Reduced Price Home Listings Become Even More Common

Dan Oppenheim
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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Dan Oppenheim, CFA

(415) 889-5617

doppenheim@ssrllc.com

November 27th 2018

Reduced Price Home Listings Become Even More Common

  • Price Reductions Even More Common in October and November. We continue to watch the percentage of homes for sale that have had price reductions, as we believe that this provides a sense of the “balance” in the market. In October, we estimate that 31% of homes for sale nationally had experienced price reductions, up from 25% in October 2017 and 23% in October 2016. Our market checks for November indicate that this trend of price reductions continued through the month, relative to the level in 2017. So, while pending home sales for October (to be released on Thursday, November 29th) will likely disappoint relative to the consensus expectation for a 0.5% sequential increase (down 4% year/year) we see the bigger issue as rising inventory and the imbalance in the market, seen in the easing of prices. We think this pressure on home prices and subsequent margin impact will limit any bounce for homebuilding stocks, recognizing that many are trading at or below book value. In addition, we expect that this slowing price environment will lead to slower home improvement spending, especially big ticket remodeling.
  • West coast price reductions reflect narrowing pool of buyers and growing inventory. The recent decline in demand and increase in inventory has resulted in price reductions on a high percentage of listings in most west coast markets. Both inland and coastal markets saw high levels of discounts, with 47% of listings in Seattle having had reductions, followed by 44% in Portland, 42% Sacramento, 38% in San Diego, 37% in San Jose, 31% in Orange County, 27% in both L.A. and the Inland Empire, and 25% in San Francisco. The largest year/year increase in the percentage of listings with reductions was in San Jose (up 2160 basis points), Seattle (up 1490 basis points), and the Inland Empire, Los Angeles, Orange County, San Diego, and San Francisco (all up 800-1000 basis points).
  • Builders heavily exposed to the West; more relevant to HD than LOW. Most of the large homebuilders generate between 30% and 70% of their profitability from California and the western U.S. (TOL has the greatest exposure of the large builders at just over 70% of profit coming from California and the west, with D.R. Horton, Lennar, and Pulte closer to 35% of profit from California and the west; William Lyon (nearly all profit comes from California and the west) and KB Home have the greatest exposure of the small-cap builders). We also expect the slower trends to impact the home centers via moderating home improvement spending (Exhibit 2), with Home Depot having greater exposure to California than Lowe’s (Home Depot has 12% of its stores and we estimate 25% of sales from California).
Exhibit 1: High and Rising Percentage of Listings with Price Reductions in West Coast Markets
Source: SSR Analysis of MLS data

 

Exhibit 2: Home Improvement Activity Likely to Slow in Coming Quarters, with Downside Risk
Source: American Housing Survey, Census Bureau, Joint Center for Housing Studies, National Association of Realtors, and SSR analysis
Exhibit 3: SSR’s Preferences Among Housing-Related Sectors
Source: SSR Analysis

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