Friday, February 29, 2008

Notes from Wachovia's Home Building Conference, Part I

Over the last three days in Las Vegas, the nation's top homebuilders and building product manufacturers have been meeting at the Wachovia Home Building and Building Products Conference, with the most notable giving presentations on how their companies are navigating the current climate in the housing industry. Following is a summary of coverage from various sources around the Web:

The Ryland Group (courtesy of BuilderOnline.com):

The Calabasas, Calif.-based builder, which operates in 28 states, told investors at Wachovia's Home Building and Building Products Conference in Las Vegas yesterday afternoon that its strategies for land acquisition and construction haven't changed, and that it would continue to focus on growing capital and earnings per share, and on scaling down its size to proportions best suited for current market conditions...

Gordon Milne, Ryland's CFO and executive vice president, made the point that his company isn't saddled with some of the weight that its competitors have been dragging around. For example, it was never big on joint ventures, and only had $30 million invested and $40 million in shared indebtedness at the end of 2007. While nearly one-fifth of its inventory is in Florida, Ryland's geographic diversity protected it, somewhat, from the severe downturns in California, Arizona, Colorado, and Nevada, where cumulatively only 16 percent of its inventory is located. (Looked at another way, the company's inventory, as of December 31, was down in Northern California by 64 percent, in Southern California by 65 percent, in Las Vegas by 60 percent, in Phoenix by 72 percent, and in Fort Myers by 69 percent.)...

Meanwhile, Milne emphasized that his company's financial condition is sound. It continues to buy back stock, having repurchased 41.6 million shares for $59.3 million last year. It will make a $50 million debt payment in 2008, but doesn't have another due until 2012. And it ended last year with $180 million in cash. (Last year, Ryland also lowered its credit line to $750 million from $1.1 billion.) Ryland owns about three-quarters of its 40,000 lots, and Milne said the company wants to get that down to 50 percent owned. At the same time, it continues to reduce its exposure to land options.

The one area from the recent boom that Ryland misses, said Milne, is the disappearance of Alt-A mortgages, which in 2005 accounted for 17 percent of the loans its mortgage subsidiary wrote. By the end of last year, Alt-A and subprime loans accounted for zero percent of Ryland Mortgage's business. "Alt-A was a big loss," said Milne.

Centex Homes (also courtesy of BuilderOnline.com):

Centex chairman and CEO Tim Eller outlined the six elements of a market trough this morning to kick off the Wachovia Home Building and Building Products Conference in Las Vegas.

Eller said that the six elements of a trough are when foreclosures rise, the economy slows, housing starts fall precipitously, the new home market corrects much faster than the existing market, land prices begin to soften, and home builders with liquidity begin to re-invest.

"What we find is that the first four things have happened, but we have yet to see land prices soften and builders with liquidity have not begun to re-invest," he said...

Moving forward, Eller said Centex is focused on streamlining its processes and operations. He said the company went from 4,500 floor plans at the peak of the boom and is now down to 700, with plans to reduce plans even more.

He said Centex will focus on "A" locations nationally and stay away from the fringe housing markets. "The 'A' locations will always prevail," he said.

Eller said the company had 44 divisions at the peak and is down to 35 today and will be down to about 30 by the company's next fiscal year. For example, in the Southern California, Centex went from five divisions down to one centered in the Inland Empire.

The company also plans to maintain a more flexible land position, going "shorter" on owned properties and "longer" on options as the market matures.

Beazer Homes (from the Atlanta Journal-Constitution):

A trimmed-down, reorganized Beazer Homes may be headed for further alterations as the troubled, Atlanta-based homebuilder tries to reinvent itself in the worst housing market in decades.

Beazer CEO Ian McCarthy, speaking to the Wachovia Homebuilding and Building Products Conference in Las Vegas, said the company is working feverishly to rein in costs, reduce its excess inventory of finished homes and meet a May 15 deadline for restating its quarterly financial reports for much of the last decade...

Over the past year, Beazer has cut its workforce in half, withdrawn from the mortgage business, reduced its land holdings, eliminated some $50 million in materials costs and withdrawn from five metro housing markets across the country.

"We are trimming our land wherever we can. And obviously we are not developing beyond the sales pace that we need today," McCarthy said.

In the weeks ahead, McCarthy said the company may reduce its activity in its 40 remaining markets scattered across 19 states by examining market data to determine which of its four product categories are best suited for each market.

In addition to the slow pace of home sales, Beazer is facing two federal investigations into its mortgage lending practices and a collection of lawsuits from buyers, stockholders and pension plan participants.

The troubles began with reports last year about high foreclosure rates in Beazer neighborhoods in the Charlotte, N.C., area.

McCarthy said the company is working to resolve its legal challenges and putting measures in place to prevent any similar problems from arising in the future, including the appointment of an internal compliance officer and implementation of a new companywide ethics policy.

K. Hovnanian (from BuilderOnline.com):

Forget about profitability and reasonable margins in 2008. This will be the year of generating cash flow. That was the message given Friday to investors by Ara K. Hovnanian, president and CEO of Red Bank, N.J.-based Hovnanian Enterprises...

Having been through several downturns since the company was founded in 1959, it's taking similar steps now to weather the storm, Hovnanian said, including renegotiating and walking away from land options, dramatically reducing land purchases, "right-pricing" its products, quickly turning its standing inventory, and cutting overhead, including a significant number of jobs...

Calling the current housing correction as dramatic and rapid as those of the mid-1970s and the early1980s, Hovnanian said each of those downturns shared an important similarity-a rebound that was as sharp and as fast as the fall-off, with sales and prices rising significantly within 12 to 24 months.

One notable difference between the earlier downturns and the current one, Hovnanian said, is the interest rate. In the early 1980s, they peaked above 18 percent. Today, they're below 6 percent and predicted to go even lower. That will work in the industry's favor as the market begins to turn around.




Thursday, February 28, 2008

The Motley Fool reviews housing stocks

I've always liked The Motley Fool for objective advice on investing in securities, and in this post they review the housing market and, more specifically, whether or not it's time to buy shares of large, public homebuilders:

Let's start with a recap of the most recent news:

  • As you know, housing starts have been sliding like kids in the playground, with the January figure down 27.9% from the revised January 2007 rate.
  • On Tuesday, Standard & Poor's announced -- in a release that became a Wall Street Journal lead article the following day -- that, according to its S&P/Case-Shiller indices, U.S. home prices dropped by a sobering 8.9% in the final quarter of 2007.
  • California-based RealtyTrac said earlier in the week that the number of homes facing foreclosure jumped 57% in January from the year-earlier month.
  • According to the National Association of Realtors, sales of existing homes slid to a nine-year low in January. You'll notice that this item and the two preceding it can only serve to inflate the already sizable inventory of homes available for sale across the nation.
  • Not to be outdone by the existing homes set, the Commerce Department said that new home sales dropped in January to the slowest rate in nearly 13 years.
  • The Conference Board said Wednesday that the Consumer Confidence Index, which has a direct bearing on home sales, fell to 75 in February, from 87.3 in January.
  • At midweek, the Bush administration rejected the notion of instituting a program of big-money bailouts for those unable to make their mortgage payments. This position runs directly counter to the approach advocated by, for one, Sen. Hillary Clinton, who, in her presidential campaign, has called for a five-year moratorium on home foreclosures....
But Fools, not all the housing news is on the negative side. Mercifully, the ceiling on conforming loans for Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) will be raised in the not-to-distant future from $417,000 to nearly $730,000. I've long felt that such a step would help housing recover at the top end, a trend that could then filter down to lower levels.

