On the path to a housing rebound
The pain that homeowners and homebuilders are feeling now is a sign that things are going to get better.
By Shawn Tully, editor at large
Last Updated: June 25, 2008: 9:08 AM EDT
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NEW YORK (Fortune) -- The news that housing starts have fallen to their lowest level in 17 years sounds like one more reason to be depressed about the shrinking value of your home. In fact, it's an almost certain sign that the path to a housing recovery is finally in sight.
If prices are going to stabilize, let alone rebound, the United States needs to produce far more first-time home buyers than new houses. That's the only way to tame the glut of "For Sale" signs dotting front yards from the Inland Empire of California to the Gold Coast of Florida.
Builders constructed far more homes from 2002 until 2006 - the peak bubble years - than could possibly be absorbed by the normal growth in households.
As a result, the market is now swamped with one million new and existing homes for sale that aren't occupied, and hence need to sell quickly. That's a multiple of the figure in most downturns, and it testifies to the duration and girth of the bubble.
"For the recovery to begin, builders need to eliminate the standing inventory of finished, unoccupied new homes," says Mike Castleman, founder of Metrostudy, which assembles sales data on four million subdivisions across the U.S.
The massive overhang of unsold inventory has remained stubbornly high. Sure, builders cut back, but sales dropped just as quickly.
Now that excess supply is finally beginning to shrink. In April, the number of new homes for sale stood at 456,000 according to the U.S. Commerce Department, still a big number, but 93,000 below the mountainous figure a year ago.
The return of the first-time buyer
The key player in any recovery scenario is the first time buyer. The housing market operates with a pronounced laddering or ripple effect. When entry-level buyers flood the market, they not only stimulate production of new homes, they purchase existing homes. Those purchases, in turn, allow the sellers to move up to bigger houses.
But when the first-timers are absent, the entire buying chain gets frozen.
Today, newbies are coming back. Why? For the first time in years, entry-level homes are affordable. Builders have slashed prices, and what they're building tends to be far smaller than the McMansions of the boom, selling for far lower prices. KB Home's average selling price dropped to $248,0000 in its February quarter, versus $267,000 a year earlier. In 2006, KB's basic model in Victorville, Cal., a former boomtown east of Los Angeles, took up as much as 3,800 square feet and sold for $328,000. Today, its stripped down offering goes for $220,000, at less than half the size.
So the first time in a decade renters can carry the mortgage payments and taxes on a new house for what they're paying a landlord. Call it the New Affordability.
Here's how the numbers play out: Single-family housing starts are now running at fewer than 500,000 a year. The normal demand for housing, based on immigration and household formation, is around one million units.
We won't get back to that figure for a while because so many people rushed to buy homes during the boom.
But with first timers returning, sales should rise to almost 700,000 units by the end of next year, according to Bernard Markstein, senior economist for the National Association of Home Builders. That means sales will soon exceed new production by as much as 250,000 units a year.
That margin forms the foundation of the housing revival that comes in four steps.
Step 1: First, the return of first-time buyers will shrink the overhang of new houses for sale.
Step 2: Second, because so few new homes are being built, first-timers will start buying existing homes from owners who want to move up but have been trapped by the dearth of buyers. Their improved fortunes, though, come with a big caveat: The prices of new homes are now lower than comparably-sized existing homes. It's as if used cars are selling for more than new ones. That can't last. So move-up buyers are going to have to accept less than they had hoped to get for their current homes.
They'll get a big break as they trade up, however. Unless they bought at the height of the boom, they'll still sell at a profit. They can then use that equity to buy bigger homes at bargain prices. During the bubble, homebuilders started pushing up home sizes to 3,500 square feet or more. It's those behemoths that are selling for the steepest discounts today.
Step 3: Next, housing starts should start rising, probably next year. The increase, however, will be slow and gradual. For the next two years at least, homebuilders will compete ferociously with existing home sellers for customers.
Step 4: Eventually, the glut of existing homes will disappear as well. The excess of new-home buyers over new homes being built makes that inevitable. But the oversupply is so enormous that the healing process could take as much as three more years. Only then will prices in former bubble markets start rising again.
What could go wrong?
One event has the potential to slow or even derail the recovery: A sharp rise in interest rates. Right now, the first-timers are gorging on 6% loans guaranteed by the FHA. But rates may not stay there.
If they rise to 8% or higher because inflation rebounds, it would take a far bigger drop in prices to make new and existing homes affordable.
The New Affordability is now in place. But if rates rise, we'll have to establish a New New Affordability - at even lower prices.
First Published: June 24, 2008: 10:44 AM EDT
Monday, June 30, 2008
Tuesday, June 3, 2008
Home purchase's can fall apart at the last second, you need a realtor who is on their toes to see that everything comes to a finish.
Most buyers and sellers feel relieved when the negotiations are done and the purchase agreement has been signed by all parties. It's a milestone. But, you might want to hold off celebrating until the transaction closes.
Current market conditions have complicated the home sale industry. Lender requirements for mortgage qualification and the types of home loans available are changing daily. Before getting into contract to buy a home, make sure you double check with your lender or mortgage broker to confirm that the loan you were qualified for several weeks ago is still available.
For example, a week before closing, buyers who were purchasing their first home -- and who had been assured that their financing was in order -- were informed that their lender was no longer providing the type of loan they needed to complete the transaction.
