Why June ‘09 is a Watershed Month for Home Building
Home builders never meet a mixed signal they don’t like.
They’ll take a phrase like, “there’s no time like adversity to go out and find opportunity,” and run with it. Only problem we can see is, there are too many of them gunning for the same opportunity, so more lose than not.
In his post today, Jamie Pirrello lends sharp insight into the structural over-capacity of the home building landscape right now. He notes that demand may well exist, but if the same demand is met by multiple competitors, then somebody wins, and the rest represent excess supply to the market. That’s certain hardship, and, as the small-print on lots of new pharmaceutical offerings often reads, may cause death.
A snippet from the Pirrello take on what’s next:
If builders don’t build too many specs and the tax credit is not extended and interest rates don’t jump to such a point where buyers are willing to forego the tax credit hopeful of lower interest rates in the future, then building specs should generate additional profits.
If on the other hand, builders build specs and too many are built or the tax credit is extended or interest rates rise to the point where buyers leave the market temporarily, then builders could be in a difficult situation. Standing unsold and completed inventory may pressure banks to demand repayment on the related construction loans. In addition, builders may need to heavily discount their spec homes as all competitors will be struggling with excess inventory and the need to discount the price of their homes.
The tail-wind real estate players, including home building companies, enjoyed for the past few months — the first positive conditions they’ve experienced in seven or eight quarters — consisted of four forces that joined, almost miraculously.
Seasonality was one of the unpredictable ones, given that two previous “spring selling seasons” came and went in 2007 and 2008, with nothing good to say about either. A stimulus-package $8,000 tax credit for first-time home buyers, eye-poppingly low interest rates, and home prices dramatically reduced off their 2007 peaks were the other three drivers of the recent flurry in activity.
HousingWire reports:
Tax credit availability and competitive low-end pricing drove the sales, according to the survey. The home buyer tax credit monetization toward closing costs on FHA loans, announced by the US Department of Housing and Urban Development, may contribute to driving sales in coming reports, as 36% of respondents expect a boost of 11% to 25% more sales per month in response to the credit monetization.
Countering those aiding winds are the buffeting blasts of foreclosures, tight home mortgage credit, appraisal hell, and a banker’s joke formerly known as construction lending.
Still, home builders believe they’re beginning to sense the darkest hour before the dawn, and they’re trying to contain their glee.
Here’s how John Burns Real Estate Consulting sums up its 306-executive panel of home building executives weighing in on market conditions:
Despite the continued negative numbers, this month’s commentary is the most optimistic we have seen since the survey began one year ago. Many builders believe we are approaching bottom, particularly in some of the most distressed markets, such as Phoenix.
The conviction of these respondents is that they’ve now seen the worst that the market can throw at them, and now is time for a floor to set in.
Still, now is a kind of new moment of truth for home builders.
A very high stakes game of chicken is about to unfold through the balance of 2009, and one of the most interesting factors to watch is what home builders wish for. As in be careful what you wish for.
Here’s a statement from NAHB Chairman Joe Robson that encapsulates what home builders are wishing for:
Due to expire at the end of November, the current $8,000 first-time home buyer tax credit has proved to be an effective policy targeted toward a specific demographic group that is showing tangible results. Enhancing this credit would help to stoke the economic engine at a key point in our recovery.
But home builders must be careful what they wish for here. If the $8,000 tax credit for first-time home buyers worked as an incentive, part of its effectiveness has been to induce a fear of missing out on it.
If home buyers feel that the government will just keep adding months to the incentive, it will lose its teeth.
So, during the next 30 to 60 days, home builders of all stripes will be taking some big chances amidst some pretty tough odds.
Since it takes roughly 80 days start-to-finish building time to complete a new-home for sale, and since roughly half of homes sold these days are at least started on spec, the game of chicken will be a three-way affair.
Home builders in the most active markets will be betting on their share of a demand as it may go, based on a promising last few months, and a guess that as the clock on the current $8k credit ticks down to the end of November.
No one will want to leave potential sales on the table as that current rebate program runs out.
Player number two in the game of chicken will be The Administration and Congress. Do they “enhance” the tax credit–possibly even goose it–or let it run out this year?
Third, and most important, are potential home buyers. They’ll be balancing several important psychological factors, and will probably have greater visibility by September or October on their own income stability and the direction of the overall economy
If they’re seriously afraid they’re going to miss their once-in-a-lifetime opportunity to buy a first home at a moment when price, mortgage rates, and tax credit are still in full force, but not for long, then they’ll be all over it to get their deals done before the expiration.
So, if home builders get what they want, and get an extension on the credit, they may be removing one of the key motivators toward getting home buyers off the sideline.
One way or another, the fact that more home builders are optimistic things are improving probably means that more home builders will be voting with their feet in the next couple of months.
We’ll likely see a gust of starts in the next 30 to 60 days, all about meeting deadlines for the expiration of the Federal tax credit.
There’ll be hell to pay if the deadline is suddenly lifted, leaving no hard stop to the benefit of a home buyer acting sooner than later.
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Are the lenders actually going to step in and lend money? The stats I saw today say no thanks we are hanging on to it.
These home buyer rebates can be coupled with agent rebates to make home buying even more valuable. There are agents out there such as http://www.homebuyersrebatemls.com that offer these programs and good information. If builders can get this information to buyers it might be less costly to build than to buy (and we haven’t seen that in 3 years!)