New construction: builders are giving it away

Last week I closed a sale of a new townhome for one of my buyers. The builder needed/wanted to keep the sales price as high as possible. Knowing this I was able to negotiate 2 years of free HOA's, and some interest-free financing, as well as a very low sales price (lowest ever sold p/s/f).

A few days after closing there was a very appropriate article in the WSJ by Dawn Watoapka titled "Builders Get Creative to Sell Homes". Some excerpts: "Highlighting their desperation to sell houses, builders are bringing back the gimmicks -- mortgage rates that start low, help with down payments, zero out-of-pocket expenses -- that helped fuel the housing bubble before it went bust. The larger builders have loan subsidiaries, where they can pay down the rates and eliminate fees. Builders, trying to survive the worst downturn since the Depression, must move inventory quickly to bring in cash. But they promise they're being responsible by scrutinizing income and credit scores and making sure loans don't reset with unbearable payments. Most industry watchers aren't worried. To them, this is simply the latest batch of incentives - this round inspired by the heightened lending restrictions - necessary for business, even if they stress already-razor-thin margins. Builders don't hold their loans -- they are usually resold to larger mortgage companies that pool them for resale to the secondary market -- and what few loan buyers remain have no tolerance for risk."

One last thing about new construction. Be careful about being one of the first buyers, if the builder can't sell the rest of the units, you'll be stuck owning a home with a bunch of renters.

US Home Prices Lure Foreigners (WSJ May 27, 08)

Thanks to falling home prices and the weak dollar, attention is heating up from foreign investors. Almost one in five Realtors surveyed by the NAR last year said they sold homes to international clients between April 2006 and April 2007. More recent data isn't yet available, but according to anecdotal evidence, those numbers continue to rise.

For many foreign buyers, property in the U.S. is downright cheap. Canadians now get an 80% discount on what they would have paid for a piece of the U.S. just three years ago, when one Canadian dollar was worth just 80 U.S. cents and properties in some areas were 50% more expensive. (One Canadian dollar is now worth roughly $1 in U.S. currency.) For European buyers, whose currency carries 25% more buying power in the U.S. than it did just three years ago, today's depressed property prices are no less attractive. While Americans are discouraged by images of neighborhoods blighted by "For Sale" signs and taped-off properties, foreign buyers are much more optimistic, especially about the long-term health of the U.S. market. "The foreign buyer has an unbridled confidence in the U.S. market that is lacking in the domestic purchaser today. They view this as the bargain of a lifetime and are terribly excited about it. They understand the U.S. market is more stable. We may have down cycles, but we go up back again. They've heard there's a fire sale going on down here."

Despite all the hoopla, though, foreign buyers alone will hardly help the U.S. crawl out of the current housing mess. Unsold inventory in some areas is so abundant that it cannot be absorbed, even with increased interest from our neighbors north of the border or overseas. Foreigners can at least bring to the U.S. market what it's been lacking most in the past months: They'll provide a psychological support of confidence.

Commercial Mortage Default Rate

As of May 2008, the national default rate on commercial mortgages is a slim 0.4%. Source: WSJ article: "Discounts? Yes, but a Fire Sale? No" dated May 9, 2008. I thought that was pretty interesting. The article states that billions, yes billions, were raised in 2007 to purchased distressed mortgages, most of it unspent since there isn't much out there to buy to give good enough returns, and since banks aren't needing to sell. The commercial market has probably weathered the worst of the credit crunch. The commercial markets do have an effect on the residential markets.

Fast Facts

Calif. median home price - April 08: $403,870 (Source: C.A.R.)
Calif. highest median home price by C.A.R. region April 08: Santa Barbara So. Coast $1,170.000 (Source: C.A.R.)
Calif. lowest median home price by C.A.R. region April 08: High Desert $210,860 (Source: C.A.R.)
Calif. First-time Buyer Affordability Index - First Quarter 08: 44 percent (Source: C.A.R.)
Mortgage rates - week ending 05/22/08 30-yr. fixed: 5.98% Fees/points: 0.5% 15-yr. fixed: 5.55% Fees/points: 0.6% 1-yr. adjustable: 5.24 % Fees/points: 0.6% (Source: Freddie Mac)

Zillow, Realtor.com and Inman debate session

At this years California Association of Realtors EXPO the President of Zillow.com, the President of Realtor.com, and publisher of Inman News came together for a debate. Some excerpts:

Zillow.com president Lloyd Frink: "Zillow believes that the nature of the relationship between Realtors and their clients is probably going to change. As opposed to Realtors being the gatekeepers of information, they're much more likely to be giving expert advice on what the information means. Zillow.com is the 4th largest website, and the Zestimate is really just a starting point for figuring out how much a home is worth. The average margin of error is 7.2%. We're very dependent on the support of Realtors and real estate brokers to make our site successful."

Realtor.com president Allan Dalton: "The notion of suggesting to people that they can find out what their home is worth without a Realtor offends me. Zillow.com and the internet has consumers. Realtors have clients. The real estate agent will always be an intregal part of the sales process"

Inman News publisher Bradley Inman: The internet created transparency....with all the information available it's created a rational market, which has created more buyers, which is good for everyone. Every year the percentage of people using the web to search for properties and/or a Realtor has increased, and will continue to do so.

My two cents: Your property's value is determined by how much a capable buyer is willing to pay, period. A good Realtor can use data to help set seller expectation. I use Zillow.com, Realtor.com Showcase, site-specific URL's, as well as a bunch of other means to market and find capable buyers. According to Zillow, 54% of buyers visit Zillow as part of their home-buying process.

according to Kipplinger (May 2008)....

A little good news to make buyers and sellers feel at ease...according to Kipplinger, the Southern California region will add 1 Million residents in the next seven years, overcoming its current housing-driven slump. Most of the growth will come from people migrating from more costly bordering counties. This will probably shore up values around Los Angeles, giving this immediate marketplace a very strong foundation, especially coupled with the fact that housing starts are down and will take time to get going again (less supply), and the finance markets will eventually strengthen and stabilize.

Upgrading your home, excerpts from the WSJ

A little cut and paste from the May 15, 2008 WSJ article titled "Will Upgrading Your Home Help You Sell It?...................The resale value of improvements in general is sliding, according to experts. In a departure from recent trends, homeowners are getting the best payback from relatively mundane improvements, such as sprucing up the exterior of their house or putting in new windows. Remodeling activity peaked in 2006 before slowing last year. And it is expected to fall 4.8% this year, according to a report by the Harvard Joint Center for Housing Studies released last month. Since many homeowners remodel using borrowed money, tighter credit means it's also harder for many homeowners to afford big projects. Even though housing prices are slumping, construction prices have continued to climb. That means adding that new bath will cost more, even as it contributes less to the resale value. Home improvements that help a property stand out in a glut of newly built houses and foreclosed properties are most likely to pay off now, as are those that make a house lower-maintenance or more energy-efficient. Some elaborate remodels, though, may actually make your home harder to sell. Lenders are nixing higher-than-normal appraisals, and that many buyers are looking for a deal. Even if someone wanted to pay extra, they would have a hard time financing the house unless they have a lot of cash. Inferior remodeling work may be worse than none at all. Cheap cabinets and poor workmanship won't fool buyers as they might have a few years ago, when many had to make snap decisions about buying a house. "Make the outside of the house look really great so that people fall in love between getting out of the car and the front door. That is money that is worth spending."