Say bye-bye to the California tax credit for new homes

It looks like the very popular tax credit program of up to $10,000 to encourage sales of new homes in California has now been cut off and unlikely to be renewed due to the state's considerable budget problems. Word has it that the tax credit -- even more than the $8,000 program offered by the federal government for all homes -- was instrumental in helping to spike sales in new homes of all price ranges. From an L.A. Times story:

California is cutting off applications for a tax credit that was designed to promote sales of new homes.

The Franchise Tax Board said it would stop taking applications for the tax credits at midnight Thursday.

The program offered $100 million in credits to about 10,000 consumers who buy homes that have never been occupied. The credit is equal to 5% of the purchase price or $10,000, whichever is less.

Buyers must occupy the homes for at least two years immediately after the purchase.

The tax board expects to have received 12,000 applications.

Interview with Robert Shiller now online at BlogTalkRadio

My interview with Robert Shiller, author of the new book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism" is now online at BlogTalkRadio. You can also listen to the interview by clicking on the widget on the right hand margin of this blog.

This interview will be accompanying my upcoming review of the book for the syndicated news service Inman News.

Is homeownership a good thing or not?

Lately we've been hearing from various economists on the value of homeownership in a society, arguing that due to the latest economic meltdown created from the housing bust that many people should remain renters forever. And that's a valid argument. But should that argument be extended to predict the end of the single-family home forever?

From my own experience, renters aren't as involved in community affairs as owners (in fact without the advantage of automatic sprinklers, grass and other greenery would die because many don't seem to even want to water the lawn), and for all of these arguments that 'if you put the same amount that you'd pay for a mortgage into an interest-bearing account' the chances of that happening across the board are so small it's almost laughable. For many people, buying and paying off a home over time is a time-tested strategy to build some wealth -- regardless of swings in the market over a 30-year period.

But don't take it from me. Listen to what Joel Kotkin has to say at Forbes.com:

Increasingly, conventional wisdom places the fundamental blame for the worldwide downturn on people's desire--particularly in places like the U.K., the U.S. and Spain--to own their own home. Acceptance of the long-term serfdom of renting, the logic increasingly goes, could help restore order and the rightful balance of nature.

Once considered sacrosanct by conservatives and social democrats alike, homeownership is increasingly seen as a form of economic derangement. The critics of the small owner include economists like Paul Krugman and Ed Glaeser, who identify the over-hot pursuit of homes as one critical cause for the recession. Others suggest it would be perhaps nobler to put money into something more consequential, like stocks.

Homeowners also get spanked by leading new urbanists, like Brookings scholar and urban real estate developer Chris Leinberger. He lays blame for the downturn not on unscrupulous financiers but squarely on aspiring suburban home buyers. "Sprawl," he intones, "is the root cause of the financial crisis."

(Note: For years, Leinberger led a well-known consulting company with multiple offices which specialized in master-planned communities, and for which I also consulted in the mid 1990s. One has to wonder how many such communities were built because of the supporting documentation his company created. Perhaps he simply had a change of heart and now realizes that sprawl wasn't the way to go, but I've never seen or heard anyone tie this rather obvious disconnect together).

If only we built more high-density, transit-oriented housing--which, incidentally, is not exactly thriving--the crisis could be happily resolved, he believes. This approach is echoed by big-city theoreticians like Richard Florida, who believes that both homeownership and the single-family house "has outlived its usefulness." In his "creative age," we won't have much room for either single-family homes or owners. Instead, we will be leasing our ever-more-tiny cribs--just like yuppies with their BMWs--as we wander from job to job.

(Note: Of course Florida lives in Canada, where there's no tax advantages to buying a home, so Candians have to bank on building equity by paying down a mortgage or hoping the value goes up. But it's still possible that the 'creative class' of whom he speaks won't want to be homeowners even with tax advantages).

Yet the recent real estate debacles should not obscure the tremendous positives associated with homeownership. Widespread and diffuse ownership of property has been a critical element in successful republics, from early Rome and the Dutch Republic to the foundation of the United States...

In virtually every country, this was largely a suburban phenomenon. People bought houses where land was cheaper, stores and schools newer. Here, too, people could transcend the often confining social limits of the old neighborhood. It was also, as the novelist Ralph G. Martin, noted "a paradise for children."

Through all this, the chattering class never lost its contempt for homeowners and their suburban refuges. Old gentry long disliked the idea of dispersed ownership of property--even if many got rich selling their own estates to developers. Aesthetes disliked the seemingly banal housing tracts "rising hideously," as Robert Caro put it, from the urban periphery...

