The number of available homes with less than 1,800 square feet has continued to decrease, reaching a new low of 16 percent, according to a recent report by Drew Reading, U.S. homebuilding analyst at Bloomberg Intelligence.
Builders realize that inventories need to be higher and that demand is there. However, they’ve been slow to deliver due to rapidly rising land and regulatory costs that have made building entry-level homes less lucrative. Indeed, regulation costs have risen 30 percent since 2011, according to data from the National Association of Home Builders. Those rising costs have been passed on to not only the builder, but home buyers too.
Still, more builders are finding a way to eke out business in the entry-level market this year. Townhome construction, for example, has soared to an all-time high, increasing 29 percent. Builders see townhomes as a way to counter high land costs with a product that’s generally acceptable to many entry-level buyers.
Further, builder giants are devoting more of their market shares to the entry-level sector:
- D.R. Horton has been offering Express Homes to expand its reach into the market, and 27 percent of homes sold in 2016 were from its Express Homes sector.
- Lennar is also targeting affordable markets with greater entry-level homes and floor plan options. It hopes to focus more than a quarter of its sales on that sector in 2017.
- Pulte neared the 30 percent mark in 2016 for closings to first-time buyers. Meritage is going even bolder in trying to capture the market: Setting a target goal of 40 percent sales closings to entry-level buyers for 2017.
The majority of entry-level buyers are millennials. Their incomes are on the rise, so homeownership may be more within reach. In the past, their incomes were only rising about 1.6 percent but are now topping 5.5 percent annually, and mortgage lending standards are easing somewhat too.
Source: “Top Builders’ Unique Strategies to Capture Entry-Level Buyers,” HIVE (Jan. 4, 2017)
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