By Nick Timiraos and Kris Hudson
WOODINVILLE, Wash.--Five years ago, Quadrant Homes churned out
starter houses in the Seattle area with an average sales price of
$269,000 and the marketing slogan, "More House, Less Money."
But facing a debt-burdened middle class and rising land prices,
Quadrant has since exchanged entry-level buyers for customers free
of credit worries and ready to splurge. Its new slogan, "Built Your
Way," accompanies homes with vaulted ceilings and gourmet kitchens
that last year sold for an average price of $420,000. "We used a
lot of market research to tell us that our old model wasn't going
to work," said Ken Krivanec, Quadrant's chief executive.
The emergence of a two-tiered U.S. economy, with wealthy
households advancing while middle- and lower-income Americans
struggle, is reshaping markets for everything from housing to
clothing to groceries to beer.
"It's a tale of two economies," said Glenn Kelman, chief
executive of Redfin, a real-estate brokerage in Seattle that
operates in 25 states. "There is a high-end market that is
absolutely booming. And then there's everyone in the middle class.
They don't have much hope of wage growth."
The recession blew holes in the balance sheets of all U.S.
households and ended a decadeslong loosening of credit for
middle-class borrowers. Now, credit is tight, and incomes have been
flat or falling for all but the top 10th of U.S. income earners
between 2010 and 2013, according to the Federal Reserve.
American spending patterns after the recession underscore why
many U.S. businesses are reorienting to serve higher-income
households, said Barry Cynamon, of the Federal Reserve Bank of St.
Louis.
Since 2009, average per household spending among the top 5% of
U.S. income earners--adjusting for inflation--climbed 12% through
2012, the most recent data available. Over the same period,
spending by all others fell 1% per household, according to Mr.
Cynamon, a visiting scholar at the bank's Center for Household
Financial Stability, and Steven Fazzari of Washington University in
St. Louis, who published their research findings last year.
The spending rebound following the recession "appears to be
largely driven by the consumption at the top," Mr. Cynamon said. He
and Mr. Fazzari found the wealthiest 5% of U.S. households
accounted for around 30% of consumer spending in 2012, up from 23%
in 1992.
Indeed, such midtier retailers as J.C. Penney, Sears and Target
have slumped. "The consumer has not bounced back with the
confidence we were all looking for," Macy's chief executive Terry
Lundgren told investors last fall.
In luxury retail, meanwhile: "Our customers are confident, feel
good about the economy in general and their personal balance sheets
specifically," said Karen Katz, chief executive of Neiman Marcus
Group Ltd., last month. Reported 2014 revenues of $4.8 billion for
the company are up from $3.6 billion in 2009.
Revenue for such luxury hotel chains as St. Regis and
Ritz-Carlton rose 35% last year compared with 2008, according to
market research firm STR Inc. Revenues at midscale chains such as
Best Western and Ramada were down 1%.
On grocery aisles, the recession and its aftermath boosted sales
of economy brands. At the high end, Whole Foods Market Inc.
reported record sales per gross square foot last year.
"Demand bifurcated," said Jason Green, chief executive of the
Cambridge Group, a growth strategy firm that is part of Nielsen NV.
"The familiar stuff my middle-class family had in the pantry, those
are under significant pressure."
In the grocery market's middle tier, Safeway Inc., the
second-largest supermarket chain in the U.S. was purchased last
year by the private-equity group that owns Albertsons, the
fifth-largest grocery retailer. Company officials said the deal
would allow the companies to reduce costs--and lower prices for
customers--as they fend off competition from low-price outlets and
high-end stores.
In the cold case, sales of premium lagers are up 16% since 2007
after adjusting for inflation, while sales of economy brands grew
8%, according to research firm Euromonitor International. Sales of
midprice beers are down 1%.
The trend hit auto makers some years ago, when BMW AG's former
chief executive Helmut Panke described the U.S. market as an
hourglass: lots of demand for budget and luxury brands but little
in between.
Steve Bates, general manager of BMW Seattle for the past 12
years, said new-car sales at his dealership were up 25% last year,
while used-car sales were flat. The M4 series, a sporty coupe
priced from $64,000, has been "selling out as soon as it touches
the ground," he said.
Then there are consumers like Vicki Oliver, 68 years old, of
Temecula, Calif. She bought a used Hyundai Sonata last year to
replace a wrecked 1995 Ford Explorer. Ms. Oliver and her husband, a
real-estate agent, added onto their home two years ago so her
daughter and son-in-law, a general contractor, could move in with
their family.
"That was a way to make things work in hard times," Ms. Oliver
said. Caribbean cruises and trips to Florida are now memories. "We
haven't done that for years," she said.
The housing market illustrates how weakness among middle-class
consumers holds back the U.S. economy. Homes are generally the
biggest purchase Americans make. Housing dollars ripple through the
economy by triggering spending on appliances, furniture and
landscaping.
For the first time, U.S. builders last year sold slightly more
homes priced above $400,000 than those below $200,000. As a result,
the median price of new homes exceeded $280,000, a record in
nominal terms and 2% shy of the 2006 inflation-adjusted peak.
Total sales last year, however, were up just 1% compared with
2013, and more than 50% below their average from 2000 to 2002,
before the housing bubble.
New homes are also getting bigger. The median U.S. home was more
than 2,400 square feet in the third quarter of 2014, a 20% increase
from early 2000 and a 10% increase from the peak of the housing
market in 2006.
