The University of Michigan's monthly survey is an ongoing nationally representative survey based on telephonic household interviews. The Index of Consumer Sentiment (ICS) is developed from these interviews. It gives a very accurate indication of the future course of the national economy. The Index of Consumer Expectations (a sub-index of ICS) is included in the Leading Indicator Composite Index published by the U.S. Department of Commerce, Bureau of Economic Analysis. The Index of Consumer Expectations focuses on three broad areas:
•· How consumers view prospects for their own financial situation
•· How they view prospects for the general economy over the near term
•· Their view of prospects for the economy over the long term
Among other things, the survey asks households to rate buying conditions for homes.
The proportion giving a "good" rating started to give way in 2004, as house prices were climbing to unaffordable levels in many areas, and bottomed out in the summer of 2006 as house prices finally topped out at the national level. But the "good" proportion has been on the rise for about two years now, getting up to 71% in August - back to the mid-2005 level.
Consumers' ratings of home buying conditions have been driven largely by house price movements. In August, 65% of consumers cited "low prices" as the key reason for viewing home buying conditions as "good," compared with only 10% at the end of 2005.
Interest rates also can have a major impact on home buying conditions, of course, but rate shifts have had a relatively minor influence on consumers' ratings during the past two years.
Improving consumer views of home buying conditions obviously do not quickly translate into stronger home sales. But the systematic improvements in recent times are laying groundwork for better sales volume a bit further down the line.
Because all real estate is local, I'd like to conduct my own survey of households in the Boise MSA. So let me know, how would you rate buying conditions for homes in the Treasure Valley?
Chuck Miller GMB CGB CGP MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc.
As a Builder, I am extremely interested in the current debate about the home building and mortgage finance industry. One comment I have heard repeatedly over the past several weeks is the need to return to "sound mortgage standards" based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment. But just how realistic is this?
According to the U. S. Department of Housing and Urban Development, the median household income in the U.S. in 2007 was $59,000. If we return to sound mortgage standards, median home values would have to be $147,500 (2.5x) to $177,000 (3x).
So under "sound mortgage standards," a household earning the median income would have to save $29,500 (2.5x) to $35,400 (3x) - 50% to 58.5% of their annual household income - for their down payment before they could purchase a home. Is this realistic? I did an informal poll of mortgage lenders and found that, home buyers with down payments of 20% or more accounted for approximately 30% of the purchase transactions over the past 12 months and approximately 70% of home buyers purchased their homes with less than 20% down.
According to the U.S. Census Bureau, the median home price in the U.S. is $231,000, so median home prices would have to drop 37% to 48%. Is this realistic? Even those homeowners who purchased their homes using "sound mortgage standards" would owe more than their home is worth.
According to the NAHB / Wells Fargo Housing Opportunity Index, which tracks the sale prices of homes sold in 223 metropolitan statistical areas, there were actually 77 markets in the U.S. where the median home price is less than $147,500 and 107 markets where the median house price is less than $177,000 in the 1st Quarter of 2008. Those include 23 MSA's in Texas, 13 in Ohio, 12 in Michigan, 11 in Florida, 10 in New York, 7 in Illinois, 7 Pennsylvania, 5 in North Carolina, 4 in South Carolina, 4 in Indiana, 4 in Tennessee, 3 in Georgia, 3 in Arizona, 3 in Oklahoma, 3 in Massachusetts, 2 in Maryland, 1 in West Virginia, 1 in Colorado, 1 in Kansas, 1 in Montana, 1 in Wisconsin, 1 in Washington, 1 in New Jersey, and 1 in Minnesota. And if you want to stay in Idaho, you can move to Pocatello. Of course, there's no guarantee that the median home price in these markets won't rise as more people move there in search of homes with sales prices low enough to allow them to qualify for mortgage under sound mortgage standards.
The Housing Opportunity Index is based on the sales prices of all homes sold in the MSA which includes both existing and new homes. Considering the data on existing and new home sales in the U.S. in the 1st Quarter of 2008, it is probably safe to assume that most of the homes sold were existing homes.
As a Builder, I would love to be able to build and sell new homes for under $148,000. But is that realistic?
