In our March home building survey, feedback from builder contacts indicated that while certain housing metrics continue to show signs of stabilization (and perhaps modest improvement), such as absorptions and cancellation rates, the vast majority of respondents are still unwilling to call an overall market bottom. While I believe it is likely that 4Q08 will ultimately represent a trough on an absolute absorption basis, my fundamental outlook that new-home sales, starts, and pricing will not bottom until 2010 remains unchanged. On the volume side of the equation, I estimate that seasonally adjusted absorptions are now at the highest level since July 2008 and are up nearly 60 percent from the trough levels seen in 4Q08. That said, absorptions remain under pressure on a year-over-year basis. More importantly, they are roughly 65 percent below the three to four sales per month rate necessary for price stability in aggregate across all markets in our survey, indicating the likelihood of further price deterioration. It’s true that some markets are posting absorption rates well above this average and in some cases have recorded a few weeks of results close to the absorption level cited above; but the strength in these markets is being driven by catalysts such as home buyer tax credits and one-time sales events, which causes me to question the sustainability of these results once these catalysts are no longer present.
Although the upward trend in volume is encouraging, several contacts provided a caveat to their more positive feedback. According to the responses, it is difficult to gauge market trends during this time of the year as March is typically the most important month from an order standpoint for builders, and this month’s sequential volume improvements, which should be the norm based on seasonal trends, were driven by further price cuts, incentives, and government tax credits.
According to builder contacts, a supplemental $10,000 California state tax credit for new home buyers has had a strong impact thus far, generating approximately 2,600 applications through the first five weeks of the program. California-based contacts overwhelmingly believe that the state tax credit was a huge driver behind the improvement in market conditions in recent weeks. However, with roughly 25 percent of the total $100 million of allocated funds already spoken for as of the first week in April, the credit is on pace to run out by July, causing many survey respondents to be concerned about the continuation of these trends once the tax credit is exhausted and the impact begins to be felt from the expiration of the government-sponsored enterprise foreclosure moratorium.
In addition to California, several other states are currently pursuing tax credits of their own. On March 19, Utah became the second state to pass a supplemental tax credit, in the amount of $6,000, to anyone buying a new home. The $10 million, or roughly 1,600 state grants, comes from allocated funds from the federal stimulus package. Several contacts have already cited a strong response from this tax credit as well. In addition, Georgia, Illinois, Kentucky, and Michigan currently are discussing instituting state tax credits for home buyers.
With seasonality set to become a headwind rather than a benefit and the eventual expiration of home buyer tax credits, I am concerned that price deterioration will continue, thus accelerating the cycle of additional impairments, builder failures, land liquidations, and disappointing cash flow results. By the end of the downturn, my contacts expect more than half of all builders to ultimately shut down, either via bankruptcy or liquidation. In my opinion, these builder and developer failures will continue to be a headwind for the industry as the banks take control of more assets including spec homes, partially built homes, and lots, which will fuel price deterioration. I am also concerned that the fragile nature of the consumer leaves it susceptible to a pullback in macro data points such as the stock market and job losses, which could lead to a reduction in confidence.