Are New Starter Homes History?Builder Magazine recently posted a follow-up article to the one published earlier this month titled 'The Rise and Fall of the Entry-Level Home: Is the lowest tiered new-home on a fast path to extinction?', with the headline, 'Are New Starter Homes History? Since World War II ended, builders lured buyers with new houses priced to vie with resale, but better built. They may now be extinct.' This article delves much deeper into the economic realities and challenges of building new starter homes for the same affordable price points they have had in the past, using $200,000 as the target sales price. Keep in mind, land costs, soft costs and profit need to be subtracted from this number to arrive at the target construction cost for builders, which makes this an even more challenging proposition. The article points out that homes can be built at this price, but they are going to need to be built deeper into the suburbs and outlying areas with cheaper materials, neither of which appeal to the millennial market they are trying to capture. The piece concludes with the following.
Ironically, given the need for new housing stock and the means of society, new entry-level housing is where most of the home building business could be, but it’s also where the market can be its riskiest, as was abundantly clear in the past decade.
“Realistically, you won’t see a lot of builders go down into this price point for a variety of reasons,” East says. “One, operationally, they can’t make money on it. They don’t know how to run that [production] process. Two, they don’t have the sales process. Three, they’re not a spec builder. So, I don’t think we’ll see everyone heading for below $200,000.”
Others are more optimistic. Palacios argues that the sub-$200,000 level buyer is ready to come back to the market. And, with lower FHA premiums and gas prices and easier underwriting, they can make their dollar stretch about 15% more.
Brad Hunter, chief economist for Metrostudy, the research arm for BUILDER’s parent company, agrees, suggesting that no matter how daunting it appears now, builders eventually will figure out how to meet this high-volume below-$200,000 market.
“I do see certain builders who are actively serving the under-$200,000 segment,” Hunter says. “Express Homes is expanding aggressively into this segment, and meeting strong demand. LGI Homes is also actively serving this segment. I expect this segment to grow rapidly in the next year or so. The under $200,000 segment is a huge underserved market, so builders who can profitably serve them will have a ready set of buyers.”
In that case, maybe the starter home is math, political science, and geography—but not history.
My ultimate goal with the Starter Home 2.0 project as it expands beyond the first initial build is to find ways to effectively deal with this great challenge and opportunity facing the next generation of home builders and home buyers.
Original Levittown House, Circa 1948