Priced to Sit Part IV: Lennar Corporation

Lennar Corporation is a major U.S. housebuilder with heavy exposure in the bubble regions, including Florida, Arizona, Nevada, Colorado, and California. They are a diverse builder with products ranging from smaller townhouses to large McMansions. With 13 developments currently under construction in the Sacramento region, they will be heavily impacting the resale market here for years to come.

One of Lennar's upper middleclass developments is called Ironcrest at Fiddyment Farm, which is located on the western edge of Roseville in Placer County. Ironcrest consists of houses ranging from the modest $464,000, 2200 square foot "Dynasty" model, up to the ostentatious $640,000, 3800 square foot "Imperial".

This 8-square-mile area of western Roseville has seen a lot of new residential development during the last few years, and there are currently 140 resale houses, including 32 flippers, between 2200 and 3800 square feet on the market within its boundaries:


The only real negative aspect of this development is its disturbingly close proximity to the Pleasant Grove Wastewater Treatment Plant and the newly constructed Roseville Energy Park. (One must consider whether a person inclined to buy a house called "The Imperial" wants a view of sewage from their second floor balcony.)


Along with the usual resale market vs. builder comparison, I decided to test my assumption that the flippers were more rational than typical house sellers, due to their strict profit motive. The following graphs tell the story:




Like the other housebuilders in this series, Lennar has under-priced the resale market at all levels. 43 resale houses (30%) are priced higher than the highest-priced Lennar house, and only 7 resale houses are priced lower than the lowest-priced Lennar house. In addition, the resale market is behaving irrationally with respect to price vs. price-per-sqft. Typically, as you move up the housing price scale, you would expect a lower price-per-sqft. In this development, the exact opposite is true. This is not a trend that is likely to continue.

Sadly, my rational flipper assumption has failed the test. There is clearly no tendency for flippers to price to the market in order to lock in previous gains (or to get out before a loss). The only remaining assumption is they are pricing based on what they owe, and success will be difficult while Lennar is undercutting them. Indeed, 16 of the 32 flippers are currently in trouble.

That puts us dangerously close to massacre territory.

Priced to Sit Part III: Beazer Homes

For the third part of this series, I chose mid-level builder Beazer Homes. Beazer has seven large developments under construction in the Sacramento region, with houses generally priced from $250K to $400K. According to their web site, they have plenty of houses "available now", which means they have had cancellations or they have been building on spec. Either way, these houses should be priced to sell quickly.

To balance out the other analyses, I focused on two of Beazer's more "affordable" developments. They are located in more marginal areas and consist of smaller houses built closer together on smaller parcels. The first, located in Rancho Cordova, is called Capital Village:


Capital Village is bordered on the north by a large office park complex, on the east by a flood-control channel beyond which are several junk yards and more light industry, on the south by another new development and some open pit gravel mines, and on the west by more light industrial. Mather Field, a major commercial airport and a hub for UPS, is less than a mile away to the southwest.

Since the development area is mostly non-residential, there were only 35 resale houses for comparison. Once again, however, a major house builder is putting the squeeze on their competition:




The second "affordable" development is called "Riverdale", and is located in west Natomas:


Riverdale is bordered on the north by another housing development, on the east and south by Interstate 5 and Interstate 80 respectively, and on the west by agriculture land. There is also a large 24-hour truck stop and an industrial equipment yard less than a mile away to the southwest.

There were 51 comparable resale houses on the market nearby, and once again, Beazer beats them all:




Like all housing market participants, new house builders are seeing the need to lower prices to attract business. They will continue to do so until all their spec inventory is depleted. Unless the resale market participants can bring their prices in line, they should expect an indefinite wait before a sale.

How long can they hold out?

Auction Report

Just received an email report from reader Pete, who attended a house auction in Roseville hosted by Accelerated Home Sales and Auctions. Here's his take on what transpired:

Max,

The auction in Roseville today was totally goofy. 16 properties and nothing sold except property #2 & #12. Everything else had minimum bids that were too high and no one wanted to be a fool. Buyers today want 10% cash on cash returns for rental properties, or there is no reason to buy it. There is too much risk in this rapidly falling market.

Property #2 @ 1607 Basler Street at 16th, Sacramento, MLS # 60066365, 828 SF, sold to the only bidder, a woman who paid the minimum bid of $195,000. $235/SF

Property #12 @ 3416 Milburn Street, Rocklin, MLS 60063806, 2213 SF, sold to the third bidder. The minimum was $275,000 and it went to $330,000. $149/SF. Milburn Street is a fairly solid property. The seller paid $336,000 for it in October 2003. After selling costs, he took a loss.

