It's been 16 months since I've published market commentary. Meanwhile, I've been toiling on a new housing intelligence platform that is nearly complete. I can now take the time to assess where we are and where we are going. Unfortunately, I'm not ready to endorse perceptions that the housing market is ready for a triumphant comeback—yet.
As Hanley Wood Market Intelligence and BIG BUILDER collaborated to gather data to analyze specific markets where big builder activity has seemed to point to signs of improvement, my immediate reaction was to ask what exactly defines a market as improving.
To those focused on the land part of the business, the market started coming to life last year as builders with capital began to buy mostly finished lots. Some of those purchases were necessitated by the need to provide cash flow against overheads required to stay committed in strategic markets. Other purchases have been opportunistic. And some builders sought to capitalize on a temporary demand boost from home buyer tax credits.
In most markets, the supply of finished lots is lower than it was a year ago, which has led to increasing interest in raw land and development. The effect of the land acquisition activity has been to stabilize land and lot prices. That's clearly one sign of improving conditions.
However, if we look at the biggest economic signals of housing health—stable and improving prices and home sales—we're not out of the woods. In most markets, as real estate-owned sales continue to exert downward pressure on pricing and foreclosures continue to feed the REO pipeline, pricing hasn't turned the corner.
Sales are even harder to divine because we've seen an increase in closings in most markets in March and April, aided by home buyer tax credits. Did the tax credits pull demand forward from the second half of the year?
I'm not too positive about 2010 registering an increase in new homes sold over 2009's volume of 374,000, as reported by the Commerce Department. I give us a 50 percent chance of seeing about the same number of closings in 2010, which means that May through December's pace of sales would slip from the first half. The chances of a net year-over-year decline, we'd place at 30 percent.
We'd say there's a one in five chance of an increase in closings to 450,000, a year-over-year increase of 20 percent.
What is acting against increasing sales? Declining homeownership and slower household formation, which trace back to a subpar jobs picture.
Recently, we've seen one encouraging factor—the premium for new homes versus existing homes turned positive in markets showing signs of life.
Our New Home Premium is the percentage difference in the price per square foot of new versus existing homes. What this metric indicates is the perceived market value of new homes relative to existing. In a normal market, we would expect to see a positive number because a new home should be more valuable than an existing home for quality/warranty/energy-efficiency reasons.
If any single metric tells you about the health of the new-home market, this would be it. A new home does not need to be discounted to move at today's absorption levels. This reflects inventory levels no longer being a problem and the new-home market being managed to margins. New homes may have given up market share to existing-home sales, but buyers are again paying a premium for new homes in markets that are “making a comeback.” It's a key early sign of improving conditions, even if other signs point to more pain in the coming months.
Jonathan Smoke is senior vice president for Hanley Wood Market Intelligence. He may be reached at email@example.com.