The ripple effect of builder bankruptcies

A couple of weeks ago, the L.A. Land blog of the L.A. Times asked me to write a guest post in opposition to an article by Daniel Gross in Slate magazine. Gross had labeled the potential tax credit to builders -- which would allow them to extend the tax-loss carryback from two to five years for losses incurred in 2007 and 2008 -- as "peverse, absurd, and unwarranted."

But where I took special issue with his thesis was this idea: "Homebuilders should look to the capital markets first, rather than to the government, especially when their financial situation is serious but not critical. The stocks of potential beneficiaries of the expanded carrybacks—big homebuilders like Lennar, Pulte, and KB Home—have plummeted. But they're nowhere near bankrupt."

The problem is that Gross ONLY focuses on larger builders, and conveniently ignores the tens of thousands of smaller companies which simply don't enjoy that same access to capital.

So of course I hope he sees an interesting series of articles now posted at BuilderOnline.com, which focuses on the ripple effect of builder bankruptcies on suppliers, contractors and homebuyers. Perhaps it's easy for him to sit in an armchair and wave his index finger at perceived flakes and scofflaws, but I'm not sure it's that obvious:

Andrew Maletich says hedoesn’t trust builders anymore. His company, Bolingbroke, Ill.–based flooring contractor RiteWay Tile & Carpet, got stiffed for $120,000 when Burnside Construction went bankrupt a year ago. RiteWay is also one of seven companies on the unsecured creditors committee in the Neumann Homes Chapter 11 case and had $850,000 in mechanics’ liens filed against 80 to 90 of Neumann’s homes his company helped build.

As 2008 began, Maletich’s mistrust spilled into his relationships with other builders, two of which owed RiteWay $240,000 and $98,000, respectively. “They’re all in trouble, and they’re all on the same string with me,” meaning he will file a lien against any builder that doesn’t pay RiteWay within 75 days of its being billed. (In Illinois, contractors have 90 days to file a lien after submitting an invoice.)...

Neumann Homes had been struggling financially well before it filed for bankruptcy. “We knew they were having trouble [because] they weren’t paying their bills, which unfortunately was ­normal from year to year with them,” says Jim Hoffman, who owns J & E Nursery, a landscaping contractor in Libertyville, Ill., which had worked with Neumann since 1999 and was owed $45,818 when the builder went bankrupt.

Contractors filed a torrent of mechanics’ liens against Neumann’s properties in February 2007, according to Merritt Credit Bureau, a Chicago-based research firm that prepares ­mechanics’ lien notices and claims. (A mechanic’s lien is a lien on property that secures the payment of debts ­related to materials and labor. Construction on that property cannot continue until liens are resolved.) By the time it entered Chapter 11 eight months later, Neumann had $12 million in lien-­related claims to contend with (out of $151 million in secured claims), to say nothing of $134 million in unsecured claims, some of that owed to contractors, too. As of late January 2008, 75 companies in eight Chicago-area counties alone had filed 2,214 mechanics’ liens naming Neumann as first defendant, and another 130 where the builder is named second defendant...

The mechanics’ liens are complicated by the fact that several were filed against homes Neumann had sold prior to filing Chapter 11. Others were filed against unfinished or unsold homes on properties that five of Neumann’s eight bank lenders took back in exchange for debt relief. (In mid-March, for example, Neumann turned over six developments to Residential Funding, its largest lender, which agreed to reduce Neumann’s $90 million debt to $13.6 million.) The banks themselves must now resolve these lien obligations before construction can resume on those properties, if they decide to continue building on the land they took back...

Several of Neumann’s 22 communities were unfinished when it filed for Chapter 11. The builder was active in two subdivisions in Antioch, Ill., where about half of the proposed 1,400 homes had been completed and another 50 were under construction. Jim Keim, the village’s acting administrator, said in early February that infrastructure, such as street lighting, and amenities, such as clubhouses and pools, hadn’t been installed. Performance bonds ensure that this infrastructure gets built, said Keim, “and we’ve had talks with bond agencies about forcing the start of that construction by the spring.”...

Some of Neumann’s trade creditors told Builder they’d be willing to take on construction work or finish uncompleted homes, as well as any new homes the banks decide to place on the properties they’ve retrieved. Contractors are ­reluctant to turn down business in a bad market, but they are more careful about which builders they’ll work with. “What’s important is communication between our clients and ourselves,” says Steve Schwarz Jr., vice president of operations for Chicago-based SS Schwarz Construction, one of Neumann’s secured trade creditors. “What we’re saying to builders is that if someone sells a house, we’re ready to jump in and build it.”