None of the other properties sold. None of the other properties even had an opening bid. The buyers are getting smarter these days. They know if a property reserve is over $125/SF, it is not worth seeking.

Two months ago, I saw an auction at 6000 Little Rock in Rocklin. It was an 1800 SF house with a minimum bid of $380,000. It had been listed for many months at $485,000 or so with a Realtor. The house sold for the minimum bid of $380,000. Today, you must realize that buyer, who probably thought he won a good deal, really caught a falling knife! He paid $211/SF. The new comp in town is a nicer, bigger, better located house for less money at $149/sf. That makes the Little Rock home worth what...$268,000 today? That buyer is down over $100,000 in two months!

The auction had about 60 people seated in the room at the Hilton Garden Inn in Roseville. They all came to check out the action and win a good deal. The only action turned out to be on the one home in Rocklin. There were 4 properties for sale in Lincoln, some are brand new, obviously owned by inverstors. No bids. The minimum bids are above what the home builders are asking for new homes in today's Sacramento Bee. How stupid is that?

There are several lessons here: 1) overpriced homes will not sell, particularly at an auction, 2) if you are going to buy an auctioned home be careful. A good deal 2 months ago may prove way overpriced two months from now, so it better make sense from a cost, income, and market comp standpoint. (ie., the Little Rock investor got burned, in hindsight). 3) Much better deals are coming downstream. There are 14 unfilled sellers at this auction who cut their prices to what they thought were the bone. Yet 60 qualified investors with money in their pockets just told them to go pound sand. Now those sellers get to reduce their prices further, or take the properties off the market. 4) If you bought a house in 2003, that is about what it is worth today. And it will probably be worth less tomorrow.

The auctioneer was named Barry Mathis with Accelerated Home Sales and Auctions. He seemed to be an experienced Realtor and kept telling us what great deals these were. Clearly, even the Realtors are out of touch with the market. He was trying to say how "small" the negative cash flow would be on these as rentals. Well, no one wants any negative cash flow now, particularly in a declining market. If a property does not gush cash flow after all expenses, including vacancy and management, you can keep it, Mr. Auctioneer.

All the best, Pete

Sacramento Regional Real Estate Trends for November 18, 2006

Inventory continues to slouch toward the inevitable end-of-the-year drop:


I expect to see an ever increasing rate of decline as we head into January. Bottom line: who wants to buy a house in December anyway? At least you can tell if the roof leaks.

Like inventory, at least one asking price metric is slowly creeping downward in all four counties:


This is probably due to the decrease in more expensive inventory rather than asking price reductions; though I am sure both come into play:


And for those who have to sell, their position continues to deteriorate:


In both Sacramento and Placer Counties, almost 30% of all flippers are in the red:



Editors’ Note: With the holiday coming up, the trend posting might not happen next week. It will return the following week.

How Can They Afford This?

Last weekend, we had dinner with some friends that wanted me to look over their escrow documents and answer some questions about their property tax bill. I'm not one to pass up a good mean, so I eagerly accepted the invitation. They showed me a supplemental assessment they received from the county for around $3,000. I explained to them why they received it and that they are responsible for paying it, not the lender through their impound account. That was a pretty easy question and I was ready to eat dinner. But, they then told me they refinanced and didn't really understand the loan they received and had some questions about it and the property tax bill they received for the 2006/07 year. The property tax bill was over $6,000, and it was stamped copy, which usually means the lender will pay the tax bills from their impounds. I quickly glanced through their original loan docs, and they elected to have impounds instead of paying the tax bills and homeowner's insurance themselves. I noticed their refinance included an increase from the original loan amount by over $100,000. It wasn't until they said their mortgage payment went down after refinancing that I decided to take a closer look at their papers. Their previous payment was about $4,100 a month, which was an interest only loan at around 7%. After refinancing just two months later, their new payment was now around $3,500 a month. The interest rate was about 1/8% higher too. It was also an interest only note. Anyone care to guess why the loan payment went down? No, it's not an option ARM either. Here's the deal, and trust me, this one is a very sneaky trick the lender was involved with...

The owners built their own house. When you build a house, the county is usually a little slower at assessing the value and the county tax records sometimes aren't updated for up to two years after the house is built. This means the value of the land when it was purchased is all that shows as the assessed value when you examine the tax records. Lenders are aware of this and know that they should estimate the tax liability for the owners when refinancing from a construction loan. We built our own house twice, and both times the lender knew to take out enough money to cover the taxes for us in our impound account.

