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Thursday, February 06, 2014

Lawler: Expect Downward Revisions to Census Q4 New Home Sales, Broad-Based Builder Optimism for 2014

by Calculated Risk on 2/06/2014 02:08:00 PM

From economist Tom Lawler:

Below is a table showing some stats for nine large publicly-traded home builders reporting results for the quarter and year ending December 31.

There are a couple of observations. First, “home sales” at these builders defined as net orders in 2013 were up just 6.9%, from 2012, while “home sales” rightly defined as settlements (closed sales) were up 21.6%.

Second, net orders at these builders did not experience the fourth quarter rebound suggested by Census’ estimate of new SF home sales, and net orders at these builders were up for the year by far less than Census’ estimate of new SF home sales.

There are several possible reasons for these differences. First, of course, the market share of these large builders may have fallen significantly. Second, builder net orders in a quarter are that quarter’s gross orders less sales cancellations in that quarter, while Census new home sales are, in effect, gross orders less orders on homes for which a previously signed contract had been canceled. Third, there may be (and appears to be) a timing difference between when a builder logs an order and when that order is reflected in Census’ Survey of Construction. (Builder net orders “lead” Census new home sales). And finally, the Census data, and especially the preliminary data – which is subject to huge revisions – may “suck.”

While the above factors make it “most difficult” to compare builder results with Census new home sales data, I have found that builder results have been useful in projecting revisions to Census new home sales. Based on these builder results, I would expect that Census’ estimates of new home sales in the fourth quarter of 2013 will be revised downward significantly.

While results varied massively across builders, there were several common “themes” across many builders. First, fueled by low mortgage rates, low new and existing home inventories, and some “pent-up” demand, builders as a group experienced a significant increase in net home orders starting in the latter part of 2012 and continuing into the spring of 2013. While many builders responded by increasing significantly land acquisitions and development spending in 2012 and 2013, many builders were unable to meet demand, partly reflecting longer-than-normal development timelines related to “supply-chain” issues. Many responded by increasing prices substantially, in some areas at a pace seldom seen. When mortgage rates subsequently rose sharply, the combination of higher mortgage rates and substantially higher new home prices resulted in a significant slowdown in net home orders. While mortgage rates eased somewhat in the latter part of last year, orders did not rebound much (or for some builders at all), mainly reflecting potential buyers balking at the higher home prices.

That slowdown did not dampen most builders’ optimism for the 2014 spring selling season, and most builders have the land/lots to increase substantially their community counts this year, and plan to do so. One reason for their optimism is that the previous hikes in prices have at many builders pushed margins up well above “normal” levels, meaning they can drive higher revenues with higher volumes without price increases, and in fact can be “quite profitable” by holding prices even if construction costs rise. As such, a reasonable assumption for new home prices from the end of 2013 to the end of 2014 would be “flattish.”

 Net OrdersSettlementsAverage Closing Price
Qtr. Ended:12/1312/12% Chg12/1312/12% Chg12/1312/12% Chg
D.R. Horton5,4545,2593.7%6,1885,18219.4%$263,542$236,06711.6%
The Ryland Group1,4281,502-4.9%2,1781,57838.0%$314,000$270,00016.3%
Beazer Homes895932-4.0%1,0381,0380.0%$279,300$235,50018.6%
M/I Homes79367317.8%1,12088726.3%$292,000$273,0007.0%

And here is a table showing some stats for calendar-year 2013 compared to calendar-year 2012.

 Net OrdersSettlementsAverage Closing Price
Calendar Year'13'12% Chg'13'12% Chg'13'12% Chg
D.R. Horton25,31522,51312.4%25,16119,95426.1%$255,646 $228,395 11.9%
PulteGroup17,08019,039-10.3%17,76616,5057.6%$305,000 $276,000 10.5%
NVR11,80010,9547.7%11,8349,84320.2%$349,043 $317,073 10.1%
The Ryland Group7,2635,78125.6%7,0354,89743.7%$296,000 $262,000 13.0%
Beazer Homes4,9895,111-2.4%5,0564,6039.8%$262,004 $229,126 14.3%
M/I Homes3,7873,02025.4%3,4722,76525.6%$286,000 $264,000 8.3%