My Mortgage Blog

I just have to indulge in a bit of Told-you-so, one of life’s cheap, ephemeral thrills. The sales of newly-constructed homes are up 28.9% year-over-year as of mid-January. The number of new homes being built is climbing by 20% over the number being built a year ago.

It took longer than I thought it would, but- told you so.

But then, I told you so largely because many of the nation’s finest investors have long been buying up buildable land and pushing up the value of shares of builder stocks; not to mention elevating the shares of home-related firms like Home Depot. Very soon, most analysts will tell us they’ve been saying this would happen for months and months. And many have.

But there are others who have had severe doubts, and still do. There are still those who are sure that the shadow market of homes facing likely foreclosures will pull the rug from under any advances in any real estate sector. So far, they’ve been incorrect. The number of foreclosure starts has dwindled for months; the number of short sales has climbed; and notably, the number of homeowners whose homes have gained in value, allowing them to refinance and to sell, has grown significantly.

Does this mean the future is hunky-dory in every respect? Of course not.

Will foreclosures disappear magically over the coming years? No, they will remain a problem for many years to come but probably not as severe a problem as many grim-faced economists have been forecasting.

What I want to emphasize just now is the likelihood that the real estate market is going through a radical change, and that it doesn’t seem to be offering up an easily recognizable recovery. And probably wont.

Anyone who has been around the real estate business for a long time has come to recognize that exciting time when a real estate market begins to pull itself out of a slump. Price appreciation begins to accelerate, sometimes at dizzying speeds. And importantly there is a fairly orderly process of selling (a ladder recovery) in which first-time buyers gobble up the entry-level homes, and those sellers can then buy up into the next level of homes, and those who buy up still higher, and so forth, benefiting the whole market.

We haven’t really been seeing this. Though first-time buyers have been somewhat active in this market, they have too often been outbid by investors, many of whom make their purchases with cash. Further, the real estate industry is discovering the peril of student loans that take the total debt load of a potential young buying above the 43% debt-to-income threshold now being used by lenders.

But builders are turning these problems to their benefit. They are funneling buyers into government programs that make it possible to buy with low down payments and slightly shaky debt records. They are creating their own mortgage lending companies that can work effectively with entry-level buyers. Sellers of existing homes can’t compete with such services.

So, it isn’t just exciting new home models and discounted pricing (which, in fact, builders don’t have to utilize at all) that are driving buyers to new homes. It is the greater ease of purchase. And, with prices that may be 37% higher than those of comparable existing homes, newly-constructed homes aren’t attracting investors. They’re attracting personal residence buyers.

As a result, instead of seeing more cash purchases were seeing more FHA and VA loans and more home purchases financed by mortgage companies associated with the builders. And, to be honest, regarding more expensive comparable new homes outselling existing homes, I never told you sound I am at a loss to predict how this will all play out. But I am certain it will inspire and enforce many changes in the ways homes are marketed and financed in the near future.