But Hoffman thinks the “toughest question” contractors are asking themselves is, “When do you draw the line and tell a client you don’t want to work with them?” If market conditions don’t improve soon, the answer could become moot. “Even before Neumann, we’d recommend that contractors give customers a 60-day window,” says Cooney of Avenue Incorporated, who serves as outside counsel for other contractors. “That’s when I’d start sending letters demanding payment. Since Neumann, people are taking heed of that advice.”

Next, the fall-out for buyers:

The scene is all too familiar.Empty lots not maintained. Government foreclosure stickers and “for sale” signs litter the landscape. Potholes and partially paved roads offer visitors an uneasy entrée into this decade’s version of Paradise Lost.

This time it’s the Gardens at Stonebriar, an 80-unit subdivision in Memphis, Tenn., a housing development a mile or so down the road from many of the large warehouses that have made Memphis a major distribution center.

Memphis has had its share of housing debacles, such as when big builders Beazer and Levitt and Sons left the region last fall. That was about the same time that prominent local builder Matthews Brothers pulled up stakes at Stonebriar....

The residents say builder-owner Mark Matthews left them high and dry, with no one to address their warranty issues, pick up the garbage, or build out the community’s amenities. Many took on subprime loans and now can’t make the mortgage payments. While a different builder, Regency Homebuilders, plans to build out the rest of the project, many initial buyers are furious about what’s happened.

“Regency will be building out the Matthews Brothers models, but for $10,000 to $20,000 less and loaded with tile floors, granite countertops, and tall cabinets in the kitchen,” says Lamont Bethea, who paid $224,500 for his two-story, five-bedroom, 3,000-square-foot home when he and his ­family moved in during April 2006...

...almost all the residents have warranty issues, but many of them didn’t pester the builder the way they should have. Now that more than a year has passed for many homeowners, it’s unlikely that the warranty company, 2-10 Home Buyers Warranty, will honor any more claims... the problem many of the homeowners ran into was that as the home builder began to fail during the summer and into the fall of 2007, Matthews would refuse to go into arbitration on a warranty claim.

...unless the builder goes into arbitration, the home buyer cannot file a warranty claim. The alleged strategy essentially worked, as many of the homeowners are now long past the one-year warranty period.

And, finally, the smaller builders:

Jaguar Boulevard is a long,lonely testament to what has happened to the housing market in Southwest Florida. Miles from even a traffic light, it slices through the subtropical scrubland of the eastern edges of Lehigh Acres. Yet there are new houses here, dozens and dozens of them, many of them owned by residents who work—but can’t afford to live—in Naples, one county to the south...

For every neatly tended stucco ranch home, there are three or four that have been abandoned in some stage of construction. Some jobs got no further than the rough plumbing coming out of the ground before the money ran out and the builder walked away. Others are finished, sitting sadly on lots choked with weeds and strewn with trash.

This is the mess that builders in the market are dealing with and working against...

The impact on the builders who are still in the market has been painful and far-reaching. Aside from ­having to compete against thousands of foreclosures, short sales, and vacant spec houses, they are struggling to find subcontractors to complete the houses they do have under contract...

The situation turned particularly dark in February when a construction superintendent for a local builder was jailed. Local news reports said he pulled a gun on a subcontractor who had been stiffed for payment on a window installation and showed up on the jobsite to pull them out.

It’s also created a sizable—and understandable—skepticism on the part of prospective customers, who worry that the builder will shut down before their house is finished and leave them in the lurch.

Many builders, including Paul Homes, have added remodeling to their portfolio of services, often working with their ­previous buyers to upgrade their homes, hoping to hang on until the market ­improves. They’re also slashing prices on whatever spec houses they have left, trying to build up cash reserves to tide them over until the market starts to rebound.

Larry Webb to step down as CEO of John Laing Homes

In a surprise announcement to employees last week, longtime CEO Larry Webb will step down as head of John Laing Homes. Anyone who's ever heard Larry speak or shared a dinner table with him would certainly remember him from his great stories, and I'm sure he will be missed, both at Laing and at building industry functions. From an article at BuilderOnline.com:

The official release has yet to come out, but last week John Laing Homes CEO Larry Webb notified employees and trade partners that he was leaving the company. The move was a surprise to many stakeholders; Webb had contracted to stay on as CEO for five years when United Arab Emirates-based Emaar Properties purchased John Laing Homes for $1.05 billion in 2006. Robert Booth, managing director for Emaar Canada, will succeed Webb as chief executive.