According to the National Association of Home Builders Economics Department Construction Cost Survey, the average new home built in the U.S. in 2007 was 3,340 sq.ft, was built on an 11,968 sq.ft. lot, and had a total sales price of $454,906. At 11,968 sq.ft., that equals a finished lot cost of $9.31 per sq.ft. The finished lot cost was $111,452 and accounted for 24.50% of the Sales Price. The cost of the raw land accounted for 40.8% of the finished lot cost and the development cost accounted for the other 59.2%.
Construction cost was $$218,810 or $65.50 per square foot and accounted for 48.1% of the Sales Price. Labor cost is typically about 20% of the Sales Price or 40% of the Construction Cost so in the average home, the labor cost would be approximately $90,981 which is actually 41.6% of the Construction Cost. According to the U.S. Department of Labor Bureau of Labor Statistics May 2007 National Occupational Employment and Wage Estimates, the median hourly wage for construction occupations was $17.57 plus 21% for payroll taxes and insurance equals $21.25 per hour. So dividing the labor cost by the hourly cost, the number of man hours required to build the average house was approximately 4,000.
The cost of construction financing marketing (2.4%), sales commissions and marketing costs (6.8%), overhead and general expenses (7%), and the builder's profit (11.2%) account for the remaining 27.4%.
According to the U. S. Department of Housing and Urban Development, the median household income in Idaho in 2007 was $51,500. If we return to sound mortgage standards, median home values would have to be $128,750 (2.5x) to $154,500 (3x). If I use the same percentages as the average new home built in the U.S. in 2007 for finished lot cost, I would need to be able to purchase the finished lots for $31,544. The raw land cost at 40.8% would be $12,870 per lot. Assuming a density of 4 dwelling units per acre, the raw land cost would need to be around $51,500 per acre. Is that realistic? Possibly.
In the Boise City - Nampa MSA, finished lot costs start at about $6.50 per sq.ft. Using this cost per sq.ft., the lot size would be approximately 4,850 sq.ft. Is this realistic? There are developments in the area with 4,500 - 5,000 sq.ft. lots, but these will need to become the norm.
However, there are other factors that need to be considered. The cost of materials used in land development, like steel, concrete, pvc pipe, and asphalt continues to increase. As fuel costs continue to increase, so does the cost to operate the equipment used in the construction. Fees also continue to increase as does the time required to obtain the necessary approvals. This added time equates to additional costs. So as development cost increase, something else will have to decrease in order to maintain a finished lot cost of $31,544. Is this realistic? Will land owners be willing to accept less per acre for their raw land? Can the lot size be decreased even more and the density increased?
If I use the same percentages as the average new home built in the U.S. in 2007 for construction cost, my construction cost at 48.1% of the Sales Price would need to be $61,929 and 41.6% of the construction cost or $25,750 would be labor cost. According to the Idaho Department of Labor 2007 Occupational Employment and Wage Report, the median hourly wage for construction trades workers in the Boise City - Nampa MSA $13.85 plus 21% for payroll taxes and insurance equals $16.75 per hour. So dividing the labor cost by the hourly cost, I would have to build the house in 1,010 man hours. Is that realistic? Not very.
Let's look at it another way. Idaho's hourly labor cost at $16.75 per hour is $4.50 or 21% less than the national cost of $21.25. We'll assume material costs are about the same. Adjusting the average per square foot construction cost figure for the difference in the labor cost would give us a per square foot cost of $59.78 ($65.50 x 41.6% x 21% = $5.72 / $65.50 - $5.72 = $59.78). Dividing the construction cost of $61,929 by $59.78 per square foot, the homes I build would be just over 1,036 sq.ft. Is this realistic? How many households do you know who would want to live in a 1,036 sq.ft. home?
In conclusion, how realistic would it be to return to "sound mortgage standards" based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment? Not very. Doing so would certainly change the home building industry which historically accounts for 10% to 15% of the gross domestic product of the U.S. We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots. And home buyers would certainly have to adjust their expectations.
Maybe I should start building apartments
Chuck MillerGMB CGB MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc.
