A Big New Market for Builders

TRADE-IN HOUSING

CONSTRUCTION of private housing has been slipping in recent months, is now running at the annual rate of 1,100,000 starts, off 200,000 from last year. So far, builders are not too worried; the trend to bigger, more expensive houses has helped maintain a high dollar volume. Nevertheless, the decline has given a big boost to a little-known idea: trade-in housing. Detroit Builder-Broker Gordon Williamson, who used to sell cars in the '20s, says that real-estate dealers are today at the point where auto dealers found themselves 30 years ago; they are going to have to handle trade-in houses to stay in business, because "we're running out of first-home buyers right now." Agrees Federal Housing Administrator Norman Mason: trade-ins would open up "a great new market of perhaps 60 million Americans who would like to move if only they could sell the house they already own."

To spur trade-ins, FHA has put into effect a liberalized financing program. For the first time real-estate brokers and land developers are eligible for FHA mortgages on trade-in deals, thus freeing them of the financial burden of carrying trade-ins on their own. Furthermore, builders who take trade-ins are no longer required to make FHA-approved major improvements before reselling them. Builders complain that the FHA still takes too long to move, appraises houses too low, lends too little on mortgages. In most cases, builders can get a top of 85% on the owner's mortgage, which in turn represents a top of 86% of the FHA appraisal; e.g., on a $10,000 house, the FHA trade-in mortgage loan insurance comes to about $7,300. Yet despite these obstacles, trade-ins have been catching on.

In Detroit, where the idea is widespread, Edward Rose & Sons, one of the area's biggest builder-brokers, works this way: when the prospective house buyer cannot finance the deal until his old house is sold, Rose contracts to buy the house at a fair market price, puts it up for sale. If the old house is sold before the new one is ready, Rose simply charges the standard 5% broker's commission. Otherwise he moves the buyer into the new house and takes up his option on the trade-in at the mutually agreed price, less the 5% commission and a $750 flat fee for mortgage financing, necessary repairs and other contingencies. Out of 175 such houses handled, Rose has had to carry only a dozen past the new home transaction deadlines. Chicago's William Trude offers a trade-in customer 15% under market value for his old house, then gives him 90 days to sell it on his own. The customer usually succeeds, much to the delight of Trude, who has had to take over only four out of 150 trade-ins.

San Francisco's Standard Building Co.. which has handled several thousand trade-in deals, sends appraisers to the prospective buyer's old house, tries to offer a fair market price. Once the deal goes through, Standard modernizes the trade-in, gives it a fresh coat of paint, then sells it. Standard expects little profit on the old house, makes its money on the new ones it sells.

But trade-in housing also has some handicaps. It requires considerable capital and is no place for small operators; a few slow deals can tie up their limited assets in vacant houses. Phoenix's Universal Homes averages ten trades a month, employs a 25-man crew to do nothing but clean and repair houses taken in trade. But when it started trading in 1952, it lost $25,000 the first year, before it learned that trades require plenty of capital and a crack organization equipped to make expert appraisals and careful deals. Says President Whitney E. Anderson: "Without a separate organization for handling trade-ins, such as we now have, a builder could lose his shirt." Some builders set up a "trade-in partnership" with their salesmen. Each contributes a small sum (often taken from his trade-in commissions) to finance further trade-ins.

Another major trouble is the homeowner's inflated valuation of his home. Says veteran Cleveland Builder Joseph Siegler: "People think they have oil wells under their houses." Says an FHA official: "Most homeowners don't subtract the years they have lived in the house. No man selling a ten-year-old car expects to get anything like his original price out of it. Yet, though a house piles up mileage too and gets behind the times in style, the owner expects to sell for at least what he paid, and most expect a profit."

So far most builders, especially in areas where new houses are still selling well, are cool to trade-ins. But the trading idea is expected to spread fast as the housing boom falters. Family formations are already dropping sharply--895,000 new households in 1955 v. a whopping 1,650,000 in 1949. Says Seattle's William McPherson, who sells 200 houses a month, half involving trades: "The blush is off the first-time buyer. Builders are going to have to aim their selling at the trade-in market or go under."

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