PARALLELS OF NEW TO RESALE HOME SALES

One of the people I respect most in this industry is a fellow named David Murphy who supplies data and analyzes new home data. I found this recent article of his to be very interesting. Let me know what you think.

"June 2008: Dear Real Estate Professional,

Smaller is better, and in the economy of 2008 price is more important than ever. Smaller automobiles are now in greater demand than larger automobiles. People are supplying their gas tanks with less fuel at any given time due to the high cost. People are cutting back on how often they eat out or go to the movies. Scaling back on expenses and paying less wherever possible is the new American trend in the face of dwindling consumer confidence. In the local residential real estate market, the same trend applies. I’d like to demonstrate this by looking at price ranges for both new and existing homes, and then examine that data in light of absorption rates. It’s important to note that the resale home market and the new home market go hand in hand to a great degree. The variables which affect the one, will in turn typically affect the other. With that understanding in place, let’s analyze current resale data and use the results to base some conclusions on the local new home market as well. For starters, let’s look at categories of resale* closing prices in relation to supply: Below is a breakdown of the number of detached resale single family homes listed within the greater Albuquerque metro market as of June 2, 2008 grouped by price:

Between $0 and $99,999 71 listings
Between $100,000 and $199,999 1,867 listings
Between $200,000 and $299,999 1,872 listings
Between $300,000 and $399,999 891 listings
Between $400,000 and $499,999 508 listings
Between $500,000 and $749,999 545 listings
Between $750,000 and $999,999 250 listings

Since the month of June 2008 has only begun, there’s no way to measure with complete certainty what the absorption rate of the above inventory of resale homes will be. However, we do have data available from June of last year that we can use as a substitute for the sake of reference. Granted, June of 2007 will likely look better than June 2008 when all is said and done, but let’s go ahead and use it to compare anyway. Below is a list of the number of closed sales for detached resale single family homes in each price category from June 2007:

Between $0 and $99,999 26 closed sales
Between $100,000 and $199,999 469 closed sales
Between $200,000 and $299,999 291 closed sales
Between $300,000 and $399,999 97 closed sales
Between $400,000 and $499,999 49 closed sales
Between $500,000 and $749,999 54 closed sales
Between $750,000 and $999,999 20 closed sales

If June 2008 were to be a repeat of June 2007, then below is where we would currently stand with absorption rates on detached single family resale homes for each price category within the Albuquerque metro:

Between $0 and $99,999 2.7 month supply
Between $100,000 and $199,999 4.0 month supply
Between $200,000 and $299,999 6.4 month supply
Between $300,000 and $399,999 9.2 month supply
Between $400,000 and $499,999 10.4 month supply
Between $500,000 and $749,999 10.1 month supply
Between $750,000 and $999,999 12.5 month supply

The above scenario of absorption would be considered a “best case” conclusion to be sure. Comparing April 2008 resale data (the most recent available to me at the time of this writing) with April of the year prior, there is a reduction of sales volume in that year-over-year comparison. Given that we’ve experienced a severe crisis of credit between this summer and last summer, it stands to reason that the above absorption rates are likely too optimistic. Regardless, what the data unquestionably shows is an increasing amount of inventory oversupply which correlates to each increasing range of price. I’ve often said there are way too many houses on the market priced between $200,000 and $300,000. While this is true, it’s also true that there is far more of an oversupply problem above $300,000. For example, in the range of resale homes priced between $750,000 and $999,999 there are 250 listings as of today. The sales rate for this price range in April of this year was only 6 sales. If that sales rate were to remain the same for the foreseeable future, we’d be looking at almost 3-and-a-half years of supply in that price range!

So how does all of the above resale data relate to new homes? I would suggest that given the obvious correlation between price and absorption, that the new home picture isn’t all that different. Below is a breakdown of the SalesTraq new home “menu” of detached single family homes based on the current records in our database. (These are not the equivalent of a “listing” per se, but they correspond very well to give a picture of quantities of new homes offered to be built within a given range of price):

Between $0 and $99,999 0 records
Between $100,000 and $199,999 259 records
Between $200,000 and $299,999 441 records
Between $300,000 and $399,999 143 records
Between $400,000 and $499,999 75 records
Between $500,000 and $749,999 56 records
Between $750,000 and $999,999 2 records

In comparing resale listings by price with SalesTraq's new home records by price, the most obvious disconnect between the two is seen between the $100,000 to $199,999 and the $200,000 to $299,999 price ranges. In the case of the resale listings, we saw very similar quantities of available inventory (1,867 listings and 1,872 listings respectively). The resale absorption rate for those price ranges shows that the consumer choice highly favors homes priced below $200,000. The same should certainly hold true for new homes, but there is a discrepancy in the numbers. It’s clear that new home builders are offering substantially more choices for consumers in the $200,000 to $299,999 range than they are for the $100,000 to $199,999 range, even though the demand trends don’t justify it. This is the same dilemma new home builders have been in for the past two years in this market – far too many homes to choose from in the $200,000 to $299,999 price range.

But is that necessarily a bad thing? I’m beginning to think it doesn’t even matter anymore. Here’s why: If new home builders have higher priced homes on the “menu” of homes to choose from, but people are choosing to buy smaller, less expensive homes from the menu instead, then what difference does it really make in the end? The resale side of the equation is the side most hurt by having to deal with all those “McMansions” which were built during the inflation of the housing bubble and subsequently dumped onto an increasingly swollen MLS. Today, demand for those larger homes has dropped off considerably for reasons of both price and efficiency. Larger homes have come to be seen as the residential equivalent of SUV’s – big, expensive electricity guzzlers. New home builders have been responding to this trend by adding a smaller plan or two in each subdivision for new home buyers to choose from. In the economy of 2008 it’s not only about price, it’s just as much about size. Expect the new housing trend to be for not only lower priced homes, but for homes with less square footage as well.