And Wednesday, closely watched luxury homebuilder Toll Brothers (NYSE: TOL) told us that its latest quarter had resulted in a loss of $96 million, or $0.61 a share, compared to a $0.33-per-share profit a year earlier. But without $245.5 in pre-tax write-downs, Toll said it would have earned $0.35 a share in its latest quarter.

Regardless of the makeup of housing news, investors seem determined to dive in to the group in progressively larger numbers. Let's look at how some big builders have fared so far in 2008:


Price 12/31/07

Price 02/27/08

Change

Lennar (NYSE: LEN)

$17.74

$21.20

19.5%

Pulte (NYSE: PHM)

$10.54

$15.91

50.9%

Ryland (NYSE: RYL)

$27.41

$30.94

12.9%

Toll Brothers

$20.06

$23.83

18.8%

Unweighted Average

25.5%


Clearly, the few rays of improving news about the sector tend to evaporate in the presence of the bad news.

But keep in mind that economic signs point to a U.S. recession; energy prices show few indications of retreating; mortgage lending remains unsettled; and the consumer, as is indicated above, is feeling under the weather.

Further, any moratorium on foreclosures would be disastrous for the homebuilding sector. While such a proposal remains on the table, it should give all investors pause.

So Fools, nibble away at the builders if you must. Just be sure you're working with a longer-than-normal investment time horizon, and that you stick to the companies with the strongest track records and the most robust balance sheets.

New home sales down but picture mixed

Although national new home sales fell to the lowest level since 1995, it was still a mixed picture in January, with sales in the West rising by 2.2% and inventory falling by 11,000 units:

New-home sales took their third tumble in a row during January, sinking to the lowest point since early 1995.

Sales of single-family homes decreased by 2.8% last month to a seasonally adjusted annual rate of 588,000, the Commerce Department said Wednesday. December new-home sales fell 4.0% to an annual rate to 605,000; originally, the government said December sales fell by 4.7% to 604,000. Sales declined 13.1% in November.

Economists forecast January sales at an annual rate of 600,000. The level of 588,000 was the lowest since February 1995's 559,000.

Year over year, new-home sales were 33.9% lower than the level in January 2007.

The median price of a new home decreased by 15.1% to $216,000 in January from $254,400 in January 2007. The average price decreased by 12.1% to $276,600 from $314,600 a year earlier. In December last year, the median price was $225,600 and the average was $274,700.

Inventories fell to an estimated 482,000 homes for sale at the end of January, down from December's 493,000...

Regionally last month, new-home sales decreased 2.4% in the South, 7.6% in the Midwest, and 10.3% in the Northeast. Sales rose 2.2% in the West.

The next big legal case: class-action suits against mortgage lenders

One constant refrain that's been repeated by many borrowers who took on subprime, option ARM and other 'exotic' mortgages (i.e., not popularized until well after 2000) was the defense that they'd been duped by unscrupulous lenders and brokers who only cared about their commissions. According to a story in the Washington Post, that defense may turn into a class action movement if a current case involving Chevy Chase Bank and a Wisconsin couple moves forward:

A federal appeals court is nearing a decision on a battle between Chevy Chase Bank and a Wisconsin couple that could for the first time enable homeowners across the country to band together in class-action lawsuits against mortgage firms and get their loans canceled.

The case is alarming Wall Street's biggest banks, which could bear the hefty cost of reimbursing all mortgage interest, closing costs and broker fees to groups of homeowners who uncover even minor mistakes in their loan documents.

After a federal judge in Milwaukee ruled last year that the Wisconsin couple had been deceived and other borrowers could join their suit, Chevy Chase Bank appealed to the circuit court in Chicago. Kevin Demet, the lawyer for the plaintiffs, said a decision by the appeals court is imminent, though others involved in the case said it could be a matter of weeks...

In recent years, home lending has boomed. But standards loosened at many mortgage firms and led to a rise of abuses, in particular predatory practices. Now, record numbers of people are finding themselves with loans that are more than they can afford and many want out.

Estimates vary widely on the number of homeowners who could benefit from the case. Those who have refinanced or hold a home equity loan are already eligible for a refund, while others can get monetary damages. The court's ruling won't change this. But by allowing plaintiffs to file class-action suits, the ruling would make it much easier and more affordable for groups of homeowners to get that relief, several lawyers and mortgage analysts said.

Dozens of class-action homeowner lawsuits have been filed in California and elsewhere against the nation's largest banks. The success of these claims could turn on the decision in the Chevy Chase case...

The law states that even a minuscule violation by a lender can lead to a mortgage cancellation, or rescission. For example, if the annual percentage rate calculation is off by one-eighth of a percent between preliminary and final loan documents or if a monthly payment schedule does not conform precisely to federal guidelines, some borrowers could get a refund for all they have paid to live in their homes for years. They would have to pay back the entire amount of the loan, but they could then seek a new mortgage on better terms.

According to the inspector general for the Federal Deposit Insurance Corp., 83 percent of federally supervised banks that issued loans at the height of the housing boom in 2005 have been cited for "significant compliance violations." Lending abuses were more frequent among the tens of thousands of state-regulated banks and thrifts, such as the now-bankrupt New Century Financial, industry analysts said.

But few homeowners have been successful in getting their loans canceled. Most people are unaware they have this right, consumer advocates said. Others have found the process too arduous and expensive, often requiring long legal battles. Chevy Chase said it negotiated two mortgage cancellations all of last year.

That could change if the U.S. Court of Appeals for the 7th Circuit rules in favor of allowing homeowners to join class-action suits. Plaintiff attorneys also would have far greater financial incentive to take up such cases...

Wall Street banks are also worried. In many cases, the cost of reimbursement falls not on the mortgage lender but on the financial institutions that later bought and securitized the loans.

Is the S&P/Case-Shiller index flawed?

You might want to get prepared for a battle between Radar Logic's Jonathan Miller and Dr. Robert Shiller, co-founder of the S&P/Case-Shiller index. No, it's not the kind of fight where we'll see anyone take a swing, but there could be some damaged pencils and an increase in carpal-tunnel syndrome among staffers at both companies attempting to defend the words of their leaders. From a Reuters story:

Standard & Poor's/Case-Shiller indexes do not adequately reflect U.S. home prices, mainly because the monthly reports are based on repeat sales and exclude new development, said Jonathan Miller, executive vice president and director of research for Radar Logic.

"The basic premise is flawed," Miller, speaking at the Reuters Housing Summit, said of the Case-Shiller indexes.

S&P-Case/Shiller produces a closely watched monthly index as well as a quarterly gauge of home prices in the top 10 and top 20 metro areas.

Using a repeat sales method, the home price change of a house sold now would compare with the last time it was sold, which could be years ago, Miller said.

