Why $200K to $300K is the New Normal for Home Builders, Even in the West | John Burns Real Estate Consulting

Why $200K to $300K is the New Normal for Home Builders, Even in the West


Since new home prices peaked in 2007, new single-family sales of over $500K have been more than cut in half, dropping from 13% to just 6% of all new home transactions. During this time, sales of under $200K have risen from 33% to 42% of transactions. In fact, sales of homes priced under $300K now account for roughly 75% of all new single-family transactions. Of course, price declines and a shift to smaller homes played a role in this change, but consumer attitudes have shifted too. Our surveys and our consulting work show that today’s buyer is frequently very focused on affordability, and this broad macro theme will continue to play itself out in the new home space during 2012.

Why200kto300kistheNewNormal

With 2011 marking the worst year on record for new home sales, it is imperative that builders enter 2012 equipped with what has now become the new normal in regional pricing. As shown below, pricing by region can vary significantly across the country, with lower price points dominating in the South and Midwest. While there has been some variation in regional price distribution for all regions over the last five years, the West has experienced a radical shift.

Why200kto300kistheNewNormal2

Why200kto300kistheNewNormal3

Whereas new single-family sales under $200K accounted for just 12% of transactions in the West five years ago, that percentage has now doubled to 24%. In addition, sales under $300K account for 65% of all new single-family transactions in the West compared to just 42% in 2007. At the same time, sales of over $500K in the West have been cut from 23% to just 8% of all transactions. While the West stands out in terms of its structural pricing shift over the last five years, all regions except for the Northeast have in fact experienced a decline in new single-family home sales above $300K; and all regions have seen a pullback in sales above $500K. Value conscious buyers are the norm in today’s marketplace. In order for a genuine Spring-selling season to materialize, builders must pay close attention to this structural pricing shift that continues to unfold.

While buyers have migrated to smaller, more affordable homes, we don’t think this is bad news for the luxury builders. In fact, there is far less competition for new luxury homes than there used to be. Also, luxury home buyers are current homeowners who frequently have little urgency to buy and, contrary to media headlines, the majority of them have plenty of equity in their current home. As always, understanding the unmet buyer demand in a particular neighborhood is the key to success. While affordable entry-level homes have clearly taken market share over the last few years, we expect luxury homes to increase in numbers as the economy improves.

 


Rick Palacios Jr If you have any questions, please contact Rick Palacios at (949) 870-1244 or by email.

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