Where were they two years ago?

This will help the pricing get back to $350,000. It will be bad if you are sitting on a big house in 2 years when the builders start plunking down little cracker boxes on the lots that they already own in the neighborhoods near you.

Inland buyers shunning mega-homes, experts say
10:00 PM PDT on Saturday, October 27, 2007
By LESLIE BERKMAN
The Press-Enterprise

The trophy house has lost its luster. With McMansions being conspicuous casualties in a mountain of foreclosures and unsold homes, builders who during the past decade sold ever larger status-symbol homes are preparing to reverse course.

Smaller and more efficient houses that middle-income buyers such as teachers, police officers and firefighters can afford are needed to revive the stalled home-building industry and lure back buyers, marketing experts say.

“The next round of development will absolutely be smaller homes,” said Alan Nevin, chief economist for the California Building Industry Association.

KB Home is building smaller more affordable homes in the Vicenza subdivision in Perris. “The next round of development will absolutely be smaller homes,” said Alan Nevin, chief economist for the California Building Industry Association.

“The No. 1 issue on everyone’s mind right now is affordability. We want to get affordable and the way to get that is to get smaller,” said Steve Ruffner, president of KB Home’s Inland Empire division.

Ruffner said whereas KB Home in the past two years built homes sized between 1,800 and 4,000 square feet, the homes in its newest communities range between 1,300 and 2,800 square feet.

Smaller homes will be designed for first-time buyers and for the baby boom generation, the eldest of whom will turn 62 next year. Builders expect they will want to trade in homes where they raised their families for lower maintenance, single-story houses.

“The next cycle (of home building) will be driven more by move-down buyers than move-up families,” predicted Mark Boud, principal and founder of Real Estate Economics, a residential real estate research company based in Irvine. “Within the next three years, the majority of what enters the market will be more affordable and, in a lot of cases, smaller,” he said.

Bigger Seemed Better

The turnabout will not occur overnight, say home-building industry experts, because builders that already have government approved plans for large homes on large lots cannot afford to make major revisions midstream. It takes time to design and engineer a new product.

“So you won’t see a lot of smaller units on the market for about a year,” said John Young, president of Rancho Cucamonga-based Young Homes.

Since the 1990s, Riverside and San Bernardino counties, once the bastion of housing affordable to first-time buyers, have seen an explosion of executive style and luxury homes. Many homeowners sold their houses and used their substantial equity as a down payment to buy something larger and fancier.

With the help of rising home values and lenient lending, there seemed to be a bottomless pool of Inland buyers able to buy the so-called McMansions — up to 4,000 square feet — that sported master bedrooms with retreats and huge walk-in closets, cavernous master bathrooms with spas, spiral staircases, multiple fireplaces, three- and four-car garages, game rooms, home theaters and sometimes even a wine cellar or separate abode or “casita” for a mother-in-law or adult offspring.

“In the last few years, most builders were going after that top 20 percent of the market, the one-in-five people, with a lot of income or a lot of equity,” said Will Haynes, a senior principal with William Hezmalhalch Architects.

As long as the economy allowed, Haynes said, the move-up market was favored by builders and land sellers because it could generate more profit than entry-level housing. He said government agencies also benefited because they could reap more tax revenue from higher-valued homes and demand more fees, parks and other benefits from developers, who could pass on the cost to well-to-do buyers.

“Everyone was hooked on higher-priced housing and the market was chasing that,” Haynes said.

But conditions have changed dramatically. Homeowners who might want a move-up house are reluctant to sell in a depressed market. Also, the risky adjustable mortgages with artificially low introductory interest rates are no longer available. Those loans once enabled many households to buy homes that were more expensive than they actually could afford.

‘A Reality Check’

Builders are leveling their sights on middle income first-time buyers, a market segment largely ignored during the recent housing boom, the housing experts say, and those customers demand houses that are simpler, smaller and less expensive.

Most builders are still busy trying to clear unsold inventories of mostly large houses with discounts and other promotions. But they say they have noticed their smaller houses are selling the fastest and that is the market they will target when they build again.

