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Saturday, July 30, 2011
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37 comments:
Since the prior thread has become somewhat of a political one, I wanted to bring this forward here:
"Harriet said...One thing that has kind of surprised me is that so many builders have hung on so far."
The homebuilding industry has shrunk quite a bit, its just not very visible to those of us not in the industry.
Despite the presence of a handful of biggies whose names we know, Pulte, D.R. Horton, Toll, etc. a good percentage of the market share still belongs to very small names weve never heard of.
The big boys had the cash to ride out the recession, so almost all of the shrinkage in the industry came via the loss of these tiny guys who went out of business, or were absorbed by one of the big name brands.
In alot of ways, thats a shame. We lose some unique builders building some unique styles, and are left with a few big names who put out similar style houses all across the country. The oft maligned "homogenization of the exurbs".
Absolutely true, Anon.
I should have said "big builders."
I know firsthand of plenty of excellent smaller builders who've moved on to remodeling, or nothing at all. It's still a difficult way to make a living.
Many large builders, having learned a lesson in the early 90's, chose to option land this go-around. They walked away from alot of deposits. Had they not done this they would have been bankrupt. In the past builders bought and owned property for future development.
The small guys, presumably, could just lay everyone off and keep a core to do remodels etc. I think many did.
We are currently getting bids for new construction in the ex, exurbs. We probably missed the boat on the lowest bids. I am hearing 140/sq ft for a house with top line finishes.
VA,
I have contemplated buying land and getting a builder, but I am finding many sites just don't have any type of estimates or anything. You have to actually get involved with builders to see prices? (Hope this isn't too stupid a question).
sehr,
Yes, for the most part. Finishes (hardwood vs carpet, granite vs. formica, tile vs vinyl, hardiplank vs siding, etc.) play a large part in the cost to build.
Ex. we want hardiplank with a stone water table. We want stamped concrete for the driveway and patio. We want Anderson windows, nice tilework and granite, upper end kitchen and bath cabinets, full poured concrete basement, trex decking, upgrade appliances...
You can see how costs can vary considerably.
We are lucky in that a very experienced friend is also building. We plan to ride his coat-tails. He has had a first meeting with two builders and they have both quoted $140/sq ft. He will talk to a couple more and actually "bid-out" his plans.
p.s. this is for an area 60 miles away, so the numbers could be lower than close-in builders.
Ok, well the area that we are looking is Fredericksburg, VA. I'm almost to the point of thinking that in order to find what we want we need to build it ourselves, inventory sucks here for what we want at our price level.
Either that or buy a flip before the flip part is done, lol, and do it ouselves. I am iffy on the whole housing ladder thing, not sure about considering that route.
sehr,
We are building in King George. Have you investigated Mitchell Homes? Their product is reasonable and they have a good rep. The finishes just don't match our lot value (we are on the water). You can find them online. They have built many homes in the Fredericksburg area.
btw - the market is still terrible down your way. Existing homes are way cheaper than new build from what I am seeing.
Question for Harriet:
I'm trying to compile all Case Shiller Reports, going back as far as my resources allow me to. Between my saved files and your monthly C-S posts, I have data going back through your Nov 30 2010 post. From there on back, the spreadsheets' data are all the same. Do you have the original numbers/data? Would you be willing to update those incorrect spreadsheets, or possibly email the data to me?
I'm trying to come up with a meaning behind the divergence of "new" C-S numbers and the revisions they make. I think it might have something to do with seasonality, but I need a lot more data to come up with anything more than a half-assed theory at this point.
Thanks!
Kevin,
I would love to say I did have them -- readers here helped me realize that we needed to keep track of the revisions. Before that, I was simply overwriting instead of saving the old files and creating new ones.
I've also grown frustrated with posting the MRIS data for the same reason - I had my nice little charts going back 10 years, and when they re-did their website, they included gobs of revisions. It's just time-consuming right now, but I'll be posting them again at some point.
Sounds good. I'll continue digging around for the old reports. They have to exist somewhere. I don't think that S&P is being forthright about what's going on with their data.
kevin,
Is this merely an intellectual exercise? With all the hours devoted I would imagine you could find a terrific buy on a house. Do you really want to buy?
Whether it is profitable or not is irrelevant, and this is unlikely to deter or rush me into ownership. I'm a data junkie. I like to do research on observations I make, things that nobody else is talking about.
