S. Robert Kaufman’s comment on my contention that it’s “Time to Applaud Rather Than Condemn Greenspan’s Housing Boom” places some blame for rapid house price increases on the shoulders of builders and asks what builders should do when aggressive price appreciation seems to be peaking out.
It’s important to note that most local housing markets are highly competitive, with prices determined at any moment by the supply of and demand for units on the market -- new and existing homes combined. In recent times, price appreciation has been driven by robust demand coupled with regulatory constraints on the supply of land for development. It may seem that builders have been able to push up prices all they want, but it’s primarily been a demand-pull situation.
At some point, soaring house prices take a real toll on affordability at the margin, particularly when mortgage rates stop falling. That’s the situation Mr. Kaufman senses in the D.C. area, and we’ve seen affordability indexes weaken substantially in regions where price increases have been relatively strong -- such as the West and Northeast.
A survey of builders around the country, conducted by NAHB in early September, identified growing buyer resistance to home prices. Nearly seventy percent of builders in the survey noticed some price resistance in their market areas, and close to 10 percent characterized the resistance as “significant.”
So what’s a builder to do when price resistance gets serious? We actually asked that question in our September survey. One-fourth of the builders were trimming prices, thirty percent were shifting their production mix toward lower-priced models, and about forty percent were strengthening non-price sales incentives -- such as free amenities or payment of closing costs.
These types of builder reactions should help promote the kind of “simmering down” process that Chairman Greenspan predicted. There’s no reason to expect the sky to fall.
What are your thoughts on Custom Builders and Small Volume Builders coming together and cooperativly purchasing product and land? How do you see this trend and its effects?
Posted by: Lee M Odess | January 25, 2006 at 05:19 PM