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Friday, May 02, 2014

Lawler on New Homes: Sales will probably move higher over the course of 2014, Prices will not

by Calculated Risk on 5/02/2014 03:35:00 PM

Standard Pacific Corp. reported that net home orders (ex jvs) in the quarter ended March 31, 2014 totaled 1,311, down 6.0% from the comparable quarter of 2013. Net orders per active community last quarter were down 14.6% from a year ago. The company’s sales cancellation rate, expressed as % of gross orders, was 14% last quarter, up from 10% a year earlier. Home deliveries last quarter totaled 995, up 5.1% from the comparable quarter of 2013, at an average sales price of $449,000, up 19.7% from a year ago. The company’s order backlog at the end of March was 2,016, up 8.9% from last March. The company attributed the big YOY gain in average sales price to “general price increases within a majority of the Company’s markets, a shift to more move-up product, and a decrease in the use of sales incentives.” Standard Pacific owned or controlled 35,715 lots at the end of March, up 11.2% from last March.

Here are some summary stats for nine large publicly-traded builders.

 Net OrdersSettlementsAverage Closing Price
Qtr. Ended:3/143/13% Chg3/143/13% Chg3/143/13% Chg
D.R. Horton8,5697,8798.8%6,1945,46313.4%$271,230$242,54811.8%
Pulte
Group
4,8635,200-6.5%3,4363,833-10.4%$317,000$287,00010.5%
NVR3,3253,510-5.3%2,2112,272-2.7%$361,400$330,4009.4%
The Ryland Group2,1862,0526.5%1,4701,31511.8%$327,000$277,00018.1%
Beazer Homes1,3901,521-8.6%9771,127-13.3%$272,400$253,3007.5%
Standard Pacific1,3111,394-6.0%9959475.1%$449,000$375,00019.7%
Meritage Homes1,5251,547-1.4%1,1091,0525.4%$365,896$314,36316.4%
MDC Holdings1,2361,300-4.9%8731,018-14.2%$377,000$339,40011.1%
M/I Homes9821,047-6.2%73762717.5%$299,000$284,0005.3%
Total25,38725,450-0.2%18,00217,6542.0%$317,582$285,20011.4%

For the group as a whole, net orders per active community last quarter were down about 6% from a year earlier.

The combined order backlog (in units) for these nine builders at the end of March was 36,257, up just 0.5% from last March.

While home deliveries in units for these builders last quarter were up just 2% from a year earlier, home deliveries in dollar terms were up 13.5% YOY, reflecting the sizable increases in average sales price. Most builders attributed the ASP gains to a combination of general price gains in many of their markets and a product-shift mix toward larger homes/move-up buyers. While not all builders commented on first-time buyers, comments from those that did suggest that first-time buyer purchases of new homes were down from a year ago. Operating margins on average were up significantly from a year ago, with some builders reporting their highest margins in 7-8 years.

While land/lot acquisitions varied significantly across these builders, in aggregate they increased sharply their land/lot acquisitions during the second half of 2012 through the third quarter of 2013. Longer-than-normal development timelines, however, partly related to “supply-chain” issues, limited their ability to meet the strong demand in the first half of 2013, and limited supply enabled builders to increase prices significantly last year.

Such “supply” problems should not be an issue in 2014, and in aggregate these 9 builders expect (and plan) to increase their number of active communities in 2014 at a double-digit pace. A key issue, however, will be demand: both interest rates and home prices are higher than they were in the first half of 2013, with prices up significantly in many parts of the country. As noted before, many builders hiked prices sharply because they could not meet demand in the first half of 2013. With supply issues unlikely to be an “issue” in 2014, it seems highly likely that the “pricing power” builders had in 2013 will not be evident in 2014, and in fact “effective” home prices may ease a bit as builders significantly increase their use of sales incentives from 2013’s unusually low level.

So SF home sales will probably move higher over the course of 2014, though prices will not. But the pace of increase is likely to be slower than most folks thought as the year began, and the hoped for recovery in home purchases by first-time home buyers in 2014 has not only not been seen, but it appears to have dipped somewhat from a year ago. So far the only builder to react to this trend is D.R. Horton, who is rolling out a new “express homes” product line in select markets with price targets in the $120,000 to $150,000 range. As a Horton official noted in the company’s latest conference call, the sharp price increases by builders last year had priced a “lot” of first-time buyers out of the market.