Sales may have continued their slow suffering through 1Q2008, but halfway into the second quarter some positive undercurrents have gained force.
According to FTN Midwest’s most recent neighborhood survey of 60 public builder communities, traffic levels at new-home communities were heartening in May; 79% of the communities surveyed noted foot traffic was either steady or increased from the previous month. Some of the increase was attributable to seasonal spikes in traffic, but it also marked a steady six-month climb-- a fact that analyst Jay McCanless said he believed was just one of a few encouraging market trends.
“We have seen a pick up in traffic from December forward, and it’s because people know the deals are out there,” he said.
Promotions such as cash toward closing costs, discounted financing, and free upgrades remained ubiquitous, but 53% of the community salespeople surveyed also said they expected future promotions to be smaller than current promotions.
McCanless said incentive offers could shrink going forward for two reasons. First, builders have aggressively cut base home prices; they’ve slashed prices to the point that McCanless said he believed the majority of price reductions are behind them. Second, because of the costs of options and upgrades--and the labor used to install them--have fallen off in the past two years, builders have chocked their homes full of upscale amenities.
This combination adds up to exceptional value for the buyer, said McCanless, a fact that he anticipates will start to translate into sales.
“If you look at what you get for $1 in a new home for what you get for $1 in an existing home, there’s no comparison,” he explained. “New homes are beating the you-know-what out of existing homes.”
McCanless added that value-driven promotion was also playing a role in the reduction of spec inventory. The level of inventory homes decreased in 68% of the communities surveyed. Similar to results from the April neighborhood survey, specs averaged one to two homes per community in May. McCanless considered this an “appropriate” level. “You have to have some spec on hand or you’re toast,” he said.
However, Patrick Higgins, vice president of sales and marketing for private builder John Laing Homes, said that in some markets such as Sacramento he’s seeing that the pendulum has arguably swung too far. Foreclosures and existing-home inventory aside, new-home inventory levels are so low that “new-home opportunity almost doesn’t exist for [buyers] unless they want to wait,” he said.
This situation has led builders to face off against another big issue. “The question today is: Are dirt starts worth more than spec inventory? That’s a huge question today,” Higgins said. “Or did the inventory reduction drop the floor on the market, and that’s the new floor?”
While the pricing power of spec versus built-to-order homes rages on, good deals on new homes abound and spec inventory is in check. Considering these two factors, McCanless said it made sense that sales would start to manifest, leading to increased starts in 2009. Also a boon to this outlook was that the credit quality of prospective buyers continued to increase this month. Moreover, reforms at Fannie Mae and Freddie Mac that reduced down payment minimums to 3% to 5%, depending on the borrower’s creditworthiness, could widen the pool of potential new-home buyers.