Homebuilders Optimistic Based On September Sales

Demand for new homes was uninspired in many U.S. markets in August, as sales activity and consumer confidence both fell short of expectations, according to builders around the …

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Demand for new homes was uninspired in many U.S. markets in August, as sales activity and consumer confidence both fell short of expectations, according to builders around the country.

Contracts on new homes in August were roughly similar to those inked a year ago, reflecting uneven sales throughout the summer. Builders with growth described it as less-than-stellar, except in Northern California, where the latest technology sector boom has combined with Chinese-investor interest to fuel runaway demand for new homes and steep price increases to match.

September U.S. sales activity, meanwhile, appears to have turned a seasonal corner, with markets in the Midwest reporting an uptick month-to-date.

"It is a bumpy recovery," said John Johnson, chief executive of Houston, Texas-based David Weekley Homes, the largest privately held U.S. builder, which builds mostly move-up homes in 18 markets across 10 states, largely in the Southwest and Southeast.

"Every week, every month is a challenge. It’s inconsistent," said Johnson, but added that the builder is likely to top its 2013 new-home sales figures by 10%. He credits Weekley’s line-up of "A" markets, including Houston, Austin and Dallas, Texas as pushing his company’s sales to "decent" if not "fantastic" levels.

"The market’s OK, but it’s not robust," Johnson said.

Consumer confidence, he said, is "lukewarm at best," in large part because the labor recovery isn’t convincing.

"Until we get a robust employment situation going again, I think it’s going to ebb and flow," he said of new-home demand.

"Those who have a need to buy will buy, but there is a large amount of people sitting on the sidelines because they’re still not confident about the future."

Johnson said Weekley’s 2014 unit-sales growth won’t approach the lofty percentage increases of 2013 and 2012, but that’s no surprise.

"From my standpoint, the market’s doing about what we expected it to."

Weekley’s average new-home selling price is $430,000, up about 4% from a year ago. Johnson said labor costs are about 5% higher than in 2013, and materials are 3% to 5% pricier.

A builder in Central Illinois said new-home demand in September is "coming to life."

"The summer was quiet, but the fall’s been pretty vigorous," said Tom Ochs, president of Hoffman Ochs General Contractors, which builds primarily custom homes in Bloomington, Champaign-Urbana and Peoria, Illinois.

Even though demand is repairing, plenty of would-be buyers tell Ochs they must sell their existing home first before buying a new one. Customers face "tough" credit conditions, and closings remain "terribly difficult," Ochs said.

"Lenders are incredibly cautious."

Ochs expects his total new contracts this year won’t surpass last year’s, but his closings should be better. (Contracts signed this fall will close next year.)

He sees signs of hope.

"A big indicator for me that things are picking up is that lot prices are coming up," Ochs said. "That tells me there’s just a little bit more demand."

Despite rising land prices, Ochs has held sales prices steady "to get the sale."

A builder in New England described new-home activity so far this year as "sub-par."

"This is also what I’ve heard from peers," said Greg Ugalde, president and chief legal officer of T & M Building Co., in Torrington, Connecticut. "Twenty-fourteen is just not what we expected it to be, and we’re just not going to get it back. We better look toward ’15."

He noted that U.S.-wide, "there are some good signs," especially in "A" markets like Texas and the Dakotas, enriched by the energy boom. But the Northeast, he said, is "not rebounding" to the same extent that other areas are.

He’s had decent preliminary interest in a 155 mixed-unit project he is opening in South Windsor, Connecticut, consisting of single-family, semi-detached and townhouse homes likely to be priced in the $200,000s, $300,000s and on up to about $600,000. T & M is counting on renting out some of the townhome condos if necessary, given the hot rental market, he said.

"So many of our first-time buyers are facing student debt and credit card debt. It almost pushes them into the rental arena right away."

Echoing Johnson, of David Weekley Homes, Ugalde said that "from week to week I don’t know what I’m going to get." Pointed advertising aimed at boosting buyer traffic might not hit the mark, "but then sometimes you’re pleasantly surprised," he said.

"I still don’t think buyers feel any sort of urgency with interest rates. They don’t think home prices are going to skyrocket so quickly."

Out of the dozen or so communities T & M has in train right now, Ugalde said "half are being driven fairly well, and half of them take a lot of work."

He foresees a soft 2014 that won’t quite match his 2013 sales numbers, a forecast that has slipped some since May.

"We’re hoping that next year will see the pickup that we thought was going to happen this year," Ugalde said. "This recovery has been very slow compared to what we all expected. We’re battling, but we’ve adjusted."

Sealing the deal is also a struggle, he said.

"Virtually every closing right now, right up until we get to the closing table we’re working with lenders to get them documents repeatedly, or there are some last-minute underwriting tests."

This applies to first-time purchases and move-up deals alike, he said.

Like Ochs, in Central Illinois, Ugalde is trying to keep his pricing "pretty consistent," and he said many of his suppliers and subcontractors are taking the same tack.

A builder in the South, where the energy industry is actively creating jobs, said the new-home market has maintained its buoyancy.

"We have a good, steady economy, but August just seemed to have a lot to distract people from home buying," said Larry Kornman, president of Slidell, Louisiana-based Sunrise Homes, which builds in New Orleans and Baton Rouge and their surrounding areas. He said readying for back-to-school and even geo-political concerns had some buyers on the sidelines.

"Our August contracts were slightly below our expectations," as well as year-ago figures, Kornman said. September has shown real improvement, however, and August internet interest previewed the upshift.

For Sunrise, Web site visits are an "excellent leading indicator for short-term traffic changes," he said.

Kornman expects his new-home sales this year will beat those of 2013 by about 5%. He pointed to mortgage access as limiting his upside.

"This credit issue is still keeping people out of the market," Kornman said. "You’ve got to have about a 640 credit score to get a loan these days. There are customers out there whom we have to work with for up to 12 months to get their credit back to good."

He suspects there are plenty of would-be buyers who assume they won’t meet tightened credit standards and so don’t even approach lenders or start their homebuying process.

But Kornman said the buyers he does have are optimistic.

"We’re getting a lot more out-of-state job transfers. Build-on-your-own lot has gone up, which shows a healthy market," he said. "That customer has to have enough money to buy their own lot and then take out a construction loan. That’s someone who has good cash and credit and is confident in the future."

At the same time, Kornman gets said no-down-payment rural-development loans are as popular as ever and constitute a decent chunk of his business.

Sunrise’s home prices have edged up by 2% to 3% this year, in line with higher labor costs as workers migrate to the energy sector from construction.

"The oil field pays well," he said.

Out west, a luxury homebuilder in Northern California said business has been bustling all year. She has has no standing inventory, and every sales release by lottery has sold out within an hour.

"The San Francisco Bay Area continues to be a very, very hot market," said Cindy Douglas, vice president of sales and marketing for Pleasanton-based Ponderosa Homes.

"Our sales releases remain small," she said. "We raise prices 3% to 5% every two to three months when we release a group of homes for sale."

Driving her business is the vibrant area technology sector, as well as a "huge number" of Chinese investors looking to buy new homes in the Bay Area, mostly with cash, she said.

Ponderosa’s average selling price stands at $1.3 million, up at least 9% from a year ago, Douglas said.

The Commerce Department is scheduled to release August new-home sales data on Wednesday at 10:00 a.m. EDT. 

This article is commentary by an independent contributor, separate from TheStreet’s regular news coverage.

This article was republished with permission from TheStreet.

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