Dallas-Fort Worth Real Estate Investor Club

In Tepid Housing Market, Builders Cater to Desires of Well-Off

Dionne Searcy
CNBC.com
Feb 25, 2015

Lisa Gray spent a few months searching for a home that would span the generations, one where her two sons would want to bring friends throughout their teenage years and that her aging parents could navigate with ease.

She settled on a two-story house here tailored to include a game room for the boys and a first-floor guest bedroom to avoid the need for climbing stairs. The cost of most homes in this new development? Roughly $1 million — and up.

"I thought I would just build and make it exactly like I want," said Ms. Gray, a managing partner at a venture capital firm, who moved into her gray-speckled-stone home three months ago.

The spacious new homes that Toll Brothers, one of the nation's top builders, is constructing on 463 acres 30 miles west of downtown Philadelphia may represent just one small slice of new-home construction, but they also tell a larger story of an economy that is increasingly driven by the needs and desires of the nation's most affluent consumers.

"There are big barriers to homeownership for lower-income households," said Jed Kolko, chief economist at Trulia, an online real estate company. "More homes have been selling in the million-dollar-plus range as the economy has recovered, and high debts and poor credit history are particularly strong challenges for many lower-income households."

In the initial years after the collapse of the housing bubble, a severely wounded industry focused mostly on putting up more affordable duplexes and other multifamily housing, including rental apartments.

But some economists say that demand for multifamily construction is leveling off. Home price appreciation in general is slowing as well; the Standard & Poor's/Case-Shiller index report on Tuesday showed a pace of growth in the single digits.

In this environment, builders are turning to the wealthy as the most reliable market on which to place their bets.

"That buyer is financially very sound, and they are putting a significant amount down," said Douglas C. Yearley Jr., the chief executive of Toll Brothers. "So, yes, we like the profile of that client and we are very confident they will close."

It is not just builders in the affluent northeast and along the California coast who are building million-dollar homes. Developers near Minneapolis, Houston and elsewhere are rapidly selling newly constructed million-dollar homes as well.

Home sales of $1 million and higher account for only a small share of the overall market. Sales of new homes over $750,000 made up just 3.7 percent of all new-home sales in 2013, according to census data. But for Toll Brothers and several other builders, the million-dollar price point has become a new sweet spot for attracting buyers.

Last year, Toll Brothers sold 585 homes across the nation priced at $1 million or more, according to Metrostudy, a research company that focuses on residential real estate development and new-home construction. That was nearly three times the number it sold just two years previously, the company reported.

Toll Brothers has long included the high end in its spectrum of new homes, but even builders known primarily for affordable offerings, like D.R. Horton, are selling a lot more million-dollar homes. According to Metrostudy, D.R. Horton in 2012 sold just five homes for $1 million or more; last year it sold 145. PulteGroup/Del Webb/Centex, Taylor Morrison and Lennar followed similar patterns in recent years.

For wealthy buyers, the recession is long gone, said Mike Castleman Jr., senior vice president of Metrostudy. "If the builders want to stay in business and keep the flywheel running, they go after that market."

Even apart from the million-dollar level, many builders are moving upscale as fast as they can. The price of newly constructed homes has risen significantly faster than the price of existing homes, according to an analysis from Zillow, the online real estate firm. In September 2005, the average price gap between existing and new homes was about $32,000; by December 2014 it had widened to $122,000.

At the Newtown Square development, called Liseter, even the harsh winter weather was doing little to slow the bulldozers breaking through the frosty ground this month for homes that will feature cathedral ceilings, hand-scraped hardwood floors, winding staircases, his-and-her walk-in closets and garages with what look like antique barn doors. The development sits on a former Monticello-inspired estate where Jean Liseter Austin du Pont once bred Welsh ponies and hunting beagles.

Buyers can tweak the floor plan, pick from a variety of shower designs and fireplace tiles, and adjust the number of data ports in the walls. Since construction began in January 2013, Toll Brothers has sold 136 homes at Liseter and hopes to sell about 300 more.

Not all the Liseter homes begin at $1 million, but buyers want extras — sunrooms, built-in wine storage, even the ultimate man cave with a glass-encased room for brewing beer — that push the price as much as $300,000 higher.

"We're trying to cater to the higher end just because that's what the market is demanding," Brian Thierrin, a Toll Brothers senior vice president who is overseeing the Liseter project, explained as he meandered through model homes after showing off a club house that looked like a fancy restaurant and spacious gym in a separate building. Final work on an infinity pool awaited warmer temperatures.

In expensive cities like New York, San Francisco and Los Angeles, million-dollar homes and apartments are hardly a rarity. But now they are spreading more widely across the country, and builders are eager to please the growing number of baby boomers who have risen to high salary levels and managed to accumulate substantial savings.

Inside a model home at Liseter, a soon-to-be-retired couple hovered over the blueprints of their new $1 million home, fussing over plans for their five-car garage to house a small Corvette collection. Their friends expected them to downgrade when they retired. Instead, by picking a new four-bedroom home, roomy enough to host grandchildren, they were doing the opposite.

In suburban Minneapolis, buyers of million-dollar homes include executives from corporations that have headquarters nearby. While few large new developments are in the works, several custom builders are putting up designer homes in Edina, Minnetonka and other upscale suburbs. Last year 468 homes, new and previously owned, sold for $1 million or more in the Twin Cities metro area, just over the number sold in 2004, around the time of the previous peak, according to Chris Prescott, a real estate agent with Redfin, a national brokerage.

"One million dollars buys a heck of a lot more in Minnesota than it does on the coast," said Mr. Prescott, who has worked in the area for 25 years.

The same goes for areas outside Houston such as Sugar Land and Woodlands, where $1 million buys a 3,500-square-foot home with a swimming pool on a half-acre lot, according to Tara Waggoner, a Redfin agent there. Many of the buyers are in the oil industry, relocating from the coasts or overseas, she said.

Developers say the rise of million-dollar home building reflects in part the challenges of gambling on open space in an uncertain market. As the recession eased, many builders bought only the most desirable sites, paying top dollar.

Toll Brothers recently acquired 5,000 lots in California where most of the homes will sell for more than $1 million. The new million-dollar homes Taylor Morrison is offering in Irvine, Calif., sold more quickly than the company expected.

"We're not purposefully skewing our business toward million-dollar homes," said Erin Willis, a spokeswoman for Taylor Morrison. "We're not going after these buyers because they have money. Core locations even in a bad market will perform better than bad locations."

PulteGroup's bigger number of homes priced above $1 million last year — mostly in California and Northern Virginia — is a small part of the inventory for a company that has an average selling price of roughly $330,000, said James Zeumer, a company spokesman. "The increase does not reflect a strategic shift in our business, but rather the normal mix and price shifts that can occur for a national builder," he said.

Stan Humphries, chief economist at Zillow, said that the housing market would not return to full health until builders are able to attract customers of all income levels. And with the job market finally improving, developers say more affordable homes may be on the way.