Real Estate Pros Steering Clients Away from New Homes | John Burns Real Estate Consulting

Real Estate Pros Steering Clients Away from New Homes


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I had some disagreements with the host of a local mortgage radio show recently. You can listen to the full 14 minutes here or read my summary below:

Disagreements

The interview was a stark reminder of what most home builders know. Real estate professionals steer their clients away from new homes because they usually make more money and get paid more quickly on resale homes. Here are a few areas where I disagreed with host Jeff Lazerson’s reasons not to buy a new home:

  • New home upgrades. While Jeff pointed out that new home upgrade costs may be priced above retail, I pointed out that many new home upgrades can be financed as part of the mortgage, and the buyer has no hassle of managing contractors. Resale improvements have to be financed with all cash or credit, and the resale owner has to manage the upgrade installation themselves.
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  • New home special taxes. New homes throughout the country do indeed finance part of the infrastructure through bonds that are passed on to homeowners. We conduct the market research for many of these bonds. Resale homes also have these taxes if the home is less than 25 years old because the bond payments last 25 years.
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  • Home builder mortgage companies. The big home builders tend to offer incentives to home buyers to use their inside mortgage company, but the buyer can always shop around and use their own mortgage company if they feel they are not getting a good deal. The builders offer the mortgage service both to capture the mortgage profits and to control the home closing process. Builders don’t want to deal with the many last minute problems at closing that are frequently caused by lenders. Mortgage brokers make no money when a buyer uses the home builder’s mortgage company, so they are incented to steer their clients away from new homes.
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  • 20% down payment. 20% down is a myth. 56% of all home buyers who obtain a mortgage are putting down 10% or less. More than half of all homes in the country are eligible for low down payment financing from FHA. These buyers do pay for mortgage insurance. It continues to amaze me how the conversation today still revolves around a 20% down payment.

The Rest of the Interview

Here are the rest of the topics we covered, with no real disagreement:

  • Mortgage rates. The bond futures market is telling me that the professionals expect mortgage rates to rise about 0.5% over the next three years.
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  • Inverted yield curve. The economic consensus is that a recession is two years away.
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  • All recessions are not the same. Recessions are never good for home prices. However, today’s young adults equate a recession with the last housing debacle. The recession in the early 2000s was more mild for housing. Housing is not likely to be the cause of the next recession due to low levels of construction and stringent mortgage documentation.
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  • Market timing. You are not timing the market if you are:
    • Buying one home and selling another at the same time
    • Buying a home you can afford in an area you plan to live for a long time

You are taking a lot of risk if the payments stretch you very thin or if you are planning to relocate in a few years. The Orange County market feels frothy to me if you are one of those people, but you can never be sure. Home building companies by definition are market timers, as their investment horizon is usually just a few years. We focus on helping them understand the cyclical risks and then to buy and build properties that will have the highest demand/supply imbalance.

  • Price increases. For years, the country has been undersupplying the housing market, adding far more new jobs than new homes. Once the excesses of the last downturn cleared, this has helped push up home prices. The Fed has also propped up home prices, dropping rates and keeping them low for most of the recovery. The recent rate hikes have had an unintended effect of incenting potential home sellers to hold onto their homes, which has kept for-sale inventory low.
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  • School districts. While it is true that homes in good school districts tend to hold their value best, you pay a big premium to purchase in those areas. Today, we are seeing more people buy in good rather than great school districts for this reason, especially because so many buyers do not have kids.
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  • Smartphone technology’s impact on new home sales. The great apps that home shoppers are using were built by companies tied to the resale market. The home builders have struggled to make their homes fit into those platforms. Resale homes have a real address, a known move-in date, real videos and photos. Home builders are catching up. Buyers should remember to search for new homes in the area in addition to just using an app.
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  • Rent control. Rent control sounds like a great solution to housing affordability. Great solutions come with downsides too. Landlords need to raise revenues when their expenses rise, and many will likely stop maintaining their rent control properties appropriately.

In summary, there are two sides to every story. Listen to both sides and decide which works best for you.

 


John Burns If you have any questions, please contact John Burns, CEO at (949) 870-1210 or by email.

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