Homebuilders Going Small

Is small beautiful? The homebuilders evidently think so as they’re cutting the size of their starter homes in an effort to compete with foreclosures.

BusinessWeek has an article that features KB Home’s new Open Series which starts at 964 square feet. In Tucson the base model sells for $89,999. It downsizes hallways and bathrooms and uses other techniques to save on construction costs. Buyers have multiple options, however, in terms of adding rooms which can increase the overall size by 40%.

According to KB Home (NYSE:KBH) the strategy is a winner. They credit the program with a 59% jump in new orders since the first of the year. Though sales are down year over year at this point they expect 2009 orders to be up overall by the end of the year.

DR Horton (NYSE:DHI) has also introduced similar offerings and I had an earlier post about Meritage rolling out the same idea. Even Toll Brothers which specializes in upmarket housing is downsizing some of its bottom end offerings.

Does It all make sense? If you want to compete with foreclosures, it’s probably the only option other than not building at all. Homebuyers looking for a starter home, particularly those without families, will probably find the offerings attractive. It might even have some legs with those looking to downsize but the big question in my mind is how houses this small will hold up in the resale market.

I’m not convinced Americans are ready to abandon lots of living space. Maybe if energy costs get high enough the incentive will be sufficient to force downsizing but that’s a bet on something that has been promised forever and still hasn’t materialized. McMansions may be a thing of the past but I just don’t see homeowners, particularly young ones, resigning themselves to raising a couple of kids in a thousand square feet.

I really do wonder if this is a lasting trend.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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