Tag Archives: housing market

McMansions, housing markets, and the influence of banks

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An Australian architect argues homes should be valued on newer tastes rather than older interests in McMansions:

Recent sales and development figures have highlighted a trend towards smaller living spaces but the system for valuations in the capital seems biased towards larger average quality homes, Canberran architect Allan Spira said…

Mr Spira said building smaller, more affordable and sustainable homes will only be an option for “cashed up clients” unless the current system of valuations is changed.

“It’s time for the banks and their valuers to stop basing their assessments on the ‘McMansions’ of the past and start acknowledging the way of the future – smaller, smarter, better fitted out homes,” he said…

Mr Spira said most recently his clients struggled to get a $300,000 loan to build their three bedroom home in Wright.

Built across 127 square metres, he said it was “probably the most affordable and sustainable home in the suburb” but valuers CBRE based their calculations on inappropriate figures as no previous sales figures existed in Molonglo.

It might be hard to make a larger argument based on two cases. But, this argument does raise some larger issues:

1. Just when exactly do bankers and others know when the housing market has turned? In this case, the architect suggests people now want smaller homes compared to the McMansions they wanted a few years ago. It is easier to see change over the course of several years or a decade but it is harder to see this in the short run.

2. How much do banks and their choices about mortgages influence house purchasing and building patterns? Banks were partly blamed for the housing meltdown in the late 2000s but what percentage of blame do they deserve? I haven’t seen someone parse out the particular effect banking and mortgage choices have on what homebuyers are willing to do. This architect suggests homes aren’t being built because banks won’t provide financing for them but it is not clear how often this really happens.

Consumer Report says buyers don’t want exurban McMansions; they want other features

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Consumer Reports lays out five features homebuyers want – and these five features are not usually associated with McMansions.

Homebuyers have become more practical since the housing market crisis—they don’t want cavernous entryways but they do want plenty of storage space. They want to be close to their jobs and integrated into their communities. And they want to keep their energy costs low. In today’s market, a McMansion in the exburbs may be a tough sell. Price is still primary, but if you’re thinking of buying or selling a home, you should learn how buyers’ preferences have changed since the last time you were in the market. Here are the five features today’s homebuyers want most.

Proximity to work…

Energy efficiency…

Lots and lots of storage…

Quality of space, not quantity…

Connection outdoors, and to the community beyond…

Perhaps this could be summed up as a McMansion double-whammy: not only did you buy a house that a lot of Americans criticize, now fewer people want to buy it from you which would help you leave such a house.

There are a couple options available to McMansion owners and builders:

1. Hunker down and find the segment of the real estate market that still wants McMansion. And there are still people who do.

2. Retrofit their existing McMansions. There might be some relatively easier fixes in the areas of energy efficiency or developing storage space. The location aspects or connecting to the surrounding community might be harder.

3. Take a decent loss on the McMansion and move on.

We’ll see what happens to aging McMansions. I don’t think this is going to happen in large numbers anytime soon but if they could be built quickly, could they also be torn down and replaced quickly?

Wait, “RIP, McMansion” or are McMansions making a comeback?

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Depending on who you read and what statistics are cited, McMansions are either returning or dead. Here is a new article in the second category:

The “McMansion” is dead.

That jumbo-sized, aspirational edifice, often with vaulted foyers, vast bathrooms and granite countertops, has become a relic of the housing bust in the Hudson Valley, builders and real estate experts say.

“It all boils down to the caution that buyers have adopted since the downturn,” said J. Philip Faranda, whose J. Philip Real Estate business is based in Briarcliff…

This is one way to interpret recent data: baby boomers and younger adult Americans, in particular, want smaller homes in more urban areas. Yet, there is also evidence that big homes are rebounding: Toll Brothers is doing okay and there are still a lot of big houses being built. So which side is correct? As I’ve suggested before, there may be two options. First, it will take some time to sort out the longer-term trends and whether the housing activity in the economic crisis continues for years. Second, it may be that both trends are happening: more Americans want smaller homes even as a decent segment of wealthy Americans can still afford supersized homes.

