At the Millbrook Pointe development in quaint and pristine Wheeling, a $269,000, brick-and-stone townhouse comes with $25,000 in free upgrades, including wood-burning fireplaces, all-stainless steel kitchens and marbled bathrooms tricked out with double-bowl vanities and whirlpool soaker tubs.
Down the highway at the Patriot Place golf course villas in Bolingbrook, buyers are lavished with lawns sodded to perfection, absurdly low seller financing and a year of free insurance that will pay the mortgage if you lose your job.
At the Sunset Ridge estates, the amenity bonanza gets even more surreal: Buy a customizable colonial for as little as $170,000 and get a brand new, $17,000 Chevy Cruze. The 2011 model. For free.
Spring for home sellers is like Christmas for retailers — peak season. Normally, that might mean a few giveaways. A better brand of siding here. An expanded choice of tile color there. But a new car? “Obviously, business has been soft,” says Kim Meier, president of KLM Homebuilders, the company offering the promotion.
The festival of upgrades on new homes — especially in the housing markets that were savaged by the subprime meltdown — is queasy confirmation of just how much the housing market remains the sickest part of the U.S. economy.
Existing home sales plunged nearly 10% in February to their lowest level in nine years. It was the largest drop since July. Forty percent of those sales were on distressed properties. And new-home sales are on track to come in at just 250,000 this year, the fewest since the Kennedy administration, when there were 120 million fewer people in the United States.
“What is discouraging in many markets is that it appears as if some of the local builders are creating the volume,” says Wayne Yamano, vice president with John Burns Real Estate Consulting.
Across the country, real estate agents are reporting a rise in traffic at open houses. But they say buyers are reluctant because of the shellshock they suffered after the free-money machine blew up in everyone’s face. The foreclosure epidemic. The plague of employment insecurity. The fear that the U.S. is on a downward slide. They’re all playing into buyer commitment phobia, brokers say.
There’s also confusion over the conflicting signals. Prices are low, but unemployment is high. Mortgage rates are attractive, but lending standards are strict. Renting is newly chic. “Everybody is now self-loathing about how we’re greedy Americans and we shouldn’t want to own homes,” says Jonathan Miller, CEO of real estate consulting firm Miller Samuel.
The U.S. will certainly have a spring home buying season this year. But even if sales rise as usual, they won’t pull the zombie housing market out of its stupor. Nationwide, forecasters expect house prices to drop at least 5% more this year. And no one in housing land is murmuring about anything like price stabilization until 2012. At least. “We don’t expect a dramatic rebound,” says Paul Ashworth, managing partner at Capital Economics. “We expect stagnation for several more years.”
The housing problems certainly aren’t easing. Foreclosures are expected to peak this year. A third of homeowners owe more than their homes are worth. Normally the number of people with negative equity is 5%. And strategic defaults, where people simply walk away, are rising.
The buying that is happening isn’t coming from first-time homebuyers. A recent study by Capital Economics found that 60% of sales are to foreigners and investors, most of them paying cash. In fact, in international real estate circles, the U.S. is viewed as the “new emerging market,” says Thomas Shapiro, president of global real estate investment firm GTIS Partners.
Foreigners are attracted to U.S. real estate because their local currencies are so much stronger than the dollar. Investors are also attracted to the properties because rents are rising. “You don’t get much money from buying Treasurys as safe investments,” Ashworth says. “There is a search for yield that is making residential property look more attractive.”
Real estate is hyper-local. The places hit hardest by the foreclosure epidemic — California, Arizona, Nevada, Utah and Florida — are certainly skewing the statistics for the worse. In places like New York City, Washington, D.C., and San Francisco, the real estate market is strengthening and can almost seem exempt from the national malaise. That’s because the job market in those cities — dominated by finance, the federal government and the tech sector, respectively — remains robust compared with the rest of the nation.
“If you have a secure job and the economy around is growing, then it’s a great time to buy,” says Barbara Corcoran, a New York real estate investor and analyst. “That’s not true in too many places, but you can see improvement in certain pockets.”
Adds Tara-Nicholle Nelson, director of consumer education at the online real estate search firm Trulia.com: “It’s like a big spring clearance sale on real estate.”
Todd Leykamp, 29, works in TV production in Los Angeles. He and his girlfriend have been casing the open-house market for six months. They pay $1,200 a month for their Hollywood rental and can afford to double that payment if they buy a house. But he says they have yet to find The One. “There are just too many factors, and every time you find one you love, there are 10 more out there you haven’t found that you’ll love just as much,” Leykamp says.
Worse news for sellers is that buyers don’t think the housing market has hit bottom yet, according to Truila.com. A recent survey by Trulia and Harris Interactive found that nearly 70% of renters who aspire to being homeowners say they will wait at least two years before buying. And nearly 60% say a housing recovery won’t come until after 2012.
“Many are reluctant to purchase a home even if they have the means because of the uncertainties in the economy,” says Celia Chen, a housing market analyst at Moody’s Analytics.
It’s clear that many sellers are panicked. A quarter of sellers who listed their properties on Truila.com on March 1 have already slashed their prices at least once.
Last summer, Bobby Barweki started looking for a foreclosure to buy. Barweki, 30, scraped together a 20% down payment by living with his parents after graduating from college in 2007. The foreclosures he looked at were all “trashed,” he says.
Then one day his dad sent him an e-mail about the free-car deal at Sunset Ridge Estates.
Barweki, a store manager at Chicago recreation goods chain Novotny Sales, just closed on a $178,900 ranch. He has a 4.875% interest rate on a 30-year-loan. Instead of getting the new car, he opted for $17,000 worth of free upgrades, including a stone facade and hardwood floors. Barweki doesn’t have much faith in an economy where the definition of a recovery seems to be that things don’t get worse. He says all the new jobs are low-paying. And he doesn’t think the housing market has hit bottom. But for him, it was the right time. “Interest rates are low, I had the money, and I got a great deal,” Barweki says.
The U.S. has already suffered one “lost decade” in housing. Now some economists are worried that the country could be in for another. “It could be 10 to 15 years before you are going to get back to peak levels,” says Zillow.com chief economist Stan Humphries.
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