American new home markets are stalled. The Census department just announced that in December 2008, U.S. building permits reached a recorded low-point, falling to a seasonally adjusted annual rate of 549,000, more than 75% off of the peak rate of 2,263,000 in September 2005.  Single-family new home sales are similarly off (about 70% from the peak in July 2005).

If you visit the emerging suburban or urban markets which are the front lines of the new home industry, the dismal numbers of the Census Bureau come to life.  Many new home communities have no sales activity, shuttered model homes, and no homes under construction; the sense of failure is truly palpable. In the Philadelphia region, there are thousands of finished lots just sitting there (some of them have sat there for five or more years at this point), bypassed by customers because the asking prices for homes are just too high. Why don't the prices come down?

In many case, the prices don't come down because the land purchased by builders and developers between 2004 and 2006 was bought too expensively, often with borrowed money. The builders cannot lower the prices because doing so would make it impossible to pay back the lender without reaching into their own pocket. As a result, since about 2006, wait and hope has become business strategy for many builders.

In most new home markets, prices are not going to recover anytime soon; the current combination of high prices and low absorption rates is unsustainable and a repricing of land is inevitable. Given this, we have been advising our clients to adopt a first mover strategy.

 

The first builders and banks who grapple with this market reality and lower prices (yes lower them more) can get their projects moving again, especially in places where the competition is just waiting for better times. There continues to be a major affordability problem nationally and even here in Philadelphia.  (See our recent home price analysis.)  Lower prices for quality product (not small inferior offerings) will generate incremental traffic, sales and market share.  Those builders who move quickly now to adjust their pricing and strategy will be the first to benefit from an improved economy. 

 

Interest rates are at historic lows, FHA-insured mortgages with 3% downpayments are a reality, and the "echo boomers" are entering their prime first-time homebuying years: all markers of potential demand. We've also observed that new home communities with momentum (like our New Daleville and Woodmont neighborhoods and like Ryan's Round Hill or Cornerstone's Terrazza) enjoy a "winner takes all" phenomenon--commanding higher absorption rates and disproportionate market share.

 

Isn't this outcome better than more of the same? Isn't this outcome better than a bulk sale of a shuttered community at a significant loss?  Unfortunately, the boom years are not returning anytime soon.  Let us know if our development services group can help your organization build a first-mover strategy.