Yet, despite the disdain, the dream of homeownership survived. Many boomers, who in their 1960s radical phase denounced suburban tracts as sterile and racist, meekly ended up buying homes there. So, increasingly, did middle-class minorities, whose rates of homeownership rose faster after 1994 than that of whites.

To be sure, the financial crisis has led to a sharp drop in levels of homeownership, as occurred in the last big recession of the early 1990s. In the future, some suggest that aging boomers will force the home market to collapse even more due both to the current mortgage meltdown and changing demographics.

Yet there are limits to how far homeownership will drop. Urban boosters, apartment-builders and greens--all advocates of expanding the renter class--tend to ignore several key facts. For one thing, the vast majority of boomers are holding onto their mostly suburban homes far longer than ever suspected. Many will remain there until forced into assisted living, nursing homes or the cemetery.

Then we have the X generation, who, if anything, has favored large homes and exurbs in large numbers. In addition, behind them lie the large cohorts of millenials, who according to surveys conducted by generational chroniclers Morley Winograd and Mike Hais, prioritize the ownership idea even more than their boomer parents do.

No doubt, the weak economy will slow this generation's push into the home market. However, by the next decade, as this generation enters the late 20s and early 30s, they will find their economic footing and be ready to enter the market for houses in a big way...

Home price declines flattening, but not evenly

Although the S&P/Case-Shiller national index is showing a flattening in the pace of price declines for the third month in a row, for various price ranges and different cities, the pain continues or is expected in the future. I'll be interviewing Dr. Shiller tomorrow at 12 noon (Pacific time) for my Housing Chronicles show on BlogTalkRadio.com, and I'm sure I'll be asking his opinion on these differences. From an L.A. Times story:

Home prices in 20 metropolitan areas were down 18% in April compared to the same month the previous year, according to the S&P/Case-Shiller home price index.

In the Los Angeles area, which includes Orange County, April home prices fell 21% from the previous year.

Los Angeles County and Orange County prices in April were down 42% from their 2006 peak, the index shows. The 20-city index was down 33% from its 2006 peak.

The Case-Shiller index had posted record year-over-year declines from October 2007 to January of this year. April's index was the third straight month in which the pace of price declines slowed slightly...

While Los Angeles area price declines have slowed, Charlotte, Chicago, Cleveland, New York, Portland and Seattle posted record year-over-year declines in April.

The worst year-over-year declines in April were in Phoenix (35%), Las Vegas (32%) and San Francisco (28%).

Los Angeles area price declines have varied substantially by price segments. The lowest-priced third of homes sold in April is down 54% in price from its peak, according to Case-Shiller; the middle third was down 42%; and the most-expensive third of homes sold was down 31%.

The lowest-priced homes in the Los Angeles area had more room to fall - they had also shown the largest price increases during the real estate bubble, with prices in that segment inflated by subprime lending...

Nontheless, because the mid-level and upper-price tiers depend largely on buyers moving equity from the entry-level tier, it's only a matter of time before we see price declines even out, and that process is already starting in certain markets.

Interview tomorrow with Robert Shiller, co-author of "Animal Spirits"

On Wed., July 1st at noon (Pacific time, 3pm Eastern time) I managed to snag an interview with Robert Shiller, Princeton University professor, co-founder of the S&P/Case-Shiller index and co-author of the new book "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism" for my Housing Chronicles show on BlogTalkRadio.com.

You can either listen to the first 15 minutes streamed live or listen to the podcast afterwards (I'll post a link). I'll be citing this interview for my upcoming review of the book for Inman News.

Time to throw out the old rule books

“If You Don’t Create Change, Change Will Create You” – Anonymous

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one.

In today’s world, new rules are constantly being written by the brash and the creative, whether it’s Google’s transformation of the advertising world or the huge success of the CBS franchise “CSI.” For example, not only did CSI creator Anthony Zuiker have zero experience writing for television, he also didn’t realize that including flashbacks and quick cuts were both against long-standing industry convention.

Not knowing any better – because he never read the old, stale rulebook – he included both, thus giving the original series a pace and look that quickly sent it to the top of the ratings game and launched two spin-offs, one of which is the most-watched show in the world. So is that just dumb luck or a sea change that will cut across all industries?

I think that even more potent forms of creative destruction are about to envelope the building industry, and it won’t just be about building more in-fill product or scaling down home sizes and prices to meet today’s demand. These changes are going to alter everything from supply chain management to the way in which homes are marketed and sold, and those veterans who keep themselves otherwise occupied while waiting for someone to call and ask for their outdated skill set may be in for a long wait.

