FHA Qualification is the Secret Sauce for Absorption

10/05/2016

Our research around the country shows us that price elasticity is one of the few consistencies in the Housing industry, and sales rates of new home projects that are above or below the local FHA loan limit proves that point. As we conduct housing market analyses across North America, we typically see lower-priced new home subdivisions outsell higher-priced communities. This is logical, since a lower price point implies a larger base of potential buyers that can afford that product. There is another indicator that is connected to this as well: the FHA limit.

FHA Sales Rates Rock
The sales rates in new subdivisions that qualify for FHA financing have achieved superior absorption rates in nearly every market in the country. As illustrated in the table below, FHA communities are outselling conventional communities nearly 2 to 1 in the Phoenix market (Maricopa County, AZ), and nearly 3 to 1 in the core of the Houston market (Harris County, TX) from a monthly sales rate perspective. This disparity is not often so significant, but it is still material in most markets. The center of activity in Orlando (Orange County, FL) sees the FHA-qualified communities achieve absorption rates that sell at a ratio of 1.7 to 1, and in California’s Riverside County (part of the Inland Empire) the FHA communities outsell the conventional communities 1.2 to 1.

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Attainability Is The Target
The key takeaway from this is that an attainable price is still a key driver for most of our new home markets nationwide. Our research also shows that some markets have such a restricted supply of new homes (with higher land costs, construction costs, and development fees that are rising) that most of the new construction is producing prices above the FHA limit. In that case, the resale market becomes the outlet for affordability.

Great Design Is Also a Driver
Regardless of the price point, compelling product that motivates a home shopper to make a move should be the focus of every new home community.

Contact us to discuss how we can help define the best products and the best markets for your operation.

Tim Sullivan, Managing Principal, Advisory

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