‘Buyers Abandoning Ship’ In Washington
The Washington Post has this on cancellations. “As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits. Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship, more than double last year’s rate, and perhaps as high as one in three new-home buyers in some places.”
“And nationally, some big builders are beginning to report cancellation rates upward of 25 percent. A home-building research firm, this week said that its latest survey of builders showed that the cancellation rate for the Washington area in March more than doubled from a year earlier.”
“The survey shows the cancellation rate locally highest in Fairfax County, at 30.9 percent, compared with 0.8 percent a year ago. Half of condominium buyers there canceled, compared with no cancellations a year ago.”
“People who are buying for investments rather than residences are the most likely to bail out, experts said. They reason that it would be better to lose a deposit than to go ahead with an investment that could lose value, particularly if builders are cutting prices in the same or nearby projects.”
“Typically, buyers of new homes pay upfront deposits calculated either as flat amounts as low as $1,000 or as a percentage of the price, generally about 5 percent of the home price. Despite the pain of giving up that much money, some buyers are canceling to cut their losses because builders are pricing the same houses for so much less, Alexandria lawyer James Brincefield Jr. said.”
“‘I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less,’ said Brincefield, who is preparing litigation for buyers who want to sue builders to get their deposits back.”
“And builders are trying to make it harder for people to split, lawyers and real estate agents said. ‘It’s getting really kind of scary right now because builders are waving their sabers,’ said Christine Cormack, broker in Ashburn and a real estate investor. ‘They’re holding people to contracts.’ That can include going to court to force closings.’”
“Hanley Wood’s survey showed the Sacramento area with the highest cancellation rate, 28 percent, up from 2.6 percent in March 2005. Rates in Las Vegas, Denver, Phoenix and Orange County, Calif., also were higher than those in the Washington area”
“While some deals may have turned sour for the original buyers, that can be heartening to those looking for bargains. Builders are offering more incentives to buy, including price cuts and free upgrades.”
“‘I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less,’ said Brincefield, who is preparing litigation for buyers who want to sue builders to get their deposits back.”
Typical. This is amazing on so many levels. I wish I were in position to walk away from 125K.
And of course the lawsuits. People want to be able to make bets that no sane person would and if they don’t work out, there’s always someone you can sue. That’s probably what drove me out of that business. I hated the plaintiffs, not the defendants by and large, although they were scuzzy too.
And suing the builders is hardly “walking away.”
When is a contract not a contract? When I don’t like the results! Gimme my money back!
All right Lawyers and accountants full employment for the next 10 years!! LMAO
http://www.suntimes.com/output/news/cst-nws-burns01.html
If you’re black or Hispanic, you can always accuse the HBs of “racism,” especially in places like Detroit or Washington DC where you can count on getting a “jury of your peers” who love sticking it to Whitey.
Remember when people were camping out just to be one of the lucky ones to get a pre-construction contract ? How many of those people read the CONTRACT while they were blinded by gold fever ? I made a few rules years ago : never camp out , never sign a contract quickly without reading it, never count on the masses knowing what they are doing , never trust a salesperson , and never say never .
Flipper to self… Damn, 125K lost. There goes all my profits from my last two flips. I’ll call my lawyer to see if I can get that money back from the builder. If that doesn’t work out I’ll start pushing for gvt “relief.”
Any Comments by the brethren on the 20/20 Program last night. It was so boring after reading this blog for a few months, I fell a sleep.
Yeah I’m bummed I missed that. All I caught was the last 20 minutes where doofus flipper with Ken doll hair was spouting off his views on flipping.
IMNOHO, it was a pretty weak and UN-hard-hitting report, but at least it was a start.
Oh man. Are you kidding me? Boring? It was the most riveting TV I’ve seen in months!
First segment: 15 minutes on flips gone bad. Interviews with people who lost money. Interviews with people who bought at the end of the frenzy and then walked when they woke up and realized they paid too much.
