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Blog: Rents Must Rise to get In Sync with Home Prices
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Posted on January 7, 2008 Marty Hackworth
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The benchmark ratio of rents to home prices is slowly returning to its long-run average but it could be at the expense of home prices, according to a study by Federal Reserve Board economists and a University of Wisconsin professor suggests.
The ratio, which compares imputed rents of home owners to the value of owner-occupied housing, is a valuation of residential housing that is equivalent to the earnings-price ratio used to value stocks.
The rent-price ratio ranged between 5 percent and 5.5 percent between 1960 and 1995 but fell rapidly after that, hitting a historic low of 3.5 percent by the end of 2006 as home prices grew rapidly.
In the first half of 2007 the ratio started to climb again, and incoming data suggests that the rent-price ratio has continued to increase, the authors note.
The study, however, suggests housing prices would have to fall 15 percent over five years, assuming rents rose 4 percent a year, to be back in sync.
Economist Morris Davis of University of Wisconsin-Madison says that "rapid growth in rents" is crucial to justify the current level of home prices. However, he adds, an increase in unsold properties on the rental market could hinder rent increases.
Source: Reuters News and The Wall Street Journal, Greg Ip (01/03/08) |
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Blog: Worst Forecast Ever??
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Posted on December 28, 2007 Marty Hackworth
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The cockeyed optimists of the National Association of Realtors.By Daniel Gross
Posted Monday, Dec. 10, 2007, at 5:34 PM ET
Daniel Gross was online on Dec. 16, 2007, to chat with readers about this article. Read the transcript.
This morning at 10 a.m., CNBC real-estate correspondent Diana Olick hit the gray streets of Washington, D.C., to report the latest housing data from the National Association of Realtors. (Strange, I was able to get the data while remaining inside.) The news? The Pending Home Sales Index, an indicator of future activity, edged up in October, although it was still off 18.4 percent from October 2006. Olick also dutifully reported NAR's annual year-end forecast, which was picked up by the wire services. While the housing market may be in the dumps, said NAR economist Laurence Yun, "Now that mortgage conditions have improved, some postponed activity should turn up in existing-home sales over the next couple of months, and I expect sales at fairly stable to slightly higher levels."
Economic forecasting is exceedingly difficult. The consensus estimates compiled by the Wall Street Journal and other outfits on measures like GDP growth and unemployment are frequently incorrect. As a profession, economists project growth when a recession is about to start and project recessions when the economy is poised for continued expansion. And as stand-up economist Yoram Bauman puts it, "Macroeconomists have successfully predicted nine of the last five recessions." There are some institutional reasons for this: Many economists are associated with corporations, Wall Street firms, and trade groups, where it doesn't pay to be bearish. Others fall into the trap of extrapolating existing trends into the future. But given the complexity of the contemporary world, the huge range of variables, the unrelenting flow of data, and the fallibility of humans, it's likely impossible to forecast consistently with any accuracy. And it's especially difficult to project economic activity when the economy reaches inflection points—times when the economy is about to go from expansion to contraction, or vice versa.
But within the fraternity of financial and fiscal forecasters, the seers at the National Association of Realtors—longtime chief economist David Lereah and his successor Lawrence Yun—may be uniquely ill-equipped to deliver sobering forecasts. They work for a trade group whose mission is to buck up the spirits of real-estate brokers. And real-estate brokers—who live to sell, promote, and market—are constitutionally disinclined to hear anything but good news. Indeed, as I noted last summer, Lereah's penchant for putting out positive spin on dismal housing numbers inspired a blog and led critics to dub him the Baghdad Bob of real estate. Lereah has moved on. But Yun has picked up where he left off.
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In addition to claiming that the sun is shining brilliantly even as rain pours down from the heavens in a mighty stream, Lereah and Yun have also hazarded optimistic, educated guesses about the future. In February 2005, Lereah published a book that is my candidate for Longest Title Ever: Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue To Climb Through the End of the Decade—And How To Profit From Them. Naturally, the boom busted soon after publication, and property values began to descend.
Clearly, the housing market encountered an inflection point in 2006, with housing prices and activity peaking. But you wouldn't have known it from looking at NAR's December 2005 forecast for 2006, in which the group said existing-home sales would fall 3.7 percent to 6.84 million and new-home sales would fall 4.8 percent to 1.23 million. Modest declines after an impressive multiyear run. Instead, as the data from December 2006 show, existing-home sales for 2006 fell to 6.47 million, down 8.6 percent (more than twice the rate forecast), while new-home sales fell 17.8 percent to 1.06 million. Last December, the 2007 forecast was once again guardedly optimistic. "Most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards," said Lereah. For 2007, existing-home sales were "expected to rise steadily from the current cyclical low and reach an annual total of 6.4 million, which would be 1.0 percent lower than this year's total." NAR wasn't so sanguine about new-home sales, however, projecting they would fall 9.4 percent in 2007 to 957,000. But once again, the forecasts were far too optimistic. As NAR reported today, existing-home sales are projected to come in at 5.6 million for 2007—a fall of 12.3 percent, not the 1 percent fall projected last December. New-home sales for 2007 should amount to 788,000—down about 25 percent from 2006 and far below the projection made a year ago.
