Tag Archives: housing market

Toll Brothers experiences strong growth

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Toll Brothers, known for their construction of large homes (McMansions to critics), recently reported strong growth:

The company hasn’t figured out some amazing new way to build houses more efficiently and get more money out of every house built; instead, it is just building more. A lot more. Compared with a year ago, revenues were up 48 percent, and the number of homes built rose 44 percent to 1,088. Toll Brothers’ gross margin—which measures revenue from sales—was 24.6 percent in this quarter compared with 24.2 percent in the fourth quarter of 2011.

The full year was successful for the company as well. Its net income was $478.1 million compared with $39.8 million last year. Pre-tax net income shows a more stark story of decline and recovery: for this year it came in at $112.9 million versus a pre-tax loss of $29.4 million in 2011.

One figure that most directly shows this significant increase in building activity is the company’s “net contracts per community,” which is comparable to what retailers report as “same-store sales.” This measure shows how much Toll Brothers is building in the areas in which it already operates. As such, it directly reflects the increasing demand for homes, as opposed to the company’s expansion into new markets. Net contracts per community were up 33 percent from the fourth quarter of last year and 60 percent from this fiscal year to last, the highest yearly gain for the company since 2006 and the highest quarterly increase since 2005.

The housing market may still be lagging but this Toll Brothers data suggests the demand for larger homes has increased in the last year. See more of the financial details here.

Mortgage interest deduction part of fiscal cliff negotiations

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The negotiations regarding the fiscal cliff include the mortgage interest deduction:

Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households, and would diminish or end the mortgage tax break for many of those taxpayers…

Such a move would be fiercely opposed by the real estate industry. The industry has played a crucial role in defending the tax break, even as other countries with high homeownership have phased it out…

One of the reasons the mortgage tax break is so vulnerable is that both Democrats and Republicans have recently favored capping deductions, including both President Obama and the recent Republican presidential nominee, Mitt Romney…

Taken on it own, the deduction limit wouldn’t make a huge difference. But it can play an important role in a broad plan to cut the deficit, and shows a willingness to tackle once sacred cows. The tax numbers suggest it may not be hard to structure deduction limits in a way that leaves most middle-income households untouched.

This is not a new idea – people have been suggesting for a few years now (see here) that the mortgage interest deduction tends to help the wealthiest the most. Capping the deduction would still provide a benefit for less wealthy homeowners and boost the housing market. Yes, homebuilders and real estate people may not be able to construct and sell as many large and expensive homes that provide higher profit margins and commissions but there are plenty of other arguments against such homes beyond the mortgage interest deduction (see the green argument and the moral argument). Wealthier Americans are probably still going to buy homes, because they have the money and there is still an American cultural push toward homeownership, whether the mortgage deduction is there for them or not.

There are other countries in the world with higher rates of homeownership even with the federal government’s decades-long support of homeownership. The data is a few years old but check out these figures reported by National Association of Home Builders: a number of European countries have higher and lower rates of homeownership. Of course, American homes tend to be larger than European homes and I’m reminded of quick suggestion in Suburban Nation that Americans may have the best private realm, referring to our homes, in the world.

I assume a capped deduction would also limit or remove the deduction for the purchase of second homes?

Perhaps the biggest thing to note here is that the mortgage interest deduction was indeed was once a “sacred cow” but tough economic times lead to new measures.

 

 

Report says green housing market expected to grow rapidly

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A recent report says the green housing market in the United States is expected to rapidly grow in the coming years:

Regardless, a new report says the value of green residential and non-residential buildings in the United States is rapidly accelerating from only $10 billion in 2005.

McGraw-Hill Construction’s 2013 Dodge Construction Green Outlook says the value could reach $106 billion next year and go as high as $248 billion by 2016.

Based on the forecast for construction of single-family homes, the residential portion of U.S. green building could reach $116 billion by 2016, the report says.

Green building is a bright spot in a still-shaky economy, added the report, which was released Nov. 15.

A green structure is defined as one built to Leadership in Energy and Environmental Design, or LEED, standards, or one that is energy- and water-efficient while improving indoor environmental quality.

So there is at least one bright spot in the housing market. The demand for green homes could grow and I suspect builders might be able to charge a premium for these homes. There could be several areas in which builders could up the price: more expensive materials, the energy efficiency and savings of the home over the years, the special design a green home might require, and the status that comes with owning a green home. The example home in the story illustrates this: it is a 3,100 square foot home that will cost around a million dollars.

