If You Build It, When Will the Home Buyers Come?

New homes sales fell 2.1 percent in May.

Sales of newly built homes fell around 2 percent in May from the previous month, but that was a little better than expectations, given the lousy home builder sentiment number we got this month and the huge supply of competing existing and distressed properties.

But let's put this monthly move in perspective, shall we?

The 319,000 sales pace is 14 percent higher than the record low set in February, but new home sales are still 77 percent below their peak in 2005, and 900,000 is considered healthy.

But how's this for an odd statement:

"The one positive in this report was the further fall in the number of new homes for sales, from 172,000 in April to yet another record low of 166,000," writes Paul Dales at Capital Economics. "With fewer new homes for sale than ever before, at some point homebuilding activity will have to increase, but we can't see it happening for several years yet."

That's the positive??

You could look at the home prices, down 3.4 percent, which is less than the 5 percent drop in existing home prices in May. But then you have to remember all the concessions builders are throwing in, and you also have to look at the fact that the median price of an existing home is 30 percent less than that of a newly built home. How's that for competition?

Take a peak at an interesting chart from John Burns Real Estate Consulting, which he titles, "Sales Rates and Concessions: Understanding the Dance"

Options and upgrades lead the incentives with price cuts coming in third behind closing costs. That means that the price drop is even lower than the official Commerce Department numbers depict, at least from the builder's perspective and the net price declines.

"Faced with slower sales, builders initially prefer incentives to price cuts, because they can delay or eliminate the longer term impact to buyers' psychology and appraiser's comps if the slowdown is temporary," notes Burns.

I'm just not sure how temporary it will all be, again, given the huge amount of distressed properties against which builders compete. Many of the analysts say simple demographic demand will eventually push sales back to normal levels. Patrick Newport over at IHS Global Insight predicts that will take at least two years.

"Tighter lending standards for builders and homebuyers, higher commodity prices, and uncertainty over the direction of the economy and of house prices are stifling both the demand and the supply side of the housing market," concludes Newport. It seems like I hear this every month. Just wondering what exactly is going to change that quote?

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