For more than a decade, the U.S. market for new luxury homes was an increasingly attractive market segment for building materials manufacturers and suppliers. From the mid-90s, when this segment averaged about 12% of all new single-family homes, until the late 90s when it grew to about 20% and remained strong into the mid-2000s. The key driver was Baby Boomers moving into their peak income earning years, and growth in income and wealth.
With the housing market crash and ensuing recession, the luxury segment of the new home market fell from its peak of 22% in 2006 to only 14% in 2010. Many believed the “dreamtime” for the luxury home market had become a distant memory. They claimed the economic downturn realigned societal values to favor frugality. Big-spending boomers were heading into retirement. The baby boom echo generation was moving into the homebuying market. All these factors seemed to portend smaller or more affordable houses. And the decline in homeownership rates, favoring a revival of new multifamily rental unit construction, cast further doubt on the future of the luxury home market.
Why does a strong luxury market really matter? A luxury home represents a much larger opportunity in materials volume than in starter and move-up homes—they are larger and cost much more to build on a per-square-foot basis. For example, starter homes built in 2011 averaged 1,600 sq. ft. of living space and cost $108 per sq. ft. Luxury homes, on the other hand, averaged a whopping 3,800 sq. ft. and cost $188 per sq. ft. For a summary of some regional difference in new luxury home materials, take a look at the recent Wall Street Journal article – Mapping the Material World – that featured some interesting data from our Annual Builder Practices Survey.
In total opportunity for building materials suppliers, a luxury home represents more than four times the revenue potential than a starter home, and about six times that of a multifamily unit! Luxury homes are fitted out much differently, too. When compared to starter homes, luxury homes are…
But don’t give up on the luxury home market yet. As the single-family housing market is now springing back to life, some hints of a strengthening luxury home market have appeared as well. In 2011, the new luxury home segment increased to 18% of the market—the same as during the housing boom years of 2004 and 2005. Further, Census data revealed in 2012 that home size for the first two quarters was higher than it had ever recorded, which means that an increase in luxury homes after 2011 is probable.
While demographics may seem to disfavor the luxury market in the coming years, a return to a feeling of affluence in the population as a whole will favor it. The economy is at the beginning of another major transformation. We’re seeing a return of manufacturing due to the revolution in extraction technologies for natural gas and petroleum from domestic sources, providing cheap fuel and low-cost raw materials for plastics. In time, the continued increase in home values will do a lot to fix the structural issues of industry economics, like low appraisals and tight lending standards, and pave the way for a return to robust housing demand. For these reasons, I am bullish on the luxury home market.***