Personal Example: 3 years ago when gas prices were peaking above $4/gallon, which had never happened before, I noticed the prices of SUVs were in the tank. I had been interested in a particular model for over a year, but wasn't going to put down $21k for it (used, 2004). When those prices fell by over five thousand dollars in six months and smaller cars (Civics, Priuses, Corollas) were becoming few and far between and a lot higher in their resale values, I did some comparative models to examine if this shift was supported by the difference in fuel prices. It wasn't. Was that enough for me to buy the SUV I wanted? No, I needed to see what happened if gas prices went up to $5, $8, and so on. I found out that for someone to trade in their SUV for a Camry at that point in time, they would never make up the premium they were paying and losing through their sale. Did the same thing for someone trading down from a Camry to a Civic, and found the same thing. Worked it back on upwards (low to mid, mid to high consumption) and realized that in almost all cases, gas prices would need to be upwards of $12 per gallon for over five years in order for this to be a worthwhile trade-down decision. That was a bet I was willing to make since gas prices over $6 a gallon (I'm estimating) over a sustained period of time would damn-near kill our economy.
So what was happening here? Were people really making such dumb financial decisions because they were scared? Arguably, yes. They reacted rationally, but not intelligently. Some guy in the midwest driving 70 miles to work and back in his Suburban simply cannot afford it when prices get that high. So he has to take his losses, downsize, and do whatever it takes to make ends meet regardless of how much his truck's value has fallen. For all he knows, it could be worth 20% less in one month. The market becomes completely saturated with SUVs and trucks, and people are having to pay "top dollar" for anything with more than 30mpg.
In realizing this, and that there was virtually no $ difference between a 6-cylinder and an 8-cylinder version of the car I wanted despite their big difference in mileage (people at the time were simply saying "No SUV, at all), I ended up paying $13k (no, I did NOT haggle) for a 6-cyl 2004 model with very low mileage. This would have cost me over $21k a year before.
Despite the 30k miles I put on and the even-higher fuel prices today, I can still sell this car for a profit. My purchase was a gamble based on simple models which were based on a series of observations I had been making in the used car market for a good amount of time. If I had more confidence in what might be called "insight", I would have bought ten of them and flipped them at a later date (and, funny enough, there wouldn't necessarily be any capital gains tax). Prices went straight back up when arbitrage kicked in, which is always more than a few months after the fact (typically a mid- or long-term market equalizer). What had happened was nothing more than a rare psychological swing in the market, enough to cause a huge rift between supply and demand for certain classes of autos, even one that wasn't good for the participants.
So the point of my long story here is that I don't believe in just accepting things for what they are. I like look for explanations of markets and sociological/economic behaviors, and I love to make (and research) observations, even if they lead me nowhere. I reject notions such as "why don't you just buy" or "fulfill your emotional needs and own" as realtor propaganda, simply the worst possible advice anybody could ever act upon with the biggest purchase in their life. People spend years - decades - going to school and building their reputation within their career with an end game of "more money". If in the end it makes less of a $$$ difference than would doing a few hours of diligence before making very large purchases, then that's a complete penny-wise, pound-foolish approach to life and one's financial ambitions. The time it took me to save $8000 on my car was less than 5 hours (10 min per month for 12 months collecting and observing the data + 1 hour modeling and analyzing the data + 1 hour deliberating + 1 hour buying the car).
kevin
enjoy the Data.
will S&P release it?
Kev -- whatever you do find in the CS data, may I suggest that you submit it here for vetting and comment. After all, your judgment is such that the data once told you that Arlington was a PWC in waiting...right at the bottom of the market no less...
http://novabubblefallout.blogspot.com/2009/01/northern-virginia-bits-bucket-1302009.html
good luck.
pat said... will S&P release it?
I don't think so. I can't find archives on their C-S reports. I guess they either figure that because their new reports contain archived data going back twenty years that it would be redundant to put all of them up on their site. Or maybe they don't want someone reverse-engineering their methodology.
Anonymous:
whatever you do find in the CS data, may I suggest that you submit it here for vetting and comment
Sure. Why not, right?
After all, your judgment is such that the data once told you that Arlington was a PWC in waiting...right at the bottom of the market no less...
Oh, you were only chiming to be an asshole. Shocker. Maybe it's better that I don't share what I find since by "vetting" you mean "ignoring the substance and importance of the data, and being an antagonistic assclown."
