also stripping stuff out of the house to get the price cheaper.”