Housing Demand Slows Down; Florida Home Building Takes a Break

While buyers are returning to some areas of the Sunshine State and looking for Florida home loans in the central cities, other signs are still pointing toward a slower housing market around the nation.

For example, construction has decreased significantly. Preliminary reports from builders Hovnanian Enterprises Inc. and Toll Brothers Inc. indicate demand is falling faster and more sharply than previously thought - and that the pullback is no longer confined to hot markets that had seen sharp home price increases in the past few years.

Hovnanian’s orders fell 20% in its fiscal second quarter; Toll’s orders declined 32%. Both quarters ended April 30.

For Toll, the order decline was across the board as all of its geographical regions reported year-over-year decreases in demand. Chairman Robert Toll attributed the declining demand to higher cancellations and to speculative buyers who are dropping out of the market and putting the homes they recently acquired up for sale.

A further examination of home building slow down

On top of this, some builders, such as Centex Corp. and Hovnanian, have started taking writedowns in connection with land options. In general, when builders take writedowns to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up.

Until now, home building executives said the pullback in demand was largely confined to markets where sales had been overheated and home prices had skyrocketed during the past few years, such as Washington, D.C., parts of California, Phoenix and parts of Florida. They blamed speculative buyers for much of the pullback, saying investors had exited the market, causing less overall demand and more inventory.

These hotspots continue to see the sharpest pullbacks, but other markets also are slowing.

Majestic Research analyst John Tomlinson, in his monthly report that tracks new home sales in 40 major markets, found sales fell year over year in every market during February and March, with the average decline being 25%.

Hope for the housing market

While there has been rising inventory and slowing sales, builders have begun offering bigger incentive packages to those seeking a Florida home mortgage loan. Whether or not such strategies work will tell if this will lead to big dropoffs in home prices, as well, in order to encourage buyers.

Bernard Markstein, director of forecasting at the National Association of Home Builders, said there is no question housing demand is slowing nationwide. He said rising mortgage rates have given people reason to “pause” in their decision to buy. Mr. Markstein is predicting that overall housing starts will fall 7% to 1.95 million from 2.1 million in 2005. He sees demand returning to 2004 levels.

Attempt at new home, construction growth

However, many builders aren’t cutting back. Instead, they’re talking about opening many new communities in order to drive order growth. Toll Brothers, for example, plans to open 80 communities during the next six months, and expects to wrap up fiscal 2006 with 295 subdivisions, up from 230 in fiscal 2005.

Chairman Toll sees the glut of inventory on the market as a “short-term phenomena” and believes the supply imbalance will correct “relatively soon.”

Despite the softening trends nationwide, Fitch Ratings analyst Bob Curran said he still believes the housing sector is heading for a soft landing - not a crash - and that the current housing slowdown is temporary and will likely rebound by late 2006 or early 2007. He said economic data for job growth and consumer confidence has been positive.

He’s not alone in this assessment. Many insiders expect a strong year for Florida real estate in 2006. A slow down certainly doesn’t equate to a reason to panic.