Weakonomi¢s » loans

The Megalist of Calling the Housing Bottom

The Weakonomist — Tue, 07 Feb 2012 15:23:50 +0000

As of this writing we are converging on the 6th year of this housing mess, and for almost 6 years we’ve heard people from the head of the Federal Reserve to real estate experts to Jim Cramer say we’ve reached the bottom of the housing market. For too long self-interested parties have made claims the worst may be over. They’ve all been wrong. It’s time to chronicle this journey. Starting with the end of January in 2012 and going back to 2006 I’ve compiled a list. Please note the listed sources aren’t always the ones making the claims, it’s just who published the claim.

Please enjoy the list:

1/31/2012 Homeownership rates fall to 66% as downturn nears a bottom – USA Today
1/10/2012 Has The Housing Market Hit Its Bottom? – Forbes
12/8/2011 Is the Housing Bottom Finally in Sight? – Kiplinger (my favorite!)
9/27/2011 This Has To Be The Housing Bottom – Seeking Alpha
6/21/2011 The Housing Bottom Is Here: Economist Russell Price Explains – Daily Finance
4/24/2011 We Could Be Near a Housing Bottom – Seeking Alpha
2/2/2011 Why the Housing Bottom Might Be Here – US News
1/28/2011 U.S. housing bottom seen in mid-2011: poll - Reuters
11/19/2010 Housing downturn has hit bottom – The Business Journal
10/25/2010 Rising Home Sales Point to a Housing Recovery – Daily Finance
10/8/2010 3 Signs the Mortgage Market Has Hit Bottom – Smart Money
5/12/2010 US Housing Prices Projected To Reach Bottom In Q3 2010 – NuWire Investor
4/27/2010 We Have Met the Housing Bottom, Maybe – The Atlantic
4/22/2010 More Signs of a Housing Bottom – Seeking Alpha
1/29/2010 In hard-hit markets, some see signs of bottom – MSNBC
2/12/2010 Builders: Housing bottom is here – SunSentinal
12/15/2009 Builders Say 2009 Marks Housing’s Bottom, 57% Predict Revenues Increase in 2010 (I checked, and a few did have revenue growth, most didn’t, and 2011 was worse) – World Property Channel
10/30/2009 Moody’s: No Housing Bottom Until Q3 2010 – Wealth Daily
8/21/2009 We Called It: The Housing Bottom – The Street
5/13/2009 Yet Another Greenspan Housing Bottom Call – Barry Ritholtz
2/9/2009 U.S. Housing Market May Bottom in 2009, Zandi Says – Bloomberg
10/27/2008 UCLA sees O.C. housing’s bottom by next summer – OC Register
8/27/2009 Cramer Calls the Housing Bottom (Q3 2009) – CNBC
8/17/2008 Greenspan sees housing bottom, criticizes bailout – Fosters
7/24/2008 The Media Are Missing the Housing Bottom – National Review (Larry Kudlow called this one)
2/21/2008 No housing bottom until ’10: CP Morgan – Reuters
1/15/2008 Mortgage bankers expect housing market to bottom out in third quarter – BizTimes
1/8/2008 Stable Existing-Home Sales Expected in Early 2008, then Gradual Rise – National Association of Realtors
12/19/2007 Is Collapse of Home Prices About To Hit the Bottom? – The Sun New York
12/1/2007 Will Home Prices Hit Bottom in 2008? Yes, but . . . – Kiplinger (again? of course!)
11/26/2007 Deere Sees a Housing Bottom in 2008 – Seeking Alpha
9/14/2007 Hovnanian Chief Says Housing Bottom Is `Very Near – Bloomberg
8/16/2007 Contradictory News Suggests Housing Bottom Could Be In View – Realty Times
5/25/2007 Housing Market Nears Bottom – Forbes
4/20/2007 Housing Bottom Callers – Calculated Risk (Hank Paulson here)
4/17/2007 IMF believes US housing market may bottom out – Reuters
2/17/2007 NAR Says Existing Home Sales Have Hit Bottom – Realty Times
2/8/2007 Housing still on down slope Economists say no recovery until midyear; prices face record fall – Market Watch
12/21/2006 Housing ‘close to bottom,’ realtor-group economist says – Market Watch
12/5/2006 Home builders see bottom of housing slump – CNN Money
11/15/2006 Housing slide may deepen; New forecast sees bottom in 2008 – Boston Globe
10/6/2006 Greenspan Says `Worst’ May Be Past in U.S. Housing – Bloomberg

When will we see the real bottom? It could be soon, one of the few people I trust to have an unbiased opinion (and someone who has attempted to track all the prior claims for a bottom) explains there are actually two housing bottoms to look for and they may be closer than you think. We’ll see if he’s right, or if he gets added to this list.

