Incentive Programs ‘Snowballing Into Summer’
The Chicago Tribune reports on efforts of homebuilders to move the inventory. ” For new-home buyers, it’s time to be wooed: Up to seven months before first payments are due. A mortgage-rate program promising to save ‘up to $83,000 over 30 years.’ Up to $10,000 in free upgrades. $20,000 off the price of a home.”
“These kinds of incentives long have been used to drum up business during the winter doldrums or to jump-start activity at a moribund development. But the frenzy of deals, which some national builders rolled out in late 2005, is snowballing into summer.”
“As the business plummets, buyers, aware that they are in the driver’s seat, are demanding, and getting, price breaks or special financing. Many local and regional builders have joined the major players to offer incentives right through the industry’s key spring sales months, into the beginning of summer.”
“‘This is probably the first time we’ve seen them through the peak selling season. It’s unusual that the incentives have continued all year,’ said housing consultant Tracy Cross. According to Cross the relatively even-keel Chicago market has become more important to major builders as sales have slowed or plunged off a cliff in other parts of the country.”
“‘National builders look to Chicago as a stable market. They look to Chicago for help to bolster sales. You can’t milk a cow that’s dead in California or reduce homes by $200,000 in Washington,’ Cross said.”
“In Washington, D.C., Centex Corp. offered $100,000 off the sales price to those who bought a house within a 12-hour period. And Lennar Corp. is giving Tampa buyers a lowest-price guarantee. Traffic in suburban Chicago sales centers is off as much as 30 percent from a year ago, according to consultant Jim Colella.”
“Slow sales forced Lennar to drop the tax assessment for a special service area at the Summerfield development in southwest suburban Minooka. Deer Point Homes has dropped prices by $20,000 for a limited time on all its homes at The Ponds of Bull Valley in northwest suburban Woodstock.”
“The suburban sales strategies reflect ‘the slow shift to a buyer’s market,’ said consultant Steve Hovany in Schaumburg. ‘Nobody ever lowers their price in new homes, but an incentive, in effect, lowers the price,’ said Hovany, whose firm advises builders and developers. With shareholders and Wall Street weighing on them, builders, especially publicly owned national companies, have ‘to grow or die,’ said Hovany. They ‘are fighting the market share game.’”
“Feeling the heat of national competitors, several local builders, big and small, are hustling to match the special offers. Warrenville-based Neumann Homes has been advertising incentives competitive with some of the larger companies.”
“Jim Colella said using incentives to keep or grab more market share is a desperate, risky game. ‘Discounting is a last-case resort,’ he said. ‘It is a slippery slope. It’s pretty tough to start discounting and then stop. Once you open it up, it’s hard to close. Look at the automakers. They started discounting. It has diminished the product.’”
“Leigh Nevers, VP of marketing for Lennar’s Chicago division based in Hoffman Estates, said her firm’s aggressive June promotional package is aimed at trimming the company’s unsold inventory of nearly 70 homes and keeping the builder near the No. 1 position in the market.”
“‘We stumbled a little bit in April,’ she said. ‘We want to get as close to No. 1 as possible, and we don’t want to slip to No. 3. It is a cutthroat industry right now,’ she said. ‘We project starts and closings to Wall Street,’ she noted. ‘We need to stay on track in this market.’”
“Nevers conceded that the costly incentives are affecting margins, and expressed uncertainty about how long Lennar’s strategy will last. ‘The market will tell us how long this will continue,’ she said. ‘We can’t afford not to be doing some kind of program.’”
BTW, I understand the RSS feeds are down. We should have those back up by tonight.
Hey Ben -
I just heard on the news about the fires in Sedona - hope you are doing OK.
Of course, the report mentioned the “million dollar houses” at risk of being burned to the ground.
Sorry for the OT as well, but I should add that the same news break mentioned the latest home starts numbers… and then, refreshingly, included a local Bay Area discussion of the coming possible wave of foreclosures with the ARMs resets.
The anchor guy at the all news/talk station said something along the lines of “I’m glad it’s not going to be me!”
