New home builders were spectacular at adapting to rising demand in 2004 and 2005 and instantly raising prices.
I remember very well a client looking at a new home in Gilbert in the spring of 2004. It was about $170,000. The saleswoman said the price increased $10,000 last month and rumor was it would increase another $10,000 this month. I thought that was B.S. but I researched it and found out she was right and the price did indeed increase another $10,000 for that one month.
Now it’s the summer of 2007. Demand peaked two years ago in the summer of 2005 and builders still haven’t adapted to the lower demand by cutting production significantly. They’re not even close.
New home builders were fantastic at adjusting to rising demand but they’ve been absolutely horrible at adjusting to falling demand.
It looks like the new home builders are incapable of significantly lowering production… on their own. It looks like it will take a few builders going the way of some of the mortgage companies before production gets into line.
The home builders are playing chicken with each other. No one wants to be the first to blink and significantly cut production. It looks like some builders will have to drive off the cliff before production falls significantly.
And that will be good for the real estate market.
{ 26 comments… read them below or add one }
dan soffa 08.23.07 at 3:47 pm
problem is. Every month abour 50% of the home closings in Gilbert are brand new homes. Why would the builders cut their prices, when people are still buy a lot of new homes….
John L. Wake - Realtor 08.23.07 at 4:06 pm
They have cut their prices instead of cutting their production.
Paul Cooper 08.23.07 at 7:02 pm
And the reason why they are buying these new homes is because they are prices 20% or more BELOW resales. Maybe the problem isn’t the new builds but the prices that greedy homeowners are still asking. Well I guess that’s a problem that skyrocketing foreclosures will soon solve.
Paul Cooper 08.23.07 at 7:06 pm
One more thing. If our current problems (the current credit crunch problem) was due to liar loans and free money to people who could not afford these houses, what makes people think that the problem can be solved WITHOUT prices becoming much more affordable so people can afford these houses without liar loans, fraud and exotic IO bull shit. When will the real estate people wake up. Unless prices come way down so that people can again afford a house without the exotic BS that is now gone, the housing mess will never recover. And that’s the truth.
John L. Wake - Realtor 08.23.07 at 8:28 pm
No one was more greedy than the homebuilders… although they have a lot of company.
Most California investors were unsophisticated investors trying to make a buck and this was their first investment property. The homebuilders are pros and they should have known better.
If the homebuilders hadn’t escalated prices so crazily the frenzy would never have been so insane.
The homebuilders were the price leaders in 2004 and 2005. When they skyrocketed their prices it created a price umbrella under which resellers could make a fortune… which in turn caused demand to explode so homebuilders could continue skyrocketing their prices… and so on.
Roger Hartzog 08.24.07 at 11:01 am
Amen! But, from the perspective of the builders, the planning/materials buying/delivery/construction cycle is a bit of an aircraft carrier that can’t turn on a dime. That’s understandable. Even as Realtors, the 180 degree turnabout in the market has taken our collective breath away, and we’re fairly adaptable to changing conditions! For me, the most frustrating challenge with this is working with my listing clients to compete in the arena with new home builders that can essentially unload a home at cost, but keep the price up by offering monstrous incentives.
Paul Cooper 08.24.07 at 5:13 pm
Oh come on! Who was doing the bidding wars in the end of 2004 and first half of 2005??? The builders?? Of course not. Greedy RE agents/investors/speculators/flippers. At least with a builder you knew what price you were paying. But with the bidding wars in the resale market the price could end up 10% higher… per month… And that is why we now have so many unoccupied properties for sale. The craziness should not be blamed on regular homeowners or builders. The craziness should be blamed on the greedy RE agents/investors/speculators/flippers who thought that homes can be bought and sold to a bigger sucker quickly like stock shares, and the lending industry for allowing them to do it with liar loans and 0% down exotic and interest only loan instruments. I for one won’t shed a tear for every one of those greedy bastards that will be foreclosed on or every lending institution that goes out of business. And not till prices become much more affordable for current salaries and normal full doc with 10-20% down 30 year loans, would this mess be over. And that’s not going to happen till 40% or more lower prices from the peak (adjusted for inflation) and 7-10 ( or more) years. Anyone who is clinching to any other way of getting out of this mess is in denial and out of touch with reality IMO. Cause with current salaries and full doc old fashion loans, nobody can afford the current bubble prices.. So the ones that priced their homes below last comparable will be the ones that are sold in this falling - catch a falling knife - market. And every year this downtrend will continue till home prices become a value proposition again with current salaries.
