Low MLS inventory was a boon to homebuilders
Monday, in the post Can the Fed reflate the housing bubble without negative side effects?, I discussed the various market distortions resulting from the federal reserve’s zero-interest-rate policy. The inflated asset values are byproducts of the fed’s actions, but with respect to housing, the distortion of market prices is what the federal reserve wants to happen. To make the stimulus have good effect, lenders stopped foreclosing on delinquent mortgage squatters and hoped to bait them into temporary loan modifications with the carrot of rising home prices. The slowdown in foreclosures caused the MLS inventory to evaporate. The result of the federal reserve stimulus and the lack of MLS inventory is a supply of homes that fails to meet current demand. Builders are taking advantage of the situation to ramp up construction to deliver the supply the banks are not.
Home builders are bidding up land prices, scrambling to find workers and building bigger, more expensive homes than they did just a few years ago.
By Alejandro Lazo, Los Angeles Times — April 13, 2013, 8:08 p.m.
Morning light revealed pitched tents and scattered sleeping bags in front of the sales offices of luxury builder Woodbridge Pacific Group.
Attracted by a dozen new Huntington Beach homes touted as “starting in the low 1,200,000s,” about 15 hopefuls had camped out for days. They were waiting for a chance to get their names on a list to buy into the first phase of a new subdivision.
Anyone who camps out to buy a home is a fool. The people who did this in 2004 and 2005 ended up underwater or in foreclosure, and that was no accident. When buying into a speculative frenzy, buyers are likely to lose money unless they time their exit very carefully. Plus if the demand for the product is that strong, don’t people think the supplier will raise the price? Is any rational supplier going to sell their product under market value to people who camp out on their doorstep? Wouldn’t it be wiser to inflate the prices for these devoted buyers and get more money out of them rather than cut them a deal?
One would-be buyer had flown in a friend from Las Vegas to hold his place in line. Another shopper had hired a pair of men to wait in 12-hour shifts.
It’s stupid enough to waste your own time in one of these lines, but to actually spend money to pay someone else to wait in line is stupid beyond belief.
Christopher Thibodeau, a 43-year-old operations director for a biotech company, rented out an RV so he could telecommute for a week in the builder’s parking lot.
“Do you absolutely have to be here? Maybe, maybe not,” Thibodeau said, sitting inside the spiffy camper with his laptop and iPhone laid out on a desk before him. “I am just going to be safe and camp here.”
Safe from what? Missing out on the deal of a lifetime? That’s kool aid intoxication.
With mortgage interest rates low and prices for existing homes rising, builders are coming back into the market. They’re bidding up land prices, scrambling to find workers and building bigger, more expensive homes than they did just a few years ago.
The tents in Huntington Beach brought to mind last decade’s housing boom,
but the market has changed dramatically since then. Tens of thousands of Southland homeowners who would like to sell their homes still can’t because they’re underwater. That has created a dearth of inventory that’s fueling bidding wars and camp-outs for a limited supply of dwellings.
Kudos to Alejandro for accurately describing what’s happening in the market.
The median home price for new homes sold in Southern California jumped 19% year-over-year to $401,000 in February, according to real estate firm DataQuick. Builders started construction on 2,097 new, single-family homes in Southern California during the fourth quarter of 2012 — a 56% increase from the same quarter the previous year, according to research firm Metrostudy.
That sharp increase is perhaps not surprising, given that 2011 was the worst year on record for new construction. Still, the rapid turnaround may be one of the most meaningful developments for the broader economy; new home construction is a powerful driver of jobs and economic activity.
The building will create jobs not only in construction but in related industries including lumber, concrete, heating and air conditioning and more. The economic boost should be even stronger when builders complete once-dormant subdivisions and move on to virgin land.
“They are going to begin with the development of new land, and that is typically about a third of the cost or more of the overall house,” said Gerd-Ulf Krueger, principal economist at HousingEcon.com. “That is going to have a pretty big impact on the housing economy.”
Perhaps builders will start with raw land again soon, but I know they are not doing this now. The supply of finished lots is running out, but there are many entitled and semi-entitled lots available. These will get purchased and turned to finished lots for builders long before developers start working on raw land.
Through the bust, builders scrimped through unprofitable quarters by putting up small, simple models to compete with the many cheap foreclosed homes on the market. Now they’re going big again as prices mend, even in markets that experienced severe price declines, such as the Inland Empire. …
Believe it or not, builders can profitably build and sell houses for $250,000 in subdivisions where they were selling $550,000 properties seven years ago. The extra $300,000 was in residual land value which has since fallen to near zero. Builders are only concerned with the cost of sticks and bricks. Anything left over becomes residual land value. During the bust, land residuals went negative, and all development and entitlement processing stopped. Now with rising prices, many of these parcels have residual value again.
