MIAMI — Surveys find that Americans tend to prefer new homes, but whether they can afford them is another question altogether.
Few homebuilders have focused on the entry-level market in recent years, though that may be changing, according to panelists speaking at the National Association of Real Estate Editors (NAREE) conference today.
A 2014 Trulia survey found that 2 out of 5 Americans preferred to buy a new home in order to enjoy more modern features, customize the home, or spend less on maintenance and repairs. But only 46 percent of people with that preference were willing to pay at least 20 percent more to purchase a new home versus a comparable existing home.
About 1 in 5 Americans said they preferred existing homes, while the rest had no preference.
“When asked about existing homes and why they prefer existing homes, people generally said they prefer traditional features, wanted to live in more established neighborhoods or wanted to pay less for a home,” Selma Hepp, Trulia’s new chief economist, told attendees.
“Most people want new … but can you afford it?” said Nela Richardson, Redfin’s chief economist.
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She pointed out that convenience and proximity to amenities are top of mind for most buyers, followed by affordability and whether a home is new.
Nela Richardson
“Millennials don’t want to have to drive every time they want coffee at a Starbucks. They want to walk there,” she said.
“Most trade off new for something they want more and that’s convenience,” she added.
New-home construction is at half the level of what it should be, according to David Stevens, CEO of the Mortgage Bankers Association.
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“Half a million new-home sales is still below what it should be. We think it should be a million per year,” he said in a panel Wednesday.
Since the housing bust, homebuilders have tended to cater to the high end of the market. But Kris Hudson, a reporter at The Wall Street Journal who has written about builder D.R. Horton’s success building entry-level homes, sees a possible change in focus among builders toward the first-time homebuyer.
For “the D.R. Hortons of the world,” that pivot will be easier, Richardson said.
“Some builders are going to have a hard time making that pivot,” particularly if they’re building on the high end, she said.
When builders do build homes, they tend to be multifamily rather single-family, largely due to risk concerns, the economists said.
“Traditionally, more affordable units in population centers have been condominium units,” but builders are making their multiunit buildings rentals because they are afraid of construction defect litigation risks, Hepp said.
It costs them four times more to insure litigation risk for for-sale condos compared to rentals, she said.
First-time buyers are also more likely to buy via financing backed by the Federal Housing Administration (FHA) and many condominiums are not FHA-approved, she added.
Many markets overbuilt during the housing boom, leaving many condo units vacant. Not surprisingly, a lot of builders are choosing to sell their buildings to one buyer to rent out rather than selling 100 units to different buyers with different financing issues, Richardson said.
New-home construction is also sensitive to regulations and labor costs. In California, builders are not building enough affordable units because it’s expensive to build, Hepp said.
“One reason is the CEQA (California Environmental Quality Act). The other reason is the land is more expensive there because it’s limited by the oceans or mountains or federal land,” she said.
Labor costs are also higher, adding $50,000 to $75,000 more to the price of a house, she added.
Local conditions are also a factor. More and more localities are starting to put building moratoriums in place using the drought there as an excuse, Hepp said.
The economists differed on whether the nation will see a return of building in the exurbs.
Richardson said, “No, unless the exurbs change. Every indication is that millennials want something different. They want to feel connected to their neighbors; they want to feel connected to their communities.”
But Hepp pointed out that people move to exurbs because they tend to be more affordable.
“If you are completely squeezed out of urban areas and there is not enough supply … people are going further out. It will, in a lot of places, come down to the economics of it,” she said.
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