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Protecting Against Structural Calamities

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | February 22nd, 2013

New homes may be new, but they are rarely perfect.

Houses are giant puzzles with hundreds of parts, all manufactured at different locations and carried to the building site. And try as they might to put together a flawless product, builders and their numerous subcontractors don't always get things right.

Luckily, buyers are more likely to have to deal with cosmetic defects than out-and-out structural failures. Scratched refrigerators, broken bathroom tiles and faulty electrical outlets are far more prevalent than badly cracked foundations or sagging roofs.

But structural defects do occur. According to recently released data from 2-10 Home Buyers Warranty, owners of new homes are as likely to experience major structural damage -- big cracks in the walls, windows and doors jammed shut, buckled floors -- as they are a major fire.

This isn't to warn buyers off new construction. Previous research has found that just one in 20 houses will experience a major structural hit over its lifetime. But one in every four will experience "some" structural distress.

Based on his review of more than 10,000 structural claims over a 32-year period, Walt Keaveny, chief risk manager of the Denver-based warranty company, says structural problems can occur from day one. But most claims are reported between four and seven years after initial occupancy.

Total losses are not common, but claims can be expensive. According to Keaveny's analysis, it costs $42,000 on average to investigate and repair a structural claim.

With this in mind, here's how this warranty company's chief management expert says homebuyers can best protect themselves from such catastrophes:

-- Deal only with builders who offer an insurance-backed new-home warranty from a reputable company. That may sound self-serving. After all, 2-10 HBW is the country's oldest and largest new-home warranty company. But it is wise advice. A 10-year warranty against structural defects is a must, especially in areas of expansive soil -- roughly half the country.

Most warranty companies underwrite builders to make sure they are qualified, which is another reason over and above the homeowners insurance protection to have a warranty. And with an insured warranty, if your builder should refuse to repair your house or go out of business, you still will be covered.

-- Coverage should start from the day you close on the house, and it should not exclude damage caused by soil movement. Researchers have found that active soils cause more property damage than floods, earthquakes, tornadoes and hurricanes combined.

The two main causes of structural damage are active soils that settle, heave or move laterally, and fill material that is not compacted to code requirements. Only 20 percent of structural claims have to do with framing; the rest concern foundations.

-- Ask if geotechnical engineers have been involved in your home's design. If so, says Keaveny, you are only up to half as likely to have a structural issue.

In a geotechnical investigation, subsurface conditions and geologic hazards are explored by drilling holes and pulling samples. These tests determine if the soil is expansive and if fill dirt has been properly compacted. Findings are given to the structural engineer so he is not working blindly when designing foundations to fit the conditions.

-- Consider hiring your own independent home inspector. Government inspectors might inspect the home, but they are making sure only that construction meets minimum code requirements.

An independent inspector should examine the house as it is constructed -- once just before concrete for the foundation is poured, again when the walls go up but before the drywall and insulation are installed, and finally when the place is completed.

Keaveny says his company requires its builders to have at least these three inspections. "If you wait," he says, "it's too late."

-- Check the grade around the house. It should fall at least 6 inches in the first 10 feet from the foundation. If it does not, water will flow back toward the foundation instead of away from it.

In areas with expansive soils, or if your house has a basement, it's best to use gutters and downspouts to carry rainwater at least 5 feet from the foundation.

If your property is graded properly, don't change it. One of the biggest mistakes owners make is to change the grade with flower beds and shrubs against the house.

-- Make sure you receive a copy of the warranty company's performance standards booklet. Controversies have arisen over the years about home warranty coverage. The booklet will spell out exactly what is considered a structural defect under your policy, so you will know exactly where you stand.

Absent this, purchase a copy of the National Association of Home Builders' "Residential Construction Performance Guidelines."

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Prices Rising Almost Everywhere

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | February 15th, 2013

The latest numbers from the field are in, and the news is good. Housing prices were up almost everywhere across the country in 2012.

