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July 23, 2016

Builders Eye Outer Lots for Entry-Level Buyers

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Builders Eye Outer Lots for Entry-Level Buyers

Builders are looking to target what they call C- and D-grade lots — which have largely been ignored in the years since the recession — to bring more entry-level buyers back to the market.

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Since the recession, with financing often severely limited, builders have catered to wealthy buyers by focusing on prime-location lots, close to big cities, with A- and B-grade spots. But as the housing market has come back, builders are realizing that there’s a mostly untapped market of entry-level buyers who want to buy new too. However, that may mean new customers may need to go farther out to get an attractive price tag.

For nearly a decade, builders have waited on C- and D-grade developments, some with half-graded lots and unfinished amenities, as they looked for home values to rise more before finishing these developments. During that time, some of these developments switched builders as they sat in influx.

“In 2014 and 2015, public builders were very reluctant to look at C and D markets,” says Mark Boud, principal of Real Estate Economics. “In 2016, they’re beginning to turn their heads a little, and I think developers have taken note of that. They’re beginning to reactivate in those areas, as builders show more interest.”

For example, builders are starting to eye lots 40 minutes or so from major cities.

“The more interior core markets are reaching the point where they’re really more or less built out,” says Jay Colvin, Metrostudy’s regional director of the Carolinas.

As such, builders from markets like Houston, Denver, Las Vegas, and Albuquerque, N.M., are moving out to submarkets.

“You wouldn’t have done this three years ago, because there was still plenty of land to go around right in Denver, at reasonable prices,” Rick Dengler, regional president for Brookfield Homes, told BUILDER online. Brookfield Homes has a development called Barefoot Lakes that is about 40 minutes north of Denver. The builder purchased the development in 2007 but hasn’t done anything with the property, until recently.

In Albuquerque, builders who want to offer more affordable home choices have to go beyond nearby prime A and B locations.

“A few years ago, there were plenty of foreclosed lots closer in, but now that those lots are all consumed, builders and mortgage companies are moving back out and going after first-time buyers,” says Vinny Pizzonia, co-president of EOS New Homes. “We started looking around for ways that we could compete, which includes looking for sites that are farther out.”

EOS has built some spec homes on lots in Los Lunas and north Rio Rancho, about 30 minutes south and north of Albuquerque. The builder sold seven homes within 10 days; the homes had a base price of $79,900.

“It is a little further out, sure,” Pizzonia told BUILDER online. “But we build in other locations about 15 minutes closer in and [know that the extra] 15-minute ride can save you $50,000.”

Source: “Lots of Risk,” BUILDER Online (Feb. 8, 2016)