Will Low-Cost Starter Homes Bring More Millennials to the Market?

Purchasing a home is a big life step that many millennials want to make. Unfortunately, surging prices have almost closed off the new-home market to young buyers, not only in California, but in other regions as well. Home builder Tri Pointe Group Inc., among others, is targeting the first-time buyer market by designing affordable homes.

Some millennials are willing to sacrifice some luxury to have solid equity in a home, like 25-year-old Brandon Lindemann who bought a three-bedroom house at Tri Pointe Group Inc.’s Terrain, a new Castle Rock, Colorado, community designed for first-time buyers. While the home has press-board kitchen counters and a yard too small for the children the Lindemanns plan to have, it’s almost 30% cheaper than the average for a new house in the area.

Following the success of D.R. Horton Inc.’s low-cost Express brand, national firms including Tri Pointe, Taylor Morrison Home Corp. and Meritage Homes Corp. are testing cheaper offerings in markets from Colorado to Florida to California.

Drew Reading, a homebuilding analyst for Bloomberg Intelligence, said, “The main concern in 2016 and beyond is that affordability is becoming a bigger issue.” So it’s smart for builders to provide product that addresses this.

“When D.R. Horton first announced that it was going to go after the entry level portion of the market, a lot of other builders wanted to wait and see how it turned out,” Brad Hunter, chief economist for housing-research firm Metrostudy, said in a phone interview. “Now that they’ve seen the concept proven, they’re figuring out their own way to provide a home that’s more affordable.”

“Most builders say land prices are so expensive it doesn’t pencil out,” said Alex Barron, an analyst with Housing Research Center LLC in El Paso, Texas. However, while other building companies are focusing on luxury buyers and affluent millennials in suburbs close to big cities, Tri Pointe, which built the Lindemanns’ home, plans to increase its share of first-time buyer properties to 40% from about 35% now, according to Chief Operating Officer Tom Mitchell. The homebuilder expanded its entry-level communities in California regions including the Inland Empire and Contra Costa County.

Do you think this approach to affordable housing will work to bring more first-time buyers to the market? Let us know your thoughts.

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