If You Build It, Will They Come?

by 02 Mar 2012

Pent-up ‘emotional’ demand by some categories of purchasers

If you build it, they will come

Back in the middle of this decade, new construction sales surged as we experienced one of the hottest housing markets of the past century. It seemed that there was a buyer for any and every home built. The last three years has shown us the exact opposite. Calculated Risk reports new construction sales in 2011, 2010 and 2009 were the lowest since 1963.

The question is when the demand for new construction will return. Some argue the current shadow inventory of distressed properties about to come to market throughout 2012 will push back any need for new home construction. Others look at current vacancy rates as reported by the Census Department's Housing Vacancies and Homeownership Survey and say that there is no need for large numbers of new home starts. From a pure statistical standpoint, it is difficult to logically debate these opinions. However, real estate is not always logical.

I believe there is a pent-up ‘emotional’ demand by some categories of purchasers for new construction. I am not saying that we are about to return to a time where ‘whatever is built is bought’. I am saying that there is a need for certain types of homes that will satisfy specific segments of the buying public. Let’s look at three examples:

The Generation Y Buyer

Many buyers are delaying a decision to purchase a home because of the volatility of the real estate market. There is no larger category exhibiting this behavior than those of Generation Y. To define this segment of the population, we go to Wikipedia:

Generation Y, also known as the Millennial Generation (or Millennials), Generation Next, Net Generation, or Echo Boomers, describes the demographic cohort following Generation X. There are no precise dates for when the Millennial generation starts and ends, and commentators have used birth dates ranging somewhere from the mid-1970s to the early 2000s.

This group realizes now is the time to buy and that they want a home of their own. A recent survey completed by Trulia shows people between the ages of 18-34 still believe in the concept of home ownership with 65% of those surveyed saying “their American Dream includes owning a home”.

(Note: I acknowledge that a percentage of this generation is buried under student loan debt. However, I’m not sure how many over the age of thirty are in this category.)

In a special report late last year by the Research Institute for Housing America titled, The Great Recession and Attitudes Toward Home-Buying, it was revealed that 59.8% of all renters between the ages of 30 and 39 believe that now is a good time to buy a home. If we consider what these buyers are truly looking for in a first home (ex. green building, FHA financing available), perhaps we can help them gain the homeownership piece of their American Dream.

The Move-Up Buyer

The Research Institute report also showed that 80.1% of all current homeowners believe that now is a good time to buy a home. These potential move-up purchasers should be targeted as potential buyers. Many settled for a home that did not fulfill all their family’s needs back five or six years ago. They were priced out of the type of home they truly desired. These buyers wanted all the best of amenities, the larger closets and the modern kitchen. They may not have gotten any of this in their last purchase.

With interest rates where they are now, they may be able to acquire the home of their dreams for approximately the same monthly mortgage payment they currently have. Do the math and make the results available to anyone who purchased 5 or 6 years ago.

(Note: I realize that a percentage of these homes will be in a negative equity situation. However, we must not overestimate this number. According to CoreLogi,c 22.1% of all homes with a mortgage are underwater. Remember, 30% of all homes do not even have a loan on them. That means that less than 16% of the homes in the country are actually in this situation.)

The Successful Business People in the Region

We are constantly being told that people cannot afford to buy a home today because of the current economic situation. There is no doubt that there are people in every state in the country that are experiencing financial difficulties. We realize that people who either have lost or are about to lose their job/business are not going to purchase a new home.

But what about the business people and business owners in your region that are doing very well right now? Two restaurants down the block may have just closed their doors but what about the one around the corner that is still open. I will guess their business increased rather dramatically. What about the law firm that specializes in bankruptcies and foreclosures? They are probably having their best years in a decade.

Could these business people and others like them feel they deserve all the rewards that come with success? Will they want to make a statement with a new, beautiful residence? My guess is yes. They will be ready to move into a brand new home in the best area/community in town. We must identify these potential purchasers and alert them to the tremendous opportunity that exists in residential real estate today.

Some builders will curse the winds of the current housing market. Others will redirect the sails of the ship they captain and aggressively target market the buyers in their area that just need a little nudge to buy the home of their dreams.

 Steve Harney of KCMSteve Harney has been chosen as one of the Top 100 Most Influential Leaders in Real Estate by Inman News and has appeared on Fox Business News. He is the founder and chief content provider for www.KCMblog.com.

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