Market Faces Major Change, But Suburbs, Small Cities May Hold Onto Their Advantage

       The worst of the housing downturn may be over, according to speakers at PCBC earlier this month in San Francisco, but builders are apt to find themselves on an unfamiliar path to recovery and can expect to see fundamental changes in what motivates prospective home buyers.

       While low home prices and mortgage rates have been key to engaging prospective customers at the outset of today’s housing recovery, and it is going to take some time for consumers to fully regain the wealth and confidence they lost in the harshest economic downturn since the Great Depression, simply building smaller and leaner is unlikely to be enough to foster a thriving business.

       At an uncertain crossroads for the economy, the future does not look at all assured for builders who are unable to think through some of the implications of today’s unsettling times and apply them to local markets they know well, those attending the annual West Coast conference were told.

       However, with change comes opportunity, and Joel Kotkin, author and a distinguished fellow in Urban Futures at Chapman University in Orange, Calif., assured builders that there’s considerably “more population growth to come,” with the U.S. population exceeding 400 million by 2050, up from a bit over 300 million today, and the labor force growing 42% between 2000 and the midpoint of this century.

        “There’s going to be a market,” he said, and the suburbs and smaller-scale urban centers are likely to outperform big cities.

Suburban Living Preferred

       “Contrary to much of the current media hype, most Americans continue to prefer suburban living,” Kotkin writes in his article, “The War Against Suburbia,” appearing in the Jan. 21 issue of The American, the Journal of the American Enterprise Institute.

       “Indeed for four decades, according to numerous surveys, the portion of the population that prefers to live in a big city has consistently been in the 10% to 20% range, while roughly 50% or more opt for suburbs or exurbs,” he writes. “The reasons? The simple desire for privacy, quiet, safety, good schools and closer-knit communities.”

       The single-family home, even a shrinking one, is also likely to be most favored by U.S. households, according to Kotkin, who says that 83% of potential buyers surveyed by NAHB and the National Association of Realtors® prefer this kind of dwelling over a townhouse or apartment.

       During the period of 2000 to 2008, Kotkin told a PCBC audience, 75% of the growth occurred in the suburbs, such as St. Tammany Parish, not the cities.

        While many in 2007 started sounding the death knell of the age for suburban growth, citing the high concentration of the housing bust in the outer suburbs, like St. Tammany Parish and Tangipahoa Parish, where a disproportionate number of buyers had relied on subprime and other conventional mortgages to afford their new homes, Kotkin said those analysts have tended to overlook urban condominium markets, where in many cases the devastation was even worse.

       In downtown Los Angeles and other troubled condo markets, he said, builders made the mistake of delivering expensive apartments for “the mythical empty nester,” when they should have been focusing on the 20-somethings who were really driving demand for a return to city living but didn’t have the income to be able to buy these properties.

        As a group, however, those same 20-somethings, members of the “millennials” generation born to baby boomers after 1983, don’t favor the urban core. The closer-in suburbs is where 43% of them want to live, Kotkin said, which is logical because that is where they grew up.

        The suburbs will also be a good place to live judging from their 6% employment growth from 2001 to 2006, compared to 0.9% for the same period in central cities, which “are difficult places in which to do business,” he said.

        Immigrants, too, are seeking the good life in the suburbs, where 52% of them live now. “They are moving increasingly to suburban areas,” Kotkin said.

       Kotkin also noted that the millennials, constituting a larger demographic cohort than their parents, are moving up relatively fast into the housing market despite the nation’s dormant job growth, and will be the most demographically diverse population of Americans in history.

        Builders should also be watching for migration to smaller-scale cities with populations of 250,000 to 500,000, such as New Orleans, or even one million to two million, where the affordability of housing is a major draw for young prospective home buyers who know that they will have a harder time finding something they can afford on either the West or East coast.

Looking Beyond the West Coast

       Richie Butler, partner and senior vice president of CityView in Dallas, said that Texas is trying to grow the young talent coming into the state by offering college students financial aid packages that big schools in California are less able to match because of fiscal constraints. And the economic advantages of moving to Texas and other economically healthier states in the middle of the country, such as Louisiana, are readily apparent in the housing market.

