New Homes Market Waiting for Foreclosures to Drop

Builders of new homes have a big problem. The tide of foreclosures since the recession began in 2008, has left a huge supply of relatively inexpensive existing homes (“distressed sales”) on the market, and home buyers are not in any mood to spend more than necessary, at least right now.

Why should they, when there are bargains to be had? Purchasing a home is the single largest transaction that most persons ever enter into, and the resulting debt can last a lifetime. Minimizing that financial commitment has a strong appeal, especially during a recession, and the ‘distressing gap’ in which existing home sales exceed those of new homes widened dramatically in 2008 and has persisted. The two statistics had been virtually even before that year, even back into the 1960s, but a severe recession can quickly change buyers’ perspectives.

As a result, a new Commerce Dept. release on Thursday confirmed fears that 2011 marked the lowest new homes sales since the Census Bureau began recording the number back in 1963: 302,000 new homes were built, down even from 2009 (375K) and 2010 (323K). Also problematic for builders was the drop in the median sales price in December for new homes to $210,300. They must recover their costs and allow for profit, but to stay competitive with the distressed market they must now cut new homes construction prices far more than before.

December, however, offered some bright spots. Mortgage rates are at a record low, and sales of previously occupied homes increased for the third straight month, indicating that more home buyers – of any kind – are in the market. Homes construction picked up somewhat in the 2001 fourth quarter, and builders are getting larger numbers of inquiries from potential customers. While all this is of a hopeful note, builders need easier financing, a sizable slowdown in foreclosures, and a public that is reassurred about their economic futures. In the latter instance, recent indicators are almost all up. In return, new homes building has a lot of economics goodies to offer, especially in hiring and in tax revenues.