Second segment: Houses of horror. More on how awful home owning is: investigative question: how’s the market for houses where gruesome have occurred? Talk about aversion therapy!
And yes the Fabio guy was lame but in general this program as so “anti house” for national TV that in the Seattle area the local nightly news felt they had to do damage control:
Before 20/20 ended, the local news had a spot- “Seattle RE still RED HOT!!!! See all about it at 11!!”
I watched THAT and it was a total fraud piece on a neighborhood where supposedly it’s impossible to buy a house, no matter how hard you try, because stuff just doesn’t stay on the market long enough.
The problem is, that happens to be a neighborhood I’ve been watching carefully since January. About 3/4 of the stuff sells under asking. And some stuff there has been on the market for over 200 days!
Here’s my question:
Anybody else live in a market that was so upset by the 20/20 piece that the local news felt it had to jump right on the situation at 11 PM and LIE about their market?
I don’t think it was 20/20 related but on the local news in San Diego last night they ran a story about ARM’s resetting, complete with advice from none other than David Lereah recommending that owners get into a fixed rate now. Great tip Dave!
It’s sadly entertaining to read DL’s comments in the paper, but to see the drivel actually come out of his mug, it takes on an almost comedic quality.
I have noticed however that there are more bubble-related stories making it to televised news than before. And they’re not of the ‘red hot market’ ilk as before but rather of some of the risks.
I agree with you spd. I thought it was exceedingly negative for real estate as a whole. Especially the animation that they used when coming back from commercial. The picture of the house with the “boom” on the roof, then comes the word “Bust” dropping out of the sky and wrecking the roof.
Many might not have noticed that subtle shift in psychology, but I did. Even a few months ago you would never, ever hear something negative associated with housing, now the giant word “BUST” smashes a roof on a widely watched program. THe long awaited Cat is out of the bag.
Ha! Just realized I left out the most impotant word in the sentence:
Segment 2 was on how hard it is to sell homes where MURDERS have occurred.
Honestly, a lot of this broadcast made it seem like buying/owning a home was about the riskiest, creepiest, downright frightening thing a person could do.
In an earlier Blog, someone suggested that you either spray paint or chalk the outline of a body on the sidewalk outside a property that you want to low ball? Help me out on this gals and guys!! hheheheheheheheheh
“Typical. This is amazing on so many levels. I wish I were in position to walk away from 125K.”
In most cases it’s borrowed money. Or as they say in the trade “liberated equity.”
RE Investor Mantra: Heads I Win; Tails You Lose
Now it is obvious to everyone what people reading here have known for along time; the builders were desperate to finish every home under contract to ensure that the buyer had no reason to back out. While I have little sympathy for the buyers or HBs it is inevitable that some will successfully sue. The HBs are now on the hook for spent money and lawyers fees and exposure to public scrutiny of selling practices. Worst of all they will be forced to reveal their actual margins on each incremental dwelling unit. Expect lots of private settlements.
Robert, appreciate your comments….you’ve been on the mark with your predictions so far!
Back in the early/ mid 90’s, construction defect law suits were all the rage. There seemed to be a correlation with these types of claims and a downturn in R/E. I sat through several depo’s on some of these “fishing” expeditions from attorneys. A shrinkage crack in a garage floor would be portrayed as a structural failure. Plaintive would name everyone, from the geologist to the cable TV installer.
Our insurance always seemed to pay the obligatory shake down fee even though we were seldom involved with the alleged defect.
I think you’ll see these type of claims increase as property values stagnate.
BTW…the hot thing now is labor claims, at least in CA.
I noted the full employment in construction litigation in San Diego back in the late 80s, early 90s. I predict that train is about to crank up again and it probably should. I’m sure the horror stories are going to be legion and the rest will attempt route out of their bad investments.
Very much agree. With such large deposits, the deposit recovery process is obvious:
1. Grab the nearest lawyer and start a lawsuit.
2. It’s a good guess that others in your situation are doing the same.
3. It’s also a good guess that the builder will offer some fraction of the deposit back to make the lawsuits go away.
Who wins the most? The flipper’s and builder’s lawyers.
