[powayseller]

I hired an architect and contractor to build a house for me, and worked with them for 1 year, until last fall. I noted the tight labor market, and having to wait for many weeks just to get a backhoe operator. Everyone was so busy, and most didn’t return calls. (Don’t get me started on why I was scheduling workers myself, and my contractor wasn’t. Hint – he was a loser)

The term “cost-per-square-foot” includes land. If they want to talk only about construction costs exclusive of land, they would not use the term cost per square foot. They’d say, “construction costs, excluding land” or perhaps “building cost”. You can see this yourself when you look for houses at zillow.com, where they disregard the amount of land in calculating cost/sq ft. This makes no sense when you compare a house on a 5000 sq ft lot with a house on 5 acres.

Pattinson said, ” In addition to astronomical land prices, soaring builder insurance costs and accelerating governmental exactions,this price-shaving strategy also faces the headwind of sharply rising construction costs due to the China effect, Hurricane Katrina and other macro-economic factors.” Certainly the tight labor market and recent competition from hurricane rebuilds have increased construction costs. However, I believe (and correct me if I’m wrong) that the greatest factor in increasing the cost-per-square foot, is the land. And of course the high builder profit margin.

The point that people must understand, is that a huge component of the cost of any house is the land it sits on. And that high workers’ comp fees increase labor costs for all Californians.

My friend owns a restaurant chain in San Diego, and she told me the same as the subs: she must pay to workers’ comp about 30% of wages, even though they have not filed a claim.

It sounds like Barratt builds really nice homes, from what you described. I like that they’re going to focus on affordable housing. A thoughtful company.

[powayseller]

Land is overvalued, thus the 40% increase in cost-per-squre-foot. Cost-per-square-foot includes the price of land. I always found this odd, especially because it makes it difficult to compare the cost of a house on 10,000 sq ft lot with a house on a 5 acre lot.

Anyway, the $/sq ft is up due to higher land cost. Also, according to him, to “government exactions, China effect, and other macro-economic factors”. Whatever that all means. Hurricane Katrina effects are temporary. None of his factors are fundamental long-term reasons that a house should be more expensive. Materials cost may be a bit higher due to increased demand in the hurricane region, but this will not make everyone’s house suddenly 10% more valuable. What a bunch of baloney.

As land costs decrease, they’ll be able to build the more affordable housing he’s talking about. He also said they’d build smaller houses, and move to more diverse locations, which I take to mean much more outlying areas. He wants to reduce the average sales price by 50%, so they must realize that’s the only way they can keep selling homes; perhaps the builders are realizing that the market for $600K starter homes is gone.

A bit of BS in his article. “…the myth of the housing bubble beginning to fade…” What myth??

[powayseller]

Poway was built mostly in the 1970’s and 1980’s, so you’ll find plenty of ranch style homes, larger properties, mature trees. Poway has maintained an extensive system of horse trails, and most neighborhoods, even the high-end ones, are zoned for horses. Lots of open space and preserves. I go running in the trails in the hills behind my house (the hiller, the more I love it). Poway is known for its schools, and the City of Poway has a budget surplus. No traffic congestion, except 2 main roads get a little backed up at rush hour. An excellent place for families, although the pricing has resulted in eliminating younger families and elementary school enrollment keeps dropping. About 1/3 of Poway is low-income, thus you see the low median price in the DataQuick results; those houses are in South Poway and their schools’ test scores are lower than the rest of Poway. We moved here for the schools, and we couldn’t afford the higher prices in Carlsbad, DelMar, and other good school district. You can find rentals in any neighborhood, as investors have bought houses all over town. We rented a 2500 sq ft house on 1/4 acre in a very desirable part of Poway, for $2500/month. So the prices are less than on the coast. We were the only renters on that street. Everyone else had lived there forever.

I am reading this for fun, and we plan to buy when the market hits bottom. My daughter is upset that she’ll have to go through high school living in a rental. I am interested in shorting housing futures, and am on their mailing list. I am also waiting for a good time to make a transfer in the retirement brokerage account, from the money market to some stocks. The stock market multiples are too high.

[powayseller]

RightSide, as the Fed is printing money to pay off the debt, and simultaneously raises interest rates to control inflation, what would be the outcome? Regarding the idea of stocking up on debt, it comes down to assessing whether deflation exceeds the drop in housing values. Do you see it this way too?

I remember reading the Wall Street Journal while I got my MBA in the early 1990’s, and at that time, there was a column where monkeys competed against mutual fund managers and stock pros for the best stock picks. The WSJ asked the experts to select their favorites, and then gave the monkeys darts to throw at a stock chart. Some period of time later, the WSJ tracked the profit/loss of each team’s selection. Most of the time, the monkeys won. Eventually, the column was phased out. I suppose it was too embarassing for the humans. My guess is the monkeys were ready to keep playing.

