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Luxury homes: Puryear, Susanka outtakes

For our June 4, 2004 broadcast, All-Star real estate analyst Paul Puryear and architect Sarah Susanka talked to Wall $treet Week with FORTUNE's Karen Gibbs about trends in the luxury home market. Here are portions of their conversation that didn't make it on the air:

KAREN GIBBS: Well, Paul, what's so attractive about Toll Brothers?

PAUL PURYEAR: Well, they're focused on the high end market. We have seen a shift in the buyer lately, because rising interest rates put more pressure on the lower price buyer. So just in the most recent month, the May data for new home sales, new homes priced below $200,000, the new homes sales dropped 11 percent in that category. On the other hand, at $300,000 and up, sales escalated 45 percent in the month of May. So we've seen this pattern now for about 12 months as we've shifted into, you know, a better economy, we also see a shift in the profile of the buyer.

GIBBS: Paul, you mentioned the second home market. Now a lot of people are feeling that the housing market has reached a bubble because we have boomers ready to retire, and they're going to sell their home. What's your take on that?

PURYEAR: Well, we don't think that we have a bubble in the housing market. I think one piece of information that most people really find interesting is that the propensity to own continues to climb with age right up to the mid-60s. In other words, by the time you're heading for your retirement years, your propensity to own your own home is the highest. So the baby boomers, the leading edge of the baby boomers being 54 or 55 years old, they still have 10 years to go. They're still buyers in the marketplace. They are not net sellers. The other thing that's going on that's very interesting is the ability, and the wealth today that some of these retirees have and in many cases not retirees, they're still working even in their 30s and 40s, let's say 40s, their ability to buy a second home. And so that market is very robust. It's not that dependent upon financing and interest rates, and in some cases those buyers are looking for a repository for cash or an investment. So, you know, that market should continue to do well with the strengthening economy.

GIBBS: Sarah, do you agree with that?

SARAH SUSANKA: Well, I do, and I also think that there's another piece to this puzzle in terms of, you know, if we can look a few years into the future as to what will be something that is a great investment both for the family that's living there and I'm assuming in the future housing companies, but the notion that you can actually have a house that's probably more expensive than we would typically think of per square foot, but that has this additional character to it that really makes people feel at home.

And so a lot of the things that I know my colleagues in the architecture profession and many designers around the country are really advocating is a quality of home that is different than what we see today. Things that have just more of the, you know, I was talking about ceiling height a few minutes ago, more care in how windows introduce light into space, more of the kind of trim work that we used to see in an older home, the care of composition that starts to have value when you've got this marketplace that has more wealth certainly for the older buyer, but I think even to the younger buyer as well these days. There's a lot more discrimination I think in terms of the interest in making a house that fits you more like a glove rather than a sack. I think people are really looking for some of that care in detailing.

GIBBS: Keeping with this future trend idea, Sarah, many of us baby boomers are going to be eventually moving into the active adult market. What type of trends and changes can we expect in housing there?

SUSANKA: Well, the things that I've noticed are that people oftentimes when they're in that empty nester phase of life and they're trying to decide do they build new, do they move, oftentimes in a situation where they believe that they need to build enough bedrooms so that if every one of their children comes back with their offspring, they're going to need to house them. I think that attitude is changing, and I think people are starting to realize that, you know, we've got, if we just build what we need and have it wonderful, our families are going to want to come and visit us, but they can stay in a hotel or someplace close by. We don't have to be able to house every one of them in the structure that we're building.

So I see a market that's probably going to be building more for what they need as a family or as a couple in that case, and then allow the money that they have that's extra to do the finishing touches that really make it a home.

GIBBS: Paul, what do you see going on in the active adult market? What are those home buyers looking for?

PURYEAR: Well, I think they are looking for something that meets their need. I think it's important to consider, you know, they're an educated buyer as opposed to the young couple going out to buy their first home. These home buyers probably have owned five or six homes over the course of their lifetime. Very often in the Sun Belt states, we'll see they're selling their home maybe in a northern state. They have plenty of money to go buy this retirement home, and they're very particular about how they want it designed. So, you know, it's a different profile of buyer.

SUSANKA: That's right. And the thing that they're interested in with that quality of design I think is why we're going to be seeing these more tailored houses. I think once people start to see what's possible, they've moved in that direction, and particularly when there's a little extra liquid cash to make that a possibility, people love that feeling that they get from something that's really well designed.

GIBBS: Sarah, what about the starter market? One generation's luxuries are all of a sudden becoming the next generation's necessities.

SUSANKA: Isn't that true.

GIBBS: And I'm thinking of the princess suites, you know, your own bathroom in your room.

SUSANKA: I'm sorry. Could you repeat the end of the question? I missed it.

GIBBS: I was thinking of one generation's necessities being, I'm sorry, one generation's luxuries being the next generation's necessities, thinking of princess suites where young kids are wanting their own bathroom in their suite.

SUSANKA: That's right. You know, I think that there's a place where as children you can envision, I used to want a gymnasium in my house, and I think that kids can imagine all kinds of wonderful things. I think the question is whether that's really, when you build that for your child, is that what they really wanted?