BEN;….Sorry OT…..A guy named Gary Shilling was just on CNBC and issiued a report on the housing market centered around the small home builders and there impact on the market since they build 75% of the housing nation wide….1 of his quotes was “The small builder is 1 pickup truck away from insolvancy”..I think he wrote for Forbes Mag but I am not sure…Can anyone find this and post ???
Here’s that article:
http://www.forbes.com/execpicks/forbes/2006/0619/168.html
This is an excerpt near the end:
Moreover, this is an industry where small contractors dominate. These guys, who are often one pickup truck away from insolvency, will get slammed when spec houses don’t sell or buyers cancel. The ten biggest home builders account for 25% of output, up from 10% five years ago, yet that leaves a whole bunch of small fry. Further sales drops are anticipated by the index of home builder sentiment–now at 45, down from the 72 peak last June.
With inventories high and sales falling, the ratio of inventory to sales flow is rising. Inventories for both new and existing homes have jumped from 3.5 months in 2003 to 5.8 months and 6 months, respectively. It is reasonable to expect those ratios to climb into the 6-to-8-month range of the real-estate-troubled early 1990s.
Already inventories since last year have jumped 91% in Boston, 236% in Miami and 149% in Los Angeles. Asking prices have been cut on one-third of listings in Boston, San Diego, Sacramento, Los Angeles and Miami. Nationwide median prices will probably fall at least 20% before the break is over. It will take a 35% fall to return prices to their long-run link to the Consumer Price Index; markets overshoot on the downside as well as the up.
Even a 20% price decline will be devastating for many homeowners. On average, those with mortgages have 37% equity in their abodes. Of those who borrowed or refinanced in 2005, 29% have zero or negative equity, calculates First American Real Estate Solutions.
A house-price collapse will be far worse than the 2000–02 bear market on Wall Street and will bring a serious global recession. Half of households own stocks or mutual funds, but 69% own homes. The resulting unemployment will kill many subprime borrowers’ ability to make payments. Both Toll Brothers at the high end and dr Horton in the starter market will suffer.
BayQT~
Thanks Bay;…….
You’re welcome.
BayQT~
When you’re 40/50 something and have worked for the Georgia Pacific paper mill in Old Town, ME, which suddenly closes the doors, the only place left to go is to Lowe’s to buy some carpentry tools and set yourself as a “builder”…
No where left to go now.
Shilling is a big time bear. He’s been 100% right since 2002 but, like every other bear, his timing has been off. Well, now he’s 200% right.
Truthfully, other than a return to 4% rates, I don’t have a clue what might slow down this inventory avalanche. Once the defaults start hitting like in the ‘94 timeframe, it’s gonna get ugly.
The PMI system was supposed to protect lenders. With the 80/20 loans skirting PMI, it looks like lenders are gonna get hammered anyways. I doubt PMI has the reserves to cover even 1/2% of the coming defaults…
I’m waiting for banks to truly tighen their lending standards–then the pain will really set in.
PMI doesn’t have that much risk (most of the really risky stuff used piggyback loans. The PMI company backs $25 billion in mortgages of which 80% are fixed rate loans (3% are option arms). The average loan size that they are backing is $136,000 and only 20% of ther loans have initial balances over $250,000 (nine percent are non-conforming).
Backing these they hold $3.3 billion in capital. In the last 20 years only 1 had more insurance payments (which generally occur 3-5 years after writing the policy) than premiums written on an undiscounted basis (keep in mind that until payments began they had been earning interest on the premiums paid). They have reserves (losses already tanken because they are expected to occur) of $360 million.
While there has been an increase in general idiocy in housing, dont assume that everyone that touches the housing market is an idiot.
Also due to the nature PMI contracts the home prices must go to 0 for PMI to pay out the full insured amount (they are written to pay a percentage of the loss).
That’s some interesting stuff. Do you have a public link for this? SOmehow $25B sounds quite low given the volume of loans issued at less than 20% down. Granted, the insurance can be dropped if values increase, but still, $25B is a drop in the bucket.
It’s all taken from the PMI Group’s 10-K.
http://tinyurl.com/gws9s
The company PMI Group and the product PMI are different things. There are I believe 4 big providers of mortgage insurance.