And note, the opening sentence of the story notes the difference between this green home and McMansions. There seem to be both similarities and differences between this green home and McMansions: it is still expensive and in the midst of sprawl even as it is a greener home, has a modern design, and is located on a one-acre lot.

Is it good for suburban neighborhoods for foreclosed homes to be purchased by private-equity funds who want to rent them out?

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Some neighborhoods are facing a new dilemma: how to respond to private-equity firms purchasing and fixing up foreclosed homes and then renting them out.

Similar scenarios and concerns are unfolding across Chicago and in other markets hard-hit by the housing crisis. Well-capitalized, out-of-town private equity funds are scouring neighborhoods, paying cash for distressed single-family homes and renting them out. The opportunities are plentiful, enabling investment groups to profit from low home prices, rising rents and an increase in the number of potential renters.

The transactions are returning vacant properties to active use. But they also are stoking fears among neighbors and municipalities about the long-term effect of large, private investors — including many that are operating under the radar — in their communities.

“This scares the hell out of me,” said Ed Jacob, executive director of Neighborhood Housing Services of Chicago Inc. “In this rush to say this is a new asset class, are we creating the next community development problem?…

The general strategy of the companies is the same: buy low, make the necessary upgrades, fill them with tenants and then sell the homes in three to seven years. With companies and analysts anticipating projected returns of at least 8 percent, there also is talk of creating publicly traded real estate investment trusts.

This presents quite an issue for suburbanites worried about property values (which is a top-level concern). Foreclosures are not good for a neighborhood. They tend to drag down sales prices for homes with residents because investors or buyers can try to get the foreclosures for cheaper. Foreclosures may not be maintained well so the yard and exterior appearance can suffer. Suburbanites fear such homes might also fall prey to more criminal activity.

On the other hand, renters are not typically viewed positively in single-family home suburban subdivisions. Renters are perceived to be more transient, not as concerned about the property itself or the neighborhood. Renters can be viewed as a different class of people, meaning people who don’t have the resources to settle down and buy a home. Renting might mean absentee or less-involved landlords who might still let the property become run-down.

What is the long-term verdict? I think rentals make sense in a lot of suburban neighborhoods. Without buyers willing to pay good money for homes, it is better for a community to have people consistently in the homes than to have series of foreclosures. The situation could be made a lot better if the landlords and/or rental investors are good landlords who make efforts to help the neighborhood. As the article notes, different communities can also look into the matter and see how they want to respond. I would guess most communities and neighbors hope the rental properties again become owned homes but this will take some time for housing prices to climb again.

Neither Obama or Romney tackling issue of housing

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There are plenty of issues to talk about this election season but neither Obama or Romney have done much to address housing:

For existing homeowners and the government, though, housing remains an enormous issue. If new government initiatives are not implemented, it could take another three to five years for the market to fully recover, analysts estimate. And The Wall Street Journal reports that neither candidate has offered ways to remake failed mortgage giants Fannie Mae and Freddie Mac, which have already cost taxpayers $140 billion and face further losses.

Across the United States, nearly 10.8 million properties — 22 percent of homes with a mortgage on them — remain underwater, according to CoreLogic, a data analysis firm. The numbers of properties where owners owe more than their home is worth is shrinking, but analysts say the process can, and must, be sped up.

Both Obama and Romney, though, have been silent on the issue. Why?

“It turns out to be a lose-lose issue for both candidates,” John Vogel, a professor at Dartmouth’s Tuck School of Business, recently told MarketWatch. “And therefore gets ignored.”

For each candidate, the reason for staying mum on housing is different. Obama does not have the strongest record to run on. And Romney has found that wading into housing opens himself up to being painted as a heartless corporate mogul.

So housing greatly contributed to the economic crisis yet neither candidate wants to bring it up. Perhaps this topic might top an unfortunate list titled something like “topics that candidates absolutely do not want to talk about.” They can discuss a range of controversial topics like abortion, education, social security and medicare reform, the outsourcing of jobs, and tough foreign policy topics but not housing…

After seeing a variety of opinions on the topic of housing in the last few years, I wonder if most people, including the experts, are just hoping it comes back. Thus far, government policies do not seem to have helped much. As some have noted, without a more robust housing market, it is difficult for people to move and take advantage of the jobs that might be available. Local governments need increasing property tax values to bring in more revenues. Mortgage lenders, the real estate industry, and builders and developers would benefit from more activity. And if the housing industry doesn’t come back quickly? There doesn’t seem to be much in place for this possibility.