For next year, NAR projects existing-home sales will rise ever so slightly to 5.7 million, and that the median home price should rise 0.3 percent. New-homes sales, however, are expected to continue to fall sharply, to 693,000, which would represent a 12 percent drop. The forecast presumes that for the largest chunk of the market—the existing-home-sales market—the bottom has come, and it sits poised at an inflection point. It's possible. But the tendency of housing professionals to call the housing bottom for the past two years—again and again—has been pretty dismal. The good folks at NAR aren't the worst forecasters ever. That title goes to the two guys who, in 1999, projected the Dow Jones Industrial Average would hit 36,000 in three to five years. But given the recent history and the slope of the trend lines, it's probably prudent to prepare for the worst rather than hope for the best.
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Blog: Alliance Title Workers Face Grim Holiday
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Posted on January 1, 2020 Marty Hackworth
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Alliance Title Workers Face Grim Holiday Two years ago, Alliance Title was one of the largest title companies in California with 200 offices and nearly 2,000 employees.
Last fall the housing market slowdown forced the firm to start consolidating offices and laying workers office. But one worker said nothing prepared her for an announcement that the company was closing.
"A lot of us worked really hard. We worked a lot of hours," said "Ellen," a former Alliance employee who asked to remain anonymous. "We were told there were several rumors that they may merge."
Then on December 10, Ellen said managers announced the company was about to shut down. "We were stunned. Everyone was stunned. The room was quiet," she said.
Managers also told they should continue working. "We were working as fast as we could, closing escrow for our clients. We didn't want to leave them hanging," said Ellen.
They worked for four more days. "A lot of us were sick," she said. "We were just sick with headaches, upset stomachs, crying. There were several people that were physically sick."
"Management got there late on Thursday. The offices that weren't already closed -- locksmiths came and changed the locks," Ellen said.
She showed News 10 letters that Alliance handed out, promising its employees full pay and compensation for bonuses and unused vacation time. But Ellen said when her check arrived it was $1,200 short. "I've also talked to four different people that are owed in excess of $1,000 and some were owed up to $2,000," Ellen said.
She said not having all of her money has put a cloud over the Christmas spirit in her home, which includes young children. "It was hard to explain to them that Santa's making gifts this year," she said. "They're making each other gifts. And we're buying used gifts."
She said she and her co-workers are now looking for new jobs. They also hope Alliance owners will hear their pleas to get paid.
"They had very good employees that worked really hard to keep them in the lifestyle they were accustomed to. We just deserve what we earned, nothing more," Ellen said.
Employees said Alliance Title had offices around California and more than 700 employees when it shut down. Some of the workers have filed complaints with the state for unpaid wages.
They said some of their clients accounts have been transferred to Financial Title, a firm owned by Alliance parent company, Mercury Companies.
Attempts to contact management for Alliance Title were unsuccessful Friday.
Any clients with questions about Alliance Title were asked to call the California Department of Insurance at 1-800-927-HELP (4357). |
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Blog: Risk & Rewards: Taste of hard times
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Posted on December 28, 2007 Marty Hackworth
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Once-thriving restaurants now face business slump fueled by housing market crisis
Published 12:00 am PST Sunday, December 23, 2007
Story appeared in BUSINESS section, Page D1
When Mike Frampton opened The Melting Pot fondue restaurant in Rocklin in 2005, business was as hot as the housing market. But the real estate slump has hit hard, forcing Frampton to step up promotions like the free lunch won by HP ProCurve Networking employees, from left, Janet Lehr, Janice Foley and Craig Stelzner this month.
Lezlie Sterling / lsterling@sacbee.com
Editor's note: Another in an occasional series from The Bee's business staff that puts you inside the world and inside the heads of small-business owners. In this installment, we look at the ups and downs of the restaurant business.
Reduce fondue restaurant owner Mike Frampton's business story to a few headlines and it might read like this:
2001: Frampton loses computer job in dot-com meltdown.
2002: Frampton opens Sacramento restaurant, The Melting Pot.
2005: Rocklin housing booms, Frampton opens restaurant there.
Today: Rocklin home and restaurant sales tumble; Frampton's future clouded.
Frampton's story symbolizes the challenges confronting restaurant operators who, lured by Rocklin's formerly white-hot housing market, now face a business downturn as home foreclosures and falling house prices wash over the region and chill enthusiasm for dining out.
It also illustrates how a tough financial climate forces small businesses to battle against economic issues not of their own making. The 51-year-old Frampton, for instance, isn't waiting for his fate to play out. He's cut fat in the business and pumped up his advertising. And he's been honest with key backers about the difficulty ahead.