My bet is that very few of these end up in court.
For the litigation industry, this is going to be better than tobacco, asbestos, and breast implants, because there are so many potential defendants: HBs, mortgage brokers, banks, appraisers, real estate agencies. And imagine the prospect of a jury box full of homeowners who have seen their property taxes double and who are sitting on a mountain of HELOC debt, while their home values have reverted to 2003 levels and all of that “magic equity” is gone. A trial lawyer’s dream come true!
Not really, there’s no one to sue. Lots of cases get thrown out.
Suing to get a deposit back is a joke. Probably thrown out.
I could see SOME class action suits against brokers from option ARM people who didn’t understand the contract. But there is a presumption that if you SIGN a contract, you understand it. To imply otherwise is to destroy all contracts. Courts won’t do that.
You can have the most bullet proof contract yet have many holes in it because some in experienced agent sent you an email saying prices will always go up or you can’t loose money…I have some of these emails.
A lawyer can call that an implied addendum. I’m not a lawyer so I can’t say how this will stand up in court but I think a attorney will be able to establish a convincing argument for an illiterate victim. My point is the internet will make this down turn much different.
Sorry for drifting from the subject. I’ll take this up on the OT threads.
Yup. I think there will be tremendous political fallout, however.
I have to agree with brianb. Flippers/speculators are not very attractive plaintiffs. Very hard to argue fraud/duress for somebody has been doing it for the past five-ten-fifteen years. On the other hand, some suits against fly-by-night mortgage brokers could potentially go forward on fraud/misrepresentation grounds — assuming the plaintiff’s lawyers could track the brokers down and that the the brokers weren’t already bankrupt themselves (or, as they say in the law biz, “judgment proof”).
That is what has happened to a lot of people who won arbitration cases against stockbrokers. No recovery, they file bankruptcy to avoid the judgments.
That’s correct. It’s one thing to win your arbitration, it’s quite another to collect.
Most judges throw out those claims at least the ones I have been a party too.
They are not fond of the “I didn’t know defense” The last one I was involved in where the buyer was trying to sue a mortgage broker. The judge inquired of me whether or not something like this was common in real estate. I responded it is. His next words while chuckling were “case dismissed”.
They already do reveal that in their earnings statements. I’m not sure if they break out “cost of land”, “cost of materials”, “cost of labor”, but the margin is in there.
These healthy margins they have now are the result of land bought years ago. FIFO accounting, or at least that’s what DHI uses. When they start expensing land bought last year with houses sold years from now…they’ll report losses.
is there prior examples of buyer recourse after a seller lowers prices? seems like a free market thing to me. i’m leaning towards the hb’s on this one. i don’t see buyers getting too far in the courtroom with getting deposits returned.
here’s a great quote from a few months ago from a real estate mogul -
“I feel totally safe playing polo on a field full of pros. But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don’t know when to hold back. It’s the same with U.S. real estate right now. There’s too much money chasing too few good deals, with too much debt and too few brains. The amateurs are going to get trampled taking seasoned horsemen, who should get off the turf, down with them. That’s why I’m getting out.” - Tom Barrack, Colony Capital, LLC - http://www.fortune.com/fortune/investing/articles/0,15114,1117911-2,00.html
Most people make their sports analogies with football, baseball etc. When you trot out polo as your metaphor of choice, it may be a sign that you’re a dick.
He’s probably only a ‘one’ goal player.
Bwwwahhhaa
This is going to be a interesting lawsuit . The market lowered the price . The investor bailed after the builder lowered other same unit price by 1ook, while being willing to charge the investor 1ooK more for the dump. IMO the builder would of been good faith had he been willing to lower the contract to his current 100k haircut of same units ,than the investor would of looked bad had he bailed .
