Real Estate Pros Steering Clients Away from New Homes

September 17th, 2018 By Daniel Fisher in Blog.

John Burns Real Estate Consulting is a 70 person team which builds market intelligence to help business executives make informed housing industry investment decisions.  I find their research and newsletters helpful in understanding consumer demand and housing trends.

In a recent discussion about “Real Estate Pros Steering Clients Away from New Homes” on Jeff Lazersons’ mortgage radio show, John Burns made observations that I found interesting and relevant to the average consumer who is buying or selling a new or existing “resale” home.  A summary is below:

The topics covered with no real disagreement –

  • Existing home preference: Real estate professionals steer clients away from new homes.  A sale of a resale home usually provides a faster, bigger payday.
  • Mortgage rates: Based on the bond futures market, professionals expect mortgage rates to rise about 0.5% over the next three years.
  • Inverted yield curve: The economic consensus is that a recession is two years away.
  • All recessions are not the same: Recessions are never good for home prices. However, today’s young adults equate a recession with what happened in the early 2000s, which was mild for housing prices.  Low levels of construction and stringent mortgage documentation make it unlikely that housing will cause the next recession.
  • Market timing: Home building company’s investment horizon is usually just a few years so by definition they are market timers.  You are not timing the market if you are:
    • Buying one home and selling another at the same time.
    • Buying a home you can afford in an area you plan to live for a long time.
  • Risk: You are taking a lot of risk if the payments stretch you very thin or if you are planning to relocate in a few years.
  • Price increases: For years the country has been undersupplying the housing market, adding far more new jobs than new homes. Once the excesses of the last downturn cleared, this pushed up home prices.
  • Interest Rate Hikes: The Fed has also propped up home prices by dropping rates and keeping them low for most of the recovery. The recent rate hikes have had an unintended effect of incenting potential home sellers to hold onto their homes, which has kept for-sale inventory low.
  • School districts: While it is true that homes in good school districts tend to hold their value best, you pay a big premium to purchase in those areas. Because so many buyers do not have kids, we are seeing more people buying in good school districts and avoiding the great school premium.
  • Smartphone technology’s impact on new home sales: Companies have built great apps for home shoppers buying in the resale market. Builders of new homes have struggled to be included in these apps because they cannot provide a real address, fixed purchase date or real videos and photos. When using a housing search app, Buyers may remain unaware of new home options.
  • Rent control: Rent control seems like a great solution to housing affordability, but Landlords need to raise revenues when their expenses rise and many will likely stop maintaining their rent control properties appropriately.

 John disagreed with the host over reasons not to buy a new home –

  • New home upgrades overpriced: The Host felt that new home upgrade costs may be priced above retail. John – new home upgrades can be financed as part of the mortgage and the buyer has no hassle of managing contractors. Resale improvements have to be financed with all cash or credit and the resale owner has to manage the upgrade installation themselves.
  • New home special taxes: New home buyers have to pay for bonds that finance part of the infrastructure. John – Our market research indicates that many bond payments last 25 years, so buyers of resale homes also pay these bond fees if there is a remaining bond term.
  • Home builder mortgage companies: The big home builders tend to offer incentives to home buyers to use their inside mortgage company, but the buyer can always shop around and use their own mortgage company if they feel they are not getting a good deal. The builders offer the mortgage service both to capture the mortgage profits and to control the home closing process. Builders don’t want to deal with the many last-minute problems at closing that are frequently caused by lenders. Mortgage brokers make no money when a buyer uses the home builder’s mortgage company, so they are incented to steer their clients away from new homes.
  • 20% down payment: 20% down is a myth. 56% of all home buyers who obtain a mortgage are putting down 10% or less. More than half of all homes in the country are eligible for low down payment financing from FHA. These buyers do pay for mortgage insurance. It continues to amaze me how the conversation today still revolves around a 20% down payment.

 John Burns Real Estate Consulting:

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