Outdoor living spaces as an extension of the home’s communal spaces are a popular feature with young buyers.

Photo: by Pixabay.com
Outdoor living spaces as an extension of the home’s communal spaces are a popular feature with young buyers. Photo: by Pixabay.com

This is the first in a series on the shortage of starter homes. In Part 2, we’ll take a look at builders that are successfully capitalizing on the entry-level market.

There’s no doubt the housing market is in the midst of a recovery. After the doldrums of the housing crash and the Great Recession, residential construction is growing steadily.

Nationally, housing starts were up 2.4 percent in 2017 from 2016, the fifth straight year of growth. Total starts are up more than 30 percent since 2013. Georgia construction also continues to boom, especially in the Atlanta market, where housing starts were up 10 percent year-over-year for the first quarter of 2018.

But one part of the housing market has been getting left out of the housing recovery: the entry-level market. In 2006, there were 443,000 new homes built priced at under $250,000. That number bottomed out at 146,000 in 2014 and climbed slightly to 156,000 by 2016. For reasons both economic and sociological, younger consumers aren’t buying homes.

Why a Shortage?

But the reasons present something of a “chicken or the egg” question. There’s demand for starter homes, but it’s tough to make the numbers work for many builders. Buyers can’t buy starter homes because there aren’t enough out there.

“The market is incredibly strong but first-time buyers are having a much tougher time finding homes even than last year, and definitely more so than pre-recession,” says Kara Cook, co-founder of Cook & James, a Georgia-based firm that offers real estate transaction services and “at home” closings. “The biggest problem currently is lack of supply.”

Rising interest rates and rising home prices especially affect first-time home buyers, Cook says, adding that most new construction is priced too high for entry-level buyers, largely due to high land and construction costs.

“Rentals are also contributing to low supply of entry-level homes,” Cook adds. “During the recession, investors bought a large number of homes for rental use and they are not selling because they yield high rental income.”

Earlier this year, real estate data company Zillow said the housing shortage was at crisis levels, predicting there would be 10 percent fewer homes on the market in 2018 than there were in 2017.

“Tight inventory fueled by a tight labor market and low interest rates propelled home values to record heights in 2017, but the outlook is now much less certain,” Zillow senior economist Aaron Terrazas said at the time. “Tax reform will put more money in the pocket of the typical buyer, but will limit some housing-specific deductions. Overall, this should increase demand for the most affordable homes and ease competition somewhat in the priciest market segments. On the supply side, the market is starving for new homes, but it won’t be easy for builders struggling with high and rising land, labor and lumber costs. Aging millennials and young families may be able to find more affordable new homes for sale this year, but they’ll most likely be in further-flung suburbs with more grueling commutes to urban job centers.”

According to Zillow, Atlanta was one of the top 15 markets that had seen the largest inventory decline, with a 14.6 percent decrease in home inventory year-over-year.

Georgia is one of the stronger housing markets in the country, says Jeff Rogers, Channel Manager for LP Building Products. Rogers is based out of Atlanta and services the surrounding region. 

“The market has greatly improved from last year and since the year before that,” he says. “Job rates are not as low and we’re seeing that millennials are getting back into the home buying market. Although we’re currently on the upswing, the market was much stronger pre-recession.”

Home prices in Atlanta have risen 6.2 percent over the last year (through April) according to the S&P CoreLogic Case-Shiller indices. Total inventory in the market represents less than two months of sales. A balanced market is considered to have six months worth of inventory. According to real estate site Trulia, the average price of a starter home in Atlanta was $107,000 in the first quarter of 2018, up 31 percent from the same time in 2017.

Elysia Stobbe, mortgage and money expert and author of the best-selling book “How to Get Approved for the Best Mortgage Without Sticking A Fork In Your Eye” says the younger, first-time buyers in Georgia have been especially vulnerable to this crunch.