Like I said most of the low down payments were structured as 80% loan (sold to an enterprise) and a second loan that was jr (meaning it takes all losses first) sold to other investors. The second loan has a higher interest rate which was to compensate them for the higher risk they were taking. In most cases a high interest rate 20 and conforming mortgage was cheaper than obtaining insurance, because there were lots of people who would take on all sorts of risk in the low interest rate environment of the last few years.
I got some coupons from Centexts that’s good for upto $100K off of their homes. I am waiting for the other builders to have coupon days and start matching and even beat competitors’ coupons!
Do they double coupons?
“‘We stumbled a little bit in April,’ she said. ‘We want to get as close to No. 1 as possible, and we don’t want to slip to No. 3. It is a cutthroat industry right now,’ she said. ‘We project starts and closings to Wall Street,’ she noted. ‘We need to stay on track in this market.’”
___________________________________________________
Didn’t we see this same “business” plan in a Sacramento article? Build, Build, Build, must be #1 for Wall Street. These guys learned ZERO from the 1990’s!
Off topic, but Ben, you should change your “Donate” icon to include PayPal. If I knew you accepted PayPal I would not have waited until now to donate.
OT maybe, but thanks for reminding us. Since I squander a few lunchtimes on Ben’s blog, and it looks like I’ll be skipping going out for lunch today, I’ll just drop today’s lunch money on Ben! Thanks, Ben, for a truly excellent information source!
OT - CNBC will air “Survival Guide - Navigating the Downturn in Housing” live this Thursday at 8 PM EST. I believe they will have a panel of “experts” to answer questions but I’m not sure who they are.
So you need an hour to tell folks to sell and rent?
It should be more interesting than that. I’ve noticed they don’t get into too many conversations about the “bubble bursting” on Squawk Box - it actually seems like they avoid such conversation. This may be to avoid losing real estate related advertising.
I’ve noticed housing has become a more popular topic on CNBC and Bloomberg over the past few weeks. I was watching an interview with the CEO of Southwest Airlines, Gary Kelly, on Bloomberg over the weekend. They were discussing the slowing of the economy and the economic indicators Southwest was most concerned with. Gary Kelly said the slowing in housing was a major concern, and even emphasized this over fuel costs! The person interviewing asked him if he thought there would be a dramatic downturn in housing and he said “In a word…yes.”
These incentiveus are a way for the builders to keep prices artificially up, and thus not bear the wrath of current homeowners in their developments. But what I’ve seen recently in our area is that builders will soon have no choice but to compete with the homeowners in their developments. Reason being is that the large amount of specuvestors (and there is not a development in NNV that was exempt from hardcore speculation) are trying to dump their homes right now. These guys cannot compete with the builders offering their homes at the same price with tons of incentives. Recently I’ve noticed many reductions by sellers undercutting builder price. Once they start that, the builder says “screw you guys” and blow them out of the water because they have so much more to play with in their margin. This incentive game will be short lived, prolonging just a litlle bit the inevitable price cuts.
Another thing that is going on up here adding to the selller’s woes is that realtors are playing a nifty little game right now. The game is that if a realtor finds a “hot one”, that is, someone that walks into their office and says “I’m ready to buy, let’s go look at homes”, they’re only taking their sucker to listed homes that are offering 2%-4% bonuses to the buyers agent (usually the buyer is never aware this is going on) If the the listing agent isn’t showing this bonus on the MLS, the buyers agent will call up the listing agent to negotiate his/her bonus for bringing them the potential buyer. Now, who do you think is paying for this? I gaurantee the listing agent isn’t giving up any of his/her slice. Also, what do you think that tells you about our market? Can you say seller desperation?!! And finally, what do you think this says about realtors? Pretty friggin’ lame!!
