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VOL. 122 | NO. 234 | Monday, December 10, 2007

Balancing The Scales

Lower permit filings could signal real estate correction

By Eric Smith

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MARKET CORRECTION?: Shelby County home sales exceeded building permits filed during the third quarter, a much-needed reversal from the excessive building amid sagging residential home sales. That statistic helps shrink inventory and allows the housing market to recover. -- Photo By Eric Smith

For just the fourth time in almost four years, Shelby County home sales exceeded building permits in a single quarter, chipping away at inventory and giving the local real estate profession some much-needed good news during the holiday season.

In the third quarter, 622 homes sold while builders filed 500 permits, according to data from real estate information company Chandler Reports, www.chandlerreports.com.

The positive difference of 122 homes sold versus homes started signals a reduction in inventory and shows initial signs of market correction.

Doug Collins, the 2008 president of the Memphis Area Home Builders Association and owner of the realty company Prudential Collins-Maury Inc. and the building company Sovereign Homes LLC, understands the importance.

"What we're seeing is builders responding to the marketplace, i.e., pulling less permits," Collins said. "Then, the sales eat away at that inventory and let the market absorb that inventory. Builders are busy cleaning up their balance sheets in a market like this."

Market specifics

The last time sales outweighed starts was in Q3 2006 - and before then it happened most recently in Q3 2005 and Q2 2004 - making this statistic somewhat of an anomaly, a once-a-year occurrence that comes when the market needed it the most.

The data comes from Chandler Reports' Builder Book, New Housing Analysis and Housing Inventory reports for Q3. Those reports include complete home sales and inventory data for Shelby County.

Housing inventory, at its most basic, is the number of homes on the market. The housing inventory for Q3 was 5,146 homes.

Realtors typically break down that number into months or years. For example, if no other homes came on the market, how long would it take to sell every home with a "for sale" sign in front of it?

Also, that number can be drilled down to a specific neighborhood. If a house is for sale in a neighborhood where 12 homes a year are selling and there are 24 homes on the market, that's a two-year supply in that neighborhood.

Neil Hubbard, outgoing president of the Memphis Area Association of Realtors and a broker at Prudential Collins-Maury Inc., said the county's inventory still needs some contraction.

"Right now our inventory is a little on the high side; I think we're around 10 months, so somewhere in the six- to eight-month range is what we consider a balanced market - and we're looking for that balance in the market," Hubbard said. "We're a little bit on the buyers' side, but it's not at a point where it's unmanageable."

Could always be worse

Unmanageable, Hubbard added, would be a place such as Las Vegas. At a recent convention there, Hubbard and other Realtors were told the housing inventory sat at an astronomical 27-month supply.

So, things could be worse. But as Shelby County's inventory creeps back toward normalcy, it still fights plenty of uphill battles such as the subprime fallout and national credit crunch.

The sagging home sales in 2007 are well-documented, and the news didn't get much better in November. In Shelby County, home sales fell 26.9 percent from the same month in 2006. There were 1,377 sales registered in November, well short of the 1,884 sales in November 2006.

November sales were off 21.3 percent from the October total of 1,750, according to Chandler Reports.

Moreover, the average home sales price of $137,341 was down 11.1 percent from the average sales price of $152,646 for the same month last year, although it rose slightly, 1.1 percent, from the average sales price of $135,807 in October 2007.

And the 19,676 year-to-date sales through Nov. 30 are off 16.7 percent from the record pace set during the same period in 2006.

But this year still could be the third-best year on record. It's in a dead heat with the 2004 year-to-date total of 19,667 homes sold.

And with housing starts being scaled back, perhaps it's only a matter of time before that happens.

One shining example for Q3's inventory reduction was the 38002 ZIP code of Arlington/Lakeland, which led Shelby County with 131 home closings. But that was down from 229 in Q3 2006. At the same time, starts were down in that submarket from 235 to 99, proving that builders have scaled back.

Survival of the fittest

For Collins, it's not a matter of if but a matter of when builders ramp up their housing starts, likely in mid-2008.

"Builders are going to react to the market, so what will invariably happen is that we will take inventory levels too low in response to what's been happening in 2007, the news (media) will say it's time to buy again, the market will run out to buy and then we've got that production time of the house," he said.

It's all part of the real estate cycle, Collins added. And at the very least, builders who weather this storm by streamlining their operation will be ready to get new homes on the ground as soon as buyers are ready for them.

"It doesn't matter which industry we're talking about; they all go through corrections," Collins said. "Obviously the strong survive and you come out the other side leaner, meaner and tougher."

Chandler Reports' Builder Book, New Housing Analysis and Housing Inventory reports for Q3 - with complete home sales and inventory data for Shelby County - are available for purchase by calling 458-6419.

PROPERTY SALES 74 74 17,458
MORTGAGES 93 93 20,128
BUILDING PERMITS 126 126 36,072
BANKRUPTCIES 63 63 11,227