"When you do a repeat sales index, you exclude all new development because there was no prior sale," Miller added. "They also exclude condominiums, so you are covering the New York City market, and you're not including condominiums, yet you're representing that that's the New York number."

The biggest problem with excluding new development, he said, is that it influences prices of existing properties in that market.

The Case-Shiller indices are a "great concept if you are measuring existing housing sales in suburbia," Miller said. "It's a very academic approach, and it's technically correct. However, it doesn't represent the actual cities that are being covered accurately, in our opinion."

S&P is not taking these criticisms lightly:

David Blitzer, managing director and chairman of the Index Committee at Standard & Poor's, countered that the repeat sales method captures the broadest swath of the housing market and provides a uniform source of comparison.

"To combine new homes and existing homes in a single index is a mistake because it's a different phenomenon, a different kind of animal," he told Reuters in a telephone interview.

"The existing homes are the bigger and the more important segment" of the housing market, he added.

Sales of existing homes roughly outnumber sales of new houses by at least five to one, Blitzer said.

And that is true -- on a national scale. But what about specific markets like California's Inland Empire where the ratio of new-to-existing home sales is higher? In the case of S&P/Case-Shiller it doesn't matter because they don't track the IE separately.

So how is Radar Logic different?

Radar Logic is a data and analytics business based in New York that produces a daily "spot" price for residential real estate in major U.S. metropolitan areas.

It tracks housing markets by publishing daily the price per square foot in 25 metro areas, Miller said. That compares with the Case-Shiller indexes, which are publishing once a month using a 90-day moving average, he added.

"The reason these indexes are being created," Miller said "is to enable trading of financial instruments on Wall Street. You want to reflect subtle changes in markets, and it's very difficult to do that if you're doing a 90-day moving average and giving 12 data points a year."

Another shortfall is that Case-Shiller "doesn't factor in remodeling, expansion of footprint, which has been a very significant trend in housing, especially over the housing boom," Miller said.

Expect more on this "battle of the indices" to come.

Home price declines accelerating

There seem to be two distinct schools of thought regarding declines in home prices. The first one -- generally held by people who own homes and don't want to lose equity or those underwater and so can't refinance -- claims that it's nothing less than a disaster. The other one -- more typically held by renters waiting to jump into a lower-priced market and many economists -- is that this is a necessary consequence of the boom, and is a good thing as long as it's somewhat orderly, although renters chomping at the bit to buy bargains want the decline to occur as quickly as possible.

Those renters may be getting their wish.

According to several different indices, the decline in home prices appears to be accelerating, both in the boom markets and at the national level.

First, from the S&P/Case-Schiller index, which compares sales prices of the same homes over time, but only does so for 20 metropolitan areas:

The decline in residential real estate accelerated though the end of 2007, and home prices in 20 key markets plunged 9.1% for the year, according to a survey released Tuesday.

The S&P Case/Shiller Home Price index showed its largest annual drop in its 20-year history. By comparison, during the 1990-91 recession, home prices fell 2.8%.

Prices dropped faster throughout 2007 with the index recording a 9.1% year-over-year drop in December...

All metro areas are now reporting at least four consecutive monthly declines.

Case/Shiller's 10-city index fell even more sharply and finished down 9.8%.

The Case/Shiller indexes compare same-home sale prices. The industry considers them to be among the most accurate snapshots of housing prices.

Of the 20 metro areas examined, all but three posted declines for the year. Miami homes lost 17.5% in value - more than any other metro area - and Las Vegas and Phoenix both had 15.3% declines.

The three that posted modest gains: Charlotte, N.C., 2.3%; Portland, Ore., 1.2%; and Seattle, at 0.5%.

Los Angeles, the nation's second biggest housing market, was the worst performer in December, when prices fell 3.6% compared with November; the decline for the year was 13.7%.

Other double-digit losers for the year were San Francisco, down 10.8%; Tampa, 13.3%; Detroit, 13.6%; and San Diego, 15.0%. Losses in the nation's biggest market, New York, were more modest, down just 5.6% for the year.

S&P/Case-Shiller has also licensed their data to Bear Stearns to help establish an over-the-counter trading system for derivative contracts so investors can bet on moves in housing prices:

The licensing agreement with Bear Stearns is part of an initiative by Standard & Poor's to help facilitate the development of an over-the-counter market for derivatives based on the Indices, and is in line with the recent announcement of Standard & Poor's acquiring exclusive rights to the S&P/Case-Shiller Home Price Indices, Standard & Poor's said in a statement.

"The S&P/Case-Shiller Indices were created specifically for settlement of financial contracts," Robert Shakotko, Managing Director at Standard & Poor's Index Services, said in the statement.

"This licensing agreement is a first step towards working with more dealers to create an OTC market for trading on these Indices," he said.

Next, a much larger index by the Office of Federal Housing Enterprise Oversight tracks 291 different metro areas, but relies more on general median prices for all resale properties. The latest release from that group shows the housing declines to be concentrated on the coasts, and that most of the country's mid-section is holding up relatively well:

U.S. home prices in the last quarter of 2007 fell 1.3%, a record drop, a new government report shows.

The survey, by the Office of Federal Housing Enterprise Oversight, also reveals a stubborn strength in most of the nation's local markets, a stability obscured by the national figures and one that is frequently overlooked in discussions of the dire shape of the housing market.

"The states suffering the most are on the coasts," says OFHEO chief economist Patrick Lawler.

The 291-city report finds widespread declines, but the worst pain is found in California, where homes on average lost 6.7% of their value over the year; Florida, where homes prices declined 4.7%; and the desert Southwest, where overbuilt Arizona and Nevada continue to writhe.

Despite the drama in those places, though, prices in most of the rest of the country held up relatively well, losing less than 2% or even, in a few places, growing. The stability is found in the middle of the country, which never saw the stunning boom-year price increases that now are unraveling in former boom markets like Florida, California, Arizona and Nevada.

In eight states, house prices rose year over year: Utah, 9.3%; Wyoming, 8.3%; North Dakota, 7.8%; Montana, 6.9%; Texas, 6.2%; New Mexico, 5.4%; Washington, 5.4%; and Oklahoma, 5.1%.

So what about other indices?

