The housing industry still hasn't realized it's building too many homes for rich people.

The Housing Industry Still Hasn’t Realized It’s Building Too Many Homes for Rich People

The Housing Industry Still Hasn’t Realized It’s Building Too Many Homes for Rich People

Moneybox
A blog about business and economics.
Aug. 25 2017 8:49 AM

The Housing Industry Still Hasn’t Realized It’s Building Too Many Homes for Rich People

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Fewer of these, please.

iStock/Thinkstock

It's possible to get rich if your business only caters to rich people. But it's hard to have a massive and really successful industry in the United States today if you only cater to rich people. There are only so many people in the country with good credit and lots of cash sitting around. And this week, we got evidence that one of America’s largest industries may be running into trouble because its products appeal only to the upper crust. I’m not talking about jewelry or apparel. I’m talking about housing.

On Tuesday, luxury homebuilder Toll Brothers reported a blow-out quarter, noting that contracts and sales were up 20 percent from the year before, and said it might sell more than 2,500 homes in the upcoming quarter.

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On Wednesday, the Census Bureau announced that new home sales in July were down 9.4 percent from June, and down 8.9 percent from July 2016.

On Thursday, the National Association of Realtors reported that existing home sales in July fell 1.3 percent in July from June—to an annual rate of 5.44 million. While the rate of sales in July was still up 2.1 percent from July 2016, this was the lowest reading of 2017 to date.

It amounts to a fairly neat summation of the American economy right now. Toll Brothers builds McMansions and expensive condos in and around wealthy urban areas. It caters to a distinctly high-end crowd, and would be psyched if it could sell 10,000 homes in a year. At the company’s Pierhouse at Brooklyn Bridge Park building in New York, condos start at $1.5 million. In the most recent quarter, the average price for a Toll Brothers home that went into contract was $837,300. But yuppies, foreigners, millennials with cash, and baby boomers are lining up. In the first nine months of this fiscal year, Toll Brothers sold 22 percent more homes than it did the in the first nine months of the previous fiscal year.

Toll Brothers may not be a typical new homebuilder, but it is clear that the building industry writ large is aiming to pitch its product toward more affluent buyers. Look at the Census’ new home sales release. The median sales price of a newly constructed home sold in July was $313,700, up 7 percent from July 2016. That may not sound like much, especially if you live in an expensive coastal region. But that’s 21 percent higher than the typical price of an existing home. And over the past several years, the building industry has raised prices on its offerings at a pace that has exceeded both the rate of inflation and income growth. In July 2012, the median price of a new home sold was just $232,600. In five years, the price of a median new home has risen by 35 percent. All of which is to say that, with each passing month, the homebuilding industry is pitching its products at a smaller, wealthier demographic slice.

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There’s also evidence that existing homes (about 10 times more existing homes are sold each year than new homes) are getting too expensive for buyers. For 65 straight months, the National Association of Realtors notes, the price of existing homes has notched year-over-year gains. In July, the median existing-home price for all housing types, the group says, was $258,300, up 6.2 percent from $243,200 in July 2016. Four years ago, the median existing home price was a mere $213,000. Which means that prices of existing homes have risen 21 percent in the past four years. Because income growth for typical Americans—the type of people who buy typical homes—has been stagnant, this means that as the market continues to rise, fewer and fewer people can afford to bid on and purchase existing homes.

To their credit, in this expansion, the mortgage industry has not responded to the rising challenge of affordability by massively lowering its standards or by offering no-money down mortgages and other exotic lending instruments. By and large, if you want to buy a house today, you’ve got to come up with a meaningful down payment and show good credit. Of course, there are a limited number of people in the U.S. who have $40,000 or $50,000 in cash lying around to make a down payment.

Clearly, there is something of a housing shortage in the United States. One of the reasons that the price of existing homes is rising so rapidly is that there isn’t much supply. The number of existing homes for sale fell 9 percent from July 2016 to July 2017, and, at 1.92 million, represents a meager 4.2 months of supply.

The solution to the problem is for developers to increase the supply of affordable homes, and to bring large numbers of homes to the market that are closer in price to existing homes. But there’s no evidence that is happening. In July, 9,000 new homes worth more than $500,000 were sold in the U.S.—only 8,000 homes worth less than $200,000 were.