In my blog on the BuildingCredibility.com website last weekend, I posed the question "Does the Rise in Foreclosures Constitute a Crisis?" Last Monday I responded to a commentor who reported a rumor that IndyMac bank was close to bankruptcy. Based on my research of the facts, I concluded that it was unlikely. While IndyMac did not file bankruptcy, IndyMac Bank, F.S.B., Pasadena, CA was closed by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) was named Conservator on Friday July 11th. This is the 3rd largest bank failure in U.S. history. So is this a crisis? Should we panic?
There is a great deal of debate over whether we are currently in a recession. It is commonly accepted that recession cycles are a normal part of living in a world of inexact balances between supply and demand. But what turns a usually mild and short recession into a great depression? I spent some time this past week and most of the day yesterday studying the Great Depression. The exact causes of the Great Depression is also the subject of debate and concern. While scholars have not agreed on the exact causes and their relative importance, the search for causes is closely connected to the question of how to avoid a future depression.
Was the October 29, 1929 stock market crash the cause of the Great Depression? The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929.Economists dispute how much weight to give the stock market crash, but it clearly changed sentiment about and expectations of the future, shifting the outlook from very positive to negative, with a dampening effect on investment and entrepreneurship, In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing.
Debt is seen as one of the causes of the Great Depression. In the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.
As debtors defaulted on debt and depositors became worried about their deposits, worry turned to fear and panic. Panic created runs on banks. As panicked depositors made massive withdrawals from the banks which had financed this debt, banks began to fail. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were either ineffective or not used.
Regarding the closing of IndyMac Bank, here are some excerpts from the Office of Thrift Supervision's Press Release last Friday:
The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMacs viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts. This institution failed today due to a liquidity crisis, OTS Director John Reich said. Although this institution was already in distress, I am troubled by any interference in the regulatory process.
As a result of an OTS examination that began in January 2008, the OTS deemed IndyMac to be in troubled condition. An overwhelming majority of problem institutions are able to successfully modify their operations and business plans, work closely with their regulator and eventually return to a healthy condition. IndyMac had reacted to market conditions and OTS concerns in November 2007 by changing its operations and business plan to build a foundation for recovery. IndyMac was actively seeking to arrange a significant capital infusion or find a buyer. The recent release of the senators letter undermined the public confidence essential for a financial institution and took away the time IndyMac needed to pursue a recovery.
In addition to studying the Great Depression, I looked up the definition of Crisis. Wikipedia defines a crisis as
· A crucial or decisive point or situation; a turning point.
· An unstable situation, in political, social, economic or military affairs, especially one involving an impending abrupt change.
· A traumatic or stressful change in a person's life.
It says that reactions to a crisis include Fear, Stress, Shock and Disbelief, and Anger, and it describes the crisis response process as having definite phases which include Shock and Disbelief, Denial, Overwhelming Thoughts or Emotions, Acceptance, and Conclusion. After we accept what is happening, we are ready to work through the problems and all of their ramification and impacts on our lives. We are left with a desire to see things to their conclusion.
So does the rise in foreclosures constitute a crisis? The failure of IndyMac Bank, one of the largest bank failures in U.S. history, could certainly be considered a crucial or decisive point or situation; a turning point. I think we would all agree that are current economic situation could be described as unstable. And the rise is foreclosures is surely creating trauma and stress - for those facing foreclosure, for those homeowners who are seeing their property values decline, and for some depositors. So based on the definition of a crisis and after much soul searching, I have moved through the Shock and Disbelief, Denial, and the Overwhelming Thoughts or Emotions phases to Acceptance that this is a crisis.
I also looked up Panic. Wikipedia defines Panic is a sudden fear which dominates or replaces thinking and often affects groups of people.
So should we panic? NO. We should not allow our fear to replace rational thinking. We should simply accept what is happening and start working through the problems. We need to see this crisis through to its conclusion.
That's the primary reason I blog - to present the facts based on my knowledge and experience and encourage my readers to replace the overwhelming thoughts of fear and despair with rational thought based on the facts so we can all start working through the problems to find solutions.
What is the solution? I believe that one solution - possibly the best solution - is to halt the slide in home prices. The U.S. Senate last week passed an extensive package of housing legislation Friday, reacting to the continuing erosion of home prices and growing foreclosures by taking their most aggressive step yet to address the housing crisis. The package includes tax relief for homeowners, changes to the Federal Housing Administration, and a $300 billion program to refinance mortgages headed toward foreclosure into affordable loans. The legislation also overhauls regulation of faltering mortgage-finance firms Fannie Mae and Freddie Mac. The two companies have seen their stock prices drop precipitously this week because of solvency concerns, and lawmakers hope the creation of a new regulator with broader authority over the companies boosts market confidence.