Now they are going to have to go into a big trial on what the damages were to the builder ,maybe how builder might of not built the project without those contracts verses builder bad faith of lowering the prices . Contract law is strong, but did builder breach contract by delivering a defective product ,(125K lower value ).Did the Builder have a clause in the contract stating contract will hold regardless of pricing in the future . Did the stupid investor read all the fine print ? The jury will side with the investor because the jury will be upside down on their mortgage by the time this case goes to trial .
What happens if the buyer/invester has lost his job? Are you still required to purchase that home when you can no longer pay for it?? Case could be made that flipping is ones method of income and that his business is no longer viable due to market conditions…
Do they give anybody their money back when they buy a investment say in the stock market if it tanks if they bought on credit or margin ? Did they give R. TOLL his money back when he didn’t act on his land options ?
While I haven’t looked at these contracts specifically, there would be contingencies for all reasons (probably none) that would let a buyer walk and get their deposit back. The only reason I’ve ever seen for letting a buyer walk in a construction contract is the builder doesn’t complete the project on time.
Typically all that would be lost would be the deposit, although during the frenzy to buy something of last year, I’m sure all sorts of clauses were added. The courts will generally allow you to contract away all sorts of things that don’t seem fair, it takes a pretty eggregious error to strike a contract. Market conditions would not be something that would let you out of a contract (the stock market wouldn’t function if it were).
Yes , I agree with you bluto , but if it went to trial who would the jury side with ? It’s about time that people start really looking at their contracts ,(like mortgages and sale contracts ),rather than crying the blues when their mortage goes up or they can’t make 100K on a property in 3 months .
Juries can’t make their own law. The case wouldn’t even get to a jury, the judge would throw it out as baseless. Even if it did, judges can overturn jury verdicts.
Hard to overturn a signed contract. The signed constract doesn’t specifiy that the market value of the house will be $x.
There are things like fraudulent inducement and such to void a signed contract. But it won’t be easy.
But any lawyer can make a case for the fact that the builder lowered the price of remaining units therefore the Builder insured a lost to the prior investors . While I don’t believe this point can overturn CONTRACT LAW ,the builder will be forced into settlement out of court .Also , if there is a lawsuit on a unit ,will that keep the builder from resale of that unit in that Builder would have to disclose pending lawsuits ?
I guess the question is: Is a house an investment or product? What if the contract states the buyer will live in the house as a primary residence, but the buyer intends to flip? This happens with high ticket consumer products like cars. You buy and next week the manufacturer offers a rebate decreasing the resale value of car. To me, flippers should look up the definition of “speculate” in a dictionary. They’ll find it doesn’t mean to get guaranteed outrageous returns.
“What happens if the buyer/invester has lost his job? Are you still required to purchase that home when you can no longer pay for it??”
I read a post on a Usenet newsgroup a week or so ago from a FB’er desperate to get out of a contract he’d signed with a builder. I actually had a modicum of sympathy for him because of the steamroller tactics the builder was using to hold him to the contract. The buyer had put down a deposit, signed a contract, and arranged decent - not a suicide loan - financing for himself. Then he lost his job and with it, his decent financing. He decided he needed to move to find work and attempted to get out of his contract with the builder.
The builder wasn’t interested in settling for the deposit. They were intent on holding this guy to the contract. When he pointed out he’d lost both his job and his financing, they found a suicide loan for him and told him he now had financing made available to him, thus he had no reason to cancel the contract. They threatened to sue if he didn’t take the suicide loan and close on the house.
If, as we’ve heard many times, builders reneged on the terms of preconstruction contracts by changing the purchase price upwards with a ‘take it or leave it’ attitude towards the buyer, I can’t find much sympathy for those builders now as FB’ers try to get out of those contracts.
In California subdivisions we have what is known as a ‘pink’ ,preliminary, slip, which enables the builder to advertise and market the property, and even take deposits, which are NOT binding. Until the builder gets the ‘white’, final approval from the Dept of RE, and signs a binding purchase contract, the builder can raise the price, change the terms, and the buyer can back out with NO penalty.It works both ways. Get to the heart of the Flipper problem.