Webb, a 20-plus-year industry veteran, got his start at John Laing as a division president in 1995. His fiery and magnetic personality quickly moved him into greater leadership roles in both the company and industry. Webb plans to use his newly found free time to relax and enjoy more time with his family.

The passing of the torch from Webb to Booth will take place over the next four weeks.

Higher jumbo loan limits so far a failure

According to a story in The New York Times, the new rules which went into effect on April 1st (April Fool's Day, no less) have proved to be more mirage than reality, and have failed to do what Congress planned when they passed the legislation in February:

In early February, Congress gave beleaguered mortgage borrowers a rare cause for celebration. As part of the economic stimulus package, it passed rules intended to make it easier and less expensive for people to take out hefty loans in the nation’s costliest housing markets...

Instead, the effort to make it easier to get jumbo mortgages — loans over $417,000 — has yielded frustration and disillusionment.

Since the rules took effect April 1, many prospective borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected. Relief, they say, has been replaced by grief...

Under the new rules, a sizable number of jumbo loan would be treated by the mortgage industry in the same way as smaller conventional loans. This change — raising the ceiling for loans backed by government-sponsored housing finance agencies to nearly $730,000 in the nation’s costliest locations — was intended to bring rates down for more borrowers and stimulate the lending that is needed to get the economy moving again.

The goal of making most of these jumbo loans accessible was aimed not at helping subprime borrowers, those people with spotty credit histories. Rather, it was meant for borrowers with good credit and ample down payments, but who wanted to buy a house or refinance a home loan in the costliest housing markets, like New York, San Francisco, Anchorage, Baltimore, Edwards, Colo., and Jackson, Wyo...

But the real concern over this program’s failure goes beyond people seeking million-dollar homes. The danger, economists say, is in how a wave of foreclosures and rising inventory of homes for sale will deepen and prolong the economic downturn started by the subprime mortgage crisis...

Robert Edelstein, a professor at the Haas School of Business at the University of California, Berkeley, said that it is essential to a healthy economy that jumbo borrowers in these upper-tier markets are able to get financing. “There could be a contagion,” he said, as the subprime woes “move up the chain.”...

Despite an eager consumer base, it appears few such loans have been made, according to John Bancroft, executive editor of Inside Mortgage Finance. He expects activity to pick up as the market adjusts to the rules. “It’s going to take some time,” he said.

But time may run out at the end of the year, when the system is supposed to revert to the old rules. Not surprisingly, lenders and their secondary investors are hesitant about changing their business for a short time.

And rates have not dropped — at least not to the degree that many borrowers and mortgage brokers had expected. In some cases, “conforming” loans, so designated because they conform to the government-sponsored rules, are a full percentage point below the newly conforming jumbo loans intended to be covered by the new law...

The reason has to do with the way loans are sold and securitized. Conforming loans carry a lower interest rate in part because lenders can package and sell those loans as mortgage-backed securities directly to either Fannie Mae or Freddie Mac or to private investors who know that the housing finance agencies can buy them later. And some of those loans can be sold even before they are finalized because they qualify for the “to be announced” market that allows fixed-rate mortgage-backed securities to be traded freely as interchangeable commodities.

An influential trade group of the nation’s largest financial institutions, the Securities Industry and Financial Markets Association, recently made a key decision that some critics say has kept those rates from dropping. The association decided that loans above $417,000 — even those jumbo loans now considered by law as conforming — would not be eligible to participate in the “to be announced” market...

But critics in Congress counter that lenders and the mortgage-backed securities industry have dragged their feet.

2007 CalPers land partnership already in trouble

According to a Wall Street Journal article, a land partnership from early 2007 involving the California Employees' Retirement System (CalPers) has defaulted on a loan payment while restructuring $1.24 billion in debt:

A large California land partnership involving one of the largest U.S. pension funds has received a notice of default on a $1 billion loan after failing to meet certain terms of its lenders.