  • Prices. The National Association of Realtors' report on fourth-quarter 2007 home prices (.pdf file) shows the median home price dropped to $206,200, down 5.8% from $219,000 the year before. More than half of the 150 cities tracked had falling prices compared with a year earlier. The latest S&P/Case-Shiller index shows prices plunging 7.7% year over year in the 20 cities tracked. Although it follows only a handful of cities, trend-watching economists favor this study because it includes all home sales, not just, as with OFHEO, those eligible for government mortgage insurance. Zillow, an online home-valuation company, reported single-family homes losing 5.5% of their value from the previous year in the fourth quarter; condominium prices dropped 7.4% in the fourth quarter.
  • Inventory. In January, the backlog of existing homes for sale rose to 10.3 months, meaning that it would take that long to sell all of them at the current pace. (When supply and demand are balanced, inventories are at five or six months; the boom created inventories as low as three months' worth). That's considerably worse than December's 9.6-month supply and 53.7% more than at the same time last year, according to the National Association of Realtors. There's also a 9.6-month inventory of new homes on the market, 54.8% more than the year before, according to Census Bureau estimates. Foreclosed homes coming onto the market contribute to the swollen inventories.
  • Foreclosures. Foreclosure filings -- including default notices, auction sale notices and bank repossessions -- continue to grow. In January, foreclosures grew by 8% from the previous month and 57% from the year before, according to RealtyTrac.
  • Home-builder confidence. The National Association of Home Builders/Wells Fargo Housing Market Index takes the pulse of construction professionals every month. A number over 50 indicates their optimism for the new-home market. The index stands at 20 in February -- a bit better than a historic low, 18, in October and November, but 20 points lower than a year ago. The NAHB says members are cautiously optimistic because of slightly increased numbers of people touring model homes.
  • Delinquencies.In the third quarter of 2007, 5.59% of mortgages (not including foreclosures) had late payments. It's the highest delinquency rate since the Mortgage Bankers Association report began 22 years ago and an increase of 0.92% from the same time in 2006.
  • Housing starts. Builders began work on about a million new homes in January, slightly fewer than December and 27.9% fewer than the same time last year, according to the Census Bureau. "Eventually, such a huge drop in production will reduce inventory and allow the market to stabilize, but for now it's just pain, pain, pain," wrote Ian Shepherdson, chief economist for High Frequency Economics, in a recent newsletter.

So where is the pain most focused?

California alone has as many new foreclosures from subprime ARMs as 35 other states combined. And even in California, it's the overbuilt markets (such as San Diego, Stockton, Sacramento, Bakersfield, Chico and Fresno) that are seeing collapse while others are fairly stable.

The worst trouble is concentrated in California and Florida, where overbuilding and speculation drove prices beyond the reach of most buyers, and Ohio and Michigan, where failing local economies, job losses and shrinking populations mean there are more houses for sale than buyers.

All states are caught, to some extent, in the downdraft of these imploding markets. Yet homeowners should be unaffected if they have traditional fixed-rate loans and can stay in their homes until things turn around.

Experts worry not so much that home prices are falling -- on the coasts they've still got far to go before reaching affordability -- but that they are falling too fast, helping pull the rest of the economy down.

"There's nothing troubling about a gradual correction of home prices," Yale University economist and Case-Shiller index founder Robert Shiller told an audience at the Reuters Housing Summit recently. "If we keep our incomes at the current level and home prices go down, we are richer, we can buy more housing." However, he said, "if they fall suddenly and fast, then that can bring on recession, and that is the worry right now."

To gauge whether that is happening, Celia Chen, director of housing economics for Moody's Economy.com, will be watching several key economic indicators, particularly those listed above.

"I think the key to a turnaround in home prices is that the mortgage markets do regain some semblance of stability within the next year. Given the fact that the credit quality problems are spreading beyond mortgages into student loans, auto loans and credit cards, there are risks that conditions in financial markets could be worse than we are anticipating and would delay the turnaround further," Chen says.

Delinquency rates will need to shrink for several months to signal that the worst is over, she says, and home builders' confidence will have to rise for three or four months.

She's also keeping a close eye on inventories -- a seven-month supply would demonstrate a turnaround beginning, and a six-month supply would indicate strong growth, she says.

Because of the national economic instability, analysts say that it's particularly hard to predict when a turnaround will happen. The effect of a recent congressional stimulus, meant to pump money into housing markets by temporarily raising the limits on government-backed loans in higher-priced cities, is likely to be limited, analysts say. "The greatest increase in eligible transactions apparently will be on the West Coast," says Feder. Only 15 U.S. counties have median prices high enough to qualify, according to MarketWatch.

Several analysts see no end until at least the middle of next year:

  • "We expect that home prices will bottom by mid-2009," Chen says. "I think by 2010 we'll see healthier price gains -- certainly nothing like we did over the last six years, but they probably reach about 4% price growth by 2010 or 2011."
  • Wharton economist Jeremy Siegel, the author of "The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New," predicts the economy will start improving in the middle of this year but home prices will keep falling until demand catches up with the vast oversupply. "I think they (prices) will stop dropping by the end of the year or early next year and then will remain stagnant for several years after that," Siegel says. "We won't have a general rise of home prices for a while."
  • Morgan Stanley analysts give sliding prices another three years.

When real estate does finally awake, it will be to a much-changed world. Credit, at least for a time, will be much tighter. That will keep many people from participating in the housing market. Also, people holding off selling now will jump in when things improve.

And the most important thing of all? Buyer psychology. It prompted the last boom and then it turned on a dime. We won't see an extended rebound in housing until the national mood rebounds as well.

"I think there are a lot of people holding off their sales because they know the market's bad, and as soon as they hear there are rising prices, they'll put their homes on the market and that (influx of homes for sale) will keep a lid on prices," says Siegel. "That's one reason I think the market's going to remain stagnant for a while. A lot of people will say, 'All right, I can finally get out.' and they're going to dump."

The last places to recover, analysts say, will be markets that inflated most during the boom, like Miami, Phoenix, Las Vegas and San Diego.

"As soon as everybody believes that the housing market will never turn around, just when it looks like we're doomed -- that's when it rebounds," says Hughes.

The 10 worst performers of the past year
Metro area1 quarter1 year5 years
Merced, CA-7.89%-18.98%53.69%
Modesto, CA-6.60%-15.48%53.90%
Stockton, CA-6.07%-15.27%50.15%
Port St. Lucie, FL-6.06%-14.45%67.04%
Punta Gorda, FL-4.66%-13.30%58.94%
Salinas, CA-5.85%-12.93%56.94%
Cape Coral-Fort Myers, FL-4.37%-12.37%67.38%
Bradenton-Sarasota-Venice, FL-2.61%-12.35%64.80%
Naples-Marco Island, FL-5.67%-12.21%79.64%
Santa Barbara-Santa Maria-Goleta, CA-3.54%-11.94%44.57%

The strongest markets were smaller towns in the West and South with strong local economies and plenty of room to grow.

The 10 best performers of the past year
Metro area1 quarter1 year5 years
Wenatchee, WA0.54%13.67%77.93%
Houma-Bayou Cane-Thibodaux, LA5.43%12.15%49.40%
Grand Junction, CO0.85%12.03%66.15%
Ogden-Clearfield, UT0.95%10.80%41.95%
Bismarck, ND4.27%10.72%46.17%
Provo-Orem, UT0.77%10.46%51.51%
Salt Lake City, UT0.49%9.68%59.84%
Logan, UT-ID1.55%8.75%31.98%
Idaho Falls, ID0.28%8.58%48.42%
San Antonio, TX1.36%8.25%39.59%

The increasing politics of the housing bust

The Bush Administration has promised to veto any legislation offered by the Democrats that could hint of a lender bailout or allow bankruptcy judges to alter the terms of mortgage documents. Claiming that lenders have been too slow to act to prevent foreclosures (which has been well documented in recent weeks) and arguing that changing mortgages after the fact will only prevent the housing market from righting itself according to the normal laws of supply and demand. From CNNMoney.com:

The White House promised on Tuesday to veto a bill seeking to follow up the recent economic stimulus package with several proposals to shore up the struggling housing market and reduce foreclosures...

