I read an interesting article in Business Week entitled, "Housing: That Sinking Feeling," which discusses the aggressive tactics that homebuilders are taking to clear out their unsold inventories. The article got me thinking about the homebuilders' role in the current market state.
Ironically, the Phoenix real estate market is being hurt (again) by homebuilders in a sort of pendulum back swing effect.
The run up in the Valley's housing market in 2004-2005 was exacerbated by over-building coupled with irresponsible lending practices by the builders themselves. Many builders sold double-digit units to investors who were clearly poised to either re-sell or rent their units out upon completion of construction. Neither high resale inventories nor high percentages of tenanted homes helps local property values.
As with many lending institutions, some builders' financing arms were overly lax with application approvals, putting some homeowners in risky programs that we're seeing play out in today's market.
For an interesting article on how homebuilders contributed to today's crisis by jumping into the mortgage business, click here.
Now we see builders, in a desperate play to generate cash flow and "hit their numbers," slashing prices so steeply that they're hurting their own customers, many of whom are experiencing such huge losses in equity that it will be a decade or more of historical appreciation rates before they can even hope to break even.
When builders slash prices, they do accomplish their goals, but they hurt surrounding homeowners in other ways, too. By lowering sales prices, they affect 'comps' values. Comps are used in most appraisals to determine fair market value for a given property. So properties that sell at fair market value in the eyes of the buyer and seller, but not in the eyes of the bank, won't close escrow unless the buyer and/or seller 'take their lumps' and compromise. Either the seller lowers the price or the buyer comes up with cash, if they want the deal to happen.
Furthermore, homeowners who have responsibly accrued some equity in their homes and want to pull some out through a refi may not be able to do so.
And all surrounding communities that have already been built out, suddenly find themselves competing with the builders if they decide to sell.
To the builders, this is business. To homeowners, it's intimately personal. Unfortunately, the builders have the advantage of deep pockets and being able to control the game, at least within their communities. The homeowners are the ones who suffer in the long run.
Saturday, October 6, 2007
Home Builders Hurt Phoenix Housing Market (again)
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5 comments:
What I find perplexing is that all the so called real estate "experts" are suddenly coming to the conclusion the market is in trouble, except now, it's not the common home owner selling thier home that's causing valuation issues, it's the builders! This is an absolute ridiculous disposition! What frustrates me about this article is that it makes no mention whatsoever of the significant drop in new housing permits over the last 12 months. It is also devoid of statistics from various other sources, which serve as key indicators that even though our market is in a virtual stale mate, it is holding it's ground:
* Q2 2007 saw an 0.3 percent drop in value
* Overall, Arizona’s median home price climbed 85 percent since 2000 to hit $260,000 at the end of 2006.
These two figures alone provide ample evidence that most who purchased home since 2000 made fantastic profits, even with a 0.3 percent decline in valuation.
Simply put: builders aren't the problem... buyers and lenders are! Those buyers are a blend of common folk like myself and both in and out-of-state investors who looked to turn a quick profit. Those lenders who offered creative, or better said, "riskier" loan programs, are now all but a figment of our imagination, and thankfully so! My argument that that common home buyer who purchased a home in which I would reside is based on personal experience. I too purchased a home using a "teaser" rate; not to buy "more" home, but to buy a home altogether. Two years later, I refinanced, but still couldn't qualify for a 30 year FRM with a rate that made good financial sense. So again, I entered into another ARM. Thankfully, I sold my home 9 months after the hay days of 2006-2007, and ironically, made a profit. I now own a home with 3x the land and almost the same square footage I had in the Ahwatukee area, this time in Gold Canyon. What's more, the builder I purchased my new home from a builders who provided me a $ 100,000 credit, which allowed me to secure a sensible 30-year FRM and a monthly payment that didn't place my family in the poor house. This, in conjunction with a healthy down payment, helped us to walk into our new home oozing with equity. 3-5 years from now, I will be even more proud of our purchasing decision.
Speaking of which, at the end of the day, it is the "buyer" who ultimately decides to enter into a contractual agreement to buy a new home. If a home owner bites off more than it can chew, then it will come back to haunt them if they can't sell in due time. The other part of the story are those unscrupulous lenders who were blinded by sheer greed!
