CaliforniaSouthern California

Strategies for Providing Attainably Priced Homes in Southern California Markets

April 9, 2019

Affordability is the biggest red flag for builders and capital providers wanting to do business in Southern California. How can home builders provide more attainably priced homes and make a profit? Poor affordability has curbed demand and price growth significantly despite a healthy economy and below average housing supply. Is affordability as bad as the previous peak in the mid-2000s? The median home price is now above previous peak levels in all Southern California markets; however, prices alone are not the best measure of affordability. Before we get to strategies, consider the following:

  • Elevated housing-cost-to-income ratio. Two out of the four major California markets have a housing-cost-to-income ratio of more than 50%, and all markets have ratios above historical averages. However, current ratios are well below peak levels seen in the mid-2000s, and Riverside-San Bernardino and San Diego have ratios only slightly above their historical averages.
  • Burns Affordability Index™ is at 7 or higher in all major markets. Our affordability index measures the market’s affordability against its own history, with 0 being the most affordable time and 10 the least affordable time. An index value over 8 typically indicates an imminent price correction. All markets reached a 10 in the mid-2000s, indicating the worst affordability in the market’s history.

Although affordability is a major concern, affordability conditions are not yet quite as bad as the previous peak and are unlikely to get much worse in the near- to mid-term, as inventory levels are rising as a result of housing demand falling, leading to pricing softness. Here are some strategies that could mitigate affordability risks:

  • Build smaller homes at more affordable price points, below FHA loan limits if possible.
    • This is easier said than done when land sellers are unwilling to reduce land prices. Consider negotiating a profit-sharing agreement with land sellers if prices go up.

  • Build product at higher densities to help mitigate high land costs.
    • It will be important to work with housing advocates (BIA, etc.) to continue to educate municipalities about the need for high-density housing in locations near job centers.

  • Consider building value-oriented homes similar to D.R. Horton’s Express product.
    • Buyers are often willing to accept a relatively low spec level in order to afford a new home.

  • Look to tertiary submarkets where traditional single-family homes can be built at affordable price points.
    • Focus on Riverside-San Bernardino, where affordability is closer to historical norms and job growth is still strong.
    • Consider buying land on a rolling-option basis to mitigate market risk, as tertiary markets typically get hit the hardest during a market downturn.
    • Consider built-to-rent single-family detached communities in tertiary submarkets. Single-family rental rates fell less than 1% in Riverside-San Bernardino during the last market downturn.

  • Target move-down buyers who have a lot of equity in their home and will likely pay all cash.
    • Per our Consumer Insights Survey, nearly half of new home buyers in Southern California consist of mature single and couples.
    • The 65+ population is expected to grow 35% by 2025 nationally.
    • Target this buyer by building condo flats in prime coastal locations and more conventional single-story homes in inland areas.

  • We have several tools to help our clients navigate the market and make informed investment decisions:
    • Our Consulting team has seen what works and does not work in every market.
    • Our Consumer Insights Survey, with over 22,000 nationwide responses, provides unique insight into the price and feature trade-offs that buyers will make.
    • DesignLens is an annual membership that helps our clients stay on top of innovative new home product trends and adds value to the bottom line with a library that includes new density solutions, community design, floor plan ideas, and connection to the top design leaders in the country. Each product featured includes a photographic tour of the models or community and insightful analysis that weaves in insight from the builder as well as our consumer research.
    • Our demographics book Big Shifts Ahead: Demographic Clarity for Businesses highlights our household formation and homeownership forecasts by age group.

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