New home sales figures from HUD and Census Bureau yesterday underwhelmed, slipping on a month-to-month basis to an annual rate of 627,000 (before later revision), a level lower than any month since August last year.
A mismatch between what more prospective buyers can take on financially and what builders can offer them profitably is ever more pronounced.
So, new home sales at a macro level have been moving sideways, as Zillow senior economist Aaron Terrazas notes here:
Whatever progress has been made in new home sales since the economic recovery began, recent data makes it clear that builders have been struggling to ramp up new single-family home construction for years. If building levels had largely stayed near their historic norms and had kept pace with population growth, there would be millions more single-family homes nationwide, and the current imbalance between housing supply and housing demand would not be nearly pronounced. A few months of incremental gains or losses will not meaningfully change that difficult fact.
Median prices–up 1.8% year-on-year–are $328,000, a 22% delta between new home median prices and resales that accounts for the still atypically high ratio of 8-plus existing home sales for every new home sale. Some of the drift upward in median new home prices owes to the relative strength of sales in more expensive West region markets, versus some weakness in the South, where prices tend to be lower.
While the numbers were not what many hoped the macro report would be, the on-the-ground narrative from builders we talk to is still positive, indicating that in spite of “air pockets” of missing mojo, the story is still constructive. National Association of Home Builders assistant vp for Forecasting and Analysis Nanayakkara-Skillington, notes:
“Despite the disappointing July estimate, total sales for the first seven months of 2018 (401,000) were 7.2% higher than the comparable total for 2017 (374,000). We expect the volume of new home sales to continue to expand along the current modest pace, subject to monthly volatility and supply-side cost concerns.”
It’s not uncommon for national trends to gloss over, or fail to pick up currents of improvement in their earlier stages, as we expect will occur as more and more entry-level communities, homes, sales efforts, and deliveries account for an increasing percentage share of the overall new-home market.
What we’ll see kick in in the next four months will be a dimension of home building strategies and tactics we haven’t witnessed for some time. Only 24 months or so ago, home builders were “cadencing” sales and delivery dates, to keep start-to-completion cycles manageable given construction labor capacity risk, and to achieve price leverage and expand each unit’s gross margins.
Now that many of these same builders have shifted mightily to bring on lower priced, entry-level models into their core portfolio–supported by a demographic tidal wave of young adults who are only now flexing their muscle as would-be homeowners–the September to December sprint for new orders and closed deliveries will be an intense one. While these firms would not be quick to say they’ve got headroom in their profit margins to work with, we’re going to start seeing the lengths they’re willing to go to to continue to drive pace and volume through their systems into the teeth of their own cost challenges. Despite visibly lower traffic rates in many communities, conversion rates are rising, which means that more and more builders have begun reaching their prospects earlier in their journey to homeownership, engaging them and reeling them in with the right product at the right prices.
Home builders, among other traits, tend to rise to challenges, and nobody who’s not living under a rock isn’t aware of a big challenge of the moment: There’s a big potential market for homeownership that [most] builders can’t access because of costs in their business models.
Anybody willing to take that one on?
Good.