In Seattle, the median new-home size topped 2,500 square feet
last year, a record, according to research firm Metrostudy Inc.
Since the market hit bottom in 2011, sales of new homes priced
above $600,000 have tripled, while sales below $400,000 are down
16%, according to CoreLogic DataQuick.
Builders boost profits selling more expensive homes. But less
construction overall means fewer new jobs and reduced total
spending.
"Over the long haul, I worry that you can't run our housing
market, which depends on volume, on affluent buyers alone," said
Diane Swonk, chief economist at Mesirow Financial in Chicago.
Young households have been slow to buy homes because of the
tough job market. Many would-be buyers can't save enough for a down
payment or don't earn enough to qualify for a mortgage. Student
debt holds others back.
A typical household, for example, would need around $60,000 in
cash to make a 20% down payment on the median-priced new home in
the U.S. To qualify for a mortgage, they would need good credit and
to show an annual income of about $45,000, assuming little other
household debt. A government-insured loan in this example could
call for an $11,000 down payment but would require an annual income
of $60,000.
Lisa and Nathan Trione are looking for a house in Denver big
enough for their five children. But there is little in their price
range: $250,000 and under.
"You're already intimidated by the process," said Ms. Trione, a
28-year-old paralegal and office manager. "And then you see this
huge price, and you say, 'I'm not ready to do that right now.'"
Ms. Trione is paying off debt she incurred while earning her
associate degree. She also is trying to raise her credit score,
which, she said, fell during a series of early financial
missteps.
Well-heeled customers, meanwhile, have their pick of mortgages.
At the same time, some banks have pulled back from federally
insured loans that allow for smaller down payments.
"We would like to build a smaller, higher-quality and
less-volatile business," Marianne Lake, chief financial officer at
J.P. Morgan Chase & Co., told investors last year.
With fewer potential customers, builders have largely abandoned
the entry-level market. "If a builder can make money on something,
he'll build it. The problem is that they can't make money at the
entry level," said John Burns, of Irvine, Calif., a consultant to
builders.
But rentals, the low-end of the housing market, are booming.
Apartment construction has neared its fastest pace since 1989. Two
of the nation's largest home builders, Toll Brothers Inc. and
Lennar Corp., have both launched multifamily construction
divisions, each with around 5,000 units in the pipeline.
"We all wished we had a big apartment portfolio through this
downturn," said Douglas Yearley, Toll's chief executive, during an
earnings call last year.
With sales plunging in 2009, Quadrant called in a research firm
that concluded more buyers might materialize if the company built
more expensive homes. "When it's data driven, the courage to make a
remarkable change is easier than when you're using your gut," said
Mr. Krivanec, the company's chief executive.
Quadrant, a unit of TRI Pointe Homes Inc., was finishing seven
homes per workday in 2004. They now finish less than two of the
more expensive houses a day. But the share of buyers who back out
of a deal, typically because they can't get a loan, is down 10%
since 2010.
To serve more higher-end buyers, Quadrant opened a design studio
two years ago that lets buyers choose from dozens of cabinets,
countertops, tiles and flooring. Some new buyers spend nearly twice
as much on such upgrades, the company said, which adds to the
profitability of home sales.
Common design features now include a walk-in closet and bathroom
nearly as big as the master bedroom. Kitchens have a walk-in
pantry.
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On a recent Tuesday afternoon on Little Bear Creek Place, a
cul-de-sac in this Seattle suburb, electricians, landscapers and
framers worked on some 23 Quadrant home sites.
Nearby, Nick and Adriana Stoll unpacked boxes in their new
four-bedroom home. The home is twice the size of the
1,200-square-foot, one-bedroom apartment they rented in nearby
Bellevue.
The Stolls customized almost every feature and finish, including
hinges on kitchen cabinets that prevent the doors from slamming
shut. "I'm typically the kind of consumer where I make a quick
decision," Mr. Stoll said. "But when it comes to your home, well,
we stared at 100 countertops for an hour."
The Stolls survived the recession and have prospered. Mr. Stoll
purchased a Seattle condominium in 2008, the day before learning he
was losing his job at Washington Mutual, the thrift sold to J.P.
Morgan after it was seized by the Federal Deposit Insurance
Corp.
Mr. Stoll changed jobs twice before he was recruited in 2011 to
work at a technology company. He broke even on the sale of his
condo last year. "Other people encountered problems where maybe
it's student loans or credit cards or car payments," he said, "and
we have none of that."
The couple put 20% down on their new home, which cost $579,000.
Ms. Stoll works as a client associate for a large financial
services company.
Growth in new home sales this year will depend, in part, on
whether builders revive their interest in first-time buyers.
Two years ago, D.R. Horton Inc., the nation's largest home
builder, launched Emerald Homes, a luxury division. Last year, the
company rolled out Express Homes, a division that pioneered
no-frills housing for the entry-level market.
Mr. Krivanec, Quadrant's CEO, said he doesn't see a return to
his company's former model. There are enough people with
good-paying jobs in the area--at Boeing, Amazon and Microsoft--to
keep sales going, even it means building fewer homes. "We like
where we're at," he said.
Write to Nick Timiraos at nick.timiraos@wsj.com and Kris Hudson
at kris.hudson@wsj.com
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