So, when you take the time as a real estate professional to put together an article like this one (which by design or coincidence became a finger pointing expedition), please do your audience a favor and paint a more honest picture. It may not help you sell more real estate, but at least those who read your articles will respect you for what you have to say about a fairly controversial subject.
Glad to see someone's reading!
A few comments about David's comments.
First, related to this blog in general. I don't see how any single posting will help me sell more real estate. Hopefully a long, cumulative effort of consistently insightful postings will allow me to build enough rapport with my readers that they WOULD trust me to assist them with a home purchase or sale.
As for the content of this blog, not every posting is going to be a dissertation. I'm going to have some analytical pieces, some 'fun' pieces, and perhaps even a few general musings, as the blog is described. *Usually* the points that I make will be backed by factual, demonstrable data, as anyone can read on their own using the links that I referenced. However, many of my postings will simply be based on my professional perceptions. Like them or not, the perceptions of a busy, full-time real estate professional is relavant and provides a level of insight that the numbers may not capture. And I don't work in a vacuum. My opinion is also shaped by the input of other Realtors that I work with.
In terms of where we find ourselves today, I believe the blame lies with a number of different players, from builders to lenders to naive, or even deceptive, homebuyers. Up until a few months ago, when so-called stated income and no-doc loan programs were used to get many homeowners into properties, the writing was on the wall. A pharmacist technician and her convenience store manager husband who claimed $160,000 in combined income should have thrown up some red flags. Shame on the homebuyer. And for the loan processor at the lender who 'mis-typed' the income and debt levels on the loan applications, shame on the lender. Both parties are paying for their actions today. What we need to remember, with regards to this posting, is that ALL builders have preferred lenders that they're 'cozy' with, and the lenders used by the larger builders are actually corporate entities of the builders themselves.
Now, as for pointing the finger at homebuyers. While some failed to make good choices, there are plenty of people that I work with who purchased during the height of the market who put 20% down and secured a 30-yr fixed note who want to sell now and cannot do so without sacrificing tens of thousands of dollars. These people weren't looking to turn a quick profit. They found homes that they wanted to live in and now find themselves wanting to move for whatever reason. Job transfer, to be closer to relatives, health issues and hospital bills, whatever. Pre-meditated profit motive does not come into play with them, but they're paying in equity like everyone else. They're the innocent victims and believe me, they're more numerous than you might think.
When I can't sell a 3 year old home in a popular Gilbert community because the builders at 3 neighboring home communities are selling their properties at $80/sq ft, how are the builders not partially to blame? They are doing what they need to do, I understand, but they have resources to ALLOW THEM to do what most homeowners cannot. That is, reduce prices to where homes will sell and still walk away without declaring bankruptcy.
Finally, with regards to the numbers that David cites in his comment. I'm not sure where they came from, as they're not cited.
In fact, according the the Arizona Regional Multiple Listing Service, which includes the Realtor Boards from all areas of Maricopa County, median home prices were $250,000 in October, November, and December of 2006, and hit a high of almost $265k in June 2006.
Here's what we see for median sales prices in 2007:
Jan: $250k
Feb: $247.9k
Mar: $252.5k
Apr: $250k
May: $255k
Jun: $255k
Jul: $250k
Aug: $245k
They're all over the board! However, if we look at # of units sold, we are on track to sell fewer homes in 2007 than were sold in 2001! Think of how many people have relocated to the Valley since then, and how much new inventory has been added to the market since then.
It's foolish to simply use prices as a gauge of market strength or value. In fact, median home prices were higher in June 2007 than in every month in 2005 except 2. Sounds like we're doing pretty well! However, by the end of the year, we'll see about 1/2 of the number of units sold in 2007 as in 2005. I guarantee you that the average homebuyer that purchased in 2005 is looking at a loss on paper today. Guaranteed.
However, as I've noted before, people who have owned since 2004 or earlier are the ones who can sell today and still see a profit, assuming they haven't otherwise leveraged their equity. They were fortunate to buy before the big run up and still stand in much stronger equity positions than prior to 2005.
As for the original tenet of this posting and my opinion of the builder's role in the overall market we face today, I stand by my assessment of this controversial issue.
