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Location: In a city within a state where politicians come to get their PHDs in Corruption
2,907 posts, read 2,059,362 times
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Quote:
Originally Posted by BoBromhal
NEW home sales, which are usually 20-25% of the entire # of sales, declined for a MONTH (from 1 year ago).
If you go so far as to see davebarnes' link, it's pretty easily explained. July 2016 was an outsized month.
July 2017 closings were down a whole 1% from June 2017, but generally, that happens with seasonality.
These types of explanations take me back to pre-2008 spins of how it's "different" because of x, y, z.
So my question to you and the others who think like yourself?
a.) In which universe can new home prices maintain a 40% premium on existing homes?
b.) Article clearly states that while the inventory of existing homes is tight, builders are carrying almost a six month inventory of spec homes? Hardly a sellers market?
c.) And this is my favorite, how can economy sustain a six percent y-o-y increase in prices?
d.) Rent increases if any are moderating across the country, and while homeowners like myself would like to think that rental prices are irrelevant, potential buyers will simply choose to rent if the prices of homes continue to appreciate.
e.) If the market continues to squeeze out potential buyers, the first sign of trouble is not decreasing prices, but reduced sales volume, as evidenced by lower sales volume for new builds? Wouldn't you agree?
From a long term homeowner perspective there's nothing healthy about a boom real estate market. It can't continue forever.
the Op titled the topic "home sales" when the link was about NEW home sales.
New home sales make up about 1/4 of all home sales.
New homes are generally priced well above existing homes. I didn't say the prices could maintain a 40% premium. I would say that new home builders can absorb a 10%-20% cut in the price - if they have to to move finished homes. I would add that what we see is the new homes that are often built further from the city center (because that's where land is), they do tend to languish first because when folks quit buying, they quit buying in the hinterlands.
There's an economic discussion link posted by someone else, which showed that July 2016 levels were higher than normal, so it might not be a stretch to see why this year's actually went down. Why were 2016 so high? I don't know. It could have been a short move of closings from June 2016 to July 2016, but that's purely speculative.
I would call annual increases of 6% on home values pretty sustainable, if the "affordability" remains. Annual increases consistently at 15% and above clearly aren't - and that's what we see (again, as in 1990, 2001, and 2007) in CA and other super-hot locales.
I'll be happy to look at both links again to see if there's really 6 months of finished new home inventory sitting there. If there's just 6 months of homes under construction, that's not nearly as bad. With overall housing demand not fulfilled by the supply, maybe builders are advertising their construction at earlier phases that in the past. It was quite common for them NOT to put new homes into the MLS until they were 60-70% complete.
I'd also say it's fool-hardy to draw conclusions based on 1 month of data without it including a clear economic shock, especially when that data
a. often gets revised
b. shows a large margin of error:
"This is 9.4 percent (±12.9 percent)* below the revised June rate of 630,000 and is 8.9
percent (±15.4 percent)* below the July 2016 estimate of 627,000."
Location: In a city within a state where politicians come to get their PHDs in Corruption
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While the new homes might only be 1/4 of all sales, they are trend setters and exhibit the most sensitive price elasticity, which is very useful indicator to compare to the rest of the market. I disagree that six percent y-o-y is sustainable. Not when the income growth rate is half that, and considering the historical precedent of home prices.
I will say that by this time next year we will be talking of a measurable drop in sales volume on the existing home side, and stagnant home prices on the new builds.
I think I said that new prices were more elastic ("can absorb a price cut"), I just didn't use the term. Certainly a Buyer, faced with a choice of an existing home priced at $X or a new home at $X + 30% (which doesn't meet the historical 1990-2011 of 10-20%) will at some point lean towards the existing home.
And I said 6% YOY was sustainable IF affordability remained. Right now, affordability is being driven by the interest rates, not by wage growth. Wages don't have to grow an equivalent 6% to the price increase.
Today, to "afford" a $300K new home (and the median new home price was reported at $313K, so 1/2 the sales were 313K or below) requires about $77K in household income. While the overall median income is just $56,500 - that includes renters AND homeowners. I'd daresay that new Buyers have incomes above that median. And someone who has been in their 10-year old house has fixed their cost to their income 10 years ago.
So, to repeat - is a 35-40% premium on new housing sustainable in the long-term? No.
Location: In a city within a state where politicians come to get their PHDs in Corruption
2,907 posts, read 2,059,362 times
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I don't think builders can afford a price cut of 10-20%. Not unless their cost structure changes. For illustrative purposes I went to look at the quarterlies of Pulte (first to think of).
Pulte's operating income for the 2nd quarter of this year is down by 35% compared to the same quarter a year ago, while the sales are up 12%. Operating Income margin is at dismal 6%.
Today, to "afford" a $300K new home (and the median new home price was reported at $313K, so 1/2 the sales were 313K or below) requires about $77K in household income. While the overall median income is just $56,500 - that includes renters AND homeowners. I'd daresay that new Buyers have incomes above that median. And someone who has been in their 10-year old house has fixed their cost to their income 10 years ago.
This is where Dave Ramsey became crazy -- mortgage freedom.
In his Financial Makeover book, he discussed in length about getting people out of CC debt but when it comes to mortgage, he failed miserably.
He advised to keep your mortgage payments to not more than 25% of you Gross.
So, plugging BoBromhal's analysis with Dave's, the $56,500 median income means $14,125 payments a year. At the median price of $313K, at 4% and 15 years, you would still be left with $100K of debt.
This is where Dave Ramsey became crazy -- mortgage freedom.
In his Financial Makeover book, he discussed in length about getting people out of CC debt but when it comes to mortgage, he failed miserably.
He advised to keep your mortgage payments to not more than 25% of you Gross.
So, plugging BoBromhal's analysis with Dave's, the $56,500 median income means $14,125 payments a year. At the median price of $313K, at 4% and 15 years, you would still be left with $100K of debt.
The median income won't support the median home price - if you're making $50k a purchase of even $150k is a stretch in the real world. $300k is basically financial suicide. That median home price has been affected greatly by people with much higher incomes & equity buying really expensive homes.
I don't think builders can afford a price cut of 10-20%. Not unless their cost structure changes. For illustrative purposes I went to look at the quarterlies of Pulte (first to think of).
Pulte's operating income for the 2nd quarter of this year is down by 35% compared to the same quarter a year ago, while the sales are up 12%. Operating Income margin is at dismal 6%.
so you think Builders HAVE TO get 35+% higher than existing, or they'll go out of business.
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