Home Builders Getting Squeezed

Deteriorating conditions in the housing market and consumer uncertainty over the economy is resulting in home builders seeing more red ink,  as they battle their lowest market share on record. The combination of the market’s decline with the expiration of the tax credit at the end of November, and the continuing lack of credit for housing production loans, keeps suggesting we haven’t hit bottom yet, and there may be further deterioration in the coming months.

From Bloomberg: Builders…battling their lowest market share on record, will need to keep cutting prices and offering upgrades to attract buyers as competition from foreclosures mounts, economists said.

[As the chart] shows (click to enlarge) new-home sales represented 7.4% of all single-family purchases in May, the lowest level since data began in 1968. From 1990 through 2005, before sales started their descent, the share was about 16%.

“The new-home market is simply not competitive at this point,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. “The share of new homes in total sales might get squeezed further…”

Builders have been hamstrung by land bought at premium prices years ago, and construction costs haven’t come down much, said Nicolas Retsinas, director of housing studies at Harvard University in Cambridge, Massachusetts.

“It’s hard to compete in prices with so many foreclosed homes,” said Retsinas. “History tells us that part of any economic recovery is a recovery in housing and construction. This is a signal that any recovery is further slowed.”

Graph: Bloomberg

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