The reason I write this long story is to make the most important point of investing: no one can predict with certainty the future of a stock, the markets, direction of interest rates, deficit. No one can predict how these forces will interact.

I will never forget this lesson. Later, as I read more, I realized how this happens to the pros. You buy 10 shares of BiotechAsthmaDrug, because they were just approved by the FDA for a breakthrough asthma treatment. The stock soars. You pat your back for having made such a suave move. A month later, the people taking the drug get really sick, and some die. Lawsuits mount, and the company faces bankruptcy. The stock plunges before you have a chance to sell, and now you lost your money. The expert picked BioTechAsthmaDrug because he has extensive knowledge of the drug market. The monkey didn’t. Some event can happen and throw a monkey wrench in your most well-thought out plans.

There are those who have predicted economic armageddon for years, and perhaps they are wrong, or perhaps their timing is off.

I love reading all these diverse viewpoints, and am open to changing my mind, yet for now, I am happy to be without a mortgage, with most of my money in CDs, money market funds, low-risk stocks (UPS, Berkshire Hathaway, stuff like that), and Vanguard index funds. I have lost very little money in this way, unless I lost due to inflation. I laughed at the tech stock boom, and couldn’t believe people were buying overvalued stocks. I bought Lucent after it dropped from $90 to $5, but then lost half because it had still further to fall, to $2.50. That was my only tech stock gamble, and it was a gamble, because I bought it without knowing anything about it, except that it seemed cheap. I will not make that mistake again. I will only buy stock in a company I understand, with good fundamentals. My method worked in the current economic environment, but may not serve me well if inflation rises and gold were our only friend.

[powayseller]

Weiss Ratings Inc. charges $14.99 for each report, and I ordered only the World Savings report. They don’t publish free reports, but give a short list of the best and worst banks and thrifts. They don’t rate credit unions.

Perhaps some of the bankers who come here can advise us where to find this information free of charge, or which banks are conservative lenders.

I want a bank which can weather a loss in its mortgage portfolio, so that means a small percentage of assets in mortgages, and that is not heavily invested in the bonds of the government sponsored enterprises, because they are at high systemic risk of default if housing values plummet. However, the money in the banks is FDIC insured, so even if they go under, there is only the inconvenience of having to wait for the government to reimburse you.

I’ve read of others who advise holding most of their assets in gold, either through stocks or in physical possession, but I’ve not been able to persuade myself of how useful that would be. If the economy collapses, can I pay for rent and groceries with gold bullion? And if things get that bad, would people even go to work and make sure we have our utilities, gas, and grocery services? It’s all too bizarre. And how could I be assured that gold won’t sink back to half its value next month (although it could keep going much higher), as it is so speculative and doesn’t seem to be attached to any fundamentals. I’ve not received a single response to any of these questions, so I think the gold bugs are just in love with gold, with its allure and glitter and mystique, but have not thought through what they would actually do with it if their much-awaited economic armageddon came to pass.

Thanks for your kind words. My kids are now really impressed with me.

[powayseller]

I like the unusual viewpoints I read here, and thinking outside the box. The strategy you mention would work for a group of buyers who are interested in buying from one seller (or builder) during a normal or increasing market. San Diego does not fit the bill. You could try this in a town with normal appreciation, like Midtown, Nebraska, or Deerville, South Dakota.

In a market overvalued 20-50%, where we are already on the downhill side, I think you would still end up overpaying. Builders are already offering concessions; I’ve read Centex doing $100K reductions in Florida. More will be forthcoming.

Even if a builder gives you a 10% concession, next month he will have a 15% concession to move inventory, and you’ll have lost equity. I read about lots of people who are mad that their builders are selling for $50K – $100K less than they paid just a few months ago.

Personally, my husband and I have avoided new construction due to the small lot sizes. I don’t like homes so close to my neighbor that when I am on the patio or in my pool, they can see me from their upstairs window. I also prefer the spaciousness of a one-story. These preferences require larger lots, a factor that new builders have avoided, as they minimize the fixed cost of land and push us together like chickens in a hen house. I find the whole modern high-density building phenomena abhorrent.

When there is a builder who has houses on real lots (i.e. 1/4 acre to 1/2 acre lots), and prices are back to reasonable levels, I would definitely contact you about that idea! The idea is great, and its time will come.

[powayseller]

He was suggesting the Fed prints more dollars so they can pay off the debt.

