Housing Preordained As Next Recession's Goat
by Broderick Perkins
The nation's housing market has gone from the darling of the New Economy to the next recession's goat as forecasts of impending housing market doom pile up faster than speculators can flip properties. The latest concerns were generated by extensive research from the National Association of Home Builders which found that 60 percent of 500 home builders nationwide said their market had spawned too many buyers who treat the housing market like a crap shoot with dice loaded in their favor as they are driven solely by the lure of short-term capital gains. Builders are concerned the activity is overinflating home prices. Too much speculative buying can generate a sizable "hidden supply" that could come back to haunt the market if price appreciation falters, say due to higher mortgage rates, builders worry. If that happens, sales of new units coming onto the market would be disrupted by speculators unloading both owned units and those still in escrow. If housing goes, so goes the rest of the economy. Housing emerged from the last recession virtually unscathed, lifting the otherwise languishing economy out of the doldrums. As buyers flocked to what appeared to be the safe haven of a tangible investment, real estate became the "psychological equivalent of gold" in the Milken Institute's "A New Kind of Gold? Investment In Housing In Times Of Economic Uncertainty." That gold may be getting a little old. Builders' concerns follow froth-fearing warnings from the private mortgage insurance industry, mortgage bankers, federal money regulators and even federal law enforcement officials who say skyrocketing home prices have attracted an underworld of organized criminals who are gaming the market. Adding to builders' worries, the number of houses for sale even before they're built has jumped 47 percent the past 12 months, according to the U.S. Census Bureau. The bureau reported that 88,000 houses were for sale, but not yet started in April -- the highest number since the feds began tracking it in 1973. A year earlier there were 60,000 unbuilt homes for sale and 40,000 five years ago. Also examining 30 "hot" metro markets (sizable markets with relatively rapid rates of home price appreciation through the first quarter) an NAHB panel of home builders found that in six months ending in April this year, the percent of new homes purchased for investment reasons went from 3 percent to 11 percent for single family homes and from 10 percent to 15 percent in the condo sector. It also found that investor-purchase loans in those hot markets were more expensive than owner-occupied loans and that they required higher interest rates, larger down payments and/or stiffer underwriting standards. Fortunately, there is less concern about overall nationwide trends. This month, the NAHB examined the new home market nationwide and concedes for the first half of the year, only 4 percent of single-family homes sold were to investors (not for primary residence or vacation home), compared with 13 percent of condo units. Some of the units sold to investors (particularly condos) were purchased as long-term rental investments, leaving even smaller shares for short-term speculative activity. NAHB also says only 6 percent of respondents to NAHB's June survey said they were actively marketing homes to investors and, overall, homes are still selling like hot cakes. There is about a 4.1-month supply of new homes for sale, up just 0.1 percent from 12 months earlier, according to the Census Bureau. Despite the mostly good news, all of the 500 home builders surveyed nationwide and 89 percent of builders surveyed in hot metro markets said they were taking steps to reduce sales to investors. Here's the plan. - Eighty-two percent said they would sell only to buyers for owner occupancy.
- Sixty-four percent said the buyer cannot sell the home or "nominate" the contract before closing.
- Fifty-five percent said the buyer cannot sell during the first year after a purchase.
- Thirty-six percent said the buyer must give the builder the first right to buy back if the home is sold within the first year.
- Thirty-six percent said the home cannot be rented within the first year.
- Thirty-six percent said they were limiting the number of investor sales per lot release.
- Twenty-seven percent said they would not provide sales incentives to investors.
- Eighteen percent said they would not sell more than one home to buyers with the same last names.
- Eighteen percent used a variety of other measures, including charging a fee (often $50,000) if homes are resold within the first year.
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