New-home sales have picked up over the past year. The folks who see the glass as half empty would say that is only because the previous year was the worst year in history. The glass-half-full folks would revel in a more than 20 percent year-over-year increase and an annualized pace better than the past three years. Regardless of how you look at recent performance, the picture is getting brighter.
The monthly NAHB/Wells Fargo Housing Market Index gauges builders’ sentiment with a score from 0 to 100, which means 50 is the point where as many builders see a better market as see a poorer one. The index was in the high teens last year but gradually and fairly consistently has risen for more than a year. Of the three components within the index, builders’ sales expectations for the next six months have been above 50 for several months, and NAHB’s forecast of a 22 percent increase in sales in 2013 is consistent with that sentiment.
As further evidence of improvement, fewer builders are offering sales incentives. The NAHB recently conducted a survey on the frequency of various sales incentives. Price discounts or reduced margins are the incentives most often cited, according to 44 percent of respondents. Price discounting was at its height (72 percent) in late 2008 and early 2009, and hasn’t been as low as it is now since early 2007.
The decline in the use of price discounts may be one reason why new-home prices increased at a 6 percent annual rate during 2012. Some of the increase was because of an 11 percent growth in the median square footage of new homes in the past two years. The growth in size appears to be a function of the higher incomes of the new-home buyers who can make it through the tighter credit standards now in force.
Free or reduced cost upgrades are the second most frequently used incentive by 41 percent of builders, down from two-thirds in late 2008 and early 2009. The most recent survey marks the first time since early 2006 that fewer than half of the builders reported using discounting upgrades as an incentive.
One-third of the builders noted using payment of closing costs or fees as an incentive, down from 59 percent in December 2008, and back down to the levels seen in 2007. Offering energy-efficient or green features was added to the most recent survey and is an incentive used by 31 percent of the respondents. It received the highest effectiveness rating, seen as somewhat or very effective by 98 percent of the builders.
The only remaining incentive utilized by more than 1 in 10 builders (14 percent of respondents) is helping to sell the buyer’s current home. This perk’s usage peaked at 29 percent in December 2008, when the use of trade-in programs also peaked at 19 percent. Trade-in programs were used by only 4 percent of the builders in the latest survey.
Mortgage rate buy-downs have fallen in popularity as mortgage rates remain near record lows. Most recently, only 4 percent of builders used a buy-down incentive compared with 29 percent in February 2009, when mortgage rates were 2 percentage points higher, or in 1982, when 59 percent of the builders used a buy-down incentive and market rate mortgages were approximately 17 percent.
The share of builders that do not offer a sales incentive has increased in the past four years as individual markets began to firm up. According to the survey, 30 percent of builders offer no incentive, up from 14 percent in late 2008. In the past 10 years, the share of builders offering no incentive peaked at 50 percent in August 2003 as the boom bloomed.
As demand continues to return, home builders will find themselves in greater control of pricing. Competition from existing homes and distressed sales will continue as well, but many of these homes are not suitable competition and new homes will command their rightful higher price.