[Note: To follow is an excerpt of an interview with Elliot Eisenberg, National Association of Home Builders Senior Economist, and creator of their multifamily stock index; Ron Whitney, 2009 President of the Idaho Home Builders' Association and a Governor's appointee to the State Building Code Board; and Richard Harp, President Elect of the Arkansas Home Builders' Association. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/072909.]
Mosca: We know that real estate is the locomotive that pulls the economic train here in America. Do you think the housing market is in the process of, or has already turned the corner?
Eisenberg: There is certainly a lot of data suggesting that we've reached the bottom, but we may be bouncing at the bottom for a while. Data is pointing to positive to neutral signs right now. There are still a lot of flies in the ointment out there and it's not going to be a happy, clear ride up the ladder by any stretch of the imagination but after three years of this declining data month after month after month, it's delightful to finally see a lot of confirmatory data that suggests an inflection point that's been hit and things are not getting worse and they are in some cases beginning to get better. Even badly battered markets like Las Vegas are showing signs that the end is near or the end is here.
Mosca: It's hard to ignore these positive signs?
Whitney: Yes, I would certainly have to agree. In our market in Idaho, your comments about finished lots being available at extraordinary prices are quite true. Lots are being priced so low, developers are bringing in builders who are building 900 to 1200 ft.² starter homes and actually putting them on the market in the $90,000 to $120,000 price range. When you couple that with the federal tax credit for first-time homebuyers it brings the first-time homebuyers out who can get into a new home with virtually no down payment and have mortgage payments equivalent to what they've been paying in rent and end up with more square footage than they had in the apartment they were in. We have a number of local developers who kind of foresaw what was coming when prices started going through the roof a few years ago and they intentionally pulled back on some of their development plans. I've spoken with a couple of them recently. They are excited about the market turning around but if they are in the process of working on their entitlements, they are still working through that on a moderate pace and anticipating that they're going to bring those new developments online when they are really confident that we have turned around and that the market has increased for that move up buyer.
Mosca: The last several weeks on our program, we have had FDIC distressed asset successful bidders, bank REO liquidators and have a link to those assets on our Web site at incomepropertyinvestmenttalk.com. A lot of the properties and assets you can find in Arkansas. Can you talk to us a little bit about the great state of Arkansas, and what's happening in your particular marketplace?
Harp: We never had the lows of the nation and we don't see the highs of the nation either. What's interesting right now in the state of Arkansas is that we've got about 12,000 houses for sale and that's 2000 less than a year ago. We are taking down some of that inventory and that's good for the entire market because that shows that pricing, demands, and sales incentives are all coming together.
Mosca: Is this a case of organizations like the NAHB helping move this economy forward recognizing that real estate traditionally, historically has been the engine to deliver growth and to help the economy when it needs to be helped?
Eisenberg: We've worked hard to get the $8,000 tax credit for first-time homebuyers and that expires on November 30 or December 1. That's been a tremendous boon to the nation as a whole in helping to buy off a lot of the inventory that is out there. That helped put a floor or a bottom on house prices and is helping to get us out of this entire process. If you're building a house you have to move into it to qualify for it.
Mosca: Do you think that Capitol Hill is going to extend that tax credit beyond its original deadline?
Whitney: From the home building industry standpoint, it would be a good thing to spur the market on because people would definitely take advantage of it but the concern is the federal budget deficit. I just assume they either make a decision or stop talking about it because we've got a lot of potential buyers sitting on the fence waiting to see what is going to happen.
Eisenberg: If I knew that, I wouldn't have to work for a living. I can see reasons of justification to do it; I can also see good reasons not to do it. My advice to a buyer on the fence would be take the $8,000 and run.
Mosca: If buyers are waiting for some kind of a bottom they are actually not making a wise decision at this point to continue to wait. What do you think Richard?
Harp: I can completely agree with that. We're seeing some stability coming into the market. Our starts were up in the last couple of months but prior to that I think the builders were making the right move in pulling back inventory and letting some of these markets eat up some of the inventory that was out there. We haven't seen prices bottom out yet but we are narrowing that gap down four percent year over year and then two percent month over month last year. We see some stabilization but we are just not there yet.
Eisenberg: We're going to Capitol Hill and showing how many jobs are created when a house is built. We showed California that when they build a house the state nets $16,000 and that's part of the reason they came up with a $10,000 credit because they are still going to be $6,000 to the good. We fulfill an important role. At Capitol Hill, the legislators call us up, their staff calls us up, the national budget calls us up and they explore our bills. We know exactly what it's going to cost and we have good frank discussions back and forth on how much they can afford to give us and how best to craft it so that its most beneficial for the country and so on and so forth.
