Home builders are professional marketers and, as such, are the most important “class” of sellers you must watch in your local market. Home builders have a lower costs, answer to a higher authority, and are more sensitive to inventories than Mr.& Mrs. Jones of Perkasie, PA. Let me explain what that means and why it is important to you, the Professional Realtor.
Home builders have a lower cost of funds. In 1995, builders were a mostly entrepreneurial bunch. They were regional, smaller, and privately-held. Less than 20% of the home builders were publicly-owned; their source of capital was debt. Debt requires servicing and has a lower margin for error in pricing. Hence, the homebuilders “marked to the market” frequently through drastic price reductions. They didn’t fear class-action suits from homeowners because their pricing was necessary to the survival of the company. In short, they had shallow pockets and did what the banks told them to do.
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Brian..........I am not understanding why builders are slashing on homes with a 6 month build. Our (new home) inventory is disappearing and gone in some sectors of our market. We only have so much land in the valley. Apparently they cannot afford to hold. Am I missing something?
:shrug: oh well it is a help to motivate the people who are sitting on the fence.
We only have so much land in the valley. Apparently they cannot afford to hold. Am I missing something?
The builders will watch the market demand build and come out with new product at dramatically higher prices than the old inventory (from the next to last paragraph).
COMMENT:Renee, they already have the land optioned. Blow out the inventory and set up the next big sale. An old Wall Street traders trick based on crowd psychology
I thought about that theory also. Builders are complaining about the price of land yet they are letting homes go for so little. They complain there is too much inventory. Yet I know someone who owns some prime land and he has builders fighting over it (and it's not even for sale!) I just smell another mini-boom here.
Crowd Psychology- nice ! I love the term! So very true and builders have the upper hand if we let them! Had a similar conversation about this with a friend moving away. They want a new home, and selling in a neighborhood with new constr. available....better be more than competitive !
This blog should be distributed to every real estate sales person and broker in the country. Know your competition. Want to sell or list resale homes?? Get to know what the new home builders are doing in your market.
Builders, as Brian says are smart. They are also not emotionally vested in a property. To them a property is a profit center. If they have financed the construction, they need to turn it over before it is even constructed because they can leverage the contract. If the house is completed, they need a buyer now. They've used capital or credit to build and they owe their subs and, if they are big enough, are looking at the bottom line.
So, while a real estate agent has a 2 year old home listed for $500,000, the builder down the street has a similar home priced at $475,000 with $10K in closing help, paying buy-down points, and a year's HOA fees.
A lot of new home sales do NOT get in the MLS and, therefore are not included in comps. Agents do themselves and their potential and existing sellers the benefit of that serious competition when pricing a property.
Funny thing about new home sales. They often go "under the radar". Buyers do not have to affiliate with an agent to visit new home models. New home builders are the smartest FSBOs around.
Ah. I feel a blog coming on.
Lenn
Hello Brian.. congrats on the feature.. well written post! I am seeing resales (listed and FSBO's) listed at or above local new construction costs. Their mentality is like you stated.. "I‘ll move if you pay me this". Realtors are looking at comps in a neighborhood and pricing simiar to those overpriced ones.. rather than looking at the entire city for example. We are still correcting in my area, but its starting to look promising.
Lenn: we are seeing builder inventory in the MLS here and there and I do believe it is SOLELY to drive traffic to that subdivision. I actually blogged about this yesterday as I was so beyond frustrated with all of the responses when I would inquire: the ccr's aren't done we can't go into contract yet, that is the base price, the home is sold. All blatant violations of MLS rules. The houses that are being listed in the MLS are so ridiculously low that it would be a skewed comp forever if it existed and closed.
Nick: I took a listing last night and that is exactly what I do, an area wide CMA of LISTEDS (not solds) just to give the seller an idea of the competition + subdivision solds in the last year. Believe it or not the subdivision solds came in lower than the area wide CMA!