John L. Wake - Realtor 08.24.07 at 5:58 pm
The builders stuck it to their clients in 2004 and 2005 by demanding tens of thousands of dollars more than they were happy with a few months earilier.
And the builders stuck it to their clients in 2006 and 2007 by cutting prices instead of cutting production.
They are hardly sainted.
Paul Cooper 08.25.07 at 4:34 am
On the one hand you complain of the rising builder prices in 204/2005 and on the other hand you want them to do something now to keep those high prices? Are you aware what a free market is? When there is a lot of demand, prices go up. When there is a lot of supply prices go down. Last I looked even without new construction, Pinal+Maricopa counties combined inventory just hit another new all time high at more than 63000. Comparing that to the inventory of early 2005 of just 4000, and the Phoenix market is awash in supply. If you want to ever move that supply you better start cutting prices. And this is all resales I’m talking about. Builders do not have the attachment to individual homes and have the capability to react to changing conditions a lot faster than your greedy RE agent/investor/speculator/flipper.
Even without new builds, Phoenix inventory is at a record high and continues to rise. Unless you start cutting prices drmatically, that supply will continue to rise.
Ken44 08.25.07 at 8:22 am
Yet, resale prices for homes closer in haven’t dropped by all that much. Sure they are down but not nearly as much as anticipated given the massive (and growing) inventory. So why is this? Isn’t it unusual for market to be see homes sit this long without a serious price cuts?
dan soffa 08.25.07 at 8:35 am
If the homebuilders hadn’t escalated prices so crazily the frenzy would never have been so insane….JW quote
dan soffa 08.25.07 at 8:50 am
If the homebuilders hadn’t escalated prices so crazily the frenzy would never have been so insane….JW quote.
First of all, I wish I had the time and money to write a book on the Phoenix home boom. If I did, the first chapter would be 2000 stock market collapse and 9/11. In my view, those events helped start the boom. Secondly, you add a booming economy and retiring boomers, to the mix and then the investors, and greedy home builders, and you have a perfect storm.
I don’t buy the greedy builder part of it. Price increases are used to discourage sales, not encourage it. Builders didn’t have guns to peoples head. Home buyers, investors and the mortgage industry were/are the problem
John L. Wake - Realtor 08.25.07 at 9:46 am
Your right Dan, I’ll stop the “greedy” BS and stick to the economics incentives involved.
I still can’t figure out why builders haven’t cut production when they have such a huge oversupply of homes.
We can assume they make more money by cutting prices than cutting production.
However, I think it is a different problem, that is, builders build regardless of the economics… until they run out of money.
If no builders go out of business in the next 2 years then it’s the former.
If some builders start falling by the wayside or being bought out, that would suggest the the second theory.
The individual home reseller is entirely different from home builders. Home builders are market makers, individual sellers aren’t.
Paul Cooper 08.25.07 at 10:24 am
If individual sellers are not market makers then what in the hell are they doing putting a record number of homes on the market??? Cause If they don’t really want to sell, then you and the rest of the RE listing agents should convince them to take their homes off the market to try and lower this ever bulging inventory (knowing full well that next year prices could be 10-20% lower).
Currently the vast majority of the houses that are moving are houses from people or business that really WANT to sell. And because they want to sell they price their homes right. The rest of it just sits there month after month (and lots of them now over a year) collecting dust and catching the falling knife down with multiple price cuts.
If these people don’t want to sell, they should take their homes off the market. But if they do, they better take a look at the last comp that sold (usually 10% or more below them) and undercut that to sell. Cause this ever bulging inventory is the worst nightmare for all out there.
IMO, RE listing agents have not been honest with their sellers to the realities of pricing in this market. I see it every day with new resales coming on the market and the first thing I think is “what were they thinking?”. The Phoenix RE market needs a reality check. Either do something to get this huge inventory down by cutting prices drastically or convince people to start taking their homes off the market if they are not serious about selling (again with the caveat that prices could very well be down 10-20% next year).
John L. Wake - Realtor 08.25.07 at 10:26 am
Dan, your comment, “Price increases are used to discourage sales” reminded me of what a client told me recently.
He said the definition of a economic frenzy is when a price increase makes people want to buy more instead of less.
Boy, oh boy, does that perfectly describe spring 2004 to summer 2005!
But don’t forget the other side of the definition - when a price decrease makes people want to buy less instead of more.
We’re seeing a lot of that now, price decreases that lead to fewer sales because some people fear future price decreases.
