Realty Check

New Home Prices Facing Growing Pressure

Sales of newly built homes are bouncing around a bottom, but prices are now at the lowest level of the year.

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The median price of a new home came in at $212,300 for October, which is up from a year ago, but October of 2010 represented the big fall after the end of the home buyer tax credit.

The fact that October of this year saw the lowest price of the year so far is not good news going forward. What this means for the nation's big builders has the analysts split.

"While we continue to believe prices may fall slightly from current levels, we believe pricing is essentially near its trough, and therefore should result in minimal impairment charges for the builders in 2012," writes Michael Rehaut at JP Morgan.

"New home prices are still at a 31 percent premium to existing home prices (vs. 14 percent historically), and given the high level of existing home inventory, we expect pricing pressure to remain," notes Dan Oppenheim at Credit Suisse.

New Home Sales Data

New home sales are still at half the normal historical levels, and they are in for more fierce competition in 2012, specifically, foreclosures.

Banks are ramping up the repossessions again after year-long delays in the process, and that will mean inventories of distressed properties will rise.

These rock-bottom priced properties may or may not compete with new construction, depending on geographical area, but they will bring overall existing home prices down, and that will do nothing good for consumer confidence.

Inventories of new construction are approaching healthy, at just a 6.3 month supply (far better than that of existing homes at an 8 month supply). In raw numbers, they are actually at a record low of 162,000 (or at least since the data tracking began in 1963). Unfortunately, that's not helping prices in and of itself.

"The bigger picture is that house prices are still being weighed down by the huge number of discounted existing homes coming onto the market," writes Paul Diggle at Capital Economics. "New home sales will also be held back by the weaker pace of economic growth that we are expecting next year. Admittedly, at some point activity in the new homes market will have to rebound to reflect underlying population growth. But that is still a few years away yet."

So will the big builders continue to slash prices in order to compete?

Can they?

"Commodity prices remain elevated, and that doesn't give builders much room to cut prices too much without really sacrificing profit margins again," says Peter Boockvar at Miller Tabak.

That's why analysts are being very selective in their approach to the home builders and are "muting" their outlooks for 2012.

"This is shaping out to be the worst year on record for the single-family housing market," says Patrick Newport at IHS Global Insight. "New home sales (data start in 1963), single-family housing starts (data start in 1959) and single-family permits (data starts in 1960) will all set record lows in 2011. Existing home sales may avoid the cellar, but only because a third of them are selling at “distressed” prices."

So what will get housing back on a strong foundation for growth? All the analysts agree: Job growth.

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