If you have more articles you want listed claiming a housing bottom, put them in the comments. While there are many stories that talk about the bottom, for the sake of this list just look for headlines.

Image: Nick Bastian Tempe, AZ

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Pay Me To Borrow Money, From You

The Weakonomist — Mon, 06 Feb 2012 15:43:13 +0000

That’s what the US Department of Treasury may be telling investors in the near future. What that effectively means is that the rate the US pays to borrow money would be negative. Investors would be paying the US for the privilege to lend to them? How can this happen in a world where our debt was downgraded just last fall? Interest rates on US debt have done nothing but fall since the downgrade. An astute reader can see that this is counter-intuitive, after-all if your credit score fell from 750 to 700 you couldn’t expect to get the same rate on a loan could you? Could you?

Maybe you could. Because interest rates aren’t just driven on the likelihood of default, they are also dependent on the market. And while the US went from being “near perfect” to “perfect-ish”, the global bond market has been in turmoil. This means that the US is still considered the safest place in the world to park your money, and so rates have fallen. Just as a person with a 700 credit score today can get a better loan rate than someone with 750 a couple of years ago.

Rates have gotten so low they’ve actually been at zero percent recently and traded at a negative yield in the secondary market. The US Treasury may soon offer some short term Treasury bills with what’s called a negative coupon. When investors submit bids for the bills they might offer $101 for a bill worth $100. Under normal circumstances they might bid $99. In 4 weeks the US would give them $100 back in either circumstance. When investors are allowed to bid $101 for the a $100 bill, that is a negative return, or negative interest rate. The idea of investors paying for the privilege to lend money to the US is so weird the Treasury systems will have to be updated just to make it possible. But this is something that has already been happening in the secondary market for these bills and so by updating their systems, the Treasury would either have to borrow less or could perhaps consider taking the proceeds and putting it towards our national debt.

Negative interest rates are not common, but you can effectively see them all around you. Think about your checking account. When you deposit money into a bank you are loaning it to them. They will pay you a small rate (if at all) for allowing them to borrow it. But then the bank slaps you with a couple of fees every month and even if you are getting interest the fees more than offset it. So you’re paying the bank for the privilege to lend them your money. Banks don’t see it this way because of all their overhead, but essentially that’s what you got.

Does it make you kind of wish banks would just get rid of fees and charge a negative interest rate? Part of me feels that way. Ditch all the fees, just charge 1% per year based on some kind of average balance. But that will never fly because each account has a basic fixed cost. If it costs $100 a year (it’s actually more) to keep a checking account going and they need $20k in balances to make that back then they aren’t going to charge wealthier customers for their business. They wouldn’t need to because they could make the money back elsewhere. People with balances below that line will just cost the bank money. So you’d end up with a segregated population that is divided by the people who pay for the privilege to lend the bank money and have access to their cash, and the people that are paid to have the same access.

Banks know that middle and lower-income demographics won’t respond well to that, so instead you have the al la cart menu fees which, while annoying, have the appearance of being fairer. Plus no consumer is going to park $50k in a place that pays -1%. So while the Treasury is looking forward to indulge in a little negative interest rate territory don’t expect to see it show up on your banking documents for a long time.

Read: Treasury may let investors pay to lend to U.S. government (Reuters)

Negative Bill Auction Yields Would Avoid ‘Grab-a-Thon’ (Bloomberg)

Image: SqueakyMarmot

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Our Cars Tell The Story Of Our Consumption

The Weakonomist — Thu, 02 Feb 2012 15:13:49 +0000

Joanne Muller over at Forbes did some interesting digging on the car buying habits of Americans. Less than 40% of rich people (defined in this case as those making $250k+) actually buy luxury cars. And about 8% of people earning less than six-figures do. Now that doesn’t sound all that crazy but Thomas Stanley extrapolated a little bit more from those numbers:

I estimate that there are 2.5 million households or nearly 2.2% of the total that have annual realized incomes of $250,000 or more. Using Ms. Muller’s estimates that 39% of “the rich” buy luxury brands, one can estimate the number who do so, approximately 975,000. Ah, but this population is much smaller than those households who drive prestige makes but have annual incomes under $100,000. About 30 million households have annual incomes in the $50,000 to under $100,000 bracket alone. Translated: 8% of 30 million = 2.4 million who are buying luxury cars but are not in the so-called “rich” category. This population is nearly 2.5 times the size of the high income/luxury vehicle buyer.