You know, CNN might label DC as a dead zone but I really wonder about the places they label as “Safe Zones”. I live in Pittsburgh, and am trying to sell my house. Appreciation here has been
argh, sorry, forgot about less than sign. To continue:
Appreciation has been less than 5% a year, and most analysts place Pittsburgh at 5 to 15% undervalued. Yet, despite this, it is very hard to sell right now. Lots of inventory, few buyers. A very similar house down the street sold for $285 last fall (had an extra bathroom to ours) and yet we can’t sell ours for $250. We never had crazy appreciations and housing value here is excellent ($250k buys you a 2000 s.f. renovated 1930’s home on a 1/4 acre lot on a beautiful tree-lined street in a school district that regularly wins presidential awards in a city just outside Pittsburgh where crime is 1/10th the national average, and is mostly white collar crime at that). The buyers are staying away in droves. Shows you the powerful psychological impact that is building - an anticipation of declining prices spooks them even if prices never skyrocketed here in the first place.
It looked to me like they labeled any place that has not had huge apprecitation as a safe zone. That logic is a bit simple, and doesn’t really make sense- becouse there could very well be big bad reasons those areas have had little apprecation.. We did a post on the Fortune article this past Thursday, if you want ot check it out:
BubbleTrack.blogspot.com
I’m about ready to move to your town . Goes to show you how buyers are spooked right now even when the value is solid like in your town .
Here’s the kicker for us - taxes. Our house is appraised at $170k and we pay near $5000 in county and property taxes a year PLUS 1.2% of my gross income. I have friends who earn well and who own $400k houses (architectural gems) who pay $16000 a year in local taxes (property + income). Ouch. Crumbling infrastructures plus top-ranked schools = expensive.
Yup–the K-Mart Blue-Light Special mentality is not a recipe for successful investing in either stocks (Nuts, I missed the opportunity to buy Enron at $0.10 a share) or real estate.
Just returned from my second trip to Tulsa in as many months. Two months ago I reported that one block in a middle-class neighborhood where listings run $90-$100k had six “For Sale” signs. Well, the same block still has six “For Sale” signs (can’t be sure if it’s the same six houses). Sorry Ben, no digital camera this time either.
Similar situation in San Antonio…but here, not many folks can even afford the $250K…that’s not stopping the building for some strange reason of Ugly Stuff asking price of $450K and on up
Doc, Wondering if your area is like ours. Lots of people who move here are from out of state….and right now they’re not selling. I wonder what this is doing to # corporate transfers and employee moving programs.
The Washington Post has this on cancellations. “As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits. Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship, more than double last year’s rate, and perhaps as high as one in three new-home buyers in some places.”
This makes sense. Anyone who signed the contract for a new home under the belief that “home prices only go up” should go cancel their orders this Monday, before the builders introduce their next round of $100K discounting.
Can you blame the buyer for walking ? But ,can you blame the builder or seller for wanting to collect on the good faith deposit ?
I can’t believe how fast the market is changing . This is going to be a faster correction than some have thought . I think it might be better that the madness stop quicker rather than the prices falling more had they gone up more . Its feels the same as when I’m about to get a shot at the doctor’s office .
50% of condo contracts in Fairfax County were cancelled in March! Can you believe that?
For those not from the DC area, Fairfax County is one of the largest counties in metro DC area and is one of the wealthiest counties in the nation. Everywhere you look there are cranes building new condo buildings. Lots of buildings are in less than desirable areas and the prices are out of this world. For example, one new townhome/condo development is being infilled by Edsall Rd in Springfield. The condos are going for the $600s and just a year or so ago gangs in that neighborhood cut off some dudes hands. Yea, thats a place I’d like to buy a new ‘luxury’ condo.
