As usual, by the middle of the day, I get bored with talking about the headline housing number du jour, and I start pondering some of the numbers that never make it into the general news stream.  Today I'm looking at P.4 of the Commerce Dept.'s report on "New Home Sales in July."  I'm wondering why sales of homes "Not started" (i.e. still empty lots) rose 33 percent month to month, while sales of "Completed" homes fell 6 percent.

"Given capital restraints, and the fact that many "spec" built homes can lead to lower margins, it makes sense that builders are trying to sell more homes on an order basis.  In fact this has been the case since late November," J.P. Morgan's Michael Rehaut tells me. "If you sell a spec right out of the gate, the margins can be comparable to build-to-order homes, or even higher, because a builder would build a few at a time and reap the efficiencies of that. However, just as often, if not more, specs can take a little longer to sell, so the builder is stuck paying the carrying costs (i.e., interest on the unsold land, fees, taxes), which hurts profitability.  Also, many specs are also homes that were built-to-order but the customer cancelled.  So builders are often forced to discount specs to sell them, if they're not sold right away."

Another view from Raymond James' Buck Horne:

"A lot of first-time buyers have become increasingly frustrated by the existing home inventory on the market, and are turning more to homebuilders with available product. The process for bidding on an affordable foreclosure for a first-time buyer has become very difficult this summer, mainly because banks & lenders have collectively been letting the listed REO inventory dry up to very low levels. This has bolstered low-end pricing and caused all these “bidding wars” on properties, which has turned off a lot of non-investor buyers who aren’t willing to put in a contract on a house sight unseen. Also, a lot of the listed REO property that hasn’t been snapped up yet is just in terrible shape, and is far from “move in ready”.

A large part of the completed spec inventory the builders are still holding is simply the wrong product for this environment -- an many of those homes are only getting older.  Notice the jump in the median months for sale from 11.8 to 12.4. The newly designed, simplified, downsized product is selling well.  All those older homes with lots of bells and whistles are still sitting out there collecting dust."

Questions?  Comments?