Homebuyers Are Settling for Smaller Houses

Includes: KBH, TOL
by: TraderMark

This was a trend we noted in summer 2008 [Jun 7, 2008: Staycations and the Shrinking Home] ...

The houses themselves are being radically downsized to meet buyers' budgets. At the peak of the last boom, in 2006, KB's customers craved cathedral ceilings, formal dining and living rooms, and fancy wrought-iron railings on windows and balconies. Today's buyers, KB found, are willing to trade size and amenities for far lower prices. But they're extremely specific about what they want to keep. Buyers welcome houses half as big as the models that reigned at the peak, as long as they offer plenty of bedrooms. They also don't miss the formal living and dining rooms if KB provides a "great room" combining the two in one open space that includes a generous-sized kitchen.

....and it appears, despite record low interest rates, taxpayer handouts, and any number of measures to get Americans to buy buy buy, we are still moving downstream into smaller homes. Of course part of this is who is buying nowadays; it is very heavily concentrated in the first time buyer segment since almost anyone else who could buy did buy during the "good times" earlier in the decade. (remember we are still almost 3% above the long term average of ownership rate of 65% in the country) Many of the "move ups" are under water - but I suppose now that they are defaulting on purpose, this should clear the way for them to be ready to jump back into the market circa 2013.

Considering how high energy prices were in mid 2008, this should serve people well in terms of heating / cooling costs if (a) inflation and/or (b) the demands of Chindia on global commodities drive up prices again in the years to come. I don't see this trend of smaller homes changing anytime soon, considering (i) the competition from foreclosures, (ii) at some point mortgage rates must go up driving down affordability and (iii) unless you work in the private sector, your wages will be under pressure from here on forward. The way things are going, the McMansions of tomorrow will all be filled with our public and psueudo public employees. (1/3rd of the workforce, and growing fast)

  • Out of the depths of housing's worst downturn, smaller new homes are turning into a bright spot for some home builders. The trend toward more compact new homes is being driven partly by the fact that more customers are first-time buyers who have less to spend.
  • Home builders are responding by offering smaller designs with features such as high ceilings and large windows that create a spacious feel and options that let buyers personalize the model they choose.
  • KB Home's (NYSE:KBH) smaller model helped it achieve a 62% increase in year-over-year net orders in the third quarter. The trend cuts across the industry.
  • The median square footage of new homes has dropped 9% from a peak of 2,300 square feet in the third quarter of 2006 to 2,100 square feet in the July-September period this year, according to data from the National Association of Home Builders [NAHB].
  • Housing size drops with each recession, but economists expect the current movement toward smaller homes to continue for some time in part because of the severity of the current housing market slump.
  • As the economy improves, move-up buyers generally enter the market and begin buying larger homes. But this time, so many homeowners owe more on their homes than their properties are worth that many potential move-up buyers will be stuck even as the economy strengthens. (and bingo was his name-o) "This downsizing is more sustainable," Crowe says. "The first-time buyer will continue to be a large part of the market because the move-up buyer will not have as much equity. It's going to take them awhile to climb out."
  • .... about half of all home purchasers were first-time buyers in October, according to the National Association of Realtors.
  • For builders, smaller, less-expensive homes mean less profit. But the industry is already facing strong competition from a high supply of foreclosed homes selling at comparatively low prices. At Pulte Homes, its most popular designs today are 100 to 200 square feet less than the most-popular plans in 2005-06. So the lower-priced homes don't seem bare-bones to buyers, open floor plans and 9-foot ceilings provide a sense of roominess. Cathedral ceilings are 14 to 18 feet.
  • To hold down costs, Corian — a surfacing material created by DuPont— is a standard for kitchen counters instead of granite. Appliances are standard models instead of pricier stainless steel.
  • Toll Bros., (NYSE:TOL) which builds luxury homes, says demand is down across the board, and not just for larger homes. Company officials say they, too, see an increased interest in smaller homes but believe that home buyers will someday return to wanting larger properties.
  • "We see the demand for smaller homes, but it's not as though there's huge demand for smaller homes but no demand for larger homes," says Kira McCarron, a spokeswoman for Toll Bros. "There is still a demand for luxury homes." (Toll obviously caters to a different income segment... )

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