In other words, most of the people buying luxury cars make less than $100,000 a year. That alone is interesting but we can go back into the numbers and learn more.

Dr. Stanley discusses in his post that the average price paid for a car by a millionaire is just over $30 grand. For the decamillionaire: $40 grand. So when someones wealth increases by factors, their spending on vehicles increases by fractions. That means that at some point on the wealth stream we stop spending more on our cars. But with so many people buying luxury brands with lower incomes it’s clear that until we reach that point, we’re overspending on cars. It sounds like that many people are faking being rich, until they actually are. Then they scale back.

This implies two things about rich people:

After a certain point projecting status becomes less important and money is spent on things with more value (maybe a second home, private school for the grandkids, charity).
Once we cross a certain point we start saving a greater percentage of our incomes

These two things are not mutually exclusive.

But what does it all mean? These numbers tell me a story about people that live beyond their means, and it’s not just with cars. It’s with purses, vacations, clothes, jewelry, food and even gifts. Most displays of economic status are not likely to be proportionate to the actual status. It is only and indicator of willingness to pay.

Personal Car Advice:

Should you be the type that struggles with figuring out exactly how much money to put towards a car, here’s my little formula. Take your total household income and subtract out any debt payments that aren’t for a mortgage. Take half of that and you’ll have the total maximum value one should ever have for their vehicles. An example is in order.

Say your household makes $90k and after student loan and credit card payments you clear $80k. Half of that is $40k so you should never have cars totaling in value beyond that. For a family with two adults that’s two cars worth $20k each. That is not to be confused always having cars worth that much. Each car should be owned for at least five years and new purchases should have at least 50% down and paid off within 2 years. Buy a car where you can do that. Get all that?

Now, spending more than $30k on any one car should be considered a luxury purchase and made in all cash. If you can’t swing those things then you can’t afford the car you want. If you can’t follow all that definitely just buy a car that costs 25% of your income, all cash.

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Kill Off The Mortgage Interest Deduction

The Weakonomist — Fri, 20 Jan 2012 14:56:30 +0000

You can find a poll to support just about anything. And recent polls support that idea. Another recent poll is showing people are very interested in changing the income tax deduction on mortgage interest and about a quarter of people are okay with eliminating it altogether.

Back before the days of the mortgage crisis I always thought the deduction to be kind of silly. It was believed that the deduction would encourage more people to buy homes, and that home ownership was better for the economy. A number of policies were put in place to encourage home ownership, especially at the lower income levels, and that’s partially where the subprime mortgage originated from.

The deduction didn’t make sense for a couple of reasons. First of all, it isn’t really fair to allow a deduction on mortgage interest and not something for rent. Second, I would expect most lower income people able to get a mortgage would probably just take the standard deduction instead of deducting interest anyway.

A number of ideas have been proposed to encourage home ownership among lower income earners and many could serve as a potential replacement for the interest deduction. The most well-known is the first time home buyer tax credit. This famously put a temporary floor on housing prices when it was available to people. When it expired, prices fell again. If this were available only to first time buyers then it does a good job of helping people get up and running. Unlike the standard deduction, it would likely play more of a factor into the home buying decision.

Another idea is to limit who can take the deduction based on income. If you make a certain amount, you can’t deduct. From a government revenue perspective that sounds nice but I don’t think it’s fair. Perhaps the solution would be to make it so you can only deduct interest on the first mortgage, not a HELOC or mortgage for another house.

Here’s what sucks about the mortgage deduction today though. I don’t think it plays a factor in anyone’s decision to purchase a home. It’s just a nice to have. Since it’s a deduction you have to file for each year, it doesn’t have the effect of lowering the purchase price or keeping your payments low. Likely, all it does it boost your federal return a little bit every spring.

Honestly, I think there should be some equity. If we’re going to subsidize monthly payments on mortgages, we should do the same for rent. Just like if you have to buy your own health insurance, you should be able to deduct that too. But tax policy in this country isn’t efficient or well-planned. That’s why I’m very much in support of changing the way the deduction works now. But, because I don’t think the current deduction even factors in 99% of home-buying decisions, I’m okay with eliminating it completely.