Thanks for your comments, David. Discussions like this one are exactly why I started this blog.
First, let me state for the record that I am not a real estate "expert", nor am I a real estate professional. I am an average citizen who has lived in the Phoenix
Metropolitan area for around 5 years. Second, the stats I refered to in my previous post came from the following source, who I might
add has have some 176K + hits since it's inception:
http://azrealestate.wordpress.com/category/metropolitan-phoenix/
Now, on to far more important items. Justin, trust isn't earned though the existence or evolution of a blog. Nor is it earned through
building a long list of "insightful" postings. Trust is earned through good old fashioned honesty and integrity. What's more, the
intangible we call "trust" begins and ends with the very first word, action, or deed manifested by your own person, either personally or professionally. That said, if you are is aiming to build "faith" and "trust" in your "expertise" as a real estate professional, you owe it to your audience to paint a [fair] and balanced picture in the interest of providing them the full benefit of reality as it relates to the condition of the real estate market.
Speaking of which, you seemed to have taken at least some of my advice as evidenced in your response to my previous post. What I don't understand is that you find it ok for an existing home to sell close to, and in some cases, double the price per square foot of a brand new home? I simply don't understand your logic? It seems as though you want your audience (or those who read your blog) to somehow conclude this it is a bad decision to purchase a home for $ 80 per square foot!
Now let me cut to the chase: what I perceive through your latest blog article "Home Builders Hurt Phoenix Housing Market (again)" is that you are frustrated that you have competition. Better said, it is my conclusion that you think the competition is unfair. Where the transactions occur (either with you or a new home builder) is what your article is all about. The reality is that no one in their right mind is likely to purchase a home whose equity has reached it's full potential both near and long-term. And yes, I agree, buying a home is "personal" for the home buyer. It is also the single largest purchasing decision we will make in our lives.
So why would you use a blog to complain about your competition? Why not beat them by telling your clients the honest truth about the true valuation of thier homes had it not been for speculators, runaway lenders, and yes, common home buyers like myself, who experienced the same sting of unethical lending practices? Honestly speaking (I wouldn't have it any other way), I applaud builders who see reality for what it is in terms of the condition of our market, and most importnatly, what it takes to move inventory; which I might add, is what you too are in the business of doing.
Plainly speaking, I understand this is nearly impossible because we all hate to face the bad news of selling a home at a loss or at a price point that is less than acceptable in the minds of the seller. I couldn't agree with you more that price point alone shouldn't be the only factor use to determine the "true" value of a certain home. I also agree with you about the roughly 50% reduction in home sales when compared to the 2005 and 2007. But the "why" shouldn't rest solely on the builders shoulders. The blame rests on the shoulders of almost everyone in the real estate industry, including, as I've mentioned in the past, buyers and sellers who subscribed to the hysteria we saw in our market some two years ago.
Look, we too were sellers whose initial sale price was $ 797K right at the eclipse of our superheated market. The result? We ultimately sat on the maret for some 9 months, made multiple price reductions during that time, and finally sold our home for slightly over $ 600K; not to someone we knew, but to our realtor's aunt. What's more, the organization under which you sell homes sold a home to an unsuspecting family relocating from Tennessee (who has since move back) for ~ $ 812K (ask around your office about this dwelling in the Crossings at Foothills Reserve), whose selling price dropped into the low $ 600's.
Using the aforemtioned scenarios as a backdrop for my next point, why is it that you find it reprehensible for builders to "slash prices", but ok for a realtor to do the same thing in the interest of selling homes?
All I have to say about this is thank God this argument is taking place in a free, Democratic society. Otherwise, you might line all builder up and have them executed for their otherwise honorable conduct.
Interesting post, David. You're clearly impassioned about this subject, which is great.
I have a few replies to some of your comments:
-Web traffic levels have ZERO correlation to data validity.
-To the extent that my postings often share my "words, actions, deeds," and thoughts, they CAN serve to achieve a certain level of trust with my audience. Hopefully at least enough to call me to learn more about my team's philosophy and service approach.
-You seem stuck on the idea that my postings should be replete with hard statistics and data. I've stated before, sometimes they will be and sometimes they won't. And sometimes I'll simply point to the data, as I did in the original posting.
