New Home Sales Trail Resales As Housing Starts Languish

Geoffrey Schiering — Fri, 21 Aug 2009 08:27:41 +0000

Encouraging news about an upturn in the Southern California real estate market is mixed with discouraging news regarding new homes sales, and new home construction / housing starts. There were 24,104 homes sold in Southern California during July 2009, an increase of 18.8% over the 20,329 homes sold in the region during July 2008. In contrast, there has been a significant decrease in the number of new homes sold, and building permits for new home construction remains at record low levels.

For example, in San Diego County the volume of resale homes sold in July 2009 jumped 11% from 3,431 homes sold in July 2008 to 3,809 homes sold in July 2009. But sales of new homes moved in the opposite direction, from 343 new homes sold in July 2008 to only 277 new homes sold in July 2009, a volume drop of 19.2%.

The most likely explanation for the different results is that new homes have come down less in price than resale homes. Prices for new homes are stickier than prices of resale homes, as builders are saddled with debt payments and pinched by decreasing margins. The median price of a new home in San Diego County was $405,000 in July 2009, down just 4.1% from the median price of $423,000 in July 2008. The median price of resale homes in San Diego County was $285,000 in July 2009, down from $328,000 in July 2009, a drop of 13.1%. Where home buyers are shopping for bargains, builders have found it more difficult to compete with the fire-sale prices of resale home foreclosures and short sales.

Sales of new homes in California were briefly boosted by a $10,000 state tax credit offered to qualified buyers of new homes in California, beginning March 1. The legislature allotted $100 Million to the new home stimulus program for the first 12,000 applicants on a first-come-first-served basis. The response was overwhelming. A total of 12,138 applications for the tax credit had been submitted when that state stopped accepting applications on July 2. As of August 12, 10,085 of these new homes had closed escrow, absorbing a total tax credit allotment of $94,511,273. The remaining $5.5 million will be distributed when the last of the applicants close escrow in August.

Housing Starts Stalled

A near-freeze on new construction financing from banks has practically brought new housing starts to a standstill. According to the California Building Industry Association, in the six months ending June 2009, there were only 907 building permits issued in San Diego/Carlsbad/San Marcos (down 35.6% from the six months ending June 2008), 1,086 permits in Los Angeles/Long Beach/Glendale (down 48.2% from the six months ending June 2008), and just 11,950 for California as a whole (down 38.5% from the six months ending June 2008). The 2008 numbers were already at record lows. After peaking at 212,960 new housing units built in California in 2004, new housing starts dropped to 64,962 in 2008, and are currently on track for only around 24,000 in 2009 (a volume decline of 88.7% from the 2004 peak).

Returning to the good news, major real estate markets in California are showing signs of stabilization and recovery. In San Diego the median home price bottomed out at $280,000 in January 2009 and has since risen to $320,000 as of July 2009. Demand for entry-level homes dramatically exceeds current inventory. With fewer than 9,000 homes for sale in San Diego County, and a total of 3,809 homes sold in July, there is presently less than a 2 ½ month supply of homes for sale in San Diego. Normally home builders would be expected to ramp up production in the face of rising demand and rising home prices. It seems reasonable to expect that banks may soon loosen up on construction loans, and perhaps there will be a pickup of housing starts in 2010.