Whitney: As far as Idaho goes, we are seeing some movement in people trying to obtain volumes of inexpensive lots. Understand that Idaho has not been the traditional market. We've had a couple of large volume builders who primarily concentrated in the entry-level market doing upwards to 2000 homes a year. Our typical homebuilder in Idaho builds anywhere from 20 to 100 homes a year and a development isn't built out by the developer as a tract or a subdivision, it's built out by a team of builders. Typically there would be some spec homes built as well. The problem that we are faced with right now is that the majority of builders that would fit that category would have a hard time finding local lenders who would finance even the model home projects or complex. Both builders and developers are interested in seeking out private money and potential lending partners when this market turns around and we can get things rolling again.
Harp: It seems like Idaho and Arkansas are very similar in the fact that we are homegrown builders too. There are only a couple of large communities of developers that own and actually operate in the areas where I operate. I'm in Little Rock; I am in the center of the state. We've got one large land developer that has been developing a large tract of land that they've had for the last 50 years. We don't have any national homebuilders, so our access to land outside of a couple different developments that I'm personally familiar with, what I mostly see is small consortiums of builders with investors developing out limited tracts of land, anywhere from forty to two hundred lots here and there, both in infield and perforated developments. That's an opportunity for an investor who wants to get involved in the upcoming need for land to be able to partner with a builder and a development team and create some of these new lots that we're going to need.
Mosca: Elliott, I have to go back to organizations like yours, the NAHB, that has helped show the light to a certain extent - the positives of building green and being green. What has NAHB done, what is it doing now, and what does it hopes to do in the future, in and around green?
Eisenberg: A whole bunch of different things. First of all, on the economic side of the issue, green houses are built; green tends to cost a little bit more money. Lets suppose you can qualify for a $200,000 house, but a green equivalent house costs $210,000; you can't buy the house. Doesn't matter how much you're going to save down the road. NAHB was instrumental, and has been and continues to be instrumental in making this argument. We want green houses, great, but we have to have mortgages. We have to have financing available to get these people into these houses. Their income hasn't gone up because they're buying a green home. We have to allow them to borrow more money so that they can then save money on a monthly basis and their mortgage company has to be aware of this. FHA has got one, it's called an EEM, or Energy Efficient Mortgage. It lets people who qualify for a FHM Mortgage, they can qualify; borrow a little bit more money. You have to have a test and the home rated or the HERS test. You have a blow test and they see how tight and how compact and how quality engineered the home is, how tight the envelope is and if it's efficiently tight enough, then you qualify for this mortgage. You can borrow a little more than you would have normally based on your income.
Whitney: It's interesting that the green topic has even come up in this conversation. Buyers are becoming very aware of energy efficiency and sustainable building. They are reading articles in the paper every day about renewable energy resources and energy efficiency being the cheapest form of energy we can buy. They are educated now and are interested in this particular subject. We feel that the turnaround particularly in the custom home building right now is going to be driven by those buyers looking for energy efficiency and trying to find ways to cut down on their utility costs and protect themselves against higher utility costs. What we want is not only energy efficient mortgages available, because you are absolutely right if you can save $200 in utility costs per month because you've increased the energy efficiently of the home, you can certainly afford $200 more on your mortgage payment to trade off on that. Elliott mentioned the HERS rating system, the Home Energy Rating System. They actually have a sticker that if a builder goes out and has a HERS inspection done on a house, the sticker comes back and tells how that house borrows relative to the average home, relative to a home built under current codes. It's almost like the EPA mileage rating on a car so that somebody can walk up to a car window and see what the mileage rating is, somebody can actually walk up to a home in see the HERS rating sticker and know how energy efficient that home is.
Eisenberg: It's also important to point out that the VA has energy efficient mortgages available, Fannie Mae and Freddie Mac too as well as FHA.
Whitney: We'd like to see the MLS listing on a home eventually have a check off box that indicates the energy efficiency of the home. We'd like to see appraisal forms have an indicator or they can adjust the value of the home based on the energy efficiency of the home. We'd like to see it on HUD statements. We'd like to see it any place we possibly can so that the homebuyers can be aware of the actual energy efficiency of the home they are buying and understand the value of that. It helps them in obtaining their mortgage.
Mosca: What is you golden nugget for today?
Eisenberg: There are a lot of states that are doing remarkably well. We hear a lot about places like Phoenix, I'm sorry Dean, Los Angeles, southern Florida but states like Vermont, North Dakota, South Dakota, Nebraska, Iowa, Arkansas that we mentioned before, Montana, New Mexico, Wyoming, Alaska, Washington State also, these are all states that have relatively very low default rate. It's generally speaking half as high or less than half as high as the national average. House prices in these states have done remarkably well. They by and large did not experience the booms and aren't going to experience the busts. Investing in those places is much less risky than people think.
Whitney: The fish and the wildlife here in the state of Idaho are going to be ecstatic when all of the builders come back out of the wilderness and get back into building homes again.
Harp: We talked a lot in this conversation about the folks that might be on the fence who are waiting on a tax credit. While it's virtually impossible for anybody to hit the bottom of a market whether it is the stock market back or the home building market, we are there. There is no better time to buy a house than now, not in a year or two or three because I feel they will be more expensive in the future. Now is the time to buy.