Sunday, February 18, 2007

Builder Spec Inventories Down

I spent some time this week talking to someone who works for one of the larger Phoenix homebuilders, and I was very excited to hear what he had to say. I've written many times in recent months about how multiple economists and other "experts" all seem to have different views about what's in store for our local real estate market. The only thing they all seem to agree on is how much the excess inventories the builders are carrying are negatively impacting our market. And this makes a lot of sense to me.

If you take a neighborhood where one owner is willing to sell his home for noticeably less than his neighbors, it's very likely to think his home will sell before anyone else's in that neighborhood. But if this owner happens to own two homes in the neighborhood, the rest of the neighbors are in a bad spot.. First of all, they'll all have to wait while the two lower-priced homes sell, then they're going to have to deal with lower offers from potential buyers, because the last two sales were both at lower prices (looking at comps, even though they were from the same seller.) The neighbors might even have trouble getting their home to appraise as high as their contract price, which would bring up another potential round of negotiations and a chance for the buyers to reduce their asking price again.

Well, this is what's happening in neighborhoods where there is still plenty of new construction going on. Except the builder isn't an owner who owns two homes; they own hundreds or even thousands Valley-wide! This is having a major impact on pricing and Days on Market for the rest of the potential sellers. The general opinion of most economists is that when builders' spec inventories come down to reasonable levels, we'll begin moving back towards a more neutral market.

So how does all this tie in with the builder I spoke with? Well, I'm going to preface my answer by saying I haven't seen written reports to substantiate what was said, and I've already posted once before about not liking to take builder's words at face value.. That being said, this builder told me they had an inventory of close to 300 spec homes Valley-wide three or four months ago, and today they have just about 100 remaining. If that pace is accurate, and if it continues, they should run out of spec homes within the next couple of months! (This builder also told me his spec homes were an amazing value - discounted by up to $75k, but a quick look around the neighborhood told me it was more like $15k or $20k - still a great value, but not quite what he said it was..)

Once the builders run out of spec homes, they'll only be working on homes for which they have orders from buyers, and they will stop deep-discounting their prices. This means that sellers of existing homes will not have to compete with the builders' spec homes, sometimes right around the corner, at artificially reduced pricing. We should then see more buyers looking at existing homes, and offers to purchase should not only increase in volume, but should increase in price as well.

What does this all mean? If you're a buyer, now's the time to make your move! Prices may not be this soft again for a long, long time. If you're a seller, hang in there, keep your cool, and have patience - the playing field may begin to level off sooner rather than later.

-Chris