Realty Check

New Housing Numbers: My Take On Sales, Prices and Lennar

New home sales drop.

New Home Sales:
I remember last fall many of the major homebuilder CEO’s told me they expected May to be the big recovery period in the housing market. Spring would spring, and all that correctional nastiness would be a fond memory. So much for the merry month of May.

New home sales in May fell 1.6% from April and are down nearly 16% from May of 2006.While 1.6% doesn’t sound like any kind of crash, it followed a ridiculous 16% burst in sales of new homes from March to April. What’s up with that? Well, guess what, April’s figures were revised down to 12%, still the biggest jump in over a decade, but forget about the month to month stuff and think about May of last year.

Homebuilders sold 16% more brand new houses last year, on an annual adjusted basis. What does that mean? It means that in May of last year, the U.S. Commerce department was predicting that 1,087,000 new homes would sell in all of 2006. This May they are predicting 915,000 new homes will sell in al lof 2007. That’s 172,000 fewer houses. Think about that.

Housing starts in 2007 are off 24% from 2006, so it’s not that all those 172,000 are sitting out there for sale; many of them were never even built. Sometimes, in reporting all these number, and calculating all these percentages, we lose sight of the fact that these are real palpable entities, bricks and wood and plumbing and roofing and people who build them and people who live in them. Just a little reality check in the Realty Check today.

The conundrum as usual continues to be prices. The S&P/Case-Shiller Home Price Index out today shows prices in the top 20 housing markets in the U.S. are down around 2% from last year. I like this report because it only looks at the big cities, which are where the booms and busts of real estate tend to live and breathe. The Pacific Northwest continues to surge, with prices up 9.6% in Seattle and 6.4% in Oregon, all thanks to technology and shipping and more importantly a real lack of land. Charlotte is also on a tear, as New York City bankers trade their metro cards in for minivans. Prices in the rest of the top cities are tanking on a year over year basis.

You would think lower prices would be good for sales, as buyers take advantage of good deals, but that really isn’t the case. The trouble is that home prices soared so high during the housing boom, they will need to come down far lower before buyers believe that they’re making a good investment. Witness the 70% drop in household formation in the first quarter of this year from last year. Young people simply don’t want to jump into this market. And sellers, well why would you want to sell into today’s market if you have the ability to wait?

“The housing market has continued to deteriorate throughout the second quarter,” says Lennar CEO Stuart Miller. “We have continued to adjust pricing to meet today’s market conditions…as we look to our third quarter and the remainder of 2007, we continue to see weak, and perhaps deteriorating, market conditions.”

Well what would you expect the guy to say when his company is reporting a 37% drop in revenues and a 28% drop in deliveries?Not to mention that Lennar’s cancellation rate is running at 29% of all its orders. One third of the new home buyers out there who thought they’d put their feet up and watch some baseball in a Lennar home either couldn’t get the financing or couldn’t stomach the investment.

Lennar, like the other big public builders, continue to preach their focus: on daily operations, on cash flow, on reducing costs and driving sales. They all claim to be weathering the downturn well and preparing for a bright future, although their statements seem to drag with each quarter: “We continue to lack visibility as to future results,” says Miller.

In other words, we don’t have a clue what to expect from this particular correction.

Questions?  Comments?

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