Housing Bust 2 Begins to Build for Homebuilders and New Single-Family Houses

To get rid of ballooning inventory amid a surge in cancellations and falling sales, Builders try to sell the rental operation, but they pull back as well.

By wolf richter For wolf street,

Amid falling sales and falling prices, if a homebuilder cannot sell their ballooning inventory of unsold new homes at current prices and mortgage rates Increase in cancellation rates of signed contracts – topping 45% in the Southwest and 38% in Texas – Despite aggressive incentives such as mortgage-rate buydowns to encourage sales and prevent cancellations, to whom should home builders sell those homes?

Rental Operation? It can also be difficult because many people have turned to retreat homes for all the same reasons: prices are too high, and financing is too expensive. Sales to single-family rental investors declined 32% in the third quarter from a year ago. So here we go with a good luck sign…

Lennar, the second-largest homebuilder by market capitalization, is approaching large rental landlords with an inventory list of about 5,000 homes that it wants to offload, according to sources Bloomberg, Many houses are in the south-west and south-east. These include entire subdivisions.

Lennar sold nearly 1,000 single-family homes to rental operators in its third quarter — and some of these homes it sold to its own rental operations. Last year, Lennar received $1.25 billion in equity commitments from Allianz Real Estate and Centerbridge Partners for its rental division to buy rental homes.

“Our program has taken a very disciplined approach of stepping back and waiting for the market to adjust itself,” Stuart Miller, Lennar’s executive chairman, told analysts in September. “Contrary to what you might have thought, we are probably selling less of our own program and more to other SFR programs outside of Lennar.”

it’s across the industry: Homebuilders have delivered at least 40,000 new homes to rental operators in recent months, Jeff Kline, an executive director at commercial real estate advisor SVN, told Bloomberg. He said many of these homes were originally sold to individual buyers who canceled the purchase contracts.

There has been an increase in cancellation of contracts signed with individual buyers, according to a survey of John Burns Real Estate Consulting With home builders accounting for nearly 20% of all new home sales, the cancellation rate rose to 26% in October, up from 8% a year earlier, and 11% in October 2019.

The cancellation rate topped out in the Southwest at 45%, up from a 9% cancellation rate a year earlier. In Texas, the cancellation rate rose to 39% from 12% a year ago (chart via Rick Palacios Jr.Director of Research at John Burns (click to enlarge):

With the average selling price of a new home currently at around $450,000, those 40,000 homes that builders are trying to offload to single-family rental operators would run about $18 billion.

But rental operators are in no mood to pay the higher price, They can bite after massive rebates — rebates that homebuilders aren’t desperate enough to offer yet.

But they’ll eventually be desperate enough to offer those discounts — it’s a bet by some big investors in the process of raising money in preparation for that moment.

Increasingly, homebuilders are trying to sell one or more subdivisions at a time, SVN’s Kline told Bloomberg.

Incentives for individual buyers, especially mortgage-rate purchases, Trying to sell homes one by one to individual buyers is tough at those sky-high prices and current mortgage rates. The obvious solution would be to cut prices, but that’s sort of the last option for homebuilders for a number of reasons, including the financial metrics Wall Street looks at. Incentives come first.

Big stimulus: Mortgage rate buydowns: In December, by 75% of home builders in a national survey John Burns Real Estate Consulting Said they are lowering mortgage rates to lower down payments for buyers. They fall into three categories of rate buydowns:

  • 32% are buying the full 30-year term. To reduce the mortgage rate by 1-2 percentage points, the up-front cost for the builder amounts to about 5%-6% of the home’s sales price.
  • 30% reducing rates for only the first two years of the mortgage. To reduce the rate by 2 percentage points for the first year, and by 1 percentage point for the second year, the initial cost to the builder amount to approximately 2% of the home’s sale price.
  • 13% are using less common buydowns.

Builders are using these incentives not only to make sales, but also to delay or prevent cancellation of sales already made.

In the Southwest, 87% of builders surveyed are reducing mortgage rates; in Texas, 81%; in Southern California, 79%; In Florida, 61% (chart via John Burns Real Estate Consulting):

what are the builders up against: The number of new homes for sale in all states under construction in the US rose to 470,000 homes, up 21% from a year-ago high, and the most since March 2008, and during a ramp Where was the inventory – before the housing bust 1 in September 2005 tore everything apart. Which destroys the theory that home prices are high because the industry isn’t building enough homes:

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it very much. Click on the Beer & Iced-Tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? register here,



Source link

Leave a Comment