Image: iAudioguide

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Flyover States and MFing Global

The Weakonomist — Thu, 15 Dec 2011 15:21:04 +0000

There are some elements of finance that even I struggle with. For example, how can you draw a line from a wheat farmer in Nebraska to a bankrupt brokerage in New-York City? Maybe that connection is easy, but why is the farmer’s money missing just because the farmer’s brokerage company went bankrupt? And why are the funds belonging to the wheat farmer in Saskatchewan just fine?

If a bank goes under then technically speaking a customer’s assets should be just fine. Maybe the bank no longer has the resources to manage your money, but your money should still be find, be it investments or cash. These assets would be transferred to another institution.

But with dedicated brokerages there are some different rules (mind you these rules may apply elsewhere too). Brokers can engage in their own financial transactions and MF Global had done just that. They bought European debt. You know how that went. So they lost a bunch of money. But part of the deal with their bets on debt requires posting collateral (because they borrowed money to buy the debt). That collateral can come from customer funds. So if you are a farmer and post collateral to make trades in wheat futures, MF Global can use your collateral as their own. One would question the logic behind this, and many have. This is why there are limits on how much of this can be done, and it is against the law to use Canadian funds to do it.

American and British funds are fair game, which is why the Nebraskan wheat farmer can’t seem to get his money back. That money is missing because even with the rules on posting collateral as collateral, MF Global may have simply broken the rules to make its own trades. So why is MF Global in such a mess? If you aren’t following there are two problems. The first is they made bad bets with their own money, the second is they may have broken the rules with posting customer money as collateral for those bets. If you want to know more about this read up on the Shadow banking system, repurchase agreements, and rehypothecation.

Now all you east coast and west coast people who don’t work on Wall Street may wonder why some wheat farmers have anything to do with a broker you’ve never even heard of. Look at it this way, imagine you averaged $75,000 a year in income over the last 10 years. But some years you made $15k and other years $150k. You had absolutely no control over what it would be. If someone offered you the chance to guarantee your income in advance for a small fee, would you take it?

Of course you would. Essentially this is one service a broker like MF Global offers. Farmers take advantage of it to smooth out the price of their product. Everything from corn to pork can be as volatile in price as a stock, so farmers don’t want to stress about how much their wheat will be worth once it’s grown. They use brokers like MF Global to engage in contracts that lock in prices ahead of time. MF Global takes a small fee, and may also collect collateral if prices aren’t paid up front. This is the collateral that ends up getting used in the rehypothecation (you haven’t looked it up yet?).

I hope people in the middle-states aren’t offended by my headline, but it helps draw attention to the idea that the global economy is truly global. A small town farmer’s money very easily got tied up in the European debt crisis and with a firm that is doing no favors for Wall Street’s reputation for recklessness.

MF Global’s bankruptcy is the largest since Lehman Brothers back in 2008. Thankfully this seems to be an isolated incident and not a domino. Hopefully new rules will be put in place to prevent such reckless behavior, should it be determined rules would have actually prevented this.

Image: mrpbps

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The Fall Of Finance

The Weakonomist — Tue, 13 Dec 2011 15:10:21 +0000

Even though Occupy Wall Street has lost some of its muster, the message has been loud and clear, people are pissed off. The easiest target has been Wall Street, and it will likely remain that way for some time. They certainly deserve a lot of the blame, blame they’ve been getting since 2007. Over the last handful of years a lot of stuff has come out. Some of it criminal, quite a bit of it immoral, and still more simply questionable.

However, there comes a time when the law of diminishing returns kicks in. I suspect as we enter the 6th year of housing issues we’ll start to see that. For some perspective, one should note that there are very few people left at the big finance companies that can be considered responsible for the crisis. Most of the execs that were running the show at the most screwy companies are gone. What’s left are people who are simply cleaning up the mess others left behind. Many of the ones most responsible for the financial crisis have quietly stepped out of the spotlight and most of them left before you ever had a chance to know them. Heard of Sandy Weill, Herbert and Marion Sandler, Martin Sullivan, Daniel Mudd? I could keep going. And you can look these people up on your own. They disappeared, and if 1% of the Occupy Wall Street protestors could tell you who they were I’d be shocked.

