Wednesday, October 31, 2012

Home Prices Turning the Corner: Are You?

Tampa’s premier home builder, Standard Pacific has recently published an article that sheds light on market conditions and trends in our area. The article is based on a report done by Barclays Capital that forecasts home prices rising as much as 5% – 7.5%!

The article also reveals some significant factors that are pushing home prices in an upward direction and how this is being done in two different types of markets. It gives an interesting look into the prime “A and B” markets, and also tells why the “C, D and F” locations will soon become more desirable.

On a local level, we are seeing this first hand. New homes in New Tampa are in higher demand than previous years and inventory is quite scarce. We are constantly in multiple offer situations and sometimes loosing the bidding war due to home buyers submitting low ball offers that do not hold up. Standard Pacific has a great presence in the New Tampa area and will soon run out of homes to sell. Don’t miss out on a home of your dreams because you still think the market is at the bottom..

Prices of New Homes

New Home prices have turned the corner and forces are driving rising prices in the foreseeable future. In this article, we discuss these forces and reveal the trends that are not evident to those who rely only on publicly-available data to form their views on home prices.

The popular aggregate price indices have shown a modest turnaround in home prices, rising nominally in recent months, but these median readings obscure the dramatic cross-currents that are at work underneath the surface. Effectively, there are two housing markets, each exhibiting distinct price trends. One consists of residential developments that are within a reasonable commute of job centers, with developed shopping and entertainment options and good schools. These are the projects that the builders care about, characterized by strong new-home demand and an increasingly scarce supply of homes and lots. The other “market” is the massive collection of remote lots, struggling subdivisions, and mothballed master-planned communities that were developed during the last year of the boom (2005/2006). Projects with these characteristics are almost completely dormant, and have very little impact on the builders.

Factors that will keep home prices rising in the “A” and “B” (good) locations are:

• New-home inventories are so low that builders who have standing or nearly-finished homes can command higher prices.

• Lot scarcities, expected to worsen in 2013, will force builders to raise prices, and the limited supply of new homes for sale means that builders have more pricing power.

• Rising costs (materials, lot prices, permitting/impact fees, and labor) will force builders to raise prices in order to be profitable.

• Pent-up demand re-emerging (people who were doubling up are now finding jobs and forming their own households, and people who were waiting for prices to bottom are now taking advantage of the buying opportunity and record-low mortgage rates). Household formation rates are forecast to increase by 50% over the next three years.

Meanwhile, in the “D,” and “F” locations, plentiful supplies of bank-owned homes for the moment continue to make new home construction a money-losing proposition. If buyers are willing to commute to those areas (‘drive ‘til you qualify’), they can buy homes from banks, at auction, short-sales, or from investors who bought from the banks or the agencies, and they can often do so at a price that is below replacement cost.

The “C” locations are neither good nor bad at present. While not all “C’s” are created equal, within two years many will rise to “B” status. No builder wants to be “below C level.” (very punny). I like Mike Castleman’s (Metrostudy’s CEO) statement during a presentation to a national builder client that builders will soon be “gnawing at the bone of C lot supplies.”

The Housing Market and Available Lot Supply…or…The ABC’s of VDL’s

At first glance at our data, it appears that there are lots of lots. But are there really?

Builders are complaining that they can’t find lots to buy, yet there is a huge 80-month supply of vacant, developed lots in the markets we track. The problem is that the vast majority of the lots are in the far-flung suburban areas that are NOT on builders’ radar, because they are so overbuilt and over-lotted.

Residential subdivisions that are close to where people work and shop, and within good school districts, are talked about as being in the “A” or “B” submarkets. Those that are farther away from the core, or are otherwise in inferior locations, are given lesser grades.

Builders have little use for those “D” and “F” lots, but have a growing appetite for A, B, and C locations, and it calls to mind the lament of Coleridge’s Ancient Mariner: “water, water everywhere, nor any drop to drink.”

This distinction is of critical importance in the hard-hit ‘bubble markets.’ In South Florida, there are 26,037 vacant, developed lots, but only 7,811 of them (30%) are within what Metrostudy has determined to be “A or B” locations. In Phoenix, there are 83,866 lots, but only 15,998 (19%) are in A/B areas. In Atlanta, there are 140,000 lots, but only 18% are in the A/B locations.

The distinctions become even more striking when one ‘drills down’ to individual submarkets. A market might have a 100-month supply of lots overall, but the submarkets where builders are preparing to build homes might only have a 20-month supply.

It should also be remembered that not all of the A and B lots represent available supply. Most of them are owned by builders or other entities. The barriers to entry into these coveted neighborhoods are high.

There is one major reason why the quality of the location matters: pricing power. Builders who have lot positions in the A and B submarkets not only command a pricing spread over the lesser locations, but they are also (in some cases) able to raise prices. Until six months ago, we had not heard of very many cases of builders raising prices. The fact that some builders are raising prices is of great significance; they would not attempt it if they did not feel secure that the higher prices would stick. This speaks to the new confidence that the builders have that demand is strengthening.

By contrast, in the C, D, and F locations, there are no price increases to be had. In fact, prices of resale homes and REO may still be declining in those areas. It will take time, but sooner or later the price levels in the A and B areas will force more buyers to make longer commutes. “Drive ‘til you qualify” is the expression.

This article was shared by Tampa’s premier home builder, StandardPacific. Information gathered for this article was found at the following sites.

1 comment:

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