Real Estate Investing

With people facing soaring utility costs, with gas prices fluctuating so that one never knows if it’ll cost $20 to fill up or $80, with the job market all jittery, and with less disposable income than ever … home buyers are more scarce than the double breasted brightly plumed dingo bird.

As a result, builders are recognizing that people now prefer paying less for smaller structures that will help reduce their electric and gas bills, reduce their monthly mortgage payment, and save money overall.  Builders are going small.

According to USA Today, in one quarter of 2008 the average size of a new home went down about 200 square feet and the downward trend continues,

In a survey last April, the AIA found twice as many architects reporting a size decline rather than an increase. In 2006, the reverse was true.

“Affordability is a major problem,” Ahluwalia says, and building smaller usually means cheaper. Also, he says, people are realizing as household size shrinks that they don’t need big homes.

Baker says there is less incentive to buy a bigger, more expensive home as the economy weakens, home prices fall and energy costs remain a concern. He says people are less likely to see a home as a good investment.

We are finding the months’ supply of homes  grows proportionately with the price of the home.  For example, if a home is over $500,000 there may be a 15-month supply. If a home is priced at $150,000, then a three or four month supply is more likely.

The bubble world of builders is possibly one that has popped the loudest over the past two years.  I’ve heard of countless construction companies going under and I wonder what has happened to all their subcontractors and other crew members.  My guess is you’ll find them here and here … the latest job numbers were released today and he unemployment rate is now 7.2 percent (not 7 percent as anticipated).  Ouch.

I’m so hoping to see the recovery of the economy and housing market start by the second quarter of 2009.

While all real estate is local, it appears that new construction has remained slow across the country and conversely, home builder sentiment also remains low.   According to MSNBC.com, National Association of Home Builders/Wells Fargo Chairman Sandy Dunn said,

“The crisis continues.  Congress and the Administration must step in with substantial incentives to bring qualified buyers back to the table as well as effective foreclosure relief programs if we are to end this negative spiral that is weighing so heavily on our national economy.”

Further, the article reports that “home builders have asked Congress to enact a 10 percent tax credit of up to $22,000 for homebuyers that purchase a home over the next year. They also are seeking a temporary interest-rate reduction on 30-year mortgages.”

In my own area where the housing market has actually remained fairly stable - but slow - new construction permits have tanked which is also impacting funding for the county,

The county and its three cities issued just 1,177 single-family home permits from January through November, a 50.8 percent drop from the 2,391 issued over the same 11-month period in 2007.

With the drop in homebuilding, city and county governments experience a drop in permit fees and a reduction in anticipated property tax revenues.

The Daily News Journal of Rutherford County, Tennessee further reports that the codes office that oversees permits has not filled vacant positions as a result of fewer permits being issued. 

What I find to be very interesting is the real lack of concern for builders.  I do think that the high volume builders could get sloppy sometimes when they threw homes together, but as one commenter said, don’t cut off your nose to spite your face,

The drop in the housing market serves all those greedy developers and homebuilders right. How dare them make so much money ! Yep, ha HA! they aren’t making money now!!!!! Neither are the blue collar workers like plumbers, electricans, block/brick layers, supply companies, carpet layers, big equipment operators, insurance agents, real estate agents, AND NO DEVELOPMENT TAX, coming in to the county for schools, roads, firestations, and general services provided by the county. And that means people aren’t spending as much in retail stores, restaurants and that means SALES TAX collections are down that go into schools, education, teacher pay and general gov’t services! DUH!!!!

Like the commenter above, I find it very interesting that the silence is deafening in regards to ancillary jobs related to home building.  The construction workers, plumbers, electricians, lumber yards, home supply stores, etc. have all been negatively impacted but you don’t read a lot about those positions.  However, those could be figured into the higher unemployment numbers we keep reading about.  Or NOT according to Business Week,

Contract workers, sometimes known as freelancers or independent contractors, face a special set of problems when it comes to being counted by the government. First, employers aren’t required to report layoffs of contract workers to the government, so when companies say they’re cutting their contractor workforce … no one knows by how much.

The recovery IS coming, but how long will we be at the bottom?  Tick tock, time will tell.

Many many many many agents complain about companies that have weekly sales meetings.  I may be the minority, but I absolutely *love* the opportunity to talk with other agents and hear what’s new in their world.  This last Tuesday was no exception - and am I ever glad I went to hear about a new construction experience an agent shared.  This story is muddy, so bear with me…

About a year ago, this agent (let’s give her an alias - JenJen) was working with buyers and together they closed a new construction home.  One year later, the buyers have received a letter stating that one of the subcontractors had not been paid.  As a result, the buyer/homeowner now owes the builder’s debt - over $3,000 for the heat/air unit.  The builder is trying to work it out with the subcontractor, but after a year without being paid, I don’t blame the subcontractor trying to get his money. 

Because the subcontractor served notice of money owed on the lien, JenJen stated doing research.  She found that the “Notice of Completion” was filed with the county before the house was 100 percent complete.  One a “Notice of Completion” is filed, there is a mandatory 10-day wait before closing. 

In reality, today’s buyers and sellers rarely wait the 10-days, but lenders should slow the transactions down to force this wait.

Work done AFTER the “Notice of Completion” is not guaranteed to be discovered by the title company during the title search.  This is why it’s important to ask for the additional owner’s title insurance. 

The water gets muddier.  Once the new home owner is served notice, they have 10-days to file the title insurance claim against their owner’s title policy.  Ironically in this case, the title company has encouraged the buyer to WAIT to file to give the builder a chance to work it out with the subcontractor.  Had the buyer listened to that advice and waited two or three weeks to file their claim, the title company would be scot-free and not have to pay out.

Fortunately, the home owner contacted JenJen and she spoke with the attorney my firm has on retainer.  They filed immediately.

I don’t know the results yet, but do know there are two huge lessons to be learned:

1. Make sure the Notice of Completion is filed AFTER construction on a new home is complete.  Wait the two weeks to allow the Title Company time to find liens.
2. When in doubt, talk to a real estate attorney to make sure your assets and your money is protected - no matter the transaction, the situation, the location.