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March 1, 2013

A Dynamic New Housing Market

Why the industry is evolving in innovative directions

In the six years since the housing market collapsed, thousands of builders, contractors and their legions of suppliers have been waiting patiently for a recovery that is only now beginning to materialize. But look beyond the millions of foreclosed homes, homeowners still underwater and unfinished developments that still pock the landscape, and you find success stories in places like Sunnyvale, California, that are among the many signs pointing to new and prosperous directions for the industry.

An entirely new generation of housing is rising from the ruins of the recession, in configurations and offering innovations and efficiencies that bode well for the metals industries. This housing will not just be, as conventional wisdom would have it, more rentable and smaller than in the past. It will be far more targeted to customer demographics, to the technological and financial expectations of a new strata of buyers, and capable of customization in new and intriguing ways.

Once a sleepy farming community, Sunnyvale’s proximity to Silicon Valley fueled a two-decade boom in the local housing market—a boom that ended abruptly in 2007, leaving many developers like Taylor Morrison with grim prospects. After demolishing five office buildings, the Arizona-based developer was all set to break ground on a 304-unit condominium development known as 37° North, named for its longitudinal location. That’s when the housing bubble burst. An entirely new generation of housing is rising from the ruins of the recession, in configurations and offering innovations and efficiencies that bode well for the metals industries. 

Morrison adeptly regrouped, and this past November held the grand opening for a different kind of development: a cluster of 132 townhomes designed especially for extended families—which, the developer believes, will appeal to the growing number of Asian immigrants in the Bay Area. Morrison had looked carefully at the new, evolving market for housing and tailored his project accordingly. Census figures released in 2011 show the Bay Area’s Hispanic and Asian populations each increased by more than 350,000 over the past decade, while the region’s non-Hispanic white population declined.

Those groups are about twice as likely as whites to live in multigenerational households, according to a 2010 study by the Pew Hispanic Center. Consequently, each of the 2,000-square-foot townhomes in this community is designed so that three generations can coexist comfortably. For instance, the three-level units are designed with bedrooms on each floor, and a bathroom on the ground floor so elderly family members don’t have to climb the stairs. And for younger family members, Morrison added interactive technology that lets each owner dim the lights, raise or lower the temperature and even see who’s at the front door from almost any mobile device.

Morrison’s multigenerational development illustrates the new—and creative—approaches that builders and developers will have to adopt to revive the critically important housing industry. It is a sector that in recent decades has generated a little more than one-sixth of the nation’s economic growth. While previous generations of developers thrived by simply throwing up cookie-cutter McMansions in newly created suburbs, experts now believe that old playbook won’t work with the new immigrants and the “millennial” generation, approximately between ages 18 and 34, that will constitute the majority of buyers over the next decade. “This isn’t your father’s housing market anymore,” says Jason Gold, a senior fellow for financial services policy at the Progressive Policy Institute. 

The developers who succeed going forward will largely be those who not only re-imagine what the homes and apartments of the future should be—but also where they will be located. Many experts believe the ubiquitous tract homes of the past will be replaced by homes, condos and apartments that are not only smaller and cheaper but more flexible, more energy-efficient and—not least—more urban. That’s partly because the demographic group—the traditional family of four—that the suburbs were built for is shrinking: According to the Census Bureau, the percentage of married couples with children has fallen by half, to 20%, since 1970. At the same time, the share of single-member households—a group that historically has preferred urban living—has risen from 13% to 28% over the same period.

“The age of suburbanization and growing home-ownership is over,” John McIlwain, a senior resident fellow at the Urban Land Institute wrote in a seminal 2010 report. “The coming decades will be the time of the great re-urbanization.”

