Artificial Inflation

We've all heard it from industry analysts and experts: Builders are slashing their prices. People are buying new homes for less than they paid a year ago. And builders are continuing to cut prices in 2007, trying to move their unsold inventory before prices fall even further.

There's just one problem with this line of thinking: The data don't show it. According to the U.S. Census Bureau, the median price of a new home has been increasing, from $249,400 in January to $254,000 in March, with the average sales price of a new home having jumped from $311,500 to $330,900 during the same period.

Yet industry experts have heard it from builders themselves that prices are coming down, says Dave Seiders, NAHB chief economist.

“About half the builders have been trimming prices, and that's from our latest survey,” says Seiders, referring to the monthly question-and-answer sessions the NAHB conducts with its members to get the inside scoop on what builders are doing.

So how are prices coming down? For the most part, it isn't via reduced sticker prices, Seiders says.

“There are an awful lot of non-price incentives being offered by builders, and that artificially inflates the sales prices,” he says.

Just some of the non-price incentives builders are employing include paying down a buyer's mortgage, offering $50,000 worth of free design options, and even knocking $50,000 off the price at closing, none of which is being captured by Census or other data collectors, says John Burns, president of John Burns Real Estate Consulting in Irvine, Calif. Other sales gimmicks include paying closing and brokerage fees, offering free cars, and providing countless other product giveaways.

But sticker prices are projected to come down as well, analysts say.

“I expect prices for new homes to decline anywhere from 5 percent to 10 percent,” says Mark Zandi, chief economist for Moody's Economy.com, adding that he anticipates the decreases will show up in the Census Bureau's data during 2007.

Seiders says there is no accurate way to track changes in new-home prices other than through anecdotal evidence from builders. But by monitoring the sales prices of existing homes, one can gauge the direction of new-home prices, Seiders says. He notes that while the data between the two differ, the patterns are similar. And the existing-home data show declining prices.

“We've been seeing systematic price declines since the middle of 2006,” says Seiders, referencing the S&P/Case-Shiller Home Price Index. “With the extra hit on demand from the tighter mortgage lending standards, the inventory overhang is still very heavy and figures now to get heavier. We're looking for downward pressure through 2007 and into 2008.”

One of the most trusted gauges of existing-home sales price trends, the S&P/Case-Shiller Home Price Index tracks repeat sales in 10-city and 20-city composites. The 20-city composite index has been in decline month over month since July 2006. In the most recent version, incorporating February 2007 data, the 20-city composite was down 1 percent from February 2006, and 17 of the 20 metro markets studied experienced price declines from January to February of 2007.

Index co-creator Robert Shiller, a professor of economics at the Cowles Foundation for Research in Economics at Yale University, sees even more declines on the horizon for existing-home sales prices. Shiller bases his expectations on the real estate futures market traded on the Chicago Mercantile Exchange, which is based on the Case-Shiller indexes.

“Over the next year, [expect] roughly a 4 percent to 6 percent decline [in existing-home prices], depending on the city,” Shiller says. “That's a substantial decline.”

The the new-home price pattern runs parallel to its existing-home counterpart, as Seiders suggests, new-home sales prices will come down as well, no matter what the data say.

As ARMs reset to higher payments, approximately 1.1 million additional home foreclosures are expected over the next six years or so, according to a study by research firm First American CoreLogic, based in Santa Ana, Calif. Those foreclosures would represent about 13 percent of the ARMs originated through purchases or refinancings between 2004 and 2006, with a total value of $326 billion in debt, the study says. The foreclosure sales, the study estimates, would result in a total of $112 billion in default losses. Christopher Cagan, director of research and analytics for First American Core-Logic and the author of the study, says the “losses spread over several years will not break the national economy.”—E. Butterfield

Though prices for construction materials have increased more moderately and even decreased in some areas in recent months, that trend is likely to reverse itself, says Ken Simonson, chief economist for The Associated General Contractors of America. The runaway price increases for construction materials that marked 2004 through mid-2006 are likely to return, Simonson noted in a March 2007 report. “The current calm is only a lull between storms and not a return to the inflation-free period of 2001–2003,” he says. By the end of 2007, materials costs could again be rising at a rate of 6 percent to 8 percent, Simonson says.—E.B.

