CES and Home Preferences With Rose Quint #683

Norris Bruce

Bruce Norris is an active investor, hard money lender, and real estate educator with over 30 years experience. Bruce has been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.

Norris Bruce
February 21, 2020

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Aaron Norris is joined this week by Rose Quint. She is the Assistant Vice President for Survey Research with the National Association of Home Builders. She holds a B.S. in Economics and International Business from Old Dominion University as well as a Master’s degree in Economics from Virginia Polytechnic Institute and State University. Her responsibilities over NAHB include planning and conducting industry surveys, specifically in the areas of builder sentiment, remodeling, housing affordability, and A, D & C financing issues.

Episode Highlights

What does her job entail as part of the A, D, and C Financing?
Why have the sizes of new single-family homes decreased for the fourth year in a row?
Why is obtaining a mortgage easier now?
What is the American Living Award, and what determines who receives it?
What are current builder trends, and is it easy to find builders?
What home features do people most want in their homes, and which are the least popular?
What kind of homes do first-time home buyers prefer to own?

Episode Notes

Aaron began by asking her what A, D, and C financing stands for, which she said is acquisition, development, and construction loans. Every quarter they send out a survey to single-family builders and land developers, and they ask them a lot of questions about how easy or difficult it is to obtain financing.

Aaron was sad to have to miss the builder show. He heard it didn’t snow this year in Las Vegas during the show like it did last year. It was actually great weather this time, which was surprising because last year was so bad. This year the event was on January 21st. Last year it was in February, and next year it will be at that time too. It was at the same time as CES, so Aaron could not do both. The only thing he got to see at CES was some of the smart home products, but not as many of the trends in the kitchen and bath and things going on in that world.

Aaron asked her if it was a good turnout and they were happy with the show. She said it was a success. Although she did not have the numbers in her head as to the number of square feet or attendees, she heard that it was very well attended. When she walked the aisles, they were packed even on the third day, which tends to be the slowest day of attendance and traffic through the aisles. She saw a lot of people connecting and networking. Aaron was sad to miss it, and it’s always really interesting to see what’s coming up. When he went last year, one of his favorite sessions was listening to Rose talking through the builder trend. This is why he was glad to have her back on the radio show.

This is the fourth year in a row that the size of the new single-family homes has decreased. Aaron wondered what was going on there. Rose said it’s a very interesting trend. In the historical context, the average size of homes increased for about six years after the recession every year consecutively between 2010 and 2015. It finally peaked that year at close to 2,700 square feet. What they have seen happened since then is a decrease year-after-year in ’16, ’17, ’18, and then most recently last year in 2019. It now stands at about 2,500 square feet, just a little over 2,000 square feet. That is only about 20 square feet bigger than it was at the peak of the housing boom in 2007 when it was about 2,500. It’s been declining. There are other trends besides the size, including the share of those homes that have four bedrooms or more or three full bathrooms or more, that point to an industry, specifically builders, who are trying really hard to meet the demand for smaller homes. They are doing what they can to shift their production mix to tend to the entry-level home buyer.

At the very peak in 2007, the builders were building on average one square foot under 2,500 square feet. It went down to 2,362 by 2009 or 2010. Aaron remembered when they were building a lot of McMansions here in California. It doesn’t seem like they’ve gone as hard this cycle. It had gone all the way up to almost 2,700 square feet. It went up to 2,689 by the year 2015, but that increase was driven mostly by the fact that the only people that had access during the recession; and immediately after the recession, those who had access to mortgages were people with very strong equity positions and good employment papers because it became very difficult to obtain a mortgage. By definition, the people that have those financial characteristics buy large homes. Now that maybe millennials are entering the market in much larger numbers, they’re coming in and maybe buying a little smaller.

It seems now the pendulum is swinging back a little bit and it’s become easier. Underwriters have relaxed a little bit on the rules on mortgage underwriting, and therefore it’s become a little easier to obtain mortgages. On top of that, job growth has been great. Wages are rising. Millennials are entering their homebuying years in full force. Demand has increased tremendously in the last few years.

