Watch for the "False" Bottom

Implications: The article suggests new home building has "hit bottom" in metro Phoenix.  Regardless of what is meant by "hit bottom", the new home market is at least a few months from hitting bottom.

Analysis:

What does it mean for homebuilding to “hit the bottom”, as suggested is the case in the Phoenix metro area? Is the bottom the time when the fewest permits are issued? The time when prices are at their lowest? Or, is it when supply reaches its peak and demand reaches its lowest point? For those people with a stake or considering taking a stake in the housing industry, it pays to know.

Regardless of which “bottom” you are looking for, we here at Belfiore Real Estate Consulting believe the metro area has likely not hit it. Supply continues to increase and demand, while still showing its head, isn’t translating into net home sales. New home prices are decreasing. These characteristics are not expected to change in the near future.

During the last 30 days, we’ve meet with high level division personnel within 3 top-10 Phoenix metro area homebuilders and learned:

• The figures reflected in current permit activity don’t truly reflect demand. Not only are a number of the permits being issued for speculative home building, permits are being attained for builders to avoid paying increasing impact fees. Most municipalities have increased fees in the last 60 days or will be increasing impact fees significantly in the next few months, driving up the cost of building a home by as much as $10,000. To avoid paying the increased impact fees, builders have purchased permits ahead of time. They will build the homes the permit was attained for sometime prior to the permits’ expirations.
• Most builders are still making money on home sales - even with the heavy discounts being given on “inventory” homes. Builders will continue discounting home prices further until they break even, or in some cases, lose money. All three of the builder representatives we spoke with told us they believe new home prices will continue to drop.
• Fiscal year-end is here for many home builders. Builders must aggressively move some of the inventory they carry or risk further shareholder scorn. Downward pressure will continue to be applied to prices.
• October was indeed one of the worst selling months for Phoenix metro homebuilders (as reported in our November publication), but it turns out, November appears as though it may have been worse. One of the top builders anticipates reporting negative sales, due to cancellations, through the end of the year.
• Inventories are too high but builders are and will continue to struggle in reducing these inventories. Buyers want “inventory” homes because of the discounts they receive in purchasing inventory homes. To stabilize prices, inventory must be stabilized, but builders that do not have homes available for immediate delivery are not able to find buyers. Even when a “new build” is contracted for, the builder understands the high likelihood the home buyer will cancel the purchase contract prior to the home’s completion and closing.

What is the bottom? Where is the bottom? When are we going to hit the bottom? We believe the best way to find it is to: (1) collect all available, reliable, data available on the market, (2) hit the streets - visit numerous sales offices and talk to those selling homes, and (3) attain the opinions of builder staff - those working in the offices of builders.

Another way to understand the most current market conditions is to talk to those that have done the leg work: Belfiore Real Estate Consulting. Data collection for our December Current and Future Market Trends Insight publication is nearly complete. We’ve attained data from a number of sources, collected first hand data from nearly 200 new home subdivision offices, and spoken with numerous builder representatives. The data is under analysis, but we’ve come to one conclusion: the residential real estate market hasn’t hit the bottom.