LandSource Communities Development LLC, a partnership that involves the California Public Employees' Retirement System, received the default notice Tuesday, amid talks to restructure $1.24 billion of debt. The partnership, which owns 15,000 acres in Southern California, had received an extension to meet its current loan terms, including a required payment, but the deadline expired on April 16. The default notice applies to about $1 billlion of the total debt...

Hundreds of lenders, including banks and institutional investors, hold the syndicated debt. Barclays Capital arranged the financing in early 2007. At the time, LandSource's assets were appraised at $2.6 billion.

Partnerships such as LandSource were a common way to own and develop land during the housing boom. They provided high returns to investors and lenders and a way for builders to keep highly leveraged land off their books. But the ventures have run into trouble as the value of undeveloped land has plummeted and as demand for new homes has eroded...

One problem with ventures such as LandSource is that they typically require builder partners to acquire land on a schedule, even if they don't need the lots. They also can require partners to contribute more equity if the land's value falls below a threshold.

Will the rapid decline in prices bring the bottom sooner?

Hat tip to the excellent L.A. Land blog for this find: According to the Center for Policy and Economic Research, $6 trillion in housing wealth will vaporize in 2008 due to the rapid decline in housing prices, which some argue could help the market finds its natural bottom sooner:

The Case-Shiller data released yesterday indicate the rate of house price decline is accelerating. The 20-city index declined 12.7 percent over the last year, while the 10-city index fell 13.6 percent. However, the annual rate of price decline over the last quarter was 24.9 percent in the 20-city index and 25.8 percent in the 10-city index. At this rate of price decline, the excesses of the housing bubble will have largely disappeared by the end of the year. At the same time, the price decline implies an incredibly rapid loss of wealth. In real terms, the rate of price decline in the 20-city index would imply a loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner.

Year over year prices are down by 17.2 percent in San Francisco, 19.4 percent in Los Angeles, and 22.8 percent Las Vegas. Over the last quarter, prices in these cities have declined at annual rates of 26.5 percent, 26.3 percent, and 40.8 percent, respectively. Prices are even falling sharply in less inflated markets. Prices in Boston are down 4.6 percent year over year, in New York by 6.6 percent, and in Washington by 13.0 percent. Over the last quarter, the annual rates of price decline have been 15.9 percent, 11.4 percent, and 26.8 percent, respectively.

The new homes sales data released last Friday are also consistent with the picture shown in the Case-Shiller index. Sales were down by 8.5 percent from the February rate and by 36.6 percent over the last year. The Northeast showed the sharpest decline with March sales down 19.4 percent from February and 64.6 from year ago levels. The weak sales levels in the Northeast were likely in part due to better than usual weather in the prior two months, which may have pulled some March sales forward. An inventory equal to 11 months of sales (which does not include canceled sales of homes that were never occupied) will provide substantial downward pressure on prices going forward. ..

All signs point to a continued sharp decline in the market, which should get us to the bottom sooner...

In the first quarter, the vacancy rate on ownership units hit a record 2.9 percent. Before the recent crash, the vacancy rate on ownership units had never exceeded 1.9 percent. The rental vacancy rate also rose, although at 10.1 percent it is still slightly below the record of 10.4 percent set in the first quarter of 2004. Not surprisingly, the West showed the biggest increase in vacant ownership units, with the rate rising from 2.6 percent last year to 3.2 percent this year. With record vacancy rates, the downward pressure on prices should continue for the foreseeable future.

Fortune 500 listing demonstrates public builder pain

This year's Fortune 500 list has been released, and the nation's top 8 public homebuilders lost a collective $5.8 billion on revenues of $67 billion in 2007, led by Pulte (-$2.26 billion) and Lennar (-$1.94 billion), which were the leaders in taking impairments for land write-downs and lower prices/incentives. Other builders realized lesser losses -- less than $1 billion -- including KBHome (-$929 million), DR Horton (-$713 million) and Hovnanian Enterprises (-$627 million).

Still, some builders on the list actually managed to squeak out a profit last year, led by NVR, which builds mostly as Ryan Homes ($334 million) and Centex ($268 million).

Not surprisingly, profit margins as a percentage of revenues were paltry or in negative territory, with a median of -9% and ranging from +6% (NVR) to -24% (Pulte Homes).

Want to know how each individual builder performed on this list? Click here for the searchable database.

