For this issue on the millennial buyer, who better to ask for commentary than someone who spent three years and 9,000 hours researching the ephemeral millennial? Culminating in a book called Big Shifts Ahead (BigShiftsAhead.com), John Burns gives us a rundown on the insight all this research has garnered and how industry executives might adjust their game plan accordingly.
BD: To start off, tell us a little about the book.
JB: In 2013, the economy was recovering but the housing market wasn’t really coming back like we thought it would or should. There was one millennial anecdote after another that people threw out as excuse. So, Chris Porter, our chief demographer, decided on a research project to figure out what was going on with the demographics, particularly related around the millennials. So, that’s the book we published, designed to simplify the discussion to help executives make decisions. That was our goal – not to help government set policy, but to help industry executives make decisions.
BD: What are some of the major take-aways?
JB: There are two main game changers in there (or at least that’s what people who’ve read it have told me). One, we redefined the generations by the decade people were born instead of the millennial, gen-X, boomers, etc… so that everyone is operating on the same time frame. The real problem was that no definition of when millennials start or end is the same; Mark Zuckerberg (who’s mid-thirties) and my daughter (who’s a high school senior) are both millennials. You can’t have a conversation about housing demand and put both of them in the same category. I think that’s helped provide a lot of clarity.
Two, we built a framework to discuss all of the trends that people are talking about. The framework is built around four main disruptors, or influencers: government policy, the economy, new technologies, and societal shifts. Everything that people bring up falls into one of those four buckets. We did a whole history of those born in the 1930s all the way up until now and how those four influencers have impacted their lives that’s providing a great framework now as people are looking at what impact new government mortgage policy or new immigration policy will have. We’re able to look at these items by decade born and the results are quite different by that metric.
For example, the economy impacted those born in the 1980s very differently than those born in the 1990s. Both groups have had the economic growth during their lifetime be half as much as that during the lives of their parents and grandparents, but those born in the 1980s, the most educated group ever with the student loan debt to prove it, graduated into the great recession and that really forced them to push back many of their ‘adult milestones’. But those born in the 1990’s were still school when that hit. There’s actually a lot of parallels between those born in the 1930s, born into the great depression, and this group, born into the great recession. I believe it’s made them very conservative, just like Warren Buffet’s generation. The best evidence of that I have is that they’re using debit cards, not credit cards. They’re a group that’s totally afraid of debt. They’re not in home buying years yet, but its one of the concerns I have that they’re afraid of mortgages.
BD: Then who is this millennial making up 40 percent of the buying market right now?
JB: The entry level buyer born in the 1980s is the millennial group making up that 40 percent. They’ve already formed 20 of their 24 million households, so that’s not the millennial that’s still living with mom and dad – they’re out. But when they form a household, that’s usually a rental household (although more than usual are coming out straight into home ownership – they saved a down payment living with mom and dad). The fact that they tend to be buying in their early 30’s rather than late 20’s, and that they tend to be dual-income, college-educated couples, actually gives them more affluence than most entry level buyers, even though that’s contrary to what you’ll read in the paper because they have been born into a crappy economy. If you talk to our homebuilding client, that’s their entry level buyer: somebody who makes $120k a year because they both are college-educated and each make $60k a year. They can afford a $500k home or maybe even more than that.
BD: Do you think that answers the concern the industry had a few years ago that the millennials were never coming or do you think that’s still something people worry about?
JB: I think the industry is clearly seeing it right now. I cannot name a builder who hasn’t come up with a more “entry level” product. But for some of them that might be, like for Toll Brothers, a $600k home rather than an $800k home. So, they’re after a very affluent entry level buyer.
BD: As far as advice for builders go, what do you think they should be building to attract that type of buyer?
JB: It’s very location specific. What I’ve shared so far has been most of the positive stuff. Only 38 percent of people are getting college degrees, the majority are not, so there’s still quite a demand for affordable first time buying. But because of the cost of land and the cost of materials, our industry is having a hard time going that direction. However, I’ve seen a lot of our clients have success, like in the outskirts of Texas for instance. That’s where that category of person is buying a new home, for the most part. Otherwise, they’re in the resale market. It’s more affordable for them.
BD: What can production builders do to attract that kind of first time buyer out of the resale market, location aside, even if it means going a bit above their budget?
JB: People love the latest and greatest, especially millennials. So, new homes that are more energy efficient, that have the latest technologies (Brookfield is doing some really cool things with the Apple Smart home as one example)… I think people want that, it’s just that for the majority of people, how much of a premium am they going to pay for that versus a resale home. I think our industry is asking for a much larger than usual premium for a new home today. Which is one reason new home sales are slow. But I also think the industry has to, otherwise there’s no profit margin. It’s costs that have forced them to do that.
BD: Do you see that affected more by materials cost or regulatory costs?
JB: It’s definitely labor and local regulations.
BD: If amenities like the ones mentioned could be provided at a cost closer to resale, do you think it would sway buyers?
JB: I think it would sway the majority. Most people would prefer to have new, obviously, and our research has shown that they’re much more likely to give up a big yard and even some square footage in the house to have new and to be closer in. But let’s say you can only qualify for a $300k mortgage, you’re only looking at what you can qualify for. There’s not a lot of housing, especially in California, that’s $300k for new. This whole experience economy is evidence of people really valuing their time and what they’re doing, so, as a generation, they’re less likely to commute to have a nicer house. They’d rather have a less nice house and be closer in, and that’s often a resale. Townhomes are much more acceptable with this group, smaller yards and all. One of the terms that we came up with that’s getting a lot of traction, especially thanks to ULI, is “Surban”, which is bringing the best of urban to the suburbs. There are a lot of smaller cities saying, “We want some of this high-density housing that’s walkable to our downtown near us.” And ULI had us do a synopsis of the book for them which they’ve circulated to their members and people are starting to use the term Surban, which I think sounds so much better than mixed-use.
BD: As you were researching the demographic, what really stood out as surprising?
JB: There were so many things. I will say one thing that really surprised me was how much government policy has changed things over the years. I really didn’t focus as much on that as I should have. For example, the GI Bill was 100 percent loan to values for every vet, which was basically every man in the country, so, of course that boosted home ownership. Most people are not military now, and we don’t have that any more. Another factor was local investment in freeways versus urban. In the 1950s and 60s, creating the freeways created the suburbs, whereas, for the last 30 years, it’s been about redeveloping downtowns, which has made urban areas far more vibrant. But I hadn’t really focused on the fact that it was urban investment, not everyone saying, “I want to live urban.” They cleaned up the urban areas and made them desirable.
BD: So, to follow that thought, the refocusing on infrastructure should have a positive impact on builders?
JB: Yes, whatever infrastructure they put in, it’s going to drive housing demand. For instance, if they build a new freeway extension like they just did with connection from the 91 to the 15 in Riverside, that opens up and creates demand for living along the I-15 corridor. In the same thread, if the money is going to cleaning up a downtown area, that’s going to generate demand for housing downtown.
BD: How do you see this playing out differently across the country? Is it something that varies heavily location to location, or do the generational trends stay pretty constant no matter where they are?
JB: Some of the trends are the same across the board. But what people can afford and where they’re willing to live varies. What kind of industries they’re coming from has a large effect. Houston has had really strong job and population growth, but the vast majority of it has been very low paying. So, there are still builders creating very simple homes for $220k in that area that are doing very well. Really, our industry has become snobbish. We’ve catered to move-up, boomer buyers for decades and we love our big luxury homes and most of the industry frowns upon LGI or DR Horton Express, because it’s not an award-winning home they would want to live in.
But I’ve seen some of those buyers… it’s an absolute palace for some of the people who are purchasing those homes, compared to the poorly-run, class B apartments they’re coming from, with all the added benefits of building equity and pride of ownership, etc… But most of the CEOs and heads of marketing in our industry do not have a passion for providing housing for those types of people. But they should talk to General Lyon about what he was building in the 1950s and 60s. It was shelter housing. When he started, he was selling homes in Southern California for $7,000 and they were nice, normal homes in North Orange County. And if you look at the Eichler homes in that are still very popular in that area today, those are very simple, well-designed homes that were targeted affordably that are now viewed as one of the best designs ever. But they were very simple homes.
Editor’s Note: This is the full transcript, from which the print version was adapted.