By Oren Jacobson, Market Analyst - New Home Star
As many in our industry like to point out with pride, homeownership is at the core of the ‘American Dream.’ Today, homeownership rates have fallen to the low 60’s, not only well below the pre-recession high but below levels from the 1980’s. John McManus, one of the few industry experts New Home Star’s top leaders consistently read, wrote an interesting piece a couple of weeks ago about the role that homebuilders play in the process of making ownership affordable and attainable.
Specifically, McManus touches on how new construction balances out market supply and helps to keep prices in the market reasonable. In the absence of this, affordability would diminish. That’s not a role many of us think about consciously or even embrace. He is right though, and we ought to consider how we impact this trend broadly. We know that many people, specifically, millennials, either delay purchasing or can’t afford housing. Are we doing anything to adjust our business model to provide affordable alternatives for these buyers? Or, are we simply taking advantage of the demand in other zones of the market, ceding this ground totally? We can’t make an argument about what’s in your business’ best interest. However, we should collectively recognize that by not fulfilling this need we limit the healthy turnover needed to spur demand upward. Additionally, these buyers will be the core of the market for decades to come. It is imperative that we eventually figure out how to best meet their needs.
McManus also touches on the impact of regulation. Certainly, some level of demand is lost in the market due to the impact of tighter restrictions in the aftermath of the Great Recession, though Congress is currently working on rolling some of that back. Equally important, but not touched on by McManus, is the psychological effect of the Great Recession on the largest pool of potential buyers in the country (millennials). They will eventually buy; the question remains, on what level and when?
It’s important to understand the realities for this generation of consumers and the lessons they have learned through the recession.
- Reality #1: They’re in personal debt to a level which no American generation has ever experienced at their age.
- Reality #2: The Recession also caused an economic compression that has stalled upward mobility and income gains. Therefore, they will likely be in personal debt longer than any previous generation.
- Reality #3: Access is becoming more important than ownership.
- Lesson #1: Real estate investment is risky.
- Lesson #2: You can play by the rules and still get crushed, so limit risk and maintain flexibility.
- Lesson #3: You shouldn’t expect corporations to protect you; loyalty is conditional, and jobs are temporary (which can mean that the home base is temporary as well).
How these realities and lessons will play out remains unseen. It’s certainly possible that we will see a relative generational decline in ownership, meaning that levels remain lower than historical trends. As an industry, we should still expect a substantial amount of millennials to eventually make the transition, even if delayed. This delay, however, may impact the number of homes a person will own over their life and the traditional move-up market. Time will tell.
What matters most is that we do a few things. First, we recognize what’s happening. Second, we develop a product and an approach to business that fits the needs of these buyers and recognizes that their tastes, drivers, constraints, and beliefs will not be the same as previous generations. Third, and most importantly, we must meet the customer where they are.
Generations are shaped by the major experiences in their lives. The Great Recession will be a definer for millennials. We must acknowledge the emotional impact on the buyers as well as the fears, frustrations, and anxiety those moments rightfully create and develop a product and experience tailored to meet those challenges head on. We must also recognize that there are perceived positive impacts from these lessons. Some expand independence and personal freedom, while others decrease the need for attachments and acquisition (home purchase).
McManus is right about the role we play in housing affordability. To that, we would add the intangible impact of broader challenges on a generation of buyers who are stepping into the market. We have a role to play in supporting supply and keeping affordable. We need to recognize the changing landscape of the customers we will be working with based on their experiences and adapt accordingly.
