Friday, February 28, 2014

Lawler: If New Home Sales report Accurate, Suggests Large Builder Share Down

by Bill McBride on 2/28/2014 04:06:00 PM

From housing economist Tom Lawler: Government New Home Sales Report, If Accurate, Suggests Large Builder Share Down; Aggressive Home Price Hikes May Be to Blame

The Commerce Department earlier this week estimated that new SF home sales ran at a seasonally adjusted annual rate of 468,000, up 9.6% from December’s upwardly-revised (to 427,000 from 414,000) pace. Estimated sales for October and November were revised downward slightly, and the estimated sales for the fourth quarter of 2013 were not revised.

While January’s new SF home sales estimate was somewhat higher than I expected, I was even more surprised that last quarter’s sales estimates were not revised downward. Most large publicly-traded home builders reporting on a calendar quarter showed relatively weak net orders last quarter compared to a year earlier, and the nine large builders I regularly track1 had combined net orders that were down 3.8% from a year earlier (not seasonally adjusted, of course.) That contrasts sharply with Census estimates showing an unadjusted YOY increase in sales last quarter of about 15%.

Of course, comparisons of builder results and Census sales estimates are tricky, given (1) the different treatment of cancellations; and (2) differences in the timing of the recognition of contract signings. Nevertheless, the difference results were “unusual,” and over the last two years builder results that varied materially from Census preliminary estimates have been a decent predictor of revisions to Census estimates of SF sales.

If in fact the Census sales estimates are reasonable (further revisions will occur, given its methodology), an implication would be that large builders’ share of the new SF home market declined significantly in the second half of last year. One possible reason is that many of the large publicly-traded builders, facing demand that exceeded their ability to supply new homes (in several instances because of “supply-chain” issues) in the early part of the year, jacked up prices by not just unusually large amounts, but by more than other builders. The combination of higher mortgage rates and these unusually aggressive price hikes not only slowed their sales, but also slowed their sales relative to other builders. Given that the huge price hikes at many large builders pushed margins on closed sales in the second half of last year to the highest levels in seven to eight years, it’s perhaps not “shocking” that other builders weren’t as aggressive.

Given the optimistic sales plans most of these large builders have for 2014 – backed by rapid expansions in their land/lot acquisitions over the last one-to-two years – it seems unlikely that these large publicly-traded builders will be able to hike prices much if at all this year unless they are will to see their share erode further, which seems unlikely.

1 D.R. Horton, Pulte, NVR, Ryland, Beazer, Meritage, Standard Pacific, MDC, and M/I.

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