And I know for several of my clients, who moved actually down to a smaller size of house, realized that although they'd built these spaces for their kids, the kid actually was quite terrified. It was too big of an area for them and they were always huddling into Mom and Dad's bed because their bedroom was too large. So there's a happy medium, and I think that oftentimes we just need to look at what really makes sense for us, what's going to make us feel good, and that extends to our children, too. And oftentimes we can help evaluate that with the child.

GIBBS: Paul, what's your take on one generation's luxuries and the next generation's necessities?

PURYEAR: Well, so much of it is a function of space utilization, and it's amazing what we see some of these builders do in 1,500 square foot spaces and by doing some of the things that Karen has just mentioned, and that is eliminating the formal living room. This generation, the new generation buyer is not nearly as concerned about the formality. I think it's just, it's more practical, more pragmatic in the whole approach, and it really is about utilizing space. And of course that gets to cost, and space in the real estate business costs money.

And if you can build more space, whether it's head room or square footage, on a smaller lot, you can produce the product at a lower cost, and that's really what this is all about. It's affordability, providing the necessities at an affordable price, and the consumer is clearly gravitating that way as opposed to some standard, formal prototype that was typical of the previous generations.

SUSANKA: Yeah, the thing that's really fascinating about this, though, is that I think so many of us in the housing market are forced to deal with this dollar per square foot issue, when really the square feet have very little to do with how comfortable a house is or how well it fits you, how spacious it actually feels. So what I've been trying to do is help people see that it's not so much the square footage as the character and the connectedness of spaces one to another that are designed for the way that you live. That's what makes the difference, and I think that's what people are starting to respond to. Certainly I'm thrilled that we're gradually relinquishing the attachment to formal spaces, which for the last hundred years really have not been very much used if people have a family room space. So it's certainly changing, and it's exciting to see the evolution of the house to more of the way we live today.

PURYEAR: But from a producer's perspective, square footage is cost. So ultimately it gets down to the product, and again the lot size, the footprint of the house, is it two stories, and sort of the volume of construction that you have to deliver to satisfy the consumer.

SUSANKA: Paul, this is one of the things that is fascinating to me from an architect's standpoint. We look at, you know you just said that the square footage and the dollars go hand in hand, but isn't it interesting that that's true with houses, but when we look at the automobile market, we value cars in a very different way. So we understand that a Lexus is at one price point and that a VW is at a different one, a Honda's at a different one. But we don't do that when it comes to square footage in houses, and that's where we really have a problem because we can all talk quality to death, but there's no real understanding that there can be a different level of composition in terms of its character that's appropriate for a different point in your lifetime.

You know, perhaps if you're a starter buyer, you're looking for something that gives you the most square footage for the least dollars, but when you're an empty nester and you've got extra money to spend, you may want to spend it on the things that really add character, but we sort of don't let that happen in this marketplace. It's really frustrating.

PURYEAR: It's certainly more difficult from a production builder's perspective. Again they're building to the market and to the masses so to speak, and so I mean we're seeing efficiencies, we're seeing evolution, but, you know, I guess…

SUSANKA: It's slow. I know it is. It's the reason that I wrote "The Not So Big House" was to sort of give people some language to start talking about a smaller, better designed house and know how to put words on it and to say that's what I want so that the production builders and builders around the country can start to respond to that need, which I could definitely see was there when I was practicing residential architecture.

GIBBS: Let me jump in here, because I want to ask you, Paul, again, I want you to tell me very simply why do you like Toll Brothers in this rising interest rate environment?

PURYEAR: We like Toll Brothers because it's more leveraged to the increasing economy, the improving economy, than it is to the rising rates. Rising rates are going to be a problem for home building in general, but historically in a period like this we see home building, the home builders at the higher price points do better. I mean it's pretty clear that a buyer of a $500,000 to a $1 million home is more leveraged to the economy and in some cases to the performance in the stock market and/or his portfolio of investments than he is to interest rates. So a 50 basis point increase in rate, yes, is a negative, if in fact he's using the mortgage market, but in a builder like Toll Brothers, about 50 percent of the buyers are paying cash.

GIBBS: Paul, why is the society so enamored with these McMansions?

PURYEAR: Well, that's a great question, and I don't think I have the answer for you. I mean certainly the McMansions aren't needed, but if you can afford the comforts, why not I guess, and maybe even status and entertainment become big parts of that. But clearly when you get into 5,000 plus square foot houses and you start talking about need, you're well beyond basic human need at that point.

GIBBS: Sarah, what's your take on that?

SUSANKA: Well, I think that a lot of people are searching for a sense of home, but they're searching for it with a tool that doesn't really get them what they're looking for. They're searching with size, with quantity, you know, more stuff. And I think a lot of us are trying to fill a hole that we feel, and the answer really is that there's a quality that's missing to the kind of the shape of the space, as I was talking about. So I think a lot of people build bigger and bigger and bigger houses and then gradually get to a point where they realize, you know, "This isn't satisfying something inside me, I want a different option." And so that's really what I address in home by design and talked about in (my book) Not So Big House.

GIBBS: Sarah Susanka, Paul Puryear, thank you very much for joining us.

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