New-Home Recovery Seen as Post-Super Bowl Selling Season Starts
Homebuilder executives and economists predict a post Super Bowl bounce in demand for residential construction as Americans turn their attention from football to another national pastime: house hunting.
The chief executive officers of six of the 10 largest U.S. homebuilders cited the potential of a sales comeback in the spring, traditionally their strongest season, during conference calls in the last four weeks. Housing forecasts from Fannie Mae and the Mortgage Bankers Association show the new-home market will begin a rebound that will last through at least 2012.
A revival in demand for new houses after record-low sales in 2010 may bolster a U.S. economy that’s 19 months into a recovery. Residential construction is a key factor in gross domestic product because it requires the manufacturing of home components such as stoves, cement, tile and furnaces. Richard DeKaser, an economist at Boston-based Parthenon Group, said he expects the homebuilding industry will this year make its first positive contribution to GDP since 2005.
“The spring market is going to be the first test of the proposition that there’s an underlying improvement in new-home fundamentals,” DeKaser said in an interview. “If we don’t see the needle move, it will be very discouraging.”
New-home sales probably will rise 20 percent to 385,000 this year, said David Crowe, chief economist for the National Association of Home Builders in Washington. Fannie Mae, the world’s largest mortgage buyer, projected an 18 percent gain, and the Mortgage Bankers Association estimated a 10 percent advance, according to forecasts posted on their websites.
‘Much Better’ Season
D.R. Horton Inc., the second-biggest builder by revenue, is “locked and loaded” to meet an upswing in demand, Chief Executive Donald Tomnitz said on a Jan. 27 conference call. The 62-year-old CEO, a former banker and U.S. Army captain not known for rosy predictions, said he is “anticipating a much better spring selling season” than last year.
The optimism couldn’t have come at a darker moment for the new-home market. The number of newly constructed houses sold per month fell to 20,000 in November, the fewest of any time in 47 years of Commerce Department data. The tax credit that boosted sales at the start of last year is gone, and cut-rate prices on foreclosures are drawing buyers to existing properties.
Tougher loan requirements by banks may also limit demand. At 2010’s end, lenders tightened mortgage credit standards by the most in three years, according to the Federal Reserve Senior Loan Officer Survey. Borrowing costs also are on the rise after the average rate for a 30-year fixed mortgage fell to a record 4.17 percent in November, based on data from Freddie Mac.
After Super Bowl
Spring is a popular time to buy because house hunters often want to have their home finished by July or August, before the start of the U.S. school year in September, said John Burns, CEO of John Burns Real Estate Consulting Inc. in Irvine, California. The weekend after the Super Bowl is traditionally when prospective buyers start looking, he said in an interview.
“If that’s a good weekend for the builders, then we’re going to have a good spring, and if we have a good spring, we’ll have a good year,” Burns said. “That’s the way it’s played out for years.”
In 12 of the last 14 years, the annual peak in new-home sales occurred in March or April, according to Commerce Department data. The exceptions were 2003, when the March start of the Iraq War captured Americans’ attention and caused people to delay house hunting, and 2009, when the tax credit that originally expired in November boosted demand later in the year.
Sales are counted by the Commerce Department at the time of contract, while homebuilders book revenue once the transaction is completed.
Good, Not Great
“The contracts the builders will be writing in the next few weekends will be a leading indicator of their closings for later in the year,” Burns said. “It’s probably going to be a good year -- not a great year.”
Residential investment probably will increase 9.6 percent in 2011 after five years of declines, based on the median forecast of 30 economists at a Federal Reserve Bank of Chicago symposium in December. Housing starts likely will jump 17 percent to a three-year high of 688,000 in 2011, led by a gain in the construction of single-family houses, said Crowe of the National Association of Home Builders.
“The sales pace for new homes will improve as we move through the spring, unless something comes along to derail the economy,” said James Wilson, director of research for JMP Securities LLC in New York. “Demand seems to be coming back.”
The real estate market’s collapse reduced residential investment’s share of the economy to 2.2 percent in 2010’s fourth quarter, the lowest since records began in 1946, from a 55-year peak of 6.3 percent in the last three months of 2005, according to the Bureau of Labor Statistics. Housing that year was a larger contributor to GDP than national defense spending.
A rise in homebuilding will help boost jobs for workers who construct houses and also for people in industries supplying the appliances that go into them. About 430,000 residential building jobs evaporated after the housing crash began in 2006 -- a 43 percent decline in four years -- while appliance manufacturing jobs fell 17 percent in the same period, according to the Bureau of Labor Statistics. The overall economy lost 7.8 million jobs, or 5.7 percent of the workforce, after reaching a 2007 high.
The drop in values after the crash will create roadblocks for potential buyers who have their own properties to sell, said Thomas Lawler, a housing consultant in Leesburg, Virginia.
Home prices in December were 27 percent below the all-time high of July 2006, according to the National Association of Realtors. That has resulted in about a quarter of homeowners with mortgages owing more than their property is worth, according to CoreLogic Inc. in Santa Ana, California.
“Traditionally, one of the strongest parts of the new-home market is the trade-up buyer,” Lawler said in an interview. “A lot of people who would like to trade up don’t have equity in their homes.”
For those who are able to move, and can sell their current residence, new houses have a draw that existing homes don’t have, according to Parthenon’s DeKaser. They fulfill the dream of many people to build from the ground up, he said.
“That’s the strongest thing this segment has going for it -- some people attach a premium to having a home that no one else has lived in, with all new walls and new floors,” he said. “Even if they can get an existing home for cheaper, they’re willing to pay the price for new.”
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