"It's really hard to market your restaurant to people when they're losing their homes," Frampton said during a recent interview at his restaurant in Rocklin's Blue Oaks Marketplace on Lonetree and Blue Oaks boulevards. "Our challenge now is trying to work out how to sustain the business through this cycle."
The $537 billion U.S. restaurant industry is slowing down for several reasons, including high fuel prices and tightening credit. The slump has spared fast-food places like Mc- Donald's. But special occasion spots like The Melting Pot, with 120 franchises in 34 states, have been particularly hard hit as consumers cut back on discretionary spending.
Those shifts are translating into more open tables and shorter waiting times at restaurants.
According to analyst Robert Derrington at Morgan Keegan & Co . Inc., 16 of 27 publicly traded restaurant companies reporting earnings in September and October missed their thirdquarter forecasts or reduced their outlooks for the full year.
Nearly all blamed the economy.
Visits to sit-down establishments with wait staff - so-called "casual dining" restaurants - fell nationally 3.5 percent from August to September, according to New York City-based industry consultant Malcolm M. Knapp.
"Conditions were especially troubling in California, which is home to a large concentration of underperforming subprime mortgages," Knapp wrote in Nation's Restaurant News, an industry trade publication.
The trend is clear in Rocklin, where nearly 40 restaurants have opened since The Melting Pot debuted there. A dozen opened across the street in the 18-month-old Blue Oaks Town Center, anchored by California's first R.C. Willey Home Furnishings store. Another 1 million square feet of retail and restaurant space is under development nearby at Sierra College Boulevard.
As a result, developers and restaurant chains aren't calling to pitch projects like they did a year ago, said Rob Braulik, Rocklin's assistant city manager. He's also noticed business at existing restaurants has slowed.
"Last year, at just about any restaurant around here, you had to wait," Braulik said. "Now, you don't."
Of course, things were different when Frampton opened his 6,000-square-foot Rocklin restaurant two years ago. He had already found a niche in Sacramento, where Melting Pot patrons enjoyed table-prepared foods dipped in from-scratch sauces accompanied by fine wines.
A four-course meal for two can take two or three hours to eat, from a $16 cheese fondue starter, to a $7 salad, to a $24 beef, chicken or seafood entree capped by a $16 chocolatedipped dessert. Each location takes in about $2 million each year, Frampton said.
"We appeal to a different sensibility. Eating at our restaurant is an unhurried social event," Frampton said.
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Blog: Neighborhoods suffer as crime follows foreclosure
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Posted on November 28, 2007 Reggie Lal
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By J.W. Elphinstone
ASSOCIATED PRESS
November 25, 2007
Eighty-five bungalows dot the cul-de-sac that joins West Ontario Avenue and East Ontario Avenue in Atlanta. Twenty-two are vacant, victims of mortgage fraud and foreclosure.
Now house fires, prostitution, vandals and burglaries terrorize the residents left in this historic neighborhood called Westview Village.
“It's created a safety hazard. And if we have to sell our house tomorrow, we're out of luck,” said resident Scott Smith. “Real estate agents say to me, 'We're not redlining you, but I tell my clients to think twice about buying here.'”
As defaults surge on mortgages made to borrowers with spotty credit and adjustable-rate loans, more people are noticing that their neighbors are caught up in the meltdown. Their misfortunes are haunting those left living on the same streets.
The effects aren't confined to just low-income or redeveloping communities. They also are seeping into middle-class neighborhoods and brand new developments.
California's Central Valley has been hit particularly hard. Thousands of homes were snapped up by Bay Area speculators who hoped to flip their homes and turn a quick profit.
They were caught short when the housing market turned. Many investors and other buyers are now trapped by falling home values and adjustable-rate mortgages that are resetting to higher rates.
Some speculators have tried to rent their properties. Others simply walked away from the homes they bought just a year or two earlier. In many cases, the purchases were made with no money down.
California ranks second for the rate of foreclosures, with one filing for every 88 households, according to RealtyTrac Inc., which monitors foreclosures. Nevada is the worst, with one for every 61 households, while the nationwide rate is one foreclosure filing for every 196 households.
In Atlanta, Smith, the vice president of Westview Community Organization Inc., keeps a map of his neighborhood, tracking each vacant property and notifying local officials when suspicious activity is observed.
Georgia has the eighth largest foreclosure rate in the nation, one filing for every 142 households.
“They've seen a lot of prostitution in the area, vagrants wandering in and out of the empty houses and drug activity,” said Dakarta Richardson, a code enforcement officer for the city of Atlanta. “Some people that I talked to are afraid to walk out of their homes at night.”
Other people in the area have been affected by break-ins, and there have been house fires in several of the vacant homes in the past year, Richardson said.
