Builders Offer Incentives In Slowing Market


[Originally published] JAN 11, 2019 | 6:00 AM

A dog and its owner walks by a new housing development in North Hollywood. (Wally Skalij / Los Angeles Times)

As the housing market has downshifted, more builders are offering sweeteners to close the deal.

Companies large and small are paying closing costs, buying down mortgage rates and trimming square footage to offer a cheaper abode. Some are countering the high cost of a mortgage with a more direct method — outright lowering prices on newly built homes.

“We are really working a little bit harder ... to get people in the door and to get people excited,” said Mark Mullin, a real estate agent selling several new projects in the Los Angeles area.

At the Gallery, a project in the Valley Village neighborhood of Los Angeles, a builder even offered to pay the lease on a Mini Cooper car if potential buyers agreed to go into escrow on a home.

“These are things they were not having to do a year ago,” said Mullin, who’s not working with the Valley Village builder.

Nationwide surveys indicate concessions are still minor compared to last decade’s downturn, and a recent pullback in mortgage rates could put some heat back into the market. But there has been a decided shift in favor of the buyer.

A John Burns Real Estate Consulting survey found that in December, 23% of builders lowered net prices, which would include list price reductions, as well as incentives such as money toward an upgraded wood floor that consumers previously would’ve had to buy. A year earlier, only 4% dropped prices.

In November, 27% of builders were cutting prices. That’s still lower than just after the financial crisis; in 2010, concessions were as high as 43%.

The housing market slowdown has been particularly pronounced in high-cost markets like California, where the state’s Realtor association says only 27% of households can reasonably afford the median priced single-family house. Sales of all homes dropped 12.5% in the three months ended November, from the same time a year earlier. Prices, which had been rising steadily, slowed considerably.

Sales of newly built homes in Southern California dropped just 2.5% in the three months ended in November, according to CoreLogic. But new-home data can mask a weak market because a buyer often signs a contract before the home is built, delaying the time the sale shows up in records tracked by CoreLogic.

Rick Palacios, research director with the John Burns consultancy, said builders prefer to offer deals such as money for upgraded appliances before cutting prices outright, because they don’t want people who signed contracts at a higher price to back out. A separate survey from the National Assn. of Home Builders found the median price cut was 4% — a level the group’s chief economist called “measurable, but minor.”

Several months ago, Newport Beach-based Planet Home Living started marketing an eight-home, small-lot community near the North Hollywood arts district. It started the cheapest unit at the Palmea project at $809,000, but “we weren’t getting the [desired] movement,” Chief Executive Michael Marini said.

So in November he cut prices on the townhome-like units by $10,000 and installed upgraded floors that previously would’ve cost buyers an extra $20,000.

On Sunday, Planet Home Living put its strategy to the test when it held an open house. It was nearly an hour before the first potential buyers showed up and left uninterested.

A short time later, Dominique Worden and her fiance, Shawn, toured the three-story model.

The couple rent in Sherman Oaks and can’t afford a house they’d like there, but they’d like to stay in the Valley. They may not end up at Palmea, but Worden, a producer in the entertainment industry, said it’s “technically in our range.” She had been eyeing the project and Marini’s price drop got her in the door.

“It’s why we came,” she said.

Real estate agent Mullin, who is working with Planet Home, said that by day’s end six groups came through. Potential buyers said they liked the homes, he said, but no one’s put in an offer. Marini said he doesn’t expect to drop prices further and thinks the reduction will be enough to juice demand for the remaining homes.

A number of major builders are reflecting the sales slowdown in their quarterly earnings reports.

KB Home, a Los Angeles company that has a major presence in California’s more affordable markets, said that in its fourth quarter ended Nov. 30, consumers ordered 2.9 homes each month per community, compared to 3.4 a year earlier.

In the three months ended Oct. 31, Pennsylvania-based luxury home builder Toll Bros. saw signed contracts in California fall by nearly half, from 10.4 per community during the quarter to 5.8. California saw the largest drop-off of its markets.