Builders should ready themselves to cash in on the graying of America. The NAHB's 50+ Housing Council projects the population of adults 55 years of age or older to grow 2 percent each year for the next seven years, from 67 million in 2005 to 85 million in 2014. The good news for builders: One-third of the nation's 55-plus adults plan to move into older-adult communities.—S. Zurier

SOURCE: WESTCHESTER COUNTY BUSINESS JOURNAL

One-fifth of the 82,000 workers who build housing in New York City are working off the books, according to a study conducted by the Fiscal Policy Institute, a nonprofit organization that is partly funded by unions. The New York Times reports that the study found that while residential construction in New York doubled between 2000 and 2005, “official” employment in the residential construction sector rose only 16 percent. On average, the non-payroll workers made $10 per hour, compared with $24.70 an hour for union workers and $14 an hour for non-union laborers.—J. Caulfield

While most of the cost of foreclosures is borne by the borrower and the lender, communities suffer as well, according to research from the Georgia Institute of Technology's City and Regional Planning Program. Testifying before a congressional subcommittee this spring, associate professor Dan Immergluck said his research on housing and mortgage markets found that every foreclosure within an eighth of a mile of a single-family house cuts property value by about 1 percent.—P. Curry

After vetting more than 1,500 applicants, Benton Harbor, Mich.–based Whirlpool Corp.'s Maytag brand announced that Clay Jackson of Richmond, Va., will portray the next Maytag Repairman in the company's ad campaign. As the new face of Maytag, Jackson will play a major role in revitalizing the 100-year-old brand. He is the fourth person to portray the repairman in the campaign's 40-year existence. The first (and perhaps most popular) repairman was Jesse White, who for 21 years, beginning in 1967, played the part of the lonely repairman whose phone never rang.—N.F. Maynard

Promising Products

Government agency announces 2007's best home building technologies.

Mold-resistant gypsum and concrete made with waste from coal-fired power plants are among the top 10 home building technologies for 2007, according to the Partnership for Advancing Technology in Housing (PATH).

PATH, a program run by HUD, says the 10 technologies are the future of home building and hold the most promise for improving the quality of homes.

“Our 2007 list focuses on PATH-profiled technologies at the nexus of technological advantage, market readiness, and market appeal,” says Mike Blanford, in HUD's Office of Policy Development and Research. “Each product on the list has the potential to transform the way we build or finish homes, and many of them offer environmental benefits as well as strengths in other areas.”

In addition to the gypsum and concrete, the technologies on this year's list include solar water heating, front-loading washers and dryers, self-cleaning impact-resistant windows, super-sized insulated concrete forms, induction cooktops, and permeable pavers and pavement.

KENMORE WASHER AND DRYER

The relevance of the list for a builder depends on what systems that builder already has in place as well as the builder's geographic location. Builders should assess whether they can or would want to incorporate these products into their practices, Blanford says. “For instance, mold-resistant gypsum might seem like an attractive upgrade in this mold-phobic [Washington, D.C.] area, but, practically speaking, it would be a waste of money almost anywhere in the arid Southwest,” he explains.

“The first thing a builder needs to ask is, ‘How different is it from what I'm doing now?'” Blanford continues. “The answer to that question will lead you to the next questions: Who on my crew [or which subcontractors] will need training? How much training will they need [because they will need some level of training]? How will this affect the price and schedule? And how will it help my future business?”

PATH introduced its Top 10 Technologies list in 2004 and has updated it every year since. For more on the PATH technologies, visit www.pathnet.org.

Open House

There's only so much that builders can do to prevent break-ins at their model homes.

Model homes are essential marketing tools for many builders. But these homes can also be among the more vulnerable elements on jobsites, which are often susceptible to illegal entry and theft.

