Highest Unsold Home Supply Since '82 Seen Needing 50% Reduction

By Brian Louis

Aug. 7 (Bloomberg) -- Hovnanian Enterprises Inc., New Jersey's largest homebuilder, cut the number of unsold houses by more than 50 percent over the past two years after lowering prices and still had 1,500 on its books as of April.

``We pretty much start a home these days when we have a contract from a buyer wanting to purchase one,'' Chief Financial Officer Larry Sorsby said in an interview from his office in Red Bank, New Jersey. The company's sales price in the northeast for homes under contract dropped 7.4 percent in April from a year earlier. ``We don't build them and hope they come,'' he said.

There are 3.9 million unsold existing single-family homes, the most since at least 1982, when the Chicago-based National Association of Realtors started compiling the data. The inventory of existing houses and condominiums must fall by almost 50 percent for prices to stabilize, said William Wheaton, an economics professor at the Massachusetts Institute of Technology in Cambridge. There is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005, according to the National Association of Realtors data.

It now takes 10 weeks to 12 weeks on average to sell a house, compared with four weeks or five weeks at the height of the five-year housing boom, said Walter Molony, a spokesman for the Realtors group.

`Fifth Inning'

Homebuilders are facing record foreclosures, waning consumer confidence and stricter mortgage standards. Almost one of every 10 U.S. mortgages was in trouble during the first quarter, the highest in records dating to 1979, according to the Washington-based Mortgage Bankers Association. Delinquencies, or home loans with payments 30 days or more overdue, rose to 6.35 percent of outstanding mortgages and the share of homes in foreclosure rose to 2.47 percent.

``It's going to take several years to get rid of all this inventory,'' Eli Broad, the philanthropist who co-founded Los Angeles-based KB Home, said in an Aug. 1 interview. Homebuilders have no choice but to sell at ``discounted prices,'' he said.

Broad, who got his start by selling homes to World War II veterans, said the U.S. housing recession is in the ``fifth inning, not the eighth inning or not the second inning.''

Builders are contending with the fallout of a housing boom fueled by a ``grand social experiment'' where the barriers to buying a house were lowered and mortgage products for people with bad credit were widely available, said Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University in College Station.

Loan Standards

Mortgage originations for purchase peaked during 2005 at $1.5 trillion, 67 percent higher than 2000, the Mortgage Bankers said.

Housing unraveled as consumers started missing mortgage payments and put their homes on the market or lost them to foreclosure, increasing the supply of properties for sale and spurring losses for financial firms. Homebuilders were then stuck with inventory they built on expectations demand would continue.

Now stricter lending standards are constraining consumers' ability to obtain mortgages and falling home prices are cutting purchases. Sixty percent of lenders said they made it more difficult for the most qualified prospective buyers to secure financing in the first quarter, a Federal Reserve survey shows.

The 18 percent drop in U.S. prices since July 2006 is creating a silver lining for some buyers and increasing sales in markets such as California.

Eager Buyers

Augustine Noronha, 38, and his wife Barbara started looking to buy about two years ago in the Cleveland area, eager to become first-time homeowners. New homes they looked at were too expensive.

Last month, they purchased a three-bedroom, 2,209-square- foot house from DB Homes, a closely held builder in Mayfield Heights, at almost 25 percent off the original list of $370,000.

``Previously it was out of my price range,'' said Noronha, who bought for $285,000. ``This fell right into place.''

The 11-month supply of existing single-family homes on the market is the highest since 1985 and there's a 10-month supply for new homes, data from the Realtors and the U.S. Commerce Department show.

Six months' supply of homes at the current sales pace would reflect a balanced market for existing homes, according to the Realtors.

New homes ``should be around four or five months at the most,'' Dotzour said.

Excess Supply

Reducing inventory will take longer because foreclosures alone may add 2.5 million homes to the market this year, according to mortgage-default data compiled by RealtyTrac Inc. in Irvine, California. New homes also are being built. The annual pace of housing starts was 1.066 million in June, data compiled by the Commerce Department show.

That total, down 53 percent from the peak in 2006, may decline as much as 34 percent more before bottoming, Dotzour said. Housing starts may fall to as low as 700,000 before reaching their nadir, Dotzour said.

``There's a lot of places in America that don't need any homes being built right now,'' Dotzour said. ``If we have this final capitulation in the homebuilders next summer, that will be the beginning of the absorption process needed to soak up the excess supply, and that could be several years.''

Market Glut

The lowest that housing starts fell since the Commerce Department began collecting the data in 1959 was in January 1991, when total starts declined to an annual pace of 798,000. To reach that point again, starts would have to drop another 25 percent.

The lowest that new-home sales got was in September 1981 -- an annual rate of 338,000. That's 36 percent less than the June pace of 530,000.

Home construction companies are still building as new orders come in, but more than 25 percent of those homes are coming back on the market when customers cancel. The average cancellation rate in the spring of 2008 was 29 percent, according to a report from New York-based Moody's Investors Service.

The glut of new and existing houses and the dearth of demand have forced U.S. homebuilders to file for bankruptcy protection, including WCI Communities Inc., the Florida builder whose chairman is Carl Icahn.

Prices Sink

The average price for a Centex Corp. home, the fourth- largest builder, fell 10 percent to $262,044 in the three months ended June 30. The average price for a Lennar Corp. house, the second-largest builder, fell 8 percent to $274,000 in the quarter ended May 31.

Hovnanian and competitors are selling or writing down land and clearing inventory. Over the past year, publicly traded homebuilders reduced unsold inventory by 39 percent to 23,400 from 38,200, Hovnanian's Sorsby said. The average price of a house in the northeast region in Hovnanian's backlog, or homes under contract and not yet sold, was $479,908 at the end of April.

Hovnanian, a home seller in 19 states, reduced its unsold houses by 46 percent at the end of April from a year earlier and the company has put expansion plans on hold, Sorsby said.

``We're not buying any new land,'' Sorsby said. ``We're not starting any new communities.''

No `Imminent Bottom'

A Standard & Poor's measure of U.S. homebuilders fell 37 percent in the past year. Home construction shares sometimes rise six months to nine months before business conditions improve, said Ken Leon, an analyst at Standard & Poor's in New York.

``They will bottom well before the fundamentals bottom, whenever that is,'' said Eric Landry, an analyst at Morningstar Inc. in Chicago. ``The evidence on the surface does not appear to be pointing to an imminent bottom.''

The housing bill signed by President Bush last week will help boost demand, Richard Dugas, the chief executive officer of Pulte Homes Inc., said in an interview. The legislation includes a $7,500 tax credit for first-time buyers.

``This is the first bit of good news we've had, in, candidly, two or three years for housing,'' Dugas said. Pulte, based in Bloomfield Hills, Michigan, is the third-largest U.S. homebuilder by revenue.

Dugas said housing legislation won't cure all the market's woes. Broad, the former homebuilding executive, agreed.

``It's of some help,'' Broad said. ``Is it a major help? No.''

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.