And that may be saving the housing market.
Elaine and Bill Cooper will wait seven months for the new townhouse they're buying in Mattapoisett, Mass., if the New England winter holds off long enough to permit laying the foundation. If not, it'll be nine months. "I wish it were next month," Elaine Cooper says.
The Coopers' long wait could be the salvation of homeowners across the USA. Gluts of unsold new homes have been earmarks of every big real estate bust in the last quarter century. But tighter inventory control by builders and the people who finance them, coupled with high demand, has squeezed the availability of finished homes just about everywhere. It's not a guarantee against disastrous overbuilding in the future. But housing economists say for now the lean inventory is a strong prop for high home values.
"It's an unequivocally good thing," says Amy Crews Cutts, economist at mortgage investor Freddie Mac.
Sky-high demand may be enough to knock down the number of available new houses. But, says Carl Reichardt, industry analyst at Wachovia Securities in San Francisco, the hot market is masking a fundamental change that will linger long after things cool: less speculative construction. "Finishing a new house before it's sold is in decline," says Reichardt.
The shift means more profit for builders now and less risk of having to slash prices when demand slackens. For buyers, it means long waits for occupancy, knocking many time-pressed relocators out of the new-house market.
Reichardt, who issued a bullish report last spring on the industry's surge in presales and its growing ability to work on a perpetual backlog of orders, says more home builders are narrowing their target markets.
Shoppers in a hurry are moving to the resale home market. Instead, builders are zeroing in on buyers like the Coopers, who are already settled in nearby Wareham, Mass., and David Shin, 28, a mortgage lender from Ann Arbor, Mich.
Shin closed recently on a new house that was nothing more than a foundation when he committed in April. Shin said the five-month wait worked well in his case. He was already a renter in the area, and he wasn't changing jobs.
The most recent Census Bureau numbers show one key measure of new homes available for sale as low as it's been at any time in the last 40 years — a 3½-month supply at the current sales rate.
Homeowners can take some comfort from that. The biggest regional housing busts of the last 25 years — Texas in the 1980s and Southern California and the Northeast in the early 1990s — shared a common characteristic: a huge number of unsold new homes that depressed home values for everyone. As the Texas real estate market was about to tank, for example, the supply of unsold new homes nationally stood at a record high — nearly 12 months' worth.
Today's ultralean supply "ought to mean more stability in current home prices, and it ought to cushion price declines in the future," Reichardt says.
Home builders don't typically make public the number of homes they sell before construction. But Reichardt estimates that eight publicly traded national companies will presell 45% of their output this year, vs. 26% in 1994.
For home builders who have managed to eliminate or reduce speculative building, the payoff can be considerable. Preselling leaves open the possibility of enticing the customer with profit-increasing upgrades. By closing the sale the moment construction is complete, interest charges on the money borrowed to build don't cut into profit.
Buyers are the winners
Richard Dugas, recently named CEO of Michigan-based Pulte Homes, says his company and other public builders are doing "a lot more preselling."
Dugas says buyers are the winners because they have a greater say in the features that are incorporated into their future home.
In some of the 45 markets where Pulte operates — Dallas and Houston, for example — the company continues to build many houses before it has buyers. Those markets, he says, include many relocating corporate employees who need quick occupancy.
But the company Web site gives a sense of just how tight the inventories are elsewhere. A link to Pulte's completed or nearly completed homes for sale across the country last week listed none in the San Francisco area, three in Southern California and eight in New York City and New Jersey.
The trend to preselling, he says, "is just good business."
"You want to close the sale when you finish the house, not six months after," he says.
John Young, a private builder in Southern California's red-hot Riverside and San Bernardino counties, says all 600 homes he'll build this year will have been presold. But incredibly strong demand and a shortage of lots prevent him from building speculative homes even if he were so inclined.
"These are the best times we've ever been in," says Young, who estimates he could sell an additional 200 homes this year if he had the land.
Young knows the other side of the new home market, too. After the Southern California bust of the early 1990s, he says, it took more than five years to sell the surplus of finished houses and ready lots.
Young says that's unlikely to happen again in this market mainly because of the time it takes to get raw land permitted and ready to build — about two years vs. about nine months a few years ago. "It's kind of a self-governor on us," Young says.
In Houston, Trendmaker Homes general manager Will Holder says the company will presell about half the 550 homes it plans to sell this year. Holder says he expects no trouble in selling the speculative houses in his inventory. Lately, he says, 80% of everything the company builds is sold within 30 days of completion. Across the Houston metro area, Holder says, about 35,000 new homes are expected to be built this year, a record.
Holder recalls the local market of the mid-1980s, when homes lost 25% of their value. But, he says, the latest boom in home construction is unlikely to cause the glut of homes the city saw then. Housing supply and demand are in closer balance now, and the city's economy is much less dependent on the fortunes of the oil industry.
John Burns, a real estate consultant from Irvine, Calif., says industry changes over the last decade make tight home inventories a permanent feature. Unsold home inventories will creep up if mortgage rates increase and demand for housing slackens. But the days of a potentially disastrous oversupply are over, he says.
Bigger companies with better management won't let supply substantially outpace demand as it has previously, Burns says. But more important, the bankers and Wall Street investors who provide capital are now averse to the kinds of risks that burned them in previous real estate busts. Says Burns: "I don't see it ever getting to those dangerous levels again. Nobody's going to be willing to finance it."
Industry consolidating
Home building remains fragmented among thousands of mostly small companies, but a strong tide of consolidation is sweeping the business. The result has been a rise in big, public companies that build nationally.
The 10 biggest public companies now account for nearly 20% of all new homes, roughly double the market share of the top 10 a decade ago. Those companies — Pulte, D.H. Horton, Lennar, KB Home, Centex and the like — inject a new level of sophistication, say Burns and other industry analysts.
The emergence of bigger builders provides a bulwark against the disastrous excesses of past busts, many industry boosters say.
Big builders, both public and private, are increasingly being run by executives with college degrees, says Burns. They're as likely these days to be run by executives trained in finance or marketing as in construction techniques.
"There aren't as many entrepreneurs who started their careers driving a pickup and swinging a hammer," says Burns.
Pulte's Dugas cut his teeth in the petroleum and soft-drink industries before taking over one of Pulte's regional divisions about a decade ago. And he agrees that the industry leadership is changing. The stereotype of home builder as "cowboy" is outdated, he says.
Not everyone sees the threat of overbuilding as a thing of the past. Mark Zandi, chief economist at consultant Economy.com, notes that sophisticated managers and scrutiny from Wall Street investors did nothing to prevent the busts in technology or telecommunications. It's no more likely to do so for home building. he says. Current strong demand for housing can dissipate quickly, and even the big public builders are likely to be caught short when it does, he says.
Says Zandi: "Too much capital is flowing into housing. I think some of the big national builders are making some of the same mistakes the tech people did, just not to the same degree."