Ah yes, the “slippery slope” of discounting! Yeah it’s hard to stop, but I believe the truth here is that people that bought in 2004/2005 without a discount are going to have an extremely difficult time trying to sell their place for 100K more (to break even) without all of the “free” up-grades the builders are now throwing in! And you know what? It’s not the builder’s problem. They have to move things forward and if you bought a home from them in the last two years (at a minimum) you can sell (if at all possible) and take an ugly beating by having to bring a wheel barrow full of cash to the closing, do a short sale (if your lender will permit) or option #3 which is suck it and keep making the payments on a depreciating asset. Uh, how many people are in this position? Lots.
that should read “suck it up”.
I thought “suck it” was more appropriate
“suck it” works, I’d stick with it….
No, stick with “suck it.” It more clearly represnts the current market.
I want the coupon - Buy one at half price - get the 2nd one FREE.
I want the coupon - Buy one at half price - get the 2nd one FREE.
“Traffic in suburban Chicago sales centers is off as much as 30 percent from a year ago, according to consultant Jim Colella.”
And Chicago is much less bubblicious then Phoenix. Just imagine how much traffic is down in places like Phoenix.
David
http://bubblemeter.blogspot.com
The prices never soared like they did in places like Phoenix, but the number of new & converted condos that have come on line (and are under construction now) is simply mind boggling. Chicago could become the cheapest place in the country to live.
I’ve been watching the overdevelopment of downtown condos in the past few years. My granny lives in Chi-town and it would be fun to buy (or rent) a place to stay for a few months out of the year if the market ever gets into fire sale territory.
On the other hand, crime rates will likely soar if the housing market has a hard landing. It was the unprecedented decline of crime rates during the 90s which made downtowns habitable again and lured many people back from the suburbs. In boom times, cities are lots of fun, but during a bust city life can get downright miserable.
We are off 40% in new home sales here in Northern Virginia compared to last year. But they are still building like mad!
Utah foreclosures drop to the lowest point in seven years:
http://tinyurl.com/rkupb
My hypothesis on this one is that the surge of speculators in the last 12 months that juiced appreciation in UT allowed well-meaning but financially illiterate families to either sell and avoid foreclosure or delay the inevitable with a cash out refi.
In some sense the rolling bubble is good if they have the good sense to sell a home they can’t afford.
The latest delusion seems to be that homebuilders will “pull back” and stop building new homes, thereby saving the market. Why would they do that? They make money from selling homes, not from protecting last years buyers from their own financial stupidity. They will keep making homes right up to the point at which it is no longer profitable to do so, and that’s a long ways down from here.
The only real overhead for the large homebuilders is land costs. Most of the actual design and construction of new subdivisions is done by subcontractors, and in the Southwest, most of the labor used is so called “day labor”. You wont even really hear about lay offs because that just means the subs don’t pick up the hired help from the Home Depot parking lot in the morning. When it no longer becomes profitable to build homes, these big developers will suddenly slim down to a few estimators and some office staff in a corporate headquarters somewhere.
Rather than being the saviors of the housing market, builders are the group that will accelerate it right down into the decline, making money all the way down.
Exactly Pacnor;…..To much jibberish posted here sometimes about the Big builders inability to compete……They will squeeze there sub’s and material suppliers along with renegociating the options they have on the land deals…..They are ruthless competitors when they need to be……
Big builders are saddled with a lot more overhead than you think. They need to spread that overhead with a lot of volume. When the volume shuts down, like now, the only way they can stay afloat is by industry consolidation. Expect takeovers & mergers. Be careful who you short pretty soon.
The small builders actually have an edge if they were careful about debt and conserving cash over the past few good years…
“Moreover, this is an industry where small contractors dominate. These guys, who are often one pickup truck away from insolvency, will get slammed when spec houses don’t sell or buyers cancel. The ten biggest home builders account for 25% of output, up from 10% five years ago”
“Rather than being the saviors of the housing market, builders are the group that will accelerate it right down into the decline, making money all the way down.”
“We want to get as close to No. 1 as possible, and we don’t want to slip to No. 3.”
Will the fallout of the bubble collapse lead to more industry consolidation? Can the residential construction industry become an oligarchy of a few big companies dominating the whole market? It would certainly seem that one possible motivation for big builders to continue building into a down market is to drive the little guy out.