The Democratic housing bill would change bankruptcy laws to allow judges to cut interest rates and reduce what's owed on troubled borrowers' mortgages, provide $4 billion to communities to purchase and rehabilitate foreclosed homes, and improve disclosure of subprime mortgage loans in hopes that borrowers won't be surprised by big payment increases.

But the White House said the $4 billion for purchases of foreclosed homes is too expensive and "would constitute a bailout for lenders and speculators, while doing little to help struggling homeowners."

The provision rewriting the bankruptcy code, the White House said, would allow borrowers to effectively rewrite their mortgage contracts, leading lenders to tighten their standards and raise interest rates.

The White House said both provisions would in fact slow the recovery of the housing sector...

In response to the criticism, Democrats announced they would tighten the bankruptcy provision so that it would only apply to subprime borrowers who can prove that they can't afford the current mortgage and permit bankruptcy judges to reduce interest rates to the prime interest rate plus a premium for lender risk.

Wednesday, February 27, 2008

Why the housing bubble is just one chapter in a larger story

When the housing boom was reaching its crescendo in 2005, there were a few lonesome voices out there explaining that it was merely a symptom of a much larger, worldwide credit bubble. Between emerging countries in Asia like China and South Korea and oil-rich states like the UAE and Saudi Arabia, there was simply too much money sloshing around outside the U.S. in search of a decent return, and of course Wall Street was promising investors that it had stumbled upon the latest "can't lose" financial instruments: mortgage-backed securities.

But it seems that explanation didn't tell the entire story. According to a fascinating article in Harper's by Eric Janzsen, in recent years the U.S. has set itself up for a regular series of booms and busts to keep the economic fires stoked. Ten years ago it was the Internet and the "new economy," and now we're seeing the down cycle of the housing boom, to be followed by certain segments of the commercial real estate boom (mostly notably retail and, to a lesser extent, office uses). Next up? Alternative energy. Get ready for the greening-and-browning of America:

A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences...

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitization, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle...

The bubble machine often starts with a new invention or discovery. The Mosaic graphical Web browser, released in 1993, began to transform the Internet into a set of linked pages. Suddenly websites were easy to create and even easier to consume. Industry lobbyists stepped in, pushing for deregulation and special tax incentives. By 1995, the Internet had been thrown open to the profiteers; four years later a sales-tax moratorium was issued, opening the floodgates for e-commerce. Such legislation does not cause a bubble, but no bubble has ever occurred in its absence...

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The media stood by cheering, carrying breathless profiles of wunderkinder in their early twenties who had just made their first hundred million dollars; business publications grew thick with advertisements. The media barely questioned the fine points of the new theology. Skeptics were occasionally interviewed by journalists, but in general the public was exposed to constant reiterations of the one true faith. Government stood back—after all, there was little incentive for lawmakers to intervene...

The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults...

Bubbles are to the industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly—the NASDAQ, for example, at 5,048 in March 2000, had recovered only half of its peak value going into 2007. When those trillions of dollars first die and go to money heaven, the whole economy grieves.

The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.

Our economy is in serious trouble. Both the production-consumption sector and the FIRE sector know that a debt-deflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression...

There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.

There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water...

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.

Say good-bye to granite countertops and other over-improvements

When granite countertops first came out, they were focused mostly in luxury homes and high-rise condos. When paired with stainless steel kitchen appliances, they presented a new design element that hadn't been done before. But when developers of condo conversions started putting in these same things en masse to imply "luxury," it became pretty evident that granite was becoming as commonplace as ceramic tile, thereby erasing what made it special. And with the premium for stainless steel appliances now all but gone, they're just another choice among several others.

Thus, this 'over-improvement' syndrome that characterized the housing boom of the early 1990s -- which also included emulating the sorts of baths one might find at a luxury hotel -- now seems to have run its course:

The granite countertop's glory days might be over.

During the housing boom, updating a kitchen with high end materials like cherry wood cabinets and a Viking stove was a sure bet to boost a home's value. Homeowners often recovered about 80% of the cost when the house was later sold.

But with so much more inventory on the market for buyers to choose from, they just aren't as impressed with the bells and whistles. Now most upscale renovations are returning less than 70% of their cost, according to a recent survey from the National Association of Realtors (NAR)...

NAR's survey revealed that returns on investment for a wide range of high-end interior redecorations dropped in 2007. An upscale bathroom renovation cost an average of $50,590, nationally, but only added $34,588 to house value - a 68.4% return. In 2006, a high-end bath renovation returned 77.4% of its cost.

Adding a brand new bath didn't pay off as well either, earning just a 69% return in 2007, compared with 72.8% in 2006. High-end kitchen remodels held up better, adding value equal to 74.1% of the cost, compared with 75.9% in 2006...

In 2005, a fancy kitchen renovation on the West Coast returned an average of 93% of its cost. Even if the owner got only a year or two use of it, the close-to-break-even return made it worthwhile. By 2007, the return had declined precipitously to 74%...

A separate report from the AIA also found demand for luxury features waning in 2007 according to the AIA. The popularity of high-end appliances declined from 65% to 47%. Demand for larger pantry spaces went down from 64% to 51% and wine refrigerators fell from 53% to 49%.

Because even a great wine can taste ordinary when you've had too much of it.


Bernanke warns of a rocky road ahead

The good news is that Fed Chief Bernanke seems to have awoken from his academic slumber and realized that the problems with the U.S. economy are much more serious than he was acknowledging (at least in public) a few months ago. The bad news is that the economic pain now seems to be impacting all corners of the country and in all businesses and no longer contained to the housing/mortgage/finance sectors. From an LA Times story by Peter Gosselin:

Federal Reserve Chairman Ben S. Bernanke told Congress today that nearly every corner of the U.S. economy was in danger of running into more trouble, suggesting that Americans were in for a period of tough economic sledding.

He signaled that the central bank was likely to cut interest rates further when it meets again next month.

Bernanke said the nation might also have to cope with more inflation, a sign that the economy could be caught in the crossfire of "stagflation," a troubling mix of faltering growth and rising prices...

The fact that the Fed chairman would be talking about still more rate cuts in the face of elevated inflation is a measure of just how deep a quagmire in which the economy has landed, with a slump in the housing market, recurring freeze-ups of the financial markets and slowdowns in consumer and business spending.

The Fed already has sliced its key interest rate 2 1/4 points to 3% in an effort to spur growth by pushing down the market-set rates for such things as mortgages, autos, credit card debt and business loans. But its efforts have been largely stymied by increasingly nervous lenders demanding higher, not lower, rates to lend, and in many cases refusing altogether to provide would-be borrowers with funds...

About the only bright spots that Bernanke managed to find were that manufacturers' inventory of unsold goods, which often rise in recessions, were within well within bounds, and that most companies outside of banking and finance remained in "good financial condition with strong profits, liquid balance sheets and corporate [borrowing] near historical lows."

"The economic situation has become distinctly less favorable" since last summer, Bernanke told lawmakers.

Tuesday, February 26, 2008

Resentment rising against local foreclosure bailouts

People who are not at risk of foreclosure are getting understandably angry about their tax dollars being used to bail out those who made bad decisions, taking on more house than they could afford or not understanding the loans for which they signed:

As the Bush administration and Congress consider proposals to ease the home foreclosure crisis, local governments across the country have been lending money to imperiled homeowners and confronting some opposition.

