The decline in housing starts is having a dire impact on the home-building business. Construction jobs will take a hit, and building suppliers will see far less demand. But for the homebuilders themselves--believe it or not--the number may not be all bad.
"Not That Large a Number"
"Frankly it's not that large of a number," says Ara Hovnanian, CEO of Hovnanian Enterprises, one of the nation's largest home builders. He said sales at the public builders, which represent about a quarter of the market, are down about 25%.
"So if sales are down 25%, you would hope that new starts would be down at least as much, so a 14% (drop) doesn't surprise me at all," he added.
Hovnanian is also pleased to see the building permit number down as well.
"There is a little excess supply," he said. "So for the overall correction to happen as rapidly as possible, and the recovery to begin, you don't want to add to the supply with new permits."
"A little excess supply" is putting it mildly.
"There are two million vacant houses in the system right now," says Margaret Whelan, home builder analyst for UBS. "There's so much inventory in the system (that it) makes it hard for the big builders to generate new orders."
The excess supply of new homes--or "inventory" as it's known in the industry--has been eating into the profits of the big builders. Cancellation rates are more than twice the usual rate, pushing more vacant homes onto the market, and buyers have been wary.
The builders admit they got carried away with the housing boom, as did the investor speculators who came with it. Now, the speculators are gone, prices have stopped appreciating at unprecedented rates, and the homes still sit.
Fighting Back With Incentives
Builders have been fighting back with incentives of all sorts. They've been "throwing things in to the houses for nothing, paying closing costs, paying financing points, buying down mortgage rates for a couple of years," Seiders said.
That has helped entice buyers in the last few months. It's also helped hold prices up, albeit artificially. But it's because of all those incentives that, experts say, sales of new homes have hit bottom and are starting to climb back.
The builders report that they're slowly getting rid of inventory and cancellation rates are coming down. That signals another bottom--for the homebuilder stocks, which analysts have been slowly upgrading.
Existing-home sales also are improving as prices come down, and that puts more competition into the market, which will inevitably bleed over into the new-home sales. Homebuilder confidence, while still in the negative, is improving, especially as the builders look toward the usually busy spring season.
So have we reached bottom in this particular housing downturn? Depends on how you want to build your case.