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Guest Post: Storm Front Approaching the Home Builders

Tyler Durden's picture





 

Via Ramsey Su of Acting-Man blog,

There is only one problem with the home builders - expectations are way too high. The builders are not only priced for perfection (as we noted here) by the market, the builders themselves have business strategies that are modeled for perfection. I believe the bar is set at an unattainable level.

Here is why.

In the beginning there is raw land. It takes years, if not decades, to develop this raw land into finished lots, lots that are ready for permitting and construction. When the final product is sold, the process of monetizing land is completed. Depending on their strategies, home builders buy land during various stages of this long development process. NVR, for example, is at one extreme. They only buy finished lots based on what they need at the moment. Even with NVR, it will still take them a few months to complete the finished design and put up a couple of models before they can officially market the communities. Most other builders take much longer from land purchases to final sales. They are exposed to market fluctuations during this holding period.

 

NVR, Inc.: buying only finished lots

 

With the time lag, there are three possible outcomes.

  • First, when the houses are finally sold and closed, the sales price and costs are exactly what the builders projected when the land was purchased.
  • Second, market conditions improve beyond their original estimates and margins come in much better than expectations.
  • Finally, the third possibility is market conditions turn out to be far below expectations and all profits gone.

The lesson here is that it is not enough for the real estate market to be improving for the builders to be profitable, they need to have a low enough cost basis in order to have a decent margin. To really do well, they will also need volume.

 

Looking back a decade, starting with the bursting of the tech bubble, the builders were preparing for lean years and did not overpay for land. They did not know that Greenspan had different ideas. Consequently, with the Greenspan versions of quantitative easing, their margins increased way beyond their expectations. With the surprise windfall, builders went wild and paid higher prices to replenish their land inventory. This did not affect their profit margins. The subprime bubble was beyond their wildest dreams and offset all the higher costs, generating even more profits. At the peak of the bubble, the builders were totally fearless and kept buying land at even higher prices until one day it all came tumbling down.

Where are we today and why do I believe a storm front is fast approaching?

  • Easy Money, and Cheap too. With the help of the Bernanke QEs, every builder has since issued equity, convertibles, new debt and/or refinanced existing debt. The cost of these funds is unbelievably reasonable. This is however a double-edged sword. The cheap money lures the builders into buying more land and/or develop what they already have on hand. The cost basis is no longer cheap.
  • Land Cost. If we take a snap shot of the builders' land portfolios today, most builders have plenty of land but the finished lot inventory has been absorbed by the favorable conditions so far this year. To survive, they have been purchasing finished lots to meet demand. During the recent earnings conference calls, most builders still claimed that they have underwriting standards that do not rely on future home price appreciation. Anyone who has looked at any recent land deals knows that is not true. They can also spend money developing the raw land in their own inventory but that would add to costs and hurt earnings for the current and upcoming quarters.
  • No Competition, for now. The builders could not have planned for a more perfect set of circumstances. Whether it is intentional or unintentional, public policies have been the greatest friend the builders can dream of. They were given free money in the form of tax loss carry-back. There were tax credits. The greatest gift, of course, are low mortgage rates along with cumbersome underwriting documentation. Builders are uniquely positioned to coach buyers through the process, far better than their existing homes counterparts. Distressed properties are artificially held off the market. For the better deals that do reach the market, investors are gobbling them up, forcing the owner users to overpay for new homes.
  • Confused. The market is confusing a listing shortage with a housing shortage. The US population grew by only 2.3 million between 2010 to 2011. Housing starts for this year are around 900,000. Baby boomers are rapidly reaching retirement age, changing housing demand. Employment remains stagnant with no signs of wage appreciation. We are at best at equilibrium, while the market is still trying to absorb the excesses of the past decade.

In summary, the building model is flawed. They cannot avoid boom bust cycles. Right now, builders have to keep buying even if they believe that the market may slow. When every "A" location property is receiving multiple bids from builders, the price is not likely going to be cheap. Can the builders afford to buy, at prices that rely on future appreciation? Can the builders afford not to buy? How are they going to generate revenue if they are not buying land and therefore not building?  Shareholders would destroy them. They have no choice but to keep building, hoping favorable market conditions will continue indefinitely. Having used up most of the cheap land already, builders are now facing a "must appreciate" predicament. If the market slows, look out below.

 

The Homebuilder ETF, XHB – still in the market's good graces for now, but for how long?

