Inside the mind of a first-time homebuyer
Like most buyers, Laura Damon, 29, and her husband, Chris, had a checklist for their first home purchase, and it included more than price point. They knew they wanted to have children one day, so living in a good school district was important to them. They also have a dog, so they kept an eye out for sidewalks and open space. Room to entertain guests and a garage for their cars was also crucial.
The couple hit the jackpot a few years ago with a home in Clarksburg, MD, just north of Washington, DC.
“We knew pretty quickly when we visited our house that it was, ‘the one,’” Laura said. “It had the ‘wow’ factor we just had not gotten from any of the other properties we looked at. It checked all of the necessary boxes and had a few extras we didn’t think we’d get in our budget.”
Meanwhile, for Rafael Notario, 27, and his wife, Paige, their must-have was location. Although they had a price limit, they knew they wanted to live in Washington, DC’s lively U Street neighborhood.
“That was the tipping point for us,” Notario said. “It was like, alright, [the house is] 80% of what we want, but the location could be a big thing, and so we’ll take it.”
Although each couple had different priorities for what they wanted in their first homes, they had one thing in common: a desire to own.
In many ways, they beat today’s odds. Both couples found homes they could afford, in the location they wanted and with many of the features and amenities they desired. Many of their peers aren’t so lucky.
The current shortage of affordable homes is hitting first-time homebuyers hard. In today’s housing economy, strong demand and limited inventory is driving home prices up across the board. New, entry-level homes are needed, but builders are stymied by high lot development and skilled labor costs and tight lending, making it difficult to meet that need and keep their margins.
The strain is noticeable. Sales of homes priced below $100,000 were down 7.2% year-over-year in May while sales of homes between $100,000 and $250,000 rose just 2% in that time, said Stephen Melman, Economic Services Director at the National Association of Home Builders. Meanwhile, sales of homes in the $750,000 to $1 million range rose 26%.
“It tells me that supply … is insufficient for first-time homebuyers trying to get into the market,” Melman said. “Not only is it hard to work and save for a down payment, but there is nothing to buy.”
Solving this problem requires more than an infusion of new inventory. Homes targeting solely first-time buyers, education on the purchasing process and research on micro-factors driving purchases in a given region are all critical. As is the simple understanding that not all first-time buyers are the same.
Bring entry level online
Builders are pushing back against those headwinds to reach the growing group of young, first-time buyers. One way they’re doing that is through home-product lines and communities that offer the lower prices and smaller footprints they can afford.
Philadelphia-based Toll Brothers late last year announced T|Select, a line of homes similar to the company’s standard offering in terms of quality and design but with fewer structural choices (Toll Brothers generally offers between 18 and 20) to speed up construction. The company says the quick turnaround helps them offer a lower price point.
“When T|Select started, everybody from (Toll Brothers CEO) Doug Yearley down talked about the reality that our goal ultimately was to deliver the same experience, the same level of quality and do so at a price point that could appeal to a broad market,” Toll Brothers Houston Division President David Assid said.
Educate new buyers
If appealing to first-time buyers was just about price, builders could simply introduce lower-cost options. Although price is a major factor in those purchases, it’s not the only one.
According to Ali Wolf, manager of housing economics at Meyers Research, more education for potential first-time buyers about how the process works could give them a better idea of what’s actually affordable and ultimately encourage them to buy. For example, Wolf found that many first-time buyers, especially millennials, think a 20% down payment is non-negotiable when buying a house.
Wolf said she asked a friend who recently bought a house what percentage he put down on it. When he responded to say he’d put down 3%, she asked if he had previously been aware that he could put down that amount. “He said he had no idea — he thought he’d have to put down 20%,” she said. Putting less than 20% down on a conventional home loan requires buyers to pay mortgage insurance, which can leave the option unaffordable to some.
Offer fewer choices for faster turnaround
Meritage Homes tries to ease the stress of a first home purchase with a simplified design process. For its LiVE.NOW. entry-level line, the company lets customers choose from a handful of home feature packages rather than sift through options like counter materials, flooring and hardware themselves.
“The buyers have appreciated that simplicity,” Phillippe Lord, Meritage Homes’ executive vice president and chief operating officer, said. “We didn’t realize how much anxiety people feel when they have to go to design studios and select $8,000 worth of options for a move-up home. In the lower price point, it’s a lot less money, but there is still anxiety associated with it.”
Like Toll Brothers’ T|Select, Meritage’s limited options help them build the homes more quickly.
“These people want to move faster, they don’t want to wait six to nine months for their house. They want to move in the next 60 to 90 days,” Lord said. “So we can deliver these homes expeditiously.”
Get to know the buyer
As important as is it is to know what first-time homebuyers are looking for in their homes, it’s also good to know why they want to buy in the first place.
Not wanting to pay rent anymore is perhaps the biggest reason people opt to own. In many parts of the country, rent prices rival those of mortgage payments.
“Most people want to own as opposed to rent [as a way] to build equity and put their monthly housing payment toward a long-term investment,” said Damon, who along with being a first-time buyer is also a real estate agent. “Some people also find a sense of pride and even independence from owning their own home.”
Notario, who lives in the heart of Washington, DC, agrees. “All other things being relatively equal, your mortgage is going to be the same as you probably would be paying in rent anyway. It was a no-brainer from our standpoint to become homeowners.”
Remember that the difference is in the details
First-time buyers are often discussed as a single, monolithic entity. But there’s plenty of variation among their ranks.
Most want affordable places to live, but what each person or household is looking for in a home and their motivations for doing so differ immensely. Some may want to live in a city, while others prefer a quieter, dispersed suburb. A good school system comes second to price on some shoppers’ list, whereas a buyer with no or grown children may have different priorities. Square footage and features all vary by buyer.
Not all new buyers rented prior to purchasing their home — some lived with family and friends without a lease. And while today’s first-time homebuyer conversations focus on millennials, Gen-Xers are also a part of the trend, having been sidelined by the recession that stalled their job prospects and earnings in early adulthood.
Regional segmentation is also a worthy exercise for builders, no matter how many or how few markets they operate in. Thinking about submarket, lifestyle, life stage and other interests is key.
“We’re finding that depending on where we are doing [LiVE.NOW.], we are attracting different types of first-time homebuyers,” Meritage’s Lord said. “Understanding that is really important.”
Thinking about submarket, lifestyle, life stage and other interests is key. “You may then find that millennials have more in common with boomers than you think, and maybe in some cases they have absolutely nothing in common,” Wolf said.