       At the height of the housing boom, home buyers in California were purchasing properties worth 10 to 11 times their annual income, compared to a moderate two to three times income in places like Texas; “it was way out of control,” said Kotkin.

       Young people are thinking “if I lived in San Diego, Los Angeles, Boston, I would never be able to buy a house,” Kotkin said. So “I want to live in St. Louis.”

       Butler said his company is emphasizing higher densities and smaller spaces to attain lower price points for its homes. “We definitely are niche,” he said, with a focus on workforce and urban housing.

       But affordability is not the only priority for CityView, which is putting an emphasis on understanding the local community. “We are partnering with those who are engaged in the community,” Butler said, and looking for experience. Also, the firm’s staff reflects the diversity of its prospective buyers.

       Butler reported that in his neck of the woods, at least, it’s getting easier to work with local government to get residential projects off the drawing board because housing and development officials are coming out of the private sector and bringing with them “an understanding of how to get things done.”

Motivating Home Buyers

        One constant in the current marketplace, according to Barbara Nagle Statler, president of Marketscape Research and Consulting, is that “people are shopping because they need to, not for novelty, as they were in the previous cycle. In sharp contrast, at the tail end of the housing boom, 80% of those looking for a home were discretionary."

       When the market was surging, “we thought people loved the product that was produced,” she said, but in reality sales were being driven by the underlying momentum. “We stopped innovating and thought we could design for people we didn’t know,” she added, and “the sales process got away from motivating the buyer.”

        To get through the next two years as markets gradually regain their health, “stick to what you know and where you have a competitive advantage,” advised Amy Price, managing director, Morgan Stanley.

         Price lamented that the markets are currently being driven by low mortgage interest rates and the ready availability of affordably priced homes, when job growth would be a far more effective spur to recovery. She regards the 20's and the 60's as the critical demographic age groups in the housing upturn. As for where the jobs will be growing, she has a favorable view of neighborhoods in the vicinity of universities and hospitals.

Major Changes Afoot

       Regardless of who is right about the future of the nation’s suburbs, futurist Paul Saffo, an associate professor in the Engineering School at Stanford University, said that one thing is certain: the industry is “not returning to building the old suburban model.”

       The economic crash, the fading of the consumer culture that arose from the 1950s, the ascendance of digital technology and the increased urbanization of the planet are among the forces that Saffo said have ushered in a period of major change.

       While Saffo left it up to builders to figure out exactly how to apply his insights on today’s highly uncertain times, he assured them that what’s shaping up now does have implications for the home building business.

       “Do not underestimate the fundamental nature of what’s happened,” he said. This is a time when builders should be angling for an advantage and scouting for new opportunities. “There is plenty to be afraid of, but there is plenty to be optimistic about,” he said.

        At the center of the new economy described by Saffo is “a new actor” or “unpaid amateur” who both consumes and produces. “Everybody can do it” and “more people can interact,” he said. In the creator economy, “people who think they’re consuming may be creating and vice versa.”

        Builders’ prospective customers are moving into an era of “deep engagement,” he said. “You can’t just watch the Web, you have to put something in to get something out.”

       “People are doing things that seem economically irrational,” Saffo said. “They are doing things for free. This will wash over into the housing business.”

        Builders can anticipate customers who ask for much deeper customization in their homes, he said, and they should be thinking about rolling out products to meet needs that aren’t being served, such as a mortgage that will accommodate the homeowner who moves frequently.

       This also might be a good time to look back at things that didn’t work in the past because the market wasn’t ready for them.

        “In housing, we’ve created rubble in which there are good ideas about new ways to do things,” said Saffo. “We tried it and it failed and it will never work. That’s the time for it to take off; it may have been an idea ahead of its time. Things that failed may be indicators of an overlooked eventual success.”

This article has been modified to relate to the Greater New Orleans Area.  Click Here for the Original Source of the Information.