Of the 134 core-based statistical areas (CBSAs) that reported 500 or more sales last year, 123 saw gains, according to year-over-year data collected as of Dec. 31 by Pro Teck Valuation Services of Waltham, Mass. CBSAs are defined as "micropolitan" areas of at least 10,000 people who are tied to an urban center by commuting.

Some increases were exceptional, such as the nearly 35 percent jump in the price per square foot in the Phoenix CBSA and 25 percent each in San Jose, Calif., and Fort Myers, Fla. Others were minuscule, such as the 0.23 percent increase in Salem, Ore., or the 0.26 percent gain in Nassau County, N.Y.

But even those slight increases are welcome, and far better than the 10 percent drop in square-foot prices recorded in South Bend, Ind., which had the biggest decline among the 11 markets where prices are still falling.

Overall, the median increase in the price per square foot was up 5.85 percent nationally, from $81.08 in 2011 to $86.42 last year, according to Pro Teck, which takes its numbers at least daily from about 850 multiple listing services.

Since all real estate is local, the national median is useful only as headline material. What's more important is judging whether the real estate market is rising or falling in your market -- and not just your city or town, but your community, your neighborhood and sometimes even your block. Breaking down housing prices by CBSA is a step in the right direction.

Moreover, Pro Teck's median price per square foot is more helpful than other measures in gauging the path of housing prices. Most of the more popular indexes are influenced by product mix and the number of sales in a particular price range. Consequently, an unusually large number of sales of more expensive houses can result in false readings, sending the average or median price higher than it otherwise would be. The same phenomenon can occur when most sales are in the lower price brackets, pushing the announced figure lower.

But the median price per square foot tends to even things out. By normalizing for swings in the type and price of houses sold, it represents a truer picture of the market. In that sense, then, price per square foot -- let's call it PPSF -- is the great equalizer by which all houses can be judged and compared with one another.

It also is worth mentioning that Pro Teck's figures are more current. Whereas other indexes you might read or hear about are three and perhaps up to six months old, the numbers supplied by the Massachusetts valuation company in its latest report are as of year-end 2012. You can't get much more current than that.

With that said, let's take a look at what's happening throughout the country:

In 39 CBSAs, the PPSF rose by double digits in 2012, with Phoenix, San Jose and Fort Myers leading the way. Interestingly, those markets were three of the hardest-hit in the country during the downturn. But now they seem to be thriving.

So does Atlanta, another spot that took it on the chin from the recession. The PPSF there was up 19.35 percent last year.

The measure was up 18.85 percent in Bend, Ore., 18.67 percent in Tucson and 18.14 percent in Santa Rosa, Calif., and Flint, Mich.

On a PPSF basis, San Francisco is far and away the nation's most expensive housing CBSA. Expect to pay $492 and change per square foot in the Bay Area. That's a 16.1 percent jump from year-end 2011. By comparison, the current PPSF in San Jose is $454, and in Honolulu it is $409.

Nowhere else do housing costs come even close to those cities. The next most expensive place is the Santa Ana-Anaheim, Calif., CBSA, where the PPSF is $281.

Las Vegas is another strongly improving market. The PPSF there was $77, a year-over-year increase of 15.6 percent and a relative bargain compared with the West Coast. Even the Riverside, Calif., CBSA, at a PPSF of $114, is less expensive than, say, the San Diego CBSA, where the PPSF ended 2012 at $219.

In the nation's capital, the PPSF is $141, a jump of nearly 9 percent from a year ago. Surprisingly, the cost is the same in the Baltimore CBSA, which has always been considered a cheaper, albeit somewhat distant alternative, at least by East Coast standards.

The PPSF is relatively equal in Dallas and Houston, too. In Dallas, it's $81; in Houston, $75. Both are up about 7.5 percent from a year ago.

In New York, the PPSF is nearly $239, a jump of nearly 7 percent from year-end 2011. But in Chicago, it is only $96, a gain of about 3.5 percent.