My county is the fastest growing in the state. There are many new home builders, and we have had to allow for thier prices for several years. They have lots of unsold inventory so are offering huge discounts. One of them has been in the local news for an overly high rate of foreclosures on homes they sold 3-4 years ago. So buyers here are a little more cautious about buying 'too high'.
Resale homes have some benefits that an agent can bring up, like the cost of window treatments, decks, landscaping, which all can be worth thousands of dollars that need to yet be spent on a new-build. The main disadvantage a resale has is the financing offered by the builders.
Good post, Brian!
People "like" new.
People buy NEW cars KNOWING they depreciate immediatly.
Houses? Heck - 'NEW' rocks. (psycologically and financially)
Nice blog Brian.
I agree with Lynn, get this message out and fast. I have Pulte that is running a contest before the first phase will be built and it is hurting the resale market.
Great blog
New is not always better, But... it is PERCEIVED by the consumer as superior. Therein lies the market problem
Agree totally.
That's why I posted "People like new". At least that's my experience. Heck.....I like 'new'.
Renee- Am I missing something?
You are pretty much right on in that the developers can't afford to hold out for very long after a community is started. The homebuilders business model pretty much demands that once a home is built it must be gotten rid of pretty quickly (so a cancellation really hurts them, but a home that is built and closed due to a presale is their maximum profit). The homebuilders are at maximum exposure and leverage at that point in time. So while a developer can sit on some land (or buy/option more if it is in a premium location) he cannot afford to sit on an already started development, he must build it out and move on (this is because they are leveraging the banks money). Public builders are usually not leveraged that much, but private builders are highly leveraged and are most exposed to the market.
Cancellation rates are running extremely high, between 30 and 60% depending on the builder, so they are becoming motivated sellers to ensure that they are not stuck with a lot of inventory. The builders are in a process of deleveraging themselves right now, because in an up market leverage is great, in a down market it will destroy them.
For those of you that have been in the business longer than 5 years, this cycle is not new. Builders have been building and Realtors have been selling for the 30 years I've been lending. Brian is right you do need to know what your builders are doing and you also need to know your resale market. Sellers are dropping the price of homes because they have to close in order to move into the new home they bought. This action will affect the value of your home more than the builder lowering prices. This is because when an appraiser pulls comps, the new home sales are usually not listed. So instead of lowering prices, do what the builders do, pay customery closing costs for the buyer.
I am asked alll the time, has the market bottomed out, will home prices go lower. I can honestly say that will all my years of experiance, "I don't know, Maybe". We are in a cycle. We go through this every so often just to get the rif raf out of the business. We are in a normal market. If you are one of the good ones you will survive.
Mikey: excellent points; velocity is the builders' friend when the ground breaks
Joseph: It's just deja vu all over again
Brian,
I hang around AR and have been known to take a "whack" at real estate bloggers.... a time or two....or ten. LOL
However, fair is fair, and your post is one of the best I've read......Spot On!....and thanks for the info.
Regards
Hey Brian, Good stuff buddy. In my market we have lots of builder specs in the MLS. Poinciana has about 15-20 builders that build in the area. Most are moving out. I went by KB this morning and they are packing up. They have 5 more specs to sell and they are done. Out of the 20 builders I have visted in the last 60 days only 3 are staying put and those are building in the lower range of the market, price wise. Out of 1600 active listings in Poinciana, almost 1000 are les than 2 years old. Most are vacant flips that flopped and builder specs.
In Poinciana we definitely have to compete with specs but not pre-construction. I have found that buyers either want an existing house or they don't. Rarely do they want to consider both.
I'm closing on two KB homes this month in Lakeland Fl and KB has all ready sold off the remaining 300 lots and moved on.
Very good info Brian.
