Meritage: “Strong Demand For Entry Level Homes” Drives New Orders Increase

/Meritage: “Strong Demand For Entry Level Homes” Drives New Orders Increase

Meritage: “Strong Demand For Entry Level Homes” Drives New Orders Increase

Meritage Homes reported first quarter sales yesterday, and the publicly traded home builder admitted what many, including myself, have been saying. New home prices have eclipsed the threshold of what most Americans can afford (or are willing) to pay. Meritage saw a 2 percent increase in closed sales for the quarter on average new home prices that were up by just 1 percent. New orders grew 10 percent compared to the same quarter last year on average sales prices that were 2 percent lower.

This is the dilemma now facing most new home builders with the Fed reversing course on its massive asset purchase experiment known as “quantitative easing”. Home prices across the U.S. have been on a tear for years, largely because of the liquidity injected into the markets and the suppression of interest rates. Yes, there was some organic growth along the way, but that’s only part of the picture.

The average sales price backlog for Meritage Homes was also down 2 percent in the first quarter to $423,000, down from $430,000 during the first quarter of last year. Another interesting tidbit in the press release is the confirmation that New home builders are already benefiting from the corporate tax cut enacted last year.

“First quarter effective tax rate was approximately 10% in 2018, compared to 36% in 2017, reflecting lower corporate income tax rates enacted for 2018”

As we head into the summer selling season new home builders will likely continue to effuse endless amounts of optimism and overplay their hand when it comes to pricing pressure. That’s the nature of the new home sales business. When have you ever seen a new home sales rep who wasn’t optimistic?

New home builders don’t have the luxury of existing homeowners. They have to move product to stay in business. If you are in the market for a new home, this is something worth remembering. Homes are priced at the margin, and affordability is now the order of the day. This the scenario playing out in the DFW housing market with both new homes sales and resale activity.

New home builders still have the potential to grow sales in 2018, but pricing will be critical. New home builders are now faced with the prospect of higher average prices or higher sales volume. It’s unlikely they can have both unless their product line falls below local market averages. There is still a shortage of new entry level homes for sale. As a reminder, Census estimates show that the average price of a new home in the United States stood at $369,900 in March. It reached a high of $402,900 at the end of 2017.

The local media are finally catching on to the fact that this may indeed be as good as it gets for the DFW housing market in the near term. Those double-digit price gains seen in past years are now running into the headwind of rising rates and monetary debacle from the Fed that is coming unwound. I will address this in more detail in a coming post.

About the Author:

Aaron Layman is the broker/owner of Aaron Layman Properties LLC, based in Dallas Texas.

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