 

Responding to New Values

 

“Much of this future development is going to be high-density, with steel frames and reinforced concrete and energy-efficient metal roofing,” 

 

In large part, the coming shift back toward cities reflects the changed values of buyers who no longer see housing as the investment it once was. A 2011 study by the National Association of Realtors found that more than half of those surveyed preferred smart-growth communities, mixed use urban districts planned for transit, bicycles and walking with intentionally small carbon footprints. Nearly three out of five in the same study said they would choose a smaller home if they could cut their commute to 20 minutes or less. And this includes retirees who want to move closer to city services and urban amenities, and have outgrown their taste for the expense and labor involved in suburban home maintenance.

Surveys also show that millennials place greater importance on living close to work and friends. According to a 2010 study by Robert Charles Lesser & Co, a Washington, D.C., consultancy, more than two-thirds of millennials said living in a walkable community was important—and more than half would trade lot size for proximity to shopping or work.

Christopher B. Leinberger, director of the graduate real estate development program at the University of Michigan and a visiting fellow at the Brookings Institution, believes that suburban sprawl will give way to “walkable urbanism,” as millennials, immigrants and empty-nest boomers look for less suburban developments that boast the strong schools associated with the suburbs and the cultural activities associated with center cities.

 

Housing That Uses More Metals

This shift will represent a boon for the metals industry, which historically has struggled to build a greater share in the residential market, he says. “Much of this future development is going to be high-density, with steel frames and reinforced concrete and energy-efficient metal roofing,” Leinberger says. What’s more, some developers are incorporating the same mechanized lifts used in theater staging to transform an 800-square-foot studio unit into a living room, dining room, bedroom and more—flourishes that may appeal to suburban retirees looking to move back into the city.

The housing industry will need new thinking like this as it hopes to lift the cloud that has hung over the sector for the past six years. Because despite the hopeful signs of recovery, persistently high unemployment, coupled with a seemingly never-ending wave of foreclosures and distressed sales, have combined in recent years to push new home sales down to the lowest level in decades. Dan Greenhaus, chief global strategist for BTIG, notes that even if new home construction doubled overnight, housing starts would remain below that of any recession in recent decades.

While housing historically has declined during periods of high unemployment, the high consumer-debt levels and tight credit conditions that characterized the latest recession exacerbated the recent housing downturn. Millennials, who should have been entering their prime home-buying years, suffered the most.

Though the unemployment rate for millennials—11.5% in December—still exceeds the national average, a more serious problem for them has been crippling student debt. Nearly $1 trillion in outstanding student debt, held mostly by the 74 million millennials, has helped drive the median net worth for Americans under 35 to just $3,662, 68% less than the same age group held in 1968. As a result, only 9% of 29- to 34-year-olds took out a first-time mortgage from 2009 to 2011—or roughly half the 17% who bought their first home a decade earlier, according to a Federal Reserve study released last year.

“First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly,” Federal Reserve Chairman Ben Bernanke said at a homebuilder conference early last year.

 

An Industry Lagging Behind Market Demand?

Some experts, such as Leinberger, believe that the weak economy isn’t the only reason sales have not rebounded. He argues that the dearth of sales activity may also reflect the fact that the industry isn’t building the smaller, urban, more adaptable and interactive homes that the next generation of buyers wants. “It’s my contention that the reason we’re bumping along at 2% [growth in housing starts] is because the development skillset of the housing industry hasn’t caught up with market demand,” he says.

As a result of slow home sales, developers of apartment complexes have seen demand soar over the past five years. According to the National Association of Homebuilders, developers broke ground on 178,200 multifamily units in 2011—a 54% increase over 2010. And if the next generation of buyers perceive housing as a shaky investment, experts believe that could create a new apartment boom, the likes of which hasn’t been seen since the early 1970s—when monthly multifamily starts hit the 1 million mark.

