2019 New Home Construction and Trends With Rose Quint #633

Aaron Norris is joined this week by Rose Quint. She is the Assistant Vice President for Survey Research with the National Association of Home Builders. She holds a B.S. in Economics and International Business from Old Dominion University as well as a Master’s degree in Economics from Virginia Polytechnic Institute and State University. Her responsibilities over NAHB include planning and conducting industry surveys, specifically in the areas of builder sentiment, remodeling, housing affordability, and AD &C financing issues. Quint is also responsible for special research projects. One of the reasons Rose is with us is because Aaron was at the International Builders Show in Las Vegas last month. He got to see her present on the new report they just released.

Episode Highlights

  • Why did she first get into the building industry?
  • What is keeping builders from building smaller and more affordable homes?
  • What are the features we will most likely see in new homes in 2019?
  • What trends surprise her, and which does she expect to see on the horizon?
  • Do millennials still want to own a home, and do they prefer new or existing?
  • What are the top features home buyers want to see in their home?
  • Are people willing to pay more for energy efficient features?

Episode Notes

Rose has done a lot of studying in the economics field. Aaron asked her why she chose the real estate industry, specifically building. When she first came out of graduate school, jobs were plentiful back then. This was the first job that came out in Washington, D.C., where she wanted to work. It did not start out as a love relationship, although it became one eventually. She is based out of one of the most unaffordable areas, so good for her. Aaron was in Las Vegas during the snow, and he drove back to California with several inches of snow all along the way. This was very interesting to see, but what was even more wondrous was the fact that it was colder in Vegas than it was in her home in Virginia. This almost never happens.

When Aaron saw her at the press conference, she was releasing information from two different reports. One was the buyers trends from the builder perspective talking about what the builders are building in 2019 and the included features. There was also a really great report she released in book format that talks about what the buyers want as well as what they are willing to pay.

Aaron and Rose next went on to discuss the characteristics of the new homes. Aaron asked why builders are avoiding building smaller, affordable homes. Rose thinks builders would like to build more affordable housing if they could manage the costs. Builders are having a really hard time managing costs to come in at lower price points. They have seen trends over the last three years that paints a picture of them trying to do that. There are really three major problems they are having. Number one is the regulations. At NAHB, they have estimated that regulations impose that all different levels of government, Federal, state, and local, cost about 25% of the price you pay on average in this country.

Another problem that about 80% of people in a recent survey said is they cannot find enough carpenters to build their home. This in turn raises the wages they have to pay, and in turn raises the price of the home.

The third problem is the scarce and expensive lots. Over 65% of builders are saying surveys that the supply of developed lots in the area is very low. They are trying to manage these costs to respond to the affordability crisis in the country. They are having a really hard time with all the input costs.

Aaron and Bruce interviewed the California Building Industry Association last August, and they had a very honest conversation about how some states are better than others. California is one that is very onerous on the regulation side. They asked the CEO what the process was in California versus other states, and he said in Florida he will have the conversation with his building team about what the economy will look like in a year. In California, the question is what the economy will look like in 15 years. Aaron said looking at this from a real estate investors perspective, most of the crowd are doing rehabs or remodeling. It is frustrating watching politicians have the conversation about affordable housing but not addressing the core issues of greasing the wheel to make that happen faster. They are part of the problem. This is one of the things the NAHB works really hard on at the Federal level while also helping the local associations to straighten out the process. If we could just bring the 25% down to half of the number, it would do a lot to lower house prices.

It seems like the size of homes are going down. Aaron wondered if this is a function in Rose’s data because of more condos being built or if she sees single-family residences going down in terms of square footage. Rose said they have seen both happen. They are seeing more townhouses being built as well as the size of the detached single-family homes going down over the past three years. If you put things in perspective from a long-term historical perspective, what happened is the recession took place, and by 2010 we hit low in terms of the size of homes being built in the country. Then, between 2010 and 2015 we saw an upward trend in terms of the size of homes being built. These homes included characteristics like a garage for three or more cars or four or more bedrooms or 3 or more bathrooms. All these things increased over time during this time period.

We have to keep in mind why this happened. It was not because people suddenly turned toward bigger homes. It was really a function of who was left playing a game of buying a home. After the recession, underwriting became really tight. First-time homebuyers retreated, and down payments became very large. The profile of the people buying homes during those years changed. It was mostly people with high incomes and previous homeowners with very good credit scores. Builders were catering to the people out there buying homes, which was not a typical mix given what was going on in the country financially.