Kevin:
"...I noticed that prices of SUV's were in the tank".
Wow. I seem to recall being blasted by that info nightly on the news...so I would imagine that everyone and their cousin "noticed" the same.
Such insight.
You seem to spend countless hours spinning your wheels (no pun).
I spent about 4 hrs last week putting a house under contract at 25% below FMV. I would imagine that even you would think this a safe price(?). I don't fault your intellectual curiousity (it obviously is satisfying to you). I do question whether you actually want to buy a house or just study markets.
Wow. I seem to recall being blasted by that info nightly on the news...so I would imagine that everyone and their cousin "noticed" the same.
Such insight.
Find me one news article from back then which showed that used SUV prices had fallen by 40%. There aren't any indexes to show those kinds of things. One would have to be paying attention. Seeing as how even the housing bubble completely was beyond your scope of awareness, I doubt you noticed at all that there was an opportunity to profit from arbitrage in the car market.
Dealers were giving rebates and goodies to get people to buy new SUVs. Dumbasses were hocking the gas-guzzlers without comparing the actual gas savings. I did the math and it didn't add up. I doubt you even gave it a single thought.
I spent about 4 hrs last week putting a house under contract at 25% below FMV. I would imagine that even you would think this a safe price(?).
Depends. Given that you think the housing bubble is the norm and that this is an overcorrection, 25% under your estimated FMV could very well be above FMV in a sans-bubble world.
I don't fault your intellectual curiousity (it obviously is satisfying to you). I do question whether you actually want to buy a house or just study markets.
Both. But I'm not simply going to buy a house for the joy of buying a house. I detest the sort of emotional convulsion that most buyers encounter when strapping themselves to a 30 year debt weight and giving no thought into the quantitative aspects of their purchase.
Uh Kev, I clearly recall people being unable to "give away" big suv's. Perhaps others recall the news reports and the skyrocketing demand for hybrids.
Regarding "bubble" pricing; do you mean that current prices are in a bubble? Would 25% below current be a bubble price? You are aware that I put zero new money in RE from early 2003 until December 2008? Much of what I have bought over the past decade involved 1031's. I'm not really understanding why you think I am a bubble-head.
I take your answer about buying to mean that you believe housing is still highly over-valued. Is this correct?
Also, regarding the "over-correction; yes, this did occur in some areas. I am well ahead on purchases made in the last 30 months. I have seen prices in certain neighborhoods double from their lows. I would guess this could only result from an over-correction unless you have a different explanation.
"Kev said...Oh, you were only chiming to be an asshole. Shocker."
Somewhat. But at the same time Kev, come on! Did you actually see the conclusions you were drawing back in that thread?
You start out explaining why "its moving in" and just hasnt hit close in areas like Arlington...yet. Glug.
Later, you tell "waiting to move" that its better to sell his DC condo then, because close in areas are in your opinion at "beginning of the downward value curve", glug, glug...
You later claim shadow inventory is the #1 reason you hadnt bought yet, saying "just imagine what'll happen when they release it" glug, glug, glug...
Next, CRT and Kob try to gently explain the error in your greatly misguided judgment, explaining that close in areas are not just a PWC in waiting.
You respond with the classic, emphatic, John McLaughlinesque one word paragraph:
wrong.
Followed by a very rudimentary analisis of the price data, and then a lesson on why these areas arent "immune", followed by a mild rebuke "im surprised you guys havent picked up on this yet" as if you are the wise old sage and us veterans who disagreed with your view needed to be educated. glug, glug, glug, glug...
I then politely suggest that you go back and do some more homework, on why "its moving in" isnt as obvious as you think it was but apparently that did no good.
Indeed, it was 2 months later, at the absolute bottom that you made your "time for Arlington to nosedive" call. Glug, glug, glug, glug, glug...
http://finance.yahoo.com/news/BofA-Donates-Then-Demolishes-bloomberg-946456059.html?x=0
bofA is now demolishing houses.
9 million unemployed, 6 million homeless and bernanke prints a trillion in TARP to demolish houses
VA_I:
Uh Kev, I clearly recall people being unable to "give away" big suv's. Perhaps others recall the news reports and the skyrocketing demand for hybrids.
That's about demand and inventory. Nobody was modeling the sudden disparity between prices and mileage.