House and Senate lawmakers still need to overcome a number of impediments before President Bush can sign the bill into law, but lawmakers are hopeful they can reconcile competing versions of the bill. The centerpiece for both bills is a program offering up to $300 billion of FHA-insured mortgages to help refinance struggling borrowers into affordable loans. The program would rely on lenders voluntarily writing down the value of a distressed loan for the homeowner to qualify for the new FHA-backed loan, and in return borrowers would have to share future price appreciation with the federal government. Other foreclosure-prevention and housing-related efforts in the Senate bill include $150 million in additional funding for housing counseling, $10 billion in additional mortgage-revenue bonds, and a housing trust fund to be funded by Fannie Mae and Freddie Mac.
The temporary first-time home buyer tax credit and foreclosure relief programs would increase home sales causing inventories to fall and helping to stabilize home prices and mortgage markets.
The National Association of Home Builders continues to lobby for several amendments to be included in the final cut of the bill - particularly a change to make the first-time home buyer tax credit (currently set at $8,000) effective for a full year starting on the date of enactment. Congress must move quickly to craft a final housing bill that will help struggling home owners and get the housing market and the economy back on their feet.
I encourage you to contact your Senators and Congressman and ask them to move quickly to reconcile the two bills and deliver the legislation to President Bush to sign.
Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc.
There has been a lot of media focus in the past few months on the historic rise in the price of housing in the United States over the past few years. This rise in price has made housing out of reach for many home buyers. For those who think housing in the United States is unaffordable, consider the following from an article in Thursday's Wall Street Journal titled How to Find Foreign Buyers For U.S. Properties.
Urban real estate in major U.S. cities costs much less than it does in many other industrialized nations. According to the Global Property Guide, an apartment in London costs $28,355 per square meter ($2,637 per square foot), and Paris $15,670 per square meter ($1,457 per square foot). By comparison, according to Chicagocondosonline.com, the median sales price in 2007 for a Chicago condo was only $294 per square foot, which comes to $3,165 per square meter.
Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc.
As green building grows in notoriety, how can you be assured that your new home or remodel is truly Green. You need to insist that your Builder's or Remodeler's claims are checked by an accredited, third-party certifier.
The Building Contractors Association of Southwestern Idaho (BCASWI) has formed a Green Building Council to encourage builders to adopt the NAHB National Green Building Program which offers innovative, resource-efficient building techniques, while preserving affordability. One key element of NAHB's suite of green building tools is their green home certification program, which is administered by the NAHB Research Center. The Research Center will accredit home certification program verifiers and act as the sole home certifying body for the National Green Building Program.
The NAHB Research Center is seeking interested, qualified individuals to become green building field verifiers the program. As the sole certifying body under the NAHB's National Green Building Program, the Research Center is responsible for training and accrediting eligible individuals to verify that homes across the country meet the criteria of the national certification program.
Verifiers accredited by the NAHB Research Center will, through a process of document review and on-site inspections, independently confirm that all green program requirements and points specified by the Builder or Remodeler are in place before a home is accredited.
If you are interested in becoming a verifier, you must have prerequisite training or experience that provides you a baseline understanding of general home building practices and specific green building knowledge. Specific types of experience that meet this eligibility requirement include:
One year of acceptable professional experience in home building and green building practices (the NAHB Research Center will determine what experience meets the acceptable level), or
At least 12 hours of green training approved by the NAHB Research Center, or
Designation by the NAHB as a Green Building Professional, or
Professional certification from Green Advantage (Green Advantage is a strong supporter of the U.S. Green Building Council and USGBC chapters), or
NARI Green Building Certification from National Association of the Remodelers Industry (NARI), or
RESNET Green Rater Certification, or
LEED Accredited Professional Certification from the U.S. Green Building Council
In order to become accredited by the NAHB Research Center, you must participate in training administered by the Research Center-either in person, via Web cast, or via self-guided online materials-and pass a verifier accreditation test. The course covers the protocol for verifying that a house meets the national certification program requirements and is intended to ensure that all verifiers across the country evaluate homes in a consistent manner. This training does not include developing the green expertise each prospective verifier is expected to have as a prerequisite.