John Mulville, the Southern California regional director for research firm Metrostudy, said there’s more fear among companies that focus on pricier homes. Even in good times, there are few people who can afford a house above $1.5 million. Some have even used the “p-word” — panic — Mulville said.

To stave off jitters, Mulville said builders are “hand-holding” clients through the home-building process and offering more concessions if they threaten to cancel.

It’s not always working. Metrostudy data show cancellations in Southern California are up compared to a year earlier.

Builders and agents blame a variety of factors for ebbing demand. Fewer buyers can afford homes following a jump in mortgage rates in 2018 and more than six years of steady price increases. Some of those who can afford a mortgage believe prices simply can’t keep rising — a sentiment worsened by uncertainty on Wall Street and in Washington — and don’t want to buy at the top.

“They are waiting for reassurance that we are not in a crash,” said Mullin.

While predicting a collapse is always a fraught business, economists, citing strong job growth and relatively tight lending standards, generally don’t foresee a crash.

They do disagree on exactly what comes next.

Some experts believe price growth is simply slowing as buyers adjust to higher rates. Others think values will come down a bit, arguing they have gotten too far out of whack with incomes.

Many families struggling to afford a mortgage in California coastal markets would cheer price declines. But on quarterly earnings calls, major home builders are quick to point out a variety of factors that would continue to put upward pressure on values. Not only is job growth proceeding despite uncertainty — California added 30,700 jobs in November, and its 4.1% unemployment rate is the lowest in more than 40 years — the large millennial population is entering prime home-buying years and oversupply doesn’t appear to be a looming problem.

In California, builders on average have constructed an average of 91,000 homes a year during the current housing upswing, according to data from the Construction Industry Research Board. That compares to an average of 158,000 a year during the boom of the late 1990s to mid 2000s. In the 1980s housing expansion, construction averaged 267,000 units a year.

“Long term, we really love California,” Douglas C. Yearley Jr., chief executive of Toll Bros., said on a recent conference call.

Builders may have gotten too aggressive on pricing. On a recent single-family project in downtown Huntington Beach, luxury builder WJK Development tried unsuccessfully to push prices up to $2.2 million, 10% above the previous per-square-foot record for the area.

“We took prices beyond the realm of reality,” said Grant Keene, chief executive of the Irvine-based company. “It made consumers balk.”

A surer picture will emerge in the spring, when many families usually launch their home search. One thing that may boost demand is a steady decline in mortgage rates from a high of 4.94% in November. This week, Freddie Mac said the average for a 30-year fixed mortgage was 4.45%, still up considerably from 3.99% a year earlier but at its lowest level since April.

The drop-off has been caused in large part by uncertainty surrounding the economy, but there are signs it helped spur a recent burst in mortgage applications. Interest has perked up at the Valley Village development, for instance, and for now the builder is no longer marketing the Mini Cooper lease, said Marc Tahler, the property’s agent.

Others see better times ahead. “I believe spring should be a pretty healthy, normal selling season,” Douglas Bauer, chief executive of Irvine-based home builder TRI Pointe Group Inc., said in an interview.

Not everyone is so sure. According to Tom Dallape, co-owner of prominent local land broker the Hoffman Co., some builders have backed out of buying lots they had previously agreed to scoop up. They didn’t want to move forward, Dallape said, because they wanted to “see what happens in the spring.”

As more Americans buy homes, will it ease the strain on renters? (+video)

Existing home sales rose 3.2 percent to a 5.49 million annualized pace in June as stable job prospects and a much-improved economy encouraged buyers. But thanks to shifting demographics and the lingering effects of the housing crash, more Americans are still renting than they have in decades. 

Post author: Schuyler Velasco

Existing U.S. Home Sales at 8-Year High

After a long stretch of cautious, respectable gains, the housing market finally got a little crazy in June. Existing home sales rose 3.2 percent last month to a 5.49 million annualized pace, according to data released Wednesday by the National Association of Realtors (NAR). That's much better than the 5.4 million pace analysts were expecting and a 9.6 percent increase year-over-year.