Land developer Empire Land files BK

Empire Land, the land development firm founded by building veteran Jim Previti after selling his homebuilding company, Forecast Homes, to K. Hovnanian in 2001, has recently filed for bankruptcy to stave off its creditors. It's a tough time to be a land developer -- land is expensive to carry and can't be depreciated -- so even though Empire was one of the largest land holders in Southern California's Inland Empire, falling values have taken their toll. From an L.A. Times story:

Empire Land, an Ontario-based land development company, has filed for bankruptcy protection, joining at least a dozen home builders that sought protection from creditors in the last 10 months as home sales and prices slumped...

The closely held company listed assets and debt of $100 million to $500 million in its filing and asked for more time from the court to provide specific financial information. Developers including Tousa Inc., Levitt & Sons and Kimball Hill Inc. have sought bankruptcy protection since June, hurt by the housing crisis.

Empire Land and its affiliates build so-called master-planned communities, large-scale projects that include commercial buildings and schools, in California and Arizona. Empire Land had assets with a book value of about $106.4 million as of Jan. 31, according to the court papers.

Why Fed Chief Bernanke should keep cutting rates

Business Week Chief Economist Michael Mandel argues that Fed Chief Bernanke should continue cutting rates until the financial markets have stabilized:

We live in a boom and bust world—and it’s not the Fed’s fault. As we wait to see what the Fed does on Wednesday, one thing is clear to me: Bernanke and his crew need to keep cutting rates until the economy and the financial markets stabilize, and not worry about the naysayers.

Since the middle of the 1990s, I’ve followed a very consistent theme in my writings. I’ve argued that we live in a high-volatility, high-growth world. High-risk, high-return: The two things go together.

In the second half of the 1990s, we had the Information Revolution, the Internet, and the tech boom. Then we had the tech bust. All told, the combination of boom and bust moved technology—and the economy—much further and faster than pessimists would have predicted in 1995.

Then in this decade we had the China and India booms, along with the housing boom across much of the world. Followed, of course, by the housing bust—but unless the housing bust leads to a megarecession in the U.S., the combination of boom and bust will have moved the global economy much further and faster than pessimists would have predicted in 2001 or 2002.

These booms and busts are not caused by Fed policy, or indeed central bank actions. Rather, they are the natural working out of increasingly efficient financial markets, combined with the much faster transmission of information and ideas across national borders. And these are good things. Over the past ten years, through boom, and bust, and boom, and bust, global per capita incomes have soared...

It is not the Fed’s role to smooth out the boom and bust cycle. The Fed is not omniscient, it does not know what the “right” level for the economy and the markets are. The best that it can do is cushion the damage of the bust, both for businesses and for consumers.

The last 10-15 years have had plenty of minuses. Consumers took on a lot more debt than they should have, perhaps $3 trillion worth. The U.S. lost a lot more manufacturing than it should have. And the Chinese economy is probably shaping up for the mother of all busts after the Olympics.

But none of this can be blamed on the Fed. The central bank needs to take care of its particular responsibilities—taking action to keep the financial system intact. And if that means cutting rates again and again, that’s what it should do.

Big builders must get out of land development, economists say

Economists Carl Reichart (Wachovia) and David Goldberg (UBS) contend that the nation's largest homebuilders need to get back to their roots as manufacturing companies and continue to pull back from land development, which ties up capital and reduces potential efficiencies. From a story in the Nation's Building News:

The large, public builders will have to consolidate operations and focus more on construction than land development or risk facing “hyper-competition” with each other that could prolong the downturn, Wall Street analysts said at NAHB’s Spring Construction Forecast Conference in Washington, D.C. last week.

The analysts, Carl Reichardt, Jr., with Wachovia Capital Markets, LLC., and David I. Goldberg, with UBS, also said that widespread acquisitions and bankruptcies among the big builders were unlikely as a result of the downturn ― even though the big builders compete with each other in nearly every major market in the country and their overall market share has shrunk from a peak of 26% in 2006 to about 20% today.

The big builders currently operate in 78 metro markets. Ten or more big builders are competing against each other in 19 of the markets and at least six big builders are competing in nearly half the metro markets.

Reichardt said the top public builders have increased their liquidity during the downturn and are beginning to reduce their “store” count — the number of communities where they operate.

But he added that they still risked remaining in a price-based competition with each other that would “mute the recovery” and “compound the cyclical excesses” largely because most of the big builders based their run-up during the boom times on land and are in too many markets.

Goldberg said the public builders have “cut prices pretty drastically” to reduce their inventories, but that during the boom years most of the builders got more involved in development and buying raw land.

