Dennis Norman Musings

By: Dennis Norman

This morning the U.S. Department of Commerce released a report showing the sale of New Homes in January was down 10.2% from December and down over 48% from a year ago.

Prices on new homes continue to drop as well.  The median price for January was $201,100, down 2.6% from Decembers median price of $206,500 and down over 13% from January 2008′s median price of $232,400.  Going back another year shows the median price has dropped over 20% from January 2007′s median price of $254,400. 

With 342,000 new homes for sale as of the end of January, 2009 the market is still rather flooded with inventory.  This inventory represents a supply of over 13 months based upon the current sales rate. 

Prices have fallen significantly, inventory is shrinking but sales are slowing and banks are putting pressure on builders and developers.  Is this the time for investors to consider jumping in?  That’s a tough question; certainly in many markets there are some opportunities to buy new homes at prices significantly lower than comparable homes sold for in the past, or even less than the cost to build the home….but in this market, how cheap is cheap enough to speculate on? 

I personally think it is foolish to think you are going to resell the home in this market at a profit.  After all we are talking about new homes….there’s probably not much you can do to make it show better than it was when the builder was trying to sell it….sure, if you acquire it at a price that is so good that you can put it back out for sale at a significantly lower price then it was at previously then perhaps you can snag someone but I think it is dicey. 

I prefer the idea of holding the homes as rentals and worry about selling them later when the market and the economy return to normal, whenever that may be.  The problem is, depending on the market you are in, it is usually difficult to be able to charge enough rent to make a new home as a rental make any sense.  However, with prices down and rates at historic lows, you may very well be able to buy some new homes cheap enough that rent will cover the debt service.  If that is the case I think I would definitely consider that as an option if you have money to invest. 

Quite frankly it seems less scary to me than the stock market.