The real estate market's slowdown has claimed Kara Homes Inc., which filed for Chapter 11 bankruptcy protection last week. The East Brunswick, N.J., homebuilder had overbuilt, so when the market slowed, it was stuck with too much inventory. Its attempts to unload inventory by borrowing from the auto industry's playbook, like discounting homes by up to $100,000 and paying a year's worth of a mortgage, only exacerbated its troubles. However, sales gimmicks were not its only trouble, according to a story in The Deal.
According to Richard Bove, a senior financial analyst at Punk, Ziegel & Co.: housing was aided in large part by demand from older buyers—in the realm of 45 to 64 years of age—purchasing homes, as opposed to young first-time buyers. As a result, while mortgage rates sit at near-historic low levels, enough demand can’t be generated to sop up inventory.
As a resident of New Jersey who bought a first home about three years ago, I have anecdotal evidence that most everything Kara, and rivals K. Hovnanian, Toll Brothers, and others built in the Garden State was tailored to the needs of Baby Boomers and not first-time buyers. Even a vast majority of townhomes were designed for affluent buyers rather than first-time buyers. Based on Bove’s comments, builders were ignoring first-time buyers because there was a larger market of Baby Boomers seeking homes both larger homes or step-down townhouses.
Another factor in New Jersey that led Kara and others to focus on older buyers wasn't just the affluence of those buyers. Municipalities encourage developers to build adult communities for people over 55 years old. In New Jersey, where real estate taxes are the highest in the nation, municipalities love these complexes because they provide tax revenue with little drain on the school system and other resources.
Of course, until recently, focusing on Baby Boomers made sense. After all, first-time home buyers traditionally have been members of Generation X, who are a far smaller demographic than the Baby Boomers and Generation Y that bookend them. However, Gen Y, which is now entering the age for first homes, may be large enough to support a market for new construction. In other words, Kara should consider its restructuring to catch the wave of Gen Y first-time buyers because the market for Boomers is clearly well served.
Of course, one could argue that Gen Y should contend with existing inventory the way their older siblings did. —Matthew Wurtzel
See story about Kara bankruptcy from The Deal
See story from The Newark Star-Ledger
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