“The industry must change,” Reichardt said. "Right now, the home building industry is a land-based business.” The large builders, he said, must “shift back to their core markets” and core competencies of “building and contracting.”

Reichardt said the builders could have to get out of land development and adopt a “land lite” business model.

“The home building industry is really a manufacturing industry,” Reichardt said, adding that he hoped the big builders would “reinvent themselves by focusing on processes and efficiencies.”

Going forward, Reichardt and Goldberg said that land development might eventually be conducted by developers partnering with “land finders” — people with enough money to invest in land development. Both said there were enough land investors waiting for the market to turn...

Goldberg said the tighter lending standards now in effect will drive less liquid builders out of the industry, but that the public builders will be able to survive.

Reichardt said the downturn is pushing the big builders and the home building industry into a period of slower long-term growth and lower returns. "The growth phase will be much slower,” he said.

In the short run, Goldberg and Reichardt both expect the big builder share of the market to shrink, but they said that, over time, their share would begin to increase again.

Economists dissect the current housing market

There were three different economists opining at the NAHB Spring Construction Conference. All are hoping that the worst is behind us, but that builders need to adapt, Congress needs to act and sales need to increase so inventory levels are reduced; From the Nation's Building News:

The outlook for housing and the economy should be gradually brightening within a few months, but before there can be any assurance that the worst of the downturn is over, there needs to be a pickup in home sales, according to panelists at NAHB’s Spring Construction Forecast Conference on April 24 in Washington, D.C.

Residential production and sales this year have declined “more sharply than anticipated,” said NAHB Chief Economist David Seiders, and the situation for the U.S. economy “definitely has darkened,” with more than an even chance that it has lapsed into a “mild” and brief recession in the first and second quarters.

Seiders said that he continues to believe that new single-family home sales will stabilize during the middle of this year, paving the way for an upturn in late 2008 and in 2009 and leading to improvements in housing starts next year. However, “the sales side has to be off the deck before starts stabilize and move up,” he said...

Through March, Seiders said, NAHB surveys of 30 large builders accounting for 25% of sales nationwide, showed “no signs of stabilization, although the rate of the decline may be slowing.” Likewise, the NAHB/Wells Fargo Housing Market Index, which polls builders to gauge their opinion of current sales conditions and demand six months down the road, remains close to its record low recorded in December and “shows no recovery yet, implying further deterioration of sales.”

“We need demand to revive to turn around the market,” Seiders said, and he suggested that a temporary tax credit for home buyers, an approach being considered in housing and economic stimulus legislation on Capitol Hill, could help provide the impetus to boost sales and end the downward spiral in home prices that is the biggest concern for the health of the nation’s economy.

As home prices have declined, he said, “underwater” mortgages with balances exceeding the value of the home have been adding to the deterioration of loan quality that began in the subprime sector last summer. This is “bad for the financial markets,” he said, and could result in further tightening of lending standards, yet more foreclosures and even softer housing demand.

Economists participating in the conference were fairly optimistic that the downward turn in housing prices, while substantial, will taper off before it takes a toll on the longer-range outlook for the economy, but nobody can know for sure, they said...

Nariman Behravesh, chief economist for Global Insight, cited a “sizable risk,” perhaps 30%, that the U.S. will experience a double-dip recession in 2009 because the fiscal stimulus enacted by Congress will pull growth into 2008 that otherwise would not have occurred until next year.

However, the current recession, like the one that occurred in 2001, is far different from those preceding it in the 1970s and 1980s, which were precipitated by high inflation, tightening by the Federal Reserve and rising interest rates.

In 2001, he said, “manufacturers were hammered, but housing was doing okay.” Today, just the opposite is happening, with U.S. export growth strong. Core inflation remains “reasonably stable” at 2.25% and looks headed back into the Federal Reserve’s 1% to 2% tolerance range.

The financial crisis precipitated by the subprime meltdown last summer “is off the front pages,” he said, “and things are calming down a bit; the worst may be behind us.”

The financial markets “woke up last August to the fact that there was a lot of toxic waste out there,” he said. Of the estimated $400 billion in global losses caused by the subprime problem, about $270 billion to $280 billion has already been declared, leaving about $100 billion in write-downs that the markets will have to face and probably be able to handle.

Behravesh added that he is “a little skeptical” of talk about the U.S. today facing the worst financial crisis since the Great Depression. At the height of the S&L crisis 20 years ago, 2,700 financial institutions failed, he said, compared to “very few” so far today.

