Tag Archives: housing market

With Toll Brothers profits up, are McMansions on the comeback?

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Marketplace suggests McMansions may make a comeback. Here is some of the evidence:

This hour, the luxury home-builder Toll Brothers said profits in the latest quarter jumped 46 percent over last year. The CEO says he sees recovery across most of the country…

The [New Hampshire] builder says there’s a real difference between what his clients want pre- and post-recession. Before it was family homes — three-, four-car garages…

Spain: And I think today people are more or less getting back to basics. They are just looking to downsize. Single-floor living. And then have moderate finishes to fit their budgets.

It may be back to basics for Spain’s customers, but Fred Cooper with Toll Brothers, one of the nation’s top builders, says that’s not what their clients want.

Fred Cooper: While initial buyers came in thinking maybe they wanted the lower-priced home, they ended up predominately buying the larger one. That’s what they want.

So we may see more McMansions, but Los Angeles architect Buzz Yudell says the funny thing is we won’t see as much of them.

It doesn’t appear clear-cut here. Toll Brothers may have more profits but perhaps this means they have effectively reached certain segments of the housing market. At the same time, the majority of builders might be scaling back a bit and building units for those who have smaller budgets.

This raises an interesting question: at what point could we truly say that McMansions have or haven’t officially made a comeback? Who gets to decide this? We’ve heard this before – see these two examples from earlier this year. A few signs we could look at:

1. Like this article does, the fate of luxury builders like Toll Brothers might be the deciding factor. Presumably, a majority of them would see profits. However, these factors could be the result of other factors like builders being more efficient.

2. The square footage of the average new home goes up. This figure did increase this year. However, Australia just passed us again.

3. Perhaps all it takes is public perception. If more people feel like McMansions are being built, this is enough.

3a. A problem with this: perceptions of what constitutes a McMansion could change in the future. In a recession, is a 2,500 square foot home, the size of an average new home now seen as bigger than ten years ago? Or perhaps bigger homes could be more green, thus reducing the stigma of being a McMansion.

Regardless of the options I laid out, I suspect the media will have a fun time debating the comeback and/or death of McMansions for a while now as the term is such a loaded time.

Australia retakes the lead for largest new homes in the world

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In recent years, Australia and the United States have alternated having the largest new homes. New data suggests Australia has retaken the lead:

In any case, that Australian homes should be costly is not so surprising given the peculiarities of the domestic market.

The Australian dream requires you to own a detached house with a large garden, a land-hungry type of accommodation that makes up no less than 76 percent of all homes.

Three-quarters of all homes have three or more bedrooms, and almost a third have four or more. The average newly built home is now the largest of any country at 243 square meters (2,615 square feet), taking the McMansion mantle from the United States.

And, while it is one of the emptiest countries on the planet, it is also one of the most urbanized, with most of the population crowding the coast in just eight sprawling cities.

I wonder how much this has to do with something I suspect is at play in the United States: housing starts may be down but those that are being built are primarily aimed at the upper ends of the market toward people who haven’t been hit as hard by the recession.

It is interesting that this is buried in the final paragraphs of a story about the Australian housing market. The overall piece suggests that a country can have large homes without necessarily having an overextended housing market like we see in the United States. One complaint about McMansions in the United States is that they have ruined the housing market, pushing buyers and lenders to have bloated mortgages and generally corresponding with American habits of overspending and incurring debt. But it doesn’t have to be this way: the article tells of different mortgage patterns in Australia such as homeowners paying them off quicker and having a small amount of subprime loans. In other words, having a large home doesn’t have to be tied to the ideas of profligate spending if the system is set up in a different way.

Argument: data says US housing bust has ended

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A Wall Street Journal columnist says the data is clear: the US housing bust is over. Here is some of the data he finds convincing:

Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. “We finally saw some rising home prices,” S&P’s David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.

Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months’ worth despite all the foreclosed homes that lenders own. The fraction of homes that are vacant is at its lowest level since 2006…

Builders began work on 26% more single-family homes in May 2012 than the depressed levels of May 2011. The stock of unsold newly built homes is back to 2005 levels. In each of the past four quarters, housing construction has added to economic growth. In the first quarter, it accounted for 0.4 percentage points of the meager 1.9% growth rate…

Economists aren’t always right, but on this at least they agree: A new Wall Street Journal survey of forecasters found 44 believe the housing market has reached its bottom; only three don’t.

The details of the argument aren’t quite as rosy: Wessel suggests at the end that things could still go wrong with housing but housing itself is unlikely to drag down the economy by itself.

