Builders' new niche has smaller homes with smaller prices

Surging prices have almost closed off the new-home market to young buyers such as Brandon and Quincey Lindemann. But the Denver-area couple has found a way in.

The Lindemanns paid $350,000 in October for a three-bedroom house at Tri Pointe Group Inc.'s Terrain, a new Castle Rock, Colo., community designed for first-time buyers. While the home has press-board kitchen counters and a yard too small for the children the Lindemanns plan to have, it's almost 30 percent cheaper than the average for a new house in the area.

"We were willing to sacrifice some luxury to have some solid equity in a home," said Brandon Lindemann, 25, an auto-repair shop manager who plans to install tile flooring himself. "We couldn't afford much more than the basic, but I'm a pretty big do-it-myself person."

Following the success this year of D.R. Horton Inc.'s low-cost Express brand, national firms including Tri Pointe, Taylor Morrison Home Corp., and Meritage Homes Corp. are testing cheaper offerings in markets from Colorado to Florida to California. Builders had shifted away from entry-level buyers following the housing crash and instead focused on developing larger, more- profitable homes during the recovery that began in 2012 amid an increase in land and labor costs.

"The recovery in the move-up segment is getting long in the tooth - there are only so many buyers who can pay $400,000 and above," said Drew Reading, a homebuilding analyst for Bloomberg Intelligence. "The main concern in 2016 and beyond is that affordability is becoming a bigger issue."

D.R. Horton, the nation's largest builder, now collects 14 percent of its revenue from its Express brand, and LGI Homes Inc., a Texas-based builder of entry-level houses that became a public company two years ago, has been the best-performing homebuilder stock this year. It reported an 88 percent increase in revenue in the third quarter from a year earlier.

"When D.R. Horton first announced that it was going to go after the entry-level portion of the market, a lot of other builders wanted to wait and see how it turned out," said Brad Hunter, chief economist for housing-research firm Metrostudy. "Now that they've seen the concept proven, they're figuring out their own way to provide a home that's more affordable."

Few builders target the lowest price ranges because communities with those types of homes would be most vulnerable to a downturn.

Still, Meritage has been expanding a segment it calls "entry-level-plus," which starts in the low $200,000s in the Houston area.

"Home-price appreciation has gotten to the point where if interest rates start moving up significantly, there's going to be greater demand for the lower price point," said Brent Anderson, a Meritage spokesman.

All eight communities that Meritage plans to open next year in the Houston area will be in the entry-level-plus category, partly because rising oil prices have already cut into sales in the higher-priced segments, said Steve Harding, president of the division.

The entry-level-plus homes are $50,000 to $100,000 cheaper than the company's typical homes in the Houston market because they're smaller. Designers removed fireplaces and the standard mud room off the garage and put masonry only on the front of a house, Harding said.

Tri Pointe, which built the Lindemanns' home in the Denver area, plans to increase its share of first-time buyer properties to 40 percent from about 35 percent now, according to chief operating officer Tom Mitchell.

The homebuilder expanded its offerings in Denver, Las Vegas and Phoenix, in addition to its entry-level communities in California regions including the Inland Empire and Contra Costa County.

"It's good to see demand back in the marketplace - it gets builders to be creative and come up with ways to meet that demand," Mitchell said. "When we can find the land and create the product to deliver affordable price points, they are selling."

The Lindemanns said they considered buying an existing home, but were scared off by stories of bidding wars with dozens of offers.

"We were tired of paying rent," Brandon Lindemann said. "When we have kids, we can get the dream house with a big backyard, at a time when we're making a whole lot more money."