Regarding "bubble" pricing; do you mean that current prices are in a bubble?
Depends on the area. In general, yes, though certainly parts of PW, Loudoun, and Fauquier counties have reverted to income-sustaining levels.
You are aware that I put zero new money in RE from early 2003 until December 2008? Much of what I have bought over the past decade involved 1031's. I'm not really understanding why you think I am a bubble-head.
I am aware, yes, and that is certainly to your credit. I'm referring to the comments you've made about how the pre-2000 market was in some sort of inverse bubble, that the market upswing was at least in part due to an upward correction in prices.
I take your answer about buying to mean that you believe housing is still highly over-valued. Is this correct?
I think over 90% of the listings are overpriced. I think that some areas are overvalued in the sense that the median household income has only risen a fraction of the proportion that the median housing prices have grown (as a percentage, not dollar-wise). For instance:
http://www.city-data.com/city/Arlington-Virginia.html
Median income is 1.5 times what it was a decade ago. Median home price is 2.38 times what it was a decade ago. Prices correlate with income and rents. There's no logical explanation other than prices being widely bubbled in Arlington. Reversion there as well as more posh areas like Mclean and Oakton are nowhere near historical trends.
"Kevin said...Median income is 1.5 times what it was a decade ago. Median home price is 2.38 times what it was a decade ago. Prices correlate with income and rents. There's no logical explanation other than prices being widely bubbled in Arlington. Reversion there as well as more posh areas like Mclean and Oakton are nowhere near historical trends."
No logical explanation? Heres one.
Say in the pre bubble days, 5 renters want to buy in to an area, with incomes as follows:
60K....60K....90K....150K....150K
Median income = 90K.
Now, if everyone buys at 3X income prices for those 5 homes, prices are as follows
180K...180K...270K...450K...450K
Median home price = 270K.
+++++++++++++++++++++++++++++++++
Now, fast forward and assume that now 9 renters who want to live there with incomes as follows
60k..60k..60k..60k..90k..150k..150k..150k..150k..
Median income still = 90k.
Now, lets say that they only could build 2 more houses. With those 9 renters competing for 7 houses, the top 7 earners will beat out the bottom 2 who are forced to remain renters. Thus, even with the buyers still paying only 3X income, prices for those 7 homes are as follows:
180k...180k...270k...450k...450k...450k...450k
Median home price = 450k.
+++++++++++++++++++++++++++++++++++
So again, pre bubble days:
Median income = 90k
Median home = 270k
everyone bought at 3X income - therefore sustainable.
Post bubble days
Median income =90k
Median home =450K
everyone bought at 3X income - therefore still sustainable.
This is a natural and logical consequence in desirable yet land constrained areas. Over time, the metrics look worse and worse as the lowest income people are forced to rent...yet its still sustainable. How did you think that in the year 2000, before there was any hint of a bubble, home prices in manhattan were at 20X income? And this isnt just a NYC phenomenon either. In the year 2000...again pre-bubble...some areas of DC were already at 9X income.
Bottom line, you really need to think more about this. We've been over this tutorial 1,000 times on this blog. Yet here we are in mid 2011 and you are still saying there is "no logical explanation"? Cmon Kev, you are better than this.
p.s. Kev - im gonna be incommunicado for a few days, so if you have any questions, ask hb or someone else to explain. Good luck.
Anonymous, that's why I look at median household income. More people and incomes per household are reflected in that figure, hence a consistent parity with housing values up until the bubble.
im gonna be incommunicado for a few days, so if you have any questions, ask hb or someone else to explain. Good luck.
One fewer poster who doesn't know the difference between GDP per capita and GDP per household... hopefully I can cope.
Kev - substitute the word people for household and the model works just as well. Again, this is nothing new, weve been over this one 1,000 times over the years. I know its frustrating to accept things you dont like to hear, but I suggest you open your mind to this one. Good luck.
substitute the word people for household and the model works just as well
GDP per person? What do you think GDP per capita is?
Again, this is nothing new, weve been over this one 1,000 times over the years.
This is the first time I was made aware that you don't understand some pretty fundamental economic measures such as "household income".
I know its frustrating to accept things you dont like to hear, but I suggest you open your mind to this one.
Tell ya what, when you understand what I'm talking about, then you can talk down to me. Until then, STFU and do some reading:
http://en.wikipedia.org/wiki/Median_household_income
Household income is not to be confused with family or personal income. Household income is often the combination of two income earners pooling the resources and should therefore not be confused with an individual's earnings.