Most of the those who listen to the Norris Group’s radio show are remodelers, so he loves looking to the builders to see them spending so much time and money researching what people want to buy. It feels like a cheat sheet. Aaron was very thankful for this. Rose said it’s one of the things that they pride themselves in doing because their builders need it. Second, the NAHB is looked after for this kind of information from other analysts, government agencies, and various other types of nonprofit organizations. Builders tell them they’re going to put in homes in the following year and will do extensive research into what homebuyers want.

One of the really nice things in her presentation was the best of American living awards. Aaron asked Rose to share what the award is and who receives it. Rose said she typically gets paired up with a co-speaker to do the press conference on the education session on this topic at IBS. This year, her co-speaker was the chairman of the award, and he is a very brilliant architect in San Francisco. You may know him done with Ross. I. I forget the name of his darling group architecture. His company is out of San Francisco, and he is the chair of the BALA Awards. For the award, builders submit pictures and specifications about homes that they built that fit into various categories for the award. A group of judges made up of builders and architects at NAHB get together once a year and choose the winners. The winners are then presented at a nice ceremony at IBS where they are given awards. This year, what Don did was he came on stage with Rose and talked about how her trends fit into what he’s seeing as an architect in those awards.

Aaron wanted to know what the award was since there were several California communities that made it in there. To reiterate, they are the BALA Awards. You’ll probably find some information online as well as some really great information and some really beautiful architecture and interesting designs as well. Her PowerPoint presentation she made is also available on the Builder’s Show website; so people can go there, download it, and look not only at the numbers but also the pictures.

Aaron asked Rose what she was hearing about builder trends and whether finding builders is difficult or easy. She said the trends that they see on the ground and on the homes that are actually being built tell them right away what she said earlier. The builders are working to meet the demand for smaller homes, seen in the fact that the homes that were put in the ground last year are the smallest homes since 2011. The average home in 2019 was the smallest home builders have put in the ground since 2011. A lot of people are curious about why it’s so difficult for builders to build small.

To a lot of people not familiar with the industry, they don’t understand the difficulties. There are two very specific reasons for this. One of them is the seriously restrictive zoning regulations that are out there in many localities in our country. Their minimum lot size requirements, for example, tell builders the house that you built has to live on a certain size lot. That makes it difficult because land is expensive or there are minimum parking requirements that tell builders you might need a certain number of parking spots off the street for a particular building. There are design standards that tell builders you have to use this material, for example, for the outside of the house, even if it’s expensive or if the homebuyer is not interested. It doesn’t matter; that’s the standard they want in this town or in this county. There’s also inclusionary zoning, whose rules tell builders that if there a number of the houses that you build in this development, they have to be priced so that they’re affordable to low-income people or middle-income people.

All these things make it difficult for builders to build small. On top of that, you add the lot prices. Last year, they estimated that the average lot price in America was $57,000. Aaron remembered NAHB Chief Economist David Berson talking last year about a lot of the concerns with builders. You have labor going up quite a bit. The regular cost is construction, and the average amount of money that builders are spending on average for government impact fees was just crazy. It’s been.

It’s been a big fight here in California with the accessory dwelling unit conversation. Some cities were charging $50,000 for these small granny flats just because you wanted to build one. It had nothing to do with the structure itself. Aaron feels for the builders, and it’s also very frustrating to listen to politicians have a conversation about affordable housing. They’re really not throwing solutions at it, just more costs. Here in California, there’s solar required, so now he’s wondering what is next.

Laborers is the other leg of that’s still on the shaky side. Any given month, there are somewhere between 300 and 400,000 open positions in the construction industry in the country. We just can’t find the labor that we need to build the houses that we need.

Aaron heard it brought up over the last year about prefabrication and national builders starting to lean into factory-built because it’s more green and maybe more sustainable. It seems like just the labor issue alone is going to be more of a concern. Aaron wondered if that came up at all this year. Rose said they talk about it internally all the time how that could be a huge help to alleviate a labor problem. The issue with modular housing or prefab housing is the overall impression and opinion that homebuyers have about those homes. It’s difficult for builders to break through that barrier when the community that they live in don’t necessarily want to have or live in those types of homes even though the builders may be ready to retool and relearn new techniques in order to build those types of homes. The biggest problem they have is objections from the home buyer. However, they don’t deny the fact that it would be part of the solution if we could increase that market. Builders have to work with the market that they have.