State of the housing market: spring here but inventory of homes for sale still down

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Even though spring is often the time when the housing market picks up, inventory is still down as we approach March:

But a return to healthy inventory levels could take years. Many homeowners can’t afford to sell because they don’t have enough equity to put into buying another house — or would have to write a check to sell. The supply of distressed houses for sale is thinning as the foreclosure crisis recedes, especially in some states. Home building, while improving, is still at low levels. And, after years of holding on, few homeowners want to sell when prices are just coming off the bottom, Realtors say.

“We’re making a painful transition from a market dominated by distressed sellers to a market in which the only people selling are people who want to sell,” says Glenn Kelman, CEO of online brokerage Redfin.

The nation now has a 4.2-month supply of existing homes for sale. A healthy market, defined as a six-month to seven-month supply, will arrive when home prices rise another 20%, estimates John Burns, CEO of John Burns Real Estate Consulting.

A jump that size will lure enough sellers to match demand pouring in from renters and investors, he says. Rising prices will also drive more home building, he says…

Nationwide, almost 28% of homeowners with a home loan owe more on their loan than their home is worth, data from market watcher Zillow show. That’s 13.8 million homeowners. They’d likely have to write a check to sell, especially if they have to pay a Realtor.

In other words, a housing recovery will still take some time. Even with foreclosures easing, prices have not recovered to the point where more people want to or can sell.

One thing I like about this article: it doesn’t engage in speculation about when the market will be back to “normal.” Too often, real estate articles are full of people making predictions about when the tide will turn. Shouldn’t years of more uncertainty like the last few years make us at least a little more conscious about making such predictions? Also, we might be closer to recognizing that perhaps times like this might be “normal” for a while.

I wonder how much this data/information is related to lower levels of mobility in the United States…

Zillow starts estimating remodeling costs

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Zillow is already known for estimating housing values but just last week they started offering another estimation: what it will cost to remodel.

On Tuesday, Zillow waded into the world of remodeling, by pairing its database of photos of pretty rooms (from its for-sale listings) with the tool that seems to drive most aspects of American life these days, the algorithm.

Thus, the company is attempting to answer the obvious question that dogs glossy magazine layouts and cable TV decorating shows: How much would it cost to do a room like that, anyway?

Remodeling costs are notoriously difficult to generalize about with the public, for a number of reasons…

Undeterred by all that, the website has rolled out Zillow Digs, which has launched with about 6,500 photos of kitchens and master baths. Beyond mere real estate eye candy, though, it also has brought in a team of contractors to offer estimates of the cost of each room’s appliances, finishing materials, labor, etc.

As the article notes, this could be quite a money maker with the number of Americans who remodel their homes. It seems like the algorithm could benefit from getting some data after the remodeling takes place; perhaps a later appraisal or an estimate based on a later sales price. Of course, this would require waiting some time after the remodeling takes place and perhaps there are not enough cases of remodeling within a certain geographic area to make a good estimate.

In the end, it will be interesting to see how many people make use of this new site. Additionally, how many will be willing to make financial decisions based on the estimates from the site?

More evidence for Canadian housing bubble?

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I wrote just over a week ago about a possible Canadian housing bubble and here is more evidence: Canadian housing is over-valued.

The distinction between higher prices and bubbly prices isn’t as subjective as it might sound. Like any other financial asset, there should be a fairly steady relationship between the price of housing and the stream of income — rent — it produces. Should be. The chart below, from The Economist, looks at the price-to-rent ratios across different countries, and measures how under-or-overvalued housing is, with negative numbers corresponding to the former and positive ones to the latter.
 HousingPrices.png…
Canada is quietly trying to deflate its bubble without any eye-catching headlines. And that means keeping interest rates low while making mortgages harder to get. Now, raising rates to pop a bubble sounds like the kind of hard-hearted long view central bankers pride themselves on, but it’s more hard-headed. Higher rates don’t just make housing (or any other asset bought with borrowed money) less affordable for new buyers; they make them less affordable for old buyers with adjustable-rate loans too. That sends prices spiraling down and savings racing up, as heavily indebted households, which Canada has no shortage of, try to rebuild their net worths. Higher desired savings outpaces desired investment — in other words, the economy collapses — and subsequently cutting rates, even to zero, won’t do much to reverse this, as houses and businesses are mostly indifferent to lower borrowing costs while they focus on paying down existing debts. It’s what economist Richard Koo calls a “balance sheet recession,” and it’s a good description of how an economy can get stuck in a liquidity trap.
But by keeping rates where they are and slowly tightening mortgage requirements, Canada hopes to engineer a more gradual price decline that won’t set off a vicious circle. In the best case, prices wouldn’t fall, except below the rate of inflation, so that real prices decline without hitting household net worths. This strategy is hardly unique — China has done the same the past few years — but it has the very Canadian name of “macroprudential regulation”.