Aaron said millennials seem to be waiting longer, and many are going into their first home time buyer experience wanting a new one and skipping that stereotypical first-time buyer inventory. They want to skip straight to the new. Aaron asked if she is seeing this, although she did not have any data to back this up. However, from the data she does know most millennials do want to own a home. However, in terms of what they are actually buying most will probably not be buying new homes. Typical millennials will be buying for the first time, and they do not have equity yet or a previous home to help with the down payment. Rose and NAHB do know that millennials want to own a single-family detached home in the suburbs. However, they do not have the data to prove that they would prefer a new home over an existing one.

Aaron asked if seniors’ taste in what they would like to purchase is changing. Rose said what is interesting is that their preferences are almost identical to the average homebuyer. She analyzed the date specifically for another press conference she did, and at this one she only looked at the 55+ population. When you look at the most wanted home features for the average homebuyer and compare that to the boomer homebuyer, they are identical. The only exception was the 55+ group added a full bathroom on the main level to that top tier of most wanted features. When she looked at this over five generations, she discovered that the older the buyer, the more essential the full bath on the main level becomes. This gives them a little more flexibility if they are not able to get into a single-story.

Aaron was interested to see the homes with four bedrooms. Back in 2000, 36% of new homes being built had four bedrooms. It peaked around 2015 at 47%, and now it is at 45%. Aaron wondered what can be attributed to us building houses with more bedrooms. Rose said the trend really took off between 2010 and 2015. These were the years after the recession when money became tight and builders really had to shift their production to the people who were purchasing homes. These were typically trade-up buyers, or those buying their second, third, or fourth home and had equity in them. This segment of the market typically buys homes that are that size. It was not so much a shift in preference as much as a shift in who was buying homes during those years. This was what led it to be 47% by 2015.

Builders are now trying to downsize. Data from 2016-2018 shows builders are really trying to balance the size of the average house they are building in order to come in at lower price points. Their struggle is with the cost and problems with regulations in trying to bring this down and still keep the price at an affordable level.

Aaron looked at the list from her presentation of the most likely features that are typical in a 2019 new home. The rating shows one being not likely to 5 being very likely. Aaron wondered if this is the base model. Rose said yes, and every year they have a historical comparison going back a number of years. They ask builders at the end of every year how likely they are to include the following features in the typical home. This does not include the super high-end home, but the typical one. This could vary from builder to builder, so they leave it at the typical home you yourself would build. They found the three features most likely to appear in the typical home is a laundry room, efficient windows, and a walk-in closet in the master bedroom. The majority of builders rated these at a 4 or 5 on the scale of 1-5.

Some concepts have been around for a while and are not going anywhere. This includes the kitchen, family, and living room all in one open space. They want to help with energy savings, so we may see more programmable thermostats, energy star appliances, and energy star windows. Half of the top ten had some type of energy efficiency angle to it.

One interesting statistic Rose had in the report on what buyers really want is that buyers do not want to pay extra for sustainability. Rose said when she presents this finding to builders around the country, they always laugh because they know it’s true. In that same report, they asked homebuyers if they were concerned about the impact building the home will have on the environment. They found a very tiny percentage, 14%, said they are very concerned and wanted their home to be environmentally-friendly. They were even willing to pay more for it. Another 18% said they were not concerned about any relationship between building the house and the environment.

The larger share, 68%, was in the group that said they were concerned and wanted an environmentally-friendly home, but they did not want to pay more for it. This made Aaron laugh as he was surprised the number was this high. What is important to take away is in a very idealistic and utopian way, they are not willing to pay for the concept of helping the environment in an ideal and realistic way. However, when you rephrase the question and ask them about a home that will save you $1,000 a year on utility costs. When they ask it this way, they get completely different answers. Eventually, buyers are wanting to pay $1,000-$10,000 or more for the home that will save them that much money. It has been hard to create a concrete way that the appraisers can point to those annual savings and build it into an actual number. It is really a function of the market that involves buy/sell and if the buyer is willing to pay extra. You will hear so many saying they want something but do not want to pay for it. Maybe they do not want a line item in the appraisal.

Rose said when she speaks to builders around the country, she asks if they want to include the energy-saving features in the home. You don’t just say your home will help to save the environment. You have to put it in terms of dollars and cents. Say if you buy my home that has X, Y, and Z features, it will translate into $1,000 or however much in savings every year. That should turn hearts, but just saying you are saving the environment will not. For remodelers and flippers rehabbing out there, this list is very helpful to see what you are up against. The way the building industry goes, so goes us in some specific ways. Part of the conversation, especially when it comes to technology is how far you go.

Aaron said for him and his remodels, he feels it is a VHS vs Beta conversation. It makes him feel uncomfortable, especially with all the security concerns right now. Being at the consumer electronics show the year before was interesting because there was only one German company that led with the conversation around security first. Everyone else was a lot more about the innovation. Aaron said he was not going to be installing anything with cameras in any of his rentals. He thought maybe on the envelope of the property he would consider a security camera in specific markets. He was glad to see that some of those things did not make it into the builder list. It was more the function of low E-windows and lighting and infrastructure things that are not necessarily smart tech.

