Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Home Builders: Reducing Starts and Raising Prices

Written by JD Esajian

Despite the low supply of available houses for sale, home builders across our great nation have begun to slow down production on single-family homes. The recent decline in new starts was more than predicted and may suggest why listings are down dramatically from this time last year. As to make up for potential lost profits, builders are simultaneously increasing prices while constructing less.

“The builders are running out of lots in subdivisions they’re building in, so they’re slowing down sales by raising prices,” said Bradley Hunter of Florida-based Metrostudy.

Recent building trends suggest an unwarranted trend within the housing industry. In what can only be described as confidence, home builders continued to raise prices amidst a backdrop of flat single family starts. “What are they so excited about?” asked Hunter. “That they have pricing power.”

Unable to meet the rising demand, housing completions stumbled 0.9 percent to an annualized rate of 690,000. Underlying demand consists of new households forming (about 1.1 million, according to Census data,) replacement demand (about 250,000 homes) and second home demand (about 50,000,) according to IHS Global Insight.

“The wide gap between housing completions and underlying demand suggests that inventories are likely to get leaner over the next 12 months,” IHS analysts said in a report to investors. “For the record, it takes about seven months on average for a single-family permit to turn into a completed home.”

Low levels of available properties and a particular focus on non-distressed homes have allowed home builders to increase their median sale price by 32 percent over last year’s price.

“While home prices are increasing at levels above those observed in 2006-2007, the fundamentals of the housing market are much more solid than what we experienced a few years ago,” said Leslie Appleton-Young, chief economist for the California Association of Realtors. “More home buyers are putting down larger down payments, and many of them are opting for more stable loan products.”

Due in large part to the focus of non-distressed home sales, and fewer foreclosures and short sales, the median California home has received a price bump. In May, distressed properties accounted for 31 percent of total sales in California, down from 52 percent of sales a year ago, according to Propertyradar, a data and analytics company. Meanwhile, nondistressed sales were 69 percent of total sales, up from 48 percent a year ago.

“In this bifurcated market, nondistressed sales are up smartly for the year but distressed sales are falling faster than the rise in non-distressed sales,” noted Propertyradar’s Madeline Schnapp. “The dramatic increase in California median home prices belies the fact that May sales, a month normally characterized by rising sales, declined 11.1 percent year over year.”

Companies responsible for the addition of new homes have recently been competing with the distressed market, many of which were relatively new builds. However, recent trends have seen that competition fade, as buyers are turning to builders because of a lack of inventory. While home builders are affected by current labor and supply constraints, they have begun to take advantage of rising prices.

However, inventory levels, as a whole, are slowly beginning to restore themselves. A recent report by Redfin has acknowledged that active listings grew 6.4 percent between March and April. The subsequent transition into May witnessed an additional 4.2 percent increase in available inventory supplies.