Moody's: US Homebuilders Increasing Focus on Entry-level Homes to Ease Affordability Challenges

First-time and entry-level homes will capture stronger demand trends over the next 12 to 18 months than other product categories

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Declining affordability, the result of rapid and persistent home price appreciation and rising homeownership costs, is among the main reasons for the current softening in the U.S. homebuilding industry, Moody's Investors Service says in a new report.

"To address housing affordability and demand challenges, homebuilders are more intensely pursuing the first-time and entry-level home segment, which we believe will grow faster compared with other product types in the next 12 to 18 months — assuming the economic environment remains healthy," says Natalia Gluschuk, Assistant Vice President at Moody's.

Affordability will continue to be a challenge for the sector, but to a lesser degree given the expectation of slower growth in home prices and mortgage rates and the increase of affordable home inventory coming to market, adds Gluschuk. Homebuilders' pricing power is declining, with the rating agency expecting price increases only up to 1% on average compared to growth in the low- to mid-single digit range in recent years.

Additionally, Moody's says that millennials will drive significant demand for entry-level housing over the next two decades. Millennials represent over a quarter of the US population and are entering the housing market in increasing numbers as they reduce student-loan debt, build wealth and form families.

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