January 10, 2011
Nation's Building News

The Official Online Newspaper of NAHB

Economics and Finance
Recession-Battered Consumers Still Up in the Air on the Housing They Want

Housing analysts at last fall's Urban Land Institute (ULI) meeting in Washington, D.C., said they saw it coming even before the most devastating U.S. housing downturn since the 1940s, but the recession has virtually assured some seismic shifts in housing demand that are being colored by a new consumer mindset.

The disappointingly slow materialization of job growth has constrained housing activity, but even when employment prospects do show improvement, the vast majority of the nation's consumers will have fewer financial resources for housing, speakers at the ULI conference said. Demographics and healthy growth in the U.S. population will be on the side of the nation's residential builders and developers in the period ahead, they said. And the past few years have created a backlog of household formations and pent-up demand for housing, but opportunities in the marketplace will be significantly different than previously, and home builders will have to scrutinize the wants and needs of consumers to find them.

As evidence that adopting a new perspective on the product being delivered and how it is marketed is well worth the effort and necessary for success in the new emerging housing market, speakers also cited examples of homes in various locations that were attracting buyers during the slow periods of last year.

"The good news is that the American population has the remarkable ability to redefine and rejuvenate markets," said James Chung, president of Reach Advisors. As the only fully industrialized nation with significant population growth, the U.S. will see an increase in demand for real estate over the mid- and long-terms, he said. "But the growth ahead is going to be rather lumpy, far different than we've seen before."

Chung added that major shifts in population dynamics, income dynamics and consumer behavior "will totally rewrite the past for some classes of real estate this decade."

A ‘Jump-Ball’ Economy

While housing economists generally expect housing to continue moving slowly in an upward direction this year, Chung said that builders will be contending with a "jump ball economy" in 2011 — "with so many consumer decisions up in the air." Most consumer segments are still assessing their discretionary spending habits, their brand preferences and their aspirations and constraints.

Even before the economy ran into financial catastrophe, the decade of 2000-2009 saw inflation-adjusted household incomes on the decline, with the exception of the most experienced workers in the 55+ age cohorts, he said. Analyzing household income statistics from the U.S. Census Bureau shows that the decade left the very youngest workers ages 15 to 24 with roughly a 12% decline in income, about the same as for those aged 45 to 54. Households 25 to 34 years old saw their incomes go down 10% and those 35 to 44 sustained about an 8% loss. Fifty-five to 64-year-old heads of household eked out an increase of about 1% and those 65 to 74 came out the real winners with average income growth of 10%.

Despite what was happening to incomes, consumers continued to spend, bolstered by borrowing, which led to nearly a doubling of household debt over the decade.

Over the past 15 years, those with the top 10% of incomes captured 48% of U.S. earned income and capital gains. Those with the top 1% of incomes claimed 21% of earned income and capital gains and received 52% of America's income growth. The spending outlook for the top 10% is encouraging, Chung said, because average income for this group was largely unaffected by the recession. The downturn did pull down the highest earners' capital gains, so spending should return to normal once those capital gains return.

The situation will be far less robust for the bottom 90% of households in income. While they did their part by borrowing and thus contributing significantly to the aggregate spending growth of the last decade, 80% of these households will be in no financial position to rebound for some time, he said.

While recent income dynamics suggest challenges, the dynamics of the U.S. population provide a more tangible indication of growth ahead, according to Chung. The 2010 Census completed in December found the population growing 9.7% from 281.4 million in 2000 to 308.7 million. Projections from the Census Bureau suggest the possibility of 350 million Americans by 2025 and 400 million by 2040.

Generational Shifts

However, major, unprecedented shifts within the U.S. population will give builders and other businesses a lot of sorting out to do, he said. The aging of the population will push the over-65 segment from one in eight to one in five. Non-white minorities — which now hold a 34% share of the population — will claim 50% in about 25 years, a situation that already exists in the nation's kindergartens. And young women are 1.5 times more likely than young men to graduate from college these days.

As a result of women being better educated than men, in the top 25 metropolitan areas, single, childless women 22-30 years old earn median full-time wages that are 108% higher than the earnings of their male peers, he said.

At this point in the economic recovery, builders are also having to distinguish consumer behaviors that are most likely the temporary result of the cyclical downturn from those that represent a more lasting generational shift. A case in point is the decline in household formations in the last couple of years despite a growing population. In part, this is a cyclical issue, he said, but it also does have a generational component that can easily be seen in such statistics as a 17.1% unemployment rate in men who are 20 to 24 in age or one-third of single men in their 20s living with their parents.

There has been a 37% increase in the number of single Americans in their 20s over the last decade, Chung said, and that raises a question with serious implications for builders and others: "What happens if their patterns don't follow those of previous generations?" If this is a fundamental shift, he said, it could "take the wind out of the sails" of the demand that is expected to materialize in the housing market as members of Generation Y — the children of the baby boomers — enter their peak home-buying years.

