Tomorrow’s Headline Today?

Sales of New Homes Plummet The 40% decline for 3-month period is sharpest in 15 years. Thus reads the headline over a front page story in yesterday’s Business Section of the Sacramento Bee, the daily chronicler of the economic and social activities in what had, up until several weeks ago, been one of the hottest real estate markets in the country. As reported by Andrew LePage, a Bee Staff Writer: Sales of new homes in the Sacramento region dropped 40 percent over the past three months compared with the same period last year, according to the local Building Industry Association. It’s the sharpest decline the group has seen for the August-October period since 1989-1990, when sales plunged nearly twice as much – 79 percent. The most amusing aspect of the article, if there is one, is that, as explained in banner ads surrounding the story on the Bee website, “The Business Section is brought to you courtesy of Beazer Homes.”

Beazer Homes is one of those aggressively expanding publicly traded homebuilders benefiting from the trees-grow-to-the-skies nature of the housing market.

Beazer’s just-completed fourth quarter earnings reveal a $2.9 billion land and housing inventory, up from $2.3 billion in 2004 and a mere $630 million five years ago.

That 36% compound growth in Beazer’s inventory might be one reason Sacramento in particular suddenly appears to be awash in housing, according to the Bee article:

The 1,388 new homes sold during the past three months marks the lowest total for the August-through-October stretch since 2001, reported the North State Building Industry Association. The group tracks roughly 55 percent of the new home subdivisions in the capital region and reports net sales – the number of escrows opened each month, minus any canceled deals.

Cancellations of pending home sales have spiked in recent months because more buyers, including investors, either got cold feet, couldn’t qualify for a loan or couldn’t sell another property fast enough, industry sources reported. Also, some builders insist they’re strictly enforcing the anti-speculator clause in their sales contracts and will cancel deals if they learn a buyer is an investor, not a primary resident. But Sacramento’s slower resale market may be the biggest reason that sales of new homes are down so much. “One of the drivers (of cancellations) is people not being able to sell the home they have for the price they expected to get for it,” said John Orr, president of the local BIA. “On the resale side … the sellers aren’t in the bargaining position they once were.” But you wouldn’t have gleaned a bit of this from Beazer’s recent (November 2) earnings call. Asked about developments in the Sacramento region, Beazer CEO Ian McCarthy told Wall Street’s Finest not to worry: We are still seeing pricing power there. We are very focused in that market on being affordable. In fact, our whole strategy in California is making sure that we’re affordable. We have not played in the very highest prices there in either Northern California and we are only in Sacramento…. I would say we’re not seeing flattening, we’re still seeing some price appreciation. Mr. McCarthy ought to pick up a copy of yesterday’s Bee, or access its web site (complete with Beazer’s own banner ads) and check out the story, which goes on at some length: Still, there’s no disputing the pronounced cool-down in the new home market…. Greg Paquin, head of The Gregory Group, agreed that “it seems pricing may have gotten ahead of itself.”…In addition, lenders are beginning to scrutinize loan applications more closely, meaning some marginally qualified borrowers now find it more difficult to use the most aggressive, riskiest forms of financing. Builders have been using these increasingly lucrative incentives, such as $50,000 toward upgrades on higher-end homes, in lieu of lowering prices. This last may explain the apparently gaping chasm between Beazer’s optimism regarding Sacramento home prices, which are not “flattening,” and the recent collapse in Sacramento home sales according to Sacramento’s own Building Industry Association: the homebuilders have yet to cut prices.

As anybody on Wall Street knows, price follows volume. And volume in Sacramento is down.

Jeff Matthews I Am Not Making This Up © 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.