They don’t care about the consumer, but they don’t want the debt to spiral out of control. I bet they are looking forward to a housing bubble collapse, so consumer spending slows, leading to reduced imports and a lower deficit. But what about the national debt? The printing dollar theory seems plausible as a method to reduce the national debt, because that’s the only way to pay it off. But, there are downsides to being the holder of debt, regardless of the debt’s deflationary valuation. Say the bank goes under and recalls its loans and you have to get a new loan but can’t because the interest rates are too high. Or deflation leads to job loss and you lose your job and can’t keep up with the payments. Oops, there goes your house. Possible? It just feels wrong to me to take on huge amounts of debt in the hope that this debt might be worth 10% or 20% or 50% less. I still have to service it. Maybe I’m way off base.

[powayseller]

Yes, San Diego’s economy is based on us selling homes to each other. I checked the hiring data in January, and it was a wake-up call. Manufacturing is down, and hiring is basically in all things RE: construction, realtors, mortgage officers, service sector which caters to homeowners who have taken out home equity lines of credit (furniture, home improvement, clothing stores, car dealers, vacation sellers, restaurants).

I have a concern about local banks. Are they strong enough to weather a portfolio loss when their mortgages aren’t paid, their Fannie Mae bonds don’t pay out, etc. I thought my credit union would be immune, but today I found out they hold their mortgage loans in-house. Great, I want my bank to be holding mortgages on overvalued real estate. I cashed out by selling my overvalued house, but my bank is still busy making loans. I don’t even have a finance degree, but if I were in charge at the credit union, I would put an immediate stop to mortgage lending and sell the portfolio to another sucker. Even the banks are idiots. No one knows when to get out.

This morning I spoke w/ an attorney, who had an auction business in the 1980’s, auctioning houses. He thinks RE is still a good buy because the interest rates are so low. He said in the late 80’s it was the high interest rates (16% prime, I think) that caused foreclosures. So he believes it cannot happen now. I tried briefly to tell him about adjusting ARMs, but he kept cutting me off, so I dropped it. There are too many fools still out there.

I like your ideas, please write more.

[powayseller]

This morning at the San Diego Courthouse on Broadway, an auctioneer was auctioning off properties, outside off the court steps. About a dozen people were gathered around, and most were very shabbily dressed. It was an odd sight! I stopped to listen, and caught only the last sale, which he called at $212K, 3 times, and no one stepped forward. He then said it would go back to the bank, and the event ended. I stopped one of the tooth-less gals standing around him, and she told me it was an auction for houses in foreclosure. She was untalkative, and quickly walked away, almost as if she thought if I got too interested, I might start coming there too and be her competition on bidding.

I called the courthouse, but got nowhere w/ the numbers they gave me. Typical, right?

What I really wanted to know is why these people allowed their homes to go to auction, instead of just selling them, and second, if the number of homes auctioned is changing.

[powayseller]

Use Weiss ratings to check the stability of your bank. Subprime lenders who hold their mortgages inhouse, will go under. I’m taking my money out of World Savings Bank when my 4 month CD expires, because they have a B rating now, but very low liquidity and too many RE loans. There’s a reason they pay the highest CD rate in the country. They desperately need the money, and not only to fund more loans. I am suspicious of their ability to keep up with their payments. I took the bait for 4 months, but then I’m out.

Remember the S&L crisis? This will be much worse. It’s interesting, the CEO of Fannie Mae keeps talking about the oncoming glut of foreclosures, as people won’t be able to make payments when their ARMs adjust. Why is he so honest? What is his motive?

Anyway, pension funds, insurance companies, mutual funds, hedge funds, etc. are going to be in big trouble and I think they could go under. Make sure your money market doesn’t hold any GSE bonds. I sold my Fannie Mae stock in spring 04, when I started reading about their accounting scandals. At that time it was $75. I don’t understand why it wasn’t dumped by everyone. It’s now around $55, and probably overpriced.

Jim, I wish I understood this MBS stuff better. It’s a fascinating topic, but way over my head. But the risk of defaulting mortgage borrowers has been spread all over the world, and with the biggest housing bubble in history, and about 45% of all loans in the US last year with no downpayment, even I can tell the fallout will be huge.

By the way, we built our house very cheap, between October 2004 and September 2006, and it cost $140/sq ft, which included $50K paid to the builder, and excludes land costs. We paid the invoices ourselves, to the subs. We used small companies too small to have much overhead, i.e. without marketing and HR departments, and some illegals, and that kept the cost down a lot. My custom stained alder cabinets were $20K, half the price of Home Depot’s. The only way to build cheaper is to do it yourself. How can you build for $90/sq ft?

[powayseller]

The Fed keeps talking about containing inflation. If they are serious, and not lying, then they will keep raising interest rates to contain it. They state the tight labor market raises inflation concerns, so they must keep raising interest rates.

