Well, the news is slowly filtering in from here and there -- the housing market is getting soft -- very soft in some areas. For instance, here's a sampling of what I've seen recently:
- Business Week notes that homebuilders are having to resort to incentives to get new buyers (and even keep current buyers). Their thoughts:
Facing their toughest year in more than a decade, homebuilders are coming up with a blizzard of incentives to help move houses. They're offering free swimming pools, finished basements, trips to Hawaii, and even luxury cars. Centex Corp. (CTX ) has been cutting prices as much as $100,000 in Northern California. "The new housing industry is taking a page from the automakers," says RL Brown, a Phoenix Real Estate consultant. "It's a model clearance sale."
Incentives are most prevalent in cities such as Las Vegas, Miami, Phoenix, and Sacramento that have enjoyed the sharpest price appreciation in prior years. The most common is an "interest rate buy-down" in which builders subsidize the early years of a loan. Shea Homes in Walnut, Calif., for instance, offers a mortgage fixed at 3.99% for five years, about two percentage points below market rates.
Luring new buyers isn't the only reason builders have embraced giveaways. They're also using incentives to keep existing customers from canceling contracts. It can take six months to deliver a finished house, and builders have traditionally accepted downpayments as low as $2,000. As home prices began to cool, speculators hoping to flip their houses simply cut their losses and ran. To keep customers from bailing out, KB Home (KBH ) is offering rebates of as much as $30,000 on homes they've already sold.
Ouch!
- Next, check this out from Jason Calacanis's blog -- ground-level observations on how the housing market is coming apart in Los Angeles:
Went looking for a house in LA this past week and sellers are starting to panic. Two years ago when I started looking it was the buyers were in a panic. You were told to make an offer within a day of seeing a house, and to send a letter to the owner about how privileged you would be if they would sell you their home. Of course you should offer 10% more than the asking price--you don't want to be rude!
The most telling part for me was that the brokers themselves are looking to get out. They want out so bad that they are willing to reduce the price by 10-15% not once, but twice, over ~60 days. Of course, after three years of 20% increases in Los Angeles a 20-30% discount bring you back to 2005--which I guess will be known as the peak.
Also, there was very little traffic at the open houses we drove by this weekend.
- Finally, things are bad even in my city, sleepy Grand Rapids, Michigan as it's certainly a buyer's market for housing:
Thousands of homes around the Grand Rapids area sit with a "For Sale" sign sitting right in the front yard.
In June of 2005 there were more than 8,800 homes listed with about 1,450 sold. This past June about 10,500 listed, but only 1,100 sold.
Now I'm not saying the bottom is falling out of the entire U.S. housing market, but what I am saying is that the dots are starting to add up -- and soon they'll form a line -- one that points down for U.S. housing I'm afraid.
This topic is also the subject of a recent U.S. News and World Report series that offers "rules for a slowdown" -- what to do when the housing market slows. I'll be covering and commenting on their series over the next few days, but let's start off today with the introduction to the series. The key points:
During the recent housing boom, the [Chevy Chase] neighborhood [in Washington, D.C.] became so sought after that it was nearly impossible to buy in. "If a house went on the market, they'd get half a dozen bids right away," says real-estate agent Tom Williams. "And it was almost always for more than the asking price."
Today, however, that's all changed. Although prices have softened only slightly so far, bidding wars are now a thing of the past as buyers mull over an inventory of unsold homes that has tripled since the same time last year. "We just don't know if it's the right time to buy anymore," says Ruth Zitner, who has been shopping for a home in the neighborhood for the past year. "So we've decided to just wait and see."
That attitude is fast turning the housing market on its head, not just in Chevy Chase but also in once hot neighborhoods from South Florida to San Francisco. The nation's largest home builders are reporting rising cancellations of orders for new homes. Meanwhile, nationwide sales of existing homes fell by 8.9 percent in June, compared with a year earlier, and by as much as twice that in places like Boston.
With sellers increasingly anxious to unload their properties, inventories of unsold homes have swelled to more than a six-month supply, an increase of over 50 percent in a year. That's considered a key threshold signaling the transition to a buyer's market that is finally beginning to drive prices down.
As I said, it's not bad everywhere:
Whether that means the nation's housing boom will end with a loud bang or a slow "pfttt" depends largely on where you live. To be sure, some parts of the country--like Texas and much of the Midwest--hardly participated in the decade-long run-up at all, limiting the downside or even bucking it. But in markets where home prices have more than doubled in the past five years, "you could see some ugly declines," housing analyst Jack McCabe says.
So what should you do about it? Depends on your situation:
If you own a house you like, have a fixed-rate mortgage, and don't plan to relocate anytime soon, there's no reason to lose sleep. And if you're a renter who missed out on the real-estate run-up, experts like McCabe say the coming year or two could actually present the buying opportunity you've daydreamed about.
But if you own a house and need to sell soon or, heaven forbid, you recently bought a condo with plans to flip it for a fast buck, you could be in for a rude awakening. So, too, could anyone financing a home with an adjustable-rate or interest-only mortgage, which could see monthly payments surge just at the time it could be most difficult to sell. It's a scenario that could crimp consumer demand and drive home prices even lower.
No matter what your situation, housing experts say that almost everyone needs to dial back expectations for appreciation in the future.
"We're entering a period where people need to follow the sort of old-fashioned rules their grandparents lived by," says Christopher Cagan, research director at information provider First American Real Estate Solutions. "Buy a house when you plan to settle down for a while, and don't think of it so much as a financial investment as a place to invest in your life."
Ha! Old-fashioned rules, huh? I guess I am kind of old-fashioned in my guidelines for buying a house, but who's laughing now? Not many, that's for sure. And the pain is likely to get worse -- especially for those people who have stretched their finances as far as humanly possible to buy the largest house possible and financed it with a ticking time-bomb mortgage that will be up for adjustment soon. The "adjustment" period will not be pleasant, that's for sure. I hate to say I told you so, but...
This U.S. News series will give us all some ideas on how to deal with the slowdown and, hopefully, help some people who are going to be going through some tough times.
For me, personally, this may be a time to make some extra money. With no debt and cash saved to invest, I'm planning to keep my eyes open for some great deals on property. If I can pick up one or two for a song, I may make a move to buy and hold until the softness is gone, making a decent return for my trouble. ;-)
You are right on- this is the time to make some money. A stratgey several of my rei friends are using here in Phx is finding properties with plenty of equity (read here at least $90K) to buy, get a heloc to hold, and reinvest part as well. It is so much fun! (and warning: highly addictive)
Posted by: prlinkbiz | August 03, 2006 at 01:41 PM
Great post, FMF. On my street, prices are still going up and up. The problem? Houses are sitting on the market for months and months. I wonder who's going to be the first realist on the block to drop the prices way down in order to sell in a reasonable amount of time.
Posted by: claire | August 03, 2006 at 01:59 PM