Also, the Fed “has really cranked things up to calm the financial markets,” including its rescue of investment bank Bear Sterns and stimulative interest rate cuts, which most likely will include an additional one-half percentage point reduction in the federal funds rate before this summer. “I would have to give high marks to the Fed for crisis management,” he said...

Behravesh did, however, cite downside risks to his relatively upbeat forecast for the economy. Among signals that are “flashing yellow or red,” housing remains “a long way off from recovery,” consumer spending “has come to a halt” and will remain weak next year, and, most worrisome, the recovery will be “tepid” once it starts.

Housing sales should start turning around during the second half of this year, he said, concurring with Seiders, and house prices will continue to decline in the next year or so even as housing production improves...

Jim Glassman, managing director and senior policy strategist with J.P. Morgan Chase & Co., noted that the three out of four Americans who now believe that the nation has entered into a recession may well be correct if by that they mean that the economy is “not so great. But if you mean that the wheels are coming off the wagon, I don’t think so.”

If the economy were really falling apart, he said, job layoffs would be accelerating to 500,000 to 600,000 a week; they recently have been in the mid-300,000 range.

“The elephant in the room,” Glassman said, “is what’s going on with home prices,” which is still causing “a lot of stress in the financial markets.”

Home prices are down about 12% since the height of the housing boom in 2005 and incomes have grown 14%, bringing “prices relative to income to about where they were in 2003” during this year’s first quarter, he said. “We have flushed out most of the excess.”

Glassman said his guess is that home prices will decline 5% or so further, but gloomier forecasts foresee another 15% to 20% drop, and what will actually happen is probably somewhere in between those two views. “By fall, we will start to see that most of this is over,” he predicted, but he conceded that he wished he knew “where home prices would settle out.”

Once the economy does show signs of stabilizing, Glassman said it would be a mistake for the Fed to quickly reverse course on interest rates, as some have suggested it should do, because the financial markets will be going through a difficult transition for some time, and this will require a “different monetary policy.”

Last summer’s financial crisis was precipitated by investors discovering that they had assets with exposure to credit risks they hadn’t been thinking about, and this has challenged the concept of securitized finance that has taken hold, he said. It will take a decade to restructure the system and restore the confidence of investors and provide them with the transparency to see where the risks lie...

Glassman also said that prospective home owners will have to return to how their parents bought homes and start saving more money for a downpayment.

“The customer you have known for the past 20 years is not the customer you will know in the next 10 years,” he said, as the economy transitions into a new era that “won’t feel like it has as much oomph.”

The best news for the economy, he said, is that the emerging economies, largely in Asia, are doing fine and providing strong demand for U.S. exports and providing U.S. companies with “spectacular levels of profits.”

“The world has never seen such great economic performance since the dinosaurs,” Glassman said, and as a result, the winds are shifting in favor of regions of the U.S. that rely heavily on exports, including Michigan.

In NAHB’s latest housing forecast, new single-family home sales are projected to decline 21.8% this year, to 605,000, before climbing 18% in 2009 to 714,000.

Total housing starts are forecast to decline 29.5% to 948,000 in 2008 and rise 10.8% to 1.05 million next year. Most of this year’s decline will be concentrated in single-family production, which is expected to drop by 37.1% to 653,000 homes.

Housing Chronicles cited in most recent Carnival of Real Estate

Many thanks to Joshua Dorkin at BiggerPockets.com for citing our latest entry to The Carnival of Real Estate on his Real Estate Investing for Real blog, "Is there really gold in building green?"

Vacant homes set new record

Those holding out hope for a rebound in the housing market will have to be patient, as the percentage of vacant homes in the country has set a new record. Look for builders to continue pulling back on new construction as incentives seem to be lost on buyers waiting for the bottom to hit. From an AP story:

The percentage of vacant homes for sale in the U.S. set a new record high in the first quarter of this year, the government said Monday.

The Census Bureau report shows that 2.9 percent of U.S. homes _ excluding rental properties _ were vacant and up for sale, compared with 2.8 percent in the fourth quarter of 2007. It was the highest quarterly number in records going back to 1956.

That works out to 2.28 million properties, up from 2.18 million in the same quarter last year, according to the report.

