Housing's New Look

As we all know, millions of people have had their homes foreclosed in past couple of years. While this fact is certainly not new or breaking news by now, it is still alarming nonetheless. What we don’t hear too often, however, is where these people go after losing their homes. The picture of housing in America has changed for sure, and some of the differences we see now could become permanent.

Largely, there has been a trade-down effect, with homeowners downgrading to cheaper homes or apartments. It’s a trend that homebuilders have been keen to take advantage of. Builders KB Home (KBH) and Lennar (LEN) in particular have made drastic changes to the homes they build by reducing homes’ footprints, using cheaper construction materials, and offering fewer bells and whistles (aside from the occasional green energy upgrade).

KB Home’s new ‘Open Series’ product line could very well represent the face of the new market for years to come as homeowners and banks alike shy away from overblown mortgages. The homes carry a small sticker price, often just over $100,000, and maximize all available space with space-efficient floor plans which could include, for example, connected living and dining room areas.

Furthermore, the floor plans avoid large hallways, big entrances, high ceilings, and other space-wasting layouts to be as energy efficient as possible while also incorporating Energy Star qualified appliances. As a result, the houses can be as much as 45% more efficient than a home built 10 years ago. In the end, KB and Lennar could have a head start on a market that is a primary driver of home construction for years, or even decades to come.

Of course, many are not so lucky to be able to move into another home or already owned a very inexpensive home, and have had to go another level down. Unemployment is obviously devastating to many individuals and families, and with unemployment rates rising, there are more applicants for subsidized housing these days. Interestingly, many areas throughout the country are showing increased vacancies among affordable housing which at first seems counter intuitive.

However, such vacancies are primarily in the upper levels of affordable housing, and the nature of the market now is that larger proportions of homeowners are simply not making any money or much less than before, and that upper end part of the affordable housing market is getting smaller while demand for the lowest levels of housing is rising quickly.

In fact, builders of some inexpensive housing communities have generally been unfazed by recessionary conditions, but this time around even demand for those units is lower as there is simply a widening gap between households who can afford housing and those who are scraping by with virtually no income at all.

One particular market that is seeing crisis and has gained significant attention from government funding is subsidized senior living. Not only has the senior community become a larger demographic nationwide, but a large proportion of these people are retired or jobless for health reasons. The jobless group speaks for itself, while many retired individuals were living on home equity that has diminished as home values have fallen. The best solution so far has been to incorporate struggling seniors into apartment complexes or small neighborhoods that can be largely afforded through social security.

One housing authority in Grand Junction, Colorado that operates affordable housing communities is running a $35,000 deficit per month just trying to keep people in homes. The U.S. Department of Housing and Urban Development has stepped in to help, but it is not a permanent fix for everything. Applications are up 25% from a year ago, a quarter of which are currently homeless.

At present, there is a two year waiting list, and the housing authority simply has to turn down many applicants. In the end, homelessness rates are simply rising quickly. In 2008, a conference of mayors reported that 12 of 25 surveyed cities reported an increase of homelessness due to foreclosures, while another eight cities did not have enough information to make a determination. There is currently $10.5 billion available to the Department of Housing and Urban Development, $1.5 billion of which has been spent so far.

Although we can expect the homelessness rate to improve once we are out of the current recession, some of the new ways we are currently sheltering ourselves are likely to become more run of the mill. Neighborhoods of the future could very well look much like the homes already being envisioned by KB Home and other new home builders.

And although we should eventually reduce our reliance on subsidized housing, perhaps large condominium and apartment complexes that make efficient use of space will become more commonplace. In a population that is already showing tendencies towards urbanization, urban lifestyles are likely to spread. In New York City and many European cities, living in a one or two bedroom apartment in a compact community is certainly not seen as a lesser lifestyle than living in a single family home.

As another plus, the urban lifestyle is generally more energy efficient than the rural one.

David Urani is a research analyst with Wall Street Strategies (www.wstreet.com). He actively covers the homebuilding, staffing, and supermarket industries. For more information about Mr. Urani, refer to the company's website, wstreet.com.

Comments

[HOBBorg:]

David Urani:
Have you looked at the downside of builders constructing these smaller, much cheaper homes in existing larger home communities where the property values were still holding steady or increasing in value? The fallout and the further devaluation of property values this marketing strategy will have on communities have yet to be recognized. Case in point, KB Home’s rational for building these homes in its yet incomplete communities is to compete with the foreclosure market, which are the very homes they built. As they boost sales designed to undercut the foreclosure market with a cheaper product it drives down the foreclosure market even further, as well as the other occupied homes they sold in that same community. Common sense dictates that this strategy only further devalues foreclosures and ultimately the rest of the market.

Oct 08 10:28 AM