Homebuilders entice renters by streamlining buying process

Cheryl Pate-Yow rushed to LGI Homes Inc.'s sales office south of Houston the day after receiving a mailer that said she could own a new home for $689 a month, only $24 more than rent on her one-bedroom apartment.

"I'm sick and tired of renting and my money goes nowhere," Pate-Yow, a 46-year-old former chef, said during a visit to LGI's Hall Park community showroom. "I didn't think I could afford to own, but I got this flier in the mail."

LGI, an entry-level Texas builder that has moved into six more states, is demonstrating that the U.S. housing crash didn't diminish the desire for homeownership. The company's strategy of luring renters with low-cost houses and assisting them with getting mortgages has spurred record sales and made LGI the top-rated builder among analysts. It's also attracting competition as D.R. Horton Inc., the largest in the industry, starts a brand aimed at first-time buyers with prices starting at $120,000.

"They're proving that there is demand on the very bottom end," said Peter Martin, a San Francisco-based analyst with JMP Securities LLC. He has LGI as his top homebuilder pick after a more than 60 percent jump in the shares since the company's November initial public offering.

LGI, based in The Woodlands, Texas, is catering to homebuyers who have been left behind in the 2-year-old real estate recovery. The share of U.S. first-time purchasers, historically about 40 percent, was 27 percent in May as slow wage growth, tight mortgage standards and rising prices put buying out of reach for many Americans, according to the National Association of Realtors.

Rental costs have surged as demand for leasing soars. The median rent in the U.S. has been about 30 percent of median income for the past two years, the highest share in data dating back to 1979, according to Seattle-based Zillow Inc.

"One of the reasons we're so busy is that it's very attractive from a value standpoint when you compare the cost of renting to homeownership," LGI Chief Executive Officer Eric Lipar said in a telephone interview.

For those who can qualify for mortgages, buying is now 38 percent cheaper than renting, according to San Francisco-based Trulia, an online real estate information firm. Among young renters, 93 percent want to be homeowners someday, based on a company survey late last year.

"The barriers to homeownership are high, but they're keeping some people out who could be spending a lot less on their housing longer term if they owned instead of rented," said Jed Kolko, Trulia's chief economist.

That's created an opportunity for homebuilders, which since the housing crash have been focusing on buyers with easier access to credit who can afford larger, more expensive properties near employment hubs. The median price of a new U.S. house reached a record $285,400 in March and was $282,000 last month, according to data reported Tuesday by the Commerce Department. Sales jumped 18.6 percent in May to the highest level in six years.

Horton's low-cost Express Homes brand has the potential to account for 20 percent of the Fort Worth-based builder's revenue in two or three years, according to Chief Executive Officer Donald Tomnitz. Horton, which had $6.1 billion in sales during fiscal 2013, is already marketing the homes in 45 communities in six states.

"My goal is, how do you increase the pool of affordable buyers?" Tomnitz said at a May Wells Fargo & Co. conference in New York. "Job growth helps, and that's what really drives our business. But if you're not getting help from the job side, then how do you change your product offering?"

Stephen Kim, a New York-based housing analyst with Barclays PLC said companies that take the lead in serving entry-level buyers have "first-mover advantages," because they're stockpiling lower-cost land before competitors.

"This is a market that to some degree has been overlooked, and it's poised to get better," Kim said in a telephone interview. Public homebuilders, many of which have mortgage units, are often able to "handhold" buyers through the loan process, he said, making new homes more attractive than existing properties for first-time owners.

LGI covers closing costs and works with mortgage and insurance companies to streamline underwriting for government loans that require no down payments -- or small ones -- for buyers who meet minimum credit requirements.

Each week, the company blankets apartment complexes and single-family rentals near its eight Houston communities with 12,000 mailers, said Brian Batten, vice president of sales for the Houston area. The fliers ask 'Tired of Renting?' They highlight the monthly costs more than the asking prices. They exclude taxes and insurance, which can cost hundreds of dollars more.

While the goal of creating more affordable housing is laudable, risks arise when entire communities belong to buyers with low down payments and fragile finances, said Jack McCabe, a housing consultant based in Deerfield Beach, Fla.

"If there's any problem with the household income or an illness or something like that, it's very easy for people to walk away," McCabe said in a telephone interview. "There's a possibility that we're going to see neighborhoods in future years devastated by foreclosures because people didn't have a stake in their homes."

Some builders aren't trying to reach entry-level buyers because banks are afraid of being penalized for giving them mortgages if something goes wrong, according to John Burns, a housing consultant based in Irvine, Calif.

"The problem is that many borrowers, who most would say are good credit risks, cannot get a mortgage because they have some sort of credit history problem, such as a missed payment, a medical bill dispute, or a short period of unemployment," Burns, CEO of John Burns Real Estate Consulting, said in an email. "The banks are waiting to be told that they can lend to these people."

Business on 06/26/2014

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