I wonder what Americans would want to hear about housing, if it even rates highly enough (or might simply be part of “the economy”). In the earlier stages of the economic crisis, there was a lot of talk about not providing a lot of support to people who should have known better than to take out mortgages they might not be able to afford. Who deserves to get help? Would Americans be happy with more regulation of mortgage lenders so they won’t be allowed to offer mortgages homeowners that could harm borrowers?

Hard to get green homes appraised as there is a lack of knowledge, comparables

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Interest in green homes, exemplified by net zero energy homes, may be growing but there is an issue: because there is a lack of comparable homes, appraisals for green homes are more difficult to do:

Last year, single-family green home construction represented 17 percent of the homebuilding market, in effect doubling since 2008, according to a report by McGraw-Hill Construction. Researchers predict that by 2016, green home construction could comprise 29 percent to 38 percent of the market, as builders devote more time to green projects. The share of remodeling projects labeled as green is expected to rise as well…

Appraisers are slowly getting up to speed. Since 2008, almost 4,900 appraisers nationally have participated in 275 courses on green and energy-efficient valuation conducted by the Appraisal Institute trade group. Still, green home appraisals continue to be difficult, in part because there are few comparable sales but also because the building technology is changing. That makes it hard for appraisers to value — and for lenders to accept those higher values — home features that can run the gamut from rain barrels to a tankless water heater to a whole-house geothermal heating system…

In the Chicago area, Midwest Real Estate Data LLC added “green” fields to its multiple listing service so sellers can highlight environmentally friendly features of their homes to potential buyers. The Appraisal Institute created an addendum to appraiser forms to help analyze the value of green features. And lenders are starting to track so-called green mortgages to see if defaults are lower than on traditional home…

To increase the chances that improvements that go above and beyond what’s required by local building codes is correctly valued, experts recommend documenting green features added to a home.

They also urge builders and consumers to consider obtaining third-party certification about the home’s energy efficiency.

Put another way, there is more cultural and economic interest in green homes. People want to both reduce their energy costs but also want homes that are “responsible” and not seen as energy-hogging McMansions. However, it takes some time for the whole market to catch up to the perceived higher values of these new homes. This is the real issue here: while extra money and time may be spent on green features, appraisers aren’t yet “rewarding” builders and homeowners with the increase in housing value they think a more efficient and green-conscious home deserves.

Thinking more broadly about this, I wonder about the motivations of builders who are constructing more green homes. Are they motivated more by wanting to be green or by the knowledge there is a growing market for such homes? Of course, being green and making money can go together and perhaps this is how it should work in a perfect world. But, this might matter for some who are more concerned about being green and who wonder if being green is currently about being trendy which could endanger such causes down the road when the cultural and economic winds change.

In buyer’s market, some skipping the starter home and buying the big home first

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With lower mortgage rates and housing prices, some young buyers are buying the big home as their first home:

Real estate agents say more twentysomething, childless buyers are snapping up sprawling homes instead of starting out small. It’s a trend that’s gaining momentum as young buyers seize on some of the best housing deals in history. While the shift is unlikely to kick-start construction of new subdivisions filled with McMansions, it’s helping to revive sales of midpriced and upper-bracket houses. The Simonses, for instance, initially planned to spend about $200,000 on a townhouse, but ended up spending tens of thousands more once they started shopping…

Clearly, most first-timers don’t have the financial muscle to buy their dream house, but with rents on the rise, the Simonses and other young buyers face stiff competition from investors who can pay cash for inexpensive properties they can use for rentals. During August, the inventory of houses priced at less than $140,000 fell 40 percent, while those priced at more than $300,000 fell half as much, according to the Minneapolis Area Association of Realtors…

This shift to larger homes runs counter to buying trends in recent years that showed higher demand for smaller houses. When the recession hit, many builders decreased square footage and touted their homes as more efficient and economical for buyers.

But Walter Maloney, spokesman for the National Association of Realtors, said many of today’s buyers are realizing that it could take many years to gain enough equity to trade up to a costlier house, so many are planning to stay longer. Last year, the typical buyer expected to be in their house 15 years compared with 10 years in 2010, he said.

So is this a good decision or not? As we are still trying to recover from a housing crash, it may be easier to now buy a larger house. However, these purchases echo two ideas that are often credited for getting us into this housing situation in the first place: people spending more money on houses than they should (even if they are more “affordable”) and people buying unnecessarily large houses. Indeed, there are some who would argue these two things should be avoided even in the best of times.

The last part of the quote above is also interesting: are we settling into a period where Americans are expecting to be less mobile? Some data from recent years suggests the recession has slowed mobility but people are making certain decisions now as well as developing mindsets that could change mobility for years to come.

