Reality Check: Most US Home Builders Describe Good Aug Sales

By Gary Rosenberger

NEW YORK (MktNews) - Most home builders described good August sales nationwide, especially at the higher end, with the notable exception of hurricane-afflicted Florida and a smattering of economically challenged states like Ohio, the Carolinas and Texas.

Builders are shying away from the high-volume, entry-level market as land acquisition and development costs escalate, exacerbated by anti-sprawl regulatory roadblocks -- a convergence of forces that could cause housing starts to decline despite strong underlying demand.

The big national builders continue to do well, but smaller builders were somewhat divided over the direction of their local markets -- with those in weaker markets blaming mostly temporary factors like weather, vacations and back to school.

There are no signs of inventory buildups, with supplies of new homes checked by a combination of self-restraint and government checks on suburban sprawl, builders say.

They insist that demographics continue to act in their favor, with heavy immigrant flows providing a steady customer base and an aging population increasing the demand for the "active-adult" and second-home categories.

Meanwhile, 30-year-fixed rate mortgages stayed below 6.0% for all of August and early September, which didn't hurt matters -- although a minority of builders wonder whether the public is getting a dose of interest-rate fatigue and is less responsive to such dips in rates.

Among the major publicly traded builders, Hovnanian Enterprises had an exceptional month with a 57% rise in the dollar value of new contracts, and a 22% increase in volume sales, "further indication that demand for our homes remains strong," said CEO Ara Hovnanian in an analyst conference call last week.

Hovnanian said the national market remains "very solid" with continued strength in California, the Northeast, Washington, D.C. and Phoenix.

The exceptions are Ohio, which has been weak for some time; Houston where Hovnanian sees "a little weakness" at the higher price points but "good strength" at lower price points; and Tampa, which was affected by hurricane activity.

"Our numbers speak for themselves. The market remains healthy," said Brian Cheripka, assistant director of investor relations at Hovnanian, which is based in Red Bank, New Jersey.

He said the discrepancy between the dollar value of the contracts and lower unit volume sales stems from changes in the mix of homes (toward the higher end) and outright price increases in most of Hovnanian's markets.

Cheripka said long-term fundamentals, such as population and immigration growth continue to favor housing formation -- and Hovnanian, along with other major builders, have responded to one important demographic trend. "We're trying to emphasize active-adult product," Cheripka said. In Northeastern coastal communities and in Southern California that category accounts for more than 30% of Hovnanian sales.

Low mortgage rates also continue to be favorable. "Rates are still at historical lows, which certainly helps the industry because it helps affordability. But interest rates alone don't drive demand," he said.

Minneapolis builder Hans Hagen of Hans Hagen Homes saw August sales up 12% in volume terms and up 34% in dollar terms, which means he's moving his focus toward the luxury end of the market.

"The increases came on the same number of projects as last year and not because we added developments -- that tells me net demand is going up," Hagen said.

"People are spending more on options and selecting more expensive homes," he said. On a same-house basis, "our prices went up nominally." Hagen observes that high land costs and zoning issues have effectively blotted out more affordable entry-level construction in his market.

He downplays speculation of a housing-price bubble, noting that any such bubble is limited to markets, not his, where escalating home prices run into an employment bust. "If there is a bubble, it's certainly not across the board," Hagen said.

Yet he saw signs of sluggishness in early September, with the local Parade of Homes attracting "about average" traffic. "Sales are a little slower than last year, but schools opened a little later in Minnesota," he said. "We expect September to end up at least equal to last year, with maybe a five to six percent increase."

August and early September were both slow in North Carolina, where heavy rains, vacations and back to school conspired against the market, said Craig Morrison, president of Cimarron Homes in Durham.

"We'll know in the tail part of September whether it's seasonal or whether the market has cooled off," he said. Right now, the former hypothesis appears to hold and Morrison expects the usual seasonal uptick to begin at the end of September.I would like to see faster job growth," he added.

Right now, he does see local housing inventory "growing a little, but nothing like a bubble."

Meanwhile, concrete prices and petroleum-based products continue to move higher, while plywood prices have retreated from earlier highs, Morrison said.

Rich Morin, president of Kara Elizabeth Homes in North Kingstown, Rhode Island, saw August as "a little weak" in his Rhode Island and Vermont markets.

Morin, who specializes in high-end modular homes, believes it was a case of seasonal summer doldrums with September seeming to "be picking up quite nicely."

He sees escalating land prices and government regulations as roadblocks to high-volume entry-level production -- and a deterrent to overbuilding despite any temptation that might arise from rising home prices.

For instance, in a recent six-month period Morin saw one of his Northeast properties appreciate by 20% before he built a single house on it. Between the price of land and difficulties in obtaining approvals, builders have been focusing on high-value homes for which there is "absolute demand" and where arguments against over-development tend to fall apart.

The losers in the equation wind up being firefighters, police, nurses and others in the workforce who can't afford the over $550,000-plus homes that Morin builds. Developers have been reducing the number of houses they build on available acreage in order to quell concerns about overwhelming local schools, sewage and water systems, and local roads, he added.

He wonders whether low mortgage rates have been around for too long and whether builders are facing a jaded public in the same way automakers can no longer excite people with their latest rebates. "I don't know if it's having as much of an effect as it once had."

Michael Rose, president of Michael T. Rose Companies, a very high-end builder and land developer operating in Maryland, Virginia and Delaware, said his market looks to be "extremely strong, to say the least."

Homes valued at above $1 million for the second-home, pre-retirement market "is off the charts," a market fueled by the aging baby-boom demography, Rose said.

He cited one area along the Potomac River in Maryland, once regarded as a backwater, where he, Toll Brothers and others are building homes valued at nearly $2 million. "If you had told me two years ago they'd building two million dollar production homes, I'd have said you're crazy."

When asked how the entry-level market was faring regionally, he replied, "There is no entry level. A lot that cost $70,000 five years ago now goes for $200,000. How are you going to build an entry-priced house on that?"

He sees no evidence that burgeoning inventories, noting that his market is characterized by shortages. "There's a lack of land availability, so you either focus on higher end or higher-density product lines," Rose said. "In our communities there is no housing bubble because there is no availability."

Rose posits that the bad press Florida has been getting over this summer's hurricane season could work in favor of builders further north, especially in a tax-haven state like Delaware, "where you're just a three-hour drive away from the grandkids and you still get nine good months of weather."

"August was another very strong month for luxury home sales in terms of new deposits and traffic," said Frederick Cooper, senior vice president of finance and investor relations for Toll Brothers, Inc., the national luxury builder based in Huntingdon Valley, Pennsylvania.

The one exception was Florida.

"Obviously, in several parts of Florida people were more preoccupied with things other than buying new homes due to the series of hurricanes over the last several weeks," he said. Florida represents just fewer than 8% of the company's total business in terms of backlog.