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

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Entry-level home ownership has died down after record highs in 2005. Home builders, hungry to eat up inventory, are turning to a more stable buyer demographic: move-up buyers.

June 01, 2007
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Why Sell to Existing Homeowners?

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.

Entry-Level Buyers are Tapped Out

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.

Future Move-Ups and Move-Downs

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.

The History of Homeownership

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.

EMPLOYMENT AFFORDABILITY PERMITS
Short-Term Outlook/Grade 1-Year Payroll Employment Growth 1-Year Growth Rate Unemployment Rate Median Resale Home Price Resale Housing Costs as % of Income* Housing Cycle Barometer** 12-Month Single-Family Permits 1-Year Single-Family Growth 12-Month Total Permits Total Permits as % of Peak Permits***
1 Houston 81,100 3.4% 4.1% 151,400 26% 5.2 53,729 2% 71,247 95%
2 Atlanta 41,600 1.7% 3.9% 169,813 24% 2.8 48,914 -21% 62,764 84%
3 Phoenix 78,800 4.2% 3.4% 265,000 40% 6.6 36,174 -37% 45,459 66%
4 Riverside-San Bernardino 43,600 3.4% 4.9% 395,000 65% 9.3 29,192 -36% 33,504 58%
5 Dallas 74,600 3.7% 4.1% 161,200 27% 5.0 25,311 -22% 34,650 47%
6 Orlando 31,300 2.9% 3.1% 249,250 41% 7.1 20,244 -25% 28,211 78%
7 Chicago 36,200 1.0% 4.2% 245,000 37% 5.4 20,077 -32% 37,626 80%
8 Charlotte 22,500 2.8% 4.4% 159,750 25% 1.3 19,637 -2% 24,653 98%
9 Las Vegas 29,600 3.3% 4.2% 305,000 49% 7.2 17,977 -43% 26,101 60%
10 Austin 30,900 4.3% 3.5% 177,100 31% 5.1 15,651 -18% 23,174 87%
11 Washington, D.C. 38,300 1.6% 3.0% 408,367 48% 8.7 14,930 -32% 21,388 56%
12 Tampa 15,900 1.2% 3.3% 193,500 35% 6.2 14,299 -48% 18,671 49%
13 Fort Worth 16,900 2.0% 4.2% 111,500 20% 4.6 13,750 -26% 18,463 48%
14 Nashville 10,600 1.4% 4.0% 149,000 26% 3.8 13,411 -6% 14,978 82%
15 Raleigh-Cary 16,400 3.5% 3.4% 188,000 28% 2.7 13,272 -7% 17,006 96%
16 San Antonio 20,200 2.5% 4.0% 146,900 29% 5.3 12,630 -19% 17,284 74%
17 Denver 19,100 1.6% 4.1% 234,000 37% 5.5 11,206 -36% 16,388 57%
18 Fort Myers 10,200 4.4% 3.2% 267,200 45% 6.8 11,042 -50% 13,774 47%
19 Minneapolis 11,900 0.7% 4.4% 229,000 32% 5.9 10,715 -37% 14,399 51%
20 Seattle 43,600 3.1% 4.4% 405,000 57% 9.5 10,237 -19% 21,779 79%
Sources: Bureau of Labor Statistics; Census Bureau through the month ending March 2007; John Burns Real Estate Consulting. Data on all markets available at www.realestateconsulting.com
**Proprietary affordability scale with 0 meaning most affordable time since 1983, 5 meaning median affordability, and 10 meaning least affordable time.
*Annual Mortgage Costs +1/7th of the downpayment divided by income.
*** Peak activity since 1985.

 

Why Sell to Existing Homeowners?

  • The current pool of renters is less qualified to buy a home than usual
  • Mortgage lending standards are tightening for people who have not saved a down payment
  • Homeowners have substantial equity
  • Every day, the U.S. sets a new record for the number of people over the age of 50
  • Older buyers are in their peak earning years
  • Older buyers may be coming into an inheritance
  • The resale market was not built with older buyers in mind

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