David Kent, a principal and architect at KTGY Group in Irvine, said builders are going through “a reality check.” He said they have a lot of unsold houses priced from the mid $400,000s to the mid $600,000s. “So they want to go below that.”

Nick Mugridge, 26, said on Easter, the day after his wife noticed a KB Home sign on Interstate 215, they hurried to the builder’s sales office in Perris to buy their first home for $302,000. “We put down a deposit before we saw a model because the price was so good,” he said.

Mugridge, the manager of a golf shop in Riverside, said he and his wife, the manager of a Bank of America branch in Murrieta, selected few upgrades for their 2,200-square-foot house. They skipped tile flooring, granite countertops, a security system and surround-sound speakers.

They ordered basic-white walls that Mugridge said he plans to customize with colors he will paint himself and he is also saving money by putting in the backyard landscaping and sprinklers.

Mugridge said the couple, who moved in a couple of weeks ago, were attracted by the small lot, which they knew translates into a lower selling price, and by the lack of a homeowners association, which means they won’t be paying monthly dues. Although their house is no McMansion, he said, it is big enough.

“Coming from an apartment this place is insanely big,” he wryly observed.

Builders say because land value accounts for about a third of the price of a home, the push for greater affordability will lead to detached homes on smaller lots and town houses or condominiums.

Haynes, of Hezmalhalch Architects, said ideally the home-building industry will target households with annual incomes of $55,000 to $75,000 by building houses priced between $200,000 and $325,000. A way to achieve that, he said, is to build seven or eight houses to the acre.

Haynes is developing a prototype for an expandable house. It would give first-time buyers an opportunity to buy a basic two bedroom, single bath structure of 812 square feet with a single-car garage or carport for about $160,000. The initial building would come with a large backyard and government-approved building plans for two future additions.

Ultimately the house could be enlarged to a maximum of 1,650 square feet, including four bedrooms, two baths, a family room and a two-car garage.

Matt Sauls, regional marketing manager for Pardee Homes, said of the six projects that Pardee has under development within its Sundance community in Beaumont, the best seller, Estrella, has the smallest homes, ranging from 1,274 to 1,633 square feet. Clusters of six and eight homes abut a common driveway.

Estrella houses, priced from $240,000 to $270,000, are selling at better than twice the rate of other more expensive Pardee homes in Sundance, Sauls said.

Among the buyers at Estrella is an engaged couple, Kandace Hunter and Philip Brock, both 26.

“Instead of a big wedding we decided to get a house,” expected to be built by the end of the year, she said.

Hunter, a high school teacher, said she and her fiancé, a warehouse worker and college student, were glad to find a three-bedroom house for $244,000 even if the tiny backyard will only hold a barbecue pit and a couple chairs. Plus, she said, the low price means they can still afford movies and concerts.

“It is our starter house. When we have a family we will move on to bigger and better things,” she said.

Little But Luxurious

Architects say designing a smaller, lower-priced house requires more connections with the outdoors to make a home seem more spacious. It also demands efficient engineering, such as placing kitchens, laundry rooms and bathrooms back-to-back to minimize the cost of plumbing.

What’s needed is an attractive house that feels bigger than it is, said Mike Woodley at Woodley Architectural Group in Santa Ana. “Buyers aren’t coming in and saying build me an ugly, small, cheap house.”

Architects and builders said they cannot dust off plans for smaller homes that were popular several decades ago because today’s small house has to accommodate a greater variety of household configurations, such as more singles and childless couples, and retain improvements that buyers have come to expect.

“At some point, people’s expectations have been raised about what they want in a house,” said Joe Barbano, in-house architect for Barrett American.

He said he doesn’t believe today’s home buyers would accept a master bedroom without a walk-in closet or a master bathroom without dual vanities and an enclosed toilet.

But Barbano said he expects for the sake of a lower monthly mortgage payment, home buyers may settle for tile rather than granite countertops, black- or white-faced appliances rather than stainless steel and possibly even linoleum rather than tile on the kitchen floor.

