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| Mixed Signals on the Current 'Meltdown' |
| Written by Jonathan Smoke | |
| 07.27.2007 | |
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Discuss this article on the forums. (0 posts) When people want to hear negative news, the media is often more than willing to comply. And regarding the housing downturn, now being called a “housing meltdown” in some circles, the public builders have given the media plenty of ammunition this week to fill their headline-grabbing articles. Six of the nation’s 20th largest builders reported quarterly earnings over the last three days. The common themes well covered by news reports have been: challenging environment for sales, significant price competition, inventory pressures, margin erosion, and weak demand. And these themes all contributed to significant impairments that the builders took turning weak profits into headline-grabbing losses.  I wasn’t satisfied with just these headlines, so I decided to listen to each call myself. I was particularly looking for insights on sales trends, cancellation rates, pricing, mortgages, and inventories. And from what I’ve learned so far, I’m hearing some mixed signals that at least give some hope that this down turn is not a complete meltdown.On new home prices, Standard Pacific and D.R. Horton reported declines in home prices for the recently completed quarter over the prior year. Average prices were down 7% and 6% respectively. Beazer Homes reported no significant change in average home prices. These pricing reports surprised me as many analysts have been claiming that new homes should recover more quickly because builders would be more willing to slash prices to counter the inventory and demand pressures. Countering this view is the notion that builders have a reason not to radically cut home prices because if they do they undercut prior sales already in backlog in existing communities. And even where they have closed homes, large declines in home prices make for rather unhappy customers. Further, since home sales and underlying permits have slowed most significantly in the highest priced markets in California, Florida, Arizona, Nevada, and portions of the north east, I would have expected much larger drops in average sales prices as both pricing pressures and mix changes compared to the prior year should have contributed to double digit average price declines. Standard Pacific reported efforts to reduce prices by 25% in some markets. D.R. Horton reported a company-wide effort to adjust pricing to meet the market needs for adequate sales pace. But they both experienced only declines in the single digits. What I expect is really happening is that builders are adeptly reacting to the market and being aware of the limits of how far they can lower the price of homes, they are likely including more in the homes or otherwise making concessions that do not get reflected in actual price paid. So their margins are falling faster than their prices. If average new home prices are really down only in the single digits, this is a sign that housing prices, while declining, are not in a free fall. And this may also explain why we don’t see much improvement in monthly sales and therefore the months’ supply of new homes. The industry still has several months needed to work off homes that had been started already when this downturn began. If we look past the blip of abnormal new home sales from 2002 through 2005, we likely should have a market for new home sales at a level of 800,000 to 1,000,000 single family homes per year. And that’s basically where we are already. The sky is not falling—it’s just returning to normal. What are you seeing with new home sales prices? We’d love to hear your opinions either on a national scale or just specific to a single market or area. To share your thoughts, just comment on this post. We can intelligently navigate through this uncertain time if we help fill in the gaps not being covered in the headlines and the sound bites on TV. Check back next week on other tidbits of information I unearth in these calls. And look for transcripts in our Builder News as soon as they are available. 
We're always looking for feedback from our readers.
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