Falling new home sales may be good for area homebuyers
Good Morning,
The news that new home starts in the Capital Region dropped 20 percent in April raises two interesting puzzles: Why the decline and what does it mean?
"The declines in starts and permits for April reflect a natural pay-back for the weather-related surge in production earlier in the year, as well as builder adjustments to eroding demand and rising inventories," said David Seiders, chief economist with the National Association of Home Builders. "We continue to believe that the evolving slowdown represents an orderly adjustment toward more sustainable levels of housing production, following the record surge in 2005 that was fueled by extraordinary demand for single-family homes and condo units by investors/speculators."
Separately, Seiders also said the following a few days earlier: "NAHB surveys of builders are documenting a fall off in investor purchases, rising sales cancellations by investors/speculators, and resales of units owned by investors/speculators as the prospects for price appreciation deteriorate. The cancellations and resales are adding supply to markets already experiencing an inventory run-up as demand by prospective owner-occupants cools in the face of deteriorating affordability conditions."
To me, there's a huge difference between a decline in sales because the weather is not as good as it had been earlier in the year and a decline in sales because weak and vulnerable investors are fleeing the market. In an odd way -- eventually, at least those defecting investors are likely to be good for the marketplace.
One of the reasons for 2005's soaring home prices, especially with condos and new-homes, has been the large number of investors who entered the market. If you take natural demand and add hordes of excess investors you simply have more demand. That pushes up prices and those rising prices attract more investors who want to get in on the action. Unfortunately, swiftly rising prices can also freeze out those who "merely" wish to be homeowners.
As investments go, new homes and condos look awfully good because they require little maintenance and until recently the market for them has been largely excellent. You can buy 'em by the bunch and not spend a lot of time with repairs, mowing and such. For investors who see condos and new homes as commodities, something on which to bet instead of pork bellies or Enron futures, such properties are dandy investment vehicles.
They are also risky. If you buy investment real estate the purpose of your purchase should be to gain value (a higher re-sale price or more equity), rent (positive cashflow) or both. That means such properties must either be rented or re-sold. Reduce the market for either tenants or buyers and suddenly investment properties can be vacant, unsold and very expensive to keep.
The recent decision by builders in many markets to sell homes at discount means that investors can no longer flip properties because buyers can get better deals from builders. Worse, such properties can be extremely difficult to rent at anything approaching a positive cashflow because many markets are brimming with look-alike new properties and condos. In such an environment, buyers and renters rule -- and fad investors with little cash will sell, sell at a loss, rent at a loss or will be foreclosed.
The good news is that the marketplace is forever in the process of self-correction. When it tips too far in one direction it begins to tip the other way, always seeking a cosmic sense of balance. It will take time to clear out the inventory now held by weak investors -- and by investors who will weaken under the burden of ongoing monthly costs. This is simply a healthy culling of the investor herd. In some cases, there will be local price declines and price declines by property type, but hopefully the worst result in most areas will be a general slowing of appreciation to something just above the rate of inflation. This would be an ideal situation for both sellers and buyers, a market with reasonably rising prices -- and something largely unseen during the past few years.
The news that new home starts in the Capital Region dropped 20 percent in April raises two interesting puzzles: Why the decline and what does it mean?
"The declines in starts and permits for April reflect a natural pay-back for the weather-related surge in production earlier in the year, as well as builder adjustments to eroding demand and rising inventories," said David Seiders, chief economist with the National Association of Home Builders. "We continue to believe that the evolving slowdown represents an orderly adjustment toward more sustainable levels of housing production, following the record surge in 2005 that was fueled by extraordinary demand for single-family homes and condo units by investors/speculators."
Separately, Seiders also said the following a few days earlier: "NAHB surveys of builders are documenting a fall off in investor purchases, rising sales cancellations by investors/speculators, and resales of units owned by investors/speculators as the prospects for price appreciation deteriorate. The cancellations and resales are adding supply to markets already experiencing an inventory run-up as demand by prospective owner-occupants cools in the face of deteriorating affordability conditions."
To me, there's a huge difference between a decline in sales because the weather is not as good as it had been earlier in the year and a decline in sales because weak and vulnerable investors are fleeing the market. In an odd way -- eventually, at least those defecting investors are likely to be good for the marketplace.
One of the reasons for 2005's soaring home prices, especially with condos and new-homes, has been the large number of investors who entered the market. If you take natural demand and add hordes of excess investors you simply have more demand. That pushes up prices and those rising prices attract more investors who want to get in on the action. Unfortunately, swiftly rising prices can also freeze out those who "merely" wish to be homeowners.
As investments go, new homes and condos look awfully good because they require little maintenance and until recently the market for them has been largely excellent. You can buy 'em by the bunch and not spend a lot of time with repairs, mowing and such. For investors who see condos and new homes as commodities, something on which to bet instead of pork bellies or Enron futures, such properties are dandy investment vehicles.
They are also risky. If you buy investment real estate the purpose of your purchase should be to gain value (a higher re-sale price or more equity), rent (positive cashflow) or both. That means such properties must either be rented or re-sold. Reduce the market for either tenants or buyers and suddenly investment properties can be vacant, unsold and very expensive to keep.
The recent decision by builders in many markets to sell homes at discount means that investors can no longer flip properties because buyers can get better deals from builders. Worse, such properties can be extremely difficult to rent at anything approaching a positive cashflow because many markets are brimming with look-alike new properties and condos. In such an environment, buyers and renters rule -- and fad investors with little cash will sell, sell at a loss, rent at a loss or will be foreclosed.
The good news is that the marketplace is forever in the process of self-correction. When it tips too far in one direction it begins to tip the other way, always seeking a cosmic sense of balance. It will take time to clear out the inventory now held by weak investors -- and by investors who will weaken under the burden of ongoing monthly costs. This is simply a healthy culling of the investor herd. In some cases, there will be local price declines and price declines by property type, but hopefully the worst result in most areas will be a general slowing of appreciation to something just above the rate of inflation. This would be an ideal situation for both sellers and buyers, a market with reasonably rising prices -- and something largely unseen during the past few years.
posted by Ken Calhoon at 7:54 AM
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