FHA Scales Back Stupid 3.5% Down-Payment Mortgages: New Home Sales Swoon

From Bloomberg News

Joseph Beben wasn’t in the market for a house until he heard about a year-old community in suburban Phoenix where 10 homebuilders are offering buyers incentives such as swimming pools, built-in barbecues and subsidized mortgage rates.

Beben, a 33-year-old general manager at Best Buy Co. (BBY), visited three of the sales offices flanking the main corridor of The Bridges at Gilbert, whose 17 subdivisions are among the about 200 locally that have opened since early last year. He settled on Woodside Homes’ community within The Bridges after the builder agreed to cover as much as $10,000 of his closing costs, and throw in another extra he liked.

“When I saw this deal, it looked like a good business decision,” said Beben, who will pay $332,000 for a 3,000-square-foot (280-square-meter) house scheduled to be completed by February. “And I wanted a pool.”

Builders in Phoenix and areas from Sacramento, California, to Orlando, Florida, are sweetening offers as sales slow in some of the country’s most volatile housing markets. Buyers, suffering from sticker shock after large price gains in 2013, are pulling back after the U.S. government cut the maximum size for mortgages with low down payments. In Phoenix, the Federal Housing Administration’s loan limits dropped well below the median price for a new home.

Market ‘Rocked’

Nationwide, new-home sales have been uneven, dropping in June before rising in July and August. The shares of publicly traded homebuilders have fallen 7.9 percent this year, compared with a 6.3 percent increase in the Standard & Poor’s 500 Index.

“Phoenix is very slow, Sacramento is spotty,” said John Burns, a housing consultant based in Irvine, California. “The investors came in and pushed prices a little too high. And then FHA rocked the new-home market really hard.”

While the number of new-home communities in Phoenix grew by a third in the past year to 457, sales per community plunged 45 percent last month from a year earlier, said Jim Belfiore, president of Belfiore Real Estate Consulting in Phoenix. Prices, including incentives, fell 0.2 percent in September from a year earlier, following a 7.5 percent jump last year, he said.

“Phoenix is a cautionary tale about raising prices too aggressively and opening up communities too aggressively,” said Alex Barron, senior research analyst at Housing Research Center LLC in El Paso, Texas. “It’s a bad combination where affordability got out of control and the FHA limit went down. Homes are unaffordable now, and all of a sudden there’s a ton of supply.”

Unsold Homes

The Bridges at Gilbert and the 5-square-mile (13-square-kilometer) Eastmark master-planned community nearby each have more than 65 finished homes yet to be sold, said Rachel Cantor, Arizona director for homebuilding-research company Metrostudy.

“There are few subdivisions in Phoenix right now where a builder is not offering some kind of incentive,” she said. “Builders aren’t usually this close together. If you go into The Bridges and Eastmark, they’re right across the street from each other. It’s cutthroat.”

PulteGroup Inc. (PHM), Lennar Corp. (LEN), Meritage Homes Corp. (MTH), Taylor Morrison Home Corp. (TMHC) and Woodside Homes are among the builders at The Bridges, while Ryland Group Inc. (RYL), Standard Pacific Corp. (SPF), Maracay Homes, Meritage and Taylor Morrison are selling properties in Eastmark.

Lonely Salesperson

“The issue in Phoenix is the market got away from itself, so everybody is offering some level of concession,” said Joel Shine, chief executive officer of Salt Lake City-based Woodside Homes. “Frankly, in a master plan with 10 other builders, and all offering concessions and you choose not to, then you need to make sure you buy your salesperson a high-quality TV set so they have something to do while they’re sitting alone.”

Phoenix and other markets where bargain-hunters pushed prices up the most in the past two years have many residents who lost homes to foreclosures after the crash -- which is also why FHA loans have become popular. The mortgages, insured by the federal government, require a waiting period of only three years following a foreclosure, while borrowers may have to wait as long as seven years to make a purchase with a Fannie Mae loan.

FHA loans also come with down payments of as low as 3.5 percent of the purchase price, and their underwriting requirements, including credit scores, are more flexible than those associated with other conventional loans.

‘That Happened’

In January, the federal government, which is reducing its share of the mortgage market to lure back private capital, cut FHA loan sizes in 652 high-cost U.S. counties. In Phoenix, the limit dropped to $271,050 -- about $24,000 below the median prices of a new home -- from the previous maximum of $346,250. The limit shrunk by 28 percent in the Las Vegas region, and 18 percent in the Sacramento area.