With the real estate market now recovering, the project’s builder, Lennar Homes, has done its own rethinking. The Miami corporation recently unveiled a “Superhome” at Rosena Ranch. It’s basically two homes in one — with a section that functions as a separate apartment, with its own kitchen and bathrooms. The builder hopes to attract families looking to house multiple generations under the same roof.
Dual McMansions? Actually, i like the concept. I have a special needs child that will likely live with us when he is an adult. A Superhome which gave him some measure of privacy and independence would be a great arrangement for us. I know one local family that shares their home with aging parents. I think we will see more demand for multi-generational housing, particularly as the baby boomers age and want to be near their children for support.
If the McMansion was the icon of excess during the housing boom, the Superhome at least seeks to make more efficient use of a huge space. Lennar has packed as many as seven bedrooms and four bathrooms into about 4,000 square feet.
“With interest rates so low, it is still affordable to buy a larger home,” Lennar regional president Greg McGuff said on a tour of the property. “You really have an opportunity for multi-generational living, but you also have the opportunity for more people living in the home to contribute to the mortgage.”
Few new homes have been built since the housing crash. Nationwide, just 42,000 completed new homes were available nationwide in February, which is near historical lows, according to the Commerce Department. Inventory in the market for previously owned homes has also dried up as wealthy investors and others have snapped up foreclosures.
In the meantime, buyers have been drawn back to the market by an improving economy, low prices and historically low interest rates. Emile Haddad, chief executive of FivePoint Communities, developer of the massive Great Park Neighborhoods project in Irvine, said both buyers and builders sat out the slump waiting to see what would happen.
There was plenty of waiting for higher prices and some evidence of demand for new product. The Irvine Company wasn’t going to sell unless they could get the land price they wanted. When prices fell and the land values were not justified, the Irvine Company simply stopped selling land, so homebuilding dried up. The group the bought the Great Park grossly overpaid for the property, sot they had no choice but to wait for rising home prices to avoid losing hundreds of millions of dollars.
Many builders, however, are taking their time bringing new products to market, said Brad Hunter, chief economist for Metrostudy. They are more concerned about charging a premium price than about selling homes in volume.”We have seen more and more builders in the position of being able to raise prices again, and to me that is the most important trend,” Hunter said. “There are builders in populated areas in Southern California that are trying to slow down their sales pace by raising their prices.“
That will work. Buyers have ability to raise their bids, but once builders raise prices to levels where jumbo financing is required, the demand falls off a cliff.
Home builders typically sell new subdivisions in phases, setting fixed prices for each phase rather than selling homes to the highest bidder. The strategy is to raise prices in subsequent phases to guarantee price appreciation for early buyers and steady profits for the builder.
But demand is so strong that some builders are tweaking the traditional formula.
When Woodbridge Pacific last month announced it would be selling new homes as part of the first phase of its 80-home Seaglass project in Huntington Beach, it did not create a waiting list of pre-qualified buyers, as builders often do. Instead, it decided to sell the homes first-come, first-served as a way of getting the most motivated and committed buyers, said Todd Cunningham, chief executive of Woodbridge Pacific.
The company also raised prices after the first six homes were sold.
That turned off Thibodeau, the biotech executive, who had waited a week just to get his name on the list. He had planned to snag a five-bedroom model for $1.3 million, but balked when Woodbridge Pacific boosted the price to $1.4 million.
“I just decided it wasn’t worth it,” he said. “I’m not trying to sound like an angry, disgruntled guy. They have limited inventory, and the market is a very hot market.”
So this guy camped out for a week and the builder raised the price on him so he couldn’t get a deal. Who would have guessed that would happen? LMAO!
OC builders are too optimistic
The current market conditions are ideal for homebuilding. There is little competition from MLS inventory, and buyers have capacity to raise their bids. Due to its highly leveraged nature due to the residual value effect, raw land has enormous potential for profit, particularly in the Inland Empire where prices have much more room to rise than they do in Orange County. In my opinion, raw land in Riverside County is one of the best long-term investments available. The Coastal California markets have the least potential to rise significantly. Prices are not undervalued here nearly as much as it is in Riverside County. The barriers to financing at the jumbo loan threshold restricts many of these sales to move-up buyers with plenty of equity and good credit, and there aren’t many of those after the crash and the recession. The builders will do well as long as interest rates remain low and MLS inventory remains sparse. Unfortunately, those conditions will not persist forever.