Home Builders Won't Drop Prices

A report this week from Barclays downgrading the stocks of several of the nation's largest public home builders drew quick contest from the National Association of Home Builders, but not for the main premise. The Barclays report centered largely on, "stretched" stock valuations, but it also cited a secondary concern about new home prices.

"New home prices have dramatically outpaced existing home prices, and the reason for that is because you have a very constructed mortgage market today. The only people who can buy are people who are very well off, so that's created a positive mix shift," noted Barclay's analyst Stephen Kim in an interview on CNBC's "Street Signs."

"But if everybody's hopes and dreams about housing come true, which is what's driving the valuations on the stocks, guess what's going to happen? You're going to get a lower mix of buyers into the market which is going to bring new home prices down even as existing home prices are going up."

(Read More: Housing Already Shows Signs of a New Bubble)

Price reduction sign on a house for sale
Seth Joel | Photographer's Choice | Getty Images

Right now the divide between new and existing home prices is wider than ever. The average price of an existing home in December was $231,400, according to the National Association of Realtors, while the U.S. Commerce Department reported the average price of a newly built home stood at 304,000.

In their most recent quarterly statements, all of the largest public home builders reported large annual jumps in the average prices of their homes sold. Pulte's prices jumped 6 percent to $287000, for Lennar it was a seven percent surge to 261,000 and Meritage led the group with a 17 percent annual jump in average sale prices to $323,000.

(Read More: Soaring Housing Stocks in Perspective)

"New home prices are advancing faster than existing home prices because demand has increased and, as Kim did admit, the mortgage filter is allowing only higher income or at least higher net worth people through the application net, and they are purchasing higher valued homes. But that is true of existing purchases as well," argues David Crowe, chief economist for the NAHB.

Crowe also makes the argument that new home prices are dictated by costs and demand. Both, he says are rising.

(Read More: New Housing Fears:Home Prices Are Rising Too Fast)

"Lumber and other building material prices have risen very rapidly recently. Shortages of lots and labor supply are beginning to show up, and I expect as new household formations begin to recover, that shortage will expand to more markets. The way to get more resources back into the housing market is to raise the price paid, i.e., wages and land prices," says Crowe.

Builder profits, he notes, among the small private builders (who still control 70 percent of the market), have been negligible for several years.

"They will have to raise prices to compensate for their efforts, risks and, at least for a short time, being the only ones left," adds Crowe

(Read More: Is the Refi 'Apocalypse' Really Upon Us?)

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

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