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.

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.

The owner of the company where I work in Middle Tennessee came to our meeting this morning and confirmed what we’re all thinking through some real evidence: the market is coming back.

Although he believes it’ll take until the second quarter of 2009, the biggest indicator is in new construction.  In my county, there were 75 more closings in new construction than “starts.”  This means that the building industry may be slowing down enough to get rid of the excessive inventory of new homes.  As demand comes back, then existing homes alongside more manageable new construction will stabilize the market.

Corbet Property Real Estate News agrees with this assessment, using for data the information that was reported in the Wall Street Journal,

Inventory levels are starting to slow with a prediction that when we reach a 5-month of inventory level sometime in 2009, which historically signals a tightness in the housing market, this will eventually turn around the housing market all together.

However, when we talk about a recovery we also should see what’s happened in the last two years.  The big guy from my company said that although our market is off, we’re off the least.  Our sales are only down 20 to 25% from the glory days of two years ago while the east and west coasts have suffered a reduction in home sales of up to 60%.  Those companies are going through some painful cuts, including cutting staff, closing offices, and renegotiating the salaries of managers just to keep the doors open.

In the long view, the agents who provide solid service and are committed to a career in real estate will survive.  Just as the mortgage companies who have smart lending practices in place will survive. 

On the commercial side, we heard today that commercial real estate is finally beginning to slow somewhat.  For example, one well-known pharmacy-type store used to allow franchises for almost zero down.  Today this company requires about 20 percent downpayment.

In my opinion and from reading and hearing what others are saying, we aren’t quite out of it yet, but the big improvement is coming soon.  I feel it in my bones!

Magnificent photo from here.