PRICE INCREASES SLOWING DOWN
Home price increases that we have enjoyed over the last 9-12 months are slowing down in markets across the country
Price increase strategies should be reined in. A rising interest rate environment and double digit price increases over the last 12 months have the new home buyers hitting their limits of what they will or can pay for a new home. Revisiting sales and marketing strategies are imperative as we move into the final quarter of 2013.
———————————————————————————————————————–Home builders across the U.S. are beginning to hit the limits of what buyers will pay for new homes in this market, as early assessments of August sales activity indicate a marked slowdown in sales due to lofty prices and rising interest rates.
A survey of 273 builders by John Burns Real Estate Consulting in Irvine, Calif., found that the respondents’ sales of new homes declined by 4% in August from a month earlier. In past years, August typically has yielded a 2% gain from the July figure. Burns estimates that its survey, conducted Aug. 29 to Sept. 3, spans roughly 16% of new-home sales in the U.S.
Perhaps more telling: far fewer of Burns’s survey respondents reported raising their prices in August than had in previous months. Of the respondents in August, 47% reported raising prices, 48% held prices steady and 5% lowered prices—the largest percentage of reductions since March 2012.
Those figures show substantial change from the results of Burns’s July survey in which 64% of builders reported raising prices, 36% held them study and one builder—statistically 0%—said it cut prices.
The survey results are the latest sign of a pause in the new-home market. For much of the past year, many builders raised prices by double-digit percentages as the supply of new homes for sale remained tight and interest rates were historically low. However, that changed in recent months as prices got out of reach for some buyers and interest rates rose by nearly a percentage point since May to 4.57%.
“The fact that we saw a 4% decline (in sales volume) does suggest there is more to it than just normal seasonality,” said Jody Kahn, a senior vice president at Burns.
That additional factor is that some buyers now can’t afford new homes. “The price increases are crazy,” said Amy Downs, a real-estate agent with Keller Williams Realty in the Dallas suburb of Garland, Texas. “I’ve seen some builders that have raised their prices $100,000 over a three-month period. That has a big impact on people buying new construction.”
Ms. Downs said that many of her clients have suspended their searches for a new home, instead waiting to see if prices come down and if interest rates stop rising.
The Burns survey mirrors other reports that have come out this week. National builder Hovnanian Enterprises Inc. said during its quarterly earnings report on Monday that some of its price increases this year “might have been a little bit aggressive,” which hurt sales. Hovnanian’s sales contracts signed in August declined by 9% from a year earlier. In response, Hovnanian said it reined in price increases in many markets and lowered prices in some.
On Tuesday, Credit Suisse analyst Daniel Oppenheim, who tracks home-builder stocks, reported in his monthly survey of real-estate agents that the flow of buyers visiting new and existing homes listed for sale fell below agents’ expectations in August for the first time since December 2011.
Specifically, agents responding to Mr. Oppenheim’s survey rated buyer traffic in August at 45.2, down from 52.9 in July. A rating of 50 indicates that buyer traffic met agents’ expectations. Any number less than that means traffic failed to meet expectations, and any number greater than 50 means it exceeded them.
“We saw August trends worsening from what we’d been seeing earlier (due to) higher prices and higher rates impacting the buyer,” Mr. Oppenheim. “We think that, in some cases, it’s that the sellers were a bit too optimistic. We might see prices come down in some situations.”
The Commerce Department will release its figures for August new-home sales on Sept. 25.
In the Burns survey, respondents in 5% of respondents reported cutting prices in August. One locale in which respondents cited price declines is Northern California, where earlier this year new-home prices had risen by 20% to 25% from the year-ago figures. (For perspective, national average price for new homes sold in July was $322,700, up by 14.3% from a year earlier, according to census data).
Ms. Kahn, the Burns vice president who oversees the survey, said small price declines often indicate that the builders offered incentives to spur buyers to close a deal. That often includes either financial assistance with closing costs, paying down interest rates or contributing free amenities such as appliance sets.
Builders, however, are loathe to admit offering incentives, lest every buyer demand them. Michael Strech, president and chief executive of the North State Building Industry Association, which represents home builders in 20 counties in Northern California, described the pricing activity in that region as a “throttle back” from steep increases rather than a slowdown.
“It’s nothing that anybody is terribly concerned about or reacting to with incentives,” Mr. Strech said. “What you’re seeing is that price plane leveling off.”
Source: Bloomberg News