Homebuyers have been backing out of sales contracts and forfeiting their down payments during the housing slowdown, but cancellation rates should steady in the first quarter and taper off later in 2007, said the chief executive of one of the nation's largest home builders Thursday.
"Cancellations are likely to stabilize and stay level this quarter, and then decrease," said Ara Hovnanian during a Web cast of a real estate conference sponsored by Deutsche Bank in New York, adding cancellations should get back to "normalcy in a quarter or two."
The Hovnanian CEO said many cancellations are for older contracts signed when the market was booming and home prices were rising. He said one way the company is avoiding cancellations is to negotiate with buyers at the closing table.
"We don't like to do it, but it can prevent cancellations," Hovnanian said.
Home builders have been reporting surging cancellation rates driven higher by sagging consumer confidence and difficulty in selling existing homes.
When asked to pick an indicator he's looking at to spot a potential bottom for housing, Hovnanian said "we're watching [home] resale listings, which is something we never used to focus on."
Home builders face an inventory glut sparked by overbuilding and speculative demand drying up, but are hoping the spring selling season can jumpstart a recovery in 2007.
"The time between Thanksgiving and the Super Bowl is a slow time, so it's difficult to gauge anything," Hovnanian said. "We're waiting to see if things stabilize."
Meanwhile, Toll Brothers Inc. Chief Financial Officer Joel Rassman said the speed of various markets' recoveries will depend on the amount of "speculative" building and the use of incentives.
Home builders have ramped up concessions to buyers such as appliance upgrades and financing breaks in order to move homes in inventory. For example, Lennar Corp. earlier this week said sales incentives offered to homebuyers averaged $47,300 per home in the fourth quarter, up from $10,600 the previous year.
Rassman said buyers are putting off home purchases because they think the house may end up being cheaper soon. The CFO said the luxury builder is closely watching buyer traffic at its communities and reservation deposits to get a handle on where the market is heading. It also conducts "soft" interviews during home tours to see if people are "real buyers" or what the company calls "tire-kickers."
If local housing markets and economies bounce back, there could be some consolidation in the home-building business, especially with larger public companies snapping up smaller private competitors, Rassman said.
"There was no [spring] selling season last year, and if it happens again a lot of the smaller private builders won't be around the next selling season," he said.
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