Welcome to Housing’s New Normal
Atlanta, the former No. 1 new-home market, remains a barometer for the nation. At 25,000 permits, Atlanta is still the third largest new home market in the U.S., but almost nine years into our “recovery,” we are still 50% below our pre-bubble normal (Atlanta permit chart). This is in spite of nearly a decade of positive job growth, positive in-migration and population growth. All of MarketNsight’s 18 cities across the Southeast exhibit this trend. Most cities are still anywhere from 30% to 60% below pre-recession levels. Whom are we missing?
Old Normal versus New Normal
In our “Old Normal” before the 2003 to 2006 bubble, first-time buyers and first-move-up buyers made up 60% of all new home sales. In that old normal, people typically bought their first home at the age of 25, started a family and moved to their second home (first move-up) by the age of 32. Currently, they account for less than 40% of new home sales. Today’s first-time buyer is 33-years-old and getting older! We are missing many of the 25- to 32-year-old buyers who previously accounted for 60% of all new home sales. We call that age group today…millennials. Moreover, we will never achieve our “Old Normal” sales numbers in this country without them.
As proof, just keep all other buyer types constant and take first-time buyers and first move-up buyers back to their pre-recession norms. This would bring Atlanta back to 50,000 permits and the US back to 1.3 million starts.
There have been countless articles written about millennials’ absence from the new home market. It comes down to this – we cannot give them what they want, where they want it, at a price they can afford… yet. We are in the very early stages of seeing some much-needed innovation in our industry, aimed at recapturing a small percentage of that all-important first-time buyer.
If You Don’t Innovate, You Die
We can simply look to our retail sector to see the desperate need for innovation. We are witnessing a complete reset in that all-important industry, with some 8,600 brick and mortar locations closing last year and that pace quickening this year. Changes in shopping habits, driven by technology and millennials, have caught many traditional retailers unprepared. We would do well to take note of this in our own industry.
The housing industry has been slow to innovate, essentially building the same house today that we built 40 years ago. Our last major innovation was also brought about by a technological revolution – the sewer. As sewer lines reached farther out from city centers, we saw the 1950s and 1960s brick ranches on a half-acre give way to the five, four-and-a-door homes of the 1980s…and there we stopped. We did not innovate from 2000 to 2006 because there was no need. You could sell anything to anyone with a subprime loan! We could not innovate from 2006 to 2016 because we were broke! If we want to recapture some of that first-time buyer demand in new homes, we will have to innovate.
The Apartment Industry has shown us the way, if we are Paying Attention
Most housing experts, including me, truly believed that the apartment industry was going to over-build beginning 3 or 4 years ago. Conventional wisdom was that rental rates would move too high, chasing renters out of apartments and back into home ownership. We were all wrong. The old rules in housing simply do not apply anymore. A quick check of the rental rates and square footages in your core counties might surprise you.
Evidently, millennials and others are willing to pay high prices for much smaller spaces in their preferred locations.
In some of the “more hip” parts of Atlanta, we are seeing monthly rental rates between $1,300 and $1,700 for as little as 500 square feet! One study predicts that Generation Z will pay $1,700 per month in rent for 11 years before they finally buy. For that same $1,700 per month with 10% down, they could own a $400,000 new home, townhome, condominium…or dare I say, tiny home? Some pioneering builders and developers are taking notice of this and choosing to compete.
We are beginning to see new groundbreaking for-sale product coming onto the scene. Product at square footages we have never seen, presented in new ways. Let us look at a few examples from Atlanta.
Thinking Outside the Box: Condos
Urban Eco Group in Atlanta has proposed a stacked flat condo on the desirable Atlanta BeltLine near Ponce City Market. Studios would start at 400 square feet (a first for Atlanta) and sell for $180,000, or $450 per square foot. That would be a $750 monthly mortgage, compared to the $1,600 a month rent for 560 square feet across the street at Ponce City Market. Isn’t this how we always talked renters out of apartments, “It’s less expensive to own than rent!” That same argument still works; it simply requires a product we have never built before in the areas millennials want to live.
The truth? A millennial could take that same $180,000, drive 46 miles due west from Downtown Atlanta, and buy a 2,000 square foot single-family home on a quarter-acre distressed lot, but will they? The data says no.
Moderns at Sugar Creek is a new townhome community in the popular area of Reynoldstown, just southeast of Downtown Atlanta. In order to meet a workforce housing requirement in the zoning, they needed to design and build an 11-foot wide townhome product (a first in Atlanta). The three-story townhomes with rooftop terraces sold immediately in the mid-$200,000s. They are now considering building similar products in additional locations.
Downtown East Point, a community just southwest of Atlanta and near the airport, recently rezoned 7.69 acres for Atlanta’s first dedicated tiny home community. Priced from the high $100,000s, this new tiny home community will feature a communal garden and 40 homes with 500 to 1,000 square feet of living space. There are currently 650 people on the waiting list!
At MarketNsight, we are beginning to see similar innovation across our 18-city footprint in the Southeast. Millennials are willing to live in and potentially buy small spaces in their target area. They are not alone. Baby Boomers are vying for the same homes. Their kids are gone, retirement is around the corner, and they want to live where the action is. For many of today’s potential new-home buyers, experiences and location trump square footage.
Maybe it is time to start thinking outside the same housing box we have been building in for the last 40 years! Wattles, Jackie. “Stores are closing at an epic pace.” http://money.cnn.com/2017/04/22/news/credit-suisse-retail/index.html. CNN, 22 April 2017.
 Michaels, Matthew. “The average millennial will spend over $200,000 on rent before buying a house —but gen Z will spend even more.” http://www.businessinsider.com/how-much-millennials-gen-z-renters-spend-expensive-cities-2018-5. Business Insider, 26 May 2018.
John Hunt has been in the real estate industry for 28 years. His company, Atlanta-based MarketNsight, conducts market analysis and feasibility studies in 18 cities across the Southeast.