Architects say today’s buyers will sacrifice formal living and dining rooms that were popular in previous decades but they insist on having the combination family room, kitchen and eating nook, known as a “great room.”

A trend toward smaller houses is “a correction long overdue,” said Dowell Myers, a professor of urban planning and demography at USC. Myers said every decade since the 1940s the median home size in the United States has been growing.

In Inland Southern California, the median square footage in a new house more than doubled from 1,061 in 1940 to a peak of 2,556 in 2005, then slid to 2,504 in 2006.

The push to ever bigger homes, Myers said, started in the prosperous era following World War II when couples needed space to raise large families.

The baby boom generation continued upsizing as a symbol of middle-class achievement even as their family size shrank.

Typically many of the bedrooms in the last wave of big home construction were not occupied by children but used for hobbies, home offices or exercise equipment.

“People thought they needed big homes because that is what their parents had done. They forgot there was once a reason for it,” Myers said. “The fashion that was archaic has broken under the weight of rising costs. People can’t afford that much house anymore.”

Reach Leslie Berkman at 951-893-211 or [email protected]

This will help the pricing get back to $350,000. It will be bad if you are sitting on a big house in 2 years when the builders start plunking down little cracker boxes on the lots that they already own in the neighborhoods near you.

Inland buyers shunning mega-homes, experts say
10:00 PM PDT on Saturday, October 27, 2007
By LESLIE BERKMAN
The Press-Enterprise

The trophy house has lost its luster. With McMansions being conspicuous casualties in a mountain of foreclosures and unsold homes, builders who during the past decade sold ever larger status-symbol homes are preparing to reverse course.

Smaller and more efficient houses that middle-income buyers such as teachers, police officers and firefighters can afford are needed to revive the stalled home-building industry and lure back buyers, marketing experts say.

“The next round of development will absolutely be smaller homes,” said Alan Nevin, chief economist for the California Building Industry Association.

KB Home is building smaller more affordable homes in the Vicenza subdivision in Perris. “The next round of development will absolutely be smaller homes,” said Alan Nevin, chief economist for the California Building Industry Association.

“The No. 1 issue on everyone’s mind right now is affordability. We want to get affordable and the way to get that is to get smaller,” said Steve Ruffner, president of KB Home’s Inland Empire division.

Ruffner said whereas KB Home in the past two years built homes sized between 1,800 and 4,000 square feet, the homes in its newest communities range between 1,300 and 2,800 square feet.

Smaller homes will be designed for first-time buyers and for the baby boom generation, the eldest of whom will turn 62 next year. Builders expect they will want to trade in homes where they raised their families for lower maintenance, single-story houses.

“The next cycle (of home building) will be driven more by move-down buyers than move-up families,” predicted Mark Boud, principal and founder of Real Estate Economics, a residential real estate research company based in Irvine. “Within the next three years, the majority of what enters the market will be more affordable and, in a lot of cases, smaller,” he said.

Bigger Seemed Better

The turnabout will not occur overnight, say home-building industry experts, because builders that already have government approved plans for large homes on large lots cannot afford to make major revisions midstream. It takes time to design and engineer a new product.

“So you won’t see a lot of smaller units on the market for about a year,” said John Young, president of Rancho Cucamonga-based Young Homes.

Since the 1990s, Riverside and San Bernardino counties, once the bastion of housing affordable to first-time buyers, have seen an explosion of executive style and luxury homes. Many homeowners sold their houses and used their substantial equity as a down payment to buy something larger and fancier.

With the help of rising home values and lenient lending, there seemed to be a bottomless pool of Inland buyers able to buy the so-called McMansions — up to 4,000 square feet — that sported master bedrooms with retreats and huge walk-in closets, cavernous master bathrooms with spas, spiral staircases, multiple fireplaces, three- and four-car garages, game rooms, home theaters and sometimes even a wine cellar or separate abode or “casita” for a mother-in-law or adult offspring.

“In the last few years, most builders were going after that top 20 percent of the market, the one-in-five people, with a lot of income or a lot of equity,” said Will Haynes, a senior principal with William Hezmalhalch Architects.