It’s not just the public who have turned their backs on Wall Street, Wall Street has too. The financial companies are worth so little these days, and they continue to struggle. The stock market would actually be up this year if it wasn’t for the banks getting killed so much. And their five year performance is just as bad. Below are the average market caps (investing term for company size or value) of the five largest companies in four sectors of the S&P500 exactly five years ago yesterday:

Technology: $158 billion
Consumer Staples: $121 billion
Energy: $168 billion
Financials: $188 billion

It’s clear who the big dog is in 2006. However since then the landscape has changed. Here’s how things look now for those companies:

Technology: $158 billion—————-> $236 billion (50% increase)
Consumer Staples: $121 billion——–> $139 billion (7% increase)
Energy: $168 billion———————> $170 billion (1% increase)
Financials: $188 billion—————–> $130 billion (38% decrease)

This is far from scientific*, but no matter how you measure it, finance is literally a fraction of what it once was. Hundreds of billions in value are gone. It continues to shrink too. 2012 won’t be a good year for these companies, even if it is for other industries. They can’t make money on loans, and they can’t even do it on checking accounts any more.

There has been a generational change in finance. It has and always will play in important role, but finance will likely be so regulated for the next couple of decades it will be relegated to the background, where it rightfully belongs. Out of sight, out of mind. Finance has entered the dark ages.

For now though the targeted attacks simply start to have less and less meaning. And not just because there might be better targets out there. But please continue to attack greed and corruption, it will help keep it out of this industry and others in the future. Technology: you’re on watch.

*Nerds can email me for specifics.

Image: Look him up

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Pushovers Have Low Credit Scores

The Weakonomist — Mon, 07 Nov 2011 14:42:34 +0000

One of the great things about the 21st century is the collection of data. We have so much data we barely know what to do with it. Companies and businesses grapple with this reality every day. Too much data and no way to analyze it and turn it into something useful. Sometimes the people who collect data have more resource than they need, and so we get studies like this one:

LSU Researchers Find Link Between Personality and Credit Scores

Personal finance sites will note that the connection between your personality and credit score. Specifically, people that are more agreeable are more likely to have low credit scores. It is not known for certain, but one could reasonably assume agreeable people are more likely to cosign on a loan with someone risky. Stubborn people are less likely and do in fact have higher credit scores.

There was also well-known connection between disagreeable or stubborn people and workplace success. That also connects with a high credit score. So stubborn people have better credit and careers.

Of course there is no practical application for this knowledge. Like many of my posts, they merely make you raise your eyebrows and give you something interesting to say at cocktail parties. By the way, do people go to cocktail parties anymore?

Thankfully the researchers didn’t limit their scope just to that. They also took on an often controversial topic in the employment screening industry: using credit reports.

Some employers will use your credit report as a part of a background check. The theory is that someone with a poor score might be more likely to steal, or be just plain lazy. But there really was no connection in this space other than a correlation with high credit scores and some good measures of job performance.

But even these aren’t likely to be applicable to employers on a broad level. On the whole I consider this study a complete waste. It’s not surprising that pushovers have lower credit scores. But that doesn’t make them a greater risk if the impact merely comes from cosigning on loans. So that kind of negates the purpose of a credit score: to asses risk.

What I’d really like to see is a more granular view the credit score and the results of personality profiles. Since the credit score is made up of various factors (length of credit, type of credit, etc…) I’d like to see what makes actual contributing factor to the correlations with various personality types.

Via: Bad attitude, good credit score (Taking Charge)

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On Externalities And Student Loans

The Weakonomist — Fri, 28 Oct 2011 14:42:59 +0000

This week Obama announced a more aggressive version of his original plan to help people saddled with student loan debt. The details are pretty simple, under the new plan you won’t have to pay more than 10% of your income towards student loans and after 20 years of doing that whatever else you owe is forgiven.

People with student loans now won’t really benefit from it, the details are beyond the scope of this article but you can read about them here. It will help some people going forward. But, analysis of the benefits shows it will really only help people making $32k a year or less. I don’t stand by those numbers myself, but the point is that based on the average debt burden of a grad, there isn’t a whole lot of benefit.

There are two groups that really do benefit though. The first group are grads who majored in Studio Art at Middlebury and financed their 4 years of Vermont-based partying. They have good friends who went to state schools but still borrowed the maximum amount and used the refund checks to buy beer and weed only to end up working as a barista and collecting tattoos of images they don’t really understand. Neither of these groups were especially responsible with their time at college and have loads of debt they can’t afford. The loan program will help them quite a bit.

The second group we know all too well. We see them every weekend in the fall. The schools! Who would benefit the most from making it easier and easier to pay for college? The colleges. By making loans easier to pay, Obama increases demand for college. Increasing demand leads to increased prices (tuition). This is a side effect of Obama’s plan to increase the number of college graduates by 2020. But that’s like curing cancer with an increase in heart disease. All the while grads will still have to pay back their loans because they aren’t bankruptable. Having college grads doesn’t mean anything. Having college grads in chemistry, computer science, and engineering and jobs for them when they enter the workforce does.