They will build until there is not one quaified buyer left in the whole USA, and then file Bankrutcy reorganization. They learned well from United Air, Northwest, and GM. It’s the new business model. This collapse will make the dot.com look mild.
Personally, I’d like to see fewer gimmocks like mortgage buydowns and free upgrades, and more actual price cuts.
Already inventories since last year have jumped 91% in Boston, 236% in Miami and 149% in Los Angeles. Asking prices have been cut on one-third of listings in Boston, San Diego, Sacramento, Los Angeles and Miami. Nationwide median prices will probably fall at least 20% before the break is over. It will take a 35% fall to return prices to their long-run link to the Consumer Price Index; markets overshoot on the downside as well as the up.
Funny how home builders/renovators give incentives here in Boston. A big thing here is off street parking inside the city. So instead of paying separately for a driveway or heavens forbid a stone garage they are thrown in “free”. If you pay the full asking price of course.
This quote has Boston inventory increased 91%. Of course these statistics don’t take into account yankee stoicism. If you get out of the car and actually walk the streets the numbers of FSBO sellers are legion. They are all trying to save that last penny instead of paying Realtors. I spoke with a Zip Realty conman/realtor 2 days ago. And he stated that many of the FSBO types would not lower their price. Which is why they have struck out on their own to find “the greater fool”.
I don’t believe it will take 5+ years for an adjustment in Beantown. It will be more like 24-36 months. Why so quick? Think 1 TRILLION of ARM resets coming soon. Tons of Volvo/Mercedes station wagon leases maturing. Because it is “different” here.
BWHHAHHHAHHAAAAAAAAAA!!!!
Yup. Newton will be ground zero for implosion in Boston. Boatload of Range Rover and Lexus SUV. Along with 1 mil + mortgages… Well you get the picture.
The number of houses for sale in Newton is pretty impressive. There are three $2 million (asking price) homes for sale on my mom’s street. One of them is a new mcmansion that’s been on the market for two years; in fact, the original developer got foreclosed on. There are some actually very nice older houses in town, but there’s no way they can sell them all at these prices. There’s like a year’s supply.
BTW, hat’s off to all the posters on Ben’s blog. One thing you can do here is start at the bottom of the replies and imediately know what the topic is. Some of the other housing blogs seem to wander off topic with regularity.
Example: Here’s a partial post from one of those “other blogs” about 3/4 down. Topic was “House prices never go down”:
People go to a church because their mom went to that church. When you marry, you go to your wife’s church…that is if you dare to marry outside of your own church. This fails to account for what to do when a church changes hands from one relatively moderate minister to an ultra-fundamentalist one. In reality, most people just stick with it.
???????????????????????????????????????????????
Nice OT post.
We’ve got more developers here in the Twin Cities crying for bailouts because their new developments are floundering. They’re blaming it on everything but the fact that they are building lousy homes at too-high prices.
For example, the Phalen Crossing project mentioned in the following article features simply *horrible* homes - narrow shotgun-style rowhouses built above garages, so that the staircases are long and *very* steep. No one in their right mind would want to deal with that kind of hazard on a daily basis. (This is Minnesota: you do _not_ want to be climbing steep, icy, twelve-foot stairs to get to the front door.)
They’re blaming the slow sales on the neighborhood - wrong. Several years ago the small, affordable, single-level townhomes and co-op building built within two blocks of the rowhouses sold out quickly, to local residents who wanted to sell their SFHs yet stay in their neighborhood. The crime rate in the area isn’t anywhere near as severe as they’re claiming (I should know, it’s within walking distance of my very safe neighborhood).
Notice these developers not only got the city to give them more bucks, they were released from committments to build further phases of these developments. They know which way the wind is blowing.
As sales lag, developers get more city money
By Jason Hoppin
Pioneer Press
In recent years, St. Paul’s East Side has seen an intense redevelopment effort unparalleled in city history. Hundreds of millions of public dollars have been plowed into new roads, schools, business parks and housing.
But a key component of that effort — enticing developers to build in downtrodden neighborhoods to attract new residents — is flagging.
