Santa Delivered Coal to New Homebuilders

New-home construction fell 4.3 percent in December compared with November to its lowest level in more than a year to a seasonally adjusted rate of 529,000 starts for 2010.  December saw the lowest level of new home starts since October of 2009, according to Department of Commerce statistics.  Starts ended the year 8.2 percent below December of 2009 and the chance that the numbers will rise anytime soon is highly unlikely.

December’s poor showing reflects a decline in single-family housing starts, which comprise the lion’s share of new residential construction, with construction falling nine percent to 417,000 units, the lowest level since May of 2009.  Demand for new housing is a victim of the recession and the large supply of existing homes on the market.  The high number of foreclosures also has impacted new residential construction.  Stricter lending standards and the fear of unemployment are also slowing new home sales.  Sales were boosted for a time last year when the federal government offered a first-time homebuyer tax credit.  Once that incentive expired, sales declined.

Another reason behind the slow pace of new home sales is likely the surplus of foreclosed homes that are on the market at extremely attractive prices.  Prices in 20 major metropolitan areas declined during the same time period, according to the Standard & Poor’s Case-Shiller Home Price Index.  The index is only 3.3 percent above its nadir, which it reached in April 2009 and has fallen 1.6 percent from a year ago.  There are several areas, however, where prices have stabilized and are not reflected in the Case-Schiller Index.

The slowdown in new home construction also raises the issue of what is happening to the acres of developed land that are shovel-ready?  In some cases, new builders are buying the vacant lots from banks and developing lower-cost housing than the original concept.  Builders are buying lots at 50 percent their original prices from lenders who want to move distressed construction loans off their books.  Developments are being revived in markets such as Florida, California, Las Vegas, Utah and the suburbs of Washington, D.C., according to Brad Hunter, chief economist for Metrostudy, a Houston-based housing researcher.  “This is a natural progression of the cycle,” Hunter said.  “Projects fail, the price of the asset drops until it reaches a point where it’s profitable for someone else to pick it up and remarket it.  They reposition the project and then what was formerly infeasible, is feasible.”

Developers are building smaller, more efficient homes that cost less to build, according to Tom Dallape, principal at the Hoffman Company, an Irvine, CA-based brokerage advisory company.  “They’re tailoring them to the market,” he said. “The average new house used to be 3,000 square feet.  Today, it’s 2,100.”

In another example, a homebuilder sold 1,300 acres of land and more than 1,500 homes sites — property once valued at $110 million for just $12.7 million. That amounts to just 12 cents on the dollar and is symptomatic of the level of financial pain banks must endure to stabilize themselves in a insecure economy.