What is unfortunate is that this stigma may be masking what could be becoming the best and most cost effective way to build a new home today. These days modular, and/or “Prefab” homes offer numerous advantages to on site construction. In her book Prefabulous + Sustainable: Building and Customizing an Affordable, Energy-Efficient Home, Sheri Koones says this about prefab:
“They are energy efficient and come in virtually any style of architecture and countless sizes. Prefabs can be high-end or fit a tight budget.
Prefab offers speedy construction and tight, energy-efficient quality. Raising a new prefab house brings much less traffic and disturbance to the neighborhood than conventional construction. Prefab can also mean lower costs and faster mortgages”

These remarks touch on the benefits of prefab, but a new day really has come for this style of construction. Ms. Koones book is not only informative, it makes for great eye candy as each page reveals picturesque design and warm, inviting spaces. We are not just talking ultra modern homes here either. Not only has “modular” been reinvented, one could argue that it is structurally and environmentally (indoor air quality, living space, material waste, and if design incorporates it, carbon footprint) superior to site built homes.

More to come on why I believe prefab may be the way of the future. In the meantime I have included some links that relate to prefab and modular homes.

Traditional Prefabs
Dwell Magazine Prefab Publication History
In-Plant Process (via Cardinal Homes)

Tweet

So where are we now? The above is not news. In fact, the above is tired, it’s old, and it’s overplayed. The market tanked, even here (for the most part), we know that. So, we ask is it done? Are we on the way up? Are the government programs working? Should I be in a government program? Should I walk away? Should I move to Canada?

In reality that paragraph sums up where we are from a national and a local standpoint. More questions than answers. New legislation and buzz about potential legislation almost every day. Interest rates are up. Interest rates are down. Interest rates are up and will never go down again. Interest rates are down again. We are heading for a double dip. Prices are on the way up. Prices are still on the way down. Houses are selling like hot cakes. Nothing is selling anymore. And this list goes on of the bits of “insight” you may hear on a daily basis, or all in one day for that matter.

That, my friends, seems to be where we are in a nutshell. Helpful? Not likely.

Let’s not forget that the rest of the country is still languishing for the most part. Because of the tier of jobs being added those positions that are filled by people from outside the area are likely being filled by home owners. Home owners who are probably not going to have the easiest time selling their home on the other side.

People who cannot sell their home do not often purchase a new home in their new city. Rather they will rent until they can get the property moved, or finally make the decision to rent out the old digs. That’s not to say that certain levels of talent are not being offered relocation packages, but I have to assume those packages are not ubiquitous.

All to say, lets not put jobs out there as an immediate fix for what could be more housing struggles to come. In the long run employment will buoy our market and give us solid ground for growth. However, to give too much credit to those factors now, in the the market of today, is premature.

Additionally: We have seen heavy reductions in prices in our area, yet have been heavily insulated in comparison to the rest of the country. Taking that into consideration the post tax credit slow down is more than palpable in our market right now. If that is true here, it is especially true everywhere else.

Generally speaking now is still a good time to buy. Sellers are seeing less traffic and making frequent price reductions. Just know that buying now could still mean a reduction in value in the immediate future. However, long term you will have bought at or close to bottom and have a loan with possibly the lowest interest rates we will ever see.

Well, I argue that it means a tough time for sellers, but what is possibly an even better time for buyers. The seller side is obvious, less demand in the market place means more pressure on their price, and more time on market, which puts more pressure on their price. The buyer advantage is not so obvious, but is also related to the demand.

The tax credit driven market was successful in bringing buyers out by the truckload, but in our area (Northern Virginia & DC) it created an extremely competitive environment in the under $500k price points. Home after home was receiving upwards of 10-15 bids within the first two days, and prices were escalating well beyond list. Buyers had little time to consider their home of choice and had to make decisions quickly, often stretching their budget and limiting their expectations of what their money should afford them. Sound familiar?

It was a bit crazy, and I will say it, possibly a bit irrational. With many buyers who needed the $8,000 credit in order to purchase not making the deadline, and frustrated buyers who just thought the credit would be nice and put in offer after offer going back to the sidelines will much of the competition be out of the game? With low interest rates and theoretically low prices this reduction in competition could actually be the REAL buyer opportunity of the next 10 years (of course this assumes we avoid a double dip in the market, which is still possible). Sure the $8,000 cash in your pocket now is nice, but in some cases it appeared folks were paying an extra $20k, $50, and even $100k over asking price in order to get the house and qualify for the credit.

Assuming you invested the full $8,000 credit you could argue that taking the $20,000 escalation was worth it over the long term. Had you saved the $20,000 off of the price and put away the difference in payment it would take a little over 6 years to save the same $8,000. Statistically speaking you probably sell the home in the 5-7 year range and not longer pay the additional $107 dollars per month on the mortgage. I make this argument to keep it honest, cash in hand can make it worth financing an additional sum.