In order for our local Green Building program to work, we need accredited verifiers. If you are interested or know someone who might be interested, you can learn more at http://www.nahbgreen.org/Certification/becomeverifier.aspx. Or you can call the NAHB National Green Building Program Hotline at 877-NAHB-GRN.
If you are a consumer and want to learn more about the NAHB National Green Building Program, you can visit the website www.nahbgreen.org or you can call or email me.
Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc.
I read the following article this morning and thought I would try something a little different. I've replaced all the references to the particular housing market and any other key words that might give away the answer with blank spaces. Can you guess which market the writer is writing about? I'll give you the answer at the end of the article.
Chuck
_______________ House Prices Decline the Most in Three Years
April 28 (Bloomberg) -- ____ house prices fell the most in more than three years in April as a dearth of credit and concern that the property slump is deepening deterred prospective homebuyers, Hometrack said.
The average cost of a home in __________________ dropped 0.6 percent, the most since December 2004, to $344,000, the ______-based research company said today in a statement. Prices declined 0.9 percent from a year earlier.
A surge in borrowing costs has prompted banks to withdraw their best mortgage offers, worsening the housing decline. Falling home prices are sapping consumer confidence and held economic growth to the slowest pace since 2005 in the first quarter.
``Weak confidence is effectively resulting in a `buyers strike,''' Richard Donnell, director of research at Hometrack, said in the statement. ``The current downward pressure on prices will only start to be reversed once there is a turnaround in buyer confidence'' that will ``revolve around greater stability in the financial markets and an improved economic outlook.''
The report is based on a survey of 3,500 real estate agents and ___________________ calculating average values using judgments of achievable prices rather than sale prices alone.
Prices fell in all 10 of the regions Hometrack follows. ___________ and ___ _____________ led declines, with a 0.8 percent drop. Prices in _________________, home to one in eight of the ___________ population, fell 0.7 percent. The average time to sell a property was nine weeks, compared with six weeks a year earlier.
Deepening Slump
The findings add to evidence the housing slump is deepening. House prices declined 2.5 percent last month, the most since 1992, according to ___________, the largest ____ mortgage lender. The _______________________________________s' measure of sentiment in the housing market fell to the lowest since records began in 1978.
Prices in _________________ fell 0.4 percent in March, declining for a second month, the _____________ said today in a separate report. On the year, home values increased 3.6 percent, the least since February 2006.
Mortgages approved by banks fell 46 percent in March from a year earlier to the lowest level since 1997, the ____________________ Bankers' Association said April 23. Falling property prices make ___________ feel less wealthy and reduce the amount of equity owners can tap for spending. A threefold increase in home values over the past decade has helped the ______ economy expand for 63 quarters.
Economic Growth
The slump has put the economy on course for its worst performance in 16 years, with the ___________________ predicting growth of 1.6 percent this year. Growth was 0.4 percent in the first three months of the year, the Office of ____________________ said April 25. The _______________, backed by the Treasury, on April 21 offered to swap around $99 billion in government bonds for mortgage-backed securities in an effort kick- start lending.
Higher money-market funding costs are making lenders reluctant to pass on ______________________ interest-rate cuts since December to homeowners. __________________________ and _________________ have led write-downs among banks on securities tied to U.S. subprime mortgages. Losses worldwide total almost $309 billion.
Kermit the Frog doesn't think so. But like a lot of things, it depends on who you ask. If you ask me, my answer would be "Yes, it is easy and it's getting easier."
In a new survey, which polled 1,001 U.S. homeowners, 28 percent of respondents said they believe it's extremely important to be environmentally responsible. But is it hard to build green? Do you have to live in a straw-bale cottage or some other strange building to say you're a green home owner? The answer is NO and NO.
In February, the National Association of Home Builders (NAHB) launched the NAHB National Green Building Program at the International Builders' Show® in Orlando, Fla. The new program helps to demystify the process and debunk the myths of green building for consumers and home builders. The NAHB program is designed to accelerate the movement of residential green building into the mainstream.