While there will certainly be some demand for the impressive homes of the past, we’re also quickly seeing a return to designs that meet needs more than wants. This is especially important for the groups of people mostly left behind during the last building boom such as families, seniors, the disabled and the homeless who can only afford to live in housing made possible by tax credits, low-interest bond financing and various other government programs.

For example, in upscale Thousand Oaks in California’s Ventura County, our staff is currently drafting a report in support of an affordable housing project that will help to house a variety of low-income families, homeless persons and the mentally disabled, many of whom now are mere numbers on a wait list that’s close to 600 families.

And who’s hoping to build this 60-unit project? A local non-profit that has managed over the last 30 years – mostly under the radar – to build, rehabilitate and fill 400 units and provide housing for 1,000 adults and 200 children. It’s that type of story (along with appropriate private and public incentives to make it happen) this industry really needs to start telling more of around a campfire – assuming, of course, that the old rulebooks are helping to provide the kindling.

Why California can't be governed

Ever wonder why we Californians seem to have so much trouble governing our finances? Well, it wasn't always this way, and, as a 7th generation California native, I can personally attest to a huge variety of changes, instituted in large part by a populace that moved from *other* areas to then impose their own will on the rest of us (such as freebies for everyone but no way to pay for it).

Being lucky enough to be born when I was, I enjoyed a solid public education, a safe neighborhood, friends and neighbors who shared similar values, an enviable infrastructure and a state-supported university system that was among the best of the world.

When it changed, it just wasn't due to Prop. 13, although that was the start of it. I remember joining my family to protest the proposition (my first foray into politics), and when a cigar smoke-smelling Howard Jarvis waddled by and told my brothers and I, "Why don't you go home and learn to read?" I'm sure he didn't realize that home schooling would become the savior for many of today's families.

The L.A. Times has an opinion piece on what ails California, and it's a quite instructive. From the article:

After Proposition 13 passed, then-Gov. Jerry Brown and the Democrat-dominated Legislature realigned -- "tangled" would be more accurate -- the relationship between state and local governments by effectively shifting control of remaining property tax revenue to Sacramento. In a crisis atmosphere, they radically transformed California's political landscape, taking power and responsibility for health, welfare, schools and other local services away from city councils, boards of supervisors and school boards, thereby establishing today's chaotic maze of overlapping jurisdiction, which defies efforts at accountability...

Proposition 13 also ushered in an era of ballot-box budgeting, as fiscal initiatives became a favored special-interest tool to take control of public fund expenditures. A series of post-13 initiatives -- including measures creating the lottery, financing public schools by mathematical formula and earmarking revenues for special programs, from mental health to medical care -- established an exquisitely complex state budget calculus that has hamstrung the rational operations of government...

The once-a-decade process of redrawing political maps based on the census has created an increasingly partisan Capitol atmosphere. Reapportionment has become essentially an incumbent protection effort, as lawmakers craft districts that are either safely Democratic or safely Republican. In this way, the crucial contests are party primaries, not the general elections. Because primaries draw the most partisan voters, the most conservative Republicans and the most liberal Democrats tend to win the nominations that guarantee election in November. The dynamic locks in ideological polarization in Sacramento, where lawmakers have little motivation to compromise...

Despite the claims of backers, the 1990 term-limits initiative did not get rid of career politicians -- it simply changed the arc of their careers. Instead of spending decades in the same Assembly or Senate district seat, legislators position themselves for the next office -- or job as a lobbyist -- as soon as they arrive in Sacramento...

Since Proposition 13, state government has become increasingly dependent on volatile sources of revenue -- the sales, corporation and progressive personal income taxes -- that generate annual shifts in tax collections corresponding closely to the business cycle. When economic times are good, as during the dot-com and housing bubbles, money pours in and there's little political incentive -- in fact, term limits create a perverse disincentive -- for long-term financial planning. When revenues contract, the Capitol has rarely made real spending reductions, preferring to wait for the next boom...

California is one of only three states requiring a two-thirds legislative vote to pass a budget, one of 16 requiring a two-thirds vote to raise taxes -- and the only state to require both. The budget requirement has been in the Constitution since the New Deal; the tax restriction began with Proposition 13. In the polarized atmosphere of Sacramento, the two-thirds rules effectively hand a veto to the minority party. Under these conditions, stalemate and deadlock on key fiscal issues have become the political norm...

In the next few weeks, a blue-ribbon commission is set to recommend sweeping changes in the tax system to stabilize revenue collections. Voters last fall approved Proposition 11, which takes away the Legislature's power to draw its own districts in favor of an independent commission. Next year, as they elect a new governor, Californians also will vote on a system of "open primary" elections aimed at aiding moderates, and they also will probably decide on one or more initiatives to dump the two-thirds budget vote requirement.

