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Homebuilders coming up “short” when competing with Residential Resales

Falling Residential Real Estate Resale Prices from Short Sales and Foreclosures impacting New Home Values

Homebuilders coming up short

New home sales in 2010 made for one of the worst years yet for many local builders according to Stuart Terl, Area Manager for the Maryland/Virginia Division of Drees Homes.

The combination of high unemployment, mounting foreclosures and “short sales” kept many home buyers away from a new home purchase he said.

While the residential real estate market is flushing itself out of what the January 21, 2011 issue of the Kiplinger Letter called the “shadow inventory [of] homes in or headed to foreclosure,” the impact on the home building industry is that buyers are being much more aggressive with offers to purchase.

Nationwide just about 4 million home loans are over 90 days delinquent verses about one million just prior to the recession. “About 2 million of those are sure to wind up in foreclosure,” according to Kiplinger.

“Buyers are trying to get fire sale deals” says Terl, as they play buying opportunities in the defaulted mortgage market against new homes.

The Wall Street Journal reported this past Monday that “sales of foreclosed homes are partly responsible for reducing home values because banks tend to reduce prices quickly to sell the homes. Sales of foreclosures slowed in some markets at the end of last year as document-handling problems raised questions about the integrity of their foreclosure processes. But that could change as banks pick up the pace of foreclosures.”

While the term foreclosure has been the buzz word for years on how banks shed their mortgage default problems, the process of ridding this shadow inventory through “short sales” is rapidly becoming a preferred method.

If you’re not familiar to what all this “short sale” stuff is all about, get ready, because, while it’s been very active for the last 4 years, it’s likely to intensify.

What is a short sale, you ask?  Simply put it is when a lender allows a house to be sold for less than the amount of the current loan or loans encumbering the property.

But there is nothing simple about it.  For years residential real estate agents have been complaining about the complexity and time it takes to process these transactions.

Things are changing:  According to a recent report by Darci Marchese with WTOP Radio, “…the bank would rather work out a deal to keep a homeowner in the home through a short sale or loan modification [because] foreclosures are expensive [and] … In fact … banks are better equipped to work through a short sale more quickly, even compared to just six months ago.”

The good news for builders is that a more active short sale market may not have as much of a negative impact on falling home values, as would that of foreclosures, since the latter typically ends with an auction.

Falling prices have actually caused some home builders to shut down some of their projects.  Recently just across the Potomac River from Frederick, Maryland in West Virginia, Drees had two new homes that they offered at prices in the low $200,000 — what they considered real bargain basement deals.  After conferring with their Realtor, they saw that “shadow inventory” distressed sales of comparable homes had pulled values to below $160,000.

The end result was that Drees sold the two houses at around better than bargain basement prices.  They then informed the land developer that they will not be purchasing any more building lots from the project until the market improves.  There is no sense in building a product that you know you’ll loose money on stated Terl.

With all that said, Drees is cautiously optimistic about their opportunities in Frederick County with hopes that the volume of sales in 2011 will increase about 10% over last year.

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The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland.  He also writes for

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