Housing’s missing decade–from about 2006 to 2016, and its selective above-average tier recovery, has messed with one of housing’s long-held tenets:
That a true and sound housing recovery needs robust participation from young, entry-level buyers to propel the daisy-chain of good supply and healthy demand into a virtuous, sustainable cycle.
So, that didn’t happen in the wake of the housing and financial crisis for a litany of reasons–credit shut-down, student debt, a jobs-free recovery among many important economic players, slow household formations and even more delayed family formation.
Now, though, it looks as if a long-awaited activation among pent-up pools of would-be first-time home buyers is ready to retrofit into this recovery cycle, so long as a stream of new, lower-priced supply can meet the now-ignited demand.
Builders, many of whose focus has been on the recovery’s first wave of demand–discretionary, well-heeled, less cash constrained, and more demanding buyers–have resumed their operational capacity on communities with higher margins, longer building cycles, and less elusive profit bogies. Even labor capacity constraint–after one abysmal season in 2015–became a mere course-correction, as schedules shifted, promised delivery times slid by a month or three, and prices adjusted to the new economics of construction labor pricing power.
Meanwhile, one of the foolproof strategies builders learned during the early recovery was how to profitably test move-up and second time move up home buyers’ tolerances for more house on less lot.
CoreLogic housing trends economist Bin He takes a look at how new home square footage patterns compared with sales transactions among buyers of existing homes, noting that our early recovery cohort–the discriminating, discretionary buyer–derived greater value in larger homes during these first years of the rebound.
Meanwhile, the builders derived greater value as well, by delivering those larger square footage homes on smaller square footage lots. Bin He writes:
The median size of a lot for a newly built home decreased from 8,250 square feet in 1990 to 6,970 square feet in 2016, which is about a 16-percent decrease. Meanwhile, the median size of a lot for a resale appears to fluctuate between 9000 to 9500 square feet. On average, the newly built homes had much smaller lot sizes, and the difference between new homes and resales is getting bigger.
Of course, density tolerances are not solely an issue for home buyers, but also one for local municipal decision-makers. However, what builders have been effective in doing is optimizing development, carrying, and operational costs by optimizing the vertical value they generate for each parcel of land they develop into communities. Bin He writes:
In order to mitigate the high cost of the land value, homebuilders reduce the size of the lots to bring the cost of the new home down so they can price these homes at a reasonable level. A closer look at the median land square footage for newly built homes in Figure 2 reveals that there are actually only two periods of time in which we see lot sizes decline: between 2000 and 2005, and between 2014 and 2016. Both of these two time periods registered large home price gains, which put a lot of pressure on the cost of acquiring and developing land, as well as the cost of attracting skilled laborers. What did the homebuilders do? They built larger homes on smaller lots.
Having gone to school on lot optimization, densification, orientation, etc. on the higher-end market, builders now have an opportunity to do more of the same as they try to lower and keep more affordable their offerings for the burgeoning entry-level marketplace.
One of the business community’s best resources for land optimization planning is BUILDER sibling Metrostudy’s own chief economist Mark Boud and his team of analysts. Have a look here.
