Homebuilders Eliminate Frills as First-Time Buyers Drive Sales

By Kathleen M. Howley and Daniel Taub
Bloomberg
August 6, 2009

When Lucas Miller bought his first property in June, he decided it was no time to splurge. He opted for laminate rather than granite kitchen countertops in his $127,000 two-bedroom townhouse in Fishers, Indiana.

“Spending another $20,000 on upgrades just didn’t make sense to me,” said Miller, 30, a chef at Ball State University in Muncie, who bought from Pulte Homes Inc., the second-largest U.S. homebuilder.

Frugal first-time buyers are driving the new-home market with purchases of low-priced houses with no frills. Sales of new homes costing less than $200,000 jumped to 47 percent of all transactions in June, up from 39 percent in May, U.S. Commerce Department data show. Homes under $200,000 accounted for almost half of the sales in the first six months of this year, the biggest share for a first half in five years.

Housing starts rose to a seven-month high in June and sales of new houses gained in each of the last four months, including the 11 percent increase in June that was the biggest in eight years. Spending on residential construction fell to a 13-year low of $252.1 billion in May, the Commerce Department said this week.

The average size of new homes is down to 2,065 square feet, the smallest since 2000, and the median price this year has yet to rise above 2004 levels, according to the Census Bureau. June’s median of $206,200 was 12 percent below a year earlier.

New Frugality

Builders, who lured customers in the housing boom with everything from granite countertops to Sub-Zero refrigerators, are modifying floor plans and options in response to homebuyers’ emphasis on frugality, said Brian Bethune, an economist at IHS Global Insight in Lexington, Massachusetts.

“The high end isn’t moving, so builders have got to dumb- down their designs and put in Formica kitchens and the bare- bones carpeting,” Bethune said in an interview. “New-home buyers are being conservative -- they’re not willing to pay for the extras because they’re worried about the economy.”

Demand is being driven by the $8,000 first-time homebuyer credit, said David Crow, chief economist of the National Association of Home Builders in Washington.

Properties in KB Home’s Bonita Canyon development in Fontana, California, were scaled down for first-time buyers. About 90 houses using KB’s new Open Series design are planned and half are sold, said Steve Ruffner, president of the Los Angeles-based company’s Southern California division. The houses are listed at $235,000 to $278,000.

Smaller Homes

The homes are 1,400 to 2,200 square feet, 30 percent smaller than previous designs, to reduce building costs, Ruffner said. Bathrooms are built back-to-back so only one plumbing tree is needed and there are fewer internal walls. It takes less than 10 weeks to complete an Open Series home, compared with almost 20 weeks for a house with older specifications, Ruffner said.

“It is very open inside,” Ruffner said. “You can decide how big your living room should be or how big your dining room should be.”

KB Home officials wouldn’t discuss construction costs. At a company development in Texas, the average Open Series home is priced $60,000 lower than KB Home’s previous models, and the cost to build them is $80,000 less, Chief Executive Officer Jeffrey Mezger said on a conference call in June.

Flexible Floor Plan

First-time buyers Leona Fisher and husband Will Sankhla bought a four-bedroom house in Bonita Canyon, lured by the flexible interior design, said Fisher, 27, a doctoral candidate in English. She turned a second-story loft space into an office for her and an editing bay for Sankhla, 32, a documentary filmmaker.

This year’s best performers in the Standard and Poor's Supercomposite Homebuilders Index are companies that focus on first-time buyers. Irvine, California-based Standard Pacific Corp. has more than doubled and Meritage Homes Corp., based in Scottsdale, Arizona, is up 84 percent. KB Home shares are up more than 32 percent this year through yesterday.

Standard Pacific and Meritage sell houses that average $279,000 to $302,000. Toll Brothers Inc., the largest U.S. builder of luxury homes, sells for an average of $600,000 and has the worst performance in the index this year, with a loss of 3 percent.

Orders for Meritage homes rose to 1,147 in the second quarter from 987 in the first three months of the year. M.D.C. Holdings Inc., the Denver-based builder of starter homes, said orders increased on a quarterly basis for the first time in four years.

‘Scared Buyers’

The design changes are helping some builders improve gross profit. Standard Pacific said second-quarter gross margin excluding certain expenses rose to 18.5 percent from 12.9 percent a year-earlier in part due to lower construction costs.

“Three years ago, everyone wanted the big house with the media room and the three-car garage,” said Sean Donahue, a broker with Re/Max Traditions in Woodstock, Illinois. “Today, a lot of people are scared about their jobs, so they’re opting for smaller floor plans and basic designs.”

Miller, the Ball State chef, said he was so determined to buy an affordable home he considered purchasing a foreclosed property. He decided his townhouse was a better deal.

“Everything is brand new, and the laminate countertops work just fine,” he said.

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