Developer tactics to avoid housing bust

The Aderra condominium project sits on a golf course and has a view of Camelback Mountain in Scottsdale, Ariz. When it opens this fall, the owners of the 312 units will have a couple of pools to dip their toes in when they leave their mission-style abodes.

But there is one thing they won't be able to do: sell their condos - that is, not until the developer has sold every one of the $190,000 to $400,000 units. The reason: "We're selling communities, not commodities," says Robert Lyles, founder of Starpointe, the developer.

Limits on resales, requirements that buyers live in their homes for a year, and mandatory profit sharing with the developers if a home is "flipped" are just some of the ways that home-building communities - and bankers tightening standards - are trying to quell speculation in the housing market. By taking off some of the froth, they hope to keep one of the greatest real estate markets in the nation's history from becoming one of the biggest busts.

Perhaps because of such efforts, housing prices are growing at a slightly less torrid pace. Recently, the Office of Federal Housing Enterprise Oversight found that in the fourth quarter last year, housing prices rose 6.77 percent on an annualized basis, down from nearly 20 percent in the prior quarter. This week, the National Association of Realtors forecast that existing home prices would rise 7.1 percent, compared with 11.7 percent last year.

Still, the housing market has withstood all sorts of pressures that normally might have caused the housing market to slow. The Federal Reserve has been raising interest rates, which cranks up short-term borrowing costs. Property taxes around the nation are rising, which makes home ownership more expensive. And an increasing number of people are subject to the alternative minimum tax, which may eliminate the mortgage interest deduction.

All these factors cause economist Anthony Chan of J.P. Morgan Asset Management to say, "I see a slowing and an ebbing, not a collapse over the next 12 to 18 months."

Others are even more cautious. "My view is we are at the mountaintop, and all roads lead down," says Mark Zandi, chief economist at Economy.com. "It's a question of how steeply."

Places ripe for a correction?

Mr. Zandi's company recently produced a report that named Boston; Las Vegas; and Reno, Nev., as the metro areas "most susceptible to a severe house price correction." It also called Colorado Springs, Colo.; Denver; Fort Myers, Fla.; San Francisco; and Sarasota, Fla., as "worrisome."

"These metro areas have in common prices well above equilibrium, and an excess supply of single family housing relative to the long-run demand," says the report.

Signs are also growing that the high home prices are making affordability a bigger issue. For example, in some markets the income-to-debt ratios are rising. This is forcing an increasing number of home buyers to borrow through adjustable-rate mortgages (ARMs), which initially have a lower interest rate. Last Friday, a survey by the Mortgage Bankers Association found that 63 percent of all new mortgages are ARMs. Of those, 17 percent are interest-only ARMs, which again have a lower monthly cost, but have a higher total cost.

Developers keen to work with eager buyers are feeding the frenzy in some markets. In south Florida, Michael Cannon, managing director of Integra Realty Resources, a national commercial valuation and counseling firm, worries about inexperienced developers rushing to build while the market is hot. These developers are offering buyers the ability to resell properties even before a shovel is in the ground.

"I call it hyper-contract flipperism," says Mr. Cannon, who warns that the activity is reminiscent of the 1950s, when tourists bought the "dream" of south Florida and then lost their money in subdivided lots.

But some lenders are apparently starting to tighten standards, particularly by cutting down on "presold" units to speculators. "It's really a case of caveat emptor," says Cannon.

Developers retooling their criteria

The lenders' caution coincides with some developers trying to cut down on speculative buying as well. For example, in Las Vegas, Arizona, California, and Florida, KB Home, one of the largest US home builders, is now inserting language into buyers' agreements that states the buyer must live in the home for one year and it must be their primary residence.

"There is a difference when someone comes in to buy and sell: They don't take care of the property the same way as a primary owner does," says Daniel Weidman, a spokesman.

In fact, Mr. Lyles the Starpointe developer, says he really dislikes it when multiple out-of-town buyers purchase one of his units and then lease it out to different people every weekend. "There is a new rock 'n' roll band every week that the permanent owners have to live with," he says.

Lyles says his firm can usually weed out investors during the qualification process. "If you look at their assets and they already own eight other condos, you know," he says.

At the moment, Lyles and others can afford to clamp down on investors because demand for housing remains so strong. Starpointe, for one, recently opened up a 116-unit condo project that sold out in two weekends. And in the Phoenix area, real estate agents are complaining that not enough homes are on the market. Traci Lemke of Realty Executive in Scottsdale, Ariz., recounts how she recently looked in seven communities for houses under $215,000. She found only 12 homes, and by the end of the day, five were no longer on the market.

"Anything under $300,000 results in a bidding war," she says. Many communities, she says, have stopped allowing investors and even those looking for second homes.

But that's not necessarily cooling the market. "Even in places that are just allowing primary buyers," she says, "some developers have gone to lotteries where they put your name in a hat to see who gets to purchase a home. Others ask you to put your name on a list."

She recalls how she entered a client's name on such a list. "It was eight months ago, and they were 188th on the list. They just called to see if we were still interested."

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...