-Purchasing a home for $80/sq ft is a great deal in some cases! It's just not one that many homeowners can compete with.
-Builders are NOT my competition. In fact, as a "Cooperative Broker" we sell a good number of new homes, all based on our clients' needs and goals.
-Last year when the market began to slide, builders decided they'd actually *allow* their customers to have independent representation again, and went back to offering co-brokes to Realtors for bringing them buyers. I'm pleased that I *CAN* once again look out for my clients' interests when they choose to purchase from a builder, instead of watching them be forced to muddle through the transaction without representation.
-Many Realtors specialize in selling new homes, a niche that would be easy to target in today's market, what with all the incentives they're offering to unload homes.
-Are builders adjusting to the market more quickly than most homeowners? Absolutely! But as I pointed out earlier, they have the resources and the obligation to their shareholders to do so.
-A homeowner being forced to sell their home at a loss is "bad news"?! That's a gross understatement. For many, it's the first step towards bankruptcy and all the painful financial and emotional issues that come along with a situation that feels, to many, hopeless. To the builders, it's a line item on their Income Statement, not an albatross that they'll be forced to live with for the next decade or more.
-There are about 4300 Keller Williams agents in the Valley, so I have no idea as to which transaction you're referring to in the Crossings.
-I never said it was "reprehensible" for builders to slash prices. My point is that their aggressive tactics are hurting residents in surrounding communities that need to sell or refinance today. No one can deny that.
-Your last two sentences should have been your opening thoughts, because the fact that you'd imply that I would have anyone executed would have saved readers the valuable time of reading any of the rest of your post. How can anyone take your post seriously after such an absurd comment?
It's interesting, David, that you see this as an "argument," while I perceive it as a free exchange of ideas. I don't turn your opinions into a personal attack against you, but you seem to take such an extreme and contentious position that you neglect to recognize that we actually agree on several key points.
I too have some final feedback to share:
- While web traffic doesn't [necessarily] correlate with data validity, it is actually an important [key indicator] one can use to determine how popular,
compelling, and meaningful a given website (or blog for that matter) is perceived to be. Providing fresh, credible, beneficial, and complete information is
one of the cornerstones of generating repetitive visitations, and in some cases, a "viral-like" effect in business and social circles on the net. My
expertise is in the marketing, advertising, website design, SEO, SEM, and e-marketing space. At the end of the day, the net-net of what I do is most often
measured by the demand my efforts create for my clients.
- I applaud your interest in achieving a "certain level of trust" with your audience; however, I don't respect anyone in a professional capacity who fails to paint a clear, fair and balanced picture to the public, from which ironically you ultimately find your customers. How about that "philosophy" and "approach"?
- I am hardly stuck on the idea your postings should be laden with hard statistics. I merely used that which I have read on other real estate websites about
our market to reinforce my contentions with your original posting, which literally accused builders for a polarized real estate market.
- Purchasing a home for $80/sq ft is an absolutely fantastic deal, especially for first-time home buyers. Thank God for a free market in which all players
can find a place to play. The reality is that home prices in the Phoenix-metropolitan area rose so fast and high that many honestly can't afford to buy a
home now. I'd love to see your W-2 between the years of '04 and '05.
- Builders DO compete with you, otherwise you wouldn't have invested the time and effort to cut them down at the knees in your original blog posting which
precipitated the series of responses you have received from me thus far. And yes, they also serve as a "cooperative broker" when and where it makes sense.
- I can't speak credibly about your point pertaining to independent representation as it is something I never experienced or had knowledge of during my first home buying experience in 2004 or in 2007.