In recent weeks, several developers have returned to City Hall to ask for more money. Sherman & Associates received an extra $500,000 for a housing project at Edgerton and Whitall streets, beyond the city’s initial $2.1 million investment. And last week the city agreed to put an extra $2.7 million into the Phalen Crossing project at Phalen Boulevard and Johnson Parkway to bolster slumping sales.
Both Sherman and LTRW Land Development, the Phalen Crossing developer, also were released from obligations to build later phases of the construction.
Part of the reason the city is willing to entice wealthy developers with millions of dollars is the widespread belief among leaders: “If you build it, they will come. And if we don’t do it, no one will.”
So far, it hasn’t worked as planned. Sales were so slow that the city agreed last week to subsidize the prices, dropping them by tens of thousands of dollars each.
A big factor is the weakening housing market, and not just on the East Side. Developers of one of the largest neighborhood developments in city history recently changed their plans for Victoria Park, just off West Seventh Street. The new strategy calls for more single-family homes but fewer overall housing units.
Some are questioning the wisdom of throwing more money at the projects. Council Member Pat Harris, who voted against the Phalen Crossing subsidy, said more subsidies may be appropriate in some cases. But in others, she said, the city is acting as a safety net for developers.
“At what point is the city responsible for making up the market? It’s not our job to make the market whole for the underlying investors,” Harris said. “There should be an element of risk for people that invest in these projects.”
http://www.twincities.com/mld/twincities/news/local/14856519.htm
We’ve got more developers here in the Twin Cities crying for bailouts because their new developments are floundering. They’re blaming it on everything but the fact that they are building lousy homes at too-high prices.
Excellent point, H.
As a former appraiser I drive by these miserably sited condo project’s, and ask myself-was this developer on drugs?
One of my favorites is the 6-unit @ $400k each which sits on the edge of a GE plant with all the units facing into the heavily florescent lit parking lot.
Think the Crispy Chicken Seinfeld episode, where the neon signage renders Kramer’s apartment uninhabitable.
Loads of this crap out there, all built on the greater fool theory and nothing else.
Exactly HD;…
Link to the “price guarantee” from Lennar in the Tampa area:
http://www.lennar.com/findhome/coupon.aspx
This was mentioned in a previous post. A few readers were wondering how long the guarantee would last. No surprise…it only protects a buyer against price drops until closing.
The interesting thing I took from the ‘90/’91 bust, was how virtually nobody had a real handle on inventory and building starts. Oh, the state would post some collective start numbers every once in awhile, but this tidbit of info was from an agency which didn’t even have the funds to subscribe to the statewide computerized MLS system.
Needless, to say, the banks were all competing against one another, and it was like, nobody knew WTF the other guy was doin’, and really didn’t care as long as “THEIR” deal got done…
And then all of a sudden voila….Scores of unsold condo developments and subdivisons…It’s infinitely worse this time around.
As the saying goes, those who forget history are doomed to repeat it.
“Jim Colella said using incentives to keep or grab more market share is a desperate, risky game. ‘Discounting is a last-case resort,’ he said. ‘It is a slippery slope. It’s pretty tough to start discounting and then stop. Once you open it up, it’s hard to close. Look at the automakers. They started discounting. It has diminished the product.’”
I have a name for this desperate, risky game: beggar-thy-neighbor.
You know, in San Diego our downtown has been “re-gentrified”, but where I work , the bums still sleep in the doorways and defecate right onto the streets, in the gutters. One of the big driving factors for downtown has been the ballpark and associated gaslamp businesses that people like coming to. During the good times, people have kind of ignored all the bums down here, but as times turn worse, will downtown empty and retrun to it’s urban blight as people are reminded by the sight of bums of thier own closeness to living on the streets? If it does, will you really want to by a condo even in its new “de-gentrified” state.
Even in the best of times, some of these areas haven’t been able to attract actual residents. They offer a less than ideal lifestyle for raising a family, which greatly limits the number of potential buyers. Aging baby boomers will flee if they feel any sense of danger. I had a friend who loved in Manhatten his whole life, but after being mugged twice in his 60s he moved.