Home sellers and home buyers seem to be on different wavelengths in recent months. Existing-home owners who are putting their houses on the market have become used to the notion of making significant amounts of money when someone sells a house, and for the most part have remained quite firm on price. This is despite rising mortgage rates, which have, in effect, continually made homes more expensive for buyers.
Large home builders haven't been very willing to budge on price either, but perhaps with broader reason: Dropping prices in a new-home community can understandably upset homeowners who recently purchased a new home there at a higher price, and it can encourage those who are in the process of buying to cancel their deals and renegotiate. The result is broad use of incentives to coerce buyers, including everything from appliance or material upgrades to credit for use in the financing process. And despite weakening demand, many large home builders are continuing to push a large amount of homes onto the market in a short period of time in order to reach unit and revenue goals.
From the average home buyer's perspective, there is little reason to act immediately to purchase a home. And with inventories building, they are probably right. As the steady supply of new homes continues to come online this year, it's expected that builders and private home sellers will begin to make price concessions. They will likely be short-term, maybe only lasting three to six months to spur inventory-eating purchase activity, but some of these price concessions could be in the double-digit percentages in some areas that have more serious oversupply issues. In the meantime, inventories of both new and existing homes are increasing broadly across most markets in the nation. While prices have yet to move downward, it is unlikely that the build-up of inventory will allow home appreciation to stay on the positive side, at least in the short-term.
As home builders come to terms with the new demand landscape when planning their 2007 fiscal year, we can expect many builders to pull back on their delivery schedules for next year. All this begins as part of a development pipeline, of course, so to get a glimpse of what each builder has in store, determining their land holdings going forward will be the best leading indicator of future activity. Many large builders have been selling off at least some land holdings to smaller builders, who either feel more capable of dealing with a changing market or aren't reading the same writing on the wall that many big public builders seem to be ascribing to.
The drama of the housing market has a backdrop of an economy that can neither be described as particularly good or bad. Oil prices have put increased pressure on inflation in the last couple months, and while there has been some recent relaxation in this trend, it will likely pick up again eventually. With a troubled situation in the Middle East, the recent closing of the Prudhoe Bay field in northern Alaska, and troubled production in Nigeria, oil production capacities have weakened, resulting in further price increases in crude oil. Coming off a peak of 6.78 percent in the second quarter, mortgage rates have been trending downward recently but will remain in flux depending on the direction of inflation. Weaker-than-expected job growth combined with lower-than-expected GDP growth in the second quarter has resulted in lower rates of inflation, vindicating the Fed's decision to pause in its cycle of interest rate hikes.
Going forward, most forecasts for the remaining months of 2006 have the economy growing at a much slower pace than in the first half of the year, along with only weak-to-moderate job growth. The economy should still be strong enough to act as a foundation for the housing market, to push prospective home buyers back to the bargaining table once they are convinced that prices have come down as much as they are going to. —Jonathan Dienhart heads the Published Research Group for Hanley Wood Market Intelligence, a division of PROSALES' parent company, Hanley Wood, LLC.
Hanley Wood Market Intelligence provides data and consulting services on residential real estate development and new-home construction, including analysis of key trends impacting the housing market through its proprietary software products and research reports. Contact: 800.639.3777. www.hanleywood.com/hwmi.