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Oct 13, 2017

Understanding Current Housing Trends and the Impact on Your Business

By David Schiever

Like most categories, residential new construction seems to be fragmenting into smaller segments to serve the ever-widening demands of today’s U.S. home buyer. These demands are creating some unique challenges for new home builders — large and small. No matter how builders intend to adapt, there are a couple of developing trends that could have even greater consequences for building materials companies who are still grappling with how to maintain profits as they continue battling competitors to be preferred providers to the nation’s largest home builders.

At Interrupt, we have a popular chart that breaks new construction housing into different segments. Pretty typical stuff including first-time single family, active adult communities and step-ups. Recently though, we’ve added a small cluster of new groups that collectively have the potential to create quite a disruption.

We won’t spend a lot of time going over the stats we’ve heard the past few years, but as a recap, housing demand is and will be higher for a while, labor is tight and driving costs up all the way through the cycle, the average price of a new home is hovering around $370,000 and going higher, Millennials are waiting longer to buy, and Baby Boomers want something different than their 3,000 sq. ft. home. You get the point.

Primarily, most pundits crunch and rationalize all the data and say, in general, that housing will grow steadily, the ratio of single-family to multi-family will stabilize and the average square footage will be about the same. There’s a big caveat to most of these positions though. They assume “consumer preferences remain constant.”

So, what if Boomers and Millennials alike decide to force change? It’s happening. First, Boomers and Millennials — the two generations that currently drive the housing market — want something besides the traditional single-family, two-story home that just replaced a field of corn. They want walkable communities that are convenient to culture. They want smaller homes and to be a part of something. In some communities where land and sprawl are a big challenge, you are already seeing more townhomes coming on line. In trendsetting markets like Denver, multi-family housing is still growing strong.

 

Tiny Homes are Here to Stay — For Now

Another example is the “tiny homes” craze. HGTV has run programming dedicated to the idea for a few years. Estimates range that somewhere between 2,000 and 5,000, or more, tiny homes are built in the U.S. annually. We found two associations looking to serve the segment. There are also publications and certification programs cropping up around the country. Estimates today put the number of tiny home builders somewhere between 300-500 with 75-100 of these building more than 10 homes per year.

Interestingly, consumers are seeing tiny homes as an attractive, affordable primary housing alternative. Others see them as an interesting solution to supplementing income via platforms like Airbnb or a vacation spot. For some, it’s a feasible way to get the adult child out of the house or bring an aging parent closer. Additionally, we’re seeing small structures solve affordable housing issues in other ways. Like in Portland, OR, where Accessory Dwelling Units (ADUs) are springing up by the hundreds. Either way, these examples represent sizable groups in the U.S. and could make this little “blip” become much bigger. Heck, right now, most people can’t say whether these would fall into new construction or some R&R facet.

 

Shared Housing Goes Mainstream

Then you have a completely different housing trend being formed by consumers’ demand for change. We mentioned Airbnb. There are other technologies serving similar needs and helping to fill what Trulia recently reported as the nearly 3.6 million unoccupied rooms in the top 100 U.S. housing markets. There’s myboommates.com that matches up like-minded boomers. Many empty nesters are renting their spare room(s) to young adults in pricier markets, creating a win-win for both parties. If this trend catches on, it could be a unique opportunity in many R&R segments (i.e., think security and home automation). It could also have an interesting effect on new construction. Remember the in-law suite fad from the 70s and 80s?

The point is, consumer genius can and likely will impact the norms we are planning against over the next few years. This drive has the potential to meld fads into something more. Further, necessity can ignite niche ideas and fuel rapid growth. How? What if some big money backs a crazy idea to rebuild entire hurricane Harvey neighborhoods with economical, stylish, energy efficient pre-fab or manufactured homes? How might that impact longer-range views on new construction?

Every day, in every industry, there are literally dozens of small and large companies working hard to carve out a unique space. And like those home buyers looking for alternative ways to own a piece of the American dream, there are even more consumers eager to give new a try.

 

Not Just a Passing Fad

Regardless of the industry, momentum for adoption to new ideas that fragment the markets we serve is accelerating at a much faster pace than ever before. Today’s little “blips” that in total may reach 1-2% share, could be 9-10% share in just a couple years. Before you know it, the “new” idea is a painful competitor eating away at your share and eroding your margins. How has your team assessed the fast-developing trends in new residential construction? My bet is, all but one or two of you have poo-pooed them as fads. If that’s you, our advice would be to keep a close eye on those one or two that didn’t. And while you are at it, do a quick proforma that cuts another 2-3% of margin from your 2020 bottom line.

 

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