Recent housing data shows that the few home buyers that are out there are trading down to houses that cost under $200,000, a trend that may mean an even longer downturn for the so-called McMansions costing above $750,000 that the middle class aspired to own by any means during the housing bubble.
February new home sales plunged 17 percent to a 250,000 unit annual rate, the lowest on record, according to data released Wednesday. Every price category of home showed declines except one: $150,000 to $199,999. According to Census Bureau data, 6,000 homes in that category sold last month, double the amount sold in January.
“What is very clear from both this week’s resale and new homes sales data is that ‘trading down’ has become a key and rather deflationary feature of the residential real estate market,” said David Rosenberg, chief economist and strategist for Gluskin Sheff, who flagged the outlier in his client note Thursday.
Digging further into the new homes data, one can see that 48 percent of all sales were for new homes costing under $200,000 last month. In July 2007, at about the very top of the housing market, this group accounted for just 37 percent of sales. Only 1 percent of sales last month were for homes that sold for more than $750,000.
“With higher down payments required, prices are subject to a ‘de-multiplier’ effect,” said Stephen Weiss of Short Hills Capital. “Ten percent down on a $500,000 home required $50,000, but now 30 percent down on a $250,000 home requires $75,000.”
The average price for a home is back to May 2004 levels, after reaching a peak in 2007, according to the latest data from the Federal Housing Finance Agency.
If the ‘McMansion’ market is in for a longer decline than the rest of the market, the builder that could take the biggest hit is Toll Brothers, which bills itself as “America’s Luxury Home Builder.” The stock was on the cusp of breaking a key price level at $20 Thursday, according to Steve Cortes of Veracruz LLC. The shares are down 4 percent over the last three days amid the bearish new home sales and existing home sales data released this week.
“New home sales only accounted for a mere six percent share of total single family sales, versus around 20 percent in the cycle peak in 2005,” wrote Rosenberg. “No wonder the S&P 500 homebuilding stocks can’t seem to recover! Dead money.”