||Builders Fuel Rise in Home Sales
Developers Overlook Buyers' Credit, Cash Problems, Luring Them to Pricier Houses
Sales of new homes are surging in the U.S., far outpacing results for less expensive existing homes and creating an unusual disparity in the housing recovery.
The trend partly reflects the small inventory of previously owned homes, now at a 13-year low after investors picked over the long-depressed market. But the strong sales of new homes also show how the nation's home builders have mastered the art of selling, even to cash-poor buyers or those with spotty credit histories.
New-home sales jumped 28.9% in January from a year earlier to the highest annual sales pace in four years, according to data released Tuesday by the Commerce Department. Sales of previously owned homes rose 9.1%. The disparate selling pace exists even though a typical new home costs 37% more than one already built, the widest price gap since the figures started being tracked in 1968, according to an analysis of home prices by Barclays Capital.
In the past two years, more home builders have offered to pay closing costs and arrange home loans through in-house mortgage operations. They have hosted free credit-counseling sessions for buyers with bad credit scores, and made heavy use of government-backed mortgage programs that allow buyers to get a home with little or no down payment.
The result is that for many buyers, it has become far easier to buy a new home than an existing one. "It's as if people were going to the car dealership and realizing that there aren't any used junkers left, so they're buying these shiny new SUVs," said Ivy Zelman, an independent housing analyst.
In some cases, that means buyers are ending up paying more than they expected for a house, raising worries that some buyers are biting off more than they can chew.
Two years ago, Lynda Riley and her husband started combing listings of existing homes in Stafford, Va., about 40 miles from Washington. With past credit problems, including a 2008 bankruptcy filing, they figured they would spend $200,000 to $250,000 for a townhouse or three-bedroom.
After seeing more than 10 preowned homes, Ms. Riley and her husband spent far more than their budget, paying $426,000 for a new, four-bedroom house with a two-car garage and shiny kitchen appliances. Their builder, Drees Homes of Fort Mitchell, Ky., helped with $5,000 in closing-cost assistance, and they received a gift of $12,000 from a family member to help cover the down payment.
"It's much easier to buy a new home than an old one," said Ms. Riley, a 41-year-old mother of two who works as a case manager for children with developmental disabilities in Alexandria, Va. "The builder's whole attitude was, 'No worries.' They help you and they trust you. They really, really want you to get approved."
One reason why inventory levels of existing homes are so low is that investors have picked many markets clean of the best-quality distressed homes. At the same time, many homeowners, worried that prices have not yet improved sufficiently, remain reluctant to list their homes. This month, the National Association of Realtors reported that the number of homes for sale fell to 1.74 million in January, the lowest level since December 1999.
"Steals are getting harder to find, and the number of bidders is up. At some point, you have to stop holding out for a steal because you need a place to live," said Robert Tayon, a Barclays economist. "For an increasing number of buyers, this means buying a new home."
Stephanie Poynor, a schoolteacher and mother of two, traveled from Kentucky to Tampa, Fla., last spring. After two frustrating months of looking at previously owned homes, many of which were purchased by investors before she could even make an offer, she turned to a local builder, Domain Homes, and bought the second model home she saw, a four-bedroom in a small gated community near the military base where her husband recently got a job. The Poynors paid $272,000, or nearly 10% more than they hoped to pay.
"We wanted to just go buy some place and be done with it. But we kept running into other people's baggage. Either the house wasn't livable, somebody else had it under contract, or you had to wait six months until the paperwork went through," she said. "This place was new. It didn't come with any baggage."
Builders have stepped up construction in response. Many of the top U.S. builders have reported double-digit growth in orders for new homes, leading to construction starts at an annual pace of 613,000 single-family homes in January, a gain of 20% over a year earlier, according to the latest Census figures.
This has been a lift to the economy at a time when overall growth is slow. After dragging on growth since 2006, residential fixed investment, which is driven by home building, contributed just over a quarter of a percentage point to the nation's 2.2% growth in gross domestic product last year.
While credit remains tough to get, home builders, with help from government programs, have eased the process considerably. Most of the Rileys' neighbors in Colonial Forge, a quiet, hillside subdivision where they were the first buyers, have similar stories. As of January, 53 new homes in their subdivision had either gone under contract or closed. Of these, 81% are expected to use loans issued by mortgage companies associated with the development's builders, with little or no down payment, backed by the Federal Housing Administration or the U.S. Department of Veterans Affairs.
New-home builders have come to rely heavily on these agencies for sales. Housing research firm Zelman & Associates reports that 50% of new homes sold in the fourth quarter of 2012 were sold to borrowers with some kind of government-guaranteed loan, with the FHA backing 31% of new-home sales with a mortgage, compared with about one in 10 in the same quarter five years ago.
Miami-based Lennar Corp., the nation's third-largest seller of new homes, said FHA lending standards now drive decisions about where to buy land, how much to pay for it and how many features to put into homes.
"Back at the height of the market, our homes were fully tricked out. They had granite, brass, everything," said Lennar President Rick Beckwitt. "As the market declined, we needed to pull those specifications out of the homes," he said, in order to keep prices within the price limits for buyers with government-backed loans.
Builders have relied on lender relationships or in-house mortgage units to help ride out the downturn. Lennar, Toll Brothers Inc., PulteGroup Inc. and others have wholly owned finance companies that provide their buyers with mortgages. D.R. Horton, the largest U.S. home builder by sales volume, and K. Hovnanian Enterprises have launched programs to help buyers repair bad credit, and they offer mortgage concierge services to get to the finish line.
Also, with so many buyers facing past credit troubles, builders are trying to expand their pool of buyers by helping people repair their credit. Woodside Homes, based in North Salt Lake, Utah, recently started a partnership with a local credit-counseling company to help prospective buyers improve their credit scores. Joel Shine, the company's chief executive, noted that it is easy to sell to people with pristine credit and a hefty down payment, and easy to deny people whose credit is in tatters.
"Then there are the guys on the border -- those are the ones we can help," Mr. Shine said. One of Woodside's sales agents recently drove a buyer from a sales office to a car dealership to sell the car and unload the monthly payment.
(Source: The Wall Street Journal, 02/27/13)
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