Slow New Construction Sales Result in an Oversupply of Homes

by Karen Goodman on January 29, 2008

Anyone that isn’t living under a rock knows that real estate sales are down.

One of the problems that we’ve had in the real estate market over the last couple of years is a huge oversupply of new construction homes. Builders were having phenomenal sales just a few years ago, and they kept buying up land to feed the demand. When their sales started dropping as the market slowed, they ended up with too much inventory and too much land.

The chart below shows the number of permits pulled through the Home Builder’s Association for single family homes by many of the St. Louis area’s larger builders over the last few years. Permits don’t always result in an actual home being built that same year, but do show the trend towards fewer home sales in the last few years.

Builder	2007	2006	2005	2004
McBride	457	511	585	614
Jones	364	334	530	386
Whittaker	83	216	243	234
Vantage	51	177	187	260
Taylor Morley	37	139	162	279
TR Hughes	89	122	223	294
Mayer	98	105	255	298
Bower & Bailey	114	94	68	59
Fischer & Frichtel	96	87	83	84
Burkemper	78	79	137	94

In order to fuel sales, many of the builder’s started offering hefty incentives to entice buyers. McBride offered $100,000 off many of their homes throughout much of 2007. Other builders offered to pay 6 months of mortgage payments so buyers could feel comfortable closing while they were still trying to sell their old homes.

The result of builders offering huge discount on new homes is that it devalues the nearby resale homes. I would be frustrated if I owned a 4 year old home with a similar model down the street when the builder decided to drop prices by $100,000. If that homeowner needed to sell, they just can’t compete against the new homes selling for so much less. AND, buyers seeing builders offering huge discounts either abandon the resale homes, or expect the same deals when they make an offer on a resale home.

The good news is that since the number of permits being pulled by builders for new homes is down, there should be less of an oversupply of new construction homes.

Hopefully that means that builders will stop slashing prices…which should help stabilize the market.