If this isn’t a sign of things to come for other areas of the country I don’t know what is.
faifax county is 90 % gov workers or surrogates= no fear of losing your job
Until the next administration - regardless of which party wins.
until spending cuts begin in earnest to stem the deficit from rolling over.
I have seen some comments on this Blog and others about how a housing deflation will be more graceful than the .com stock one. They cite that there is more “real value” because of the physical asset (vice a piece of paper in the stock market).
How true indeed. Never once I have seen anyone try to heat, paint, redecorate, mow the lawn around a piece of stock. Home ownership (I own a small house I bought for a song in north Escondido, CA) is a chore as well as having its moments.
I am truly worried what is going to happen to the excess inventory that they have built and are continuing to build. What a horrific waste of natural and human resources.
Graceful? Did you miss the debates over “illiquid” investments?
“Real value” was last represented in 1996. Everything since then is wishful thinking.
I recently read “Timing the Real Estate Market” by Craig Hall. Here’s a few quotes I copied down. Take them for what they’re worth - if anything. Enjoy.
3200. Seven Real Estate Trends - Three National - 1. Inflation, 2. Interest Rates, 3. Flow of Funds, Four Local – 1. Job Growth, 2. In or Out-Migration, 3. Path of Progress, 4. New Construction.
3201. Four Ways to Know it’s a Seller’s Market: 1. You can feel it. 2. Market data doesn’t lie. 3. Listen to others. 4. Sometimes you’ll know because it simply falls on you. Four Ways to Know Positive Momentum is at Risk: Prices on competitive properties stop going up or down. 2. The bid/ask spread widens. 3. The rental market softens. 4. “Pack Mentality”
3202. “Real Estate often lags behind national economic trends.”
3203. “Sell when everyone wants it and buy when there’s blood in the streets.”
3204. “When someone else wants something you’ve got, and they want it badly enough, let them have it.”
3205. “When the pay window is open, sell.”
3206. “It’s unreasonable to think that anyone can tell what the top is until history shows it to us. Hindsight is the best judge of tops and bottoms.”
3207. “There is no question that history repeats itself, but it rarely repeats itself exactly. You have to learn to trust your gut instinct.”
3208. “Gut instinct is merely putting together experience and knowledge with confidence. You develop intuition by doing the work and nurturing confidence in your own abilities to rationally understand a market and come up with ideas and plans of your own.”
3209. “All of our perspective is colored by today’s moment in time.”
3210. “The Two Greatest Lies in Real Estate: 1. “It will only take $X to cover needed real estate improvements on this property. 2. Real estate is a cash flow business.”"
3211. “Yes, hindsight is indeed 20/20. And, if you stop and think about it, the thought that occurs just before “We could be in trouble” is “Everything couldn’t be better.” When you’re in the middle of a market in which prices are getting ready to decline, that’s when you’re most likely hearing good news and excitement from investors confident about the future. The irony is that we often get caught up in the enthusiasm without stepping back to look at the facts available about current trends.”
3212. “No matter how successful you are or how smart you think you are, there will come a time when your gut instinct, judgment, and even this book will let you down. Timing in real estate just like in all of life has a habit of surprising us every once in a while and just when we least expect it.”
3213. “Sometimes we do the best we can and things don’t work out, while at other times things work out in spite of us.”
3214. “Maintain your perspective and keep your humility.”
3215. “Relying on luck without knowledge and skill is risky business.”
Thanks Gekko …enjoyed reading .
When I go out running, I go through some different neighborhoods in NoVA. I keep a mental note of the houses that are up for sale. There has been a nice corner lot house on the market for months and I’ve never seen anyone going in or out of the house… even on the weekend during open house hours.
This morning there were 5 or 6 people walking into the house and there were at least 4 cars outside. I thought “Wow… I wonder what’s going on?” As I got closer, I noticed what it was… there was now an “Estate Sale” planted out front.
I guess either the seller ran out of money for the mortgage and needed to start liquidating furniture, or the bank finally foreclosed. Makes you wonder if it’s the beginning of a trend as prices fall….