Brian - Very interesting blog - thanks. I think the comments Marko made re: "they don't build them like they used to" has some real implication here. I know I'm on the wrong side of the desk (I'm a loan originator), but when my wife and I bought last year we looked at quite a few new homes, newly remodelled homes, and homes that have been allowed to age. The new ones were the easiest to pass buy because they looked and felt like a showroom at Home Depot. The had no character. The new remodels often suffered from the same problem. We ended up buying a 115year old Victorian in need of some TLC, not because I wanted weekend projects for the next few years, but because it was substantial, solid, had character, and felt like home instead of a home improvement store display.
My 2 cent suggestion - and you folks are probably all doing it already - sell ambience , solidity, and homeiness.
BB,
I consider both as they have their advantages. My preference is a house that's a few years old because most of the "bugs" have made themselves known by then and the seller usually has some equity that can be negotiated. New is nice but I don't get the "new house fever". What Brian brings out is there *is* a price/value difference between the two......and is rarely discussed in an open forum. In fact, I have NEVER had an agent even consider it exists.
Brian,
My comments are simply an opinion....nothing more. Strongly stated, from time to time..... :)
Oh, and btw, you said "What about the big price drop coming from the builders? Well, that may or may not happen. "
My builders just raised their prices. And I don't see the others lowering them either
This is great-you've reiterated everything we've been preaching to new and experienced agents alike for the past few years. See, Charlotte NC is a contrary market and we're just now coming out of a 5 year buyers' market into a balanced market. And with the huge availability of affordable land and cheap labor from the very very deep South (ahem), builders have been able to hold prices down themselves (new construction has accounted for 52% of all closings in this area since 2001).
To any agent just now getting into real estate, we preach preach preach to visit new construction and learn what they're offering and for what. The smell of new sheetrock is quite seductive and if resellers don't get it, they aren't going to compete.
My comments are simply an opinion....nothing more. Strongly stated, from time to time
Keep coming back here, Stan (and Mikey). You two are keeping everyone on their toes.
Brian,
Is the builders lender usually a good option for a buyer. Are the cost savings for going with a big builder's lender?
Ardell:
Usually, yes. In this market, they offer crazy incentives for using the builder's lender. Many builders just don't care if it's deal killer and they are comfortable with an independent lender.
The incentives ain't free. The profit a builder's lender makes is generally twice as much as an independent originator bu the incentive is generally 3 times that profit. So, it makes sense to use the builder's lender 70-80% of the time.
I advise clients to get the loan and the incentives and let me unwind the mess the builders' lender made in a refinance a few months later
Brian,
Thanks for the post. Great pricing information. The builders are offering huge incentives in our market,but it is pegged to using their preferred lender.
Brian,
The "preferred lender incentive" topic sounds like a great blog topic.....any chance you could expound on the subject?
Regards
Brian.. In my part of the world.. Southern CA along the coast... we are built out so rarely have any large projects.. what we do have are expensive spec homes by local builders. New is very hot in our area but buyers have been very consistent in what they will pay and have waited out many builders.. prices have leveled and while no major dips no big increases either. For many builders this means their expectations have not been met.. Some have adjusted to the market and others have not.. which is another story..
The major impact on our community is not in the prices of newer resale homes Vs new construction but at the bottom end of the market.. builders have stopped grabbing any buildable lot(not necessarily scrapers.. just small homes on large lots) and are now only buying prime locations and are not paying big premiums as they did in previous years. This has opened the market to more entry level buyers who no longer have to compete with builders to buy a starter home. However as inventories decrease and fewer new homes are built we will should see a lack of new home inventory about mid summer.. and I believe a big price jump as inventory declines...
Good post but as a broker specialzing in marketing for builders, I find that the builders see everything as a business and are not emotionally attached to the properties. I ask them to price at what they will sell for and move on. (We don't need incentives to sell in our market presently). As to selling a new home, know your builder and their reputations for quality of construction and reputation for after sale service. Buyers love new (when it si built right and timely) especially when they get to customize their homes. They will refer buyers to you to work with the builder.
Our buyers see appreciation and it works for everyone. I see these buyers the next time they build as well as sell their existing home.