Talk to a marketer and you will hear this term frequently: “Product Mix”. It refers to the breakdown of a market and precisely what is selling. This then allows companies to focus on what to manufacture. Imagine a computer company determining whether to build desktop or laptop computers. A quick look at the product mix of what is selling allows them to divert resources to the appropriate market.
Builders operate in much the same way. The problem is that a project must go to the city or county months or years before construction begins, and that can be 6 months or more before the first buyer can occupy the residence. Therefore, there is always the risk of over building a certain type of home. Below you will see a graph by quarter from 2003 to Present for the combined Charlottesville and Albemarle markets. Each line represents a product type: Detached, Attached, and Condo.
(Click on the graph for a larger image.)
The quickest thing most folks will notice is the enormous bump that occurred in the 1st quarter of 2005 when the first condo conversions became available to the general public. The condo market was steady until it got another bump mid year 2006 and then slowed until the end of 2008 when it hit the skids.
This is a fascinating tale of what the right project was to work on then… and not now…
Builders watched as the early developers sold their stock quickly, but trends shift, and the developers who brought condos on the market at the end of 2008 were greeted with credit issues as well as an over built market.
Contrast this with attached homes which saw a bump in prevalence just as condos were slowing. While I cannot state for sure that I know what was happening, I do have a theory here. Detached homes tend to be the priciest of the three product types. Therefore, those who may not be able to afford the 3BR/2BA home on a 1/2 acre in the county look to more affordable options. Those options tend to be condos and townhouses. When credit became impossible to get on condo projects, the attached home was the only solution.
But, take a look at the last 3 quarters where detached homes have grown in popularity even while attached homes fall off sharply. This coincides with the convergence of prices across the different product types. For the first 9 months of the year in the city, the median home price of a townhouse was $242,000. But the detached home price median in the city was only $261,000. A difference of only $19,000. That’s just over $86 month in mortgage payments on an 80% loan.
So what does product mix tell us about the future market? It says that as long as the price between detached homes and their counterparts are small, the detached homes should continue to rise as a percentage of the sales. It also reiterates that we need financing to be eased in reference to condo projects.