Entry-Level Home Market May Be Perking Up

Entry-level home market may be perking up

The upper end of the U.S. housing market started turning in favor of buyers months ago.Tight property inventories have eased, and several cities are seeing sales slow down and sellers cut their asking prices.

For buyers looking for an entry-level house, though, the conditions aren’t so clear cut. Economists say the typical first-time buyer still faces a tight and competitive market across numerous cities, but there are also signs that market may turn in their favor too.

According to Black Knight, home-price growth decelerated in 69 of the 100 largest metro areas in the six months through August. In 40 of the 69 markets with cooling prices, homes in the lowest tier, or bottom 20 percent of the market, saw the largest deceleration in price growth, according to Black Knight. These markets spanned the country, but seven of the 40 metros were in California and one was in the high-priced Portland, Oregon-metro area. 

Price growth in the bottom tier decelerated in the 40 cities at an average rate of 2.2 percent over the six months, the biggest slowdown in growth among the five price tiers, according to Black Knight.

Notably, though, prices of homes in this bottom tier still rose at a faster pace than the four higher price tiers during the six months through August. In the markets with slower price growth, bottom-tier properties averaged 7.5 percent annual growth, whereas prices rose by 3.4 percent in the highest price tier, according to Black Knight.  

Builders reach down 

A lack of affordable new homes for sale has been another major issue at the bottom ends of the market, according to analysts. Here too, though, conditions could soon ease. Builders have been producing more homes aimed to attract the entry-level buyer.  

“Our tracking suggests that the first-time homebuyer share for new single-family homes is about 30 percent,” National Association of Home Builders Chief Economist Robert Dietz said during an interview this week. “That puts it closer to the historic norms. In years past, right after the Great Recession, it had fallen as low as 18 percent.”

Dietz said it is hard to track the entry-level new-home market, but one way to do it is to examine the size of the new homes. Builders increased the average size of new homes after the recession, but new homes have been shrinking again.

As of the second quarter, the median floor area of a new home was 2,344 square feet, which is still larger than it was a decade ago. That it has been declining over the past three years, however, suggests that builders are reaching down in the market.  

“The reason that median [floor area] is falling is that we are adding more inventory at the bottom end of the distribution,” Dietz said. “It is roughly declining since say 2015 or so. That is occurring because builders are adding that entry-level inventory.”  

Dietz said the growth trends of townhouse developments and custom-built homes — which typically represent the bottom and top price tiers of new-home sales, respectively — also suggest that the builders are catering more to the first-time buyer.

Townhouse starts, which are typically lower-priced and average around 2,000 square feet, increased by 23 percent over the 12 months through the second quarter of 2018, compared to the same time frame in 2017, Dietz said.

Over this same period, the growth of typically higher-end, custom-home starts was flat, Dietz said.

“I think the shift will continue,” Dietz said. “What is going to drive the builder perspective is both the demographics and the fact that more and more millennials are going to be moving into the new-home market.”

Dietz noted, though, that while builders have more opportunities to fill a void in entry-level homes, there are risks. The U.S. housing market has shown clear signs of slowing this summer, and more existing homes are on the market. He also said that first-time homebuyers tend to be disproportionately hurt by rising rates, which put pressure on prices.

“We are at a 10-year low on housing affordability. That entry-level market is certainly subject to unique risks in terms of being able to sell those homes,” Dietz said.

Conditions in entry-level price tiers are still tight, however, data from the National Association of Realtors (NAR) suggests. Among all price tiers for existing homes, inventories are the tightest for homes in the $100,000-$250,000 range.

On an unadjusted basis, there was a 3.6 months supply in this price tier, according to NAR, a full-month lower than the 4.6 months supply [or 4.4 months seasonally adjusted] for all property types. By contrast, there was a 10 months supply for the properties priced above $1 million.The West region, particularly, had a shortage of homes in the $100,000-$250,000 range. There was an estimated 2.8 months supply.

“We say that, historically speaking, roughly six months would be considered a normal supply of housing inventory in a balanced market,” said George Ratiu, NAR’s managing director of housing and commercial research. “Obviously, this is undersupplied.”