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VOL. 123 | NO. 167 | Tuesday, August 26, 2008

Home Inventory Reduction Creeps Along

By Eric Smith

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Homebuilders continue to shed their inventory of new homes – a crucial step toward housing recovery – although the rate at which they are reducing stock is slow while overall supply remains abundant.

Unsold inventory dropped 14 percent in Shelby County during the second quarter (April through June) with 3,594 homes available June 30, 2008, compared to 4,187 homes available June 30, 2007, according to the most recent New Housing Analysis by Chandler Reports, www.chandlerreports.com.

Despite fewer homes on the market, the slow rate of sales has yielded a higher supply. Based on sales, the supply as of June 30, was 8.1 quarters or 21.3 months. Last year, the supply was 5.7 quarters or 14.3 months. (Supply expressed this way is how long it would take at the current sales pace to bring total inventory to zero.)

At the same time, starts are down countywide. That reveals a concerted effort by builders to whittle supply in hopes of continued market correction, noted Doug Collins, president of the Memphis Area Home Builders Association (MAHBA) and owner of the real estate company Prudential Collins-Maury Inc. and the building company, Sovereign Homes LLC.

“We would all like to be reducing the inventory quicker, but we’ve been reducing it pretty much for the last 12 months,” he said. “There were probably a couple of months when permits exceeded sales. But overall, for the last 12 months, we’ve been reducing inventory.

“We’re slowly headed toward an equilibrium.”

Rate of closings key

For equilibrium to be realized, the county will need plenty more periods like the second quarter, when sales far outpaced starts. Shelby County saw 444 new home closings in the quarter and just 241 new home permits. That marks a 39 percent decline from the 732 new home closings and a 73 percent decline from the 876 new home starts in Q2 2007.

Builders seem to understand the need to focus on closings rather than construction.

“We had such an abundance of inventory in response to the market in 2006 and the first part of 2007, when we had such an abrupt decline in demand that left us with too much inventory,” Collins said. “The good news – not that there’s a lot of good news in the economy today – is most of that excessive inventory has been absorbed into the marketplace. There’s still builders with specs, so the market hasn’t absorbed all the inventory that’s out there, but we’re in a lot better shape today than we were at this time last year.”

Most submarkets saw decreases in closings and starts compared with last year. The busiest area in Shelby County was the Arlington/Lakeland ZIP code of 38002. It saw 99 closings in Q2, down from 147 a year ago; and it saw 65 starts in Q2, down from 129 a year ago. The new home inventory in Arlington/Lakeland as of June 30 was 573, representing a supply of 5.1 quarters or 14.7 months.

That led the way among the most prolific ZIP codes. Others include the Cordova South ZIP of 38018. It saw 55 closings, down from 56; and it saw 47 starts, up from 45. Its inventory is 291 homes, for a supply of 5.3 quarters or 16.3 months.

The Collierville ZIP of 38017 notched 39 closings, down from 76 a year ago, and 39 starts, down from 54 a year ago. Its inventory is 308 homes, which equals a supply of 7.9 quarters or 19.6 months.

Sale and trade combos

Jimmy Moore of J. Moore and Associates said many builders, including himself, indeed are focusing their efforts on sales. Most have stopped building speculative homes and are only starting presales.

Another hot trend is trade, whereby builders agree to take a buyer’s old home plus cash in exchange for a new home. That alleviates the homeowners’ fears about a shaky housing market and helps builders’ bottom lines.

Until that elusive equilibrium is reached, it may be the modus operandi for builders for months to come. Certainly, they will continue exerting their efforts on sales over starts.

“I think we’re in more of a ‘wait-and-see’ mode,” Moore said. “Even the builders who have reduced inventory are not eager to start any new houses right now. We’ve always slowed down right before a presidential election; we’ve just never been hit with so many different problems for housing like we have right now.”

PROPERTY SALES 116 288 17,672
MORTGAGES 143 337 20,372
BUILDING PERMITS 139 488 36,434
BANKRUPTCIES 43 158 11,322