After several encouraging summer months, new home sales have caused concern in the building industry. Weak sales figures, regarding recently built homes, suggest affordability may impede the progression of the building industry. Of particular concern, however, is the scenario builders may face in the upcoming spring. According to a survey by John Burns Real Estate Consulting, a housing research and advisory firm, new home sales declined by eight percent in October from their September level and by six percent from the previous year. The recent decrease in new home sales highlights the second consecutive month in which respective sales declined from the previous year. For comparison, the market has not experienced a similar dip since 2011.
As if declining sales figures were not already enough for the building industry to absorb, the percentage of respondents disclosing that they raised prices continued to decline. As of October, 28 percent of the companies involved with the survey were able to raise prices. This is a drastic decline from July, when 64 percent acknowledged price increases.
“October was basically a crummy month for a lot of builders,” said Jody Kahn, a senior vice president at Irvine, Calif.-based Burns. “Their frustration is about the government shutdown and how it probably trumped any seasonal (sales) lift that builders were hoping to see. Most did not have very good sales.”
The survey consisted of responses from 273 U.S. markets and was intended to provide a glimpse of new home sales prior to the U.S. Census Bureau. Due to the federal government shutdown in October over budget and debt negotiations, Census isn’t scheduled to release data on new-home sales in September and October until tomorrow (December 4th).
The survey highlights the significant impact market indicators have had on the industry. The drop in new home sales may be directly attributed to a one-percentage point increase on mortgage rates and rapid home appreciation on a national level. While mortgage rates have since receded, buyers still remain reluctant to actively pursue newly built homes. Uncertainty will therefore continue to prohibit new contract signings for the immediate future.
Builders are aware that contracts typically fall off in the fourth quarter because of a cyclical lull in the housing sector. Contractors tend to use the winter months to close deals and buyers are more inclined to focus their attention on holiday shopping. However, several conditions proceed to worry respective builders. Not only have contract signings stalled more than anticipated; the federal budget and the fragile state of the economic recovery make it increasingly difficult to remain optimistic. These conditions can potentially hinder the upcoming spring selling season and push the recovery back even further.
“There’s some nervousness about the spring selling season,” Ms. Kahn, of Burns, said. “That’s partly because they’re worried about the lack of urgency from their prospects will continue.”
To compensate for the appreciation and interest rates that are hurting business, some builders are considering an alternative approach. Scott Laurie, chief executive of The Olson Co., a builder based in Seal Beach, Calif., acknowledged that his company underwent a drastic change to accommodate the new trend. Olson Co. shifted their attention away from more expensive housing towards townhomes. According to Laurie, the move was in response to home prices outpacing job growth. Prospective buyers simply can’t afford new homes in today’s market.
“I think this (slowdown) is a good wakeup call for the industry,” Mr. Laurie said. “You can’t just raise prices 2% a month. That doesn’t work. What works is affordability.”