We’ve come a long way from the 1970s when the word “mobile home” was a dirty word. But what can you do? If you go to the IBS and see the exhibitions, these homes are beautiful. They look spectacular. You could not tell once you’re inside that you’re in one of these houses. It’s impossible. They look just like a stick-built house. In some cases, especially with the labor shortage, you might consider it might be even better built for it when it’s in a controlled environment. There are specialists that are doing very specific things, so it’s a marketing issue.

Aaron said he loves the lists that Rose puts together, and it’s always interesting to see what comes up and what doesn’t come up. One of her lists is a rating scale from 1 to 5, one being not at all likely and five being very likely the builder will include it. Her top three that ranked highly were the walk-in closet in the master bedroom, low E windows, and a laundry room. One ranked at 4.9, while the last two were at 4.8. Apparently, if you’re not building those and you’re doing it wrong. When builders nationwide tell you that it’s a pretty sure bet they’re going to include these things in their homes, you can walk into any average home out there this year and these features will be there. It’s all driven by consumer preferences. Homebuyers one these things in their homes.

Rose also mentioned at the press conference last year that consumers wanted energy-efficient features, they just didn’t want to pay more for it. Aaron wondered if this is still a trend they are seeing. Rose said when you ask home buyers in a very theoretical census to whether they’re interested in helping the environment through their construction or purchase of their home, you don’t get a lot of warm feelings from home buyers when you present it in that very theoretical sense. However, when you ask them in a different way and how much they would pay extra for a home in addition to the price of the home if it saved them a thousand dollars in utility costs every year. It’s basically the same question, but one is theoretical, and the other one’s very practical, very dollars and cents and tangible. In that second form of the question, you get very different results. You get people saying they will pay on average close to $8,000 or around $8,000 to save that thousand dollars a year in utility costs. The vast majority said they would pay upwards of $5,000. In a theoretical sense, there’s not a lot of warm feelings. But, if you express it as a builder in terms of the savings, you will have buyers interested.

Energy and sustainability-focused features are also on this list. A lot of these things are things that we’re putting into rehabs anyway, and a lot of times there’s rebates from the local utility to help underwrite that cost. The way to market it is really creative. Aaron spoke to the Appraisal Institute over the last 30 days, and he was talking to them about the form that they’re creating. Just because you put in a $30,000 solar system doesn’t mean that the consumer will want to pay that much more for the house. The form that they’ve been working on is trying to create the ROII for the consumer, showing them how much money the house can save. That’s a brilliant way of marketing it. It’s just telling them annually how much they can expect to save, which is really great, taking into consideration maybe the local utility as well. The more granular you can get it, the better.

There were a lot of green features in the survey, and when you tabulate them all and take a look at all of them broadly, you understand that when homebuyers hear the word green, the first thing that comes to their mind is energy-efficiency features. That’s the top of the whole list of green features. They want to save money and energy. The second category of green features that they want to deal with involves improving their quality inside their home. The first thing they go to when they hear green is saving money on energy. First and foremost, that’s what it means for homebuyers when they hear the word green. Not so much the smart technologies. Those things fall way lower. The first thing they think about is the technology that will help them save money.

At CES last year, the word wellness kept coming up instead of sustainability and green energy efficient. It was interesting to see. KB Homes are showing off like a whole house wellness system that was tying all the smart technology together, and it was specifically addressing things like air quality. He thought it was really pushing it. He didn’t see really any smart home driven consumer input on any of this. Aaron wondered if they were on the survey and just didn’t rank. Rose said they are there, they just don’t rate as high.

Last year, the bottom of the list and most unlikely features were cork flooring. When you compare the results that you’re looking at now from the builder survey and you compare that to the consumer survey, it’s right on. The homebuyers say that is absolutely not something I want. Aaron was really glad to see duel toilets in the master bath out and pet washing station. That just seemed unnecessary. One of the things he was really surprised about was seeing the outdoor kitchen not ranking higher because you hear so much how it’s about wellness, family get-togethers, and open space. He was really surprised that did not make a top feature. You have to keep in mind how the question was asked of the owners. It asked them about features that they are automatically including in the price of their typical home. They’re not automatically giving you an outdoor kitchen in the price of a home.

