Mixed Price Signals from Builders
JUNE FLETCHER, Wall Street Journal, March 16, 2012, link
Q. I am interested in new homes, but don’t want to buy one that will go down in value. It looks as if the country’s economy is getting a little better, but I am getting mixed signals from local builders. Some are lowering their prices, while others are raising them. Why is that and what does it mean for my market?
A. If you are planning to stay in your home for three or more years, you probably don’t have to worry about falling new-home values.
But we are still in the beginning stages of a recovery, which is one reason why you’re getting such confusing signals from builders. Since the recession began, builders have been hammered, but not all have been affected equally; nor have they responded to the downturn’s demand in similar ways. That puts some of the builders in a much better position than others to give you a good value on their homes.
To see how well any builder you’re considering has weathered the downturn, take a look at their annual reports and financial press for the past several years. You should be looking for signs of how well they anticipated and prepared for the downturn, which will give you clues as to how savvy its management is.
For instance, some had to take steep losses on homes or developments that they over built during the boom years. Others found themselves stuck with big land inventories that they had gobbled up during the boom years at premium prices. These builders may well have to play catch up as the markets turn to make up for their previous poor performance, and one way is to increase prices on new developments. (Other ways include cutting features and squeezing contractors.)
On the other hand, other builders got great deals on lots that their land-bloated peers shed during the recession at bargain prices. They looked for ways to make their homes more competitive, perhaps by making them greener and more energy-efficient. These builders don’t need to pump up prices dramatically on their new customers, and are holding them down—for now.
But as the recovery continues, I do think you will see across-the-board price increases, for several reasons. A 2011 survey by the National Association of Home Builders showed that average construction costs for a single-family home declined to $184,125 from $222,511 in 2009, mostly because the finished area of homes had declined, to about 2,300 square feet from 2,700 square feet. But home shrinkage isn’t likely to continue as the “millennial” generation starts forming families. And several manufacturers and suppliers of building products, including gypsum and roofing, have announced substantial price increases this year.
Meanwhile, in your case, Denver seems to be climbing out of the doldrums. The Metro Denver Economic Development Corp. projects employment growth will be 1.1% in 2012, mirroring the national average, and more demand for housing; about 15,400 people are expected to move to the area, compared with about 8,500 in 2011.
Improved job growth and demand has heartened builders; so has the falling supply of resales, which were down 42% in January from a year earlier, according to the Home Builders Association of Metro Denver. That month, builders took out 318 permits to build single-family detached homes, and 50 to build single-family attached homes. That’s an increase of 48.6% and 117.4%, respectively, from a year earlier.
So if you are interested in buying a new home, I suggest you start shopping now. Once all builders feel more confident that they can raise prices without losing business, they will.