More Home Buyers Pull Out of Deals
New homes have been one of the hottest segments of the housing market, but a growing number of builders in California are reporting an increase in the number of buyers canceling orders.
The rise has been dramatic in Northern California, where fallout from the high-tech decline is spreading. But more home buyers in Southern California also are pulling out of deals to purchase new homes.
Cancellations in Orange County, for example, have been rising all year, with the rate climbing to 22% in April, up from the benchmark 15% in each of the last two Aprils. The pattern has been more zigzag in Los Angeles County, where it stood at 20% in April, according to Meyers Group, an Irvine real estate research firm.
New-home developers generally see cancellation rates climbing throughout Southern California. But thus far, builders say that housing demand remains healthy and that plenty of buyers are in the wings to pick up the slack.
“There’s no question that there has been an increase in cancellations,” said Jon Jaffe, president of Lennar Homes in Mission Viejo. “But at the same time, we’re seeing a net sales pace that hasn’t dropped off. It’s just that we have to work a little harder to achieve that.”
Builders, nevertheless, realize that cancellation rates, which they track closely, provide an indication of where the market is heading. Homes that sit on the market longer could cause builders’ expenses to rise. And if the recent trend persists, leading to a drop in overall sales, companies could be forced to scale back production.
Builders already see how the economy has caused more consumers to alter their buying plans. In some cases, potential buyers have been unable to obtain mortgages, while others simply had second thoughts about buying homes now.
Still, the scarcity of new construction, together with continued job growth and low interest rates, has created such high demand that many builders are able to replace potential buyers with other ones--even at higher prices. The typical new home in Los Angeles County cost $303,000 in April, up 6% from a year earlier. In Orange County, the price rose 12% to $443,000, according to the Meyers Group.
Irvine home builder Standard Pacific Corp. said canceled orders in April rose to 28% from 18% a year earlier. The company said the increase mostly came at housing tracts in the Bay Area, which has been hard hit by the tech industry slowdown.
“The buyers are more cautious,” said Andrew Parnes, the company’s senior vice president. “They’re hearing more about layoffs in the Bay Area, and that’s causing them more concern, making them more cautious about making big-ticket purchases like a house.”
Consumers have backed away from one out of four Southern California new homes built by Lennar Homes, more often for those in the $700,000 range, Jaffe said.
He described the current 25% rate as typical for the company, though higher than last year’s pace. He sees the increase as a sign that the housing market is slowing to a normal pace.
Despite the rise in canceled orders, Lennar hasn’t changed its plans to build about 2,500 homes in Southern California this year, Jaffe said.
Some consumers remain unshaken by a stream of bad economic news from corporate cutbacks to sliding stock prices. Michael Diaz sees no reason to cancel his purchase of a Coto de Caza home under construction. He and his wife and two children expect to move in by late July.
Although companies where friends and family are employed have had layoffs, Diaz feels confident in stretching his finances to buy a home in a neighborhood where prices start around $600,000. The down payment came primarily from savings and a hefty 55% gain from the sale of their Mission Viejo home, he said.
“I’m not too concerned about the economy. It’s hard for me to imagine that things wouldn’t work out here,” said Diaz, 35, referring to his year-old job at a Carlsbad firm that designs electronic parts for computers.
Diaz said he could not think of anything that would diminish his optimism.
“I have no thoughts of pulling out of the deal,” he said. “I see it as rock solid.”
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Housing Slowdown?
The monthly percentage of potential Los Angeles County home buyers canceling their purchase orders compared with last year’s rate
Source: Meyers Group