When it comes to the preference for the type of home to buy, she separated them in her presentation into the first-time buyers and repeat buyers. What was interesting was it looked like there was a shift. Single-family homes ranked 77% of consumers. That’s what they wanted. The townhome looked like that shifted to people more willing to look at multi-family and manufactured homes. Rose said yes, and the reason she broke it down by first-time buyers versus repeat buyers, repeat buyers being people buying their second, third, fourth and so on home, is that this decline in the average size that they spoke about at the beginning of this interview is making it very important for everybody in the industry to understand what those first-time buyers are interested in since they’re the ones coming in with a lot of strength into the market. What they found was the single-family detached home is the king of the land. This is the type of home that a majority of both first-time homebuyers and repeat buyers want. Very small minorities are interested in any of the other types of homes that they listed. Townhouses are under 10 percent. Multi-family units and condos are under 10 percent. When it comes to manufactured homes, barely 5 percent of first-time buyers want to have that kind of home.

With the preferences for new and existing homes, Aaron saw data that points to millennials starting their homebuying careers so much later in life and further along in their career and therefore possibly only jumping into homeownership as they’re creating family units and having kids. They’re buying at a higher level than in past generations. Aaron was curious if the demand for new homes is different this time around than maybe it has been in the last several decades? Rose said the study is really about what your first preference is when it comes to buying new versus existing. The data shows that a majority of first-timers would like to buy an existing home versus the repeat buyers, and the majority of them want to buy a new home. When you look at the reality in the last few years of the share of new over existing, obviously the share of all sales that are new homes is 10 percent or less compared to over 90 percent of existing homes. Preferences are one thing, but then reality is another thing.

Rose also broke down the preference for home sizes for first-time buyers. Their current home size is a little over 1,200 square feet. They want 50 percent more space. The first time home buyers want more space. Look where they are now. They’re just under 1,300 square feet, and now they want to go to about 2,000 square feet. That’s 56 percent more space. What’s interesting about that number is that it’s not that different from what the median size repeat buyers want, which is 2066 square feet.

The preference for the location was not surprising. The really high numbers are in the suburbs, and the first time buyers are trending a little bit more in the central city and urban environments. You don’t see as much preference for rural these days. Rose said you get 25 percent or so of both your groups that want to live in a rural setting. The story here is that a majority of buyers want to live in the suburbs, and that’s something that builders take back to when they listen to this kind of information. They take back to the city council, and some think everybody wants to live in the central city now and that’s where all the growth should be. It’s growing, but it’s not where everybody wants it to be. Most people still want to live in the suburbs.

A number of stories show the preference for a home is one story. However, Aaron said it always seems when he is in new communities, it’s very rare that there are many single-story models as part of the mix. What you want and what you get are two different things. You can look at the data from the Census Bureau on characteristics and know that the majority of homes are not one story. However, that’s the preference. People would like to live in one-story homes. Builders have a hard time doing that because they have to give you the 2,000-2,500 square feet that they’re going to give in that house. AThe lot sizes are at their smallest because of the prices of the land. In order to give you the square footage there, they have to build up.

Aaron ended by asking her if there were any other trends on the show floor or that she has been studying that surprised her. She said not really. She thinks it’s a continuation of where they have been in all of these years. She thinks the fact that the homes are getting smaller is a good thing overall for the homebuying population out there looking for housebuilders who are trying to ease the affordability crisis that we hit at the end of 2018. They’re responding, so she sees 2020 as a good, strong year for housing.

Aaron asked which web site they should visit if they want to find the presentation. She said they should go to www.buildersshow.com and look under Education. The easiest way to do this is to look up Rose Quint. You could also look up the name of the session that she presented, but that’s a long title. Type in her name on the website after clicking Education, and her session will pop up and the PowerPoint will be attached to that page.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.