These were well-qualified buyers who had enough cash for a 10 percent down payment and closing costs. They needed to borrow a first mortgage for 80 percent of the purchase price and a second mortgage for the remaining 10 percent. The lender who was providing the 10 percent second mortgage decided they would no longer provide 10 percent second loans to first-time buyers.
In a similar situation, buyers who had been approved for 80-10-10 financing were told by their lender at the last minute that their underwriting guidelines had changed. The lender would no longer provide a second mortgage for 10 percent of the purchase unless they were also providing the first mortgage.
A year ago, financing was readily available to just about anyone who wanted to buy a house. And, most of what sold appraised for the purchase price. It was rare to see a listing back on the market because the buyer couldn't get financing. If a deal fell apart, the most likely culprit was an irreconcilable difference over an inspection issue.
HOUSE HUNTING TIP: Due to the change in the credit markets, buyers are wise to include financing and appraisal contingencies in the purchase contract in addition to an inspection contingency. A contingency should give the buyers a period of time to satisfy the condition in question. If they act in good faith and attempt to satisfy the condition, but are unable to, they may have the right to withdraw from the contract without penalty, depending on how the contact is written.
When buyers find themselves in competition, it's tempting to waive contingencies. A year ago, many buyers felt comfortable waiving contingencies for financing and property appraisal. There was a loan product for everyone and appraisals weren't an issue.
This is no longer the case. Most lenders have stopped doing easy-qualifier, no-cash loans and pay-option mortgages, to name a few. Lenders have also tightened up on appraisals, credit score and verifiable income requirements.
Buyer's remorse is a more serious issue in a slow market where home prices are soft than it is in a market where prices are escalating. Sellers can help prevent buyer's remorse from sinking a deal by properly preparing their homes for sale. This includes pricing accurately for the current market so that the buyers don't feel they overpaid when they see the inspection reports.
Obtaining pre-sale home inspections will also help keep buyers from having second thoughts. The more buyers know about the condition of the property before they make an offer, the less chance they will back out due to inspections.
THE CLOSING: A soft market makes an offer that is made contingent on selling another property more risky. Even if your buyer has lined up a buyer for his house, if that deal falls apart so does yours.
Our agents at Coldwell Banker Leader Realty have the experience, know how, and support behind them to propel your transaction to a finish. Call us at 773-465-4200 or visit us on the internet at http://coldwellbankerleader.com to put our 30 plus years of experience in your corner.
Current market conditions have complicated the home sale industry. Lender requirements for mortgage qualification and the types of home loans available are changing daily. Before getting into contract to buy a home, make sure you double check with your lender or mortgage broker to confirm that the loan you were qualified for several weeks ago is still available.
For example, a week before closing, buyers who were purchasing their first home -- and who had been assured that their financing was in order -- were informed that their lender was no longer providing the type of loan they needed to complete the transaction.
These were well-qualified buyers who had enough cash for a 10 percent down payment and closing costs. They needed to borrow a first mortgage for 80 percent of the purchase price and a second mortgage for the remaining 10 percent. The lender who was providing the 10 percent second mortgage decided they would no longer provide 10 percent second loans to first-time buyers.
In a similar situation, buyers who had been approved for 80-10-10 financing were told by their lender at the last minute that their underwriting guidelines had changed. The lender would no longer provide a second mortgage for 10 percent of the purchase unless they were also providing the first mortgage.
A year ago, financing was readily available to just about anyone who wanted to buy a house. And, most of what sold appraised for the purchase price. It was rare to see a listing back on the market because the buyer couldn't get financing. If a deal fell apart, the most likely culprit was an irreconcilable difference over an inspection issue.
HOUSE HUNTING TIP: Due to the change in the credit markets, buyers are wise to include financing and appraisal contingencies in the purchase contract in addition to an inspection contingency. A contingency should give the buyers a period of time to satisfy the condition in question. If they act in good faith and attempt to satisfy the condition, but are unable to, they may have the right to withdraw from the contract without penalty, depending on how the contact is written.
When buyers find themselves in competition, it's tempting to waive contingencies. A year ago, many buyers felt comfortable waiving contingencies for financing and property appraisal. There was a loan product for everyone and appraisals weren't an issue.
This is no longer the case. Most lenders have stopped doing easy-qualifier, no-cash loans and pay-option mortgages, to name a few. Lenders have also tightened up on appraisals, credit score and verifiable income requirements.
Buyer's remorse is a more serious issue in a slow market where home prices are soft than it is in a market where prices are escalating. Sellers can help prevent buyer's remorse from sinking a deal by properly preparing their homes for sale. This includes pricing accurately for the current market so that the buyers don't feel they overpaid when they see the inspection reports.
Obtaining pre-sale home inspections will also help keep buyers from having second thoughts. The more buyers know about the condition of the property before they make an offer, the less chance they will back out due to inspections.
THE CLOSING: A soft market makes an offer that is made contingent on selling another property more risky. Even if your buyer has lined up a buyer for his house, if that deal falls apart so does yours.
Our agents at Coldwell Banker Leader Realty have the experience, know how, and support behind them to propel your transaction to a finish. Call us at 773-465-4200 or visit us on the internet at http://coldwellbankerleader.com to put our 30 plus years of experience in your corner.
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