It was the fastest pace for home sales since February 2007, and prices continued to climb: the median single family home sold for $236,400 last month, a 6.6 percent increase above June 2014, and higher than the previous home price peak set in 2006.

“Buyers have come back in force," NAR chief economist Lawrence Yun said in the report’s release. “This wave of demand is being fueled by a year-plus of steady job growth and an improving economy that's giving more households the financial wherewithal and incentive to buy.”

Strong sales activity for housing is a good thing for many reasons, but here’s a huge one: If more and more Americans take the leap and buy homes, it could finally ease the strain on renters, who, thanks to a combination of demographic and economic factors, are seeing their housing costs balloon and their ranks become more crowded than they have been in decades.  

Rental nation

Where the ownership side of the housing market had been locked in a steady crawl until recent months, the rental side has been in a full-out sprint. Nationwide, rental prices have increased 4 percent since April 2014, outpacing the growth of home sale prices, according to a May report from Zillow. Several major cities saw much larger rent increases, led by a 14.9 percent hike in San Francisco and a 12.9 percent rise in nearby San Jose, Calif.  Twenty-four major metros, from Dallas to Denver to Tampa, Fla., saw their rents rise at a faster rate than the national average.

The rental market is also more crowded than it’s been in two decades: according to the Census Bureau, the national vacancy rate for rented homes hit 7 percent in 2015, its lowest level in at least 20 years and a drop from about 12 percent in 2009.  The home ownership rate, meanwhile, fell to 63.7 percent in early 2015 – its lowest level in 25 years according to the Census Bureau.

“A gap persists between the median monthly rent and the median monthly mortgage payment: rentals are more expensive,” IHS Global Insight economists Patrick Newport and Stephanie Karol write in an e-mailed analysis of the NAR’s report. “This suggests the presence of substantial barriers preventing current renters from becoming owners.”

Millennials, but also …

As with many things economy-watchers fret over, part of the issue is Millennials, who are finally striking out on their own but delaying life benchmarks, like marriage and children, which typically lead to home ownership.

Growth in the housing market is closely tied to what economists call “household formation,” or when a person leaves his or her family home and becomes a separate unit, says Mark Fleming, chief housing economist for the insurance firm First American. Since the recession, he notes, household formation by Millennials has ramped up, but virtually all of those new households are renting. 

“We’ve created barely any new owned households,” he says, but that makes sense with the priorities of most young adults. “One of the primary reasons is mobility. When you’re younger, you’re not sure where you want to live yet, and it’s more expensive to sell a house than to [end a rental agreement].”

Renting is expanding beyond the typical college grad with his first job and three roommates, however. The share of single-family homes in the rental space is rising, from 9 percent a decade ago to 13 percent in 2005, according to a recent report from Moody’s Analytics. That suggests that many families who lost their homes during the housing crisis still haven’t built up their savings and credit enough to get back into the market, says Rolf Pendall, Director of the Metropolitan Housing Communities and Policy Center at the Urban Institute, a Washington think tank.

Baby Boomers, too, have potential to squeeze the rental market from the other end as their income levels drop and they transition out of homeownership. A recent Urban Institute report suggests that the share of Boomers in the rental market will more than double by 2030.

Both Mr. Fleming and Mr. Pendall argue that on its own, a nation of renters isn’t cause for alarm (unless you’re a certain type of real estate developer). But it is a problem, Pendall says, if rental demand is driving prices up to the point where people can no longer find affordable housing in the areas they want to live and work.

“There’s an inability of the economy right now to deliver jobs at wages that pay enough money so that people can afford their rent,” he says. “As rents go up, more families will be at risk for homelessness,” a problem that disproportionately affects poor African American and, to a lesser extent, Latino communities.

Relief ahead?

Still, if home sales continue to accelerate and the economy continues to improve, it should help ease the strain on the rental market in the long-term. As young adults age and settle down in larger numbers, Boomers will eventually pass away, loosening a still-tight inventory of homes available for purchase. “[Millennials are] a bigger generation than the Baby Boomers, so anything they do en masse is really going to swing the market,” Fleming says.