Well, this particular lender decided that he was going to estimate their taxes based solely on the value of the land as it showed in the current tax record. Yes, that's right, he gave them an impound account, but only for $800 a year. At this point, I asked my friends if they personally knew the lender that had set this loan up. Right then, the wife looked at the husband and gave him a dirty look and said "I told you something wasn't right with your friend. I knew he was out to get us." I looked at the husband and explained to him his loan. I told him, which I assumed he knew, that his loan was interest only for the first 7 years. The problem is he didn't know it was interest only. The look on his face was of complete disbelief and shock. I explained that he would be paying approximately $3,500 a month for the next 84 months (almost $300,000) in interest only and his loan balance would still be over $600,000 as when he took it out. Next I told him that his lender decided to only take out $79 a month instead of closer to $525 for his property taxes, which meant that the bill stamped "copy" for over $6,000 would in fact have to be paid by him. The good news, if you can call it that, is that "only" $3,000 of it was due by December 10th. He would have until April of 2007 for the other $3,000. The wife wanted to kill her husband at that time and they started to get into it right there in front of me.

The real issue here is that I don't think they could qualify for the new loan amount since they raised it over $100,000 and the lender knew this but wanted/needed their business. They make about $80,000 a year combined. Their mortgage payment should be around $4,700 a month for a fixed principle/interest mortgage with property taxes and insurance. A $4,700 a month house payment is 70% of an $80,000 a year combined salary.

I wonder how often this same situation is being repeated throughout Sacramento...

Priced to Sit Part II: DR Horton

Continuing with the "Priced to Sit" theme, I decided to check out another hotbed of flipper activity: Elk Grove.

Over 10% of all flipper activity in Sacramento County is taking place in Elk Grove, and house building continues unabated. One major builder is DR Horton, who has 46 major developments underway in Northern California, including five in Elk Grove alone.

The Laguna Estates development cluster is located in south Elk Grove. DR Horton has two projects underway there; a mid-priced one called "Savannah", and a higher priced one called "Kensington". The houses range in size from a modest 2,075 SQFT to a grandiose 3,621 SQFT. According to their web site, DR has houses available now at all price and size levels. These spec houses are currently competing directly with 152 similar resale listings:

Resale activity within the Laguna Estates development cluster. Large dots represent asking price changes.

Apparently, DR is having trouble moving their inventory, and they are now offering a 14.7% discount on their 2300 SQFT model:


For the purposes of this analysis, I ran two comparisons: one assuming full asking price from the DR web site, and another using a 14.7% across the board discount on all models:



Here again, we see a builder using their superior market position to keep 152 resellers struggling. Using the discounted price assumption, there are 53 resale houses priced higher than the highest DR Horton house, and not one resale house is priced to comp.

It's over for these guys.

Priced to Sit: How Flippers Get Into Trouble

As a companion piece to my Flipper Massacre series, I would like to highlight another battleground in the Builder vs. Flipper war, and predict the likely victor.

KB Homes is a national house builder with several developments in the Sacramento region. One of their notable development clusters is the "Hampton" series located in North Natomas. It consists of four sub developments, ranging in size from sub-1000 sqft condos to 2600 sqft McMansions.

These developments have also been a hotbed of resale activity. There are currently 399 resale listings within the Hampton development cluster competing directly with KB. 319 are less than 2600 sqft:

Resale activity within the Hampton development cluster. Large dots represent asking price changes.
As of November 11, 2006, there were twenty flippers in trouble within these developments. How are the other 299 sellers doing? Turns out, not so good.

The following is a comparison of the resale market and the current KB Home offers within the Hampton development cluster for houses 2600 sqft and under. Notice anything interesting?



In order to remain competitive, KB is under pricing the market at all levels. Notice the highest price/sqft KB house is nearly selling for less than the lowest priced resale house! Also, there are 179 resale houses priced above $408,000, the highest priced KB house.

Clearly, this entire development cluster is in trouble. Every single resale house is doomed to languish on the market until KB depletes its inventory. If (and that's a big if) the resellers are able lower their prices some, KB will drop theirs in tandem. The resellers don’t stand a chance.

Distressed Properties

I've decided to start a monthly column on the distressed property situation. My definition of a distressed property is one that falls into any of these categories: short sale, bank-owned, foreclosure, or foreclosure pending. Fortunately, our nifty MLS system has fields for all of those types of properties. Unfortunately, not all agents are savvy enough to fill them out. At any rate, I ran a search for the 4 county area and came up with the following:

# of distressed properties - 1,016
# of MLS listings - 15,330

Keep in mind, my search was strictly limited to "Residential" listings only.

1 in every 15 houses listed for sale falls into the distressed property category.

