New home builders were spectacular at adapting to rising demand in 2004 and 2005 and instantly raising prices.
I remember very well a client looking at a new home in Gilbert in the spring of 2004. It was about $170,000. The saleswoman said the price increased $10,000 last month and rumor was it would increase another $10,000 this month. I thought that was B.S. but I researched it and found out she was right and the price did indeed increase another $10,000 for that one month.
Now it’s the summer of 2007. Demand peaked two years ago in the summer of 2005 and builders still haven’t adapted to the lower demand by cutting production significantly. They’re not even close.
New home builders were fantastic at adjusting to rising demand but they’ve been absolutely horrible at adjusting to falling demand.
It looks like the new home builders are incapable of significantly lowering production… on their own. It looks like it will take a few builders going the way of some of the mortgage companies before production gets into line.
The home builders are playing chicken with each other. No one wants to be the first to blink and significantly cut production. It looks like some builders will have to drive off the cliff before production falls significantly.
And that will be good for the real estate market.