“We were having a nice robust recovery and then that happened,” said Buddy Satterfield, president of the Arizona division for Shea Homes, which has two communities in The Bridges and is opening one in Eastmark. “When you take the FHA limit down to $271,000, you hit us right in our sweet spot.”

FHA mortgages for new homes in the Phoenix area fell 39 percent in August from a year earlier, while the number of buyers financing existing homes with the government-insured loans gained 12 percent, according to RL Brown Housing Reports, a consulting company based in Scottsdale, Arizona.

Wouldn’t Qualify

About 48 percent of FHA borrowers who purchased Phoenix-area properties from Meritage Homes Corp. in 2013 wouldn’t qualify under the new limits, said Brian Hall, vice president at Scottsdale-based Imortgage, which partners with the homebuilder to finance its sales.

While builders in Nevada also experienced a sharp drop in sales this year, they didn’t open as many communities as their Arizona counterparts because of limited land availability and approval delays, said Dennis Smith, president of Home Builders Research Inc., a Las Vegas-based consulting company.

After jumping 32 percent in 2013, new-home sales in the Las Vegas area in the first eight months of this year fell 26 percent from a year earlier, he said. Smith said he recently spoke with a builder who lost a sale in the Las Vegas area to a competitor who cut the price by $17,000 and covered closing costs.

“It’s a big adjustment,” Smith said. “It’s hard for builders to cut their pace when they’ve been trying to rejuvenate their numbers over the past five years.”

Builder Discounts

In Sacramento, where new-home sales last month dropped 16 percent from a year earlier, builders are beginning to discount finished homes, said Greg Gross, director of the Northern California region for Metrostudy.

“There almost isn’t any new-construction home in Sacramento that would qualify for FHA under the new limits,” Gross said. “Last year, there were plenty.”

In Orlando, where builders such as Hovnanian Enterprises Inc. (HOV), Beazer Homes USA Inc. (BZH), Ryan Homes (NVR) and David Weekley Homes are advertising incentives such as discounts, appliance packages and the covering of closing costs, new-home sales fell almost 19 percent from a year earlier in June, the latest month for which figures are available from Metrostudy.

Builders are competing with a growing supply of previously owned homes as investors withdraw from the market. Orlando’s inventory of listings jumped 81 percent in August from a year earlier, according to Move Inc. (MOVE)’s Realtor.com.

Supply Increases

In Phoenix, the supply increased 26 percent. Existing-home prices in the area rose 4.4 percent in August from a year earlier, compared with an increase of 6.4 percent nationally, property-information provider CoreLogic Inc. (CLGX) reported today.

The median price for an existing home in the area is $189,900, a discount of more than $100,000 compared with a new home, said Greg Burger, chief operating officer at RL Brown Housing Reports.

Still, builders continue to open communities in anticipation of demand that RL Brown forecasts will double in the next five years, fueled by employment growth and an influx of seniors to the state, Burger said.

“Short-term demand is soft,” he said. “But the long-term outlook for new housing in metro Phoenix is good.”

Retirees Bob and Camille Berg bought a finished house at The Bridges from Shea Homes on July 29 for $240,000 as an escape from a lifetime of snowy winters in the Chicago area. They negotiated a reduction of almost $10,000 on the price of a home that came with upgraded cabinets and granite counter-tops after looking at four companies’ residences in the subdivision.

Moving Homes

“I like the competition -- it was good for us,” Bob Berg said. “A couple of the builders said to me, ‘What will it take for you to buy this home?’ That’s kind of drastic when they say something like that. It tells me they want to move that home.”

Beben, the Best Buy general manager, said he wasn’t even looking for a home until he overheard his golfing partner, Tim Ehlen, discussing Woodside Homes’ offer of $22,000 toward a swimming pool. Ehlen, a Re/Max Solutions agent, showed him around.

Ehlen and Stacia, his wife and business partner, said they’ve recently brokered deals for two other new-home buyers, including one who got $38,452 in discounts, free window blinds and coverage of closing costs. Those able to make purchases are the lucky ones, they said.

“If people qualify to buy, there are some great deals to be had,” Stacia Ehlen said. “But it’s just harder to qualify to start out with.”

 

http://www.bloomberg.com/news/2014-10-07/homebuilders-offer-freebies-as-booming-u-s-markets-cool.html?hootPostID=ee77876ae7fe9cb5c2c30362bb4cc859

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access