“While there are more down payment assistance programs available now than we’ve seen in recent years, what people can qualify for as far as how much house they can buy is still limited by their maximum monthly payment due to their debt to income ratio,” she said. “So, it’s kind of a catch 22. While home prices are still increasing, salaries have not increased to match it. Even though there’s more money available for down payment assistance and closing costs, millennials are frustrated by their lack of buying power. One other surprise factor that millennials sometimes don’t consider is that the repayment of their student loans must be considered even if it’s deferred.”

Research from the National Association of Home Builders shows that affordability remains a challenge for many buyers. According to an NAHB survey released at this year’s International Builders Show, the average home size was 2,627 square feet in 2017, larger than what is typically considered a “starter” home.

Sixty-five percent of prospective home buyers don’t believe affordability is going to get better, while 79 percent can only afford half the homes in their market, said Rose Quint, assistant vice president of survey research for NAHB.

“These potential buyers see a problem with housing availability. They know it’s a tough nut to crack, but they are not deterred. They are still planning to buy a house in the next 12 months,” she added.

There are reasons to be optimistic, though.

Wage growth is helping to make homes more affordable, according to the most recent NAHB/Wells Fargo Housing Opportunity Index.

Nationally, 61.6 percent of new and existing homes sold in the first quarter of 2018 were affordable to a family making the median income of $71,900. That was up from 59.6 percent in the fourth quarter of 2017.

“At the national level, median family income rose an impressive 5.7 percent to $71,900 in 2018 from $68,000 last year, and this wage growth helped to boost housing affordability,” said NAHB Chief Economist Robert Dietz. “A growing economy, along with tight inventories and increasing household formations, will lift housing production in the year ahead. But we also expect mortgage rates to continue to rise, and this will place downward pressure on affordability.”

Of the three Georgia markets tracked by the HOI, all performed better than the national average for affordability. The Atlanta/Sandy Springs/Roswell MSA was ranked No. 122 in the nation and No. 39 in the region, with 70.5 percent of families able to afford the median-priced home of $218,000. The Gainesville, GA, MSA was ranked No. 145 in the nation and No. 54 in the region with 66.3 percent of families able to afford the median-priced home of $210,000. The Chattanooga, TN, MSA – which includes part of Georgia – was ranked No. 109 nationally and No. 34 for the region with a 73.8 percent of potential buyers able to afford the median-priced home of $167,000.

What First-Time Buyers Want

Builders can capitalize on the demand for starter homes by delivering the features those buyers are looking for. Among those are: easy access to public transportation, integrated technology and walkable neighborhoods that have stores and other necessities close by.

“Georgia has seen a boom in building multi-use buildings in the suburbs as well as in urban areas,” Stobbe says. “Multi-use buildings are where the first or main floor are businesses such as coffee shops, drug stores, dry cleaners, grocery stores, offices or restaurants while the other floors are for housing such as condos/apartments. More first-time home buyers are moving into these kinds of buildings because everyone wants to have all the amenities without having to walk very far or drive.”

Cook identifies six major characteristics for builders trying to reach the first-time buyer market:

Affordability – “A large amount of first-time buyers are millennials and they typically carry student debt; they don’t necessarily have a large enough salary to make up for it.”

  • Energy efficient homes
  • Flexible space to meet changing needs and open floor plans
  • Great outdoor/entertaining space
  • Updated and move-in ready
  • Wireless connectivity and good cell signal

Rogers says starter home buyers are also interested in amenities that emphasize gathering spaces in the home.

“Kitchens are still very important but outdoor living is growing,” he says. “This started mid-recession. In the ‘90s, it was all about building the biggest house possible. The house took up a lot of the land it was built on. Now there is an emphasis on creating more outdoor living spaces as an extension of the home’s communal areas. We’re seeing more screened-in porches, patios with outdoor TVs, etc.”

NAHB research confirms that information, showing that millennial buyers are willing to sacrifice space for amenities, including high-end finishes and plenty of gathering space.

Be sure to check out Part 2 of this series in the September/October issue of Georgia Professional Builder.