- Perhaps I need a little clarification? So a homebuilder who sells a home is somehow in the wrong for doing so? Again, either by choice or Freudian slip,
you have yet again attacked homebuilders by cleverly classifying a transaction with the word "unload". Enough is enough! A new home sale is the same as an
existing home sale. It's a sale! Again, thank God someone has the ability to adjust their price point to allow those who can afford and qualify for a home
loan to buy a [new property] whose return-on-investment will most certainly be significantly higher than an existing home whose equity has all but reached
it's pinnacle. Oh, and speaking of "incentives". When we first listed our home in Ahwatukee, we started at $ 227.97/sq ft, compared to other similar homes
that had previously sold for $ 232 or more per sq ft. Being "reasonable" sellers, we realized the price point wouldn't hold, ultimately lowering it down to $ 172.85 /sq ft. Today, the same home style (see MLS# 2859478, which has been on the market for well over 1.5 years) is priced at $ 742,000. What’s the
difference you might ask? Our home sold because we made the decision to lower our price to a point we believed (with the assistance of a realtor), would
attract a buyer. Guess what? It did! And thankfully so!
- Yes, I absolutely agree that homebuilders are adjusting prices more rapidly than those who are selling a pre-existing home. But it’s not just because they
have the resources, nor is it because they are obligated to shareholders to do so. Conversely, it’s because they realize demand has dwindled so drastically
that it makes sense to do so. Ironically, this is the same thing we did as a pre-existing home owner. Moreover, as you well know, savvy shareholders are
looking at earnings per share (public companies) and long-term growth and profitability (both applicable to public and private companies). As a shareholder
of many different stocks, I care about all of the aforementioned. The delta between labor and raw material costs required to build a home has increased, not
decreased over the last 12-24 months. This, in conjunction with the need to sell homes at a lower price point in order to create demand, has rendered profit
margins paper thin. So, new homebuilder’s profitability has also likely declined in proportion to the margins you too are experiencing as a realtor.
- I agree with you on your point that selling a home at a loss is "bad news", for the person selling the home. Oh, and bankruptcy is something I too am
familiar with. And yes, it was a painful lesson I wouldn't wish on my worst enemy. The repercussions lasted for more than 10 years. But I blamed no one but
myself for the personal, financial and professional decisions I made at that time. But again, I didn't blame the creditors for my situation. I blamed myself. Its called "personal accountability" and living within ones means. You know as well as I do the "albatross" precipitated primarily from conglomeration of
loose lending standards, stated income loans, home equity lines of credit, risky and high penalty loan packages, speculators, and, oh yes, superheated,
unsustainable price run-up's.
- Again, you classify what Wall Street would call a "market correction" as "aggressive tactics". I am not in denial that I can buy a new home at a price
point more suitable to my liking vs. buying a home with an inflated and unrealistic price point.
- My point about executing new home builders was hardly literal. As one with an MBA, I had assumed you understood the distinction between the aforementioned
and the "literal". That said, I will go on to say that freedom of expression and speech is a byproduct of a democracy I fought to protect for 14 years, and
from which I earned two honorable discharges from the U.S. Armed Forces. I take both very seriously and balk at your suggestion that your readers should
arbitrarily dismiss my well-deserved input in the interest of introducing balance to a topic which might have otherwise resulted in your hijacking of reader
perception as it relates to the "real" cause[s] of our current real estate situation. Moreover, how can anyone take you seriously or credible if you lack the desire to render a fair, full, and reasonable assessment of a matter deemed very important to our local and national economy and lives.
- Thank you for misclassifying my points of view as "argumentative". My point here is that it is ok that we agree to disagree. It is also ok, or at least I
thought so, for your readers to express their points of view regardless of which side of the fence they land? I'll cut right to the chase here: You obviously have an objective in your retort. The most apparent is your interest in eroding the truthfulness one might find in the points I make in the interest of maintaing command and control over the subjects you yourself elected to elaborate upon from a "professional" perspective. That, in and of itself, is quite surprising to me, especially given the fact that I have taken my own time to carefully prepare my input/feedback/antagonistic commentary, or whatever you want to call it. Listen, I am not as interested in being a thorn in your side as I am in seeing that someone like yourself, with the extent of experience and education you have, to give your audience a quality handshake and tell the whole story for what it is: a horrible scenario we all wanted to deny and hoped would never come, but ultimately did. From a macro perspective, I need you and you need me. Although I am not a "buyer" today, that doesn't mean I won't be a "seller" in the future. And regardless of how the experience may unfold, as I related in a previous post, at the end of the day, I am the one who signed the contract. Thus, I (as are all people) responsible for the decisions they make when they buy or sell a home.
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