John Murphy’s MEDINA REAL ESTATE REPORT

The National Association of Home Builders reported housing starts this week for the month of April 2008:

Single-family housing starts dropped 1.7 percent for the month to a seasonally adjusted annual rate of 692,000 units, the lowest monthly production rate since January 1991 and 42.2 percent below April 2007.

I remember seeing on Yahoo! the positive news story about housing starts being up, but when you look under the hood at the statistics and the details of the release from the NAHB, you see that the multi-family starts overly influenced the report. The fact is, across the country, demand for single family homes remains soft and the builders remain pessimistic about their futures - see graphical display below courtesy of Calculated Risk.

Locally here in the Twin Cities and particularly the western suburbs, while business is certainly softer than many builders would like to see, I am seeing some encouraging activity in new developments such as Prominence Woods (Maple Grove, MN - Wayzata Schools), Taryn Hills (Plymouth, MN - Wayzata Schools) and Bridgewater at Lake Medina (Medina, MN - Wayzata Schools). Several spec homes have recently gone pending meaning someone has purchased the home but it has not closed yet.

Toll Brothers, the luxury home builder, swung to a loss for its fiscal fourth quarter which ended October 31, 2007.  This was Toll Brothers first quarterly loss in 21 years.  They are arguably the best run of the national home builders and even they have finally had to succumb to the slowdown.

“By many measures, Fiscal 2007 was the most challenging of the forty years that Toll Brothers has been in business,” Robert Toll, chairman and chief executive officer, said in a statement. “1974 was perhaps rougher, but the difficult times only lasted one year.”

Highlights of the earnings report includes:

• Net loss of $81.8 million compared to a net income of $173.8 million a year ago
• Loss included writedowns of $314.9 for homes they will have to sell at a loss
• Revenue fell by 35% to $1.17 billion for the quarter
• Net signed contracts fell by 48% to $365.3 million
• The company expects to deliver between 3,900 - 5,100 homes in 2008 priced between $630,000 - $650,000 (note: this is 3 times the median price of a home in America today which is $207,800 according to the National Association of Realtors’ latest report).

Toll Brothers was late to the party here in the Twin Cities.  They have developments in Eagan and Maple Grove as was noted by my post earlier this year.

“What goes up, must come down: thoughts about the residential real estate market through 2010″ is one of the more lucid articles I’ve read about the state of the Twin Cities real estate market. The article was written by Chris Galler, SVP for the Minnesota Association of Realtors (MAR). The Minnesota Association of Realtors has done an excellent job of trying to prepare agents for the coming changes in Minnesota real estate. They have always spoken honestly about the challenges facing the local real estate market.

We all know about the rising supply of houses for sale due to overbuilding, low interest rates, and lax lending standards. What most people don’t realize is that part of the slowdown we are currently feeling is in part due to a major demographic shift that is afoot right now in the State of Minnesota. There is real concern that there aren’t enough young people coming up to buy the homes from the baby boomers. Add to that the rapid aging of the population and one has to realize that the tide has turned in Minnesota.

The housing stock has essentially been built for married couples with children. However, that category of buyer is a dying breed in many ways. There will be a rapid rise in households without children. They may include a married couple without children or a single mom, single dad or single person. Those buyers aren’t likely going to be interested in the 4,000 - 5,000 square foot two story often found in today’s suburbs. As a result, I believe we will continue to see ongoing pricing pressure for many of these bigger suburban homes for years to come.

There will be cities that will handle this demographic change better than others. For example, it’s my opinion that cities such as Maple Grove and Medina will continue to attact the traditional married couple with children who are looking for the traditional two story home in a nice neighborhood with good schools, amenities and services. In the case of Maple Grove, they are also making sure they have housing to meet the needs of the various households that are being formed today and they have an excellent span of housing options for people.

While we are currently down about 4.5% in prices this year and quite possibly will be down another 5% in 2008, no one that I know of is predicting a big drop in home prices here in Minnesota. That being said, sellers need to be aware of the fact that the market is not likely to bail them out of their home any time soon given the shifts that are taking place demographically in Minnesota.

I am looking to buy homes in Plymouth, Medina, Maple Grove and St. Louis Park for investment purposes.