As long as the economy allowed, Haynes said, the move-up market was favored by builders and land sellers because it could generate more profit than entry-level housing. He said government agencies also benefited because they could reap more tax revenue from higher-valued homes and demand more fees, parks and other benefits from developers, who could pass on the cost to well-to-do buyers.

“Everyone was hooked on higher-priced housing and the market was chasing that,” Haynes said.

But conditions have changed dramatically. Homeowners who might want a move-up house are reluctant to sell in a depressed market. Also, the risky adjustable mortgages with artificially low introductory interest rates are no longer available. Those loans once enabled many households to buy homes that were more expensive than they actually could afford.

‘A Reality Check’

Builders are leveling their sights on middle income first-time buyers, a market segment largely ignored during the recent housing boom, the housing experts say, and those customers demand houses that are simpler, smaller and less expensive.

Most builders are still busy trying to clear unsold inventories of mostly large houses with discounts and other promotions. But they say they have noticed their smaller houses are selling the fastest and that is the market they will target when they build again.

David Kent, a principal and architect at KTGY Group in Irvine, said builders are going through “a reality check.” He said they have a lot of unsold houses priced from the mid $400,000s to the mid $600,000s. “So they want to go below that.”

Nick Mugridge, 26, said on Easter, the day after his wife noticed a KB Home sign on Interstate 215, they hurried to the builder’s sales office in Perris to buy their first home for $302,000. “We put down a deposit before we saw a model because the price was so good,” he said.

Mugridge, the manager of a golf shop in Riverside, said he and his wife, the manager of a Bank of America branch in Murrieta, selected few upgrades for their 2,200-square-foot house. They skipped tile flooring, granite countertops, a security system and surround-sound speakers.

They ordered basic-white walls that Mugridge said he plans to customize with colors he will paint himself and he is also saving money by putting in the backyard landscaping and sprinklers.

Mugridge said the couple, who moved in a couple of weeks ago, were attracted by the small lot, which they knew translates into a lower selling price, and by the lack of a homeowners association, which means they won’t be paying monthly dues. Although their house is no McMansion, he said, it is big enough.

“Coming from an apartment this place is insanely big,” he wryly observed.

Builders say because land value accounts for about a third of the price of a home, the push for greater affordability will lead to detached homes on smaller lots and town houses or condominiums.

Haynes, of Hezmalhalch Architects, said ideally the home-building industry will target households with annual incomes of $55,000 to $75,000 by building houses priced between $200,000 and $325,000. A way to achieve that, he said, is to build seven or eight houses to the acre.

Haynes is developing a prototype for an expandable house. It would give first-time buyers an opportunity to buy a basic two bedroom, single bath structure of 812 square feet with a single-car garage or carport for about $160,000. The initial building would come with a large backyard and government-approved building plans for two future additions.

Ultimately the house could be enlarged to a maximum of 1,650 square feet, including four bedrooms, two baths, a family room and a two-car garage.

Matt Sauls, regional marketing manager for Pardee Homes, said of the six projects that Pardee has under development within its Sundance community in Beaumont, the best seller, Estrella, has the smallest homes, ranging from 1,274 to 1,633 square feet. Clusters of six and eight homes abut a common driveway.

Estrella houses, priced from $240,000 to $270,000, are selling at better than twice the rate of other more expensive Pardee homes in Sundance, Sauls said.

Among the buyers at Estrella is an engaged couple, Kandace Hunter and Philip Brock, both 26.

“Instead of a big wedding we decided to get a house,” expected to be built by the end of the year, she said.

Hunter, a high school teacher, said she and her fiancé, a warehouse worker and college student, were glad to find a three-bedroom house for $244,000 even if the tiny backyard will only hold a barbecue pit and a couple chairs. Plus, she said, the low price means they can still afford movies and concerts.

“It is our starter house. When we have a family we will move on to bigger and better things,” she said.