 


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Mon, 12/03/2012 - 14:21 | Link to Comment realtick
realtick's picture

Construction Spending - The Sarcophagus Stimulus Plan http://chartistfriendfrompittsburgh.blogspot.com/2012/12/construction-sp...

Mon, 12/03/2012 - 14:29 | Link to Comment MillionDollarBonus_
MillionDollarBonus_'s picture

This article couldn’t be further from the truth. Home builders have access to super low interest rates and a ravenous American consumer, armed with cheap loans and other goodies like HARP. Pessimism is at an all time low, which indicates that the housing market is about to take off. Pathological doomers always miss the best prices. They missed the boom in Bonds in the 80s, they missed the boom in consumer stocks in the 90s, and now they are about to miss out on the housing boom for the second time in a row. I feel sorry for ZHers with no understanding of economics or investment. They act like they know what they’re talking about, but it’s clear that they are nothing but a bunch of amateurs with a bitter hatred for everything that is decent and wholesome about America.

Mon, 12/03/2012 - 14:48 | Link to Comment redpill
redpill's picture

They've thrown everything they can at this housing market and it's barely shown a bump.  There will be no housing boom.  But of course this is MDB we're talking about here.

Regardless, I have some issues with this article:

- Housing starts are NOT 900k this year, they will probably wind up being 750k or so., and only ~520k of those are single family homes (which includes non-stacked townhomes and condos), which is most of what the production builders deal with.  Difficult to take the thesis of the article (which I don't disagree with in some ways) seriously when the basic data points are wrong.

- Operationally the big builders are still moving very cautiously.  Supply is tight and they will keep it that way in all phases of their business.  This results in more a premium for new homes over resale and will help mitigate any cost basis challenges in the near term.

- I wouldn't call conditions this year "favorable" except in comparison to years prior.  A lot of the tightening in the resale market that has pushed buyers toward new homes has been the result of cash/investor purchases, something that for the most part peaked in 2011.

- The Fed is still trying to goose housing, the hot money will be pushed toward housing for several years to come now as faith in equities continues to wane.  Between that, ZIRP, and ongoing federal sponsorship of home loans through FANNIE/FREDDIE/FHA there is a big gov't push to hold the line on home prices.

- The new home market has never been so consolidated and dominated by the largest home builders.  The barriers to entry are more formidable than ever.  If volume can't happen through natural demand (which right now is not supported by broader fundamentals) the bigs will push it through consolidation to increasingly leverage economies of scale.

 

The real threats to new home builders are not the time it takes to develop lots or whether they are working off plausible product pricing models.  These are business issues they are used to dealing with, and those that have survived this long have gotten pretty good at it.  However, were the federal government to do something like eliminate the mortgage interest tax deduction, it could upset the apple cart of financial feasibility of home ownership.  It's already a pain in the ass to own a house to some degree, having the tax benefit stripped away would slam new home builders square between the eyes.  A cultural shift away from home ownership is a real possibility and a material threat to the business as it exists today.

Secondly, from a stock price prespective, anyone that is buying home builder stocks at this point is a bit of an idiot anyway, imho, but it's important to keep in mind that this supply chain and labor force can not expand overnight.  Even in a best case scenario of positive market conditions, there is a substantial supply chain lead time to even take advantage of it.  So anyone expecting explosive growth in volumes will be sorely disappointed no matter what.  They aren't selling iPhone apps, they are selling houses that have many thousands of different components and suppliers involved.

Mon, 12/03/2012 - 22:16 | Link to Comment StychoKiller
StychoKiller's picture

Builders should be concentrating on building nursing homes and other managed-care facilities...

Mon, 12/03/2012 - 15:25 | Link to Comment Super Broccoli
Super Broccoli's picture

i wouldn't talk about the US housing market but being a real estate developer for 5 years here in europe i need to say that i can't feel any boom coming !

 

People are not dumb to the point they'll reinflate a bubble that just did burst (and by the way bubbles never do reinflate).

For a real estate developer what's important isn't the price but the transaction volume and this is long time gone. I don't believe that cheap loans could help us now as not a lot of people will be willing to take huge real estate debts in our current deflation !

Mon, 12/03/2012 - 16:17 | Link to Comment ZackAttack3
ZackAttack3's picture

How is pessimism at an all time low?  Consumer confience is at an all time high?  Please Goldman SAchs, stay off here and find you muppets somehwere else. 

Mon, 12/03/2012 - 16:23 | Link to Comment GCT
GCT's picture

MDB your in my realm now.  Yes I do build houses from time ot time.  I have desgined and built custom homes starting at 800 sq. f.t to over 12000 sq. ft.  for almost 40 years, so I am going to let you in on some real issues and not the crap your blowing up everyone's ass here today.The author does makes some points about land use. 

