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How the Economy is Challenging Home Builders

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By Dennis Walsh: Home builders continue to face numerous economic challenges that run in stark contrast to the boom times of recent years. Exactly what the impact and how long these challenges will continue is a hotly debated topic in real estate circles. Some of these issues include:

Economists and housing analysts widely agree that current unsold housing inventory still remains at historically high levels. Data reported by the Census Bureau and National Association of Realtors estimates unsold new homes at almost a six-month supply, while the supply of existing resale homes approaches a seven-month supply.

While these numbers are troublesome, according to David Seiders, NAHB Chief Economist, they do not reflect the huge number of pre-sold new homes that have resulted in cancellations. With cancellations also running at historically high levels, estimated to be currently around 25% for the nation’s largest builders, the supply of available homes inventory is actually much larger than many reports reflect.

Further, subprime and other aggressive mortgage programs that fueled the recent housing boom are resulting in a significant increase in foreclosures. This too is expected by many experts to increase the inventory of available homes. It’s estimated that as high as 50% of subprime mortgages that end in foreclosure will result in those homes being owned by lenders REO departments. These homes will also increase the current oversupply.

At the same time these factors are occurring, the mortgage industry is tightening up lending practices, which is expected to have the effect of reducing the number of buyers who can qualify for the purchase of this large inventory.

Some economists maintain that the loss of subprime mortgages would only affect a small portion of builders, particularly those who focus more on entry-level and affordable products. However, as the majority of new home buyers are moving up from lower-priced homes, the ripple effect could be felt in the higher-priced markets as well. Further, some analysts contend that many higher-priced and luxury homes have been purchased with no-doc, interest-only and in some cases, negative amortization instruments. Since most builders do not break out sales on the basis of mortgage types, the percentage of sales financed by more exotic mortgage products is difficult to determine.

Another factor difficult to measure is the impact of the large inventory of investor-owned homes. Many sit empty waiting for a buyer, while many others are being rented in hopes that market conditions will improve to allow a more profitable sales price at a later time.

While debates continue to rage over whether our nation’s economy is experiencing a housing bubble, many realities make it clear that we’re entering a very different business environment. More and more analysts are also agreeing that a return to a healthy market may not happen for a number of years.

One question that begs answering is what exactly would a ?healthy? market look like? From my perspective, a market that operates with some measure of balance between supply and demand would be a step in the right direction. Further, a market where this supply was available at price points within the affordability of the buyers in demand would also offer greater stability for the long run.

With all of this in mind, I think it?s important for us to recognize today’s market as the market we’re living and working in?right now. Rather than waiting for a healthier market to return, those of us who hope to survive and thrive will accept the realities and build a business plan around meeting the needs of those who truly wish to buy and sell.
Unlike many individual resale sellers, builders and developers must stay in the market?they must continue to build and sell homes. More than ever before, they’re considering and pursuing whatever alternatives that will allow them to continue to build and sell successfully.

What’s great is that we can bring excellent solutions that will help them meet their goals. Our assistance in helping builders deliver the ?right? homes at the ?right? pricing in the ?right? locations to meet the needs of real home buyers will bring tremendous value to all involved. As competitive factors heat up, we can deliver sales and marketing solutions to support builders, developers and their communities. We can also assist move-up buyers in the marketing and sale of their existing homes, as well as facilitate financial solutions to meet their needs.

Americans will continue to seek out solutions to meet their housing needs while builders and developers will continue to work to meet these needs. Our Certified New Home Specialists? are trained to deliver the professional guidance and service to help all achieve these goals.

So as today’s housing market presents competitive challenges for us all, these same challenges open up doors of opportunity. My advice: leave it to the soothsayers to do all the ?soothing and saying?, and start knocking on those doors!

Based in Newport Beach, CA, Dennis Walsh & Associates, Inc. is a leading source for training and sales tools for success in both new home sales and resale real estate business. More than 30,000 real estate professionals have participated in their Certified New Home Specialist? and Residential Construction Certified? certification courses.

For more information, visit www.sellnewhomes.com or call 800.428.122.

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