Note to Homebuilders: Small Homes Sell!
Note to homebuilders: Small homes sell! Why? Because they are affordable.
Now that we don’t have a housing bubble that will inflate prices, home prices will need to return to something that approaches income parity. During the bubble years, when many homeowners bought more home than their income justified, the income-to-home-price matchup was something that disappeared. Instead homeowners relied on continuous refinancing, made possible by constantly increasing home values, to keep payments at a level they could manage.
Since smaller homes were not as profitable as large homes, homebuilders were eager to oblige the homebuyers by building ever-larger homes. This was particularly true in Orange County. The post-boom result is that Orange County is short on small, and therefore more affordable, homes.
As we know now, home prices are no longer increasing; they are decreasing. The home building business model of the past can not be sustained. As economist Chris Thornberg, a principal at Beacon Economics, has said, the housing market will not recover until home prices match incomes. (For a look at what that means in Orange County and how much more O.C. home prices will need to drop, see one of Jon Lansner’s posts.)
An Associated Press article backs up this smaller-home theory.
“KB Homes slashed its first-quarter losses by 75% as first-time homebuyers flocked to the builders’ smaller and more affordable homes…”
The article went on to say:
“First-time buyers accounted for 70% of its first quarter sales, up from 53% in the first quarter of 2008, and they represent ‘the most attractive segment of the market, as they do not have to sell a home before purchasing,’ said Jeff Mezger, chief executive.”
Other homebuilders might benefit by following this example from KB Homes. Potential homebuyers might also benefit from a housing market that has homes that they can actually afford. And Orange County businesses might benefit if the available housing stock can accommodate workers at all levels of the job ladder. This is something that Orange County businesses have been championing for some years.