By Market Analyst Oren Jacobson - New Home Star //
Apartment rates are at all-time highs in many markets. Homeownership rates remain well below pre-recession highs, and family formation remains delayed for many millennials nationwide. This means vacancies are lower, demand is higher, and prices continue to follow close behind demand. Such patterns present an opportunity for builders, though many builders aren’t in a position to take advantage of it. If you’re among those builders, it’s time to ask if your strategy is right for the time being.
Many of you have probably heard of the economic idea coined as ‘trickle down’ economics. The basic notion is that cutting taxes at the top allows the top to invest more, and the benefits of the growth from that investment lead to a better situation for everyone else. Disregard whether or not you believe in the validity of this idea for the moment. I only introduce it to frame the next point. Real estate is definitely not a trickle down sector of the economy. Rather, it’s a ‘trickle up’ market which is why this apartment rate issue is so relevant and of high importance right now. In order for the real estate market to do well, growth and strength have to come from the entry level points and move, or trickle, upward toward higher price ranges. Here’s the basic framework of how this happens:
First, a renter decides to purchase. In most cases, that renter is transitioning into their first purchase. Most often, that purchase is an entry-level property of some sort. The purchase of an entry-level home allows the seller (current owner) to move (trickle) up to a larger, more expensive home (price range). Now that this seller (owner) has a contract on their existing home, they go out and search for a replacement home. This next home is often larger and more expensive. This process repeats itself once more as the seller becomes a buyer of someone else’s home, or a new home, thus enabling another to transition or create other types of economic growth.
Right now, elevated rental rates create opportunities for new home builders as the relative affordability of homeownership compares in many markets when considering the true cost of renting (lost rents plus the lost tax break) against the true cost of owning. However, the argument that owning is more affordable than renting is irrelevant if you don’t have any product affordable enough for that first-time buyer who is most likely trying to break the rental cycle.
As a builder, you must evaluate the affordability of your entry-level product. Is it priced at a point that is achievable for those who are exiting their rental phase? Is it in the right area for such buyers? After assessing such details, you can conclude whether or not you can take advantage of the current state of this aspect of the market and the opportunities that are available for you.
This particular opportunity may be one that will exist for several years. Even if the millennial buyer is taking longer to make that purchase, eventually life will force their hand. If you aren’t already looking for land and working towards developing product to meet their needs, you ought to consider it. Gauge this option and measure if it will fit your organizational strategy and internal competencies. Even if you’re not in the right position now to take on this advantage, it doesn't mean you shouldn’t make some moves in that direction.