The least expensive of the most active CBSAs? That would be Flint, Mich., where the median price per square foot of living space is an affordable $51 -- an 18 percent jump from Dec. 31, 2011.

As an alternative, consider South Bend, Ind., where the PPSF is just under $53 and falling.

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Builders to Polish Image With Ad Campaign

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | February 8th, 2013

Homebuilders are fighting back!

For as long as there have been hammers and nails, builders have waged the battle for customers among themselves, all but ignoring existing homes as true competitors. But now, with many markets still flooded by foreclosures and with the possibility that millions of wannabe sellers will list their properties once the logjam of distressed properties finally clears, builders across the country are about to change their strategy.

Starting next month, a group of perhaps 1,000 or more builders will launch a multiyear, multimillion-dollar, multifaceted advertising campaign aimed at persuading potential purchasers that new is better than used.

Not that it will take much arm-twisting. Research by Builder Homesite Inc. (BHI), a group of like-minded large builders that came together a dozen years ago to try to figure out how to sell more effectively, shows that a solid 19 percent of all homebuyers already believe new is better. An additional 35 percent are agnostics who don't have a preference one way or the other.

"That's a much larger share than we thought," says Keith Guyett, vice president of marketing with BHI, which is owned by a consortium of 32 of the nation's largest builders. If builders were able to sign just one out of every five of those buyers, they'd be selling 900,000 houses a year.

As it is, builders accounted for just a 7 percent market share last year, which equates to fewer than 400,000 sales.

Tim Costello, CEO of Builder Homesite Inc., says builders' wounds are largely "self-inflicted."

"It's not that people aren't buying; it's that they are buying existing homes," he says. "It's not a demand problem; it's a marketing and messaging problem."

The goal, then, is to "change the search path" by creating advertising around quantitative research that shows, among other things, that the quality of new construction is better, that new neighborhoods are safer and that new homes have better floor plans, cost less per square foot and are less expensive to maintain.

"We're not trying to convince more people to buy," says Guyett. "We just want our share. And we think we can really move the needle if we concentrate on the 35 percent of the market that is indifferent and forget the 46 percent who think existing homes are better."

The coming ad campaign is labeled "Start Fresh, Buy New." But in that the campaign will emphasize the notion that owners of spanking-new houses will enjoy the freedom to do more of the things they want in life, you could call it the "Got Milk?" campaign for the new-home market.

"We're trying to make the 'joy gap' as wide as possible," says Guyett, tossing out such catchphrases as "Everything Is New and Perfect" and "Do the Things You Want to Do, Not Have to Do."

With a new home, "You can be the first and only one to soak in your whirlpool tub or lie on your carpet," says Guyett.

His boss is a little more graphic. "People don't want to sit on someone else's toilet seat," Costello says. "Or pick someone else's toenails out of the carpet."

Will it work? Can builders pull together to speak in one voice while still drawing important distinctions between their own particular models?

BHI thinks so, if only because it plans to enlist the aid of local brokers and agents, the real estate professionals who hold sway over the vast majority of would-be buyers.

Research shows that 84 percent of all buyers are either working with an agent or plan to engage an agent to help find a house and negotiate terms. But for one reason or another, agents tend to be a thorn in the side of most builders. Until recent years, most builders were reluctant to pay agents full commissions. Agents aren't particularly fond of builders, either, largely because they lose control of the process when a builder is involved.

Either way, says Guyett, 84 percent is "a statistic we can't ignore."

The research shows that agents want to sell new homes and have better relationships with builders. But they need more information, information that often can't be found in the local multiple listing service because homes can't be listed until they are finished, floor plans can't be shown, and community information can't be listed at all.

So, as part of the "Start Fresh" campaign, BHI plans to engage realty pros more deeply and give them the education and knowledge they need to sell new homes against their normal bread-and-butter inventory of existing houses.

Will it work? A pilot effort conducted in Phoenix last fall to test BHI theories indicates it will. "The response has been phenomenal," Costello says. "In seven days, we fundamentally changed the relationship between builders and agents" and new vs. used.

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