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New Construction in Today's Market - Where the Opportunity Lies
By Eugene L. Meyer
RISMEDIA, June 2008 - Is there a silver lining in the dark cloud hovering over real estate? Leaving aside for a moment the conventional wisdom that all real estate-like politics-is local, there has seldom been a time when the expertise, knowledge and services that savvy brokers and agents bring to the table have been needed more than now.With resales from foreclosures glutting the market and prices in some areas seemingly in freefall, the days of multiple offers and speculative profits are largely gone. The result has been far fewer FSBOs-homes for sale by owner-and more agent-represented listings.
With a huge inventory of unsold new homes, strapped builders who previously relied on an in-house sales staff are increasingly turning to outside brokers to move the product. In some markets, builders are hard-pressed to pay full commission, leading brokers to cut them a break, lowering commissions, making sacrifices to make a buck. In other markets, however, commissions on new home sales are the same or have never been better, or higher.
So maybe it’s not a silver lining. Maybe it’s only a bronze.
But for some, it’s pure gold. “What’s happened is that just about every builder everywhere is not only paying co-broke commissions but very healthy ones, in the 10 to 12 percent range, to move some of the standing inventory,” says Dennis Walsh, whose California firm ([1] www.SellNewHomes.com) links real estate agents with builders.
This new builder’s attitude contrasts with what prevailed during the boom years. Then, Walsh says, “in the hotter areas, such as California, the builder often wouldn’t pay any co-broker commissions at all” for agents to bring them buyers. “They’d handle all sales themselves.” Those were the days when the sales force could pretty much sit back and let it all happen.
The current market has led to a whole universe of new options, not all of them slam dunks. Some brokers are targeting short sales, homes priced for less than the mortgage balance, or REOs (real-estate owned), properties that as a result of foreclosures have become part of a lender’s portfolio. “But these transactions involve a lot of moving pieces,” Walsh says. “It’s awfully hard to coordinate, and often agents have to compromise on commissions to get the numbers to come together.” Better to work with overstocked new homes, he says.
Nationally, housing starts were down to a little more than one million in April, from a peak of nearly 2.3 million in January 2006. In all areas but the Northeast, where housing starts reached a new low of 89,000, starts were slightly up in April compared to the previous month but still far below their peaks, according to the National Association of Home Builders.
For single-family homes, the figures were even worse. In that category, housing starts declined 1.7% in April, to an annual rate of 692,000 units, the lowest since January 1991, and 42.2% below April 2007. NAHB officials attributed the low numbers to the high volume of vacant new houses still on the market. But the good news is that sales of new homes were slightly up in April after an 8.5% decline in March, though still near the lowest levels since 1991. Home prices, meanwhile, were 14.4% lower in March than a year earlier. Tightened credit requirements have only made the problem worse.
In many parts of the country, the glut that resulted from overbuilding during the boom years is far from gone. In normal times, the Phoenix market could absorb about 40,000 new homes a year, but peak demand pushed it to 60,000, much of it investor or speculator-generated, according to John Foltz, president and designated broker of Realty Executives, which has 17 offices and 1,600 agents in Arizona. The firm is primarily in resales, but about 15% of its business is in new homes. The percentage hasn’t changed, but the number of transactions has dropped. “Almost everybody has a smaller income,” he says.
When economic conditions took a turn for the worse, newly built spec homes “had very little market to be sold into,” he says. Furthermore, cancellations left many of the houses to languish in a builder’s bulging inventory, resulting in sharp price reductions.
“Now, the builders have adjusted,” Foltz says. “That inventory is slowly being absorbed-slowly.” But it may take two or three years to bring inventory back to normal levels. The glut has had a spillover impact on the resale market, with current homeowners whose houses have lost value tending to stay put rather than trade up as they might have in the past. Price declines have been especially sharp-as much as 25%–on the outer rings of Phoenix. Prices of closer-in, custom-built homes have also dropped, but by less, five to seven percent.
“The more positive impact,” Foltz says, “is that some of the builders who, depending on their own sales people when demand was so high, were less assertive about paying real estate commissions to Realtors to sell a product, are now actively co-broking to bring in buyers.
“The commission rates are actually higher in new homes than they were,” adds Foltz. “In our area, the rates have improved an average of 20 basis points or so. I don’t see [agents] asking for higher commissions when they list a property, but there are fewer commission negotiations during the sale.”
Foltz is guardedly optimistic about the future. “It’s evident in some of the data, but it’s only a glimpse,” he says. “The change is from decidedly negative short term to much more neutral. Not like it’s bouncing and people are suddenly euphoric, but there is much less negativity than six months ago. The sense on the street is we are digesting and absorbing the impact of this market, and Phoenix will return to a more long-term historic growth.”