If you, or if you know of someone, who is in or near pre-foreclosure and they need help unloading their property, I may be able to help.  There are many people who purchased property in the past 2-3 years who are now upside down in their homes.  They may be able sell their home in a short sale and avoid foreclosure.  For more information about short sales see this post from earlier this month.
I will consider any property that you may have and I have the ability to close quickly.

The Star Tribune reported today on the many incentives local and national home builders are offering consumers to purchase homes now.  As I reported last week after my Parade of Homes tour, K. Hovnanian and others are offering significant incentives and upgrades for new home purchases.

The Star Tribune is reporting that the average cost per finished square foot is down by 8% this year.  There is no source for that data point, but it does not sound that far fetched given what the  builders are doing to sell homes.

Speaking of the Parade of Homes, when I was in to see the new K. Hovnanian development called Hidden Creek Estates in Maple Grove last week, the sales agents told me to come back next week with a buyer so they can get $100,000 in incentives on home purchase.

Throughout the Twin Cities metro, builders are offering incentives.  LeGran Homes is offering a couple of options on incentives including paying your PITI for 6 months or finishing off the basement or building a 4-season porch.  I believe they are also paying closing costs as well.

Many of the national builders have done a very good job of offering various incentives including buying down interest rates and paying for closing costs.  But I have to think the K. Hovnanian offer takes the cake for biggest incentive of the year in the Twin Cities.  The offer is $80,000 towards upgrades and $20,000 in closing costs.  If you want the specifics see here.

I believe the offer is good only for this coming weekend, September 14 - 16th.

Given the slowdown in new home sales, the steady trend of larger and larger homes being built might be coming to an end. It is too early to tell, but given the oversupply of housing along with the mortgage challenges buyers face today, the national home builders are starting to scale back the size of new homes.

The Wall Street Journal published this story yesterday. It starts out…”The McMansions may be shrinking.”

I spent last weekend visiting about 20 different Parade homes in the Maple Grove, Plymouth, and Medina areas. You sure wouldn’t know that builders here are concerned about how large they are building homes. Many of them had over 3,000 finished square feet on the main two floors and some had close to 5,000 finished square feet with finished basements.

The biggest home I saw touring the Parade of Homes last weekend was Parade number 366, 7401 Merricmac Lane N., Maple Grove. The home offers over 6,300 finished square feet for $834,445 and is built by K. Hovnanian Homes. The home is part of the Hidden Creek Estates development in Maple Grove, MN.

For those unfamiliar with the Parade of Homes, each year in the Twin Cities, the Builders Association of the Twin Cities sponsors and spring and fall Parade of Homes. This year they have just over 800 homes on the parade. That’s down from the usual number of 1,100.

Here’s the Star Tribune’s interactive map of Medina and Maple Grove foreclosures.

Friday, April 13, 2007, the Star Tribune published this story on the oversupply of luxury homes in the Twin Cities.  The story is focusses on the U.S.’s number one luxury home builder, Toll Brothers who has moved in to Eagan and Maple Grove recently.

Here’s the April housing supply outlook from the Minneapolis Area Association of Realtors.

Perhaps you’ve heard about some of the discounting and incentives many builders are using to encourage buyers to buy their new homes.

Lennar has now dropped the price of this Kensington model to $559,900 with Lennar’s incentives.  It is located at 6338 Troy Lane, Maple Grove and is in the Bonaire masterplanned community.  (The home is still priced at $589,900 in MLS).  The home is scheduled to be completed in October.  It has 4 bedrooms up along with a bonus room and has nearly 3100 finished square feet on the main two levels.  Other similar homes are currently priced at $630-$640k.  One home that is now on the market, sold one year ago for $666k and is now for sale for $689,000.  It looks like it’s the same house that Lennar is selling now for $549k with the exception that the yard is complete and it has a deck.

It’s not often we see deals like this, but Lennar has a “take down” schedule where they need to have homes sold by a certain date in order to keep the project moving as planned.  If you are looking for a home like this and are a shrewed buyer, you could wait to see how close they are getting to scheduled completion and take advantage of the discounting.  Of course someone else might jump in front of you on this as they might feel it’s a great deal at the given price while you might have waited for further discounts…but that’s what makes a market!