OC new home sales fall a frightening 41%
A dramatic and unexpected decline in new home sales is either the sign of a market top or an opportunity to get a great deal this spring.
Has the OC Housing market peaked for this cycle? Is the current slowdown the sign of a major change in the market, or is it merely a lull that represents a buying opportunity? There are good arguments for either case.
The economy is improving, and although the new jobs aren’t necessarily supportive of housing, increased economic activity generally supports house prices and sales. Further, mortgage interest rates are near record lows, so houses are more affordable on a monthly payment basis today than they were in mid 2013 when mortgage rates hit 4.5%. This could be a buying opportunity.
However, mortgage interest rates are forecast to rise, which has proven to be a strong headwind, and some global macro forces may be working against the OC Housing market. In numerous recent posts, I speculated on whether or not the demand from Chinese buyers is sustainable. I stated the best indicator for changes in the behavior of Chinese buyers would be new home sales in Orange County because Chinese buyers are such a large portion of recent demand.
About a month ago a reader with some hearsay inside information at the Irvine Company posted a comment that appears to be proving prescient:
Anecdote from a reader: Chinese exodus
I have a friend that works with the Irvine Company. He works with the management of many, many apartment complexes. They have a gauge on the influx of Chinese money flowing through their units. Many arrive and initially set up in apartments, then start buying homes with cash. They make rent payments with wads of cash. They purchase high end cars and luxury items while residing in apartments before they move on. …
I occasionally ask about latest trends. Last week he told me he has noticed a trend developing. Chinese money seems to be leaving Orange County. Over the last couple months he has noticed and received many reports of Chinese investors either going back to China or simply leaving Orange County due to the price level. He also mentioned that this trend is picking up steam. So much so that he personally sold his home in Orange County and is renting. He moved last weekend.
Something on a very large scale is brewing. 2015 has started out with a bang.
A bang indeed…
It appears that Orange County homebuilders have caught a case of the homebuying blues.
The local housing market started the year with more of the same, but with a twist. According to the January report from CoreLogic DataQuick:
• Housing transactions continued to dip: January’s 1,982 home sales were 10 percent below the previous year.
Last year was not a good year for sales. Remember all the nonsense about blaming the weather for a poor first-quarter performance? Well, if sales are down 10% from last year’s poor performance, then the start to 2015 is truly dismal.
• Price increases continue to erode: January’s 2.3 percent year-over-year gain in the median selling price was the smallest advance in 31 months.
Everyone expected house price increases to moderate because houses are much more expensive relative to incomes than they were three years ago; however, what wasn’t expected was a continued price flattening and a decline in home sales despite a significant drop in mortgage interest rates.
The surprise twist was that Orange County builders – among the stars of the recent housing recovery – now look like laggards. My trusty spreadsheet tells me:
• The 190 new homes sold in January were 41 percent fewer than a year ago – the third consecutive month of year-over-year drops after 26 consecutive months of gains.
A 41% drop in sales is a catastrophe. How can any business cope with a 41% drop in sales?
The next few months will be a great time to be a new home shopper as incentives will proliferate and builders will be more negotiable on price. If builders don’t become more accommodating, they will be forced to deal with a buildup of standing inventory, and they may even be forced to slow production and lay people off again.
• In the last three months, developers have sold 902 homes – down 29 percent from the same period a year-ago and the slowest sales pace since October 2013. …
Orange County’s median selling price for a new home is up 41 percent in four years, compared with a 30 percent gain for resale single-family homes, according to CoreLogic DataQuick.
Is anyone surprised that sales are down? If prices went up 41% during a period of income stagnation, the buyer pool is now significantly thinner. With affordability products banned, the builders have no mechanism for financing prices that are simply too high to sustain brisk sales volumes.
Obviously, homebuilders haven’t figured out their old ideas about escape velocity are no longer operative. I think 2015 will be the year they finally come to realize they can’t deliver product exclusively to the move-up market and deliver sales with any volume.
The recent slowdown suggests that builders may have gone too far.
Builder prices, Franks says, “got a little bit out of control.”
But don’t expect any cuts soon, he says, because developers “would rather have homes sit than discount.”
Bullshit and spin offered by a consultant to builders. Builders don’t make money by building homes and letting them sit empty; they make money buy selling homes. New construction is must-sell inventory.
Privately, this consultant is probably telling his clients they better be offering more incentives and prepare to lower prices because otherwise those new houses will sit there for a very long time.
Are local new home prices too high? In January, builders sold homes at a median price of $798,500 – 42 percent above the overall market’s $562,500. From 1988 to 2014, the “premium” on new home prices averaged 24 percent.
Local developers may be hitting price resistance. The January median price for new homes was 12.4 percent higher than a year ago, but that is down from the 15 percent gains developers averaged in 2014.
Local developers are hitting price resistance, and since they sell almost exclusively to the move-up market, they are also seeing the first signs of the long-term weakness caused by the ongoing slack demand among first-time homebuyers.
Franks thinks the current new home shopping lull won’t last long. He expects that existing homes will appreciate this year by far more than builders raise their prices – giving developers renewed competitiveness.
Plus, strong economic fundamentals should keep the overall housing market on a slight upward trend in 2015.
“We are set up for a good spring season,” Frank says. “We expect a strong year … but nothing wacky.”
Wishful thinking on display.
Does anyone believe him? Do you think he believes it himself?
… everybody should be watching to see if homebuilders can regain the magic touch with shoppers.
If not, you can expect developers to do what they hate to do: discount. And that could be bad news for the overall housing market.
I expect to see incentives increase in direct proportion to standing inventory because builders must move these homes. The Irvine Company has more holding power, and they could leave homes sit empty for as along as they want — the let homes sit idle for three years from 2008-2010, but the smaller builders and developers don’t have that luxury.
This spring will be a buyer’s market.