Q4 Home Construction Down Slightly...

The following article appeared in last weeks Austin Business Journal.

"Q4 Home Construction Down Slightly...

Austin area home builders broke ground on 1,389 new homes during the last three months of 2009, down slightly from the same quarter a year ago, according to a report from Residential Strategies Inc.

“We view this market performance favorably as indicating that the bottom of the market has been, or will soon be reached” Residential Strategies Austin Division Manager Tommy Tucker said. “New home starts have shown the smallest year over year decline during this downturn, furthering RSI’s opinion that the worst of the activity declines are behind us.”

Builders commenced 6,784 new home projects last year, which is 60 percent less than a 2006 peak of 17,128 annualized starts and 25 percent less than 2008.

The company reported new home median prices dropping from $206,888 in in third quarter to $201,481 in last quarter 2009. This quarter’s new home price is off 8.35 percent compared with the same period one year ago."

We have consistently seen a drop in the number of new construction starts since signs of economic woes appeared in late 2007/early 2008. This is not surprising and coupled with the tightening of the equity markets and a weakened/more conservative banking industry the number of starts continues to dwindle.

Many builders are concerned with the trend because the lack of credit has drastically reduced the number of projects they can undertake. The requirements needed to secure financing for a spec home are at a minimum 20% down and often come with higher down-payment requirements and/or the creation of a banking relationship (ie. the builder is required to hold a $50,000 CD with the bank etc.) The stringent requirements make it next to impossible for a builder to move forward with speculative homes. The custom market remains intact (but certainly not at the level of previous years) and is currently the lifeblood of builders.

These trends will cause an imbalance in the market place. The reduction in the new home inventory is not consistent with general diminished demand for new homes, rather economic concerns and lack of capital have suppressed the market. We anticipate the increase in consumer confidence, continued economic growth and more accessible capital will cause a renewed surge in demand for new construction. However, the 2 year+ decrease in the number of starts will result in a shortage of inventory and drive new home prices even higher. Additionally, we expect lot inventory to decrease and prices to rise as consumers and builders start to purchase more lots.

Exactly when this shift will take place can certainly be debated, but when it does the new home market place should be very interesting to watch.