One of the weak points in the residential market recovery is the building of entry level homes. Historically, entry level housing has been built on speculation. Speculation is building new homes without first having a purchase contract in place. Inexperienced, first time buyers seldom think to nor can afford to have a house built on contract. Instead, they contact a realtor and dive into what is available in the MLS. Of course, spec houses are listed in the MLS. But so few entry level houses are being built that few are being listed.
Maybe the speculation entry level market will begin growing now that the unemployment level is hovering around five percent. Historically, when the unemployment rate reaches this low level, businesses have to offer higher wages and salaries to attract competent employees. Many of those that remain unemployed are generally not employable. Higher wages and salaries enable more first time buyers to make the move from renting to buying.
While many large builders continue targeting the middle to higher end market, DR Horton has aggressively moved into the entry level market. DR Horton began a new home brand in 2015 named Express Homes. Of course, it started from ground zero but sales grew phenomenally the first year.
DR Horton sold about 2,000 entry level homes in its first three months. That amounted to about 18 percent of its total sales. Good, solid numbers when starting up a new line of housing. The entry level homes sold for an average of $179,000 in contrast to its higher end houses that sold for an average of $284,000. Most builders were targeting even more wealthy buyers of new homes up around the $340,000 price range. As rents continue out pacing the price of ownership, volume building at the lower end is likely to be a profitable move for the big builders.
According to the company's CEO, David Auld:
“We were first movers, and we were aggressive first movers,” adding that DR Horton’s Express brand “had been the driver of market share gains.” The builder says its high-end brand, Emerald, has been seeing slower movement while Express and Horton—its mid-level division—are gaining traction.
While it's true that demand for entry level housing fell dramatically during the recession, those times are now well behind us. Since 2008 and until recently, first time buyers have been plagued by unemployment, student debt, and restrictive mortgage qualification standards. Unemployment is clearly easing as are mortgage standards (slightly), and as wages rise, student debts become less burdensome.
The spring buying season isn't far away. According to the National Association of REALTORS®, we continue facing a limited number of new and previously owned homes on the market. This is causing home prices to increase at an unhealthy pace. More new houses are needed on the market. Instead of constantly trying to push buyers into larger luxury homes, builders should be working the entry level market for first time buyers and the high amenity smaller house market for seniors.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.