It will still be interesting to see how long it takes housing to recover. Not everyone has a positive outlook about housing values.

 

“McMansions making a comeback”!

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Several sources picked up on the latest data from Trulia that suggested more Americans are interested in bigger homes. With a headline of “McMansions Are Making a Comeback,” here is what US News & World Report said:

After greed and excess torpedoed the housing market a few years ago, Americans understandably began favoring more modest homes instead of pricey palatial abodes.

But it seems old habits die hard.

Reverting back to a “bigger is better” mentality, interest in mega-mansions 3,200 square feet and larger has almost doubled from a year ago, according to new data from real estate website Trulia. About 11 percent of today’s house hunters say they want their own McMansions, up from just 6 percent last year…

About 16 percent of those surveyed said their ideal home was in the 2,600 to 3,200 square feet range, but according to listing data from Trulia, homes currently on the market skew much smaller, with only 10 percent of homes listed falling within that range. Nearly 60 percent of homes listed are 2,000 square feet or smaller, which means many house hunters’ hopes will be disappointed.

More from the Wall Street Journal as architects are also noting the trend:

Big homes are back in style.

That’s the headline from the American Institute of Architects’ first-quarter Home Design Trends Survey set to be released Thursday. Eight percent of the 500 architecture firms responding say square footage of homes increased in the first quarter, up from 5% a year ago. This change, the biggest year-over-year jump since the survey started in 2005, ends a multiyear march toward smaller homes driven by the housing implosion…

But today’s buyers are different from those seen during the buy-as-big-as-you-can boom. “People don’t want bigger homes just to have bigger homes,” says Steve Ruffner, present of the Southern California division for KB Home, one of the nation’s largest home builders. “Buyers show up with calculators. They actually calculate cost per square foot. They really understand what they’re getting for the money.”

Interestingly, 45% of architects reported more interest in single-story homes, up from 35% a year ago. The result is the largest percentage since 2005, according to the AIA. During the easy credit housing boom, builders quickly inflated home sizes to generate more profit. An easy way to do that was to tack on a second – or third – floor, making single-stories hard to come by in some communities. While more of today’s buyers seek more space, they don’t necessarily want to deal with stairs. Aging boomers are also more likely to seek a one-story address.

We will see how this plays out. Of course, the story is more complex than “Americans want bigger homes again” or “the housing recovery has begun.” And it will be fascinating to watch how these new, larger homes are marketed and perceived: if buying a McMansion is really a moral choice, can there really be a good defense for such a purchase?

Chicago region home prices back to April 2000 levels

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Data from the S&P/Case-Shiller suggest that Chicago area home prices have returned to levels from early 2000:

Home prices in the Chicago area hit a new post-housing crisis low in March, falling to levels not seen locally since April 2000, according to the widely watched S&P/Case-Shiller home price index, released Tuesday.

With the most recent decline, average  home prices in the Chicago area have fallen 39 percent since they peaked in September 2006, according to the index…

Much of the pricing pressure was on homes that sold for less than $139,182, as the average selling prices for those properties in March fell 3.4 percent from February and were down 9 percent from a year ago and reflects the impact of distressed homes on the market. That puts the pricing environment for lower-priced homes akin to where it was in April 1995…

“We’re beginning to see more stability in the overall numbers,” Blitzer said. “The housing situation in the United States, while certainly not booming, is seeing some stability and possibly some gains going forward. Prices will be the last thing to go up.”

As the article notes, economist Robert Shiller has expressed skepticism that housing prices will rise anytime soon.

While there may be a lot of worry about foreclosures (and Illinois ranks poorly here as well), the issue of depressed housing prices might linger even longer. The wealth that people expected to incur through their house has, on average, been reduced to 2000 levels. Another way to interpret the data above is that on average, people who have bought a home since April 2000 can’t expect to make any money on selling their home now. This could limit people’s abilities to move and purchase homes as well as change how they think about homebuying.

 Zillow just put together a new map of the United States based on what % of homeowners are underwater. The map has more people in the red than one might hope:

The real estate information website Zillow has compiled its data from the first quarter of 2012 to build this map, showing just how much negative equity there is among the homes in many counties. Deep red along the west coast, throughout Florida and in the Great Lakes region serve as a harsh reminder of the chronic troubles these areas are still struggling to control…

In the worst hit counties, more than half of the homes are underwater. Clark County, Nevada – home to Las Vegas – is among those in the unfortunate top 1 percent, with 71 percent of homes underwater. For the vast majority of homes here, the amount owed is more than 200 percent of the value. Clayton County, Georgia, part of metro Atlanta, has an astounding 85 percent of its homes underwater.