Little But Luxurious

Architects say designing a smaller, lower-priced house requires more connections with the outdoors to make a home seem more spacious. It also demands efficient engineering, such as placing kitchens, laundry rooms and bathrooms back-to-back to minimize the cost of plumbing.

What’s needed is an attractive house that feels bigger than it is, said Mike Woodley at Woodley Architectural Group in Santa Ana. “Buyers aren’t coming in and saying build me an ugly, small, cheap house.”

Architects and builders said they cannot dust off plans for smaller homes that were popular several decades ago because today’s small house has to accommodate a greater variety of household configurations, such as more singles and childless couples, and retain improvements that buyers have come to expect.

“At some point, people’s expectations have been raised about what they want in a house,” said Joe Barbano, in-house architect for Barrett American.

He said he doesn’t believe today’s home buyers would accept a master bedroom without a walk-in closet or a master bathroom without dual vanities and an enclosed toilet.

But Barbano said he expects for the sake of a lower monthly mortgage payment, home buyers may settle for tile rather than granite countertops, black- or white-faced appliances rather than stainless steel and possibly even linoleum rather than tile on the kitchen floor.

Architects say today’s buyers will sacrifice formal living and dining rooms that were popular in previous decades but they insist on having the combination family room, kitchen and eating nook, known as a “great room.”

A trend toward smaller houses is “a correction long overdue,” said Dowell Myers, a professor of urban planning and demography at USC. Myers said every decade since the 1940s the median home size in the United States has been growing.

In Inland Southern California, the median square footage in a new house more than doubled from 1,061 in 1940 to a peak of 2,556 in 2005, then slid to 2,504 in 2006.

The push to ever bigger homes, Myers said, started in the prosperous era following World War II when couples needed space to raise large families.

The baby boom generation continued upsizing as a symbol of middle-class achievement even as their family size shrank.

Typically many of the bedrooms in the last wave of big home construction were not occupied by children but used for hobbies, home offices or exercise equipment.

“People thought they needed big homes because that is what their parents had done. They forgot there was once a reason for it,” Myers said. “The fashion that was archaic has broken under the weight of rising costs. People can’t afford that much house anymore.”

Reach Leslie Berkman at 951-893-211 or [email protected]

“the worst of residential mortgage credit deterioration has yet to be seen across this country.”

Loved this!

These forecasts are very good. Thanks for posting.

Bugs – this is part of the banking game – create a bubble in some asset class, profit on the expansion of that bubble, then when the bubble pops profit on the deflation – Goldman will get lots of business (and fees!) from anxious clients wanting to reduce their exposure to CA real estate

Great analysis! This explains exactly why ‘the experts’ don’t say anything on the way up. They’re all in on it.

Everyday I distrust Big Business, and Big Finance more and more.

“the worst of residential mortgage credit deterioration has yet to be seen across this country.”

Loved this!

These forecasts are very good. Thanks for posting.

Bugs – this is part of the banking game – create a bubble in some asset class, profit on the expansion of that bubble, then when the bubble pops profit on the deflation – Goldman will get lots of business (and fees!) from anxious clients wanting to reduce their exposure to CA real estate

Great analysis! This explains exactly why ‘the experts’ don’t say anything on the way up. They’re all in on it.

Everyday I distrust Big Business, and Big Finance more and more.

“Bugs – this is part of the banking game – create a bubble in some asset class, profit on the expansion of that bubble, then when the bubble pops profit on the deflation – Goldman will get lots of business (and fees!) from anxious clients wanting to reduce their exposure to CA real estate”

This is the same game played back in ’99-2000 with equities. It’s taken the better part of a decade for me to begin to see the forest for the trees, but it is very clear to me now what has been going on.

In my opinion, the true origin of this was in October 1987, when I was only in my second year of High School at Lincoln-Way High in New Lenox, Il. It’s taken twenty years for this to come full circle but it is happening.

I think all of the true Piggs should really be discussing how to take advantage of this if possible. I think there will be opportunity for those who were prescient enough to see this coming. The key will be survival first and opportunity second, but I don’t think that it is impossible.