The rise in crime in Westview is typical of a neighborhood struggling with numerous foreclosures, according to a recent study by Dan Immergluck of Georgia Institute of Technology in Atlanta and Geoff Smith of Woodstock Institute in Chicago.
That study showed that when the foreclosure rate increases 1 percentage point, neighborhood violent crime rises 2.3 percent.
“The key here is the concentration of those foreclosures at a neighborhood level. When you have more than one foreclosure in a few-block area, that's when you start to think about the effects on property values and the effects on crime,” Immergluck said.
A report published Tuesday by the Center for Responsible Lending, a Durham, N.C.-based consumer advocate, estimates that 44.5 million U.S. households will see their property values decline a combined $223 billion as foreclosures surge in coming years, particularly in minority communities.
Historically, the most affected areas were lower-income and prone to subprime and predatory lending, irresponsible house flipping and mortgage fraud, Immergluck said.
However, “the problem now is on a different scale,” he said. “It's affecting a lot more suburban, moderate-income places” as more people of different incomes default on riskier loans.
In the Franklin Reserve neighborhood of Elk Grove, a suburb south of Sacramento, homeowners are fighting inner-city problems such as gangs, drugs, theft and graffiti.
During the boom, the suburb sprouted 10,000 homes in four years, attracting investors from the San Francisco area. Now many houses stand empty, weeds overtaking lawns, signs lining the street: “Bank Repo,” “For Rent,” “No trespassing – bank owned property.” A typical home's value has dropped from about $570,000 to the low $400,000s.
Banks aren't watching foreclosed properties closely, said Modesto Police Chief Roy Wasden, who is monitoring the housing decline as chairman of the California Police Chiefs Association's Marijuana Dispensary Task Force.
Modesto police recently discovered about 100 marijuana plants growing in the backyard of one vacant house. That led them to about 500 plants growing inside an occupied home.
“As it gets colder, (squatters) will start building fires in these structures, and it's quite dangerous,” he said.
Wasden said inland California areas seem harder hit than coastal cities, where more expensive neighborhoods have generally held more of their value.
But the problem is widespread for residents who took out large home equity loans or bought with subprime mortgages and are now trapped by the lower home values, said law enforcement officials and real estate experts.
“Everyone in the United States is looking at the Inland Empire (the region east of Los Angeles), where a lot of homes have gone into foreclosure or may soon,” said Linda Adams, a lawyer in the Riverside County community of Murrieta whose firm represents 1,500 homeowner associations in Southern California. “It isn't just the inexpensive homes. It's really expensive neighborhoods, as well.”
In Shaker Heights near Cleveland, neighbors of a planned community of $1 million Tudor homes can report a foreclosed or vacant house, and the address goes on a police watch list. Of 13,000 housing units in Shaker Heights, 330 are under surveillance by patrol cars and undercover officers, police Chief Walter Ugrinic said.
RealtyTrac reported that Ohio is fifth in the nation with one foreclosure filing for every 107 households.
The city repairs vacant homes if recalcitrant owners won't, bills the owner and, if unpaid, a lien is filed. This year, the city has spent $800,000 to fix 44 properties, up from $500,000 in 2006. Typical repairs include fixing roofs and painting, with an emphasis on problems visible from the street.
Additionally, before a house is sold, it must pass a housing inspection, which includes a repair-cost escrow requirement created in 2000.
This encourages owners of vacant or foreclosed properties to make repairs, said Kamla Lewis, director of neighborhood revitalization. |
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Blog: California Is Still Home to Nation’s Least Affordable Housing
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Posted on November 28, 2007 Marty Hackworth
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California Is Still Home to Nation’s Least Affordable Housing CBIA Calls for Needed Reforms to Increase Homeownership November 21, 2007 Contact:
John Frith CBIA Vice President/Public Affairs (916) 443-7933 ext. 332 (916) 803-3005 (cell) or Mike Castillo Communications Specialist (916) 443-7933 ext. 346 ( Note to editors: A PDF table listing the bottom 65 metro areas, the percentage of homes affordable in each area, and comparisons to the previous quarter is available on the CBIA Web site in the newsroom section.) SACRAMENTO - Despite falling home prices throughout most of the state, California remains the nation’s least affordable market for housing in the third quarter, the California Building Industry Association reported today. The quarterly NAHB/Wells Fargo Housing Opportunity Index, compiled by CBIA’s sister organization, the National Association of Home Builders, found that homes were less affordable in 13 of the state’s metropolitan areas when compared to the second quarter, while affordability inched upwards in 15. On a statewide basis, just 12.6 percent of all the homes sold could be afforded by a median-income family, up slightly from 11.7 percent in the second quarter. Robert Rivinius, CBIA’s President and CEO, said the fact that affordability has not increased dramatically despite a housing downturn that has lasted over a year is ample proof that market corrections alone are not likely to allow the hundreds of thousands of Californians priced out of homeownership to be able to buy their first homes. “Despite market corrections that have made some areas more affordable, the fact remains that the cost of housing in California is out of reach