Whats hot today?  Multi-family and that is basically it or low end housing for now.  Depending on what location of the country your in determines your low end.  Low end where I build is 100,000-120,000.  We can build them and they sell.  The problem is developers and the big builders want bigger homes as they sell them with larger margins. 

MDB you may understand investments but you know nothing about building homes. 

Currently I  am working on a design for two bedroom homes at around 60-80k depending on the land price.  As your family grows you just add on if you follow the plan.  All the drains and foundation are in place and under roof.  You add wall, electrical and HVAC which is terminated in the attic.  I am still owrking outrthe 4 bedroom home.  The three is complete.  I am not sure how the developer will take it but I do have the library of standard plans.  I think the time is needed for home people can grow with.  I think a family as it grows should be able to grow their home with them instead of moving.  The key is use of space and providing a homeowner with a plan for future additions without screwing them over.  All of my expansion space is already under roof and used as outside living space.

The biggest problem with home buyers is they want a mcmansion without considering how much they could currently save if they accepted basic items and upgraded.  Alot cheaper. 

Housing in some parts of the USA have alot further to fall MDB.  2500 sq. ft. and above are not selling.  Talk all the smack you want MDB, but if you do this for a living you would know the market.   

Mon, 12/03/2012 - 16:45 | Link to Comment ncdirtdigger
ncdirtdigger's picture

I know not what market you are in, but in this market 2500+ sqft is all that builders are building (seems to be the only folks who qualify to borrow). We have enough ghettos already built to last another three Obama terms.

Mon, 12/03/2012 - 19:24 | Link to Comment TruthHunter
TruthHunter's picture

"but in this market 2500+ sqft is all that builders are building"

All  for health care or gubmint folks no doubt?  

The succession of bubbles still propped up and yet to burst helps sustain the housing illusion.

When healthcare goes through a readjustment, not many doctors will want or afford 2500 square feet anymore.

Mon, 12/03/2012 - 17:08 | Link to Comment theprofromdover
theprofromdover's picture

Everything has to shrink in size.

Homes, cars, meals, travel distances, bills, government.

Mon, 12/03/2012 - 18:39 | Link to Comment Things that go bump
Things that go bump's picture

When I was growing up in the 50s, in a outlying suburb of St. Paul, families with 8 kids stuffed themselves into 800 or 900 sq feet 2 and 3 bedroom ramblers.  That is how everybody I knew lived.  I went to school with kids from a family of 23.  I have no idea how they managed.  The kitchens were tiny, the living rooms were tiny, the bedrooms were tiny and there was only 1 bathroom.  My ex husband had more space out in the country, but they still had to double up (there were 13 of them) and they had no running water, not even a pump in the house (primitive even by 50s standards).  People had 1 family car and 1 family TV. I didn't know anybody whose mother worked outside the home. The government minded its own business.   Sometimes less is more.

Tue, 12/04/2012 - 00:00 | Link to Comment cornflakesdisease
cornflakesdisease's picture

As a home re-modeler, I see it everyday as the big home owners want to paint and spruce up their home to sell.  Two years later, they have had three people actually come out and look and still no buyer.

I also clear out foreclosed houses and sell whatever is worth anything.  It's amazing what is left behind.

Many of these house are in posh neighborhoods and they are unlivable.  Roofs were allowed to leak for three years or mold and mildew or paneling and doors coming apart after two years of no climate control and the house isn't fit to live in and will take 40 or 50% of the homes retail cost to make habitable (no these are not ghetto homes) they are in hot markets like West Houston etc.

And ironically as many of the abandoned items have intrinsic value; china, TV's, appliances, etc, no one wants them as there is a glut of all this stuff.  Pawn shops in our area don't want anymore tools, TVs, gadgets, etc.

 

Saturation.

Mon, 12/03/2012 - 17:03 | Link to Comment obejoyful
obejoyful's picture

Lay off the weed dude, at least during working hours.

Tue, 12/04/2012 - 08:12 | Link to Comment wahrheit
wahrheit's picture

Excellent humorous troll as always

Mon, 12/03/2012 - 14:48 | Link to Comment TruthInSunshine
TruthInSunshine's picture

 

It's all good!

As long as Freddie, Fannie and the banks that get their gravy and orders from the Treasury-FedReserve dynamic duo keep intentionally sitting on delinquent mortgages, never to foreclose, even choosing to "rent" out vacated units [so as to not create a tidal wave of sales inventory thus creating real price discovery-aka suppressing prices], and so long as making one payment once per year can get delinquent homeowners another 12 months of mortgage free living, year after year)...