Some of these municipal and state efforts have met resistance from people who consider the assistance undeserved and adamantly oppose anything that resembles a taxpayer bailout...

The goal of these programs is not just to keep people from losing their homes, but also to limit broader economic fallout, including plummeting property tax revenues and widespread declines in home values. Still, they pit what some government officials say are practical economic solutions for the common good against individual ideals of fairness and personal responsibility.

The opposition may be rooted in “this ancient notion of deserving versus undeserving, and you’re undeserving if you made a bad decision,” said Nicolas P. Retsinas, the director of the Joint Center for Housing Studies at Harvard University.

While the negative reactions have not stopped the assistance efforts, it has put some local officials on the defensive and forced them to try to sell the programs to the general public, not just to the intended recipients...

Small, government-supported “rescue loan” programs have been used in many places before. Those efforts, as well as the current ones, typically have been cast as having broader benefits, similar to the way public health programs are portrayed, Mr. Retsinas said.

“Much of the rationale,” he said, “is less the notion of keeping an individual from getting sick than it is, ‘If we vaccinate this person, their illness won’t cause other people to get sick.’ ”...

Government has a history of getting involved in foreclosure crises. During the Great Depression, the federal government created the Home Owners’ Loan Corporation, which helped refinance about a million loans — and made a profit in the process. In December, Alan Greenspan, the former Federal Reserve chairman, suggested that government provide assistance to homeowners facing foreclosure...

Alex J. Pollock, a resident fellow at the conservative American Enterprise Institute who has written about the foreclosure prevention programs of the Great Depression, echoed concerns that, in some cases, government intervention could reward irresponsibility and make markets unpredictable. “The problem on the other side,” he said, “is if you have a general problem that threatens to cause a general downward spiral, then everybody’s going to suffer.”

What some people don't understand is that our society is based on continuously bailing out people for thoughtless behavior and bad decisions: it's part of the cost for living in a society such as the U.S. Simply put, we have a social safety net that helps out the less fortunate as well as the idiotic. It's not necessarily fair, but it's the system we have in place.

For example, we all pay higher car insurance rates to pay for fraud and those without insurance. We all pay higher insurance for medical care because hospitals are generally obliged to treat those without enough -- or any -- insurance. We pay higher drug prices than most other countries so drug companies can continue to invest in research (as well as lobbyists and friendly lawmakers who want to remain in office so they can be around long enough to reward the drug companies for their donations). We pay higher taxes so that some people can receive welfare and food stamps and Aid to Mothers with Dependent Children. Many of these people have also made thoughtless decisions -- should we punish them too by withholding their assistance and replacing it with a stern lecture?

Some of these dissenting homeowners also don't understand that a foreclosed home across the street from them has a domino effect: first, it impacts the value of their home. Next, it makes it harder for them to refinance or sell (or move to take advantage of a new job).

I'm predicting a bail-out from the federal government that will truly anger a lot of people. But that's the system we have -- sometimes we just protect people from themselves.

Why housing remains in a deep freeze

It seems somewhat odd that in places where median prices have fallen by up to 17% -- like Miami -- home sales haven't risen as affordability increases. The reason is that lending standards have become so much stricter, which is seriously blunting the impact of declining prices and lower interest rates. After all, even a 1% interest rate doesn't help you if no one will lend you the money. From a WSJ article:

There were signs of spring last week in housing, with home-builder sentiment and home construction showing glimmers of improvement. But two developments -- tightening lending standards and a surprisingly mixed interest-rate environment -- suggest a real thaw is far from near.

In December, Fannie Mae began demanding bigger down payments from borrowers in housing markets where prices were declining -- which would describe every one of the 20 biggest U.S. housing markets tracked in the S&P/Case-Shiller home-price index.

Last week Freddie Mac, for the second time since November, raised the fees it charges when it buys riskier loans from mortgage lenders. Lenders can either eat these fees or pass them on to borrowers, sometimes in the form of higher mortgage rates...

Freddie Mac says it wants to be compensated for the risk of taking on a mortgage -- setting the lending bar higher to keep defaults low. If it didn't do this, Freddie says, it could be forced to take on more capital, reducing the amount of money available to finance new home purchases.

"We're in one of the worst housing-market reversals in 80 years, and that's going to have an impact on credit risk," Mr. German said. "We're going to have to align our fees with the real risks in the marketplace."

Meanwhile, the Federal Reserve's rate-cutting efforts are having a mixed effect. The three-month London interbank offered rate has come down significantly thanks to Fed rate cuts. That is a boon to many borrowers whose mortgage payments shift with Libor. The average five-year adjustable-rate mortgage interest rate on "conforming" mortgages, those that Fannie and Freddie are allowed to buy, has fallen to 5. 57% from 6.43% when the Fed began its credit-loosening campaign in September, according to HSH Associates, a Pompton Plains, N.J., publisher of mortgage-rate data.

That will help hold down the monthly mortgage bills of many homeowners. Still, these rates haven't fallen nearly as much as the 2.25 percentage points in Fed short-term rate cuts...

This week will bring a barrage of housing news, including reports of preowned- and new-home sales, along with S&P/Case-Shiller and Office of Federal Housing Enterprise Oversight home-price data. Also due out are earnings reports from Freddie Mac, housing-focused retailers Lowe's and Home Depot, and home builder Toll Brothers. Each of these numbers is expected to move in the wrong direction: lower.

Despite the Fed's efforts, in other words, there is really little reason to think the sector is near a clearing from this storm.

It looks to me that the Fed just doesn't have the power to fix these issues, and that another type of government intervention will be needed. I don't see how we're going to avoid some type of government bail-out, especially in an election year. Politics generally seem to trump everything else in the U.S., perhaps including angering those who rent and those not at risk of foreclosure.

A bad combination: Inflation rises as home prices fall

Back in the 1970s, the dreaded economic trend was "stagflation," which meant a stagnant economy coupled with rising inflation. By the early 1980s -- when mortgage interest rates were in the double digits -- the "misery index" became a new number to track, which combined unemployment rates plus inflation.

Inflation is really worse than recessions because its impact is much longer-lasting; to break its back in the early 1980s, then-Fed Chairman Paul Volcker continued to hike interest rates -- over 19% for federal funds in 1981 -- to tame inflation for the long term, although it seems that Reagan gets most of the credit for it (and all he did was re-appoint the guy in 1983) while Jimmy Carter got the blame. From a high of 13.5% in 1981, Volcker managed to lower it to 3.5% two years later. I don't think I could've done it any better myself!

Now it looks we need a new term: that of falling home prices (or deflation) and rising inflation for almost everything else (except for flat-screen TVs, which fortunately continue to get cheaper):

Two worrisome trends for the economy — falling house prices and the rising cost of everything else — picked up speed in data reported on Tuesday, putting policy makers in an increasingly tough position.

If they move too aggressively to cut interest rates and stimulate the economy, they might stoke inflation at a time when consumers are already squeezed by higher prices for food, energy, clothing and other goods. But if they choose more austere measures, the economy may weaken substantially faster...