Now, if you just focus on technology, which is a separate part of the research, they found out when it comes to technology they want smart technology to help them feel safe at home. This is the number one reason why buyers are interested in technology according to their findings. It is not to have a smart refrigerator or oven that will turn on by itself or tell you whether you have milk or not. All those choices came down to the bottom of their preferences. The choices that ran highest were choices that dealt with safety. This includes security cameras and a wireless home security system and doorbell. Although they don’t rank in the top ten, they are the most important for homebuyers.

Aaron talked to the KB Homes team at the Builder’s Show, and he asked them if they were making a commitment to one smart technology over the other. They decided to lean toward Google. There is the hardware conversation, then there is the software conversation. There is the artificial intelligence, voice bot, and Alexa vs. Google Home Assistant. Amazon has really decided to split the hardware conversation and push it over into the ring brand. They are letting the Alexa voice be its own thing and are allowing a lot of other hardware manufacturers to role it out as part of their product. This is really smart.

Rose was really surprised to see how many appliances at the exhibit included Alexa as part of the hardware. You don’t need a separate tool outside of your counter to have Alexa. It could be part of your refrigerator or microwave. Aaron said sometimes he just wants a light switch to be a light switch. Why overcomplicate it? He can see the vision of the future with Bluetooth technology or the lighting in your home changing as you walk up to it. It will be interesting to see the different level of different graphics and the consumers who decide to adopt this. Aaron was one of the first to buy the Philip’s LED bulbs at the Apple Store. He used it once, and it stayed warm white ever since for the next four years.

Aaron was really glad he got to attend CES and then the Builder Show. CES was all about the consumer and tech, then afterwards he could see what the builders were actually doing with it. One company that had the most interest booth had LED lights in shower heads. They always outdo themselves every year. Aaron asked if there was anything on the list of new features that the homebuilder did not want to do. For example, one thing that baffled Aaron that he did not understand was necessary was duel toilets. Rose said every year they built what was known as the American Home for the International Builder’s Show. This is a show piece for every new technology and material and system that can go into new homes. This is open to the public every week, and she has seen it there every year for about the past ten years. It was here she has actually seen the dual toilets for several years. However, it is definitely not something most homebuyers want.

As builders, you have to understand what people want to buy. However, it is also critical to understand what they do not want because they are not going to pay for things they have made clear they do not want. On that list, the number one item was an elevator. Over 65% of buyers said they are not buying that. Most also do not want the dual toilets, wine cellars, or to live in a community with a daycare center. Among the 25 green features they included in the survey, the one that over 50% of buyers rejected was a roof covered with plants. Rose told builders to only include that as an option and not include it in the typical home.

Another thing not popular with homebuyers is laminating the kitchen. Two-story places are not popular either because they want to keep cool or warm. Cork flooring is another very specific thing people don’t like. Sometimes as trends begin to emerge, the NAHB tracks them since they do not know if they are going to become something important. The report talks about 77% of the people being surveyed wanting single-family detached. This is the vast majority of buyers, and 64% are in the suburbs. We cannot be ruling out this boomer generation wanting to be closer to city environments.

Aaron was surprised that rural came in at 24% as this seems rather high. Rose said it has been consistently about that number over the 20 or more years the survey was conducted. If you look at the country, there are over 300 metropolitan areas. However, in terms of square footage it is mostly rural. She had a great chart that broke down central city suburbs and rural. Of the 55+, 12% wanted to live in a rural environment while 85% wanted to live in the burbs. For the millennials, 26% wanted to live in a rural environment while only 51% wanted to live in the suburbs. It was not surprise 23% were attracted to central city living. Aaron thought the rural piece was interesting since he did not expect this.

Rose said another interesting fact that came out of this research was 23% of millennials wanted to buy their home in the downtown area. Now, that 23% is twice as much as any of the other generations. This is 11% for Gen-Xers, 8% for boomers, and 3% for seniors. When you look across history at the last 15 years, you see an increase in the share of millennials wanting to buy in downtown. Rose told builders at the show that they had to interpret the result very carefully since it is still a minority number. It is not the majority of millennials who want to live in the downtown area. The majority still want to live in the suburbs, and it is where they will look for the home. Unfortunately, we know downtown is not very affordable, and the type of home they want to buy there is even less expensive.

The report on the buyers is very extensive on demographics, and it is so valuable for rehabbers to see what features are most attractive. Aaron asked where people would go to purchase the report, which Rose said NAHB’s bookstore at www.builderbooks.com. Type in “What Home Buyers Really Want,” and it should pop right up.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

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