Some residents opposed to Section 8 vouchers being used for large homes in South Florida gated communities

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Here is another side effect of the sluggish economy and housing market: some big homes in South Florida are being rented with Section 8 vouchers.

Housing advocates and the government view the turnabout as a win-win for homeowners and the poor, who have access to safer communities and better schools.

But some neighbors are aghast.

After a single mother and her nine children rented a house in the exclusive Isles neighborhood of Coral Springs, the homeowners association adopted an amendment to its governing documents stating: “No Section 8 or government leasing assistance is permitted.”

The association is threatening eviction.

Federal law does not expressly outlaw such bans. But the prohibition can’t be used as a pretext for other illegal acts, such as denying housing to people because of their race, gender, national origin, disability or number of children.

The Sun Sentinel examined federal housing subsidy data from housing authorities in Broward and Palm Beach counties and found 230 homes commanding rents of $2,000 or more, up to $3,375 a month, from Section 8 families. Typically, tenants pay about one-third of their income toward the rent and the government pays the rest.

Most of the homes were basic, modest-looking residences in unassuming neighborhoods. But about a dozen were far grander, upscale houses concentrated in Broward County’s western suburbs, including Coral Springs, Miramar and Cooper City, where one six-bedroom rental is worth $500,000.

I can’t say I’m surprised by the response of some of the gated community residents: they moved to these communities in part so they might never have to run into people with Section 8 vouchers. It doesn’t sound like this is widespread just yet but I can imagine the headline years later: racial and economic integration was achieved in South Florida through a terrible housing market that limited the ability of wealthier residents to keep out poorer residents.

More micro-apartments being built in American cities

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New York City isn’t apparently the only place looking into micro housing units; micro-apartments are apparently popping up in other major citiesb.

Micro-unit apartments range from 300-square-foot studios being built in San Francisco, where studios average 510 square feet, to New York’s pilot for a building with studios of 275 to 300 square feet, vs. an average studio size of 517 square feet. In Boston, the units are as small as 354 square feet, vs. an average studio size of 492 square feet, says real estate research firm Reis.

These small spaces, McIlwain says, are particularly well suited for the influx of young professionals moving to high-rent cities like New York and San Francisco. If they’re priced right, the tiny apartments make it more affordable for members of the younger crowd to have their own space, vs. roommates…

Kennedy expects his studios to go for $1,500 to $2,000 a month. That would be somewhat less than the $2,075 a month average rent for a San Francisco studio — an average of 493 square feet, according to SFGate.com, citing data from real estate service RealFacts.

Tiny typically means cheaper — but just to a certain extent, McIlwain notes. Total construction cost for an apartment drops as you make it smaller, he adds, but cost per square foot rises.

It will be interesting to see how many of these units are built. There may be demand but I wonder if these are long-term units, meaning young people may not stay here long (housing more for a particular stage of life) or the economy could improve.

Baby Boomers can’t retire because they all bought McMansions?

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The economic crisis has changed the retirement plans of many. How might have McMansions played a role?

Financial planners on the South Shore and a new national study all point to the same troubled financial picture for people in their late 40s to their early 60s: Many are carrying so much debt from mortgages and student loans they co-signed for their children that retirement is a distant dream.

“They traded in their houses for a McMansion and bought at the higher part of market. They hocked it over 30 years, and they have little equity, if any,” said John Napolitano, CEO of U.S. Wealth Management in Braintree and 2012 president of the Financial Planning Association of Massachusetts…

The study found that the mortgage burden for baby boomers is 25 percent higher than it was for the same age group in 1990.

“In the refinance boom, mortgage brokers convinced (baby boomers) don’t stress out and sold them on a 30-year mortgages,” said Harris. “It was all about cash flow.

The article suggests Baby Boomers are also helping their struggling children. Yet, I wonder about these figures about mortgages and McMansions. This leads to two questions: (1) How many Baby Boomers really bought homes that might be considered McMansions? (2) And how many of them went into excessive debt to purchase this McMansion? For example, I would guess there are a decent number of people underwater on their regular-sized (less than McMansion size) home, particularly in certain housing markets.

This could be a classic case of McMansions serving as a whipping boy or shorthand explanation for the complicated housing market of recent years. When the term McMansion is used here, a certain image comes to mind: a house that is extremely unnecessary for the homeowners. Without seeing the actual numbers, it is hard to know this is exactly what happened but using McMansion certainly helps drive home a particular idea.