for many hard-working families who want to be able to buy their first home,” Rivinius said. He noted that policy-makers need to recognize that the high costs of land, fees, and over-regulation are pushing homeownership out of reach for first-time buyers and that our state and local representatives need to come up with solutions to ease restrictions to allow more homes to be built to meet the demand of our ever-growing population. “California’s housing costs are driven by supply and demand. Because of increased restrictions and regulations, the supply of new homes hasn’t been able to keep pace with the demand of our rapidly growing population, which has made prices climb dramatically over the years,” Rivinius said. “As a result, California now has 25 of the 30 least-affordable markets in the nation.” Rivinius cited countless lawsuits against housing proposals over environmental issues, a scarcity of entitled land on which to build, and ever-increasing government fees that can add $50,000 to $100,000 to the price of each home or condominium, as three barriers that must be addressed. During the third quarter, nine of the 10 least-affordable communities in the nation were located in California, as were 26 of the bottom 33. Napa County saw a significant decrease in affordability, overtaking Los Angeles County as the nation’s least affordable market – only 3.3 percent of homes sold were affordable to a median-income family. Los Angeles County had been the least-affordable market in the nation for 11 consecutive quarters, but is now second with affordability inching upwards to 3.7 percent. Monterey County was the third least-affordable market (4.2 percent), followed by Orange County (4.8 percent), and San Luis Obispo County (5.7 percent). Only one metro area scored affordability levels higher than 25 percent – Butte County, which decreased from 30.0 percent to 27.2 percent. Affordability climbed by more than 2 percentage points in four California markets, including Merced County, where the affordability rate climbed from 3.8 percent to 7.4 percent. Santa Barbara County saw affordability climb from 6.2 percent to 8.6 percent, while Stanislaus County saw an increase from 7.0 percent to 9.7 percent, and Sacramento County had an increase from 15.0 percent to 17.2 percent. Nationwide, 42 percent of new and existing homes sold in the third quarter were affordable to families earning the national median income. Kokomo, Ind., became the nation’s most affordable major housing market with an affordability ranking of 90.5 percent, overtaking Indianapolis, Ind., which came in second with a ranking of 87.5 percent. ### How the HOI is calculated For income, NAHB uses the annual median family income estimates for metropolitan areas published by the Department of Housing and Urban Development. NAHB assumes that a family can afford to spend 28 percent of its gross income on housing; this is a conventional assumption in the lending industry. That share of median income is then divided by twelve to arrive at a monthly figure. On the cost side, NAHB receives every month a CD of sales transaction records from First American Real Estate Solutions (formerly, TRW). The data include information on state, county, date of sale, and sales price of homes sold. The monthly principal and interest that an owner would pay is based on the assumption of a 30-year fixed-rate mortgage, with a loan for 90 percent of the sales price (i.e., 10 percent down-payment). The interest rate is a weighted average of fixed and adjustable rates during that quarter, as reported by the Federal Housing Finance Board. In addition to principal and interest, cost also includes estimated property taxes and property insurance for that home. This is based on metropolitan estimates of tax and insurance rates from the 2000 Decennial Census, as estimated by NAHB from the Census Bureau's Public Use Microdata Sample (PUMS). Mortgage insurance is not currently a component of the HOI. More information about the HOI, including historical tables for communities nationwide, can be obtained at http://www.nahb.org/page.aspx/category/sectionID=135. Questions about the methodology should be directed to Gopal Ahluwalia (202-266-8480) or Rose Quint (202-266-8527) in NAHB’s Research Department. The California Building Industry Association is a statewide trade association representing more than 7,000 businesses - homebuilders, remodelers, subcontractors, architects, engineers, designers, and other industry professionals. A recent study determined that homebuilding generates approximately $60 billion a year to the California economy and creates an estimated 526,000 jobs statewide. More information is available on the Association's Web site, www.cbia.org |
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Blog: As New Home Sales Stall, Deals Abound
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Posted on November 28, 2007 Reggie Lal
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BusinessWeek
Wednesday November 21, 8:08 am ET
By Prashant Gopal
On Nov. 20, the residential real estate industry seemed to finally get an unexpected dose of much-needed good news. After four consecutive months of declines, the number of new homes being built crept up by a stronger-than-expected 3% in October, according to the Commerce Dept. But on closer look, the October numbers may just be an aberration. Building permits, an indicator of future construction, plunged 6.6% as homebuilders faced mounting inventories of unsold homes and sluggish demand from buyers.
The annual rate for houses and apartments rose to just over 1.2 million in October. But the rate for single-family homes dropped 7.4% to 884,000 -- the lowest level since the early 1990s. Overall, the pace of groundbreaking dropped 16.4% from October, 2006. The small increase in overall housing starts in October was driven by multi-family dwelling starts, which tend to fluctuate widely from month to month.
