The real estate industry has been trying to explain lagging new home sales in the best way it can, but are such interpretations correct? If you’re a real estate investor or home buyer there’s an alternative you may want to consider.
New home sales in March 2014 were down 14.5 percent when compared with February, according to the Census Bureau.
Why such a huge fall-off?
“We keep hearing from our members that tight credit conditions are preventing many first-time buyers and younger families from being able to buy a home,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB). “Congress must outline a clear policy on housing finance so that qualified buyers can get home loans. Otherwise, this continued uncertainty could threaten the housing recovery and overall economy.”
“Overly stringent underwriting standards for mortgages have had a detrimental effect on modest-priced markets and have hit first-time home buyers particularly hard,” said NAHB Chief Economist David Crowe. “As a result, most of the sales are coming from a smaller pool of buyers who have a more established credit history, are more likely to finance with higher cash down payments and are purchasing higher-priced homes.”
Is it possible that “tight credit” is causing potential new home buyers to flee from the marketplace? Not likely. There’s a lot of evidence that lending standards have become much more relaxed during the past year-and-a-half or so — not tighter.
According to Ellie Mae, the typical credit score for a successful loan in March was 725 — that’s 25 points lower than the same measure in November 2012. Not only are required credit scores down substantially, the lending process itself has become much easier: In March it took an average of 40 days to close a loan versus 50 days in November 2012.
Both Snow and New Home Sales Fell
Another reason for soft home sales could be the weather. The past winter was tough and according to the home building community stalled many sales.
“There is no doubt that the persistently bad weather took a toll on sales in February,” said Kelly.
But home sales were not persistently bad. In the Northeast — an area not known for warm and comfy winters — new home sales in March were 12.5 percent higher than in February.
The real problem behind slowing new home sales has very little to do with either the weather or credit: The new home marketplace is simply filled with the wrong product at the wrong price.
“The median sales price of new houses sold in March 2014 was $290,000; the average sales price was $334,200,” according to the Census Bureau.
What about existing properties?
Existing homes had a median sale price of $198,500 in March, says NAR, making them vastly more affordable than new properties.
When you think about higher monthly mortgage costs, more expensive property insurance and steeper property tax bills are new homes really worth an up-front premium of more than $90,000? For a lot of investors and buyers the answer is plainly no, the alternatives to high-cost new houses are existing homes and distressed properties.
Not only are existing homes cheaper than new homes, distressed homes are cheaper than both new and existing homes. NAR says foreclosures in March sold on average 18 percent below market value while short sales buyers saved 12 percent.
There is a solution to this problem. Builders can construct smaller homes.
“The average home size has continued to rise for the past four years, from 2,362 square feet in 2009 to 2,679 square feet in 2013,” said Rose Quint, NAHB assistant vice president for survey research.
Homes grew 13 percent in size in four years. Did household incomes rise? No. Did household size get bigger? No.
According to the NAHB, “as homes get bigger, so does the average sales price, rising from $248,000 in 2009 to $318,000 in 2013.” That’s a 28 percent increase, meaning prices are rising faster than square footage at a time when both incomes and household size are falling.
The disconnect between new home prices and income leads naturally to fewer sales. In 2005, builders constructed 1.28 million new homes, a figure which fell to 431,000 units in 2013. That’s 849,000 fewer sales.
New homes will always have an allure and there’s an ongoing need for a larger housing stock as the population grows. Moreover, more new homes are good for the economy because they represent additional employment opportunities as well as fresh spending for new furniture and related goods.
Unfortunately, the new home development trends seen during the past few years are not sustainable. Bigger is not always better — or a winning strategy. As evidence just look at falling new home sales. Without smaller units and lower prices a lot of builders will force themselves out of the marketplace, shackled with products that are too big, price tags that are too high and sale volumes that are too small.