Pushing to the Bottom

Implications: Investors and market observers can count on continued homebuilder losses, as home prices a pushed downward further.

Analysis: When released next week, Belfiore Real Estate Consulting’s KnowledgeBase Current and Future Market Insights July publication will clearly communicate one thing:  builders are still searching for the pricing bottom.  During the months of May and June, builders- particularly publicly-traded builders- continued to push prices downward at an astonishingly aggressive pace.  Consider the discounts (all calculations net of incentives) at the following communities (select product lines, communities located within one square mile of one another- in Laveen, Arizona):  

Avalon Village
KB Home
Discounted Prices 13.6% from March to June

Laveen Ranch
Richmond American
Discounted Prices 8.9% from May to June

Redhawk at Rogers Ranch
K. Hovnanian
Discounted Prices 12.8% from May to June

Paseo Pointe
Pulte Homes
Discounted Prices 10.7% from May to June

Investors and market observers can count on continued homebuilder losses, as prices drop further.

Current heavy discount levels suggest the pricing bottom may be close.  In outlying market areas, new home offering prices are now below the cost of constructing homes.  In these market areas, BREC personnel believe the pricing bottom is imminent; few builders will start constructing new homes in these market areas if they believe selling the home will cover the cost of construction.  

BREC’s current pricing forecast calls for shrinking new home prices through the first quarter next year, followed by pricing stability.  

BREC is currently cautioning builders considering initiation of heavy discounts.  Although price discounts have typically lead to immediate home sales, home sales success is short-lived.  Prices in competing communities are adjusted downward, and these communities take market share from the builder that initiated the price adjustments.