A Lack of Confidence
"I don't think there's any good news in the numbers," said Celia Chen, Director of Housing Economics at Moody's Economy.com. "The builders are still pretty pessimistic."
Builders' confidence sank this year as contract cancellations grew and banks tightened requirements for home loans. The National Association of Home Builders/Wells Fargo Housing Market index, which measures builder confidence, held steady in October and November at 19, a record low. The index was on the rise in late 2006 and early 2007, reaching 39 in February. Readings below 50 mean more builders see market conditions as poor than favorable.
Chen said she expects the drop in housing construction to wipe away 1% of gross domestic product growth this year and next, but there might be some good news for buyers. Builders are not just scaling back new home production, they're slashing prices. The new home discounts are so great in many parts of the country that existing home prices can look unrealistic by comparison. Moreover, in many parts of the country new home sales have actually fallen below existing home sales.
Paying More for the Lived-In Look
Until recently many buyers were willing to pay a premium for owning a new home where the bathrooms, kitchen, and bedrooms have never been used. But that premium is vanishing and is even reversing in favor of existing homes in parts of Florida, Las Vegas, California and other over-built areas throughout the nation.
That has pressured many builders such as Ryland (NYSE:RYL - News), Meritage Homes (NYSE:MTH - News), D.R. Horton (NYSE:DHI - News), and others, to make deals. In some cases, builders have trimmed prices to such an extent in the second half of 2007 that buyers in many markets are actually paying less per square foot on average for new homes than used homes, according to data from HousingIntelligence.com, a Web site operated by housing research and advisory firm BlueSmoke.
New homes tend to be larger and include more bathrooms, sunrooms, and other amenities, as well as new roofing, wiring, and plumbing. They constitute a small fraction of the housing market. Existing homes make up the bulk of the market and their prices, on a square foot basis, were dropping at a slower pace even as demand for housing was drying up and concerns deepening over foreclosures and defaults by subprime mortgage borrowers.
A Smaller Square Foot
"It boils down to simple psychology," said Jonathan Smoke, president and founder of HousingIntelligence.com. "If households live in existing homes that are on the market and can avoid having to sell (for job transfers, bankruptcies, and other life changes) then they will sit tight rather than take a hit to equity. Builders need cash to pay subcontractors and suppliers, to continue development, and pay their debts. In many circumstances, a builder can take a loss to get rid of inventory."
The median price per square foot for a new home nationally dropped 12% to $123.71 in the four months ending in August, according to Smoke's company. Existing home prices during the same period rose 2% to $129.95 per square foot. The HousingIntelligence.com report included data for 194 of the nation's 363 metropolitan statistical areas, including most of the communities where boom-time construction was rampant, Smoke said.
Builders these days are willing to negotiate on price and will often throw in extras such as granite countertops, upgraded flooring, and subsidized loans to close a deal. Still, buying new isn't necessarily cheaper; the cost of a home depends on its location, your negotiation skills, and the dynamics of an individual market, including the number of unsold homes in a builder's inventory. New home bargains can be found, especially in California markets where developers have been making sizable price cuts.
Watching the Economy
Builders are "willing to sweeten the deal because buyers are uncertain," said Michael Castleman, chief executive officer of Metrostudy, a national housing research firm based in Houston. "It's a good time to buy because you're going to get a better deal today than six or nine months ago. The question is will the deal be better tomorrow? That's the risk."
Castleman said the price advantage of buying a new home is temporary and will end once re-sellers are forced to reduce asking prices. So far, the relatively strong economy is preventing a large decline in existing home prices, he said. If the economy goes south, "People will end up losing their jobs and getting jobs in another city at which point they'll be anxious to sell and get a house in a new city," Castleman said. "Resale values will then drop dramatically."
Richard DeKaser, chief economist of National City Corp. (NYSE:NCC - News) said the new home prices in certain markets aren't necessarily bargains. And existing home prices may not have adjusted downward yet. "Maybe they're just not succumbing to market realities," DeKaser said of resellers. "Historically, if you look at how property prices respond in moments like this, there is a 6 to 12 month lead time. New home prices change before (prices for) existing properties."
Bonuses for the Agents
Pierce Haney, a Realtor with RE/MAX Capital City in Austin, Tex., said the reasons for the shrinking gap between new and used homes vary from place to place. In Austin, many older homes are in the vibrant downtown where buyers pay a premium to live. But builders have been building on cheaper land, away from the city, and now have to work hard to attract buyers. They're not only offering incentives to buyers, they're giving agents special bonuses and free vacations for bringing in buyers.
"If you could sell about five new homes next month as a Realtor, you could probably take a trip to Paris, a cruise to the Caribbean, a trip to Australia and an all expense paid trip to Las Vegas and still make a commission on top of that," Haney said.
Click here to find out the worst markets for new home sales in the U.S. |
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Blog: Single family home starts at 16-year low
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Posted on November 28, 2007 Marty Hackworth
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Builders move to cut back supply of new homes due to glut on market, although apartment growth lifts housing starts.
