New Homes May Be a Good Deal

For now, excessive inventory issues persist, as indicated by the latest monthly builder confidence survey the National Association of Home Builders conducts in conjunction with Wells Fargo to gauge builder perceptions of current single-family home sales and sales expectations for the next six months. Their housing market index held at 19 for December, one of its lowest readings since the study began in January 1985.

There are some signs of a turnaround, though.

"We are selling homes at a faster pace than we are replacing them, [so] the supply will get back in balance faster, and this will lead to improved market conditions," says David Clough, president of Waterford Homes in Norcross, Ga. "The best deals on new homes are happening now and will decrease as the supply aligns itself more closely with demand."

And "after a very slow period for new sales contracts in October and November, we have experienced an improvement in sales pace during the first three weeks of December," says Ara K. Hovnanian, president and CEO of Hovnanian Enterprises(HOV Quote), a giant builder based in Red Bank, N.J. "This is encouraging given that December is historically a slower sales month."

Still, year over year, the number of net contracts at Hovnanian for fiscal 2007, excluding unconsolidated joint ventures, declined 20% to 11,006 contracts. For the fourth quarter, the company recorded a decline of 10.3% from the fourth quarter of 2006. Other homebuilders have experienced similar drops.

New-home prices could start to ease back up after construction on homes stops its decline. But that might not happen for months, or even a year or more.

An indicator of when homebuilding will pick up pace would be to look at the activity of companies that research due diligence for developers and homebuilders about the value of their land acquisitions. Companies such as Developers Research, a national real estate consulting firm based in Southern California, but with specialists working on assignments in 25 states, have seen a significant drop in their business in recent months.

"We previously reviewed [over the last nine years] about 60 to 80 projects every month. During the last two quarters, we have looked at less than 10 projects per month," says Developers' Research founder and president Barry Gross. "Whereas we previously reviewed projects for many of the national homebuilders, during the past six months we have looked at less than 10 projects total for the national homebuilders."

This indicates that national builders are not purchasing finished lots for construction of homes, he says. "Since our work is generally completed three to six months before a building permit is obtained, we believe the reduction in our due diligence work indicates that most homebuilders will not be commencing new tracts until a least the third quarter of 2008."