/sarc

Can you say Fed Monetary Policy, Congressional incompetence and Ececutive Branch intentions have already inflated another real estate bubble (hard to believe given the epicly dire state of the economy, huh?).

Even Dennis Gartner gets "it."

The November 30, 2012 edition of The Gartman Letter said:

“The Federal Housing Administration finds itself in rather dire fiscal circumstances as mortgage after mortgage after mortgage that it made to people who should never have been given a mortgage are defaulting every hour.  17% of the FHA’ mortgages are now delinquent and this is a shocking number.”  [Especially since the FHA is by far the largest mortgage paper owner -- on existing homes -- and also happens to "finance" 84% of all new home purchases, as it's a conduit for banks/mortgage "providers" to offload their mortgage paper onto the taxpayers.]

 

So what is the Obama Administration doing about it? 

 

“Well it is extending the so-called grace period being allowed to its mortgagees. Starting in August of last year, the FHA began extending this grace period, giving dead beats a longer period of time in which to beat dead. Now, if you are unemployed but have an FHA guaranteed or issued mortgage you can miss a full year’s payments and not be considered delinquent… up from what we considered an already far-too-lenient 3 months. After a year in the grace period if no payments are received, the FHA will begin foreclosure. However, as we understand it, if one payment is made before the twelve months is up, the mortgage is considered current and the clock begins again.

 

“Really, you cannot make this stuff up. What we have then is a growing pool of mortgagees who know that their house shall eventually be foreclosed upon and thus whose upkeep on the house diminishes with each missed payment. As one prescient economist once said, ‘Never in history has a rented car been returned waxed.’ Always in history ‘renters’ treat houses more poorly than owners, and owners not making payments are not even renters… they are merely squatters.”

 

Please note that billions of accumulated federal liabilities and contingent guarantees are at stake here.  None of this federal liability is part of the current fiscal cliff debate.

 

Bonus material:


Mon, 12/03/2012 - 21:36 | Link to Comment andrewp111
andrewp111's picture

I wonder what the expiration of the unlimited Congressional guarantee of F/F and FHA debt at the end of 2012 will do for them going forward. Off the cliff, maybe?

Mon, 12/03/2012 - 15:01 | Link to Comment Joe moneybags
Joe moneybags's picture

 Builders are selling new homes everyday in the hardest hit areas of the country:  Phoenix, South Florida, and California's inland empire.  Even with a substantial inventory of REO by banks, and further foreclosures, the value is there for the investor/owner.  The bubble burst more than 6 years ago: it's time to quit hoping for a re-burst.

Mon, 12/03/2012 - 15:06 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Bahahahahaa!!!

"Value is there for the investor/owner..."

 

Wait until true price discovery when the dam of shadow inventory turns from a slow, manipulated trickle into a flood "revises" that.

Mon, 12/03/2012 - 14:25 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

Flawed?  You have no idea how flawed.

 

Read this book...

The Geography of Nowhere, by JH Kunstler.

And in the meantime, stop shopping at Wal-Mart.

Mon, 12/03/2012 - 14:25 | Link to Comment cossack55
cossack55's picture

Where are the in-ground swimming pools with Lanai?

Mon, 12/03/2012 - 14:56 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

Where are the in-ground swimming pools with Lanai?

Here they are...

HUD's 203(k) program can help you with this quagmire and allow you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. The FHA insured 203(k) loan is provided through approved mortgage lenders nationwide. It is available to persons wanting to occupy the home.

 

The downpayment requirement for an owner-occupant (or a nonprofit organization or government agency) is approximately 3.5% of the acquisition and repair costs of the property.

 

http://portal.hud.gov/hudportal/HUD?src=/topics/home_improvements

Mon, 12/03/2012 - 15:17 | Link to Comment walküre
walküre's picture

Imagine you're stuck to "live" in one of those? Did the "home" builders strike a deal with Big Pharma at the time?

Mon, 12/03/2012 - 15:06 | Link to Comment Joe moneybags
Joe moneybags's picture

Kunstler's view of the death of suburbia is "greatly exaggerated."  Nowhere in the world is the cost of shelter cheaper than in the U.S.  And, to Kunstler's dismay, fuel will remain reasonably prices, and little Suzie will play soccer, and Johny will travel with the band to Disneyland.