This is something worth watching. I haven’t seen yet any speculation of how a downturn in the Canadian housing market might affect the United States. I don’t know how much connection there is between the Canadian and American housing markets. The Canadian market is certainly smaller than the US market; there was a big drop in Canadian housing starts from 2008 to 2009, a drop from 211,056 to 149,081, but housing starts in 2012 were back to 2008 levels at 214,827. In contrast, the US had 954,000 private housing starts in December 2012 alone. But, if a housing crash in Canada had a broader impact on the Canadian economy, then it may influence the American economy after all.

Canadian housing market may be headed for a crash

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The troubles of the US housing market have been well documented and now it looks like the Canadian housing market may also be headed in the same direction:

A housing correction—or, possibly, a crash—is no longer coming. It’s here. And you don’t have to own a tiny $500,000 condo in downtown Toronto or a $1.3-million bungalow in Vancouver to get hurt. With few exceptions, the impact will be indiscriminate as the euphoria of rising house prices is replaced by fear. The only question now is how bad things will get. If the decline picks up speed, as many believe it will, there could be a nasty snowball effect. Construction jobs will be lost. Homeowners will end up underwater. Consumers may stop spending. “I’m getting very nervous,” says David Madani, an economist at Capital Economics, who has been predicting a drop in housing prices of up to 25 per cent in Canada. “I know I’m a bear, but the housing market itself has the potential to put us in a recession, let alone what’s happening in Europe and the U.S.”

Canada could be setting itself up for a devastating one-two punch: a painful domestic housing slump just as Canada’s export and resource-driven economy is hit with falling global demand. The most acute threat is the U.S. debt crisis, which, if handled poorly, could tip the world’s largest economy back into recession, taking Canada along with it. Meanwhile, Europe remains mired in a recession and concerns about China’s growth persist. “I feel like Canada is in the path of a perfect storm here,” Madani says. Other than housing, “the key pillar of strength is our booming resource sector,” says Madani. “If you take that away, it’s just going to knock the lights out.”…

Eight months later, the story has been reversed. And not just in Toronto and Vancouver. In Victoria, existing home sales were down by 22 per cent in November from a year earlier. In Montreal, sales were down 19 per cent last month. Ottawa’s sales were down nine per cent and Edmonton’s were down six per cent. With all those houses lingering on the market, prices dipped in 10 of 11 big cities across the country between October and November, according to the Teranet-National Bank index. It was the first such drop since 2009.

The weakness is also evident in new home construction. The Canada Mortgage and Housing Corporation reported a third straight month of falling housing starts in November. The trend is expected to continue next year.

I wonder if anyone will ask whether the Canadian housing market should have applied more lessons from watching the travails of the US housing market. This article suggests there are some similarities and differences in the two situations: a similar overextension of credit and the involvement of speculators alongside a market more insulated from a collapse since more mortgages are guaranteed by taxpayers and a glut of urban condos. But, it would be helpful to have more comparison points: what are the differences in government policies regarding mortgages and homeownership? What are the policies about encouraging sprawl versus urban residences? What percentage of the economy is tied up in construction, housing starts, and real estate sales? Of course, there is also the difference in having a significantly smaller economy (Canadian GDP of $1.4 trillion, just over $15 trillion GDP in the US) and population (over 34 million in Canada, over 311 million in the US).

PulteGroup says majority of Americans want equal size or bigger homes

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A spokeswoman for PulteGroup says data they collected shows a majority of American homeowners want equal size or bigger homes in the future:

Across all demographics, the millennials (age 28 and younger), Generation Xers (born from the early 1960s through the early ’80s) and baby boomers (born 1946 through the early ’60s) said they want their next house to be the same size or larger. An overwhelming majority, 84 percent of homeowners ages 18 to 59, said they don’t intend to downsize.Larger homes are what people dream of. People told us they yearn for large spaces, for large backyards and big patio spaces. Large closets. A nice master suite. They yearn for large kitchens, oversized mudrooms. No, I don’t think the McMansion is dead. People want that square footage…

They want to maximize the use of every nook and cranny. They expressed a strong desire for homes that are designed in such a way as to make them feel organized. They want smart use of the space. Take those bigger mudrooms, for example. They’ve come to be called the owner’s entry, off the garage, and though they may contain the laundry equipment, they’re also places to stay organized — they’re drop zones for the laptop or the kids’ backpacks and all that other stuff we carry in through the garage…

Only 28 percent of those ages 55 to 59 said they want their next home to be smaller.