This article from 24/7 Wall St. breaks Zillow data down even further to name the ten cities with the highest rates of homes with negative equity. Las Vegas, Reno, and Bakersfield are the worst performing cities in the country, with rates above 60 percent.

While the situation is certainly bad in many, many parts of the country, four-fifths of all counties in America have fewer than 35 percent of their homes underwater, according to the map. But it’s still a widespread problem – and one that seems to be growing. More than 31 percent of all homes in the country are underwater, according to these first quarter 2012 numbers from Zillow, a jump from the 28 percent the company noted a year earlier and the 22 percent the year before that.

It could take a long time to reverse these trends.

Recent uptick in sales of McMansions?

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Here is an argument that new home sales of recent months might be driven in part by larger homes, sometimes known as McMansions:

Data released on Wednesday shows that sales of newly built homes rose 3.3% in April from a month prior and 9.9% from a year ago. While the figures do not disclose the size of these new homes, home builders credited the McMansion side of the spectrum. That’s a reversal from recent trends: During the recession the size of homes got smaller, shrinking 3.4% to 2,382 square feet, according to the US Census. But last year that size jumped 5.2% to 2,505 – the largest in at least four years. In many regions of the country, homes are even larger.

Home builders say the trend toward larger new homes picked up more this year. Michael Villane, president of Lead Dog Builders, a custom home builder in Rumson, N.J., says he’s currently building homes with sticker prices of $1.5 to $4 million, up from the $1.3  to $1.5 million his clients were commissioning a year ago. While the average size of homes in the region is 3,500 to 5,500 square feet, he says the orders he’s received this year are for 7,000 plus-square feet homes. Though there’s no official definition of the word, many define McMansions as new homes larger than 3,000 square feet.

In some cases, home builders are enlarging homes even if clients don’t ask for it. Michael Dubb, CEO and president of The Beechwood Organization, a New York-based home building company, says his firm is building houses with larger kitchens, higher ceilings, and overall more spacious rooms in an attempt to appeal to buyers who might be on the fence about buying a new home. By building bigger without raising the price, he says, the company is hoping to increase its sales. (He says they’re not downgrading quality, but rather cutting into their profits in order to make more sales.)…

Requests for large new homes come at a challenging time for the overall new home market. New home sales hit a 51-year low of 307,000 last year, according to the NAHB. That figure is expected to jump 18% this year, but it would still be way off its peak of 1.3 million homes in 2005.

If I had to guess at what is behind this, here is what I would say: there is a bifurcation in the current housing market. On one hand, you have a large group of potential homebuyers who are looking for smaller homes. One recent book I reviewed calls this the “demographic inversion” as young adults and retiring Baby Boomers look to downsize and purchase in denser areas. Proponents of these trends argue that the Americans of the future are looking for a different kind of homeowning experience in the future. On the other hand, you still have a decent number of wealthy homebuyers who are now moving out of a hibernation stage brought on the economic/housing crisis several years ago. They are looking to buy homes similar to what they would have bought ten years ago but now feel financially stable enough to pursue this.

The article doesn’t mention this but I wonder if this is also at play: new home sales are at the lowest stage in 51 years so this new push for larger homes among the wealthy is really raising the average in a way that we haven’t seen in the past. When those at the lower economic spectrum get back into buying homes (though some would argue that they won’t – perhaps we’re moving to a rental society), the average figures for the whole country might come down or stabilize a bit.

Real estate wisdom: don’t build the nicest McMansion on the block

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An oft-cited piece of real estate wisdom is that you shouldn’t buy or build the nicest home in a neighborhood. Here is an update on that tale: especially don’t do this when you are building a McMansion.

For example, consider the fate of what became a conspicuously large house for sale in an Atlanta suburb.

A few years ago, at the top of the market, the owners purchased a small fixer-upper, then renovated and significantly expanded it. Once completed, the owners tried to sell their McMansion in one of the worst real estate markets ever. After a year without success, they had to lower the asking price multiple times — and ultimately walked away with a big loss.

The fact that they bought at the top of the market and tried to sell during a decline in values certainly didn’t help. But it wasn’t the only factor by any means. On one side of the house was an apartment building. On the other sat a home that was an eyesore.