John L. Wake - Realtor 08.25.07 at 10:29 am
“… catching the falling knife down with multiple price cuts”
Well said.
dan soffa 08.25.07 at 12:33 pm
and why aren’t people lowering prices??? jobs and more jobs…
http://www.startribune.com/535/story/1381903.html
Paul Cooper 08.25.07 at 3:46 pm
>>
Actually the Phoenix credit bubble is 1 year behind Vegas. That means that late 2007/early 2008 you will see a boom in foreclosures here. We’ve only seen the tip of the iceburg so far. Feb/Mar 2008 are going to be boom foreclosure months.
Here is a must read article with lots of great data on the resets that are coming:
http://www.safehaven.com/article-8106.htm
………
We have just seen $197 billion of mortgage resets so far this year. That is less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007 or $521 billion. This suggests to me that the number of foreclosures is due to rise dramatically from the already high current levels, putting more homes into a weak housing environment.
These homes that are going to see reset prices are for the most part not going to be able to be rolled over into a traditional 30 year mortgage because there is not going to be enough equity to get a traditional mortgage. While the total increase in payments is an estimated $42 billion, which is not all that large in the grand scheme of things, to the individuals who are paying the increase it is a large increase in their housing costs. My estimate is that this is about one-half of 1% of total consumer spending. Along with inflationary rises in food and energy, this is going to continue to put pressure on consumer spending.
………………
Paul Cooper 08.25.07 at 3:47 pm
Don’t know why but the link I had in the article didn’t come thru. Here it is again without the http part. Just cut and paste it to your browser:
http://www.safehaven.com/article-8106.htm
Paul Cooper 08.25.07 at 3:49 pm
wwwDOTsafehavenDOTcom/article-8106.htm
Replace DOT with a period
KG 08.25.07 at 7:24 pm
Builders have lowered their prices a bit. But then they increase the prices of upgrades to make up for the price decreases in the base price of the home.
So when you see prices from $199,000 add another 15%-20% for upgrades that people purchase at the builders’ design center. (tile, carpet, shutters, paint, lighting, appliances, etc)
So now my question is….when the numbers come out and new home prices are $$ is that the price including all the upgrades or is it just the base price a customer is paying??
KG 08.25.07 at 7:33 pm
I can see some lawsuits against mortgage companies. These brokers were getting paid a larger commission for these exotic loans and studies have shown that a lot of people could have qualified for a fixed 30.
If you can prove this can you sue the mortgage companies and win? Maybe settle for some cash or to move into a 30 year fixed without any closing costs and fees. But then again just like Paul Cooper mentioned above, the problem would be the appraisal.
John L. Wake - Realtor 08.25.07 at 11:25 pm
I believe there was a ton of fraud with the stated income “liar’s loans” but I don’t think it would be the home buyers that would likely sue the home builders. They may be co-conspirators but the home buyers were more culpable than the lenders.
What’s the borrower going to say, “The mortgage guy said I needed that amount of income to get the loan so that’s what I wrote on the form”? Doesn’t sound smart to me.
However, the companies that bought those packages of fraudulent loans might come after the mortgage companies if the mortgage companies had deep pockets… particularly if it was a builder’s mortgage company because the builders have some assets worth going after.
2005 buyer 08.26.07 at 12:41 am
I bought two houses one in late 2004 for 180,00 and a second one for 300k with 10% down in mid 2005 both with full documention and a 50k a year income.
Has anyone looked at the statitstics of household income here lately? It is more than mine. The phoenix market at before boom prices was considerably below the nation. People enjoyed the cheap 140k and less house prices and were able to drive 40-60k automobiles. Now home prices have adjusted and that 40-60k automobile is now part of their house payment. I have never seen so many want to be bollers driving around as I do out here. The adjustment here is now how money is to be budgeted not that home prices are too high…..has anyone been to California lately? You dont see many people driving around with $800 per month car payments and an $800 per month house payment which is what everyone here is crying about now……..todays mortgage industry will get the builders in check…you cannot stay in business for very long and continue to sell houses at cost for very long it shows in their profit reports……..
dan soffa 08.26.07 at 8:05 am
Good Point “2005 Buyer”. I drive an Impala with 172K miles on it, and my “BMW” payment sits in Gilbert, AZ…..
KG 08.26.07 at 9:47 am
We spend a lot of time in Del Mar and Carlsbad, CA. I see many more big Beemer’s and Mercedes in the Phoenix area than I do in San Diego. I think the median price home in Del Mar is over $800K.