Mon, 12/03/2012 - 15:17 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

 

 

Nowhere in the world is the cost of shelter cheaper than in the U.S.

lol... 

http://www.worldmapper.org/display.php?selected=194

 

...fuel will remain reasonably prices...

lol... 

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPAK1&f=M

Mon, 12/03/2012 - 15:42 | Link to Comment prains
prains's picture

Joe when fuel is $8 a gallon you'll be trying to suck ethanol from kernels of corn and your suburban dream will be the nightmare it always has been

Mon, 12/03/2012 - 14:24 | Link to Comment SpykerSpeed
SpykerSpeed's picture

Home prices MUST be propped up by Daddy FedGov, otherwise property taxes would fall drastically.

Mon, 12/03/2012 - 14:27 | Link to Comment cossack55
cossack55's picture

Too true. And then where would the Public Mindcont.....School System be?

Mon, 12/03/2012 - 15:03 | Link to Comment walküre
walküre's picture

That is the one issue that gets no attention anywhere.

We are simply not allowed to DEFLATE because it would IMPLODE all municipal budgets and then implode all the municipal bonds that banks are holding worldwide.

Instead we pretend that shit is worth mega dollars and keep propping up the municipal bureaucracies that have blown out of proportions based on the years of the building booms.

Mon, 12/03/2012 - 21:32 | Link to Comment andrewp111
andrewp111's picture

I thought Munis are held by individuals, not banks.  The tax break on Munis is of most value to high rate individual taxpayers. It is of little value to entities that don't pay taxes, or for those who can dodge taxes by international money movements.

Mon, 12/03/2012 - 14:26 | Link to Comment tickhound
tickhound's picture

Hence the CNBS media drive to pimp Wal-Mart / Pay-Pal Mortgage loans... with a complimentary flu-shot, of course.

Mon, 12/03/2012 - 14:33 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You know what the worst looking chart on WS is?

The dollar's.

But this, as you know,is all apart of the plan.  For prices are not rising in the markets, no - stocks, houses, even gold - their prices have only been rising inversely to the dollar's fall.

Mon, 12/03/2012 - 14:32 | Link to Comment apberusdisvet
apberusdisvet's picture

20 million ABSOLUTELY FUCKEN VACANT homes in America; deteriorating by the second.  Another 5 million slated for foreclosure.  Stop listening to the NAR and NHBA propaganda folks, the "recovery" is at least a generation away.   As for the merchant builders, they represent the best short opportunity over the next 12 months.

Mon, 12/03/2012 - 14:36 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The 'recovery' will occur when houses have their prices cut in half from where they are now.  That or gold needs to quadruple in price.  Either way, the value of goods will need to find a real equilibrium for price discovery to provide a recovery.

Mon, 12/03/2012 - 14:39 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

Home prices in my neck of the woods are now back to 1993 levels, so I wonder how much further back in time they can go?

Mon, 12/03/2012 - 14:57 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

I think Portland, Oregon is at about 2000 levels, not sure.  I think the whole US market will disconnect from itself.  The Kuntsler books show how idiotic suburbs were to invent and they will become completely vacant when oil rises above $200/b.  But there will be prime RE.  Farmland, metro areas near farmland, etc.

Prices in LV will go to zero.  Prices in Portland, next to supple valleys with yearlong rainfall, they will stay elevated by a demand flux of desert rushing North.

Energy will be a problem and even though it takes oil to repair hydroelectric dams those dams will hold a premium as an energy source. NG will continue toplay a larger role, solar too, but the fact is....

....nothing will ever replace Llght sweet crude.

Mon, 12/03/2012 - 15:12 | Link to Comment walküre
walküre's picture

For prices to fall that much, the lot value would have go to zero and the building value goes way below replacement cost.

Let it fall, but then blow up the municipal budgets right with it and blow up all the home insurers who have their monthly incomes based on this pixie dust and fairy tale values.

Then the banks will get a kick in the ass as well.

That is what should have happened in 2008 but no, we didn't get that right then and there. Instead we are stuck with ever greater amounts of ever greater governments, insurance companies and banks.

It's all bullshit at our expense.

Mon, 12/03/2012 - 15:12 | Link to Comment Joe moneybags
Joe moneybags's picture

"....nothing will ever replace Llght sweet crude."

I nominate this sentiment for top honors in the "Thinking deeply inside the box" award.


Mon, 12/03/2012 - 15:56 | Link to Comment A Nanny Moose
A Nanny Moose's picture

....nothing will ever replace Llght sweet crude.