California Forward, a bipartisan good government group financed by major foundations, is crafting proposals to conform government systems and processes to modern management methods. And the business-oriented Bay Area Council is pushing initiatives for a state constitutional convention, the first since 1879, to wipe the slate clean and build a new, rational structure for state government.

New home sales down by 1/3 from last year

As builders continue to compete -- generally unsuccessfully -- against heavily discounted foreclosures and are unable to obtain financing for new homes, sales of newly built units fell by 33% between May of 2008 and 2009. But is a bottom about to be reached? First, from an L.A. Times story:

The seasonally adjusted annual rate of new-home sales was down 0.6% from April and fell 32.8% from May 2008, amid a glut in housing. New-home sales in the West, however, were up 1.3% over April's adjusted annual rate...

The median sale price for a new home in May was $221,600, down 3.4% from a year earlier.

But in the battered Inland Empire, the pace of decline is showing marked signs of slowing. Yesterday I spoke with Lou Hirsh of the Riverside Press-Enteprise:

Inland new home sales in April were down 20 percent from April 2008. That is lower than the 28 percent year-to-date decline compared with the first four months of 2008, and the 41 percent decline seen for the period of May 2008 to April 2009.

"That tells me that we're getting closer to the bottom," said Patrick Duffy, a principal and analyst with MetroIntelligence Real Estate Advisors in Los Angeles.

Duffy said the cancellation rate on new Inland homes in April was 7.8 percent in April, versus 22 percent a year ago. Declines in inventory absorption rates and median asking prices are also less severe than at the same point of 2008...

National experts said that without bigger price cuts, builders may keep losing market share as the jobless rate and foreclosures climb, aggravating the drop in resale prices.

"Further increases in mortgage rates would be a huge concern amid rising unemployment and falling incomes," Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pa., said before the Commerce Department report...

Next book review: "Animal Spirits"

For my next book review for Inman News, I selected the book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism" by economists George Akerlof and Robert Shiller.

The reason I chose it was because few markets are more prone to human psychology than residential real estate, so I was hopeful that the book would provide some tools to real estate agents to educate potential buyers when deciding to enter into a deal.

I'm also trying -- so far unsuccessfully -- to grab 15 minutes of Dr. Shiller's time for a brief, 15-minute interview for my HousingChronicles show on BlogTalkRadio (and also to help with my review). Since I've interviewed the authors of nearly every book I've reviewed for Inman News and the L.A. Times -- including other noted economists such as Richard Florida and Mark Zandi, who regularly testifies in front of Congress -- I was thinking Dr. Shiller would be willing to do the same.

However, since the PR rep for his publisher is having zero luck scheduling this interview, if any readers of this blog have any sway with Dr. Shiller, you'd have my gratitude to intervene. While the lack of an interview certainly won't stop me from writing the review, I'd find it much easier to tie it directly to the Inman News audience with a few specific questions. After all, this isn't the type of book to which your average real estate agent would gravitate, so I had to talk my editor into letting me review it in the first place.

According to Amazon.com, here's a description of the book:

The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today.

Keynesianism, Reaganomics and Thatcherism? I can't wait!

Can't wait for the interview? Buy the book at Amazon.com (now only $9.99), or click on the widget below:

Next up on the To Do list: The Crumbling of America

In between the turmoil in Iran, the impending Gosselin divorce, a stock market that can't decide which way it wants to go and an attack on celebrity blogger Perez Hilton, it's hard to think of one more problem to be solved, but this one is important.

The History Channel is currently running a two-hour special entitled "The Crumbling of America," and what it shows is quite sobering. Even to bring up the country's crumbling infrastructure back to where it should be will cost -- you guessed it -- trillions! And who's to blame for this long-delayed maintenance?

Ultimately, we are -- because we think all taxes are bad and insist on electing politicians who are afraid to tell us inconvenient truths. And, as one expert on the show opines, people are going to die before we wake up to the consequences of our collective disinterest in what once made the United States what it was: an infrastructure that created the best efficiencies the world has ever known. Sadly, he's probably right. From the History Channel Web site:

America's infrastructure is collapsing. Tens of thousands of bridges are structurally deficient or functionally obsolete. A third of the nation's highways are in poor or mediocre shape. Massively leaking water and sewage systems are creating health hazards and contaminating rivers and streams. Weakened and under-maintained levees and dams tower over communities and schools. And the power grid is increasingly maxed out, disrupting millions of lives and putting entire cities in the dark. The Crumbling of America explores these problems using expert interviews, on location shooting and computer generated animation to illustrate the kinds of infrastructure disasters that could be just around the bend.