The program has an easy-to-follow checklist on its Web site - http://www.nahbgreen.org/ - to help make it easier for builders and consumers to include the seven essential elements of green building: energy efficiency, water efficiency, resource efficiency, indoor environmental quality, effective lot and site development, minimal global impact and homeowner education and maintenance.
Along with the checklist, builders and home buyers will find a wealth of resources on the site to help make green building a reality, including links showing how environmentally-friendly products and materials work.
Is it a lot more expensive? The survey revealed that 32% of U.S. consumers consider purchasing more expensive renewably sourced products to help deter global warming; and nearly 65% of U.S. consumers said they are willing to pay 5 percent more for products made with renewable resources. Whether you're considering building a new home, or just want to make your existing home more environmentally-friendly, you can take steps to go green that won't break the bank.
Many green elements can be included during the building design process. Using the Systems Engineering Approach to Home Design and Building we are able to design homes that are cost effective to build as well as energy and resource efficient. In fact, the energy consumption of new houses can be reduced by as much as 50% with little or no impact on the cost of construction.
Now more than ever, you can find a wide range of green building products in the marketplace to help achieve your goal of being more environmentally responsible. These green building products include green insulation products, like GreenFiber's Cocoon Cellulose Insulation made from 85% recycled paper fiber, mostly recovered post consumer content; BioBased spray foam insulation made from soybean oil, an annually renewable resource, produced by over 600,000 farmers, right here in the U.S; or UltraTouch fiber insulation made from recycled denim; energy-efficient windows and doors; energy-efficient furnaces, air conditioners, and water heaters; energy-efficient appliances; chemically neutral low VOC (volatile organic compound) paints; flooring; and natural landscaping products. Mst, if not all, home improvement stores carry a full line of compact fluorescent bulbs which use 70 percent less energy. And advances in green technology like solar roof panels and shingles and wind turbines have made these items less expensive.
The Building Contractors Association of Southwestern Idaho (BCASWI) has just formed a Green Building Council to promote the NAHB Green program to educate our members and consumers and encouraging builders to adopt the NAHB National Green Building Program which offers innovative, resource-efficient building techniques, while preserving affordability.
"We're bringing green building into mainstream home construction," said Steve Martinez, BCASWI President and local home builder. "Builders can do a tremendous amount to make homes more environmentally friendly, without pricing them out of the reach of the average homebuyer. The goal of our Green Building Council will be to educate builders and consumers about building green."
This summer, the BCASWI will begin offering the NAHB University of Housing's Green Building for Building Professionals course, leading to the Certified Green Professional designation - your assurance of commitment to continued education of the green building process.
But you don't have to wait to learn more about being green. You can visit the NAHB Green website at http://www.nahbgreen.org/. You can download a free guide at www.nahb.com/greeninnovation, or you call or email me.
Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc.
The recent report for the fourth quarter of 2007 found the price of housing in Boise “moderately overpriced.” So what does that mean with regard to the risk of future price declines?
Before I begin, I would like to emphasize that I adhere to the advice of the sixth century Chinese sage Lao Tzu. My intent is simply to share a little knowledge and offer a few observations. I am not making any predictions.
National City Corporation and Global Insights, an economic research firm, publish a Housing Valuation Analysis in which they evaluate single-family house prices in 330 metro areas to determine the extent to which housing in those markets is under or overvalued. That report designated the Boise metro area “moderately overvalued.”
Metro areas with valuations below the historically normal range, that is below -15 percent, are considered “undervalued.” Twenty-six of the 330 metro areas (7.8%) were actually considered “undervalued” in the 4th Quarter of 2007. Metro areas with valuations in excess of +32 percent are designated as “overvalued.” Twenty-one of the 330 metro areas (6.3%) were considered “overvalued” in the 4th Quarter of 2007, but this was down from a peak of 58 metro areas during the fourth quarter of 2005 and the second quarter of 2006 (a reduction of 11.2%). “Overvalued” markets present a risk of substantial future price declines (10 percent or greater). Metro areas with valuations between ±15 percent are consistent with the study’s standard deviation of the historically normal distribution and are considered “fairly valued.” Metro areas between “overvalued” and “fairly valued” are areas above the historically normal range of +15 percent, like Boise, and are designated “moderately overvalued.” While “moderately overvalued” markets have values above the historically normal range, they present very little or no risk of substantial future price declines.
