The tug-of-war between factors that increase demand for housing and issues that restrict home purchase… has never been more intense.
In this environment, it is increasingly difficult for builders to profit from demand accelerators — while at the same time — avoiding cost and regulation impediments.
Two Factors Unambiguously Propel Demand for Single Family Housing
Over the past year and a half, there’s been a remarkable rebound in household formation by younger adults moving out of their parents’ homes to live independently, or with roommates.
Notably, over half of adult householders under age 25 now live alone or with non-family members. This shift has been a significant, and often overlooked contributor… to the dramatic increase in housing demand for both owner-occupied and rental units.
The growing number of millennials entering into their 30s — during the same 2020-2022 timeframe — is the second factor fueling housing demand.
As Jessica Lautz, Vice President of Demographics and Behavioral Insights at the National Association of Realtors, remarks:
“Millennials are faulted with killing off a myriad of things: department stores, paper napkins, ironing, even doorbells. But homeownership and the dream of homeownership? Well, that’s not one of them.”
After peaking as “apartment dwellers” in 2018-19, millennials now make up the largest share of homebuyers… some 37 percent. Although the homeownership rate for those under the age of 35 is lower than past generations at the same age, millennials are still very active in the housing market. But not all of them are first-time homebuyers.
While 82 percent of millennials aged 22 to 30 are indeed buying a home for the first time, the majority (52 percent) of older millennials aged 31-40 are actually repeat buyers.
So, what’s driving millennials in their home purchasing decisions?
- Increased preference for more space/more bedroom options to support the 34 percent of home buyers looking for work-from-home features.
- An increase in ex-urban living… with 85 percent of homes purchased outside city centers. After all, they’re all now in childbearing age seeking a fenced-in backyard.
Impediments to Home Ownership
The aspiration to own a home remains strong. Yet, these millennials and other first-time buyers face multiple challenges to home ownership. Jerry Kantor, President of the National Association of Home Builders (NAHB), sums it up as a “crisis in affordability.”
In the face of elevated home prices, climbing mortgage rates and an uncertain economic future… new homebuyers have pulled back. And according to the Mortgage Bankers Association, mortgage applications dropped to the lowest level at the end of June 2022. Marking the biggest slump in 22 years. Consider that:
- Rising interest rates have cost the typical homebuyer up to $165,000 in purchasing power since last year.
- In June, the national median listing price for single-family homes was $450,000, up 16.9 percent from the same time last year and more than 31 percent from June 2020.
As a rebound in household formation meets an affordability crisis… builders are struck in the middle. And, they’re becoming frustrated.
The NAHB’s housing-market index — which gauges the single-family housing market — fell to 55 in July from 67 in June. Reaching its lowest level since May 2020. But don’t forget … a number above 50 still indicates that more builders view conditions as “good” rather than “poor”.
D.R. Horton, the number one homebuilder in the country, recently reported that nearly a quarter of their contracts fell through from April to June 2022. The cancellation rate of 24 percent was up about 7 percent from 2021.
To counter the slowdown, homebuilders are offering more incentives to prospective buyers… while reducing production. Many are expanding their participation in multifamily. And in the Build-To-Rent(BTR) sector.
Sonny Patel, Director of Land Acquisition at Taylor Morrison and champion of BTR development, explains:
“We are bullish on the new rental concept. We see a shift in consumer behavior. Consumers want more flexibility than what they get with a 30-year fixed mortgage. In Texas, we expanded Taylor Morrison’s customer base to include a segment of consumers who seek maintenance-free peace of mind without sacrificing the lifestyle of a single-family community. There is a huge demand for this product among Gen Z, millennials and baby boomers.”
Another example comes from Scottsdale, Arizona… where Toll Brothers teamed up in 2018 with BTR brand BB Living to start developing land in the Sun Belt. In this model, Toll Brothers develops and retains ownership of its BTR properties. And BB Living maintains them. A win-win for both.
In 2021, Toll Brothers reported:
“We believe that residents in our BTR communities want suburban single-family home living, so they are specifically choosing this rather than multifamily rentals. It is a different experience and lifestyle with all the attractions of low-density suburban living. For some residents who might currently be living in and outgrowing a one- to two-bedroom rental in one of our multifamily Toll Brothers Apartment Living properties, this is an ideal next step product offering.”
To most industry analysts, Build-To-Rent is an interesting — yet still early in formation — option. Adam Perdue, an economist at the Texas Real Estate Research Center, credits “Wall Street money” with funding many BTR developments.
And recognizes increased media attention… for creating visibility and legitimacy for the sector. As such, BTR is still unproven as a long-term development option. Growth may be large, but — he asserts — the base is extremely small.
In fact, the NAHB estimates that the BTR sector represents a mere 2 percent of multifamily… and reminds us that multifamily is only 5 percent of total housing.
Bob Tancula, President of Senex, Researcher and Forecasting Expert to Home Building Brands, remarks:
“I’m sure that some of the surge in multifamily is due to entry level people being priced out of the market. But the multifamily segment operates differently from single family… by being more influenced by interest rates on the investments in these projects.
I think those influencers and decision-makers, (banks, investment firms, large contractors) have seen that the internal rate-of-return on multifamily projects will be better in the coming quarters. And so, they moved up projects to take advantage of lower interest rates in first half of 2022… anticipating the higher rates that we see now. Yes, much better financials for investors — is driving growth in multifamily — while single-family is slowing.”
Recourse to Market Instability: More Than Builder Fixes
Of course, there’s no silver bullet for solving current market instability.
Yet, leadership at NAHB has identified three structural factors that they suggest must be addressed, before markets stabilize:
- Lumber prices. Re-consider Canadian lumber tariffs… and increase timber production from federal lands. Since the spring of 2020, lumber prices have added $14,300 to the price of a typical single-family home.
- Tax incentives. Substitute a mortgage interest deduction in favor of a $15,000, refundable, first-time homebuyer tax credit… to help make homeownership more accessible for working-class families.
- Regulation. Re-write inefficient zoning rules. Lower impact fees. And expedite approvals for affordable projects — and allow a range of housing types, including multifamily.
To fulfill the housing needs of all Americans, solutions must address housing challenges on a coordinated and structural level.
What are your thoughts on today’s housing situation? Send an email to sk@kleberandassociates.com to get the conversation started.
August 11, 2022 · Christine Luzar
Steve Kleber,founder of integrated marketing communications firm Kleber & Associates, and I recently discussed the challenges in the current housing climate. We explored the factors influencing the lack of affordable housing, the response from the homebuilding industry and what still needs to be done to ensure more widespread housing access.
~ Chris Luzar, Frohman & Associates