One reason for this is that they have a lot of stuff, and they don’t want to let go of all that stuff. And stuff has to have a place to go. In our Del Webb properties (for residents 55 and older), we’ve installed fixed stairways from the garage into the attic, instead of the rope that pulls down stairs to the attic, because it’s safer for the homeowners — they want that unused attic space for their stuff. We call it a storage loft.

Summary: Americans want big yet organized homes, partly to hold all of their stuff. Of course, matching the dream for the big home to economic realities might be more difficult.

I’m also a bit curious about the demographics of this study. Is it a nationally representative sample?

The rise of the zombie mortgage titles

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Here is what happens if a bank decides not to go through with a foreclosure and the owner is stuck with a “zombie title“:

Since 2006, 10 million homes have fallen into foreclosure, according to RealtyTrac, a number that in earlier, more stable times would have taken nearly two decades to reach. Of those foreclosures, more than 2 million have never come out. Some may be occupied by owners who have been living gratis. Others have been caught up in what is now known as the robo-signing scandal, when banks spun out reams of fraudulent documents to foreclose quickly on as many homeowners as they could.

And then there are cases like the Kellers, in which homeowners moved out after receiving notice of a foreclosure sale, thinking they were leaving the house in bank hands. No national databases track zombie titles. But dozens of housing court judges, code enforcement officials, lawyers and other professionals involved in foreclosures across the country tell Reuters that these titles number in the many thousands, and that the problem is worsening…

Banks used to almost always follow through with foreclosures, either repossessing a house outright – known in industry parlance as REO, for real estate owned – or putting it up for auction at a sheriff’s sale. The bank sent a letter notifying the homeowner of an impending foreclosure sale, the homeowner moved out, the house was sold, and the bank applied the proceeds toward the unpaid portion of the original mortgage.

That has changed since the housing crash. Financial institutions have realized that following through on sales of decaying houses in markets swamped with foreclosures may not yield anything close to what is owed on them.

It would be fascinating to know exactly how many of these homes there are – and what the best solution to this issue might be. I remember the stories of homeowners who thought it was easier to simply walk away from their homes but it sounds like the banks have caught on and realized they might not make much from that situation either. It sounds like we need some guidelines to determine who is responsible for the home if no one, the homeowner, the lender, and perhaps even the community, doesn’t want it.

“The typical American home” is a reminder not all American homes are new

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The 2011 American Housing Survey provides a summary of the traits of the typical American house:

This Is What the Typical American Home Looks Like Now

A little bit more on the changes to American houses over time:

Some aspects of the American home have changed dramatically since the first survey was conducted in 1973 (which makes sense because half of the occupied homes today were built in 1974 or later). Central air conditioning was a luxury that only 18% of households enjoyed back then, but the number grew to 43% in 1993, and today 66% of dwellings have central AC.

The number of bathrooms in a typical home has also grown. From 1973 to 1991, one bathroom was the norm, and for the next 20 years, it was one and a half bathrooms. The 2011 survey is the first time that the median residence was found to have 2 or more.

What strikes me most about this summary is that this is a very different picture of housing than we typically see and hear about. A lot of attention is lavished on new housing: people are interested in the size (new homes are on average about 2,500 square feet so way above the full average for US homes), new building trends (McMansions, green homes, homes of the future), new features (less granite countertops and stainless steel appliances?), and new housing starts. There are good reasons for all of this: housing is a big industry with lots of money involved.

At the same time, most houses in the United States are not new houses. They are homes that need maintenance, updating, and aren’t necessarily bringing in similar amounts of money into the economy. They are probably more accessible to average Americans and are probably located in older, more established communities. In other words, we need to also pay attention to the existing housing stock to think how both the existing and new stock can be effectively utilized.