This is the part where you log out, go do your thing for a few days, and hope that as few people as possible will be reading this far down an old thread. You'd probably hate to be regarded as economically clueless rather than merely antagonistic.
Kevin,
I still haven't heard any cogent explanation of why the old rule of thumb of 2.5-3X salary trumps lender qualifying ratio's. Out homebuying in the early '80's, we were told the rule of thumb (3x salary) but rates were over 12%.
Rates have been hovering between 4.5 - 5.5 for years now. Why would anyone who is contemplating a long-term purchase disregard the actual monthly payment? Ah...I forgot, it's the "fear" factor. What if I have to sell in the near future and rates have sky-rocketed? My house value will crater! Irrational fear = paralysis.
I suggest you look at what happened to prices in the early '80's as rates rose to 18%. Also recall my idea to go FHA and have an assumable loan to alleviate this concern.
As anon pointed out, you completely ignore wage growth in N. Arlington and how this has outpaced many locales. It's supply and demand. High wage earner's are keeping others out of the desired N. Arlington suburbs. There is no new inventory. There never was a wave of foreclosures and there won't be. Demographics, dear Kev.
Contrast the hard hit areas. Entire subdivions (multiple subdivisions!) all delivered at peak with the loosest underwriting in history. Turnover=stability. Location, location, location.
The other war-zones were the lowest tier where many were lead down the path to "riches". It's all very clear if one is really looking.
I guess you have backed-off your assertion that I was blind to the price distortion and your belief that no over-correction has ocurred in this region.
VA_I:I still haven't heard any cogent explanation of why the old rule of thumb of 2.5-3X salary trumps lender qualifying ratio's. Out homebuying in the early '80's, we were told the rule of thumb (3x salary) but rates were over 12%.
Rates have been hovering between 4.5 - 5.5 for years now. Why would anyone who is contemplating a long-term purchase disregard the actual monthly payment?
Who is disregarding it? Part of the problem is that it's the only thing people consider, hence they were taking out negative-am option ARMs when they could. I realize the impact that these interest rates have, and it's part of why I believe there will be further downward reversions in home prices. It also doesn't even come close to explaining the current disparity between household income and home price levels.
I suggest you look at what happened to prices in the early '80's as rates rose to 18%. Also recall my idea to go FHA and have an assumable loan to alleviate this concern.
I'm not familiar with your plan, but if it's to use the FHA to boost buyers' ability to borrow more, then I'm not likely to agree with the idea.
As anon pointed out, you completely ignore wage growth in N. Arlington and how this has outpaced many locales.
Completely ignore it? That's EXACTLY what I was pointing out! Wages, wage growth, income per houshold... FFS, the number of people living under one roof and their combined income determine their collective affordability. That information is reflected in household income statistics, which has traditionally been in line with housing prices. What Anonymous didn't realize is that there is actually a statistic to measure a household's combined income of its inhabitants. He thought I was talking about per capita.
VA_I, as a reminder, many of us here have pointed out repeatedly why the housing prices of the early 80s did not fall in direct negative correlation with interest rates. The main factor is that inflation was quite high during the same time. If you look at real prices during that time, you get a much clearer picture of what was happening.
Take a look at this graph at CR:
real housing prices over time
Ace,
I viewed the graph you linked. Inflation-adjusted housing prices fell behind. Wages increased and eventually raised housing prices. I remember bidding wars in the later 80's.
We didn't actually witness much of a drop in the numbers and I think this is important to buyer psychology. It's been mentioned many times here that stagnant prices are likely for a number of years. Wage inflation will eventually catch up and cause price increases unless the economy gets worse instead of seeing a recovery in the next few years.
The issue in my mind is uncertainty among buyers regarding everything from their employment situation to another leg down on pricing.
There seems to be a generational difference in beliefs about the future - near and far.
I was talking with a group of 30ish professionals last night and they are very reluctant to buy. We may have a generation of renters. This does not affect me; in fact, it helps me.
I'm not going to live my life fearing a doom scenario. I'm not in a situation where I could ever envision a forced sale. I would like to see a time in history (including the Great Depression) when rents fell.
If a big drop in house prices (over and above what we have seen) is too much for some to handle, then renting is the best option.
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