A leading index of home prices in 20 cities fell by 9.1 percent in December from the same month a year ago. Using a three-month moving average, the index, the Standard & Poor’s Case-Shiller, is falling at an annual pace of more than 20 percent. The index tracks repeat sales of single-family homes; it does not include condominiums.

Another government index of home prices that covers more of the country but does not include loans above $417,000 fell 1.3 percent in the fourth quarter, after falling 0.3 percent in the third quarter. The index, compiled by the Office of Federal Housing Enterprise Oversight, showed prices declining in all states, except Maine.

The Labor Department reported that wholesale prices, which exclude taxes and distribution costs, rose 1 percent in January, up from a drop of 0.3 percent. Compared with a year ago, prices were up 7.4 percent. Excluding volatile food and energy prices, the index was up 2.3 percent from a year ago, up from 2 percent in December...

“February may go down in history as the month that the previously indefatigable U.S. consumer finally threw in the towel, beaten by a combination of deteriorating labor market conditions, surging prices for food and energy and collapsing house prices,” Paul Ashworth, a senior United States economist at Capital Economics, wrote in a note to clients.

The Fed has cut its benchmark interest rate to 3 percent, from 5.25 percent in September, in an effort to offset the drag from the housing market on the broader economy. Its efforts have helped reduce some of the strains in the financial market but they have been less successful in lowering borrowing costs and easing lending standards for businesses and consumers...

Economists say home prices will remain under pressure for much of the next year or longer because the supply of homes for sale remains high. It has also become harder for home buyers to get mortgages as rates have risen and banks have become more conservative in demanding bigger down payments and more proof of income than they did during the housing boom.

In many parts of the country, specialists note that home prices remain too high based on affordability calculations made using incomes and interest rates. A recent report by analysts at Credit Suisse, the investment bank, said that prices in some metropolitan areas like Phoenix, Miami and Los Angeles would have to decline by 20 percent to 40 percent more than they have already fallen for home affordability to be restored to its long-established level.

What they DON'T mention is that prices to rent have also escalated sharply over the past 5 and 10 years; certainly not at the same level that home prices did, but enough to make investment properties pencil out at a higher level than median incomes alone would indicate.

Housing Chronicles hits 1 million headline views on Reuters

Since signing up with the blog syndication service BlogBurst on February 5th, Housing Chronicles has just passed 1 million headline views for the media companies subscribing to the service.

Most of these views have been on the Reuters website (nearly 1.05 million alone), with the balance on the websites for Fox Business News and the Chicago Sun-Times. Thank you BlogBurst, for an impressive deployment of a great idea. Looking forward to being syndicated to even more of your subscriber sites!



Monday, February 25, 2008

The silver lining of gradual home price declines

Dr. Robert Shiller -- co-founder of the S&P/Case-Shiller Index and author of the best-selling book Irrational Exuberance -- has found a silver lining in gradual home prices: that of appropriately mixed-income communities:

Robert Shiller, Yale finance professor and author of the highly touted "Irrational Exuberance" book on asset bubbles, said gradually falling home prices are nothing to fear.

It's the more swift and sharp slide that can undermine housing, and thus consumer confidence and the economy, he said here at a Reuters Housing Summit.

"There's nothing troubling about a gradual correction of home prices. If we keep our incomes at the current level and home prices go down we are richer, we can buy more housing," Shiller said.

"On the other hand, if they fall suddenly and fast then that can bring on recession and that is the worry right now."...

"We want a gradually declining market, we don't want a collapse in our institutions," Shiller said.

"The purpose of this should be to try to maintain confidence, which is a dangerous thing to lose, and we want to also maintain a sense of fair dealing, that we're a society that cares about its people," he added.

The subprime mortgage meltdown spawned a much broader housing downturn, but it has hurt many low-income people, many of whom were taken advantage of by lenders.

"We can't have millions of low-income people be thrown on the streets because of some financial dealings. That would be disastrous to our sense of fairness and cause damage for years to come."...

"In major cities, we see often the service people can't live there any more, the firemen, school teachers. This is not the way we want our society. We want affordable housing," he said.

Shiller said it can't be all or nothing, and that there has been a big misperception that houses will constantly appreciate.

"Some times people will try to imagine that we can have both high home prices and affordable housing. But I can tell you that doesn't add up," he said.

"You either have high home prices or lower home prices and lower home prices are what we want, and people shouldn't be afraid of that," said Shiller. "Most of us care about our children and grandchildren, and these people have to buy houses so why would we want high home prices. We want economic growth, we don't want high home prices."



Who's Your City?

It's almost like the now-famous line that Joan Rivers started throwing out when interviewing celebrities on the red carpet at the Oscars and other awards shows: "Who are you wearing?" Now Dr. Richard Florida -- author of "The Rise of the Creative Class" -- argues that individual personalities are also closely intertwined with specific cities in a new book, "Who's Your City?"(which I'll be reviewing for the L.A. Times and perhaps interviewing Dr. Florida for further insights). In contrast to "The World is Flat" theory espoused by Thomas Friedman, Florida states that place still matters no matter how much technology makes it easier to telecommute from anywhere:

It's a mantra of the age of globalization that where we live doesn't matter. We can innovate just as easily from a ski chalet in Aspen or a beachhouse in Provence as in the office of a Silicon Valley startup.

According to Richard Florida, this is wrong. Globalization is not flattening the world; in fact, place is increasingly relevant to the global economy and our individual lives. Where we live determines the jobs and careers we have access to, the people we meet, and the "mating markets" in which we participate. And everything we think we know about cities and their economic roles is up for grabs.

Who's Your City? offers the first available city rankings by life-stage, rating the best places for singles, families, and empty-nesters to reside. Florida's insights and data provide an essential guide for the more than 40 million Americans who move each year, illuminating everything from what those choices mean for our everyday lives to how we should go about making them.

NAR: Resale sales and prices still declining

The Nat'l Association of Realtors has released their latest numbers for January 2008, and it's more of the same: falling sales (hitting a nine-year low), declining median prices (down 4.6% from a year ago) and rising inventory (hitting 10.3 months, or about double what is typical in a normal market). From the New York Times:

Sales of previously owned homes fell for the sixth consecutive month, dropping 0.4 percent, to an annual rate of 4.89 million, the National Association of Realtors said on Monday. While the decline was less than forecast, the sales pace is the slowest since the survey began nearly a decade ago. The median home price dipped to $201,100, down 4.6 percent from a year ago.

At the current sales rate, it would take 10.3 months to sell off the current inventory of unsold homes. “That’s enormous,” said Joshua Shapiro, an economist at the research firm MFR. “That’s double the normal amount and well above where we were a year ago.”...

Weak demand is likely to put more pressure on home owners to lower their asking price, extending one of the worst slumps in the history of the housing industry. The median price of an American single-family home fell in 2007 for the first time in at least four decades, and sales of those homes dipped 13 percent last year, the biggest annual decline in a quarter-century.

Sales of single-family homes actually ticked up in January, but the rise was offset by a plunge in sales of condominiums and apartments. Median prices fell in both categories...

Still, there were a few positive points in the report. Economists had predicted a steeper drop-off in sales, and purchasing figures were revised up for the last five months. The December sales estimate was raised to a 4.91 million annual rate.

