New Homes Sales, Market Slowdowns, and Investor Irrationality: Looks like its Time to Face a Correction
Tanking new homes sells should have real estate flippers and small investors worried. Today KB Homes reported a loss of $149 Million. Additionally, CEO Jeffrey Mezger remarked in the Wall Street Journal, “We can’t predict when market conditions will improve,” essentially ensuring investors conditions will not improve next quarter. Homebuilders have been feeling the pinch for over a year now, but it is finally getting serious.
Surface level analysis of the problems with homebuilders points to signs of a tanking real estate market and excess supply of new homes in some markets. Given the choice between a new home and a “used” home, most consumers will choose the new one. Additionally, homebuilders have the power to offer incentives like upgrades, favorable financing, and lower prices to move their inventory. Investors in hot markets that are cooling will find it hard to compete with institutions like KB Homes, Toll Brothers, Lennar, etc. This will make it tough to move, even the nicest flip.
Furthermore, this situation definitely signals a slowing in the real estate market. Despite what many have been saying on the Realtor/NAR front, investors and agents alike should be preparing for a real estate slow down. KB Homes sites access to capital as one of the mitigating factors affecting home buyers among other factors. This access issue will affect buyers, as well as more aggressive investors, who opted for no money down loans.
The deeper analysis suggests all of the negative news will eventually affect the market sentiment on real estate. Over the past six months the real estate market has seen the collapse of the subprime real estate market, issues with commercial and investment banks, mortgage rates rise, and issues with homebuilders. At some point investor and consumer confidence in real estate has to be affected by all of this news. While this news may not be the tipping point, investors should be asking how much more can the market take?
Investing is part fundamental and part irrational. At times the market seems to go 90/10 one way, and at times those proportions flip. As more negative real estate news emerges and as fundamentals weaken, the market has a tendency to overreact. These overreactions create great investment opportunities; however, it’s never fun to be on the downside of irrationality.
In part this is why the National Association of Realtors constantly insists on being up beat about the real estate market. It’s in everyone’s best interest to think happy thoughts about real estate despite the change in fundamentals. As an investor I would love to keep the market up as long as I can, but at some point all this negative news will turn investors and consumer sentiment negative. When it does, investors need to be prepared to react quickly. This could mean lowering rents, becoming more opportunistic, raising investment standards, or simply taking some time out of the market. Planning for a softer market now could save investors a lot of future headache.Related posts: