The Current Housing Market; Looking for Insight

[rcaldwell]

Guys/Gals,

I am an equity analyst at a large mutual fund company in the midwest that is responsible for covering the Homebuilders and Fannie and Freddie. I have have followed the sector for about three years and the stocks (homebuilders primarily) have been great investments for us. I was hoping to get some insight from you on a few topics that have me worried. Talking to the senior management of these companies is not always very helpful as the sell you the pie in the sky, things are great forever routine. I have read the forum for about a month and you seem to have insight I haven't heard before. I was wondering if I could get some feedback on the following topics. I am interested from hearing from all regions of the country as most of my builders are nationally diversified. Any insight you could give me would be highly appreciated. Here are my questions:


Supply- The public builders I follow (All the big boys Toll,Lennar,Beezer,Pulte, D.R. Horton, Centex, NVR) have made the assertion that adding supply is much more difficult in areas with slow/no growth initiatives. Thus the pricing increases they are able to get is due to supply/demand imbalances. Do you find this to be true? Looking at macro numbers, supply on a unit basis doesn't look historically high given the activity we have seen and the low rates. Just wondering what your seeing?


Pricing-I have read quite a bit on this forum about inflating pricing due to lender pressure. For those of you in California, Washington D.C. and Florida, how much inflation in these fast price appreciating areas is due to appraisal inflation? How much is due to supply? I guess I am wondering how sustainable are those markets? For those of you in Texas, Arizona and Denver, what do your markets look like?



Market Share- The big builders are pounding the table over the fact that they are taking market share from smaller private builders. Are you guys doing more work with public homebuilders? Do they seem to be gaining market share? The statistics say they are but I would like any feedback you could give me.


Public Builders- What are your impressions of the big public homebuilders? What types of practices do you see and really any general comments you might have.


I want to thank anyone that responds. I really appreciate it. This is a very tough space to call right now and insights I can gain would be very helpful. If there are any topics I could help with please let me know, and again, thank you.


RFC

 

[J. Parker Graham]

Marketing Trends and Observations - Detoit Metropolitan Area

Supply - The marketing trends are not, and have never been static.
Sububan appeal and mass exodus from the inner city. Redevelopment of specific neighborhoods causes people to move back into the inner city. People move in and out. The suburban areas have become affected by overcrowding and the lack of proper roadways to handle peek traffic. The population is in a state of constant motion. The large builders are finding development is restricted by the availability of afordable land.

Pricing is dictated by what the market will bear. Smaller new home builders will take a concession. Or else entise the buyer with "free amenities" while the base price remains constant. New home subdivisions are rapidly being replace with site condos due to the much shorter time
required for municipal approval. Inflation is of little consideration in this market. the majority of the metropolitan comunites show a negative growth pattern since 9-11, with the examination of the MLS statistics. So, jow can there be an inflation factor with negative market appreciation ?
I tend to deal with facts, sales marketing analysis, rather than bottom lines of the larger builders. We have many nich markets in Detroit, with there own marketing conditions. There are certain price levels whereby nothing is selling. The refinance market is strong now.

Market Share - is determined by community standards and community demands. After a while most new construction take on a certain "sameness". There is almost no truly custom building in Detroit.

Public builders fill a need to provide housing. They have been dificult in the past to work with due to the corporation production line prevailing attitudes. Attempts were made to close on properties with out completing the outstanding punch list construction items.

In conclusion the market is stable to declining. Each defined community is
does not behave like the one adjacent. Each is an entity to it self. Predator lenders offering sub prime loans are operating unchecked, and without regulation. For the moment we have the appearance that nothing is wrong, but don't look too deep. The days of corporation builder price controll is over.

Regards,
The opinions expressed here are strictly my own.

J. Parker Graham

 

[Restrain]

North Texas Area:
1. Builders are building on the basis of contracts, not doing specs as there is an excess inventory. I have seen prices cut 10% or more on larger homes due to slow sales of existing inventory. Yes, the major builders (Weekley, et al) are undercutting the small builders - they can build cheaper per unit. However, custom builders have a solid chunk of the market in this area.

2. Concessions - Yes there are significant concessions, often in terms of additional upgrades at no cost or with 0 down financing through their own mortgage units. One major builder is giving away pools with the homes as part of the closeout of a subdivision.

3. Inventory vs. market. In the North Dallas/Plano market, the inventory is beginning to show an imbalance in terms of homes on the market and foreclosures vs. buyers. As the homeowners use up their 401Ks, more foreclosures will be taking place as the layoffs continue.

In summary, there is a declining market due to technology layoffs and foreclosures. I anticipate a 2-5 year workout unless the economy makes a rapid upturn. But I do not see this happening as layoffs are continuing. I do not see an upturn in this economic sector as no one is hiring. Technology people are now doing such things as airport bag screeners. This does not pay for housing like tech jobs do. Final note on employment. Saw a note on the daily mortgage briefing page. Of the employment last month, almost 25% was in the area of mortgage companies. If only one limited sector is responsible for this amount of hiring, the hiring can slow down signficantly as one minor sector is affected.

 

[Atlanta CG]

Atlanta area has not appeared to experience a significant slowdown in new developments. Broker wife states that first entry homes - very popular with Pulte & Colony Homes, locally, still sell fast and prices do increase as the supply in the particular subdivisions dwindle. They are all offering concessions but only if using their own mortgage companies, up to $6,000 in closing costs paid & some minor reduction in the asking prices. Townhouses are being constructed very fast and my impression is that they will bottom out quickly due to overbuilding in large developments. Expensive condos took a severe beating recently and office vacancies are now over 15% and anticipated to exceed 20% in all markets soon, with a likely 2 year recovery period. This will affect housing as new tenants are not moving into Atlanta at the previous pace, and influx of new buyers is subsequently reduced. As a reviewer, I am seeing significant errors in appraisal values, relying on housing sales that are either flips or obviously over-inflated to create 100% or higher financing. Have seen 4 or 5 appraisal licenses revoked over the past couple of months, and this may accelerate. There is currently an oversupply of middle-range homes: ie., $300,000 - $400,000, sold initially as $200,000 homes over the past 5 years. This will continue as most of our subdivisions seem to involve this level. Inner city activity appears to have moderated somewhat, but this is an area where independent builders are actively acquiring older homes and renovating or buying older homes for demolition & new construction. The big builders are staying out of this market.

 

[Ray Miller]

In our area (rural S.W. Wisconsin), I have notice that it is becomming a buyers market. Lots of inventory on the market. Homes that were selling last year at this time with two or three back up contracts. When being on the market for one week to two weeks, are now setting for over ninty days with no contracts.

On vacent rural land have seen a price drop of $200 to $300 per acre on comps over the last six months. Of course we have CWD that I think has an effect on the cost of hunting rural land value.

Just my thinking.

Ray Miller

 

[Jonathan Davey]

They are getting sued alot, they blame it on sub-contractors, truth be told, to some degree thats not unlikely, but more than likely: there is a reason the subs do xyz work.......came from the top. Also, FYI: friend of mine is a senior VP for one of the largest banks in the country...expectinjg the same as i was ,,,,,,a 20% depriciation :roll: