New Home Sales Flatline

"Flatline" appears to be the operative word for the homebuilding industry these days as sales levels remain near historic lows amid fierce competition from banks where the supply of distressed sales coming onto the market continues unabated.
The Census Bureau reported(.pdf) that new home sales unexpectedly declined last month, from a downwardly revised annual rate of 417,000 in August to 402,000 in September.

On a year-over-year basis, sales were down 7.8 percent and, from the peak of the residential construction boom back in mid-2005, sales are down 71.1 percent.

More importantly, current levels of home construction and sales remain near historically low levels, first reached in January of this year, and this bodes ill for a sustainable economic recovery where residential construction normally plays a major role.

Last week's report on housing starts showed a similar trend in recent months.

As noted here many months ago when all-time record lows were first being made, in population-adjusted terms, the current housing downturn is without precedent. The pre-2009 all-time low of 338,000 in September of 1981 works out to a population-adjusted rate of about 460,000 today, meaning that, even after the improvement of recent months, new home sales would have to rise another 15 percent just to get back to the previous record low!

While there has clearly been improvement in new home sales in recent months, recent increases are akin to your favorite 2000 technology stock rising 8 or 10 percent during a few months in 2001 after plunging 80 percent in 2000.

Inventory remained at a 7.5 months supply in September, down significantly from earlier this year but still about 50 percent higher than normal, and the total of 251,000 unsold new homes is the lowest in 27 years, a confirmation of just how low current sales levels are.

It looks to be a long and difficult road to recovery for the homebuilders, particularly in light of the expected waves of foreclosures that are expected to come in the next year.

Comments

[chris coonan:]

it amazes me that contractors are actually still building new homes....

WASABE? WASABE!

Oct 29 06:17 AM

[John Galt:]

Homebuilders.... HOMEBUILDERS?????

We built 15 years worth of supply of housing in a 5 year period. I don't even think the 7.5 months of inventory is correct ( I think it's more). There are empty and foreclosed entire neighborhoods out there.

When they bring up housing "starts" and "permits" numbers it's almost comical. Housing starts? If we didn't build a single new home until 2019 we'd still be fine.

Oct 29 10:35 AM

[concrete guy:]

All housing is local. Did anyone else notice that new home sales in the Midwest were up 34%? I have yet to see an author address this apparent anomaly. The Midwest, with it's predominately conservative local and regional financial institutions and business climate, escaped the worst excesses of the bubble and appears poised to continue to lead the rest of the country out of the housing mess.

Oct 29 12:19 PM

[OldSusanna:]

John Galt; you are so right on the money...
Concrete Guy; it's so good to hear that some pockets of humanity kept their sensibilities intact during the frenzy-feeding of the housing bubble... Hopefully; this administration's actions won't harm or undo the health of those areas who managed their <housing, etc...> responsibly.

Oct 29 12:45 PM

[HardwoodFlo...:]

The author touches on one great point but does not expound on it- typically homebuilding recover leads the country out of a recession. If you chart back all of the previous recessions, unemployment and housing you will see something very interesting: housing begins to rebound and fast. Then unemployment starts to decrease AFTER then the recession halts and we return to health.

What is different about this time around is that the lending situation, for the 1,000 post, is still messed up because banks only want to write that which is FHA backed. Thus the top end of the market is lagging, there is no "move-up" market. Without the upper-end of the market showing improvement it will be hard to call an end to the current situation. Actually, if the upper-end does not start to move you will see bigger problems because the price declines will be greater (in %) than they were in the first leg down which was lower priced sub-prime stuff. This will continue a negative atmosphere around RE and housing.

Galt- not sure about your "over build" assessment the country in good times adds 1.5 million households a year and in bad times 1.2 million. Builds have been sub 1 million for the longest time in American history. New housing inventory is below 2,000 per Million (vs the 82 housing recession where it was 12,000 per million). We lose 500K houses a year to tear downs. The demographics are there for a recovery but the lending mechanisms are not.

There will be massive pent up demand on the back side but that wont be realized unless lending get's back to normal and people have jobs. The jobs and housing recovery are some what correlated.

In the end, we are not there yet...and this is due to a-hole bankers strangling small business, not lending to qualified buyers (because under the current provisions they are forced to raise more capital to make new loans and who wants to 1)raise more capital from traditional sources e.g. deposits are calling in more loans 2)outside sources where capital is very expensive).

Anyway, the assessment that the housing market is at current levels "overbuilt" just doesn't hold up when we are talking about sub 300K in new housing inventory. Get us back to normal sales levels and the inventory of new and existing homes is marginal from a historical perspective.