The Northeast had the steepest declines in January, with sales falling 3.6 percent. Sales dropped 2.1 percent in the West and 0.5 percent in the South, but rose by 3.4 percent in the Midwest.

As usual, the NAR tried to put a positive spin on the numbers (after all, they ARE a trade group):

Lawrence Yun, chief economist for the Realtors, said he believed the housing market may be on the verge of bottoming out with a rebound expected to start toward the end of this year.

"Subprime loans and other risky mortgage products have virtually disappeared from the marketplace, and over the past five months, this has been reflected in soft but fairly stable home sales," he said.

He said he expected demand to be bolstered in coming months by the action of Congress in the economic stimulus bill to raise the caps on the size of loans that can be backed by Fannie Mae and Freddie Mac and the Federal Housing Administration.




Housing Chronicles named top blog in this week's Carnival of Real Estate


I'm very pleased to report that the first blog posting I've submitted to the Carnival of Real Estate (a weekly compilation of submitted blog postings hosted by different real estate blogs each week) has been given honors as Top Post of the week by the Nubricks.com blog for the carnival's 79th edition. Nubricks.com is an online overseas property resource for unbiased international real estate news, pre-launch property deals, and timely expert advice for investing abroad.

Entitled "Strategies to Thaw out a Frozen Market," the posting synopsis is as follows:

Since it seems that any potential remedies offered by the federal government to address the frozen market for home sales and mortgages could take months to have a large impact, both builders and existing homeowners stuck with unwanted inventory have, by necessity, become much more creative. From housing swaps, auctions and providing insurance against pricing declines to leveraging unused home equity with reverse mortgages or offering hard money property loans, some sellers and buyers are finding that a little ingenuity can sometimes trump a market in paralysis.

Created by the bloggers at Zillow.com, The Carnival of Real Estate's mission is as follows:

The goal here is to bring together the best real estate bloggers from around the country (and world) to share information about what we’re all passionate about: real estate. This is intended to be a forum for everyone to participate. Like a potluck, everyone brings something and may the best dishes be recognized each week.

The Zillow Blog Team — well, actually one very tuned-in guy on the team — was pondering the existence of Blog Carnivals for everything from “street poetry” to cats, but there was not one for real estate. Obviously, we were amazed by this realization. No Carnival for real estate? This must be fixed! So, we at Zillow thought, “Why not create a Carnival of Real Estate?” And so, we did.

And I'm glad they did!

I'm thinking of taking some ideas from this blog post and pitching them as potential stories for media such as the L.A. Times, and for that I'd really like some input. Are housing swaps working? How about auctions? Interest-rate buydowns or price guarantees? Hard money mortgages? What is working in today's market to allow some movement in the marketplace? Please send all suggestions to me at pduffy@metrointel.com. Thanks in advance!




Redevelopment of downtown L.A. delayed

One of the biggest challenges facing the ongoing redevelopment of downtown L.A. is its sheer size: it dwarfs the downtown areas of many other cities also undergoing revitalization efforts, including Long Beach and San Diego. Consequently, its redevelopment efforts have been a bit spotty and generally focused in specific areas such as South Park (including and surrounding the Staples Center, et al) and Bunker Hill (Disney Hall, The Music Center and the proposed Grand Avenue project).

But since new development is subject to more externalities than just about any other business, things like a declining real estate market or tighter credit can postpone or torpedo the best of projects, the Grand Avenue project among them:

More than a third of the approximately 110 residential projects proposed for downtown -- including the 50-story Zen tower on 3rd and Hill streets, the Mill Street Lofts in the industrial district, the multitower Metropolis off the 110 Freeway and the conversion of the former Herald Examiner building -- have been delayed or put on hold amid the rocky real estate market.

Yet downtown boosters and urban planners are focusing most of their angst on two mega-projects: the Frank Gehry-designed Grand Avenue complex on Bunker Hill and Park Fifth, which would be the tallest residential complex west of Chicago.

Both projects have pushed back their start dates in recent months as developers sought capital and construction loans in an increasingly difficult market and negotiated the various government approvals needed to begin construction...

Though the area has seen an influx of loft dwellers over the last decade -- the population has doubled to 34,000 -- many urban planners see it as a work still very much in progress.

Even the most ardent of downtown supporters agree that the area has not yet reached a critical mass -- in part because most of downtown's rejuvenation is occurring in pockets rather than across the entire zone.

New downtown dwellers still complain about a lack of shopping and that for every newly vibrant street, there are others that still seem dead. The high-end retailers that downtown boosters would love to have in the city center have kicked the tires but still not agreed to put stores there.

Grand Avenue and Park Fifth are seen as crucial because they would bring a new kind of retail -- upscale hotels, gourmet markets, fancy gyms and boutiques that are usually found in high-end malls -- to downtown.

The flagship projects also are going after a segment of the buying market that so far has resisted moving downtown in big numbers: wealthy condo buyers who would be attracted to the architectural significance of their buildings as well as the high-end amenities they offer. Such people would include empty nesters moving in from high-end suburbs as well as people seeking second homes...

The $2-billion Grand Avenue plan calls for building shops, condo towers and a boutique hotel -- as well as a civic park -- on city and county land near the Walt Disney Concert Hall downtown.

The project, now being called "the Grand" by its developer, was originally set to begin construction last fall but was delayed -- and then delayed again. Groundbreaking now is projected for this summer.

Bill Witte, chief executive of Related California, the developer, said the delays in starting construction were more a result of the time it took to develop designs with Gehry and get approvals from government agencies for the developmentthan of the credit crunch.

In addition, Witte said, a lawsuit by Peter Zen, owner of the Bonaventure hotel, sidelined the project's start date by some months. Zen's lawsuit, which was eventually settled, argued that Grand Avenue would violate a previous downtown redevelopment plan by adding too many housing units in the area. Neither party can discuss the terms of the deal.

Related turned to the Dubai fund after CalPERS' financial advisor -- the investment firm MacFarlane Partners -- decided it had already spent enough on downtown projects, including another mega-project, L.A. Live...

But some real estate experts are skeptical, saying the downturn in the economy -- and the falling real estate market -- is making investors skittish about huge new developments.

"The bottom line is, the real estate world is frozen right now," said Homer Williams, a Portland developer who is involved in a number of projects in downtown L.A.'s South Park district. "Unless you have to move -- either you've been transferred, get married, divorced, something that compels you to do something -- you aren't going to do anything."...

The question is whether downtown can persuade those buyers to take a chance on the fledgling neighborhood.

The area might get an answer in coming months with L.A. Live. It's moving forward without the delays that Grand Avenue and Park Fifth have encountered. L.A. Live, which opened its first phase -- the Nokia Theater -- last fall, will eventually include a hotel-and-condo tower, the West Coast headquarters for ESPN, restaurants and a multiplex.

The condominiums, being marketed as the Ritz Carlton Residences at L.A. Live, are selling for at least a million dollars each -- and as much as $1,000 a square foot.

L.A. Live has been boosted by the activity and growing street life around Staples Center. Grand Avenue hopes the nearby cultural attractions of the Music Center and the Museum of Contemporary Art can similarly enhance that project.

"We remain very bullish about this," said Witte, the project's developer. "Especially when times are tough, it's very important you have a story to tell."