The escalation is only part of the story. Take the competition out of the market and you begin talking about reductions in price. What if that $20,000 escalation instead becomes a seller accepting a bid for $20,000 less than asking price? That is a post tax credit swing of $40,000, and I’m not sure $8,000 in hand can out duel $40,000 even if it is financed over 30 years. If you were going to live in the house for the full 30 years, and leave the $8,000 invested over that 30 years then yes, perhaps. But statistically that is unlikely, on both accounts.

These are just thoughts. It does seem quite a bit slower out there, but it is yet to be seen whether the competition has really dried up, or if competitive bidding will continue. So far it seems as though plenty of investors are still on the prowl and hunting the same grounds as most would be first time buyers ($500k and below).

My advice to buyers who missed the credit is to keep at it. I have clients who actually could not wait for the credit to expire because of the intense competition and fervent pace.

Perhaps the most powerful (by shear size) generation in American history, Millennials will tip the scales for, or against a great multitude of things. My interest lies in their potential impact on the green economy, specifically in green home building and renovations. In many aspects of the economy the Millennial attitude toward environmentalism and “green” living is yet to be determined, and some would argue does not look promising. They are the most environmentally educated generation ever, the question is will they put their wallets in line with that knowledge? They are the greatest “have it now” generation we have known yet, with an appetite for all the latest gadgets and gizmo’s most of which are the most environmentally harmful ever. But how will this demand for instant gratification and the latest in technology and style impact their home buying and renovation decisions?

I speculate that the mere chic of going green in home building will bring a large Millennial market share. However, the instant gratification demand is also met through energy savings, improved comfort through air quality and temperature control, and the ability to show off their “product”. The other side of the coin for new construction could be a lack of choice in the first place. If the federal, state, and local governments continue to provide tax incentives for builders and home owners to “go green” eventually buyers will be back to choosing between this house and that house, not the LEED house or the “draft”house down the street. “Green” could (and should) become an irrelevant term because of sheer ubiquity of the product. With adequate Millennial drive and continued government backing that could become a reality.

The issue, however is the fact that at the end of the day Millennials may simply remain “carbon neutral” in comparison to today’s consumers. Unless technology companies figure out a way to continue to meet the demand for new products and to produce record volumes of those products, while also reducing the energy put into creating them, reducing the waste that is represented by their lack of lifespan and recycleability, and adjust how products are powered the Millennials will have to do a heck of a lot of green home building and renovation to offset their lifestyle.

Though there is still some significant level of uncertainty as to the state of market recovery, and the speed at which recovery will take place there is room for optimism, especially for those in the DC Metro area. First, though, lets define recovery. In my view, recovery will mean a return to a market based on a solid economic foundation, which presents itself with solid growth structures that are based upon the real economy of supply and demand… REAL demand.

My first positive sounds pretty negative. In order to get to that solid foundation I believe we had to lose every bit of real estate value we have lost so far, and potentially more. Those values were falsely inflated by false senses of demand and speculation of future demand, and as mentioned in my last post I still have concerns that government initiatives are falsely supporting the market, which is actually delaying recovery based upon the previous definition. In essence it is the battle of band-aid philosophies; ie, is it better to just rip it off quickly and deal with all the pain at once, or pull it off ever so slowly, thus minimizing the pain but feeling pain for a longer period of time. Personally, I adhere to the rip it off philosophy, that way all the cards are shown and we can get to work rather than guess at what’s coming next. All that said, there is reason to believe that we have, in fact, hit bottom. 2010 will be full of ups and downs, but that will just be us bouncing around along the bottom for a bit.

The second positive is the most important one; population growth and an aging generation. As I understand it the flow of new faces into the United States has slowed a bit during these times. Jobs are more scarce thus making the sense of opportunity a bit less. However, the flow is still steady, and will increase again as the economic climate here improves. Population growth is a huge positive for real estate values because it adds to the demand side. It is not low interest rates, government incentives, or anything else, just REAL demand from people who are looking to put a roof over their heads. For the DC area the population projections due to job growth are profound, which adds additional fuel to the fire. We are seeing this trend already with many major corporations moving their US headquarters to places like Fairfax County, companies like Volkswagen/Audi, Hilton, Rolls Royce, etc…

The rest of this positive is in the aging population, and no I’m not talking about retirees, I’m talking about the Y generation, those being called by some the “echo-boom”. My understanding is that this population segment is nearly twice the size of the Baby Boomer generation. Essentially the baby boom generation was “fruitful and multiplied”. Call them Gen Y, Millennial’s, Generation Next, whatever you choose. The point is, there are a lot of them, and they are in, or coming into home buying age. The current market, and the reduction in home building that has resulted, has created what will become in the next 6-18 months a housing shortage. Again, it is a simple reality of demand. Besides now perhaps being the best time for years to come to buy builder stock, it is a fantastic time to be buying real estate. As renters, one would not want to sit on the fence more than another year or two. As investors, pick up as much property as you comfortably can now.

Some say that real estate is more affordable now than it has been in 30 years. That is great, but more important is the fact that it could be 30 years before real estate is this affordable again.

