Builders Predict More Declines of New Construction, New Home Sales Across U.S.

We’ve talked at length about the Florida housing market slowdown and the fallout that may or may not result from it. It’s a topic that has gripped high-growth markets during the past six months or so, but now more reports are surfacing that suggest it’s spreading nationwide.

Recent, preliminary reports from builders Hovnanian Enterprises, Inc., and Toll Brothers Inc., whose fiscal quarters ended April 30, indicate demand is falling faster and more sharply than previously thought. Perhaps more significantly, the reverson is no longer confined to the hot markets such as South Florida real estate that saw sharp price run-ups in recent years.

Hovnanian’s orders fell 20 percent in its fiscal second quarter, an abrupt drop from the 5.5 percent growth posted in its fiscal first quarter. Toll Brothers’ orders declined 32 percent, even steeper than the 29 percent dropoff posted in its fiscal first quarter. Toll Brothers’ decline was across the board — all geographical regions reported drops in demand on a year-over-year basis.

Toll attributed the declining demand to suddenly high cancellation rates and to speculators who are dropping out of the market, putting the homes they recently acquired up for sale. At the same time, higher home loan rates are not helping matters as far as luring new buyers. Although the company does not sell directly to speculators, it is not immune from the fallout.

“We have certainly been impacted by the overall increase in supply,” Chairman Robert Toll said.

Some builders, such as Centex Corp. and Hovnanian, have started taking writedowns in connection with land options. When builders take writedowns and walk away from land options, it is a sign that either land values are falling or demand in that market has dried up. In past cycles, declining land values have been a clear a sign that the market is falling fast.

Until now, home building executives said the pullback in demand was largely confined to markets where sales had overheated and prices had skyrocketed during the past few years. Washington, D.C., California, Phoenix and parts of Florida rank highly on that list of places where speculative buyers fueled incredible price gains and are now backing off, causing less overall demand and more inventory.

While these hotspots continue to see the sharpest backtracking in terms of home building demand, other markets also are slowing.

In his monthly report that tracks new home sales in 40 major markets, Majestic Research analyst John Tomlinson found that sales fell year over year in every market during February and March, with an average decline of 25 percent. The areas with the biggest declines:

• Washington, D.C., down 22 percent
• Los Angeles/Long Beach, down 50 percent
• Tucson, Ariz., down 50 percent
• Sacramento, down 46 percent
• San Francisco, down 30 percent
• Phoenix, down 37 percent

“Almost every major market that we track is showing pretty significant year-over-year declines in sales. It’s much more broad-based than it was prior to February,” Tomlinson said.

Rising inventory, slowing sales and bigger incentive packages all signal a correction in the housing industry. But time will tell if this will lead to the big dropoffs in home prices that people are most afraid of. So far, builders’ efforts to offer more incentives and discounts have failed to drive new home sales. As a result, some may need to the only real incentive that matters — price discounts.

Bernard Markstein, Director of Forecasting at the National Association of Home Builders, said that without a doubt, housing demand is starting to slow nationwide. He said rising mortgage rates have given people reason to pause in their decision to buy.

“We’ve been getting reports of a slowdown in housing across the board,” Markstein said. “But so far, it’s just a moderating of activity - not a falling off of the cliff. It’s more of a return to normalcy for the housing market.”

Markstein predicts that overall housing starts will fall 7 percent to 1.95 million from 2.1 million in 2005. He sees demand returning to 2004 levels, which, comparatively, is still very healthy. It will be interesting to see if these reports hold water in the Florida home loan market, where rising rates and increased inventory have sent out warning signals for months.