Slump Prompts Builders to Get Back to Basics : Housing: The national trend is for smaller units that economize on materials and labor, making them attractive to the estimated 2-million-strong market of first-time buyers.
Amid the worst housing slump since World War II, developers in the wind-swept Antelope Valley are completing houses at the rate of four a day for a stream of buyers who drive 70 miles or more in search of affordable homes.
The focus on bare-bones, entry-level housing priced as low as $80,000--at a time when the median home price in the state is about $200,000--highlights a national trend that is beginning to transform home building as thoroughly as the 1970s gas crisis changed the U.S. auto industry.
Builders, who once competed to erect ever more fancy and expensive homes for over-reaching baby boomers in the 1980s, are downsizing new construction and economizing on materials and labor.
Though they risk hurting their thin profit margins, builders have turned to starter homes to attract the only group that seems to be buying houses these days: the estimated 2-million-strong market of first-time buyers.
“We kept hearing that it was a buyer’s market, but the only (close-in) homes that we saw in our price range needed a whole lot of work,” said Terry Lewis, a Pasadena church employee who recently bought a new $98,000, four-bedroom home in Rosamond. “I decided the extra commute was worth it. Our house payment now is less than what we were paying for rent.”
Inexpensive starter homes represent one of the few bright spots in an otherwise beleaguered housing industry. According to the National Assn. of Home Builders, new home sales will fall to 508,000 units this year from 534,000 in 1990. And sales of existing homes managed only a slim 1% gain in October after four monthly declines as Americans--concerned about the economy and unable to sell their current homes and move up--remain on real estate’s sidelines.
Developers have managed to lure many first-time buyers only by building tiny homes that undercut the price of most existing starter homes. The entry-level housing market also appears to be cannibalizing sales of condominiums as lower interest rates and prices enable first-time buyers to stretch and buy a single-family home, experts say.
In Southern California, more than 100 home buyers lined up last summer in Adelanto to purchase homes priced as low as $80,000 from Upland builder Ira Norris. In New Jersey, one of the most expensive housing markets outside California, New York and Connecticut, homes priced at less than $100,000 are being built by DKM Properties Corp. In suburban Washington, Artery Homes says that by using “advanced construction and cost-control techniques” it has been able to offer first-time buyers homes for about $100,000.
“The market for the first-time home buyer is the only viable market out there right now,” said Ronald Berman, chairman of DKM Properties in Lawrenceville, N.J.
The focus on first-time home buyers is in sharp contrast to previous housing slumps in which the bottom end of the market collapsed while sales of more expensive homes remained strong.
In the early 1980s’ recessions, for example, sales of new and existing single-family homes dropped 50% to 2.3 million in 1982 from 4.3 million in 1978, but the percentage of homes then selling for $250,000 or more climbed to 1.8% in 1982 from 0.3% in 1978, according to the Census Bureau.
Today the tables are turned. Sales of luxury homes have declined dramatically while less expensive homes priced from $70,000 to $149,999 rose to 59% of all home purchases in the third quarter of 1991 from 51% during the same period in 1989, says the Census Bureau.
“Luxury homes became overbuilt and overpriced because of speculation,” said Marc A. Weiss, professor at Columbia University and director of the school’s Real Estate Development Research Center. “Entry-level homes is where the stronger market is today, (aided by) lower interest rates, prices and the large market of people who still don’t own a home.”
In California, first-time home buyers will account for about 189,000 home purchases, or about 45% of all sales this year, up sharply from 165,200, or 37% of sales they made in 1990, according to a recent survey by the California Assn. of Realtors. The figure marked the highest percentage of first-time home buyers since 1981, when CAR began conducting the survey.
The most recent national figures show that first-time buyers accounted for 35% of all U.S. home purchases in 1990, up from 31% in 1989, according to the National Assn. of Home Builders.
Among those purchasing their first home this year were Doug and Laura Burnside. The couple bought a five-bedroom house in Palmdale in May for $134,000 after hunting for nearly a year.
“Prices were a good $35,000 to $40,000 less than when we first started looking at homes and interest rates were down,” Laura Burnside said.
But like many first-time buyers, the Burnsides’ purchase of a new home from West Venture Development Co. was more than a simple economic decision.
“It was a lifestyle change,” Laura Burnside explained. “We’ve been married for four years; we have a child. We decided we wanted to settle down and find a place to raise our family.”
Major tract home builders, of course, have always tried to maintain moderate prices to attract the middle- and working-class consumers who make up their main market. But in recent months, builders have intensified efforts to reach that market, virtually eliminating move-up and luxury models from their inventory and erecting only the least expensive homes.
In April, Kaufman & Broad, California’s largest home builder, briefly offered homes for $76,990 in Rosamond, which the company contended at the time were the lowest-priced, single-family detached homes in the state. And West Venture is building homes for families earning as little as $30,000 annually.
“When you can get a home down into the $70,000 to $90,000 price range, you can sell to the school teacher, the policeman and the single person,” said Norris, president of Inco Homes. “Land costs have come down substantially in this recession; labor and material costs are less too.”
Although builders say their profit margin is less with entry-level housing than with more expensive homes, the shift to the starter-home segment has been applauded on Wall Street, where many analysts say most home builders that concentrate on entry housing have outperformed expectations.
Merrill Lynch Capital Markets analyst Robert P. Curran last month raised his investment rating on Kaufman & Broad, noting that the company’s “focus on entry-level housing . . . should help Kaufman & Broad increase market penetration during the cyclical expansion ahead.”
But the jury is out on whether first-time buying activity will spark an overall housing recovery.
Many developers harbor such hopes--persuaded that the move-up market will swell in the 1990s as members of the baby boom generation get promoted to higher-paying jobs and have more children. But most analysts don’t see a broad housing recovery soon.
“Unless incomes grow, people don’t really have the ability to move up,” said Robert H. Edelstein, co-chairman of UC Berkeley’s Center for Real Estate and Urban Economics. “Right now people are mostly buying new houses out on the fringes. There needs to be more purchases of existing starter homes. And as inventory of those homes wears away, that will help the move-up market.”
In the meantime, first-time buyers are making do with cramped homes that often compromise on amenities, according to a new Census Bureau survey of 1.7 million purchases of new and existing homes by first-time buyers in 1988 and 1989.
Less than half of first homes had central air conditioning, the Census Bureau said, only 33% had fireplaces and less than two-thirds dishwashers. By comparison, nearly two-thirds of the homes bought by people trading up had central air, more than half had fireplaces and nearly 75% had dishwashers.
But it is primarily cheap land prices and smaller floor plans that allow builders to cut costs the greatest.
Pardee Construction Co.’s least expensive homes in the Antelope Valley, for example, have about 1,000 square feet, compared to the 1,700 square feet that was typical three years ago, said Peter Panagopoulos, an assistant vice president at Pardee.
“Most of the price reduction is simply the size of the home,” Panagopoulos said. “Contemporary buyers have a very high set of standards, so the only way to capture this market has been to provide value in smaller sizes.”
