Letter to the Editor: Home Owners Will Not Be Buying New Homes for a Very Long Time

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From a homebuilder’s (NYSE: XHB) perspective, the majority of those who presently own a home will not likely be in the real estate market (NYSE: IYR) for a new home for a very long time. If the Federal Reserve implements policy based on their research where interest rates stay at an all-time low for a grossly extended period of time, I think you will find that most homeowners with negative equity will be in their homes for the foreseeable future.

Conversely, if the Federal Reserve goes against research, and increases interest rates, the evidence shows there will be an increase in defaults. Those that default will not be able to purchase a home for several years. Based on this double-edged sword, most people in this category are not homebuyers right now.

The targets for a new home builder are first time homebuyers, relocates, and those with discretionary income:

First Time Homebuyers

The problem with the first time homebuyer category is — given a real possibility of interest rates staying low — they have plenty of time to sit on the fence. Builders will need to create urgency to generate sales.

Relocates

Those who are relocating have urgency to move, but are looking for immediate occupancy. If you are a builder and are not carrying inventory, then you are completely missing out on a market.

Discretionary Spenders

Those with discretionary income are most likely the baby boomers seeking an active adult lifestyle. If they invested their money wisely (and got lucky), now is a great time for them to buy a second home. This group isn’t getting any younger, interest rates are at an all time low, and new homes are extremely affordable yet have incredible value.

Demographic Changes are Here

I think one could presume (albeit not very conclusively) that we are about to experience some societal changes that our generation is not used to. The average size of families may go down over time because of homeowners’ inability to purchase a move-up home. The negative equity in current homes will not allow for re-sales at a favorable price, which in turn will prevent some families from expanding to a larger home. In addition, you may start to find that the average time period one owns or stays in a single residence grows from the current rate due to the negative equity and their inability to sell for a profit.

Nationwide Home Inventory

Lastly, I will note the nationwide inventory level is a generalized statistic which is irrelevant to me because homebuilding is a local business. Consumers should look at inventory on a local level to determine if now is the appropriate time to purchase a new home.

All the best during these extraordinary times,

Anonymous, Top Home Builder in Florida

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