The proximity of these two properties should have been a warning to the owners: Don’t super-size your house when it’s surrounded by properties that aren’t at least equal in value. Instead, the owners had gotten caught up in the market frenzy. They didn’t think about what would happen when it came time to sell…

A better strategy, no matter what kind of market, is to buy the worst house on the best block. You can always improve the property and therefore increase its value. And because it’s on a great block, improvements you make to the home will be practically guaranteed to give you a top return on your investment.

I wonder if there aren’t two factors here that could mitigate the reduced selling price of the McMansion:

1. The owners really really wanted to be in this particular neighborhood. And if they have the money to build the bigger home and absorb the loss more easily (the article doesn’t say), perhaps this was more about the block than the particular house. Sure, they may have not made the most money they could have on their property but perhaps that wasn’t the most important thing.

2. If one does pursue the strategy of buying the worst house on the block, might one have to pay more to buy into a nicer block compared to buying a nicer house in a worse block? In other words, this advice partly depends on the context of the neighborhood. To buy into a nicer neighborhood at the start, one is likely to have to overpay, particularly in neighborhoods that are really hot or where there is a lot of pressure to tear down the existing home and build something bigger and better.

Overall, I’m intrigued by the general logic here from real estate agents: all that matters is the spread between what an owner paid (plus what they end up putting into the house) and what they get when they sell the home. In a perfect real estate world, all homeowners are told that they too can make money off their homes. Is this really possible? Is it even realistic for most owners? There are other reasons people buy homes and wealthier homeowners have more financial latitude to do what they want.

Shiller makes more dire prediction: “we might not see a really major [housing] turnaround in our lifetimes”

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I highlighted about a month ago a prediction from economist Robert Shiller that suburban housing values may not recover anytime soon. Shiller made another prediction this past week that is even more dire:

The housing market is likely to remain weak and may take a generation or more to rebound, Yale economics professor Robert Shiller told Reuters Insider on Tuesday.

Shiller, the co-creator of the Standard & Poor’s/Case-Shiller home price index, said a weak labor market, high gas prices and a general sense of unease among consumers was outweighing low mortgage rates and would likely keep a lid on prices for the foreseeable future.

“I worry that we might not see a really major turnaround in our lifetimes,” Shiller said.

Shiller is the most pessimistic prognosticator about the housing market I’ve seen. Is this earning him credibility or scorn?

By the way, is there any academic or impartial observer who keeps track of such predictions? I thought about this during the NFL draft: think how many hours and days were wasted coming up with mock drafts that are based on one-seventh of the draft and often have mistakes. What is the same number of hours and days was devoted to trying to predict the outcome of the US housing market in the coming months and years – would the predictions get any better?

Americans optimistic that their home’s value will increase in the next year?

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Gallup recently released results of a new poll regarding homeownership and housing values. Here is some of the interesting data:

Americans are much more positive about the direction of housing prices this year than they were last year. They are significantly more likely to expect the average price of houses in their area to increase over the next 12 months than to decrease, 33% vs. 23%. Last year, Americans were about evenly split, 28% to 30%…

Today’s housing price expectations differ sharply from those during the housing price boom. In 2005, 70% of Americans expected house prices in their area to increase, while 5% expected them to decrease. Expectations moderated as prices hit record levels in 2006-2007. Expectations became more negative during the recession and financial crisis. In 2010, price expectations were similar to those anticipated today…

Fifty-three percent of Americans believe their house is worth more today than when they bought it, down significantly from 80% in 2008 and 92% in 2006. It confirms that many Americans are underwater in terms of the value of the home they currently own.

These lowered expectations about their housing values seems to go along with lower homeownership rates, reported at 60% by this Gallup data but the Census said the homeownership rate was 66% in the fourth quarter of 2012. I would guess that the Census has a bigger and better sample than Gallup to assess this.

I wish they had gone on to ask whether homeowners believe their houses should make money in the long run. These lowered expectations come after a period from roughly the early 1990s to middle 2000s where more people viewed their homes as good investments. Even after the economic crisis, I would guess a majority still believe their homes should earn them some money in the long run even if it takes a little longer to get that value.

Argument: “Peak Housing, Peak Fraud, Peak Suburbia, and Peak Property Taxes”

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Charles Smith suggests the housing issues in the United States are related to several other concerns and all of this isn’t likely to improve soon.

I don’t know if Smith is correct but why aren’t more people talking about the possible long-term consequences of a depressed housing market? Is this unlikely to happen or are people afraid that this actually might happen?