Homebuilder Report: Demand is high for new homes, but inflation is pricing out buyers – May 2023
By Jessica Chevalier
Within the last six months, the builder market has changed dramatically. Throughout most of 2022, “it was build it and sell it,” says Jay Smith, vice president of Shaw’s builder, multifamily and specialty markets businesses. But inflation negatively impacted a factor that was already pressured by supply chain costs-affordability-which priced some buyers out of the market and encouraged others to stay put, locked into their current home with the 2.5% and 3% interest rates that were the norm two years ago. In spite of that, builders continue to build, says Smith, adding, “There may be some indication that the new normal of sticker shock due to interest rates is wearing off a bit, so we may see a return to health in spring and summer.”
ENTRY-LEVEL BUYERS SQUEEZED
As one would expect, entry-level home sales are under the greatest pressure in the current market, as buyers of this tier have the least financial flexibility. “Those renting today aren’t willing to commit dollars for a home that might have run $350,000 a few years ago and is now marked at $475,000,” says Dan Butterfield, vice president of Dal-Tile residential sales. “That exceeds the threshold of acceptance on cost.”
Butterfield emphasizes that the stall in entry-level home buying is not due to a lack of interest but to the prohibitive cost to do so. Demand did not dry up; the cost of buying simply became unattainable. The median cost for a new U.S. home was $397,100 in 2021 and $456,500 in 2022, according to the U.S. Census Bureau. That is expected to recede slightly this year; in February 2023, the median cost declined to $438,200.
For those entry-level buyers who have outgrown apartments but aren’t ready to commit to the high cost of ownership, build-to-rent properties offer a useful alternative, providing the privacy and outdoor features of a single-family property without the stress of unexpected costs that comes with homeownership.
Some builders construct entire communities of build-to-rent homes, which, as multifamily builders do, they either operate themselves or sell to private equity.
Currently, the biggest volume of single-family homebuilding is taking place in the “smile” states, including California, Arizona, Texas, the Carolinas and Florida, says Butterfield.
Christine Slaughter, national director of design and marketing for Shaw’s builder and multifamily business, points out that in the builder business it’s important to differentiate between what’s trending and what’s selling. “The builder channel tends to be a bit behind in trends-even more than retail-and, traditionally, it tends to be conservative due to the consumer’s awareness of resale. Even though a buyer is entering a 30-year mortgage, their sentiment is that they don’t want to over-personalize a home due to the potential for resale.”
She notes, however, that the pandemic challenged that sentiment. “Over the last three years, as we are spending more time in our homes, we have realized that we do want personalized spaces, so it’s a fine line,” she says.
One of the ways that builders help consumers feel more comfortable is through curation-assembling packages of finishes that have broad appeal, which assuages some of the buyer’s anxiety in making choices. “This removes the guesswork but is not super cookie cutter,” says Slaughter. “With the amount of design information at our fingertips today with Pinterest, Instagram and influencers, buyers are savvier than they have ever been, but they suffer from information overload. Builders take that information and compress it down to be more manageable, to make stylized choices but not wacky ones. This gives buyers confidence.”
Value is another key component in providing finishes for homebuilding. “Buyers want products that will perform, look good and offer value,” Slaughter continues, “and that’s where we see a rise in resilient and LVP because of its high style with performance qualities and low maintenance.” In terms of vinyl, the company reports that LVT continues to take share from other categories in the builder channel, and, for Shaw, that is Floorté. However, the company’s Coretec Premier, used within higher-end homes, is its highest growth category for the builder market.
“Hard surface is key today,” says Slaughter. “A lot of builders say buyers want all hard surface, but carpet is the best acoustic insulator available.” In addition, Slaughter notes that the design options of carpet today offer more opportunities for style and personalization than ever before. Slaughter reports that, with less carpet used throughout the home, buyers will often opt for better-quality goods for the carpet they do buy.
In addition, she notes a return to hardwood in some pockets of the country-driven by consumer demand, adding, “With regard to warmth and texture, nothing is as good as the real thing.” She believes that the current trend toward biophilic design has had an impact here.
The company also reports that tile and stone are growing nicely, and carpet remains the material of choice for bedrooms, with its Endurance and Eclipse collections the most popular.
