Homebuilders Say Sayonara to Entry-level, Hello to Move-up Buyers

A good rule of thumb during a housing downturn, when you have more entry-level home buyers than luxury home buyers, is to reduce the cost of the house in every way you can. You are generally better off targeting buyers who already own a home.

Falling interest rates and aggressive lending practices have helped first-time buyers more than any other group. Accordingly, the homeownership rates among younger buyers reached all-time highs in 2005.

Homeownership rates among the under-25 demographic increased from 15 percent in 1994 to 25 percent in 2004. In the same time, the homeownership rate increased from 42 percent to 49 percent among the 25–34 year-old demographic. The impact of these two groups alone accounted for approximately 1.3 million additional owned homes over the last 10 years.

Based on the statistics, we advocate builders target older buyers.

Move-down buyers are a great opportunity for home builders. Census data shows a steady preference for homeownership for the older generations — a rate that even increases past the age of 65. This becomes particularly important as the first of the baby boomers begin to approach retirement age.

Homeownership rates are highest for the demographic over the age of 55. Approximately 81 percent of households over the age of 65 currently own their home, a rate that has steadily increased over the last 25 years.

Significant home equity means move-up buyers don't have an affordability problem. Although they generally have little urgency to move, they usually have the financial means to do so.

In today's market, building a quality move-up home in a highly desirable area has a much higher chance of success today than building entry-level homes in remote locations.

As mortgage rates soared to all-time highs in the early '80s, the national homeownership rate dropped. Home ownership slipped out of the reach of many potential buyers, most notably the younger buyers. From the mid-1980s until 1994, this measure remained flat, hovering around 64 percent. However, homeownership from 1995–2004 witnessed tremendous growth, peaking at 69 percent by 2004. While rates increased across all age groups during these 10 years, the younger buyers experienced the greatest acceleration in buying activity.

Chris Porter of John Burns Real Estate Consulting contributed to this report.

John Burns helps many of the largest companies in the industry with strategy and monitoring market conditions. He can be reached at jburns@realestateconsulting.com.