‘Builders Don’t Want To Cut Prices, But They Will’
A pair of reports on the California housing bubble. “It looks like that long-awaited cool-down in the median price of a San Fernando Valley house arrived in April with an annual increase of 8.2 percent, the first single-digit increase in many months. The final report will be released sometime this week and it will show the median price of a Valley house at about $598,500, down 2.7 percent from March’s record $615,000.”
“This is further proof that buyers are gaining more traction in a market that long favored sellers. But even with prices moderating, they still are not a bargain.”
“The condo market behaved in like fashion. Sales will be under the year-ago level. The condo median price last month hit $385,000. That’s an 11.6 percent annual increase, again likely the smallest in many months. And the condo price fell 3.5 percent from March.”
“Fifty percent of home sales were at the list price while 54.7 percent of condos sold at list.”
“One thing that market watchers have not seen yet this year is the housing affordability index from the California Association of Realtors. Here’s why. CAR scrapped its monthly report in favor of a quarterly one.”
“This is probably a good thing because the monthly index did not seem to track closely to reality. For example, it assumed purchases were made with a 20 percent down payment and 30-year fixed-rate loan. And no more than 30 percent of the household income servicing the mortgage debt. Now we’ve got a half-century mortgage, thanks to Statewide Bancorp in Rancho Cucamonga.”
“Leslie Appleton-Young, the association’s chief economist, said earlier that they were going to tweak the model to more reflect current market conditions.”
From the Bakersfield Californian. “The number of local homebuyers canceling builder contracts has crept skyward in the past year, along with worries about rising interest rates and the real estate market’s future. Kern County’s cancellation rate was 8.1 percent for the first three months of 2006, up from 2.3 percent a year before.”
“The cancellation rate for Centex Homes’ Central Valley division has hovered around 25 percent so far this year; double what it was last year at this time. Roughly 70 percent of those buyers backed out for financial reasons, said Centex spokeswoman Lissa Walker. Many just couldn’t afford the increasing interest rates and down payments, Walker said.”
“With sales dwindling, builders are reaching out more to real estate agents, said (realtor) Jeanne Radsick. Radsick said her office receives three or four faxes a week with details from builders on houses that need selling. ‘It isn’t just one or two. It’s a lot of builders,’ she said. ‘Builders are seeing the slowdown.’”
“Homebuyers will likely see more builders begin to offer incentives, especially the public companies that have sales quotas to meet, said (analyst) Patrick Duffy. Private builders don’t have the same pressures, Duffy said. ‘In general, builders don’t really want to cut prices,’ but they will, he said.”
‘Fifty percent of home sales were at the list price while 54.7 percent of condos sold at list.’
What, no mention of how many sold over list? I guess we can assume none did. A reader mentioned that the CAR affordability release was over-due. Now we know why.
It is great to hear that homes are finally becoming more affordable again. Kudos to the builders who brought us the supply glut!
Can’t wait to see CAR’s propagandized change to the affordability index. Is it just me, or is this an incredibly blatant act of deceit and market manipulation?
WTF is the point of tracking (or publishing for that matter) an affordability index if the benchmark changes?
Do you want lube with that? The builders are making a fortune off of the clueless drones fumbleing out there in the real estate market. Just get me in the door with a low payment for now and things will work themselves out down the road. Because you know real estate only goes up and you can refinance later with all that free equity.
This is absolutely typical behavior for any powerful organization (including government) when their measuring stick is no longer producing the desired numbers, you just change the measuring stick!!! See how easy it is to make everything ok again.
You know it……paint a rosy picture, and the rest of the world is rosy, too.
Disgusting!
With affordability hitting the single digits in some areas of Cali CAR had to do something.
Look, Suzanne RESEARCHED this.
Next they’ll add trailers, RV, and Time Shares into their sales figures to improve the numbers.
It won’t be to long before doctoring up the numbers will be impossible.
Some enterprising investigative journalist or Ben should do an expose of the gaming of the RE market.
