DO HOME BUILDERS UNDERSTAND WHAT BUYERS WANT?

Two real-estate economists said Thursday that many home builders aren’t doing a good job of determining what home buyers want.

Nela Richardson, chief economist for brokerage Redfin Corp., and Selma Hepp, chief economist for Zillow Group’s Trulia real-estate website, both said builders aren’t constructing enough entry-level housing to meet demand. They’re focusing more of their resources instead, the economists said, on building pricey homes for buyers with ample credit.

“If there is any speculation in building, it’s going to be toward the higher end,” Ms. Richardson said, speaking during a panel discussion at the National Association of Real Estate Editors’ annual conference in Miami.

By speculation, she meant building homes without buyers already signed up. Building entry-level homes on a “spec” basis was a common practice before and during last decade’s real estate boom, when there was ample demand for those homes.

But that entry-level demand fell off dramatically in the downturn and since, with many entry-level buyers hampered by strict mortgage-qualification standards and mounting student debt. Meanwhile, demand for pricier homes remains strong, so builders can safely construct spec homes in that segment. But determining if entry-level demand is recovering well enough to warrant wide-scale spec building of less expensive homes requires builders to make an educated guess about future demand.

The economists say entry-level housing demand is adequate and increasing. But many builders aren’t so sure.

“First-time purchasers have begun coming back to the housing market, more slowly than expected and more slowly than they have historically,” Stuart Miller, chief executive ofLennar Corp. said during the builder’s call Wednesday to discuss its fiscal second quarter results with investors. “They’ve had the most difficulty accessing the mortgage market. And although that is beginning to open up … they are not yet jumping into the marketplace.”

Both economists noted that condominium construction generally is depressed relative to demand because builders are focused more on rental apartments. Condos are a common landing spot for first-time buyers because condos are smaller and less expensive than detached, single-family homes.

Trulia’s Ms. Hepp said builders are wary of building condo projects due to theprevalence of construction-defect lawsuits filed in various states by condo owners associations. Redfin’s Ms. Richardson added that it’s easier and less risky for builders to sell a newly constructed multifamily complex to a single institutional buyer rather than piecemeal to scores or hundreds of individual buyers as condos.

The economists were split on whether home construction will fully return in far-flung suburbs, often called exurbs. Builders had all but abandoned those areas in the downturn, because the price-sensitive buyers that favor the less-expensive housing built in the exurbs had stopped buying and many buyers favor the shorter commutes to and from homes closer to the city center.

“Every indication is that millennials want something different,” Ms. Richardson said in explaining her prediction that the exurbs won’t fully return to favor. “They want to feel connected to their neighbors and their communities.”

Ms. Hepp countered that price is the driving factor for many buyers. “Why people go to the exurbs is because of affordability,” she said.

The economists each cited data from their firms’ surveys regarding buyer preferences. Recent Trulia surveys found that two out of five buyers prefer new homes because they want modern features, the ability to customize amenities and less need for maintenance and repairs, Ms. Hepp said. She added that roughly half of respondents said they want larger homes than those they were in.

Redfin surveys found that 36% of buyers cited convenience as the main factor driving their home purchase, 11% cited affordability and 5% said they primarily want a newly built home.