The Upside in Today's Cancellations

Implications: Home builders are struggling with high cancellation rates and will likely continue to in the near-future.  There is an upside to the cancellations, though.  Many buyers are cancelling due to fear- fear that will dissipate at some point.

Analysis:

Cancellations in major markets throughout the country continue to devastate the balance sheets of home builders. Many new homes are being sold several times before actually closing and title changing hands. During recent community surveys, Belfiore Real Estate Consulting (“BREC”) found a few communities that had sold out within the last 2 to 3 months, only to be forced into reopening when sales contracts were cancelled. In one such community, a builder representative told BREC he and his partner had sold each of community’s 268 homes nearly three times; there are more than 104 unclosed homes within the community, so, the builder will likely be required to resale some of the units again. Another major U.S. builder told us that it recorded a net negative 28 sales in the Phoenix metro area during the month of October. The Phoenix metro area seemed to have experienced its worst month in November. Most builders recorded no sales or negative net sales. Cancellations are dragging builders to losses.

There is a silver lining in current cancellations, though. Current “can” rates are due to numerous reasons, but fear is one of the top reasons.... After making an emotional decision to buy a new home, buyers are thinking about their purchases and impending closing, and many are deciding they don’t want to loose money. They are concerned further price drops will follow and they’ll be holding an asset with a lesser value. So they cancel the contract they signed to purchase a new home.

Fear is good reason not to purchase a new home. No one wants to be upsidedown on what will likely be the largest single-asset in his or her lifetime. Home builders should feel fear is a good reason for current cancellations, as well, because at some point in the not-so-distant future, fear will dissipate. And, when fear dissipates, one long shadow currently cast upon the home building industry will disappear. Speculative supply will undoubtedly decrease, as much of it was the result of cancellations. Sales rates will become more predictable and most builders will more easily adjust to the environment of the time, whatever that may be. With supply retracting, new home prices will stabilize and perhaps begin increasing again.

The market is not going to turn around in a day, or even a month; it will take time, just as it took time in getting to where it is today. You will, however, know it is turning when you hear fear is no longer one of the reasons for buyers walking from their contracts. Listen closely for the change.