NEW HOME PRICES ARE NOT GOING DOWN.

A prospect came into our models yesterday looking for a brand new home, around 2000 square feet, with granite, among other options, and a pool. Normally this would be cause for celebration, but then he made the proclamation that he wanted it for "$299,000", and not a penny more.

Apparently accompanying this statement was his observation that builders are going out of business and that they were having to give homes away. Let me leave alone for a moment the question of why someone would want to buy a home from a builder they knew were going out of business, and let's look at what's wrong with the whole pricing perception.

While it is true, obviously, that the real estate market has experienced a strong decline, what most people don't realize is that real estate is local in nature, and that what is going on in some areas of the country, is not necessarily what is going on everywhere in the country. Further, there are really at least three distinct product offerings in each real estate market.

There are:
(1) resale homes, the value of which is determined by comparable sales which are measured by what others purchasers would pay for a similar home in the neighborhood.

(2) built for sale homes or "spec" homes, which builders have built on speculation, trying to take advantage of the past demand for new homes ready to move into.

(3) contracted or to be built homes, which do not yet exist and are specifically "built to order".

Each of these categories is experiencing a different phenomena right now. Let's address them in order.

As for resale homes, for the most part, these are privately owned, owner occupied homes. Most of the people who had to sell these homes have already sold them, or they may be on short sale or foreclosure. For those that remain, I have found that most of these people are going to wait out the market. After all, they have a place to live and don't have to move. They are not going to lower their prices anymore than they already have. And although the foreclosure market is higher than normal (and higher than any of us would like) it still represents a statistically small amount of homes when compared to the total market size.

For example, estimates for sub-prime mortages put the total size of that market at less than 15% of all mortgages; and only 15% of those are considered in danger of foreclsoure (not in foreclosure). That translates into about 2.25% of the whole market.

In the Built-for-Sale category, you will find most of the inventory held by large building companies, most often ones that provided builder financing, and so buyers or investors could get by with a relatively small deposit before they had to close on the home. When the market turned, many of these builders were left with completed homes and no closings. This is where the bulk of the new home inventory comes from. Even in the most conservative estimates, the national levels for this inventory is somewhere around a twelve month supply or less. Here in Manatee and Sarasota, the supply is actually much lower. According to the last Metro Study report, there is a four month inventory of vacant developed houses. This is of particular note, since no builders are building new spec homes, and it takes most builders six months or more to build a house. This number will only continue to decline at current absorption levels.

Finally, we have the new construction category, which is when someone contracts to build a new home. Many people feel that prices should be going down for these homes, when in fact the opposite is true. This is due to a variety of contributing factors. First, there have been numerous material cost increases over the past several years, many of which were absorbed by suppliers, trades and builders, since it was hard to raise prices in a down market. Unfortunately, this practice can only go on for so long, especially without any compensating new sales, since no one can afford to sell something for the future at less than it costs them.

Steel alone is predicted to increase as much as 70% during 2008. Petroleum products continue to go up, which includes anything that has plastic in it. Remember, there are still countries and places in the world that have high demand for raw materials, and since many domestic suppliers have lowered their inventories, prices have remained steady or increased.

On the labor side, we have seen inflation without any construction wage growth, and trades have had to absorb increasing insurance costs, transportation costs, health care and food products. Just about everything that goes into a house in Florida gets shipped here, so the increasing fuel and shipping costs have to be passed on. All this means that builders will be raising prices, so get ready for it. In fact, I would be concerned if a builder wasn't increasing pricing this fall, since we know material and labor costs are going up. The only way around this would be to offer a lower quality or specification level product, or to hire cheaper labor. Neither of these is good for the discriminating buyer.

For those of you who think it is wise to beat a builder up on price, it may be possible on an inventory home, but for a to be built home, remember it doesn't exist yet, and what you may be negotiating is the highest quality labor the builder can find for the cheapest guy who will agree to do the work because he is desperate. Is that really who you want to build your house? Most builders could substitute materials, change subcontractors, and cut costs significantly without violating codes or their contracts, and you would never know the difference, until you lived in the home for a few years.

Please don't be foolish and think you are getting a good "deal" in those instances. Your "deal" will certainly be outweighed by the low quality you get to enjoy years down the road. I would rather apologize once for our price, than for the quality your home for the entire time you own it.

After all, when was the last time you paid the cheapest price for the highest quality item?

So, in summary, now is the best time to buy. You can still hit the area of the market that is just past the bottom. If you are looking for a "deal" jump on the foreclosures or short sales now, as they are the last of the areas to still get "bargain". Of course, you may be stuck with homes that need a lot of work and have no warranties, but you usually get what you pay for.

If you want a new home without those headaches, and don't want to build, then you might consider some of the dwindling builder inventory, but be fair and move fast, it should be gone by the end of this year.

Finally, if you are consider building, jump now. I don't think prices will ever be lower to build a new home, at least not in Florida. I know material prices are going up, and I shudder to think about the labor problems we will have as the market comes back. We have lost so many tradesmen already in this downturn. But that is another topic.