February 18, 2011 / 9:59 PM / 9 years ago

US homebuilding's long winter won't end this spring

NEW YORK (Reuters) - Ah, springtime. When temperatures rise, and home prices fall.

A home in the Pallisades District of northwest Washington is advertised for sale directly by the owner, October 24, 2006. REUTERS/Jason Reed/Files

The first field reports about the spring selling season for new homes are rife with word of buyer incentives, broker bonuses and price cuts as spooked builders sacrifice profitability to secure some sales.

“For this early in the season, there has been a lot of pressure on price,” said Larry Lippincott, a co-owner of ForeverHome, a private builder in North Carolina’s high-tech “Research Triangle” region.

Homebuilders like Toll Brothers Inc, D.R. Horton Inc and their smaller rivals used to be able to rely on an annual boost to business that started in the winter and culminated with warm weather.

Even last year, the federal homebuyer tax credit was supporting demand and giving builders and investors reason to hope that its protracted slump was easing.

But the way this spring is shaping up, homebuilders will likely lose money in the first three months of the year, and might do the same in the first half, said Morningstar analyst Mike Gaiden.

Homebuilders “are going to make sure to drive as much as they can through incentives,” said Jody Kahn of John Burns Real Estate Consulting, based in Irvine, California. “The market isn’t expecting how soft price might get.”

Homebuilder shares are up about 25 percent since the beginning of December, according to the Dow Jones U.S. Home Construction Index, beating a 13 percent rise in the S&P 500.

In her most recent weekly survey, Kahn saw price cuts nationwide, including $4,000 broker bonuses by Horton in the Washington D.C. area, discounts in Dallas and increased incentives in Southern California.

“Nobody really wants to talk about discounting but I have no question that it’s the case,” she said. “It’s just too many builders, and too many markets.”


No wonder homebuilder confidence remained stuck at 16 for the fourth month in a row in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index. A reading above 50 indicates that more builders view sales conditions as being good than poor.

New homes must still compete for buyers with resales and cut-rate foreclosures and short sales, the legacy of a housing boom characterized by risky lending and speculation, said Mesirow Financial Chief Economist Diane Swonk.

“Discounts are still moving houses,” Ticonderoga Securities analyst Stephen East wrote in a client note. He recently toured a PulteGroup project in Orlando, Florida that sold six homes in January — but was offering an $11,000 incentive.

The big builders that have the budget to advertise are setting the tone, said Bernard Helm, a housing market analyst specializing in North and South Carolina.

“A lot of the new homebuilders that we compete with are still pretty volume-oriented,” said Standard Pacific Corp Chief Executive Officer Ken Campbell. “In order to capture buyers in a world where home prices are still going down, they have to lower their prices.”

Toll Brothers’ “National Sales Event,” starting on Feb. 19, promises “amazing incentives” like upgraded design features and $1 special option packages.

Toll declined to comment, citing quarterly results to be released on Wednesday. Horton also declined to comment.

Volume must rise before prices can rise, Campbell pointed out. Even he said prices might take longer to recover than they have after past downturns.

In the Research Triangle’s secondary markets where Lippincott’s ForeverHome competes against many national builders, prices have already fallen 10 to 15 percent from the fourth quarter, Lippincott said. They are also down, but by less, in the prime markets.

Likewise, John Anderson with Twin Oaks Realty in Minneapolis-St. Paul says Pulte, Lennar Corp and others are pushing prices down to compete with the used home market.

“Buyers are bargain hunting and trying to push the bargains even more,” Helm said.

Reporting by Helen Chernikoff; Editing by Tim Dobbyn

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