THE PRESENT IS NOT THE FUTURE

Summary

    There is a simple truth: Developers won't build homes to sell at prices lower than the cost of construction.     What this article failed to show us is WHY new home prices are falling.     The article failed to note, for example, that there is now a far smaller inventory of new homes than there were last year.     It did not mention the impact of foreclosures on the new home market.  It did not mention that foreclosures are being sold for LESS than the cost of replacement.     The bald facts are not enough for an article like this.  And, the article did not paint the whole picture.     

Analysis

 
    

    One leading indicator of new home sales is new home permits.  Virtually no analyst and no reporter discuss new home permits when describing declining sales and prices. They also fail to look at the price difference between existing and new homes.

    New home permits are a leading indicator of new home sales. 

    Permits are directly related to the foreclosure problem. 

    In Las Vegas alone, new home permits never exceeded triple digits in any month last year.  Indeed, December’s new home permits totaled 147 – the lowest total since 1974.  Similar numbers can be found in Southern California, Florida, the “rust belt,” and virtually every major market in the USA.   That means sales will continue to float downward, at least for the first six months of this year. 

      At the same time as permits declined, foreclosures soared.  In Las Vegas, for example, the number of  forclosures more than doubled to 25,000+ in 2008 vs. 2007. 

    For new home builders, that creates competition which is priced below the level of replacement cost.  In a nutshell, that means builders simply can’t compete from a pricing point of view.         

    Again, look at virtually any community in the US and you’ll find that median new home prices exceed median prices of existing homes.

The overlooked impact is that first time buyers are purchasing foreclosures rather than smaller new homes right now.  That first-time buyer is the critical first link in the housing chain ... necessary for the future success of the industry.

    More importantly, nearly all of the doomsayers have missed an interesting new trend that appears to be moving through major markets: Downsizing     

     NEW TREND: What is happening quietly in many markets is that builders have figured out that incentives don’t work.  The key is to create a home that will compete with the foreclosure prices. 

    So, smart builders are downsizing.  It’s happening in Las Vegas, Albuquerque, Southern California, Austin and other markets in the US.  In Las Vegas for example, you can buy a NEW single family home for under $110,000.  Among the public companies, KBHome, DR Horton, Lennar and others are offering product sized 1,300 square feet or less. The same holds true for local builders like American West and Storybook Homes.     

    And, the price per square foot is generally less than $100.     

    The median price of a new home will continue to fall through the first half of this year, in part because of this trend.  But, downsizing should have a positive impact on sales, perhaps as early as the third or fourth quarter of this year.