Despite High Demand, Some Builders Slow Production

While smaller builders are taking the brunt of the price increases, the big public builders may actually be taking advantage of them. Knowing that supplies are low and demand is high, some are limiting sales in order to keep prices high.

(Read More: Housing "Stuck" Due to Short Supply)

"We are pricing our homes and limiting the number of lots we're releasing for sale in some communities to better manage our order volumes relative to our production capacity, and to maximize our profit from those communities," wrote Meritage CEO Steven J. Hilton in the company's quarterly earnings release.

Meritage is not the only one, as limited supply of new and existing homes pushes prices higher across the nation. It may seem counterintuitive to stop building in such a scenario, but apparently it is making business sense.

(Read More: Housing Recovery to Face Test as Builders Report)

"Many builders are starting to limit production," noted Megan McGrath of MKM Partners. "I think raising prices is one part of the equation, but I also think there is the issue of limited labor and finished lots at play."

With the housing crash so deep and prolonged, the big builders may have been caught off guard by the swiftness of new housing demand. Few predicting the inventory shortfall, and it is still unclear how long that shortfall will last. Builders are in the business of selling homes, but they also need to be in the business of staying in business and delivering to shareholders. If slower production amid rising demand equals higher prices, then that may just be the new normal.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com

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Home Prices Soar on Short Supply, Investor Demand

Home prices in Atlanta were up 10 percent in December from a year ago, but a year ago they were down 17 percent year-over-year, on the S&P/Case Shiller Index. What changed? Investors. As Atlanta's foreclosure rate soared, investors, no longer finding the big bargains out West, began moving into Atlanta and snatching up distressed properties at a brisk pace.

"Market prices have to go higher to provide incentives for more new houses to be built," said Aaron Edelheit, CEO of Atlanta-based The American Home, a company that invests in distressed properties and turns them into rentals. "I believe we are on the cusp of a massive housing shortage in many parts of the country due to the historic lack of residential investment in the last five years. This summer, I expect the housing market to be 'blue flame' hot."

(Read More: What Tops Home Buyers' Wish List Now)

Prices today are rising fast because supplies of homes for sale are so low. Both new and existing homes are running near four month supplies.

For new homes, builders just aren't able to start fast enough, due to labor and land restraints.

For existing homes, there are fewer distressed properties for sale, a segment that has driven the market into recovery, and organic homeowners are either unwilling to list their homes for fear of selling at the bottom, or unable to list because they are still underwater on their mortgages.

(Read More: Foreclosures Fall Due to New Laws)

"Taking new and existing homes together, the relationship between the months' supply of unsold homes and house prices points to an acceleration in the pace of house prices gains in the year ahead," said Paul Diggle of Capital Economics.

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Housing’s Huge Supply and Demand Imbalance

“Pent-up demand.” That is the rallying cry of the housing bulls, as they forecast the great recovery of 2012.

“Pent-up demand.” That is the rallying cry of the housing bulls, as they forecast the great recovery of 2012. So many potential buyers are doubled up with family, stuck in undesirable rentals or just plain afraid to put their current home on the market, but that’s about to change, say these optimistic prognosticators.

“Inventories [of unsold homes] have been coming down, showing very healthy declines,” Ivy Zelman, CEO of Zelman and Associates told the Wall Street Journal. And Zelman is new to the bull ring, as she is famous for predicting the housing bubble in the first place.

Pent-up demand exists, no question, but it has nowhere to go right now for the vast majority of organic home buyers. When I say organic, I’m excluding investors from the mix, because that demand is high and building up cash like mad. I mean regular lower to upper middle-class Americans still struggling in today’s rough economy.

“There are relatively few borrowers that can qualify for a mortgage given today's tight lending standards,” says Laurie Goodman, Senior Managing Director at Amherst Securities. “Aside from FHA and VA mortgage, you need 20 percent down, and that's very, very difficult for most borrowers.”

Goodman, one of the best number crunchers I’ve come across in this field, claims there is far more distress in the housing market than some of the leading mortgage data providers portray. She counts eight to ten million more foreclosures over the next six years, because she adds borrowers currently in mortgage modifications.

“That includes borrowers who have never missed a payment before, but are deeply underwater and are apt to default because borrowers just like them are defaulting on a regular basis,” Goodman contends.

She notes that household formation has been running very low of late, just 5-800,000 a year. A normal level is 1.1 to 1.2 million units a year.

“Even if we go back to 1.2 million units a year, and even if 50 percent of those are home buyers, which I think is a very, very high number [the rest being renters], that won't be sufficient to clean up the huge overhang of supply we're going to have over the next four to six years,” she calculates.

Why is 50 percent high? She calculates on:

“The homeownership rate for the U.S. as a whole is 66 percent. If you take out the borrowers who haven’t made a mortgage payment in a year it is 62 percent. The Center for Joint Studies at Harvard estimates that out of the 1.2 million units per annum household formation over the next decade, 70 percent will be minorities, who have lower home ownership rates. In this context, 50 percent seems generous.”

