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Article #82
The BIA’s Development Trends Conference presented some very diversified opinions from the “experts” about where we are in the cycle and what changes are expected as opportunities return. Here is a summary of topics and their interpretation, both positively and negatively.
Obama Stimulus packages |
Infusion of capital into the market, saves financial institutions, saves owners |
Delays natural process, government more involved, union labor costs, inflation most likely, taxpayer burden |
U.S. housing starts lowest since 1945 |
Faster burn off rate of inventory = recover faster |
Driver for economic recovery (construction is) missing |
Housing prices have fallen to affordable price levels. |
Affordability is high, interest rates are low, and mortgages make sense relative to income and rental alternatives |
Falling prices =no equity; owners can’t move up or keep their home. Builders and banks have legacy development challenges |
1993 trough market in Southern Calif. was long and slow vs. hard and fast like now |
Recovery could be faster because of faster adjustment |
Fewer survivors because fast adjustment is harder for businesses to withstand; longer recovery b/c of damage |
Buy land now |
Builder need to “reload”. Investor had flipped first deal with double profits. |
Banks/FDIC haven’t processed distressed properties yet; More value declines to come |
Buy in-fill, affordable, near transit with green building principles |
Long term solutions will be addressed with higher density, better work, live, shop balance. Development will evolve. |
Difficult to build higher density due to cost and legacy single family values. Will have to burn through old product first |
While there are still a lot of uncertainties and challenges, MSA is optimistic that is now is the time to be positioned for opportunities. Land deals will present themselves in the immediate future. Many of the proposed land uses will need to be revisited in light of a changing economy and buyer attitude. MSA has a mix of expertise in strategy, local market knowledge and product development to help investors, lenders and homebuilders make informed decision.
Article #81
There is a sales strategy some builders are implementing. Sell Now. 2008 has proven to be a year that demonstrates continue price decline with most projects reporting 25% to 30% declines within the last 12 months to maintain absorptions averaging 2 to 3 units per month.
What does it take to “blow out” a project with an absorption pace akin to 10 or 20 units per month? A recent review of best selling projects in the Los Angeles market revealed less than 10% of the projects are employing these tactics. The limited number of projects offering these incentives further increases their chances of getting the attention of buyers who finally believe the values are good enough to weather further price deterioration.
A sampling of projects successfully selling shows that the developers/builders are accepting offers 15% to 18% off the market price. A smaller incentive of 10% has been successful at more affordable project (starting in the mid $200,000s). The incentives are typically packaged to include special financing such as an incredible 2,1 buy-down program on a fixed loan, paying non-recurring closing costs, pre-paying the Home Owner’s Association fees for up to two years and discounting the overall prices below market. FHA financing, with the new higher loan limits, has been vital for these projects as well.
For a project with completed, unoccupied units, the best strategy is to price the units to sell quickly. Waiting will only likely result in further price declines and unnecessary carrying costs only to end up six months from now with the same pricing passed on earlier
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