Apr 27, 2023 - Economy

Why homebuilders are talking about first-time buyers again

Photo: Justin Sullivan/Getty Images

The mortgage rate shock has refocused homebuilders' attention on an underserved segment — the first-time homebuyer.

Why it matters: Since the mid-2000s housing boom ended with a disastrous financial crisis in 2008, builders have mostly focused on larger, more expensive houses — the kind that are out of reach of entry-level buyers.

State of play: But now, sale activity in existing homes — the vast majority of houses — has slowed to nearly at a standstill.

  • High prices and surging mortgage rates have hammered affordability — and made those who already own their homes leery of moving, a phenomenon known as "the lock-in effect."
  • This is suppressing the inventory of existing homes on the market for sale.

Between the lines: At the risk of stating the obvious, first-time buyers don't already own a home — so they're not stuck in place by a sweet, low-rate mortgage.

  • And with fewer than usual existing homes on the market for these entry-level buyers, builders see an opportunity.
  • "It's a renewed focus, given the lack of inventory," Robert Dietz, chief economist at the National Association of Home Builders, tells Axios. "First-time buyers are going to play a key role in the order expansion for home builders going forward."

Driving the news: This week, executives at big builders like D.R. Horton and PulteGroup referenced the importance of first-time buyers on their earnings calls.

  • "There is a higher likelihood of the entry-level buyer transacting at this point in time because they don't have a home to sell," said PulteGroup CEO Ryan Marshall. "They're not hampered by the low interest rate that they may be hanging on to."
  • D.R. Horton also said it's taking steps that, reading between the lines, will appeal to entry-level homebuyers. "We have continued offering incentives and reducing the prices and sizes of our homes where necessary to provide better affordability to home buyers," said co-COO Paul Romanowski.

Zoom out: Builders’ rising interest in first-timers signals the industry’s need to find new customers as existing homeowners stay put.

  • Case in point: New housing starts are down about 20% over last year.

The bottom line: While it’s good from an affordability standpoint that builders are renewing their interest in starter homes, there's little sign of a Levittown-style surge of modest-home construction to magically solve the inventory problem any time soon.

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