The Builders Association of the Twin Cities published its February 2009 Hot Sheet last week. You can find the full report here.
Below is one of the more interesting graphics in the report produced by MarketGraphics Research Group. Despite the fact that there has been a major slowdown in construction in the Twin Cities, it seems to me like we are still building too many homes.  If you look at the graphic below, you’ll see that there are approximately 4200 completed new homes for sale. (These include single family, townhomes, and condos in the 13 county metro). This graph below also appears to show that there are approximately 2840 new homes under construction right now in the Twin Cities metro. (Click picture to enlarge in a new window).
Here’s the problem. I just ran an MLS search for homes (single family, townhomes, and condos) that were built in 2008 and closed in 2008. A total of 1281 units sold in 2008. My search did not include homes built in 2007 but sold in 2008. But based upon 1281 units selling in 2008 and if the numbers below are correct, then there is a 3.2 year supply of completed new construction. If you factor in the 2840 units being built, that would be another 2.2 years of supply. What’s not clear is where this supply and new construction exists and what kinds of units we’re looking at. I suspect many of the completed new construction units and the units to be built are multi-family projects – i.e. townhomes and condos. Of course my belief is that we need those like we need a hole in our head. (Click picture to enlarge in a new window)
Builders and developers have to make a living, but I am not convinced they are slowing production fast enough to keep pace with the market. I believe they need to cut building to get ahead of the market. Based upon that, new construction should be cut by 75% this year and another 50% next year and remain at that level through 2011 or until we see a marked improvement in Twin Cities real estate. I realize it’s difficult to do this and one can’t operate a command and control economy when so much of this is based upon micro markets. If there is demand in Maple Grove but not in Shakopee then go ahead and build in Maple Grove.
Part of all the building that continues is based upon projects that were approved years ago and already under construction. For example, Lennar, Minnesota’s number one home builder, has a massive project underway in Northwest Plymouth with its Legacy Park and Taryn Hills developments. It wouldn’t make sense that they would stop building that. However, they just added a few hundred townhomes to the oversupply of townhomes already available in Plymouth.  They will sell them. Existing or traditional townhomes owners are at virtually an insurmountable disadvantage when it comes to selling right now if you’re price points are anywhere near those of Lennar’s.
In the northwest metro, there are several new home projects that are ploughing ahead. These developments will continue to put major pricing pressue on existing homeowners who are trying to sell.
Below are just some of the developments underway in the northwest suburbs:
Having a healthy new construction market will be important for the overall market. The challenge for many builders today is there are too many spec homes that still need to be sold.