They thought the same thing about slaves. Perhaps you are correct, but the narrative that our best ideas are always behind us, is as old as ideas themselves.

Mon, 12/03/2012 - 15:28 | Link to Comment northerngirl
northerngirl's picture

Almost the same in my area and after the New Year I expect we will get to 1993 and then some really fast.

Mon, 12/03/2012 - 16:29 | Link to Comment TheFourthStooge-ing
TheFourthStooge-ing's picture

Dr. Richard Head asked:

Home prices in my neck of the woods are now back to 1993 levels, so I wonder how much further back in time they can go?

What we gonna do right here is go back. Way back. Back into time, when the only people that existed were troglodytes. Cave men ... cave women ... neanderthal ... troglodytes ...

http://www.youtube.com/watch?v=VlRXQEA0yj0

Mon, 12/03/2012 - 21:28 | Link to Comment andrewp111
andrewp111's picture

The FUCKEN VACANT houses will be purchased by government entities (near full price) and torn down. Many lots will be then sold back to builders cheap, or turned into city parks.

Can you say BAILOUT?

Mon, 12/03/2012 - 14:38 | Link to Comment Uber Vandal
Uber Vandal's picture

I am sure that if the mortgage interest deduction goes the way of personal loan interest deductions after the 1986 Tax Reform Act, that should be very, very bullish for home builders, right?

 

Mon, 12/03/2012 - 14:38 | Link to Comment Segestan
Segestan's picture

Unlike china.... the US is spending money that does not reach down the chain to help support the actual workers in this industry. Besides most of the work completed over that last decade was from legal and illegal immigrants who now - ARE- the only workers available in most of the nation. The future for construction is Not good.

Mon, 12/03/2012 - 14:54 | Link to Comment Rathmullan
Rathmullan's picture

Homebuilders: dumber than the the fake concrete they use to construct "homes". But they sure know how to lobby congress for every nickel in subsidies short of the banking industry. And they've managed to keep big labor at bay.

Mon, 12/03/2012 - 14:56 | Link to Comment Jena
Jena's picture

I recently learned about USDA loans available in this area of California (not exactly agricultural) with 0% down and the going rate of interest.  You do have to verify employment and they are limited to a certain loan amount.

It seems we never do learn, but what else is new?

Mon, 12/03/2012 - 15:32 | Link to Comment pursueliberty
pursueliberty's picture

They aren't limited to a certain amount, they are limited by household income and household debt to income ratio.  In order to qualify you have to fall under a certain income.  It goes up by household members, but here for a family of 2 in the $74,200.  I think a family of four it is around $83k.  With no other debt you could qualify for around a $400k home. 

The real kick with the usda loan over the fha is pmi.  The pmi for a usda is around .5% and fha is now around 1.2%.

My wife sold around 10 houses this year to usda loan consumers.  Best loan available if you qualify.  If you really want to get pissed you should dig up info on USDA direct loans.  These are the ones where the government picks up part of the tab for the home buyer.

Mon, 12/03/2012 - 15:39 | Link to Comment walküre
walküre's picture

are the loans bundled afterwards and then cut and packaged with the stamp of "safe" as products to international investment funds?

Mon, 12/03/2012 - 16:05 | Link to Comment Jena
Jena's picture

Thanks.  This was a new wrinkle for me as I didn't think there were any government housing loan structures under the sun.  But that was ignorant to assume.  

You're right, the pmi difference would be substantial on a $400K loan.

I'm almost afraid to know more about the USDA direct loans.  I'm trying to get to a less pissed off state these days.  But my blood pressure is kind of low so I'll put it on the list...

Mon, 12/03/2012 - 15:41 | Link to Comment steve from virginia
steve from virginia's picture

 

 

 

DC metro area is pretty typical, most new construction is a) govt projects such as office towers and highways, b) infill development usually townhouses and c) multi-story multi-family mixed use near transit. Even suburban development is multi-family developments near commercial centers with retail/commercial built in.

 

The 'typical' single-family small lot tract house development is over and done with. The 'drive until you can afford' model is unworkable b/c of high buildout costs and the high real cost of fuel set to increase until 'America as we know it' is destroyed. 

 

Sorry MDB, the 'borrow short-lend long' repo-finance shadow banking mechanism that funded sub-prime loans, HELOCs, Option-ARMS, negative-equity loans and whatnot is non-existent. Banks in Norway will never buy US mortgage-backed securities again.

 

The 'sprawl cities' such as Phoenix, Orlando, Las Vegas and Atlanta took a massive hit starting in 2007 ... and the pain isn't over. The 2d tier speculators that have returned to these places looking for the imminent return to the bubble will lose all their money.