National City Corporation and Global Insights employ a statistical technique to evaluate single-family house prices to determine “fair value” in the housing market. “Fair value” contrasts with financial asset valuation or “intrinsic value.” Unlike the Case/Shiller index which only considers the 20 largest housing markets in the U.S.. the National City Corporation and Global Insights study evaluates 330 metro areas which collectively account for 93 percent of all existing single-family housing units and 78 percent of all related real estate value, as of the fourth quarter of 2007. Their approach is statistical in orientation, examines a particular historical period — Q1/1985 to Q4/2007 — and accepts that house prices, on average, adhered to some normal relationship to underlying determinants during that time. The study examines the ratio of home prices to household incomes and attempts to explain the variation in that ratio as a function of four key determinants: Household Population Density, Conventional Mortgage Rates, Relative Income Level, and something they refer to as Constant. Constant is a value they calculate for each metropolitan area to control for historically observed differences in metro area price-to-income ratios that are not explained by the other three determinants. These values reflect a variety of difficult to quantify, but nonetheless important, factors that influence prices including pollution, climate, expected property price appreciation, cultural amenities, school systems, miscellaneous costs, (e.g. tax and utility rates) and geographic location.
The data for the Boise MSA suggests that housing in the 4th quarter of 2007 was overvalued by 26.1%. But the study cautions against assuming that a particular degree of overvaluation implies that house prices are destined to decline by that amount. For example, the observation that Boise, Idaho is overvalued by 26.1% should not be assumed to imply that prices here are headed for a 26.1% drop. They explain that this is not necessarily correct for the following reasons:
• Housing markets tend to adjust very gradually and price declines, when they occur, have historically averaged 18 quarters in duration. Because house prices determinants generally improve over that time (especially population density and incomes), price declines are typically about one-half the initial degree of overvaluation.
• Historically normal dispersion of valuations is quite wide and their model has a standard deviation in house price valuations of +/-15 percent, meaning that any valuation between 15 percent overvalued and 15 percent undervalued should be considered statistically normal.
The report includes data on past price corrections in metropolitan areas over the past 23 years. It defines price corrections as declines of at least 10% over a period of at least 8 quarters. Only 102 of the 330 markets have experienced severe enough price corrections to be included in the report. The peak valuation in those 102 markets ranged from 98.5% in Midland Texas in the 2nd quarter of 1986 to a -0.9% for Merced, California in the 4th quarter of 1990. The price corrections ranged from a decline of 35% over 20 quarters in Anchorage, Alaska from the 2nd quarter of 1985 through the 1st quarter of 1990 to a decline of 10% over 23 quarters in Napa, California from the 3rd quarter of 1991 through the 1st quarter of 1997. For the 102 markets, the median or typical degree of overvaluation was +32.1% and the typical correction episode saw a median decline of 17% over a median duration of 16 quarters.
Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder – Chuck Miller Construction Inc.
(208) 229-2553
www.chuckmillerconstruction.com
Condominium Living Offers Convenience, Amenities and a Good Return on Your Investment.
Is condominium living right for you? According to the National Association of Home Builders (NAHB), condos are now an important housing option for home buyers nationwide. At the height of last year’s wave of new condominium construction, condos represented nearly half of all new multifamily building, with that rate forecast to stabilize at about a third of the multifamily market by late 2008.
Why are people choosing condominium ownership? Many home buyers find that condos offer advantages that a traditional single-family home doesn’t.
Many empty nesters thinking about enjoying their freedom now that the kids are out of the house are purchasing condos. Active seniors—especially those who once lived in urban areas—are returning to downtown areas, leaving behind the larger house, yard maintenance and the daily commute. If you fall into this category, you may want to opt for a smaller, easier-to-manage condominium home that’s not only close to your job, but also near shopping, dining and entertainment.
Baby boomers anticipating retirement frequently purchase condominiums or townhomes in areas offering a favorable climate, a variety of recreational opportunities, cultural attractions and easy access to good medical facilities. Some purchase condominiums or townhouses near their grown children and grandchildren. These may be primary residences or secondary homes. Keeping a second home tidy and undisturbed when you are not there can be a hassle. However, when you purchase a condo most of the unit’s upkeep is covered by your monthly condo fee, whether you are there or not.
