Homebuilders Buying Land Again – House Price Patterns Support the New Activity

Friday, April 23, 2010

In The Wall Street Journal, there was a surprise article describing homebuilders beginning to compete for property: “Land Prices Jump as Home Builders Move In” (By Dawn Wotapka, April 21, page A-5).

We have been seeing improvements in many areas of the housing markets (I have covered these indicators in Housing and Homebuilding articles).  Now, we get this optimistic sign: Homebuilders are confident enough to start building up their land inventory again.

“That marks a big shift from the downturn, when builders halted development and liquidated land for pennies on the dollar. Now the companies are spending millions of dollars to boost their land supply, optimistic that sales will pick up once the employment picture improves.”

A key concern for these builders has been the uncertain housing pricing. By restarting their property acquisition programs, builders are signaling that the pricing picture is solid enough to ensure they can make a profit.

Let’s take a look at what the pricing data now show. As discussed before, the Standard & Poor’s Case-Shiller price indexes provide a good view of price movement (better than the typical median home price indexes often quoted). Besides the widely reported US composite results, Case-Shiller also provides data on many US metropolitan areas. Here is the pricing environment through January, the latest period reported.

First, the pattern of price movements over the past 10 years (Graph #1 shows composite price indexes; Graph #2 shows all 20 metropolitan areas)

The prices are adjusted for inflation, so we get a true view of real price trends. While the 20 lines give a busy picture, we get two readings from this graph:

  1. The driving force of the US bubble appears to have dissipated. Notice how there has been about a full washout in most markets.
  2. Local market dynamics appear to be operating again. There has now been over one-year of steady to slightly rising prices, at different rates, in the local markets.

Second, how the past 10 years compares to the previous 10 years – and how the entire 20-year period looks

Point-to-point percentage changes can be tricky because they can miss important interim moves. But we can make the following observations:

  1. The different local price moves are clear. In addition, note how many areas had price changes in opposite directions from one 10-year period to the next.
  2. The inflation-adjusted, annualized 20-year price changes are not very large, offering further evidence that most (all?) of the bubble pricing is gone.
  3. The areas where the 20-year price increases are largest (e.g., Portland, Oregon) have some real dynamics at work that have caused those changes. They are not the result of leftover bubble pricing mentality.

So… The Case-Shiller house pricing data provide support for the notion that the housing market has established a foundation. This is just the environment homebuilders need to operate at a profit, and their land-buying activities indicate they believe it.

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