 

The real costs for both fuel and credit that cannot be met by wasting/using the fuel or taking on the loans. The 'vig' or upfront interest cost might appear cheap but the repayment in deflated money becomes extraordinary with the passage of time.

 

A buyer might assume a builder's loan but will never earn enough in real money to meet its real cost over the life of the loan. The builder cannot take on the cost of the loan or subsidize the buyer without failing. If the buyer isn't subsidized he cannot afford to buy the house. Right now much of the burden of subsidy is falling on the FHA/Ginnie-Mae and the Fed. However the increasing real cost of credit has the same effect on these agencies over time as it does on the builder. Sooner or later everyone goes broke.

 

Greece is actually a good model for what is underway around the world and in the US. We've been bankrupted by our automobiles and the 'automotive lifestyle'. Good capital has been pumped into gas tanks and burned up for nothing.

 

It's an old song via Steve From Virginia: you have a choice: drive a car (and waste capital that can never be replaced) or have a functioning finance system and money that has some worth. You cannot have both.

 

 

Mon, 12/03/2012 - 16:29 | Link to Comment GCT
GCT's picture

Steve in the last year 15 builders turned keys over to the banks for over building and not knowing their market.  The smart ones build small specs or pre-solds only and others went into remodeling for the time being.

I am just sitting on the land as it is paid for.

 

Mon, 12/03/2012 - 15:59 | Link to Comment icanhasbailout
icanhasbailout's picture

Is it a Stormfront or a Golden Dawn?

Mon, 12/03/2012 - 16:39 | Link to Comment steve from virginia
steve from virginia's picture

 

Sieg Heil, Bitchez!

Mon, 12/03/2012 - 16:23 | Link to Comment americanspirit
americanspirit's picture

Not a lot of discussion about the 'quality' of the new homes being built. Wouldn't be at all surprised if some homebuilder with a sense of wicked humor is actually developing a subdivision somewhere, probably Las Vegas, called Potemkin Village.

Mon, 12/03/2012 - 16:33 | Link to Comment sessinpo
sessinpo's picture

comments:

While I agree with the overall notion that home building may be priced to perfection, as is other markets. I disagree with this time lag idea to the extent that Ramsey writes.

 

We have seen many examples of when the market demand was strong enough, the market responds accordingly. The Dakotas is one such example with their boom in energy. Housing, make shift at first, went up immediately, not taking the years or decades Ramsey indicates.

 

If a region is taking years or decades to build houses, there is a reason for it. The demand isn't strong enough. Personally, in the strongest of RE markets, I've seen whole subdivisions go up within months from just one builder. Yes, they are cookie cutter homes. But is pretty amazing to see hundreds of ranch style 3-4 bedroom 2 1/2 bathroom 1 acre, 2 car garage, central heating/cooling homes go up in just months that provide living for a thousand or so. Where there is a will, there is a way and profit provides that will (or incentive).

The same thing occurred in silicone valley as the tech boom took off in the 1990s. I could go on with many more examples.

Mon, 12/03/2012 - 21:23 | Link to Comment andrewp111
andrewp111's picture

It takes years or decades in many Metro areas because of an extremely tough permitting environment. When it is that hard to get permits and subdivision zoning permission, you need to have buyers who puts up the cash in advance before you build anything.

Mon, 12/03/2012 - 17:01 | Link to Comment JayKitsap
JayKitsap's picture

I am near Seattle, supposedly a pretty stable economy.  Commercial Real Estate in the burbs is basically dead, housing in my county has rebounded some has rebounded some at the low end (below avg cost) on small lots.  I believe it is building on lots developed previously that are going for a loss.

Has anyone tried to buy piping, electrical panels, furnaces lately - prices are way up.  Wood is low and steady but the rest of the prices are up.  The costs for the builder are up and he needs to compete with the existing home sales.  Here the only action is in sub $300K houses with an estimated drop in the year of -3% with that.  The expensive waterfront houses are 10% down from last year, probably half of the peak.

I think we are now insulated from the mortgage interest deduction, a 3% mortgage doesn't incur much interest so at most the deduction is worth 1%, a huge cry from saving 3% or more when rates were at 9%

I believe it is a false dawn before further darkness.

Mon, 12/03/2012 - 17:19 | Link to Comment blunderdog
blunderdog's picture

Back when I was younger and believed in things like steady employment and decent wages, I used to want to buy a house.

