Land Problem Weighs on New Home Sales

There are signs that the spring selling season seems to have cooled off for new homes, as the Census reported Wednesday
that as of June, builders are on pace to sell just 350,000 newly built homes in 2012, an 8.4% decline from May. New home sales are coming off a fairly deep bottom -- 2011 was
the worst year on record for builders, with just 306,000 homes sold -- and compared to the sales pace of 304,000 in June 2011, last month's numbers are quite strong.

But in general, the new-home construction industry has
struggled to gain momentum, despite a broad rally in home-builder stocks over the last nine months. This is particularly frustrating for builders, who are watching from the sidelines as other parts of the housing market -- specifically, existing home sales and home prices -- seem to have bottomed out, and appeared in many markets poised to turn a corner.

A combination of factors is holding them back: mortgage
credit remains tight, and many consumers are still spooked by instability in the global economy, particularly with Europe's debt woes. But one factor in particular seems to be rearing its ugly head: the lack of profitable land.

The last four to five years have been slow for land developers,
the companies that pave roads, lay pipe for sewer lines and handle the paperwork to lay out subdivisions.
That's because the housing bust seemed to prove that most parts of the suburbs - where most of the large tracts of land that builders like to build on are available - are overbuilt. That realization, along with the grim reality of the 2008 credit crunch, has kept banks from lending land developers the capital they need to invest in land and prepare it for builders.

For builders, that means lower margins, fewer new communities and fewer sales. Housing starts, though
trending up, are still 60% below where they were in 2002, before the bubble got inflated.

"We've heard the builders moaning about the lack of land,
lack of land.
Now we are starting to see that," said John Burns, a prominent home-builder consultant. "The master planners are holding out for better prices, the farmers are holding out. The land sellers are all waiting for the market to come back. The result is the builders can't find land at the prices they want."

According to a recent study by Mr. Burn's firm, only three of
the 13 publicly traded builders have seen an annual increase in the number of new communities with homes for sale. And some of the largest builders have seen double-digit percentage declines in the number of new communities.

Wednesday's numbers, as with all government data, come of course, with a grain of salt. The decline in new home sales in June from May looks worse than it might otherwise look
because May's figure was dramatically revised upward. In other words, for May, the Census Bureau initially projected that builders were on pace to sell 369,000 homes. A month later, after revising the figures, the bureau, a division of the U.S. Commerce Department, said that the May sales pace was actually 382,000. June's 350,000 figure has not yet been revised, and is still a projection, and the changes come with a high margin of error.

"Monthly sales numbers are volatile," wrote Teunis Brosens,
an economist with ING Bank NV, in a research note. "Even including this month's setback, the trend remains positive.
Sales are improving slowly but steadily, led by improving home-builder confidence. We remain of the view that home-building activity has bottomed and should continue to improve in the coming months."

June's figures also showed a significant difference in new
home sales in different parts of the U.S. The Northeast, for example, got clobbered, with sales falling to just 16,000 homes, the same level as a year ago, and a decline of 60% compared with May. Sales fell from 198,000 in the South during May to 181,000 in June. The Midwest and the West regions of the country saw modest gains.

Most public builder stocks were in the red as of mid-morning,
with the Dow Jones U.S. Home Construction Index down 1.5% on the news.

By Robbie Whelan

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