Affordability is the biggest red flag for builders and capital providers wanting to do business in Southern California. How can home builders provide more attainably priced homes and make a profit? Poor affordability has curbed demand and price growth significantly despite a healthy economy and below average housing supply. Is affordability as bad as the previous peak in the mid-2000s? The median home price is now above previous peak levels in all Southern California markets; however, prices alone are not the best measure of affordability. Before we get to strategies, consider the following:
- Elevated housing-cost-to-income ratio. Two out of the four major California markets have a housing-cost-to-income ratio of more than 50%, and all markets have ratios above historical averages. However, current ratios are well below peak levels seen in the mid-2000s, and Riverside-San Bernardino and San Diego have ratios only slightly above their historical averages.
- Burns Affordability Index™ is at 7 or higher in all major markets. Our affordability index measures the market’s affordability against its own history, with 0 being the most affordable time and 10 the least affordable time. An index value over 8 typically indicates an imminent price correction. All markets reached a 10 in the mid-2000s, indicating the worst affordability in the market’s history.
Although affordability is a major concern, affordability conditions are not yet quite as bad as the previous peak and are unlikely to get much worse in the near- to mid-term, as inventory levels are rising as a result of housing demand falling, leading to pricing softness. Here are some strategies that could mitigate affordability risks:
- Build smaller homes at more affordable price points, below FHA loan limits if possible.
- This is easier said than done when land sellers are unwilling to reduce land prices. Consider negotiating a profit-sharing agreement with land sellers if prices go up.
- Build product at higher densities to help mitigate high land costs.
- It will be important to work with housing advocates (BIA, etc.) to continue to educate municipalities about the need for high-density housing in locations near job centers.
- Consider building value-oriented homes similar to D.R. Horton’s Express product.
- Buyers are often willing to accept a relatively low spec level in order to afford a new home.
- Look to tertiary submarkets where traditional single-family homes can be built at affordable price points.
- Focus on Riverside-San Bernardino, where affordability is closer to historical norms and job growth is still strong.
- Consider buying land on a rolling-option basis to mitigate market risk, as tertiary markets typically get hit the hardest during a market downturn.
- Consider built-to-rent single-family detached communities in tertiary submarkets. Single-family rental rates fell less than 1% in Riverside-San Bernardino during the last market downturn.
- Target move-down buyers who have a lot of equity in their home and will likely pay all cash.
- Per our Consumer Insights Survey, nearly half of new home buyers in Southern California consist of mature single and couples.
- The 65+ population is expected to grow 35% by 2025 nationally.
- Target this buyer by building condo flats in prime coastal locations and more conventional single-story homes in inland areas.
- We have several tools to help our clients navigate the market and make informed investment decisions:
- Our Consulting team has seen what works and does not work in every market.
- Our Consumer Insights Survey, with over 22,000 nationwide responses, provides unique insight into the price and feature trade-offs that buyers will make.
- DesignLens is an annual membership that helps our clients stay on top of innovative new home product trends and adds value to the bottom line with a library that includes new density solutions, community design, floor plan ideas, and connection to the top design leaders in the country. Each product featured includes a photographic tour of the models or community and insightful analysis that weaves in insight from the builder as well as our consumer research.
- Our demographics book Big Shifts Ahead: Demographic Clarity for Businesses highlights our household formation and homeownership forecasts by age group.