But in the meantime, both he and Pendall say that measures should be taken to make both renting and buying, if people so choose, less of a burden, including better accessibility to affordable mortgages and further loosening of credit standards. On the rental side, Pendall says, one possible solution is easing the zoning rules for areas that are dominated by owner-occupied homes to allow homeowners to build additional units on their lots. “The biggest segment of growth is people over 65,” he says. “They want to age in place, but they may need extra income an support for someone nearby. Allowing property owners to build second units if they want to, and providing support financially so they can do it more easily, is a great medium to longer term rental strategy – taking neighborhoods that are all owner-occupied and giving them the means to mix rental and owner." 

Are sellers seeing bigger returns this year — finally

Post author: Daren Blomquist

Post author: Daren Blomquist

U.S. homeowners selling in 2015 are enjoying the biggest gains in home value since 2007 thanks to rising home prices over the past three years.

Home prices nationwide increased 23 percent since bottoming out in March 2012, based on data from the RealtyTrac May 2015 U.S. Home & Foreclosure Sales Report.

Diving deeper into the data, we looked at the difference between the average sales price of U.S. homes and condos sold so far in 2015 compared to the previous sales price of those same homes to determine how much home value gains 2015 sellers are realizing.

What we found is that U.S. home sellers in 2015 are realizing the biggest home value gains — both as a dollar amount and as a percentage gain — since 2007.

In terms of dollar amount, sellers are realizing an average gain of nearly $30,000, which comes out to an average 12 percent gain in home value since they purchased their home.

Sellers are realizing an average gain of nearly $30,000 — an average 12 percent increase.

Of course, this does not include the amount those homeowners paid down on their mortgage, so the actual equity in the homes sold in 2015 is higher than that 12 percent.

The infographic below shows the historical trends in sellers’ home value gains as well as the markets where sellers in 2015 are seeing the biggest average home value gains.

4 pitfalls of owning a successful nightly rental

HomeAway and Airbnb models can bring heartache, too

Post author: Paul Oster

Post author: Paul Oster

As the Internet and sharing economies continue to grow, an increasing number of property owners have, or are considering, the new business models offered by the likes of VRBO and Airbnb.

It is all about increasing personal cash flow. And though the additional revenues are attractive, the consequences of these programs also have some downside. And some have drawbacks many haven’t considered.

I’ve been in and around the nightly rental business for over 30 years now. I’ve owned them, managed them, sold them, counseled owners on operations, and on and on.

Some of the first Internet-based vacation rental websites were hatched in my real estate office in the mid-1990s. I’ve seen plenty of evolution and iterations.

But as property owners consider pursuing one of these avenues in their own home or a distant resort location, there are some things to consider.

1. Local jurisdictions will increasingly want to collect bed tax or transient occupancy tax on any rentals less than 30 days. These bed taxes can range from 5 to 25 percent of the rental rate.

Local governments can and do peruse the Internet and appropriate websites to find almost anyone and everyone who is involved in various nightly rental operations.

If an owner utilizes any marketing (including Craigslist, trade and occupational magazines, and HomeAway sites) they will likely be identified by the local code compliance division. Bureaucrats will increasingly chase these escaped taxes. You can count on it. Expect it.

Most local governments will also require a special business license to collect the bed or “transient occupancy” tax. This is an added expense. But just filing for the license puts them on notice of rental activity.

From there they will require monthly or quarterly reporting of rental revenue and remittance of taxes collected. And if an owner forgets to file or remit, the fines can be substantial — even if no taxes were collected. The necessary collection of taxes alone can often drive some owners back to third-party management companies.

2. This rental activity can become a full-time (or overtime) occupation or preoccupation. I have had more than one Mammoth Lakes condo owner (and client) build up such a highly successful rental program (via the likes of VRBO) that they decided to sell their property; and not because there was some extreme profit to be made.

They had simply created an unruly monster. The fielding of emails from prospects, communicating with bookings, and scheduling cleanings and maintenance became overwhelming. And if there are unanticipated problems (and there always are), then the time consumption can easily double.