Butterfield reports that tile is in demand for both floors and walls in homebuilding. “When a buyer is given the opportunity to purchase upgrades, any time a designer is involved, I’ve noticed that the designer would press natural stone, ceramic and porcelain, and hardwood, as well as a considerable amount of good quality broadloom carpet,” he says. “Then, due to labor concerns and shortages and the fact that builders began developing package house brands, we didn’t see as many of those materials.” However, products like the company’s RevoTile “widen the band of labor who can install the tile” and Butterfield points to additional innovations, such as level spacers, that enable builders to install ceramic and porcelain with greater ease.
Amid the pandemic, when builders could virtually sell anything they could hang a door on but supply chains were substantially hobbled, some builders didn’t have the luxury of choosing the perfect floor but, instead, took whatever was available at the time. Butterfield reports that, amid these times, Daltile totally removed imported products from its builder studio, which limited its mosaic offerings but, more importantly, eliminated frustrations around material availability. “U.S.-made became an important value proposition,” says Butterfield. “Today, regardless of the relaxation of costs on global freight and other issues, we would hope that those builders who saw the advantages of U.S.-made would continue selecting those products.”
Keep in mind that reselection processes aren’t only a frustration for the builder, but, in some cases, for the buyer, as well, who must come in and select substitutes for her first-choice options that are out of stock.
As for the material choices with build-to-rent homes, Butterfield reports that builders who plan to operate their own rentals are seeking “durable goods,” taking product lifecycle into consideration as they will be the long-term caretakers of, and investors in, the property.
With price tags high, homebuilders are leveraging varied techniques to woo the potential homebuyer to their properties.
One incentive some are utilizing involves putting buyers back in the driver’s seat with regard to finishes. “For the last few years, builders would build a nice home, but, as far as finishes went, they had the final say about what went in, and they sold those homes anyway,” reports Butterfield. “Today, we see control going back to the consumer: deciding the square footage they desire, the finishes they prefer. We will see the consumer go back into the design center to view their options and make decisions around interior and exterior options, right down to the paint colors.”
Another tactic is to build a house with a lower asking price, which can be achieved multiple ways, including by building on less expensive land-often farther from the metropolitan center-or constructing homes with less square footage. In addition, some builders are looking to technology to bring down the ticket cost, for instance, “using digital printing machines to create modular parts,” says Smith, rather than building every element from scratch onsite.
While suppliers may feel price pressure as builders look to trim costs, selling homes ultimately benefits all parties involved. “There has been a strong focus on the topic of affordability, and that can manifest for us and our customers as significant pressure on the price side of the business, but, to builders’ credit, they are spending a lot of promotion on interest rate buy-downs and concessions,” Smith says.
Butterfield notes that some builders today are buying down interest rates for the homebuyer’s first two to three years of homeownership.
Interviewees report that builders have a very specific view of the demographic for whom they are building particular homes and communities.
“Builders will call out, ‘These are first-time buyers or first-upgrade buyers or retiring seniors,’” explains Butterfield. “They understand all the criteria around what is needed with the size of the home and its spaces.” This includes square footage and allotment, finishes, and community amenities.
In fact, Butterfield notes that he recently saw a builder modify its brochures with varied terminology, depending on what buyer they were hoping to attract. For a senior buyer, a den may be called a “living room”; for a younger buyer, it may be called a “retreat.”
Overall, however, there are several overriding trends in the builder market today:
• Buyer lifestyle is a significant consideration.
• Pets play an ever more important role in the home and are taken into consideration in building.
• Flexible spaces and outdoor spaces remain highly desirable.
• Some builders are constructing multigenerational housing, adding in-law suites-with a living room, bed and bath-as part of their plans.
• Buyers want homes and finishes that will last, not cheap placeholders.
• In addition, they want a home constructed of healthy materials.
• There is a demand for one-story homes, but these are hard to come by in new construction because that format requires more land.
• Urban infill-three-story residences with 2” lot lines and rooftop decks-are popular with buyers who want to be closer to the urban center.
Interface believes that within government-owned public space, it is seeing a general prioritization of sustainability. This inent segment grow and expects it to continue to grow into 2023.
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