Now I'd rather pitch a tent and use the money I'm not wasting on interest to pay for the gym-membership so I have a place to shit, shower, and shave.  They clean up after you and give you free towels, too.

Storage-units make pretty decent "home-offices" if all you need is heat, power, and an Internet connection.

(I'd like to take a moment to welcome new troll prankster Joe moneybags.  Good luck displacing MDB_ as the resident jokester.)

Mon, 12/03/2012 - 17:48 | Link to Comment ian807
ian807's picture

Worse, the housing is essentially crap, from an engineering standpoint. Unfortunately, this is one of those areas where capitalism fails. Everyone is motivated to get what's cheapest, right now! Not what's cheapest or best in the long run.

For example, building a house with passive earth cooling will save thousands over the life of the house, but costs more up front. Ditto with things like positioning the building angle for maximum natural heating and solar panel placement, aluminum framing in southern climates, wood siding instead of hardyplank, slab foundations instead of adjustable pier and beam.

Naive house buyers are encouraged by salespeople to engage in the shortest of short term thinking. Roman buildings have lasted thousands of years. Ours will fade away like summer dew.

Mon, 12/03/2012 - 17:51 | Link to Comment dolph9
dolph9's picture

If you pay attention, you will notice something interesting happening in the suburbs of America.

Beneath the apparent prosperity and shine is a slowly creeping desperation.  Cost overrun is real...beyond "buying" a home with an inflated mortage, there's the actual issue of living in it and maintaining it...both of which have genuine, real costs involved which must be serviced by income...income that no longer exists as corporations have either outsourced jobs or brought immigrants in to do jobs for lower wages.

Moreover, the quality of neighborhoods and suburban cities is starting to decline.  To anybody who grew up in the 80s, 90s, or before this is palpable.  Signs of decay and vacancies are everywhere, if you notice.  Street life, which was always fairly poor in the suburbs, is now nonexistent, as everybody sits in their homes with their televisions and computers.

The oppressive distances become more noticeable with higher oil prices...at any inopportune moment, one can quickly realize just how helpless they are without a car and the fuel to run it.

The American nuclear family is also in decline, for a variety of complex reasons.  And, going with it, is the reason d'etre for suburban life.

On top of this, the federal government, in its infinite wisdom, decided that bad neighborhoods must be dispersed by giving subsidies to the ghetto people so they could be "upwardly mobile" and move out to suburbia.

Little thought was given by the federal government whether such people were suited to suburban life or not, and little thought was given to the fact that suburbia is in decine...creating the perfect trap for the aspiring rap artists and nba players, not to mention the Latin and Asian immigrants who are quickly realizing they were played for fools.

The real tragedy?  Suburbia was once the only option for middle class Americans to live a decent life, away from both the urban ghetto and the boondocks.

Sorry folks, but the jig is up and there's nowhere left to run.

Mon, 12/03/2012 - 20:16 | Link to Comment blunderdog
blunderdog's picture

     The real tragedy?  Suburbia was once the only option for middle class Americans to live a decent life, away from both the urban ghetto and the boondocks.

Nah, suburbia has *always* sucked, the reasons why shifted over time, that's all. 

You can't "fake" a community.  It's either there or it isn't--it doesn't matter how you organize the building lots.  A fair number of Americans had the impression it was possible for awhile, but it was mostly just escapism.

Mon, 12/03/2012 - 23:40 | Link to Comment cornflakesdisease
cornflakesdisease's picture

100% correct.  Housing is disposible.  What was the best neighborhood 20 or even 10 years ago in West Houston, are dumps now.  I'm alarmed at the speed of the decline.  The prop taxes are insane in Texas.

Tue, 12/04/2012 - 01:40 | Link to Comment Lord Of Finance
Lord Of Finance's picture

To Million Dollar Bonehead,

  

    The Case/Shiller saw a 20.5% increase Y/O/Y in Pheonix. Last time we saw that was in 2005. This is clearly not the sign of a healthy market. One half of Vegas homes are being bought by investors, and of course only a bonehead wouldn't know that housing growth under these kinds of circumstances is even more prone to collapse because investors will flee the scene at the next downturn. They don't have the incentive to stay when conditions deteriorate as to traditional buyers.

 

Why are you here. You should be tweeting Geithner or Krugman.

Tue, 12/04/2012 - 01:45 | Link to Comment Lord Of Finance
Lord Of Finance's picture

Oh yeah. I should also add that homesales/building in the northeast is not recovering. It is anchored to the sea floor. There is a hole in the hull in the ship above it. All aboard!!!

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