NEW YORK (CNNMoney.com) -- The collapse in home building continued in October as single-family home starts fell to a 16-year low and permits for all types of new homes dropped to levels not seen since 1993, according to the government's latest reading on the state of the battered home building market released Tuesday.
While overall housing starts edged up to an annual rate of 1.23 million from 1.19 million in September, topping forecasts, that was due to a blip of sorts, a 46 percent spike in the more volatile starts in buildings with five or more housing units.
By comparison, the start of single family homes fell 7.3 percent to an annual rate of 884,000, the lowest level since October 1991. While there were month-to-month gains in single family starts in the Northeast and Midwest, the South, which accounts for nearly half of all new home sales, saw starts fall nearly 20 percent from September; they are now down 31 percent from year-earlier levels.
"The large declines in single-family starts and permits clearly show that this component of the housing market still is weakening seriously," said David Seiders, chief economist for the National Association of Home Builders (NAHB).
Permits, a less weather-impacted measure of building strength that is used to gauge builders' confidence in the market, fell 6.6 percent to an annual pace of 1.18 million from 1.26 million in September. That fell short of a 1.2 million rate economists surveyed by Briefing.com had forecast. Permits for single family homes fell 8 percent from October.
"It's unreasonable for builders to build with gusto when they're staring at an 11-month supply of houses on the market," said Mike Schenk, senior economist, Credit Union National Association. "If you like bad news and gloom and doom, keep reading these reports."
A cutback in the pace of home building in recent months has been a drag on the nation's overall economy. But it is seen as a necessary step to work through a record glut of completed new homes available for sale on the market.
"Builders continue to do what they absolutely have to do in this market downturn," said Brian Catalde, NAHB president and a home builder from El Segundo, Calif. "They are repositioning themselves for the market's eventual recovery by cutting back on production and working down their inventories."
The report comes a day after the NAHB's survey of members' confidencematched a record low level. And it follows a report earlier Tuesday that D.R. Horton, the nation's No. 3 home builder by revenue, reported a loss in its most recent quarter on a 35 percent drop in sales.
Of the nation's largest home builders, only luxury home builder Toll Brothers (Charts, Fortune 500), No. 6 in terms of revenue, has yet to report a quarterly loss in the current downturn - and analysts are forecasting a loss for its just completed period after preliminary results showed a sharp drop in the number of homes sold and an even steeper decline in prices.
The five larger builders all reported much larger-than-forecast losses in their most recent financial periods. Earlier this month Hovnanian Enterprises (Charts, Fortune 500), the nation's No. 7 builder by revenue, reported that the sales pace during October "significantly deteriorated" compared with recent months in most of its markets, and its preliminary results also showed a sharp rise in cancellations.
In October, credit rating agency Moody's downgraded the debt of No. 1 home builder Lennar (Charts, Fortune 500), No. 2 Centex (Charts, Fortune 500) and No. 4 Pulte Homes (Charts, Fortune 500) to junk bond status. |
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Blog: Housing Market's Stench Means Cut Price to Sell
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Posted on November 28, 2007 Marty Hackworth
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Nov. 19 (Bloomberg) -- Raffles, festive balloons, open houses, car giveaways. Will any of these incentives sell houses? Not at the moment.
You don't have to be particularly creative in a market glutted with homes for sale. The painful reality is that homes are commodities. There are more than 4 million of them sitting out there unsold and more coming on the market every day due to foreclosures. If you really need to sell a house, price is the one lever that will move a property.
Almost everywhere your competition is abundant while buyers are waiting for prices to fall even more. U.S. existing-home prices are expected to drop almost 2 percent this year nationally, according to the National Association of Realtors, and are likely to fall further in areas oversaturated with homes for sale.
``Buyers just want price,' says Mike Morgan, a Stuart, Florida-based lawyer, real-estate broker and consultant who researches property markets for hedge funds and financial institutions. ``Buyers have become educated and they can easily cut through the fluffy incentives.'
Morgan doesn't see any national rebound until at least 2010; maybe longer if builders keep constructing homes, and if banks continue dumping foreclosed properties on the market.
Morgan's Perspective
There's no way of telling how many homes are truly on the market since the picture is so dynamic.
About 2 million properties may be foreclosed upon in the coming year alone, resulting in an estimated loss of $223 billion in U.S. home equity, particularly in California, New York, Florida and Illinois, according to the Center for Responsible Lending, a North Carolina-based non-profit group.
Living near a foreclosed home may even trim as much as $5,000 from your own home's market value, the center says. Some 44 million households will be affected, or about a third of all U.S. housing units.
Selling has become a trying proposition in this dour market. Morgan has found that traditional deal-sweeteners such as paying broker bonuses and giving cash back on closing to the buyer aren't working as well as price cuts.