And for those expecting relief in not having to pay them back after 20 years…. really? You don’t think you’ll have them paid off after 20 years? How slow is your income going to grow? Under all but the most extreme circumstances, all you’re going to do is substantially increase the amount of interest you pay on the loans.

This amounts to charity. It helps the people in the worst of circumstances no matter how they got there. Yes it is needed, but there’s a reason I don’t give money to people sitting on the median in intersections. I believe my dollar will go a lot farther treating the problem, or trying to prevent it. To try to solve these problems by treating the symptoms only is irresponsible in my opinion. It’s better than nothing I suppose, but without some measures to help solve the problem of driving up debt in the first place it’s just a handout.

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Weak Links: Yes The Downgrade Was Weeks Ago But This Is Still Funny

The Weakonomist — Fri, 23 Sep 2011 15:06:16 +0000

Do you remember Robert Reich? You probably don’t but he was the Secretary of Labor under Clinton and a well-known political economist. Apparently he’s got a sense of humor about his profession as here he is explaining what happens to the US if our debt continues to get downgraded. (Via Gizmodo)

Here are some other stories I’ve been itching to share lately but just haven’t gotten around to writing about:

The Mathematics of Basketball – Yes I know football just started but basketball isn’t too far off either. If you’re really nerdy or just a big basketball fan this is a great article that breaks down the strategies of basketball in terms of math and statistics. So much of the game can be broken down into when you should actually take the shot.

The Etrade Baby Gets Smoked – I don’t do much with brokerages, but I’ve always like the Etrade commericals with the talking baby. My buddy Josh at Reformed Broker came across this little gem of a video that shows what’s more likely to happen to folks that trade all the time than the success the baby tends to have in the commercials.

You can’t get a mortgage because interest rates are too low – It’s a good thing the Fed is going to continue to drive down mortgage rates.

Rick Perry And Texas Job Numbers – The most definitive look yet at a what will be a controversial topic for the next year.

Your Law Firm Does Not Have Your Incentives – I know I know, this is the most surprising news of the last decade. Law firms have every reason to screw you, lie to you, and overall just try to squeeze as much money as they can out of you without regard for customer service. Why? Because it’s hard to tell if a lawyer really did a good job or not.

Got something that should be in my semi-random link roundups? Send it in!

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Homebuilders Will Keep On Building

The Weakonomist — Tue, 13 Sep 2011 14:42:25 +0000

Even with housing prices falling and so much damage to the real estate market, the homebuilders continue to push on. New neighborhoods continue to slowly pop up and shoppers are still considering new homes. With so many delinquent mortgages and empty houses and desperate sellers, why are people still buying new homes?

Are builders making any money these days? Sort of. The revenue is down to something like a third of the glory days and those that are making a profit aren’t making much. Essentially, they’re trying to stay alive. And to stay alive, they have to keep building.

The builders that survived the housing crash and weren’t already overextended could actually be in good shape. Some of the cost for builders is land acquisition and just like houses these days, land is cheap. They buy it from other builders, or just maw and paw landowners. Whomever they buy the land from that land is cheap. Especially if they can get it from a desperate competing builder who is trying to stay afloat.

Builders have to try and make a profit though, and if they can’t make a profit they aren’t going to keep building. Resellers and homeowners don’t have to make a profit since they may have other reasons for selling. So who is winning in this battle over prices? In neighborhoods near builders, it’s the builders.

Find a neighborhood that isn’t quite finished yet and you’ll see resellers and the builder competing head to head. The builder is almost always happy to undercut the reseller because time is money to them. Many builders will just build a neighborhood 2-3 houses at a time using popular options and sell them to interested buyers, instead of building each to spec by specific buyers.

This all seems counter-intuitive for what is best for the overall recovery of housing. We need to get through all the inventory, not continue to add to it. But the free market must do what it must do. And the buildout of homes does create more jobs for construction workers.

So while the housing recovery is still struggling to even be called a recovery, homebuilders will keep building for the time being. Don’t expect that to change unless the business conditions sour to hard core levels. But most builders use debt and for now they have access to that debt, are willing to undercut sellers, and might even offer some favorable financing to boot.

If you’re in the market, happy hunting. If you’re trying to sell, it’s all about the staging!

Photo: Concrete Forms

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