The Toenail Factor

Posted by: Chris Palmeri on April 12, 2007

For Jeff Mezger, chief exec at KB home (that’s him at right), one telling indicator of home prices is the differential between new homes (that’s what he sells) and existing homes.

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Traditionally new homes sell for about 10% more than existing homes, a premium justified (or so the salesmen say), because “you don’t find toenails on your carpet when you move in.” In some formerly hot markets, such as Orlando, the price differential had risen to 25%.

The correction has already begun. In March, existing home prices in Orlando dropped back to 2006 levels, a median price of about $240,000 per home, according to the Orlando Regional Realtor Association. Sales were down 42% from March of last year. The inventory of homes on the market climbed 61% to 24,500.

It’s all part of the natural cycle of the business, Mezger says. He says some markets—typically those with strong job growth—such as the Carolinas and San Jose have already stabilized. For much of the rest of the country—Orlando—included, it will “get tougher before it gets better.” After all, nobody wants to pay up for someone else’s toenail clippings on the carpet.

 

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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