While some homebuilders are reporting increases in prices, a large majority of the construction firms believe new Federal Housing Administration (FHA) guidelines may lead to lower overall home sales according to the February “Housing Survey from the Frontlines,” a monthly homebuilder survey issued by John Burns Real Estate Consulting (JBREC). According to the survey, builders in Southern California, Texas and the Northeast said new home prices increased month-over-month. Some gains are coming from a reduction in sales incentives, but some builders are increasing base prices. However, 87% of builders surveyed said they expect to lose sales due to new FHA guidelines. Half of the builders surveyed expect to lose 10% or more of sales. As HousingWire reported in January, the FHA raised insurance fees and down payments for borrowers with lower credit scores to address the FHA’s capital reserve ratio, which fell below the Congressionally mandated 2% threshold. Borrowers with a FICO score of less than 580 are now required to make a 10% down payment, up from the previous 3.5% down payment. In addition, seller concessions have been cut in half to 3%, from 6% and mortgage insurance fee at closing increased from 175 bps to 226 bps. According to the survey, 44% of builders said reduced seller paid closing costs would have the biggest impact, while 40% said the increased down payments for low FICO scores would be the biggest impact. “The new FHA guidelines will have a tremendous effect on the first time homebuyer. We have seen over the past 12 months that this buyer does not have a lot of money for a down payment and usually has to be put on a savings plan to get to the 3.5%,” said a builder in Washington, DC. “Closing assistance is also crucial for this same cash poor buyer. It seems like one step forward with the tax incentives and then two steps back with the new guidelines.” In separate commentary released Monday, JBREC said industry buzz is that the Washington, DC economy is on the mend even though, after adding jobs in 2008, the city started to slightly lose jobs in early 2009. This grew into solid job losses as the year progressed. Professional and business services as well as leisure and hospitality jobs are the primary sources of lost jobs. Construction employment, severely hit by the commercial real estate decline, is also declining, JBREC said. Despite the decline, JBREC believes DC will be one of the first housing markets to stabilize due to improved affordability, a lack of new home construction, and relatively few foreclosures, but warned, “don't count your chickens before they hatch.” This concern would seem to contradict commentary released by analysts at Barclays Capital (BarCap), who said the changes might be “all bark, little bite.” Indeed, some builders surveyed are less concerned about the impact of the FHA changes. “The required 10% down payment for those with FICOs of less than 580 will have no impact, since no one will finance anything less than 620,” said a Tampa builder. “The 3% max contribution will hurt the first time buyers, though, with little cash to spend on closing costs.” The February survey gauged the perception of 292 home building industry executives in 99 metropolitan statistical areas (MSAs) that oversee more than 2,200 communities. JBREC said the national average net sales contracts per community increased to 1.6, up from 1.4 at the end of 2009, but below September 2009’s high of 2. “Sales gains are very focused on the entry level and in the best locations. Traffic pick-up is in quality more than quantity,” said Jody Kahn, a JBREC vice president. The biggest increases were reported in the Southern California, Northern California and the Northeast regions, JBREC said, adding net sales were flat in the Southwest and Midwest, and declined in Southern Florida. In addition, the survey showed new developments are outselling older developments, due to better locations and lower price points. The average unsold, finished inventory per community decreased to 3.0 units, but is up from 2.8 units in the fall. JBREC projects inventory to increase through May, when builders will rush to write contracts by the April 30 signing deadline for the federal homebuyer tax credit. Nearly all builders are starting some speculative inventory; most are cautious, but some large builders are very aggressive, JBREC said. But not every builder is pleased by the increase. A Jacksonville builder said in the John Burns survey: “Many local and national builders are starting too much inventory in hopes of closing them before the tax credit ends, further increasing standing inventory which the market does not need.” And a builder in Phoenix echoed that sentiment. “Still holding our breath to see if there is a selling season. We think the $6,500 existing homeowner tax credit is worthless. Builders' spec starts way up on hope.” Builders reported cancellation rates are at low levels, as most builders are targeting the entry-level buyer, who doesn’t have a home to sell. The majority of builders, 62%, reported cancellation rates between 1% and 15%, unchanged from January’s survey, but up 57% from October. Only three builders reported cancellation rates above 50%. Most builders will not accept a sales contract that is contingent on the sale of the buyer’s current home, JBREC said, adding builders are carefully prequalifying potential buyers, which reduces cancellations, and rates have remained stable. Write to Austin Kilgore.