Significant Drop in Home Building Needed

COLLEGE STATION, Tex. – Texas' new-home market could face a long period of decline unless home building drops significantly, says Dr. Mark Dotzour with the Real Estate Center at Texas A&M University.

"If home building doesn't drop 25 percent from where it is now, the Texas home market could slow down for a longer period than we would like," said Dotzour, the Center's chief economist.

Dotzour's remarks were in response to recent data from the U.S. Commerce Department, which showed that, nationally, new home sales in August dropped to their lowest rate in seven years.

"I think the national economy is on the verge of a tipping point," Dotzour said. "The odds of a recession are increasing to about 50 percent, which is way up from three months ago. The Fed may have to cut rates even further, but I'm not sure that cheap money will help much right now. In fact, the ten-year treasury rate, which is the base for 30-year mortgages, has gone up ¼ percent since the Fed cut the Fed funds rate by ½ percent."

According to Commerce Department data, sales of new homes in August were at a seasonally adjusted annual rate of 795,000, 8.3 percent below July's revised rate of 867,000 and 21.2 percent below the August 2006 estimate of just over one million.

The inventory of unsold homes fell by 1.5 percent to 529,000, representing an 8.2-month supply at the August sales pace. Texas' inventory in August was at 5.8 months, a 12 percent increase over a year ago.

"The inventory of unsold homes is rising all over the state," Dotzour said. “For example, in San Antonio, the MLS reported 12,857 homes for sale in August, up 45 percent from a year ago.”

Nationally, the median sales price on new homes in August was $225,700, a 7.5 percent drop from last year and the largest year-over-year decline in 37 years.

Dotzour said he is hearing reports of Texas builders substantially lowering prices and offering massive concessions on new homes to move inventory.

"One builder in Dallas had more than 150 homes for sale, so the company had a huge, three-day sales blitz. They dropped the prices of spec homes substantially — up to $150,000 on some homes," he said.  “This makes it very difficult for existing homeowners in the area to move if they need to.”

“Clearly the recent chaos in the mortgage markets has closed the door for many entry-level new home buyers,” said Dotzour. “Without the aid of subprime loans and other loans that didn’t require income verification, the pool of available buyers for new homes has been substantially diminished. The buyers won’t come back soon, if ever.”

Builders have done a good job of scaling back production to avoid a huge buildup in inventories, said Dotzour. However, it appears even more reduction is needed to keep the inventories at reasonable levels. Such reductions will allow Texas to avoid price declines like those in other areas of the United States.

The Real Estate Center has been providing solutions through research for 35 years. Funded primarily by Texas real estate licensee fees, the Center was created by the state legislature to meet the needs of many audiences, including the real estate industry, instructors, researchers and the general public.

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