Her conclusion, and the one I’ve been promoting for over a year now, is that the only way to re-balance supply and demand is to get investors into the market in force to buy up these properties and meet the huge rental the demand that will continue for several years. As we reported last week, hedge funds are busy working on deals, but government needs to help. Fannie Mae and Freddie Mac are currently sitting on a huge supply of foreclosed properties and facing even more down the pike.

The Federal Housing Finance Agency (Fannie and Freddie’s conservator), along with the U.S. Treasury Department, need to get moving on their so-far inchoate plan to sell these REOs in bulk to investors, and in doing so, make sure said investors are provided with financial incentives to make it worth their while. As Goodman notes, these investors will be buying single family homes, not multi-family apartment buildings (which have identical units), so they need to build out property management organizations to handle repairs, manage tenants and keep the properties rented.

“I fully expect that they will end up implementing something at some point this year,” adds Goodman, “because there is simply no choice.”

Questions?  Comments?  document.write("");document.write("RealtyCheck"+"@"+"cnbc.com");document.write('');And follow me on Twitter @Diana_Olick

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[The Alarmist] Calls For Price Spike Left Out Supply, Demand Part

Last weekend there was a widely talked about article in the Sunday NYT called “Why Your Next Place May Cost More” that covered the recent plunge in building permits.

The experts quoted in the NYT article all seemed to exude an alarmist tone that prices were going to jump next year because no significant new product was being built but they completely disregarded product that has not been sold yet or the limited financing available to consumers to spur demand. In other words, permits dropped because demand is limited. Its not some sort of random event. If there was a shortage in a year as suggested by the experts, then permits would explode starting right now.

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Here’s the theme of the NYT piece.

“But starting in 2012, after most or all the new projects that were stalled or delayed have finally sold out, the supply of new apartments will take a decided dip, and prices for all apartments could start to rise significantly again.”

Here are a few of the quotes in the piece.

“We tend to go through these cycles where, when you finally come out of a recession, there’s a shortage of inventory,” said Gregory J. Heym, the chief economist for Halstead Property and Brown Harris Stevens. “You usually expect the slowdown to come over a couple years, but this was like slamming on the brakes. So to start up again may take awhile.”

Actually its just the opposite. For example, it took 7 years to unwind the inventory in the 1989 housing crash until 1996. Inventory was bloated in 1992 through 1995 – prices were soft and there was very limited new development. The recession ended 5 years earlier in 1991. After the 2001 recession inventory increased for another 2 years and only peaked because of the onset of the biggest global credit bubble in history.

Gary Barnett, the president of Extell Development and one of the few developers who continued building through the downturn, said the lack of inventory was more pronounced now than in previous recessions. “In the early 1990s,” he said, “there was a big overhang of things that had been built in the late ’80s, but when things stopped this time, it just fell off a cliff.”

The number of building permits “didn’t go from 10,000 to 6,000,” he added, “it went from 10,000 to nothing. So we don’t have the overhang and no big inventory to work through. That’s why the market recovered much more quickly than people expected.”

Not exactly. Permits fell below 500 in 1992 (373) and 1994 (428) after the 1990-1991 recession and didn’t return to “normal” levels for 5 more years.

However housing prices didn’t rise for another 8 years after the end of the 1990-91 recession.

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While I agree its a very dramatic drop in permits but permits don’t necessarily correlate with what gets built. I also don’t see us in this predicament forever. Actually the permit filing drop is the much needed visual for the credit crunch. Its not a sign of shortage, its a sign of surplus.

Why file an application for a building permit if commercial lenders aren’t financing new condo development in any meaningful numbers? Why? Because lenders see shadow inventory (they are holding it); they see high unemployment (even though NYC is improving); they see individual buyers unable to get financing in new development in large numbers to create the demand needed to absorb yet new condo construction. As I said before – if it were so obvious that prices would spike in 12 months and there would be a chronic housing shortage of new development, don’t you think permits would explode right now?

Here’s a contrarian piece that was provided by the NY Observer my Matt Chaban: We’re Running Out of Apartments! (Well, Maybe Not)

If commercial banks aren’t willing to lend now, and it takes at least 2.5 years to get a project online, even if current unemployment, shadow inventory and the ongoing credit crunch were ignored, then it would be 2014 before we see meaningful new construction volume.

Or am I using the wrong equation? Help me understand, please.

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Trulia PSA: Facebook Connect Integration Temporarily Halted Due to Overwhelming Demand

The good news: Today, we launched our Facebook integration.

The not so good news: Due to an overwhelming amount of users trying to sign in with Facebook, some of our servers “melted” and had to pull the plug for now.

Our engineers are working hard to get everything back on track. Thanks to everyone for your patience

Popularity: 1% [?]

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