Slowdown Hits Banks
The cooling housing market remains a major challenge to growth, particularly for banks that are heavy on construction lending. “Construction loans have driven between 25% to 30% of loan growth during the last two years,” said James Abbott, a research analyst with Arlington, Va.-based investment bank Friedman Billings Ramsey, which covers community banks and thrifts in the Southwest and West Coast. Historically, he said, such loans have accounted for about 5% to 10% of annual loan growth. Nevertheless, Jeff Davis, an analyst at Cleveland-based institutional equity research firm Midwest Securities, said that “banks will have a few issues” but he isn’t expecting any dramatic increase in loan loss rates. “You’ve also got to think about the tenor of the times and that is, the economy is incredibly robust,” he said. “It’s been in overdrive, and it’s shifted down to third gear. So at the margin, it feels like things have really slowed down, but unemployment is low, incomes are up.” “It really is more of a return to normal,” added Ryan Beck analyst Megan Malanga, who says that the slowdown is being exacerbated by “buyers who know they have the power right now and are waiting on the sidelines for price to come down, which may or may not happen, but there is demand out there. People aren’t stepping up to the plate and buying houses because they think they can get it for a lower price, and that compounds the problem, so I think it just feels worse than it really is.” In an Oct. 3 research report on construction lending, Abbott wrote that “bankers and builders generally believe a long-term inventory glut is unlikely,” because builders are responding to current market conditions by cutting production, lowering prices and increasing incentives.(www.leesburg2day.com)
Leesburg Today (11/1/06); Therese Howe
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Builders Give Buyers a Break
A recent survey by NAHB confirms that 28% of the builders nationwide are offering optional items at no cost, up from 12% a year earlier, and that the number of builders offering special financing has gone from 27% to 33%. Since mid-September, Heritage Homes Group of Jamison, Pa., has been offering “employee pricing plus,” which entitles home buyers to the same discounts its employees would get if they were to buy a home in one of its developments: $25,000 worth of options for free if they buy a single-family home and $10,000 in options if they buy a town house. Heritage will also offer its buyers any new incentives that arise while their house is being built so they don’t need to fear missing out on anything, and it offers 100% financing deals to buyers who can make the monthly payments but don’t have any money to put down. All of the incentives, says Greg Lentine, the company’s director of sales, were designed to meet the concerns it was hearing from its potential buyers as interest rates and home prices increased. “We’re just trying to get more people into our homes.” Chuck Hamilton, executive officer of the Lehigh Valley Builders Association, says that the larger, national builders are more likely to offer incentives than the smaller, local builders. “The national builders buy land and build on speculation,” he says. “Hence, they end up with unusually large inventories when a market slows down. Rather than merely sitting on large inventory, incentives are often used to move the homes. This is a phenomenon that you rarely see happen with local builders who have always built to local market needs.” (www.mcall.com)
Morning Call (10/29/06); Beth W. Orenstein
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For Sale, By the Owner’s Ego
Evidence is mounting that people set prices, particularly for housing, as much on ego and self-image as on an objective view of the market. This is one of the reasons that home sellers won’t cut their demands enough to make a deal and helps explain why the unsold inventory of homes has risen so high in many markets. A body of research developed over the past two decades, known as neuroeconomics or behavioral economics, has illuminated a few key concepts. Applied to housing, people will cling to prices they recall from a brighter day, even when market conditions have changed; they will walk away from a sale if they feel the buyer is getting too good a deal at their expense; and they are terrified that if they sell now, the market will rebound and they will feel like fools. But some sellers are able to be more dispassionate. Six months ago, mortgage broker Steven Waller bought three dilapidated townhouses in Front Royal, Va. for about $100,000 each and spent about $20,000 refurbishing each. He is flipping the properties by selling them for $149,000 each even though they have been appraised at about $180,000 and similar units are being sold by their owners for $165,000 to $200,000. “I’m making a profit, that’s all that matters,” Waller said. “I have no emotional attachment to it. You can stay ahead of the game if you price at where they will sell rather than sit on them for a year.” (www.washingtonpost.com)
Washington Post (11/4/06); Kirstin Downey
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Forecasting Changes on the Housing Front
Looking at housing data going back 25 years, Wharton real estate professor Todd Sinai and his colleagues found that recent growth in housing prices was largely explained not by a bubble but by basic economic fundamentals such as low interest rates, strong income growth among high-income Americans and unusually low housing prices in the mid-1990s. Their research also found no evidence that most buyers were bidding up housing prices based on unrealistic expectations of future price increases, and that the conventional metrics for assessing the housing market — such as price-to-rent and price-to-income ratios — ignored the effects of lower real, long-term interest rates, thus failing to accurately reflect the state of housing costs. He and his co-author Chris Mayer didn’t begin their research thinking they would prove or disprove the widespread media reports of a real estate bubble. Instead, they simply hoped to create a measure that could be used down the road to gauge whether real estate markets were overheated. “We didn’t have an agenda or any idea really how things would look when we started this research,” he says. “I’ve been studying housing markets for a long time, and while I’ve learned to be skeptical of media reports, house price bubbles do happen.” (www.wharton.upenn.edu/alum_mag/)
Wharton Alumni Magazine (11/06); Nancy Moffitt
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Mayor Breaks Tie Over Inclusionary Zoning; Measure Fails
Oakland, Calif. Mayor Jerry Brown last week dramatically cast a tie-breaking vote against a proposal by the city council that would have required developments of 20 or more apartments or homes to set aside 15% of the rental units for households earning 60% of the area’s median income, or about $50,000 for a family of four. The measure would also have required 15% of for-sale homes to be affordable for households that earn the area’s median income, or about $84,000 for a family of four. Brown, who acknowledged his long opposition to inclusionary zoning measures, called for a blue-ribbon commission to study the measure and said that it would do little to help the 30,000 families living below the poverty line in Oakland, while driving developers — and private investment — out of the city and perhaps even reducing property values. Brown said the measure, if it were implemented, would create what he called a “lottery” for the 100 affordable homes and apartments he estimated would be built in a single year, while taxing market-rate homes. “There is no Santa Claus,” he said. “Someone has to pay.” The mayor suggested that city funds would be better spent improving the thousands of run-down apartments throughout Oakland. (www.insidebayarea.com)
Inside Bay Area (10/31/06); Heather MacDonald
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Conservation Efforts That Pay Off
According to the Residential Green Building SmartMarket Report by NAHB and McGraw-Hill Construction, home owners increasingly are more interested in making improvements that will help them conserve and increase the energy efficiency of their homes. Outside the home, deciduous trees provide cooling shade in the summer and allow sunlight in to warm during the winter. In addition, one tree can filter up to 60 pounds of pollutants from the air each year, according to NAHB. According to the U.S. Department of Energy, home owners can save as much as 10% to 50% in energy costs by going green, and one of the most important steps is to increase thermal insulation in both existing and new homes. Heating water accounts for about 15% of the average household’s energy use. “The easiest way to improve efficiency is to cut back the water heater thermostat to 120 F and wrap the unit and hot water pipes with insulation,” said Ronnie Kweller, deputy director of communications for the Alliance to Save Energy. To save water, a new clothes washer with the Energy Star label will use half as much energy and water as one that’s 10 years old, and front-loaders use about 40% less water than top-loading models. Savings are similar with new dishwashers. Low-flow shower heads and faucet aerators are inexpensive, easy to install and will immediately reduce your water consumption and water-heating costs by as much as 50%, according to NAHB. (www.insidebayarea.com/oaklandtribune)
Oakland Tribune (10/31/06); Nancy Moffett
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