Starting with affordability numbers getting so bad that they have to change the metric.
“Leslie Appleton-Young, the association’s chief economist, said earlier that they were going to tweak the model to more reflect current market conditions.”
Please allow me to translate:
The metric is so far out of whack that nobody with 3 working brain cells would buy an overprice piece of $hit at these prices, so we need to change the forumula so that houses are affordable.
You mean so that houses SEEM affordable…because we know they’re not. What is it now in LA…7% of the people can afford the median house? That’s just crazy!
I suggest they base the new affordability index on liar loans; then we can always be assured that housing is extremely affordable.
it’s the same story everywhere; in my country the realtors also keep telling us that houses are very affordable (thanks to huge subsidies, totally irresponsible mortgages, insane leverage, two instead of one incomes per home, the lowest interest rates in four centuries etc.).
“…blatant act of deceit and market manipulation?”
I’m shocked, I tell you, shocked.
In southwest florida higher interest rates wont be the only thing to lower home prices, insurance coverage or lack of will.
http://www.news-press.com/apps/pbcs.dll/article?AID=/20060514/NEWS01/605140439/1075
Insurance price increases in Florida should be getting a lot more news coverage within a week or two. It appears that finally the insurors are sorting out more scientifically the difference between coastal areas and non-coastal, relative to risk and probability. It should be very interesting to watch the politics that result.
The bubble has definitely burst here in the San Fernando Valley. Prices are down from last summer. Sales volume is way off- 25-30%. All of a sudden it seems like some of the sellers have caught onto what is happening and the price reductions are coming fast and furious. This time last year maybe 2-3% of the listings would have been reduced in the last week. This year, we are having around 7% of listings reduced in a week. Inventory is way up. From around 1800 this time last year, to over 6000 this year. Our sales pace for April should come in at around 1350. This puts us at 4.4 months of inventory, still not huge historically, but way way above last year’s one month of inventory.
Sorry, that should say I expect May to come in with sales around 1350 (based on pendings, and sales so far this month). April’s volume was 1443.
Thanks for your comments Deb!! I must say I have seen 3 of 5 houses sell in my small gated development in Valencia and all sold for a reduced price. Anywhere from $10k - $30k off. The houses still sold in the $600k range which makes me sick! The houses were originally built in 2001 and sold for around $300k. When are these crazy people going to get it in their heads that these properties are not worth this much? We are currently renting there for $2400/mo. I would pay as much as $500k for one of the houses (and I think that is too much), but $650k is CRAZY!! We are thinking it should really start busting in the next couple of years? Hopefully…..
thanks for the numbers deb. very consistent with the numbers i’m keeping for the sfv. i only started counting actives in february (around 4000 then). i had no idea there were only 1800 actives a year ago. still, i’m hard pressed to find anyone outside of this board that will agree with me that selling my toluca lake house in august 2005 and renting now is a good idea. regarding a price correction, a friend of mine likens it to “turning a greyhound bus around in an alley.”
In Seattle, although the local media continues to paint a rosy real estate story the % of Reduced Listings to New Listings has been running around 30%!!! These #’s are taken from the NWMLS.
deb
I live in Studio City and stupid 1400 sq ft fixer houses are selling for $925K. I’m waiting to see the change here cuz houses sit…but then they SELL. Damn! I’m glad you see a decline…I hope it comes my way soon!
Is there any way you can post links to some of those reduced prices? I just took a walk with my kids and grabbed a flier: 850,000 for a little rinky dink house in Sherman Oaks, the lot was like 6,100, SF was like 1700. We need a lot more reductions from these levels!
Here in Washington state for sale signs are sprouting up like spring grass. The truly foolish believe it is just that time of year with the kids getting out of school and time when most folks move. However, there is much more activity than usual. “Price reduced” or my favorite, “New Price” signs are showing up on more and more lawns. Additionally, many “for Rent” signs are popping up in huge numbers.
