Going smaller and cheaper helps home builders survive
Last summer, Marie Davis was living in an 800-square-foot, one-bedroom apartment and not liking it. A single woman of 27, she wanted bigger and better.
“I thought, I’m handing money away in rent, and I’ll never see a return on it,” she said.
One day, Davis was passing by a new subdivision, Greystone Estates, in Shiloh. “I saw the price range on the sign, and that caught my attention,” she said. So she stopped in.
The staff at Fulford Homes, which builds in the subdivision, realized something about Marie Davis: She is a rare find for builders. She has a good, steady job, and wasn’t not trapped in a home she can’t sell. People like Davis are today’s prime customers, and there aren’t enough of them.
Two and a half years after the official end of the Great Recession, the home building industry is still stuck deep in its own depression.
Not only are builders selling fewer homes, but the homes they sell are smaller and lower priced. McMansions are becoming passe. A new frugality is at work, driven largely by today’s buyers.
People like Davis benefit from that.
“I realized that what I was paying in rent is pretty close to what I’d be paying in a mortgage,” said Davis, who works in contracting at Scott Air Force Base. She figured she’d be getting a lot more for the money - a three-bedroom, two-bath ranch spanning 1,660 square feet with a two-car garage. The price was $179,000.
She moved in last October, and her monthly mortgage payment is about $100 more than her rent.
Last year was awful for builders in St. Louis.
Single family home construction was down 21 percent from 2010 on the Missouri side of the metro area, measured by permits issued, according to the Home Builders Association of St. Louis.
Preliminary numbers, which doesn’t include the town of DeSoto, show 2,273 home building permits issued last year, less than half the 5,894 built in the top of the boom in 2006.
In the Metro East counties of St. Clair, Madison and Monroe, 796 homes were built through November 2011. That’s down 27 percent from the comparable period in 2010, and 67 percent below the 2006 boom year, according to figures from the Home Builders Association of Greater Southwest Illinois.
The housing depression harrowed the building business. Taylor-Morley Homes went out of business. Whittaker Homes went through bankruptcy. T.R. Hughes sold off or allowed banks to repossess hundreds of lots.
“The common theme is that they went long on land at the peak of the market,” said builder Ken Stricker of Consort Homes in Chesterfield. They borrowed to buy big tracts, and were stuck with it when buyers disappeared.
But Consort and others kept building through the downturn, though at a vastly reduced rate. They are leaner firms today living on narrowed profit margins.
LOOKING FOR BUYERS
Back in the good old days, around about 2006, Gene Stumpf would build 25 to 30 homes a year. They were four and five bedroom mansions, covering up to 4,000 square feet and selling for $500,000 or so.
That market has virtually disappeared, unfortunately, says Stumpf, who founded Stumpf Homes in 1985.
Unemployment is part of the reason, but that’s less of an issue for affluent people who buy big houses.
The real problem is the sick market for existing homes: people who might want a bigger house can’t sell the one they now own for an acceptable price.
So, builders find themselves building more for people who don’t have homes to sell.
“The market that did best for us is the first-time home buyer,” said Mark Fulford, of Fulford homes in O’Fallon, Ill.
The best sellers are ranch houses, with three bedrooms covering about 1,700 square feet and selling in the $180,000 to $190,000 range, he said.
In some ways, it’s a throwback to the modest developments that sprang up locally in the 1960s and 1970s. But the newer models have extras - double vanities in the bathroom, walk-in closets, and full basements.
Those amenities, plus the newness, is the edge that lures buyers away from existing homes.
SMALL IS BETTER
Changes in taste, in family size and personal finance are also driving the trend toward smaller homes. Americans no longer see a house as an investment, so there’s less incentive to buy big.
More customers are older couples. “They don’t need 3,400 square feet. Their kids have moved on,” says Stricker.
Kim Hibbs is a custom home builder. His customers are affluent people who want a home designed for them.
Even Hibbs’ buyers are thinking smaller. There’s less call for large family rooms and formal dining rooms, with customers asking for more open floor plans.
They make up for the smaller size with upgrades, creating “jewel box” homes with heated floors in bathrooms, granite in bedrooms.
In the boom times, developers would start a subdivision, build some model houses and wait for the orders to role in.
“Often, somebody would come in over the weekend and I’d have a contract on my desk Monday morning,” said Stumpf.
Usually, builders wouldn’t start construction until an order was in hand. Buyers would wait to sell their existing homes until the hammers were banging, confident of a rapid sale.
That’s changed. These days, move-up buyers don’t sign deals until they have a contract for the old one in hand, and they can’t wait for construction.
So, builders are putting up more “spec” houses - houses built on speculation that a buyer will show up.
“Those are the ones that sell,” says Stumpf.
A spec home strategy requires a friendly bank, and builders say their bankers are getting a bit friendlier.
The custom business has another problem: appraisals. Appraisers drew criticism for overestimating values during the housing boom, and they’ve become conservative in response.
They sometimes have trouble putting a value on a unique custom house, says Hibbs.
Without a high enough appraisal, borrowers can’t get loans, and builders lose the work.