Comment: Housing inequality is only going to get worse for now

By Conor Sen / Bloomberg Opinion

Like so much else in the U.S. economy, the housing industry is realizing that it pays to chase luxury these days. Even in a market that’s famously unaffordable, buyers looking for high-end finishes and communities with golf courses and pickleball courts are willing to pay up. At the entry level, price is the only differentiator. What is a savvy builder to do? Migrate toward the higher end of the market, of course.

That’s the scenario likely to play out as the fortunes of wealthy households and working-class Americans diverge in an economy where the stock market is booming, but the labor market is sluggish. The near-term implications are a slowdown in the construction of entry-level homes; hardly what’s needed to improve affordability. But what’s often missed is that, in the longer term, all building is good building: More luxury housing will have the effect of putting on the market more 20- and 30-year-old starter homes being vacated by millennials ready for an upgrade.

For now, million-dollar-plus homes are the fastest growing part of the resale market, up 20 percent in September from a year earlier, followed by homes in the $750,000 to $1 million range. Three large, publicly traded developers spoke to how this divergence is playing out in the new builds market during their recent quarterly earnings updates. PulteGroup Inc. said that net new orders from first-time buyers were down 14 percent year over year. Orders from move-up buyers were down 3 percent, while those from active adults (think 55 and older) climbed 7 percent. “Weaker consumer confidence and stretched affordability are limiting opportunities with first-time buyers,” Pulte’s Chief Executive Officer Ryan R. Marshall said.

Taylor Morrison Home Corp., for its part, noted that its positioning at the higher end of the market has been a source of resilience. About 70 percent of the builder’s sales derive from move-up or “resort lifestyle” buyers, which explains its average selling price of $602,000. Compare that to an entry-level builder like Lennar Corp. with an average selling price of $383,000. Taylor Morrison’s Chief Executive Officer Sheryl Palmer said the company has “a price-focused approach to drive volume, especially where we serve predominantly first-time buyers,” while it can be “more patient to protect values,” with its more affluent communities. Profit margins in the resort-lifestyle segment are “typically the highest kind in the portfolio,” Chief Financial Officer Curt Vanhyfte said.

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