Housing’s Struggles Continue As Some Prices Roll Back to 1990s Levels

It seems the Federal Reserve may maintain some excuse to keep printing money. Hundreds of billions printed in the name of economic recovery and inflation can be seen almost everywhere except the housing market, one of two of the Fed’s main targets – the other being employment. (See “Inflation Watch” for running highlights of stories on rising prices and related news.)

While I have argued in the past that the housing market will not recover until 2013, bouncing along the bottom on the way there, I continue to be stunned by some of the dire statistics. The latest rounds of housing data have included some stark milestones.

In “Atlanta’s median home price falls again” (April 20, 2011), the Atlanta-Journal Constitution (AJC) reports that Atlanta’s median home price slid to $100K, a drop of almost 15%. Incredibly, this plunge takes the Atlanta market to levels last seen one year after the 1996 summer Olympics. For the entire U.S., the median single-family home price fell 5.3% to $160,500. Home sales volume dropped 6.9 percent. (Numbers are year-over-year and come from the National Association of Realtors).

(Long-time readers know that Atlanta holds a special distinction for me as this was the city where I finally decided to join the housing bubble. My parallel plans to position myself to buy into the fallout from the bubble did not quite work out the way I had hoped!).

Good Morning America (ABC News) summarizes the latest numbers as “Home Sales Up, Prices Down” and takes us on a tour of the country to see what $100K buys these days. Atlanta is the feature city where a nice home 20 minutes from downtown formerly selling for $242K is now going for a song at $52K. It has four bedrooms, 2 1/2 baths, a 2-car garage, and 2000 square feet of living space.

Sales of homes $100K or less are up 9.6% nationwide. In the South, sales of these homes are up 13.6%. In the West, these homes have flown off the shelves at a 44.6% pace.

The New York Times writes about the impact on builders in “Builders of New Homes Seeing No Sign of Recovery” (April 23, 2011). The feature tale of woe is KLM Builders in Richmond, IL, a distant suburb of Chicago. Last year, KLM matched the U.S. government’s $8,000 tax credit for new homebuyers, but the company only sold 20 houses all year. The latest deal is a $17,000 credit at a local General Motors dealership. KLM has sold seven homes since March with this promotion. It is no surprise that home prices in Richmond have plummeted back to levels last since in the mid-1990s.

The article references some telling statistics (emphasis mine):

“Sales of new single-family homes in February were down more than 80 percent from the 2005 peak, far exceeding the 28 percent drop in existing home sales. New single-family sales are now lower than at any point since the data was first collected in 1963, when the nation had 120 million fewer residents.”

“Four out of 10 sales of existing homes are foreclosures or otherwise distressed properties”

“Single-family home construction fell 21 percent to an annual rate of 422,000.”

KLM is clearly lucky to even be alive. In a CNBC interview last month, Toll Brothers (TOL) CEO Douglas Yearley noted his company’s competition has been “decimated.” Most local builders have gone out of business in the last few years. Of course Yearley observed that he is very comfortable with TOL’s competitive position.

Some other interesting and important nuggets from this interview:

• TOL has the housing sector’s longest land supply (13 years) and has $1B on hand to buy more land.
• 80% of TOL’s sales are for homes under $700K
• Households making over $100K are growing 4x the national number
• The average TOL buyer puts 30% down (me: wow!)

While TOL hangs in there based on the improving fortunes of its average customer, Beazer Homes (BZH), based in Atlanta, has been forced to get creative in its handling of surplus housing inventory. Three weeks ago, BZH announced it will partner with local property managers and use a portion of its cash reserves to rent out pre-owned, recently built homes:

“Beginning in the Phoenix market, the new [Pre-Owned Homes Division] is charged with acquiring, improving and renting recently built, previously owned homes within select communities in markets in which the company currently operates…Homes targeted for inclusion in the Pre-Owned Homes program will have been built since 2004 by a reputable builder, including homes built by Beazer Homes. All Beazer Pre-Owned Homes will receive necessary repairs and upgrades to bring them up to strict Company standards.”

BZH will be taking advantage of the bargain basement prices quoted above by targeting distressed sales like foreclosures and short sales. While BZH is looking to eventually expand into Nevada and California, the size of the program will remain modest by the end of fiscal 2011 with just over 100 homes in Phoenix. BZH hopes to make additional profits by selling these properties when the market recovers. I believe monitoring this new initiative will provide additional clues on the future health of the housing market.

(Sidenote – interesting story in MyDesert.com describing how Canadians are taking advantage of their strong currency relative to the dollar to snap up homes in Southern California’s desert areas. Some are also taking advantage of high home prices in Canada to draw down equity and pay cash: “Canadians lured by favorable exchange rate, sun goose local home sales.”)

*Chart created using TeleChart:

Be careful out there!

Full disclosure: short TOL, long XHB puts