West Coast Home Price Reductions Accelerate

Dan Oppenheim
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Dan Oppenheim, CFA

(415) 889-5617

doppenheim@ssrllc.com

October 29th 2018

West Coast Home Price Reductions Accelerate

  • Price reductions provide clearer picture than inventory. It’s sometimes easier to get a sense of housing trends by looking at the homes that aren’t selling, rather than the ones that are. We’ve been concerned by the many comments from homebuilders about how inventory levels remain low in western markets, likely to indicate their belief that the slower new home sales are temporary, instead of resulting from a market with greater competition from higher existing home inventory. The increasing prevalence of price reductions reinforces our concern about the home center stocks (Exhibit 1), as we believe the price reductions and climbing inventory suggest that the sales declines – which drive home improvement spending – are likely to be more than temporary.
  • West coast price reductions more common than in prior years. The housing slowdown has been most severe on the west coast, seen in both the slower sales and rising inventory. This imbalance has resulted in price reductions on homes for sale, with 40% of homes for sale in Seattle had experienced price reductions (up from 30% in September 2017), 40% in Portland (a high level, but down slightly from 43%), 17% in San Francisco (up from 11%), 29% in San Jose (up from 16%), 24% in LA (up from 18%), 30% in Orange County (up from 22%), and 33% in San Diego (up from 30%), based on MLS and Redfin data (Exhibit 2).
  • Inventory levels rising, going against seasonal norms. Inventory in California typically increases from October-December, but we expect that inventory will increase in October 2018 based on the slower sales activity and higher level of new listings seen in our market checks. The approximately 24,000-home increase in unsold inventory in September was well above the approximate 13,200 and 5,700 home increases in September 2017 and 2016, respectively (Exhibit 3). Unsold inventory in September was at a level more appropriate for the end of February (high inventory ahead of the spring selling season).
  • West remains key source of profits to builders; more relevant to HD than LOW. Most of the large homebuilders generate between 30% and 70% of their profitability from California and the west region (Exhibit 4). We also expect the slower trends to impact the home centers via moderating home improvement spending (Exhibit 5), with Home Depot having greater exposure to California than Lowe’s (Home Depot has 12% of its stores and we estimate approximately 25% of sales from California). We would not be surprised to see Home Depot temper guidance and expectations for 2019 when the company releases earnings on November 13th (Exhibit 6).
Exhibit 1: SSR’s Preference Among Housing-Related Sectors
Source: SSR Analysis
Exhibit 2: High and Rising Percentage of Listings with Price Reductions in West Coast Markets
Source: SSR Analysis of MLS and Redfin data
Exhibit 3: California Existing Home Inventory Spiked in September, Checks Suggest October Increase as Well
Source: SSR analysis of MLS data
Exhibit 4: Homebuilders Derive 30-70% of Profitability from CA and the West, Areas of Slowing
Note: Pretax profit from California and western regions
Source: Company reports and SSR analysis
Exhibit 5: 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 6: Home Depot Comps Likely Peaked in 2Q18, with Slowing Ahead
Source: Company reports, National Association of Realtors, and SSR analysis

 

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