Overall, indicators of new home conditions improved very slightly, but remain weak according to the John Burns Real Estate Consulting June survey results.
This month, 306 home building executives from more than 200 companies reported that sales remained very weak in May, and that prices continue to decline. A total of 2,221 new home communities in 95 unique metros were represented in the survey.
“Builder contacts in a few locations are telling us that traffic and sales are off in the first weeks of June, and they suspect the end of the spring selling season may be near,” said Jody Kahn, vice president of Irvine, California based John Burns Real Estate Consulting.
Moving into the summer months, escalating foreclosure and REO pressures are anticipated and the clock continues to run down on the availability of both federal and state new home tax credits. “We’re also being told more often that appraisals are not supporting the home price. That’s a significant additional challenge,” said Kahn.
Despite the continued negative numbers, this month’s commentary is the most optimistic we have seen since the survey began one year ago. Many builders believe we are approaching bottom, particularly in some of the most distressed markets, such as Phoenix.
Regarding the recent rise in mortgage rates, we don’t think it’s having a negative impact yet because it initially acts as a stimulus that gets potential buyers to finally buy a home and lock in the rate, according to CEO John Burns. “Clearly, it is not good for sales in the long term, but affordability remains excellent, so we don’t think it will have a significantly negative impact if mortgage rates remain below 6%.”
Survey Highlights:
- Pricing net of incentives continues to decline, at a slower rate: Overall, the direction of new home pricing is trending more toward Flat than Declining, but they are increasing nowhere. This month the Northeast and Northern California regions joined Texas in reporting flat new home prices.
- Average net sales per community slipped to 1.6 nationally: In a reversal from last month, 8 regions of the country reported slightly declining net sales per community. Sales were primarily driven by tax credit availability and competitive pricing at the low-end of the market. Many private builders have sold their inventory but are unable to finance new starts, which may be dragging down the sales rate in some locations. Keep in mind that the sample of new home communities varies somewhat, so the decline could be attributable to a shift in mix.
- Ratings of current sales and 6 month outlook were flat, while the traffic rating declined slightly: Builders’ rating of current sales matched last month, which is nearing a “Fair” rating. Traffic lost a little footing but sales expectations for the next 6 months held. California builders expressed concern that the $10,000 state credit is disappearing and the spring season is waning. Our estimates show the California state credit will be tapped out in July, but there is a movement afoot to allocate more funds to the credit, which is being supported by an academic study proclaiming that a new home start generates $16,000 in state taxable income.
- More builders start homes: 69% of our participants started between 1 and 4 homes this month, and 25% reported no starts. This is an increase.
- Builders anticipate a modest positive impact from HUD’s initiative to monetize the tax credit at closing: 36% expect a boost of 11-25% more sales per month.