In my neighborhood one owner put up a for sale sign and with in a week 2 more neighbors within 2-4 houses of the original had signs up as well. Also, just last month the house next door sold and now the house on the other side of us is up for sale. There is a genuine concern that is palpable. The greed factor is starting to get the better of people as they consider that maybe the good times are coming to an end.
Houses are sitting on the market longer and potential new buyers are taking their time to grind concessions out of sellers. Every weekend the builders across the street have $10,000 off signs all over the development enterance.
I am just going to pull up a lawn chair and watch the carnage as I rent for the next few years. I see major price corrections coming in the next 12-18 months; probably in the area of 20-25% with possible long term price drops to 30-40% of current values.
I emailed the reporter on the Bakersfied story this week. Basically calling her out to write an unbiased story on the local housing market. This is a start.
To add to the builders’ woes, construction labor costs may move sharply higher if pending legislation to reign in illegal immigrant labor is passed into law:
—————————————————————————————–
HOUSING SCENE LEW SICHELMAN
Home-construction sector relies on immigrant labor
May 14, 2006
WASHINGTON – Whatever your opinion regarding immigrants who have entered the United States illegally, realize that if you are in the market for a new house, it’s very likely to take longer to build – and cost more to buy – if they are forced to leave the country.
The National Association of Home Builders estimates that 20 percent of the construction work force – about 2.4 million people – is foreign-born. While it’s impossible to know how many are undocumented, some estimates put the number as high as 50 percent or more.
Whatever the true count, though, builders across the country say that illegal immigrants play an important role in a construction labor market that already is stretched thin.
Craig Havenner of the Christopher Cos., a Fairfax, Va.-based builder, certainly has no idea how many of the carpenters, brick masons, roofers and other craftsmen who work for the subcontractors he hires are here illegally. Nor does Michael Fink of the Leewood Real Estate Group in Trenton, N.J.
But both builders say they’d be hard-pressed to deliver their products on time or at the same price if those here illegally were ordered to leave the country, as some in Congress have demanded.
http://www.signonsandiego.com/uniontrib/20060514/news_1h14sichel.html
Yes and my strawberries and lettuce will cost more.
Boo f-ing hoo.
Based upon the crew I saw working on a semi-custom home in my subdivision here in Northwest Georgia, I’d say figure may actually be higher than 50%. I thought I was back in Southern California when I drove past it yesterday.
All hispanics are not illegal. Just the ones that think they already own the place.
“Leslie Appleton-Young, the association’s chief economist, said earlier that they were going to tweak the model to more reflect current market conditions.”
My guess is that they are going to tweak the model to hide the fact that prices are plummeting, the knowledge of which tends to make prospective buyers hesitant, as the prospect of owning a home which is declining by 10% YOY in value is considerably less exciting than the thought that you will soon be a millionaire thanks to 20% YOY gains. No matter — when the statistical fog clears, it will be obvious to all that California prices are falling, and the eventual correction to revert to fundamental values will be all the more drastic if statistical propagandists make efforts at this point to hide the truth about falling prices.
I think they’ll tell that “values” stay flat, but prices decline. This way everybody is happy. They actually sang this tune a couple of months ago.
I guess I’ll wait to buy until their index shows affordability at 138%.
I’m not sure that they are manipulating the model to hide the falling prices, to cover the increase in interest rates, or to mask the absolute horror of single digit affordability. Probably a combination of all three.
Appleton-Young said as recently as last November that Central Valley real estate would appreciate “10-18%” in 2006. So, what about all those “investment” properties in Visalia, Bakersfield, and Fresno? I guess prices will rebound in the second half of the year, because real estate always goes up!
