For home builders, something must give

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Lew Sichelman

Some renters would give up a bedroom in their current unit and rent a smaller unit – if it meant they could save up for a down payment on their first home faster.

Settling for a three-bedroom home instead of four is a choice many buyers have to make, and that will continue in the months to come, especially if housing costs and mortgage rates remain stubbornly high.

In the new home sector, many builders are making this choice for them: not only in terms of the number of bedrooms, but also the number of bathrooms, the size of the garage or the lot, and everything that allows builders cut costs to make their plans cheaper to build.

Going forward, said Anja Seng, senior research analyst at John Burns Real Estate Consulting, builders will face the same challenges as their clients. Some will charge ahead as expected; some will put projects on hold and wait for a better deal. But Seng said “the most creative” among them will seize the day by making bold design choices.

Not just builders – tenants too

Some builders, like the three highlighted in a recent Burns newsletter, have already done this. One dropped primary baths, another eliminated private yards, and the third took garages off the table. If their success is any measure, other automakers may soon follow.

And if other builders need to be more convincing, they should heed a recent survey by RentCafe, a rental search engine, which found that one in three renters would gladly give up a room if it helped to save a little faster for a house. (Full disclosure: RentCafe is owned by Yardi, which also owns Multi-Housing News, a publication for which I write a monthly column.)

RentCafe asked 3,659 visitors to its website if they would be willing to downsize to better save for a down payment, and 36% said they would. The study found that renters who are willing to compromise on space could save an average of $3,735 per year.

With that kind of savings, the typical renter would have enough for a 10% down payment on a first home in their particular markets in six years and seven months. It’s still a long time, of course, but that’s without investing any other funds – and that’s just the national average. Building a deposit can happen much faster in some places.

In Dayton, Ohio, for example, a tenant would save enough by renting a smaller unit — $3,168 a year — to set aside 10% on a $57,652 starter home in just 21 months. And a tenant in Philadelphia would set aside enough — $7,416 a year — to put together a 10% down payment on a $142,288 home in 22 months.

That tenants are willing to make such a sacrifice to achieve their dreams should embolden builders to do the same. The question every builder must answer is: what are first-time buyers willing to give up to move from tenants to owners?

Compromise to hook buyers

A potential freebie is a large, lush and expensive master bathroom with shower and tub, a cubicle toilet, and dual sinks. That’s what a builder did at the Eagle Ridge development south of Seattle, where two of five proposed floor plans lack master baths. Instead, the primary and secondary bedrooms shared a bathroom, according to the Burns report.

The target market: tenants who were already used to sharing a single bath. As a result, shared bathroom plans sell as well as the builder’s more conventional layouts.

In the Kissing Tree community south of Austin, Texas, private yards have been swapped for a prime location in which clustered homes overlook a golf course. The homes have sold so well, the consultancy reports, that the builder is opening two new phases.

And at Chatham Park Cottages in suburban Raleigh, North Carolina, 23 of 30 homes have assigned parking spaces instead of garages. Although the automaker expected some pushback, Seng reports, the idea has been well received and the company plans to replicate the idea elsewhere. And why not? How many apartments offer tenants assigned spaces, let alone garages?

Extras don’t come cheap

It’s hard to say whether other first-time buyers would give up a luxurious bath, a lawn or a garage. But those aren’t the top priorities of recent and aspiring homebuyers who are surveyed each year by the National Association of Home Builders. Almost invariably, the most undesirable features are of little importance, as most builders targeting first-time buyers don’t offer them – elevators, for example, or cork flooring.

More importantly, the 10 most undesirable features are selected from a list of 200. When asked specifically how many bedrooms they would like, most respondents said three would do just fine.

Bedrooms are not that expensive to build, save the extra cost of putting a roof on them. But full bathrooms are expensive: around $25,000 each. And with that in mind, most survey respondents said two baths were enough.

Garages aren’t cheap either: around $27,000 to park one car and $45,000 for two. Knowing the cost, most buyers still said they would opt for a two-car garage, although 18% said one car would be enough.

Finally, there is also a noticeable shift towards fully or partially open floor plans that feature kitchens that open up to the living room, dining room, or family room. This means fewer walls, which translates to a bit less cost, at least for the builder.

All of this tells me that today’s buyers are more flexible than ever. They realize that something is needed to bring prices down to a level they can afford, and they are willing to compromise.

Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications. Readers can contact him at [email protected]

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