Is It Time to Buy New?
Original Post Date: April 27, 2012

By: June Fletcher

Is now a good time to buy a newly constructed home?

Most economic signs point to yes, according to three economists at the National Association of Home Builders’ semi-annual construction forecast webinar on April 25.

I’m inclined to agree, but not just because the usual closely watched indicators like employment, GDP, household employment and income growth are generally looking healthier these days. I’m swayed by the fact that builder confidence has risen by more than a third year over year (even though it slipped a bit in April from the month before). While builders tend to be an optimistic lot—otherwise, they wouldn’t be in a business that requires them to make large capital outlays for land, labor and materials months or even years before a potential payoff—this uptick is significant.

Builders keep a close eye on both the national economy and local market conditions. While they sometimes get caught up in irrational exuberance (or simply greed) and overbuild, last year they were exceptionally cautious, building only about 433,000 single-family houses and about 177,000 multifamily units. While that’s not as bad as 2009, when home building hit a trough, it’s still far below the average 1.3 million total units constructed annually since 1990, according to Robert Denk, NAHB’s assistant vice president for forecasting and analysis.

NAHB chief economist David Crowe expects the pace will pick up quickly this year. He predicts single-family starts will jump 17% and multifamily 22%. The jump will be partly in response to a gap of at least a million units between the current level of production and looming demand, particularly from Millennials who are just entering the job market and are yearning for their own place. “You can’t live in mom’s basement forever,” he said.

And this gap will grow greater as the number of distressed properties is absorbed. Mr. Crowe noted that while six states still have more than a year’s worth of distressed properties to sell, 24 have less than a six month’s supply; the national average is 8.4 months.

If you’re a seller, more new homes and fewer foreclosures will be a mixed blessing. On the one hand, your home’s price won’t be dragged down by cut-rate foreclosures; on the other, you’ll have to compete with hungry builders offering the latest plans and amenities.

If you’re a buyer, the outlook is more promising. Since 2006, home prices have fallen and incomes have risen to the point where the ratio is back to 3.2, the historic norm. That’s not expected to change, at least in the near term. And Chris Varvares, senior managing director of Macroeconomic Advisers, predicts that housing prices will stay flat this year then grow slightly, by 1.5%, in 2013.

But if you’re looking to buy a new home, don’t get too complacent or wait too long. Mr. Varvares ventured that his price forecast might actually prove too conservative, should sidelined consumers suddenly decide that the time is finally right to buy. “I’m betting on a surprise to the upside,” he said. Barring some major economic shock or setback, so am I.