There is evidence in at least some cities that the departure of today's young from their parents' way of doing things represents a "teutonic shift," he said. For example, only 18% of the current residents of San Francisco and Boston between the ages of 25 and 34 have ever been married. In other cities, he said, the majority of the young can still be expected to marry like prior generations, only just a few years later. Both trends, to various extent, hold implications for housing demand and the kinds of housing that will be needed, and both point to the need to watch how the situation can unfold in different ways in different places in a context that is not entirely familiar territory. "Like with most of today's data, the story is lumpy on a market-to-market and segment-to-segment basis," Chung said.

The Post-Recession Consumer

According to Teri Slavik-Tsuyuki, senior vice president and chief marketing officer for Newland Real Estate Group, LLC, the consumer who is coming out of recession is decidedly not the same consumer going in. The recession moved consumers out of an indulgent era of trading-up and accumulating goods into a period of economizing, anxiety, frugality and self-preservation, she said. And today, consumers are emerging into a consequences era in which they are assuming responsibility for the part they played; they are vigilant and resourceful, setting priorities and joining networks to achieve what they cannot accomplish alone.

"Consumers are redefining the value of what's worth the money," she said, and asking which features in a home really make a difference, what are the real benefits and reasons for buying and what tradeoffs should be considered. "There is a commitment to creating more meaning in everyday life, including a richer life centered around the home and connections."

For example, looking at the results of polling by Yankelovich, for 65% of consumers, responsibility and good citizenship in home buying today means making sure your home is as energy-efficient as possible. For 42%, it means not buying a home that is larger than you really need (up from 34% in a 2007 survey). For 22% of those polled, if the home doesn't offer savings through energy efficiency, it's an absolute deal breaker; for an additional 19%, residential energy efficiency is very important and they would be willing to pay more for a home that offered it.

Since 2007, Slavik-Tsuyuki's research has found a shift in household composition away from couples with kids to couples without them. Couples with children were the most common family type in 2007, with a 51% share that today has dropped to 41%. Childless couples, on the other hand, have grown from 30% to 44%.

Newland Research has also uncovered significant changes in the disposition of the recovery consumer. In 2008, dining out was what most consumers — 48% — believed was the best way to spend their free time. In 2010, only 11% cited dining out as their favorite pastime. In 2010, 23% said relaxing at home was the best use of their free time, and 10% said the time was best spent visiting with neighbors in their community (up from 2% in 2008).

Sixty-one percent of the consumers surveyed by Newland last year said they planned to spend less than $300,000 on their next home, up from 51% two years earlier.

Retooling Product Segmentation

From last year's less than stellar housing market, Slavik-Tsuyuki related several success stories where retooled product segmentation made her company's product more affordable and widened that product offering. "Ask the buyers what they want and develop niche products," she said. "How people shop for homes has changed," she added, and builders need to be cultivating targeted, customer-centric relationships at the individual level.

In Houston's Summerwood community, retooling for young couples and singles entailed reducing lot widths from 60 feet to 50 feet, bringing the homes down into the $130,000 to $180,000 range. The surgical move resulted in 22 sales in three months. The reintroduction of townhouses also worked in landing sales.

In Stonemill Farms in Woodbury, Minn., builders set out to deliver single-family detached homes at a townhome price by moving to small homes and lots and redesigning an 11-acre, 99-home enclave from cul-de-sacs and long fingers to a "coving" plan with one undulating road running through the property. The plan reduced the speed of the traffic and widened the frontage of lots to accommodate two- to three-car garages. Homes averaging about 2,200 square feet were priced at $259,000 in a community where the average home price settled at a loftier $360,000.

Attracting a sub-market of empty nester buyers, but converting less than half of them into sales, Briar Chapel, in Chapel Hill, N.C., decided to conduct focus groups to find out what was wrong, and the older prospective buyers were able to provide the builder with the details of what was missing. A master bedroom on the first floor was not the only thing that mattered to these buyers:

  • A second story was ok, they said, "but close off the upstairs so I don't need to pay to heat it when the family leaves.

  • Give me rooms with a "designated purpose that doesn't require me to guess how it should be used, or where to put my furniture."

  • The kitchen needs natural light and should be located near the garage, to avoid "traipsing through multiple rooms."

  • Steps into the house from the garage or front door are not acceptable.

  • Dual master walk-ins and sinks are a must. Female heads of households requested two entirely separate areas for each sink.

Slavik-Tsuyuki stressed the importance of talking to prospective buyers as individuals. In the initial marketing for Briar Chapel, six e-mails were sent to an internal list of prospects; there was no external marketing. Eleven homes in the community were sold before the model opened, five as a result of this campaign, she said.

Among the sales lessons learned from the recession, she said, homes can no longer be sold "by the pound" or like commodities.

The recession has also created new priorities for the amenities that consumers want in their communities, she said. For households that expect to be staying closer to home more, hiking and biking trails and the ability to connect with neighbors have gained importance. At the top of the list of what consumers want are nearby shopping, restaurants, libraries, schools, a swimming pool, small parks and a trail system. At the bottom of the list are tennis courts, a golf course, a community amphitheater, daycare, planned activities by a social director and a country club.

"Be prepared to adapt," advised Slavik-Tsuyuki, "and do things in smaller chunks." As for marketing to buyer needs, "customers know what they want," she said. "If you don't have it, they won't buy it. If you ask them, they'll tell you.”

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