For now, though, the abnormal market in new homes gives brokers and agents an edge, and an opportunity. “In some cases they’ll offer advances on commissions, paying some of it before the closing is even done, before the house is complete,” says Rich Rector, chairman of Realty Executives International. “Sometimes they’ll offer bonuses. Look at the builder as a seller. Sometimes when you need marketing help, you’re willing to pay more. I hate to use the retail analogy, but that’s what it is. Think about a department store. If there’s an oversupply of something, you might drop the price. But if someone out there is willing to help sell it, they might get a higher commission. It’s really sort of retailing economics 101 in a way.”
Dave Schoner, head of the new homes division of Coldwell Banker Mortgage Real Estate, represents 120 builders in the New York-New Jersey-Connecticut area. “Things have slowed down, but they haven’t stopped. They continue to build, and I continue to sell,” he says, and commissions are holding steady. “It’s not like I raise my [commission] to take advantage of unfortunate circumstances,” says Schoner, who now must “spend more time counseling them on current market values.” As a result, he adds, “Builders have adjusted their expectations.”
“The trends are very localized,” says Rick Hoffman, regional senior vice president for The Corcoran Group, a brokerage in Manhattan, Brooklyn, eastern Long Island and south Florida. Sales volume in the prosperous East End is lower this year, but not by much. “We’re beating the market,” Hoffman boasts. New homes, largely high-end with custom quality finishes, continue to be built and to sell in the $6 million to $10 million range. But because of the overall slowdown, Hoffman says, “we’ve seen our average commission rate go higher.”
With their huge inventories, not all builders can afford to pay higher commissions. “New homes have been hit exceptionally hard,” says Steven Domber, president and principal broker of Prudential Serls Prime Properties, which has six offices and 200 agents in the northern suburbs and near exurbs of New York City, spanning both sides of the Hudson River. “Most builders are selling houses out of their inventory and at lower prices just to clear their books.”
In fact, there is building going on, he says, not new subdivisions starting from scratch but those where the land has already been readied for development. “In many cases, they have no choice but to build. Sometimes, if you overpaid for land and are holding it, the only way to get out is to build your way out of it,” Domber says. “Others are slowing down the approval process. No one is rushing to get a new subdivision on line.”
If times are bad, Domber believes, “you have to be more flexible with commissions when you know the client is losing money. Staying alive in the [down] cycle is a real challenge for a broker,” who must “educate builders that market value has nothing to do with the cost to build.”
Domber says he sets commissions “on an individual basis,” depending on “how long a relationship you have. You’re more flexible with a guy you’ve been working with for ten years and 200 homes than someone with a few homes over a few years. It’s very subjective.”
Given the new homes market, Domber’s brokerage is doing more resales and concentrating on the commercial end, “diversifying,” he says. A few years ago, he says, new home sales accounted for 30 to 35% of his business; now, it’s 10 to 15%.
Sidebar
To Remodel or Not?
The current buyer’s market-for new and resale homes-has had some serious side effects. As sellers try to unload properties whose prices have already dropped, they are loathe to spend a lot on remodeling to make them more marketable. Even those staying put are hesitant to invest in remodeling or additions they think won’t help their homes appreciate.
The Joint Center for Housing Studies at Harvard University has forecast that home improvement spending will continue to fall through the end of 2008, at an annual rate of 4.8%. Reflecting this trend, the Lowe’s home improvement retail chain posted an 18% drop in its first-quarter profits. The overall picture, though, is muddled by regional differences.
In northwestern New Mexico, for instance, new home construction and remodeling continue, as before on a small scale. “Remodeling-wise, I’m as busy as I’ve ever been,” says Lonny Rutherford, of Farmington, New Mexico, and the current remodelers chairman of the National Association of Home Builders. Sandy Dunn, a broker-builder and NAHB president, based in Point Pleasant, West Virginia, reports, “The market here is a little softer” but not drastically so.
But if remodeling is down in many other areas, staging a property to boost its sales appeal is up. “The buzzword is not remodeling but staging,” says Prudential Searls’ Steven Domber, based in Poughkeepsie, New York. “Staging has replaced remodeling.”
In most markets, that has meant fewer expensive additions or remodeling jobs and more of the less costly cosmetic work to impress potential buyers. Homes, to sell, “must be sparkling and shining,” says Dennis Walsh, of California’s SellNewHomes.com. “Remodeling now means repainting, re-carpeting, redoing the doors on kitchen cabinets, the kinds of things that make a house look well-kept, show better, look cleaner, in nice move-in condition.”
Eugene L. Meyer is a former Washington Post reporter and editor who freelances from Silver Spring, Maryland.
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