They also must keep interest rates high to keep foreign investors and central banks interested in buying dollars, T-bonds.

Furthermore, they don’t care about a housing bubble collapse. They’ve pretty much said so (“we think the impact will be negligible”, “we can’t predict asset bubbles”). Their rich friends won’t be hurt when housing busts, so why should they care? It’s more important to keep dollars flowing into the country than to keep Americans out of bankruptcy. Besides, anyone who bought more than 5 years ago won’t lose money, unless they sell. Housing will eventually go back up. They didn’t bail out anyone when the stock market tanked. Economic cycles happen.

[powayseller]

Picpoule – can you explain more about preforeclosures and the process? Why would people in preforeclosure not even have their home listed for sale? I saw several like this in RealtyTrac.com. Why are auctions and foreclosures so “hyped”? I have heard there are late night infomercials and books on this topic. What happens to the seller who doesn’t have equity?

[powayseller]

Foreclosure auctions don’t give you much of a bargain, and excited investors can overbid a property. Check commercial banker’s post from a few weeks back. They also don’t get the disclosures and inspection report. The late-night informercials and books have turned daytraders into foreclosure bargain hunters, and I doubt there are any good deals at auction. In 2-3 years, when banks own the house, maybe you can get a discount. There is no easy money to be made. If anyone could really buy a house at 30% off appraised value, there would be more people doing that, driving up the auction price. The County Assessor rented a larger hall for last week’s annual lien auction, bec. so many more investors now come to them. If anyone has proof of getting a house at auction below appraised value, only then will I believe it.

Check out this from realestate.msn.com, I don’t know the date:

In the months ahead, analysts expect delinquencies to rise, putting a greater number of these foreclosures on the market for buyers to choose from. That’s bad news for owners who live in these areas, analysts say, because rising foreclosure rates typically mean falling home prices.

But it’s good news for buyers looking for some relief from the high prices of the last several years. In addition to driving neighboring home values down, foreclosures themselves tend to sell at a discount to the market, said Rick Sharga, vice president of marketing for RealtyTrac. Typically, Sharga says, buyers can shave 10% to 30% off the market price with a foreclosed home, depending on demand.

The best deals can usually be negotiated with an owner, when a property is in default, but hasn’t been put up for auction or turned over to the bank.

“Sometimes you can negotiate both ends, with the property owner and the bank,” Sharga said.

Risky business
But foreclosures don’t always mean bargain-basement prices.

“In a hot real estate market, I have seen properties sold out of foreclosure for more than the estimated market value,” Sharga said.

And there are more drawbacks and risks to buying property at auction. First of all, most buyers will need to come up with 100% of the purchase price on the day following the auction. Second, many times a property can’t be fully inspected, and in some states, the previous owner has the right to buy it back for what you paid within a certain period.

“Like any other investment, the higher the reward, the higher the level of risk,” Sharga said.

[powayseller]

Why would a realtor refuse to list at a lower price? My realtor would have been thrilled to list competitively. What is that realtor’s motive? Realtors only get 1% of the 6% commission, so a $20K reduction in price would net about $200 less in her pocket. Is she trying to get that extra $200, or does she or a relative have a house in that neighborhood and doesn’t want the comps to go down?

[powayseller]

Well, how do you get the sellers to agree to a listing that is 5% less than what their neighbor got last summer? The sellers don’t “get it” yet.

Perhaps you can relate by imaging how you might price a car which you’re selling privately. The ideal listing price is the Kelly Blue Book trade-in value + 5% or 10%. The trade-in value is what the dealer would give you. Make sure you select “fair” condition, because that’s what the dealer uses. This way, you get more than the dealer would pay you, and your buyer pays less than the dealer would charge.

But, as my brother and husband are finding out, sellers advertise their cars for the much higher “private party” value. My brother did this also, and did not get a single call for his car (except from a pre-recorded auction type place). He ended up selling it to the dealer for the trade-in value as part of another purchase.

My husband has checked countless car ads, and finds that sellers have them priced at that too-high private party value. So he keeps looking.

This is the same that happens with housing, as buyers take their time to find the best deal, and sellers refuse to take less than the maximum imagined amount. And if they are not forced to sell, they will hold onto that imagined value, and possibly reduce by $5K increments. Only those who are really motivated will take a lower offer.

A couple in my neighborhood is getting ready to list their townhouse, and were told by their realtor that it’s worth $575K. Gee, then why are the other 2 for-sale units, listed at $550K, still sitting on the market? The realtor was checking the last closed sale, and not adjusting for a declining market. Maybe she told her sellers she could get them a higher price, just to get the listing. I get so annoyed that other people are prolonging this slide down! But I am powerless over them, right? This takes too much patience.

[Author]

Posts