“You start with model homes [in an undeveloped area], and people see that as a big red target,” James Boulton, a vice president with Classic Homes, recently told The Gazette in Colorado Springs, Colo. There, through mid-March of this year, police have investigated 426 construction-site thefts and burglaries in the previous 27 months. Boulton estimates that Classic loses $50,000 to $100,000 annually to jobsite thieves.

Over the years, Hovnanian Enterprises has had its share of model-home break-ins and vandalism, says Michael Kelly, vice president of purchasing and production, and the builder has learned a few things about deterrence, such as configuring a community when it starts so that “you can't get to the models without going through the sales office,” which minimizes the number of people wandering around the site unattended, at least during working hours. All of Hovnanian's models are armed with security systems linked to the local police and the security company that installed them.

Newport Beach, Calif.–based Fieldstone Communities places models in each of its subdivisions and equips them with “zone systems security” that, according to director of construction Rick Peters, indicates when a door is ajar or a room has been entered. Each sales office can monitor its models electronically, and the alarm system is linked to the security company, says Peters.

Neither Peters nor Kelly is keen on using security guards or surveillance cameras to deter thieves or burglars, mostly because of their limited capacity to cover homes located within wide-open areas with many entrances. -- John Caufield

Sad Reality

Housing discrimination complaints set a record in 2006.

Last year saw the highest number of housing discrimination complaints ever filed in the U.S. in a single year. According to HUD's annual fair housing report, the federal agency and state and local government agencies received 10,328 such complaints in 2006. Race and disability, the report says, made up the lion's share of the cases.

“As diverse as this country is, we still see instances where individuals are denied housing because of the color of their skin or because they have physical disabilities that require certain accommodations,” said Kim Kendrick, HUD assistant secretary for fair housing and equal opportunity, in a press release announcing the report.

Of the complaints filed, 40 percent alleged racial discrimination and almost the same percentage alleged discrimination against persons with disabilities. The report says that most of the complaints cited discrimination in the terms and conditions of the sale or rental of housing, or a refusal to rent.

Even though the Fair Housing Act of 1968 prohibits discrimination in the sale, rental, and financing of dwellings, HUD is engaged in ongoing enforcement activities regarding these types of complaints. In particular, the agency is working to increase the stock of accessible housing for people with disabilities. Part of that effort includes training architects, builders, and developers in the accessible-design and -construction requirements of the Fair Housing Act. -- Nigel F. Maynard

To read a copy of the fair housing report, visit www.hud.gov/offices/fheo/fy2006rpt.pdf.

From Bad to Worse

Builders in Northern Virginia are facing a down market and difficult local politics.

Business is bad enough, so it's understandable that builders in Virginia's Prince William County and nearby Loudoun County were upset when the board of supervisors in both counties passed resolutions saying they would take 12 months before approving any new residential project.

While not technically a moratorium, that's essentially the net effect, between the county governments' resolutions and the ongoing business downturn.

Mark Granville-Smith, CEO of Classic Concept Builders in Manassas, Va., says he'll be lucky to build 15 homes this year, down from 50 homes per year during the boom. Granville-Smith is also concerned about the increased costs builders are being asked to pay for local infrastructure.

“What we're seeing is that the governmental cost of a new home is greater than 10 percent of the sales price,” says Granville-Smith, who explains that the average new home sells for $500,000 in Prince William County.

“There's only so much [that] a decline in land prices would offset such high governmental fees, which means the home buyer ultimately pays—and that makes homes less affordable,” he says.

Corey Stewart, chairman of the Prince William Board of County Supervisors, says the residential market was overheated and the county needs time to absorb the 3,000 to 5,000 new households that have moved to Prince William annually for the past seven years. -- Steve Zurier

FAST-PACED GROWTH

SOURCES: U.S. BUREAU OF CENSUS; PRINCE WILLIAM COUNTY (VA.) OCCUPANCY PERMIT DATABASE