Sweetening the Deal to Sell a Home
Mark Zandi, the chief economist of Moody’s Economy.com, estimated that sales incentives might now be equal to as much as 3% of the effective prices of houses across the country on average, but there is simply no way to know for certain. “Sellers are pretty picky,” said Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania. “They are not willing to lower prices enough in downturns; they don’t do it very quickly;” and their reluctance delays sales, contributes to rising inventories and allows prices on the remaining transactions to show an annual increase. Incentives are more common in the new-home market, where builders are under financial pressure to sell empty homes and, as large businesses, have the ability to absorb the financial hit. Executives at some of the biggest building companies say the giveaways can equal 3% to 8% of a home’s sale price. Price reductions this high could wipe out the year-over-year price gains in many markets. In the existing market, many sellers are providing subsidies. Frank Borges Llosa, who owns Frankly Realty in northern Virginia, analyzed records for condos in one Virginia ZIP code and found that the use of subsidies had soared since last year, when they were nonexistent. In Arlington, 14 condos had sold for $350,000 to $550,000 since June 1, and 10 of them included a subsidy from the seller to the buyer averaging more than $7,000. Zandi said he believed that the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily. (www.nytimes.com)
New York Times (8/25/06); Vikas Bajaj and David Leonhardt
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Consumers Curb Upscale Buying as Gasoline Prices, Housing Bite
In addition to high gasoline prices, economists say that consumers likely are being hit by a slowdown in the housing market that is making it more difficult to obtain cash extracted from the equity in their homes. Since home owners often put this money back into their homes, higher-end home-furnishing retailers such as Williams-Sonoma and Pottery Barn could be vulnerable. Wendy Liebmann, president of consulting firm WSL Strategic Retail in New York, finds evidence in a recent survey of 1,500 consumers of a broader shift in spending behavior after almost a decade in which most were “trading up” to high-end items. Many are now cutting back, she says, with low-income households becoming more likely to stick to dollar stores and supercenters and middle-income families visiting more mass merchants and grocery stores than specialty outlets. Liebmann says that households earning as much as $75,000 a year are changing their spending habits, judging from responses from this group that are more similar to those of low-income households than those of wealthy families. Fashion accessories, clothing, home décor, electronics and entertainment are the types of spending most likely to be chopped, she says. A drop-off in consumer spending, which accounted for three-quarters of U.S. economic growth last year, could herald the broader slowdown sought by the Federal Reserve and its two-year campaign to raise short-term interest rates. (www.wsj.com)
Wall Street Journal (8/21/06); Justin Lahart and Amy Merrick
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House, Lawsuit Rising; Builder Contends 2nd Builder’s Home Infringes on a Copyrighted Design
With two builders in the Akron, Ohio area embroiled in a lawsuit over home plans, Carmine Torio, executive director of the Home Builders Association of Portage & Summit Counties, notes that copyright infringement disputes have become increasingly common in the housing industry. Many home builders are unaware of the Architectural Copyright Protection Act of 1990, under which owners who copyright plans receive exclusive right to use the plans and must be paid a fee for their use. Anyone who uses another’s copyrighted design to build a home without permission can be sued for infringement. Using modified plans can still be infringement. A “substantial similarity” in the two designs will be the deciding factor. David Crump, director of legal research for NAHB, said that most people aren’t aware of copyright issues. “They see the picture of a home in a magazine, and they take it to the architect or the builder” and ask them to design a home along the same lines, Crump said. “The consumer has to understand that they have to have permission to use another’s copyrighted work.” Crump said that his own house is based on a model he saw in Southern Living magazine. He contacted the copyright holder for permission and for about $300 “I received a one-use license for the use of that plan, and I was able to make modifications and use it.” Permission is often not that hard to obtain, he said. “A lot of designs are published simply for the purpose of informing people that these are available designs.” (www.thebeaconjournal.com)
Akron Beacon Journal (8/20/06); Gloria Irwin
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Developers United to Pay $15M Tab for Road Widening
KB Home, along with a group of 13 builders and developers building 17 new projects in Orange County, Fla. ponied up $15 million to widen a county road that didn’t have the capacity to handle the traffic projected to result from their residential and commercial plans. The county had stopped offering a pay-as-you-go alternative for the road and had "no plans to improve the road or to otherwise resolve the development moratorium caused by the lack of traffic concurrency,” said Cara Kane, Florida public relations regional director for KB Home. Jim Harrison, director of growth management for Orange County, said the road was at least 15 years away from being widened because of funding issues. George Glance, president of KB Home Orlando, said his company “is just responding to demand for new homes and trying to be a good steward to the community.” His company is putting up roughly 40% of the $15 million because it has roughly 2,100 of about 4,000 lots in the area. Alan Bradley, an associate with Orlando-based The Huber Group LLC, a real estate development firm that has two residential developments with a combined 700 homes coming online in the area, said there was no choice but to fix the road. “Our projects would be stalled indefinitely,” Bradley said. “Now we are fixing it for free so we can build here.” Impact fees for single-family homes in the county are currently $3,500 and are set to rise to $3,605 in July 2007. (www.orlando.bizjournals.com)
Orlando Business Journal (8/21/06); Kurt Schultheis
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The New House on the Block — As Rates, Inventories Rise, Developers Try Auctions
Overall residential auction sales are up, according to the National Auctioneers Association, growing 4.4% for the first half of 2006, compared with 4% for the same period in 2005. The group projects that home auctions will account for $255.4 billion in revenue in 2006, compared to $240.2 billion last year. NAHB says interest in home auctions is up as builders experience an increase in contract cancellations — 30% this summer, compared with 15% last summer. Large numbers of new homes went under the gavel in the late 1980s and early '90s when many of the houses being built on speculation wound up in foreclosure when the market turned down. That’s much less likely to occur in the current market, according to industry observers, in large part because big developers, who build 68% of all houses in the country, are waiting for signed deals before they break ground. Companies such as Pulte Homes, Centex and Toll Brothers all say that they haven’t auctioned their homes and don’t plan on doing so anytime soon. To register for an auction, a buyer must put down a deposit, usually 8% to 10% of the home’s estimated value. (www.wsj.com)
Wall Street Journal (8/25/06); June Fletcher
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High Costs Plague Gulf Rebuilding Effort
Shortages of raw materials, in combination with record fuel prices, are causing price increases for residential contractor supplies and construction delays for the Gulf Coast as it attempts to recover from last year’s hurricane season. “Construction and labor supplies have been tight for several years, with material costs increasing much faster than overall inflation,” says NAHB economist Michael Carliner. In the aftermath of Katrina, there was a spike in demand for certain repair materials. But Carliner explains that “the 2005 hurricanes actually reduced demand in the short term. The long-term rebuilding effort will mean additional demand, and shortages are therefore likely to continue for several more years.” On the labor front, Don Sampson, president of the Louisiana Home Builders Association, explains: “Our labor force mostly consisted of hourly workers that needed a paycheck each Friday, and when there wasn’t one, they left. The people who stayed here are charging a premium. We are building more houses because of the storm. And that will last a couple more years. But it’s taking about 30% longer on average to build a home due to workforce availability. It has taken a lot of the home buyers out of the market. Low interest rates were great, but high material costs are taking a lot of families out of the picture.” (www.archrecord.construction.com)
Architectural Record (8/25/06); Tony Illia
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