The Coming Change in Housing

As buyer preferences change and costs rise, builders and developers have to shed the traditions of production housing to succeed

By JOHN MARTIN

In the mid 1970s, a revolution of sorts began in Irvine that transformed the housing market. In the burgeoning Northwood subdivision, a sea of 50 x 100 foot lots plotted side-by-side like a mosaic of dominos ruled the day. But a future marketing hall-of-famer named Ken Agid saw things differently. He spotted a fragmenting market, warning builders that homogenous lot configurations and cookie-cutter floor plans would fall from favor. In a fragmented market, he said, you have to know and understand the different preferences of the emerging consumer segments. So he pioneered the first Diversified Product Programming and Design strategy, a formula that shaped product design on careful market research. His novel approach became wildly successful.

Tour the Northwood and Woodbridge neighborhoods toda and you can see when the change happened.

In Northwood, you’ll find garage dominant streets and battalions of two-story, look-alike product. For their time, they were hugely successful. But it was the end of an era.

Around Woodbridge’s groundbreaking inner loop, however, you’ll see the fruits of Agid’s vision: Creatively plotted clusters of single-level attached homes parked 50 feet from curb’s edge. In between street and front door, vast green belts laced with meandering walkways, lush hedges and tree groves created a sense of place. Homebuyers cheered.

Today, the homebuilding industry is coming face to face with a similar sea change in the market. For the past 20 years, builders and developers lost sight of the product-consumer matching model that Agid pioneered. Instead, they fixated on high-margin, move-up developments packed with two-story, master-up product on 60 x 100 foot lots or larger.

We’re now 10 years into the current housing recovery; a recovery, by the way, marked by remarkably resilient land prices that seem to know no direction but up. In the meantime, higher costs for materials, labor and regulatory compliance rule the day. The result? Bubble-like home prices and a nationwide affordability rate that’s at an all-time low.

At the same time, the homebuying market is contracting. Active home shoppers are mostly confined to price-sensitive Millennials and Active Adults not particularly eager to move.

“The housing market is changing in very fundamental ways,” said Matt Zaist, President and Chief Executive Officer of William Lyon Homes. “Affordability is at an all-time low, market segments are narrowing and blurring, and supply is lagging far behind demand. We need to be on our game in terms of understanding buyer preferences, which are very exacting, and mitigating their resistance to purchase.”

Zaist is right about the profile of consumers driving today’s market. Millennials are a decade behind their parents in terms of household formation and homeownership. They’re painfully price sensitive. And when they are in a mood to buy, they are looking for community designs emphasizing common open spaces, with amenities that promote social connectivity but still offer privacy between neighbors. They want open floor plans, indoor-outdoor integration, loads of technology, and outdoor spaces such as rooftop decks.

Active adults, on the other hand, are anything but eager to move. Indeed, my frontline surveys of on-site sales folks reveal a popular phrase among Active Adults entering a sales office: “We’re not in a hurry.”

Interestingly, the preferences emerging among Active Adults are not far from those of Millennials. A smaller, but feature-rich, single-level home will motivate them to move. They’ll also respond to seamless transitions from indoors to outdoors, privacy, and a diverse community with social amenities.

The similar wants we are seeing between these groups is why we’re seeing community design trends that bring “the wisdom and the youth” of these two markets into smaller scale communities.

Adapting and responding to these dynamic, fickle new markets through product diversification and affordability is today’s challenge. That means increasing densities and achieving new efficiencies in production.

“The development side of the business demands a deep understanding of the marketplace, a crystal-clear vision of the community you want to create, and a laser focus on performance from entitlement to build out,” said Steve Cameron, Founder and President of Foremost Communities.

Our industry is evolving and facing new challenges. Market segments that are price sensitive or those not eager to move, forces builders to focus on density, new product development, and innovations in community design to motivate today’s consumer.

John Martin is an ULI Advisory Board Member and President of John Martin & Associates, a real estate market research firm based in Costa Mesa, California. He may be reached at john@martin-associates.net.

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