In all seriousness, though, I just hope the cold that the Central Valley has caught with regards to home sales/prices spreads to the North Coast of California. But, I still see overleveraged, underpaid young couples here taking the dive into homeownership with their 500K mortgages and daddy’s money. Hopefully this house of cards will fall soon.
let’s see let’s tweak the model to show a 2% down payment,a 55% debt to income ratio ,on a stated income 5/1 hybrid arm…which is how most people in sonoma county have been buying their homes.anthony it has started…look at ziprealty for price reductions,and foreclosure.com for notices of default.
No, no, no, Tom. See, you’ve got it all wrong. It’s 40% down (HELOCs from other properties), 80% debt-to-income (stated income), with a 1% teaser rate. Now, there…it’s all fixed. 100% affordability in California. See, no bubble here!
So why are houses in the SFV expensive? I thought that was kind of dumpy. Hot weather and mostly an agricultural place. Do houses in Kansas cost 600K?
Who lives there? Isn’t it too far to commute to LA or SF?
SFV is hot, smoggy, and ugly, but very expensive, because there are only two middle class/American pockets left in LA: the westside, and the SFV. If you don’t want to be completely surrounded by latinos or armenians, you have to pay up, around 800K for a little shack with a small yard.
How far is the SFV from LA? Fresno? Isn’t that 150 miles away?
SVF is part of LA. Your’re confusing it with the San Juaquin Valley.
well that was a pretty ignorant statement investorgirl….when was the last time you actually went to the valley? it’s vast and diverse both economically and culturally. huge latino and armenian populations here. i hear “the blacks” and “the orientals” are fond of living in the valley too.
You gotta mention the frequent high speed pursuits when describing SFV. It was kinda cool to try to recognize the intersections when watching it unfold on TV. My favorite was the guy that stole the 7Up truck.
White flight…..
Since when is the West Side “middle class”??
Many will remember the WS analysts who continued to be cheerleaders of the internet stocks on the way down, largely based on their compensation structures, lack of ethics, and greed.
Just as there was then - in the last asset bubble (a la Fed) - so as it is now (”history may not repeat itself, but it does rhyme” - M. Twain, paraphrased), with a huge conflict of interest in the market commentary. Do not listen to the analysts, or those with an ax to grind when it comes to financial advice (read: cheerleading). “Pay no attention to the man behind the curtain.”
As I recall, there was a backlash to the WS analysts self-serving stock recommendations, and subsequent class-action lawsuits as well. I would expect that there will be the same this time around. There has to be a financial penalty, don’t expect ethical behavior here. Now if we can get the Fed to stop blowing bubbles. That’s the real trick!
We should see some irrefutable numbers by Fall ‘06, but I’d still like to see the monthly affordability stats, non-hedonically adjusted (as in CPI). Same game different player.
Brianb,
I think you’re confusing the San Fernando Valley (SFV) with the San Joaquin Valley. The San Joaquin Valley is farther north, is all about agriculture, is really hot and smells badly. The SFV is really LA suburbia, so it does have some high paying jobs and is “fairly” close to downtown LA.
I’ve lived in both Kansas and the San Joaquin Valley, and hands down, Kansas was far preferable. Just because its California in the SJV, don’t let it fool you. Plus, prices in Kansas are about 1/3 those in the SJV, and about 1/5 those in SFV.
Actually, the more I think about it, I’d take Topeka or Wichita anyday over Bakersfield and Fresno. At least I’d wouldn’t die in Kansas from arsenic in the water or the nation’s worst air pollution.
And I bet Kansas doesn’t have anywhere as bad a smell as the San Joaquin Valley. I have been in dirty outhouses that smelled better than the SJV. And the heat is so oppressive it just compounds the smell of that bovine fecal matter. And, I have never been to Kansas.
Oh PLease !!! Kansas ?? You have got to be kidding…
O/T: Looks like it might be an interesting day in the market. Gold way down, index futures way down (DJ was down over 50 pts, I believe, then back up to 27 down right now). From what I can tell right now, there’s Forex movements as well (dollar stronger?). Bonds are up (prices), but not too significantly.
Just interesting… Watch your gold and dollar/foreign currency positions.