As I have noted in previous blogs, most of the rapid unsustainable appreciation in the price of houses in the past few years was the result of increases in the cost of land. An NAHB study on construction costs for single-family homes in 2007revealed that the raw land cost represented 10% of the cost of a new home. Because condominiums and townhomes projects typically are higher-density developments (more living units per acre) than single family detached home projects, the raw land cost is spread over more units. For this reason, the cost of condominium is generally less than that of a single-family detached home of similar size and quality.
Even though rates have risen slightly, mortgage interest rates are still near a 45 year low. Young people may find that purchasing a condo as their first home can be both more financially attractive and more feasible than you might have anticipated. They may consider the purchase as a step towards affording a more substantial residence later. Many of today’s condos are located in downtown in neighborhoods where young professionals congregate.
Condo can also be a good stand-alone investment. You might find that it makes financial sense for you to purchase a condo in a university community like Boise as an investment – one that can be used by your child during his or her college career, then rented or resold after graduation. You could purchase a smaller used single family home, but multifamily developments built to be sold as condominiums often feature value-added amenities and services not found in older existing neighborhoods.
I don’t know about you but I have can think of much more enjoyable ways to spend my evenings and weekends than mowing the lawn, pulling weeds, or cleaning the gutters. That’s why I chose a condominium. When you invest in a condominium, many everyday maintenance activities are no longer necessary, and the few that are generally are covered by your monthly condo fee.
Are you empty-nesters or soon to be empty-nesters? Is your current home larger than you need or will it soon be? Are you retired or nearing retirement? Do you travel frequently on business or vacation? Are you busy professionals who value your free time? Are you a younger buyer looking to purchase their first home? If you answered yes to any of these questions, condominium living might be a good bet.
If you think condominium living might be right for you, I know of two very nice new condominium units in Hidden Springs with more on the way. You can view them both right here on BuildingCredibility.com or you can visit my website.
A good friend of mine recently observed that I seem to be using my blogs to save the home building industry. He expressed his concern that most of my readers would view that as self-serving. He strongly encouraged me start selling myself and provide people invaluable information.
My friend's observation leads me to believe that my purpose has been misinterpreted. I am not trying to save the home building industry. So what does this have to do with Fear and Anxiety? While I admit that might be a secondary objective, my primary objective is to help you, my readers, overcome your fears and anxieties regarding your decision to buy or build a new home.
Wikipedia defines fear as an emotional response to tangible and realistic dangers and states that most fear is usually connected to pain and offers the example that some people fear heights because if they fall, they may suffer severe injury or even die upon landing. It notes that fear is a survival mechanism, and usually occurs in response to a specific negative stimulus. It also emphasizes that fear should be distinguished from anxiety, an emotion that often arises out of proportion to the actual threat or danger involved. It describes anxiety as a physiological state characterized by a number of components that combine to create the feelings that we typically recognize as fear, apprehension, or worry.
I have also heard fear and anxiety described using the acronym FEAR standing for False Expectations Appearing Real. As I stated previously, my primary objective is to help you overcome your fears and anxieties regarding your decision to buy or build a new home. The available economic and demographic data such as the employment to permit ratio, the number of new household being formed or in-migrating to our market, the low vacancy rates, and other data indicates that there are a lot of you who would normally be buying new homes who aren't. I and others in the industry believe that your decision to wait is based, at least in part, on fear and anxiety arising out of all the negative news and misleading data on the state of the national housing market and the national economy - news of plummeting home values or the inability of anyone with less than perfect credit and or a large down payment to obtain a mortgage.
I would like to know if I'm right or wrong. If I'm right, I would like to know what your fears are so that I can either validate or, hopefully, alleviate them.
There is a Japanese proverb that "Vision without action is a daydream. Action without vision is a nightmare." If you have a vision of home ownership, but fear and anxiety are preventing you from taking action, let me help you overcome your fears. If you are prepared to act on your vision of home ownership, let me help you clarify your vision and set realistic expectations so your action doesn't turn into your nightmare.
Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder - Chuck Miller Construction Inc. (208) 229-2553
Chuck Miller GMB CGB CGP MIRM CMP MCSP CSP
;)
;)