Yet, suburban apartment complexes of the future won’t be anything like the garden-style rentals of the past. Humphreys & Partners Architects LP, an Irvine, California-based firm that designs roughly one out of every six new apartments each year, has for example introduced a new floor plan, the e-Max, that squeezes a studio unit into 340 square feet by incorporating a rolling island and a fireplace tucked beneath a closet. According to the firm’s CEO, Mark Humphreys, younger renters are willing to accept smaller living quarters in exchange for resort-style common areas with stainless-steel barbecue grills and poker lounges where they can entertain friends and neighbors.

Urban developers are getting into the act, too, using creative flourishes to build more-affordable apartments. In San Francisco, developer Patrick Kennedy has designed a prototype unit that takes its inspiration from an Airstream trailer to build a 160-square-foot studio that meets the city’s smallest legal size for new apartments. And Simon Woodroofe, who built the capsule hotel Yotel off Times Square in Manhattan, has designed an 800-square-foot prototype called, YO! Home, that feels as much as four times larger thanks to motorized lifts that shift panels to transform a bedroom, say, into a living room. “Space is such a premium in city centers around the world,” Woodroofe says, adding that his concept “simply expands that space.”

 

Rethinking the Traditional Home

At the Massachusetts Institute of Technology, researchers have
developed robotic movable walls that let homeowners and condo
dwellers adjust room sizes as their needs shift—over the years or the
course of a single day. (photo courtesy of Kent Larson)

 

Experts believe that to coax the growing legion of renters back into the housing market, builders will have to rethink the traditional home as well. Doing that will require developers to combine new materials, technology and a greater understanding of demographics in ways rarely done before. It also may require the industry to rethink the “trade-up” and “planned obsolescence” philosophies that have defined housing.

Future buyers, for instance, may be more likely to demand more flexible units that last longer and can be modified to meet their changing needs over time. That means homes could be built with a kind of spine or shell that can be updated over the years as the buyer ages—and as newer, improved materials emerge. New structures may combine an owner’s home and business under the same roof—with the ability to move the walls for each as their business and family needs change. Two Clemson University architecture students designed such a mixed-use design, called LiveWork, and their concept won the international Dow Solar Design to Zero competition in 2012.

Much like “open-source” software programs that users can customize as needed, future owners or renters could use Web-based tools and configurators to design the wall units according to their individual needs and interests. At the Massachusetts Institute of Technology (MIT), researchers have developed robotic movable walls that would let homeowners and condo dwellers adjust room sizes as their needs shift over the years or the course of a single day.

“First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly,” Federal Reserve Chairman Ben Bernanke said at a homebuilder conference early last year.

 

By using transformable wall systems made with steel, a bedroom could transform to a home gym, a living room into a dinner-party space for 16 or an open loft space for a large party. This flexible approach enables an 840-square-foot condo or apartment to function as a unit two to three times larger—but at a price that costs 10% less than conventional construction and, hence, is more affordable. “Open-source housing could be a hot trend moving forward,” says Kermit Baker, a senior fellow at the Joint Center for Housing Studies at Harvard University and chief economist for the American Institute of Architects.

A new era of flexible housing could have far-reaching ramifications, even down to how homes and apartments are built. To Kent Larson, an architect and director of the Open Source Building Alliance at MIT, the advent of flexible housing would turn construction into “much more of an industrial design process than a craft,” with the motorized systems and components prefabricated in a factory and then installed on site. That’s already happening in Europe, where factory workers now churn out finished walls, floors and roof panels that are assembled with the help of automated equipment.

The idea of housing with movable walls, mechanical lifts and computer controls may seem hard to believe. Then again, it wasn’t too many years ago that the notion that housing could ever drop in value seemed just as far-fetched. But the plunge in housing prices around the country seems to have left future buyers chastened—and more unwilling to consider housing as an investment. If that’s the case, then these new technologies, materials and concepts may actually return housing to what it used to be: a decent investment and a comfortable place to live, raise a family and grow old.


Dean Foust was a writer, editor and bureau chief for BusinessWeek for 23 years. He now produces thought leadership content for corporate clients, including a number of Fortune 500 companies.