Flipper Massacre Part II: Woodhaven Place

Most bubble watchers are familiar with Woodhaven Place. It is part of a JTS "community" in West Sacramento that became the poster child for the last days of flipper insanity at the peak of the bubble. Recently, several Woodhaven Place came up as Flippers In Trouble listings:

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410 Woodhaven Pl West Sacramento, CA 95605

Total Loss: $103,100 Percent Loss: 13.7% Asking Price: $649,900 Bedrooms:6    Baths: 3    Sq. feet:3500 Previous Sales: Sold on 2005-11-18 for $753,000 MLS# 60120845      Google Maps

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365 Woodhaven Pl West Sacramento, CA 95605

Total Loss: $78,000 Percent Loss: 8.4% Asking Price: $850,000 Bedrooms:5    Baths: 4    Sq. feet:4235 Asking Price Changes: Down 8.4% from $928,301 On 04-15 Down 19.8% from $1,060,000 On 08-05 Down 19.0% from $1,050,000 On 10-07 Down 18.3% from $1,040,000 On 10-21 Down 12.8% from $975,000 On 10-28 Previous Sales: Sold on 2006-07-11 for $928,000 MLS# 60112755      Google Maps

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360 WOODHAVEN Pl West Sacramento, CA 95605

Total Loss: $57,000 Percent Loss: 7.8% Asking Price: $675,000 Bedrooms:6    Baths: 3    Sq. feet:3574 Previous Sales: Sold on 2005-10-17 for $732,000 MLS# 60116463      Google Maps

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390 Woodhaven Pl West Sacramento, CA 95605

Total Loss: $21,000 Percent Loss: 3.1% Asking Price: $659,000 Bedrooms:4    Baths: 3    Sq. feet:2855 Asking Price Changes: Down 9.1% from $725,000 On 07-28 Down 8.3% from $719,000 On 09-23 Down 4.4% from $689,000 On 09-30 Down 2.9% from $679,000 On 10-28 Previous Sales: Sold on 2005-11-14 for $680,000 MLS# 60084952      Google Maps

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A Google search revealed that these are probably all foreclosure sales. Thinking this was similar to the Lincoln Crossing Massacre, I checked out the JTS site to see how many properties they said they had available:


AgentBubble was gracious enough to look up the Woodhaven transaction data, and sure enough, all the properties are now privately held:



The FITs are highlighted in yellow. Unfortunately, not all the sizes were available, but from the ones that were you can see that the prices varied substantially between units. Most interestingly is the fact that it’s the lowest priced units that are facing foreclosure.

Every person who bought on this street has lost money, some over $200,000. The massacre has only just begun…

Sacramento Regional Real Estate Trends for November 11, 2006

Sacramento Regional Real Estate Trends for November 11, 2006

Note: Although I am moving Flippers In Trouble to a subscription service, this blog will always remain free. Until the leading real-estate "professionals" over at SAR decide to publicize these important trends so the people they serve can make informed decisions, this blog will remain free as a public service.

For what it’s worth. :)

Another week, another small inventory decline. Since inventory has dropped continuously over the last four weeks, I added a trend line to guess where the bottom will be:


That would still leave us with over 15,000 homes for sale on January 1, 2007, which is unprecedented. If the inventory run-up of last spring repeats itself, there will be 20,000 listings by May 2007.

All of this inventory is not helping the flipper market. FITs now number 216 and 729 in Placer and Sacramento Counties, representing over 25% of the market. Throw in those asking to break even, and 40% of flippers are throwing in the towel:



Flippers have been decreasing their market share over the summer, down to 18% of all houses for sale in Sacramento County:


As for prices, the run-up of more "affordable" inventory continues in the face of the broad market decreases:


This is reflected in the steady drop in price per sqft:


But who wants to live in Oak Park, anyway?


On a side note, oc_renter has begun tracking foreclosure data on Bubble Markets Inventory Tracking. I bet that will be the trend to watch, starting next year.

Sacramento Regional Real Estate Trends for November 4, 2006

Well, the monthly inventory drop came with barely a whimper. Inventory is down a measly 178 units over last week:


This is remarkable compared to last year, when there was a 25% drop in inventory from peak to trough. (As an aside, I do find it curious that housing economists are using the recent drop in inventory as "proof" that a soft landing is in the bag. I think it's the wrong time of year to make such a prediction.)

On the asking price front, both Sacramento and Placer counties saw declines in all three indicators over last week, while higher-priced Yolo and El Dorado counties remained stable:


Price-level inventory trends remained stable, with a steady increase in lower-priced inventory and the steady decrease in the number of higher-priced units:


The flipper market continued to deteriorate, with over one in four flippers in Sacramento now taking a loss. Casey, you’re not alone...