Owners with highly desirable properties can build up significant demand including excessive inquiries. Owners with less desirable properties can be inundated with time-wasting bargain hunters. And repeat customers are great, but they can become exacting and are likely to become discount seekers.

For many owners, these operations can become a delicate balance between increased revenue and time constraints.

3. Besides having strangers stay in your “home,” all of this renting creates wear and tear on a property. And this inevitably irritates many property owners who take pride in their properties or have certain personality types.

Renters rarely treat properties as well as an owner, and that is an unrealistic expectation. The owner must budget for replacements just like a quality hotel. It is the cost of doing business. But that can be beneficial in keeping the property fresh and modern.

An owner moving into such an enterprise must learn the value of durable surfaces and simplicity. Successful hotel operators are excellent mentors.

Any replacements such as flooring, paint and furnishings must be considered for functionality before aesthetics. But the two can be married. But abuse, accidents and theft do happen.

The owner’s cleaning crew becomes the front-line “eyes and ears” and is a critical relationship. Especially with resort properties for identifying problems such as damage so an owner can make claims on security deposits.

Or for an item that needs specialized maintenance. It is important for an owner to find the right people to facilitate the “turnover.” But that is just more time consumption.

The bottom line: If an owner is one who likes everything to be perfect, then renting might not be a wise choice. It is important to have appropriate expectations and expect the best but prepare for the worst.

4. Besides the collection of bed tax, there are other tax implications. A serious conversation with one’s accountant is warranted. Converting properties from nonrental properties to rental properties can have lasting tax impacts.

Rental income and depreciation can be great for the gross income picture but can have other ramifications in the property owner’s grand taxation scheme. Sometimes it can work beautifully, and other times not so well. It is better to understand before rather than after.

As the sharing economy grows and is increasingly pushed forward by new Internet-based marketing, the demand and desire to rent vacant housing space to willing and able customers will only expand. There will be opportunities all around. But it’s a case of “owner beware.”

Paul Oster is broker-owner of Re/Max of Mammoth, has held public office in both planning and tax appeal, and is author of and

30-Year Fixed Mortgatge Rates Plunge to Lowest Rate in 16 Months

Post author: Prashant Gopal

U.S. mortgage rates plunged, sending borrowing costs for 30-year loans below 4 percent for the first time in 16 months, as signs of a slowing global economy drove investors to the safety of government bonds.

The average rate for a 30-year fixed mortgage dropped to 3.97 percent, the lowest since since June 2013, from 4.12 percent last week, Freddie Mac said in a statement today. The average 15-year rate fell to 3.18 percent from 3.3 percent, the McLean, Virginia-based mortgage-finance company said.

Mortgage rates are following a slide in 10-year Treasury yields as weaker-than-expected economic data fromGermany to China combine with concern about a spreading Ebola virus, sparking demand for safe investments. Borrowing costs for home loans have fallen for four straight weeks, offering a break to buyers and giving owners a new opportunity to refinance.

“Domestically, there is no evidence that the economy is weakening in the manner of the rest of the world,” saidMillan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York. Lower borrowing costs “will make it a more favorable environment for housing if the U.S. fundamentals hold up.”

A gauge of U.S. mortgage refinancing jumped 10.6 percent last week, the most since early June, the Mortgage Bankers Association said yesterday. The share of home-loan applicants seeking to refinance climbed to 58.9 percent, the highest since mid-February, from 56.4 percent, the group said.

Rates for 30-year loans began rising from a near-record low of 3.35 percent in May 2013 after the Federal Reserve signaled it would start to unwind its stimulus plan aimed at keeping borrowing costs down. Traders cut bets that the Fed will raise interest rates by September 2015 to a 31 percent chance today from 78 percent odds at the end of last month, according to federal fund futures data compiled by Bloomberg.

To contact the reporter on this story: Prashant Gopal in Boston at

To contact the editors responsible for this story: Kara Wetzel at Christine Maurus