Digging Out From the Snow

Metrostudy’s latest research shows new-home sales tracked slightly lower than the first quarter last year, but things are turning up in the second quarter, at least for some builders. Shaking off the winter blues, consumers seem to be purchasing new homes with more confidence, and in areas that recently were snowed-under, builders are able to move forward with construction at a normal pace.

Note: markets that didn’t get snow suffered an unusually deep slump in sales this past winter, too, so weather wasn’t the main cause for the drop. Things seem to be picking up in those areas as well.

Metrostudy’s latest field study (350 researchers drive nearly 500,000 miles every 90 days, counting all lots, starts, and units of new-home inventory) is uncovering some interesting trends and turning points.

• In Florida, starts fell in Tampa, but rose in Sarasota and Naples, consistent with our finding that retiree-driven markets were better able to weather the downturn that occurred after the Fed announced the taper and mortgage rates went up. Retirees often buy homes with cash, which reduces that group’s reaction to changes in mortgage rates.

• Some builders have resorted to lowering base prices to shore up flagging sales. Metrostudy has identified only a few instances but will continue to watch this key indicator. The majority of builders utilize incentives instead of lowering the list price because they want to avoid sending a signal to buyers that prices are going down (which tends to make buyers delay buying). If some builders are resorting to base-price reductions, that is a significant sign. If sales paces firm up in the next month or two as we expect, any price reductions will be reversed quickly.

• Looking west, Dallas starts are up 26 percent. It’s interesting to see that higher prices and lot shortages are not yet dampening the starts pace. Lot deliveries are starting to ramp up there; I expect that to continue all year.

• First-time buyer activity is still low, but rents are rising, shifting the rent-versus-buy decision decidedly back toward ownership. Builders have been concentrating on the high-margin move-up buyers so far in this recovery, but I expect builders to build more homes to target this group in 2015 and 2016.

For now, mortgage financing is still a demand-side issue. In addition to the strict underwriting standards of the lenders themselves, we are seeing the impact of new regulatory limits.

The western U.S. lost momentum from the FHA resets and qualified residential mortgage (QRM) changes in January, particularly in the first-time move-up segment. The FHA limit was lowered from $500,000 to $335,000 in California’s inland markets, and the QRM debt-to-income ratio went from 56 percent to 43 percent, both of which resulted in a negative impact on demand.

In Las Vegas, the FHA loan limit has dropped 28 percent from $400,000 to $287,500 in 2014. This has already had a negative impact on housing demand.

I expect that sales paces will get back to normal for the majority of builders over the next two months, but that some of them will end up “below plan” for the year, based on their internal targets.

Price escalations also will return to normal. A year ago, I warned that the pace of new-home price escalation would be slower in 2014, and that is turning out to be the case. Supply on the resale market is loosening up, and the momentum-buying that happened in early 2013 has been replaced by normal organic demand—both factors behind the moderation of price increases. Instead of high double-digit rates of increase, I anticipate a 5 percent uplift this year on average for new homes, slowing further in 2015 and still further in 2016. That said, if you’re working on a pro forma for a new project, the rate of increase likely will be faster than average because communities gain value as vacant lots fill up, amenities get built, and people move in and create a sense of “life” in the community.