``On one $429,000 home a client wanted me to sell, the seller wanted to give the broker a $30,000 bonus on top of the commission. I told him it wouldn't help. I told him to just drop the price.'
Because the market is so price-sensitive -- buyers want bargains and sellers want to get prices they saw at the market's peak -- you have to be flexible when advertising your home.
Morgan suggests you sell exclusively through Internet-based property sites and local Multiple Listing Services. He has found that newspaper ads, signs and open houses don't work as well as the Internet.
What Works
When you price your property, you need to employ a strategy that can run counter to your emotional perception of the home's value. That sometimes means listing at a price far below what you have anchored upon.
Like any commodity, a home's price will follow supply-and- demand trends. In theory, custom homes in desirable neighborhoods should hold their value. Other properties should be discounted depending on how many similar homes or condos are on the market. Every market is different, though.
``If you don't get any calls on your listing price after a week, drop your price $10,000 or about 2 percent of your original asking price,' Morgan says.
``The market will tell you what the price of your home is. You better be priced 10 percent under your competition -- and then be prepared to think about accepting offers under that.'
I know that's a disheartening strategy. Yet if you have to sell now, you need to take an honest look at housing inventories in your area.
Check Inventories
Selling in Miami? You are up against almost 80,000 listed condos and single-family homes, according to ZipRealty, an online brokerage service.
There are almost 30,000 units in Las Vegas; 42,000 in Boston; 35,000 in Seattle and 110,000 in Los Angeles. Those inventories are through October.
Price-cutting is the order of business in most major markets. The service's price-reduction index, for example, shows that more than half the listings surveyed in Boston, Orange County and Sacramento, California, are discounted.
Even markets that were considered relatively stable are bloated with unsold homes.
``People were telling me Boston and Seattle were OK,' said Morgan, who recently visited both cities. ``I've got news for those folks. They aren't OK.'
Trouble Ahead
Will the Federal Reserve's quarter-point rate cut on Oct. 31 revive the moribund housing market?
It may spur a few buyers, but it won't help homeowners unable to refinance out of unaffordable adjustable-rate loans and headed for foreclosure. Nor will it clear out the massive inventory of newly built and previously owned homes.
Untold numbers of sellers are holding on to their properties or selling without brokers. Many pull homes off the market to rent at a loss.
Also look for builders to keep finishing new homes because they need to move inventory.
To sell those houses, they have to offer steep discounts. They will be advertising and doing anything they can to attract buyers. It will take more than balloons and donuts, though, to land the number of buyers they need to stay in business.
(John F. Wasik, author of ``The Merchant of Power,' is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.
Last Updated: November 19, 2007 00:08 EST |
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Blog: San Mateo Home Sellers in Trouble
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Posted on November 28, 2007 Reggie Lal
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San Mateo Home Sellers in Trouble #6 — 11/05/07 to 11/18/07 — Nearly 20% of New Listings In Trouble
November 19th, 2007 | Silicon Valley, Foreclosures, Wealth, Value, Housing, Mortgage, United States, Personal Finance, Investing, Real Estate, San Mateo, Global Economy, Money
Well, it’s been two weeks since the last update and in the last fourteen days about 305 homes in San Mateo County were listed on Redfin. This time 59 homes qualified as home sellers in trouble. This is nearly 20% of all the new listings in San Mateo! Quite a few of these homes are marked as lender owned. Here are some highlights.
Total Count of San Mateo Home Sellers in Trouble for 11/05/2007 to 11/18/2007: 50
Average Time from Last Sale Date: 1.53 Years
Average Annualized Loss: 15.5%
Average Size of Home: 1204 Sqft
Average Price Per Square Foot: $499
Biggest Loser: 516 MacArthur, Redwood City with an annualized loss of 95.6%
I have noticed that a lot of homes with last sale prices of September or October of this year are lender owned. For example, the biggest loser for this report is a lender owned property and its last sale price is a weird number that doesn’t end with a zero. I have spotted at least 10 homes like this.
I personally think it’s still a good idea for home shoppers to wait a year or two before purchasing, because from this data it seems that the situation is getting worse. About a month ago I reported that there were only 46 troubled homes listed in a two week period and that was equivalent to about 10% of the homes newly listed. Today I am finding almost 20% of the homes newly listed are lower than their last sale price. That is a very big change in merely 4 weeks. Since San Mateo is a fairly small county and supposedly the most resistant to the foreclosure situation I imagine the problem is a lot worse in other counties. Additionally, a lot of the homes in trouble I have listed in previous reports have not been sold and they will pull down the prices further. Another trend I noticed is that a handful of these homes have last sale dates of 2004, so that means we’re rolling back prices to more than 3 years ago. I think that the price of every home should roll back to before 2004, but I am realistic and I don’t think that will happen right away. However, I think it will happen one handful at a time.
Written By:
http://baglady.dreamhosters.com/
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