INTRO: The now late Jim Rohn had a good seminar piece on positive vs. negative. His point in brief, we need both in their appropriate time. If negative things are happening, or will happen it does little good to pretend all is well rather than to prepare accordingly. Likewise, if outlooks really are positive, it does little good to act like the sky is falling.

NEGATIVE: Though there have been some positive numbers in the housing market of late, especially in our area (DC Metro), I run with the crowd that believes we are not in the clear just yet. There are far too many factors teetering on the brink of decline and in large part they are being falsely supported by government infusion (I am not saying I am against the government support per se’). The latest infusion being the blank check Fannie Mae and Freddie Mac were just promised this week. Any one economic area going over the edge could be the “tipping point” for any other given area, or areas.

So far the market recovery is more about a PR campaign for consumer confidence than it is a real return to economic stability. The hope is that the government can prevent disaster long enough so that the consumer (you and I) will become confident enough to spend money we still don’t have in order to build more confidence so we spend even more money we still don’t have, and so on. Just the other day I heard a report stating that economic recovery appeared to be on it’s way because consumers were using more credit cards again. I could be in the minority, but when we correlate leveraging debt (again) with recovery I get a little nervous. It tells me we may have learned precious little in this season.

Here is what I see out there. In short; I see commercial real estate folks who are nervous. Insiders see their industry on the brink with building owners who have over sized loans, and tenancy rates that are plummeting, leaving a profit and loss gap that will not fill any time soon. From what I understand the majority of small bank failures this year have been due to commercial loans going delinquent, not consumer loans. I also see the full spectrum of homeowners who are still upside down on their homes and will be for some time to come even after a true recovery begins. Many of these home owners will remain one income reduction, medical emergency, broken down car away from delinquency on their mortgage, until prices recover.

Finally; If, in fact, we do see additional declines in home values, which I believe we will when it is all said and done, more trouble is on the way because it would likely deepen the cycle of delinquency and the number of buyers willing and/or able to soak up that inventory is shrinking. Why more decline? Many reasons, but the simplest is this: We have yet to lose all of the falsely inflated value in the housing market. Example: just down the road from where I sit right now there are 3 bed 2 bath townhomes that would have sold in 2003 for about $430,000 or so at best. Those same town homes are still selling anywhere from $550,000 to $600,000. Why is this a problem? In 2003 $430,000 was already an inflated price that was hard to believe since a rough median price for 2002 was $370,000, while in 2001 the highest price overall was shy of $320,000 (still high for its time given then recent history). A healthy housing market grows at an average 3-7% a year. To this particular neighborhoods credit, if it made gains of 7% a year for those last 8 years since 2001, the top homes should be fetching about $515,000, which is at least in the ballpark. However, at 3% gains for the last 8 years running, the top homes should only be fetching about $395,000. My pessimistic self suspects a balanced market is found somewhere in the middle.

POSITIVE: that is for next time, but the future is bright for real estate in the DC Metro area.

The other crowd who, without an extension, will need to come to grips with disappointment are those who have an offer on a Short Sale listing where a response from the bank has not been received. If they do not have a response by Friday they have little chance of actually closing by the 30th of November, and thus will not qualify for the credit.

If you are a buyer in this position, you are far from alone. If you are an FHA borrower, you are VERY far from alone.

For detailed information visit www.tax.virginia.gov.

AUTHOR’S NOTE: I firmly believe that home ownership is not for everyone, and there is a right time and a wrong time to buy. That time is based more on personal financial condition rather than the whims of the market. The intent of this message is to provide information to those ALREADY considering a purchase or a sale.

Opportunity for Buyers:
For buyers the benefit is clear; close by the 30th of November and receive a check in the mail for the difference of the credit and their taxes owed come refund time. One caveat is the income limitations to the credit. The phase out for individuals begins at $75,000 of annual income, and $150,000 for married couples filing jointly.

However, if there are folks thinking about purchasing and taking advantage of the credit now is the time to take action. Many first time buyers today are coming up against heavy competition, causing the process of finding a home to take weeks or even months, and multiple offer attempts. Realistically if someone is going to close by the 30th of November, they need to be under contract to purchase their home of choice by November, 1st, leaving just 6 weeks to search.

For detailed tax credit information click here.

Opportunity for Sellers:
The tax credit not only benefits first time home buyers, but sellers can be rewarded as well. If you know of someone who owns a property that they believe would be purchased by a first time buyer, and they have considered selling in order to move up or down-size, and are cash-capable to do so, now is not a bad time to list.

Here is why:
· Well priced homes are receiving multiple offers, and are often being bid higher.
· With multiple offers comes lower (or even no) requests for closing cost credits.
· Some well priced homes, in good condition, and in F.T. Buyer tiers are selling in a matter of days.
· When selling, and purchasing with the same agent, agents are sometimes more lenient with their commission rates on the listing side.
· The next higher pricing tier that a seller would purchase into is likely in a softer market, and more open for negotiation, providing for greater savings.
· Coming to market now as a regular sale can make the home a very popular target for buyers frustrated with waiting on short sales, or losing bid wars on foreclosures.

Nothing above is a guarantee, and not all homes will provide the same opportunity, but the possibility is out there.