Wednesday, January 21, 2009

Buying A New Home? You Better Be Careful...

New Housing DevelopmentJust in case you needed one more thing to worry about, a recent article published in the New York Times should have you thinking twice about buying a home in a new subdivision. The article is titled, “Banks Foreclose on Builders With Perfect Records.” The article talks about how banks are starting to do such things as call for extra collateral from builders—even if they have never missed a payment—essentially dooming them to failure. If you have purchased or are planning to purchase a home in a new subdivision that has not yet been completed, this could be horrible news for you.

Builders rely heavily on credit to function, and now that credit is being restricted even for the best borrowers, builders are in serious trouble. According to the New York Times article, already we have seen more than 20,000 builders nationwide go out of business. Before the carnage is finished, the total will likely swell to more than 50,000, according to Ivy Zelman, a housing analyst quoted in the article. That total would represent more than half of all U.S. builders. So why exactly should new home buyers be worried?

When you purchase a home in a new subdivision, part of the purchase price is based on community features and factors. The subdivision might have a nice park for the kids, or just great, overall family appeal. These are things that sell people on wanting to move into that particular neighborhood. The problem in new subdivisions is that typically people buy homes before the community is finished. If the builder were to go out of business, it is possible that the community might not be finished for a long time, if ever. Not only is it possible that early homebuyers might not ever see the clubhouse that they were promised, or that neighborhood park, but they may also be forced to look at partially built, rotting homes for a few years. In case you didn’t connect the dots already, that means that resell values of existing homes in those communities are likely to plummet.

The worst part about this is that these buyers could be completely blindsided. It doesn’t even matter if they went so far as to make sure that the builder looked financially sound and was current on payments to the bank. The banks are so scared about the collapsing real estate market—especially in the sun belt region—that they are prematurely foreclosing on these builders right now. If the banks are prepared to go to these dramatic lengths, regardless of payment history, who knows what they will do next? It seems that as a homebuyer, you can only protect yourself by paying for nothing but what you see. Don’t bother looking at the master plan with the salesperson. Just walk outside, look around and ask yourself whether this house is worth its price, even if nothing else gets finished. If it isn’t: Move on.

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January 22, 2009 at 1:02 PM Family Man said...

It sounds as if the banks are trying to increase the value of the exisiting housing stock. I keep wondering how we are ever going to get out of the trench if the builders continue to flood the market with new homes as they appear to be doing here in AZ. Who is going to buy an older home that might need work when you can buy a brand new home for the same price, or less? The REOs and exisitng houses are simply not good values to home buyers or investors. But, if the banks put the builders out of business and eliminate the competition...

January 22, 2009 at 2:18 PM Anonymous said...

No house is worth the current prices. The prices have another 50% to drop from their current 1/22/2008 prices. And that's just to get to fair market price. The bottom will probably be about 1/3 less than fair market.

We have to wait at least until 2011 before the bottom hits, and that assumes the price declines significantly accelerate.

On the bright side, if sellers continue to stubbornly hold up prices, more and more will be foreclosed upon and the final sales price will be all the more lower. 1/2 to 1/4 fair market prices could happen. That means the median middle-class house could cost as little as 1/4 * 3 * $46,000 or $35,500. Even at 1/2 fair market, the price would be $69,000.

To summarize, fair market price for a typical middle class house is 3x median income or $138,000. If the price declines rapidly accelerate, the bottom will be $92,000. If the price declines are slow, the bottom will be between $35,500 and $69,000. Think that can't happen? Look at the Great Depression. Housing market prices are determined by the margins, not by those who can afford not to sell.

January 26, 2009 at 9:36 AM Jim said...

I agree that some house prices are currently not really worth it but I think that if you look around you can find a good deal, and choosing the right company is important too. I recently bought a new home through this company called Taylor Morrison and they were great, here's a link to their site if anyone is interested in checking them out:

January 29, 2009 at 11:22 AM Diana L. Bartolotta said...

Please re-read the NYTimes article referenced in this piece. Banks can't foreclose, legally-speaking, without a default on the terms of the security instrument. Moreover, this was not a foreclosure, but rather an appointment of court receivership. I realize that this might seem like hair-splitting to non-lawyers, but there is a significant difference. The difference is this: The bank didn't foreclose on this guy's properties. Instead, it got a court to appoint a receiver, which means that someone is appointed by the court to look over the developments' progress and make sure the bank's security interest isn't impaired. Huge difference. Foreclosure = the bank takes the real estate from the owner. Receivership = a third-party is just looking over the owner's shoulders. It is also important to note that on commercial loans such as this, banks have always negotiated terms that protect their security interests. That's the nature of secured lending.

As an attorney who represents the little guy (e.g., homeowners facing foreclosure, small-time real estate investors, first-time homebuyers), I just want to make sure that my clients are getting the right information about what's going on in the marketplace and not misinformation that has the effect of scaring them unnecessarily. Now is a great time to buy - prices are down, interest rates are down - but if potential homebuyers are misled with information about banks foreclosing on borrowers who weren't even in default, they are going to be too scared to take advantage of the current home-buying opportunity. Please make sure you verify the information before you pass it on to the public; that's all I ask.

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