Oct 29 04:19 PM

[HardwoodFlo...:]

BTW I would not recommend buying "wall street homebuilders". Here is why- in the last run they had they were building McMansions. Well those days are gone. They will be forced to build smaller houses. This will mean to things 1) they will lose economies of scale- it costs a homebuilder relatively the same amount of money to build a 5,000 sq ft home as it does a 3,000 2)margin erosion as they are selling into a cheaper market to try and hit the $415K FHA ceiling. Expect higher costs of building (although input/raw material costs will be lower but not for long as many suppliers have been ripped out because of the length of the recession) and lower selling prices. Together these equal lower net incomes.

The WSB (wall street builders) sold themselves on t he fact that they wouldn't "overbuild" because they had in-house economists and market research that would for go the pit falls of smaller "mom and pop" builders. Well we know how that turned out. Now they are selling themselves as logistic and cost experts- well that ain't gonna work.

Building in the future will be "build to design" more custom and more particular for direct needs not wants.

Oct 29 04:26 PM

[OldSusanna:]

First; national statistics only tell one chapter of the story--real estate, as they say, is very localized and your comments do not reflect the conditions in my area, nor in areas where many of my clients own homes. Only time will tell whether (hardwoodflooring's) thoughts regarding the recovery are accurate; I suspect however, they will prove only partially so... I make my living, primarily, from new construction projects--so the fate of this industry is of great interest to me.

Oct 29 08:07 PM

[OldSusanna:]

To avoid hate mail, let me clarify: I make my living primarily from CUSTOM projects and opposed the development of the (far too many) stepford-wives-like subdivisions in my area. Many of these homes were purchased in multiples by Realtors to be flipped upon completion in a "double closing." Our current estimated 7 month inventory does not include the many homes now owned by Realtors/Developers/Sp... (even Banks), retracted from the market. These entities are struggling to keep them rented (in a now glutted rental market) in efforts to: a) hold out for a better market; and b) create an illusion that our local market it healthier than it actually is. The estimated inventory not so long ago was an astounding 24 months. The high-maintenance crap used (in general) for interior and exterior finishes are going to be coming due, in short order, for lots of attention--costs that will be, at this time, tough for many to afford. What a mess.

Oct 30 10:35 AM

[HardwoodFlo...:]

The problem with your comments Old Susanna is not hat you don't have pertinent anecdotal information is that you provide little insight into what the core problem is nor what the solutions are.

My info doesn't pertain to "localized info" though I can expound on just about every market in the country from Bozeman, MT to Livermore, CA. That's not the point, the point is what are the potential pitfalls of the next leg down and what is seen on a MACRO level that can affect the MICRO.

All I was doing was articulating the facts of the MACRO view... Thanks for voting down my comments ( I could care less) but what is really regretable too bad you didn't read them to understand them.

Oct 30 02:37 PM

[thiazole:]

I believe that there was one recent example where that didn't happen in recent memory. There was a housing market contraction from 1979 to 1982, but there was a recession in 1980 that ended in the middle of the housing market contraction, and unemployment was falling during that short period of time between the 1980 and 1982 recession.


On Oct 29 04:19 PM HardwoodFlooring wrote:


> If you chart back all of the previous recessions, unemployment and
> housing you will see something very interesting: housing begins to
> rebound and fast. Then unemployment starts to decrease AFTER then
> the recession halts and we return to health.

Oct 30 02:45 PM

[OldSusanna:]

I follow seekingalpha, mainly, to become a more informed citizen and a better business-person. I throw out comments as food for thought and to elicit further comments whether they be like-minded or contrary. I don't mean to offend with anecdotal input--which is, in reality, the best I have to offer. I read all comments with the same interest and curiosity. I find this venue quite engaging and informative. If more "laymen" such as myself explored the thoughts, opinions and ideas of seasoned experts, well--maybe these economic hiccups would occur less frequently (or a least with less severity). BTW, HWFlooring; I issued only one down vote and it was, primarily, for the following comment: "it costs a homebuilder relatively the same amount of money to build a 5,000 sq ft home as it does a 3,000." This may, in many instances, be true for land and shell costs, but is not very accurate when finishes and amenities are included. I personally thought that statement undermined your stance.

Oct 30 03:22 PM

[HardwoodFlo...:]

Thiazole- CalculatedRisk has some great graphs of the unemployment vis-a-vis housing/recession and employment.

Oct 30 03:45 PM

[HardwoodFlo...:]

OlsSusanna- While you might be right in regards to "custom build" that is not the case with the Wall Street Builders who put little in terms of casework and other expensive amenities. Typically this means for them- Wall Street Builders- a little more base-shoe, drywall and cheap-ass floor covering. In that context: your opinion is undermined.

Oct 30 03:50 PM