What Home Builders Need Is Confidence and Optimal Building Sites

June 19, 2012 / Russell Legato, Residential Property Analyst

The companies that build new homes need two things to prosper, confidence in their ability to do so and available land on which to construct the new houses. There are many indications that they will get the first because encouraging signs are increasing to a level that has not been seen since 2007.

What Home Builders Need Is Confidence and Optimal Building Sites

A prominent national association of such companies reports the market index up another point in May. That places it at 29 for the month, indicating a consistent improvement. Factors influencing this improvement are low listing and selling prices and unusually low interest rates on mortgages. A 30 year fixed rate mortgage can be had at an interest rate of only 3.80 percent for excellent credit risk applicants.

The market index has three major elements that affect the index, which are current sales conditions, traffic and builder’s expectations. Current sales conditions increased in June. Traffic and expectations of the builders remained level.

A group of 337 builders were included in this index evaluation. In the Midwest, it increased by five points. In the West, there was a four point increase. The Northeast and South did not fare as well. It dropped three points in the Northeast and two in the South.

As Murphy’s Law would have it, there is now a shortage of favorable building sites for homes. Hundreds of lots were made ready for construction during the boom in 2007. Home builders snatched them up for constructing subdivisions.

A surplus of the prepared lots is still waiting for houses to be built on them. But, they are still unsold to people wishing to have a new home built. The problem is location, location and location. No one wants to build in many of the areas where the lots sit waiting.

Conversely, builders are unable to find lots available where people do want to live. These include suburbs with good schools and proximity to the workplace. Functioning in a capitalistic market, we know what’s going to happen next. Bingo! Developers and builders and eventually homeowners are going to pay a higher price for the premium, most desirable locations. Those seeking a new home will be likely to at least consider buying an existing home to escape the higher prices. That will contribute to a new market index of sellers of existing homes scoring and builders of custom built dream homes not scoring.

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