The West had the biggest gain in vacancy rates among homeowners, rising to 3.2 percent in the January-March period from 2.6 percent in the same quarter a year earlier. Vacancy rates inched up in the Northeast and remained steady in the Midwest and South. The national vacancy rate, including new and existing homes, has been steadily rising since mid-2005...

The Census Bureau's report also said that the U.S. homeownership rate remained at 67.8 percent in the first quarter, down from a peak of 69.2 percent at the end of 2004.

The housing market's five-year boom is quickly becoming a faint memory, as sales and home prices have fallen dramatically over the past two years in once hot areas such as California and Nevada.

Last week, a Commerce Department report said sales of new homes plunged in March to the slowest pace in 16 1/2 years.

Centex Corp., Pulte Homes Inc., Hovnanian Enterprises Inc. and other builders have been caught with unsold properties over the past year as mortgages became harder to get, sales slowed and the economy soured.

Builders have slashed prices, but the discounts have done little to lure buyers who are holding out, uncertain about when the price-drop will stop.

The National Association of Realtors reported last week that sales of existing homes also fell in March, dropping by 2 percent, with prices declining on a year-over-year basis by 7.7 percent.

Backlash against housing bailout continues to grow

Ever since the issue of sub-prime and Option ARM loans arose to lead the housing market into its historic crash, I've been asking the simple question, "Why would someone sign something they didn't read or understand?" One common reply is, "Well, not everyone's like you, some people simply relied on their brokers and agents to explain it to them."

Fine. But there's a growing consensus among the anti-bailout crowd that you can't claim to be a responsible adult in the U.S. today and not read what you sign. From a story at CNNMoney:

Why should American taxpayers have to pay to bailout reckless lenders and borrowers?

The website Angryrenter.com, launched just last week, has a vitiation demanding that Congress not pass any bailout programs that reward risky borrowing and lending. To wit: "Let the free market sort it out!"

The petition is gathering 40 to 50 signatures per hour, according to spokesman Adam Brandon, who adds that the site is already getting 15,000 visitors a day...

"A third of the American public rents," Brandon pointed out. "They're saying 'I've been saving for a mortgage for years. I could have jumped in on a subprime loan too. Now I'm going to have to pay for a government bailout."...

Many CNNMoney.com readers agree, expressing outrage at the idea of seeing their taxes used to keep people in homes they never should have purchased...

Many people would prefer the government do nothing at all to prop up the housing market -- especially those hoping to buy in a more affordable market.

Patrick Killelea has been blogging about the housing bubble at Patrick.net for four years from San Francisco, where it takes a not-so-small fortune to buy.

"Bailouts reward bad behavior. I've been diligently saving, denying myself lots of things so I can afford to buy, yet the government is saying we have to keep all these people in their homes," said the Web site programmer and author. "Well, wait a minute! Why can't I spend more than I can afford and have the government bail me out."...

StoptheHousingBailout.com is another newly minted site devoted to the bailout backlash. "I just got really angry," said blogger Morgan Ward Doran, an L.A.-based attorney who isn't professional involved with the housing industry. "Everyone I hear from is against the bailouts."

Doran argues that lenders, brokers and home builders all made huge profits by overbuilding houses pushing through poorly underwriten loans, and now they want taxpayers to cushion their fall.

Indeed, there is a provision in the Senate bailout bill that would give extensive tax breaks to home builders, which has some people especially incensed...

Most people who are against bailouts trust the market more than the government.

The fastest way to return to normalcy is to let the market work, according to Angryrenter.com's Adam Brandon. He acknowledges that the impact on some homeowners will be devastating, but that things will get even more painful if we don't let the free market work its magic.

"I feel terrible for people losing their homes," said Brandon, "but the sooner we let the market sort this out, the sooner we can get back to growth. When the government gets involved, it can delay the inevitable."

Much more to the credit crunch than sub-prime loans

There's a review of two different books on the credit crash in the April 28th edition of Business Week magazine: "The Trillion Dollar Meltdown" and "Bad Money." Both books posit that the credit crash is due more to the excess power of Wall Street and the financial community than sub-prime loans, which were merely a symptom of a style of free-market capitalism that got out of control. So what will the consequences be? Certainly some pain -- but not until those in power admit the extend of the problem. From the BusinessWeek website:

Are you confused about how so much American debt could vaporize so fast, threatening to take down the global financial system? Are you wondering what should be done to prevent another systemic crisis in the markets? Are you puzzled over what it all means? Two recent books offer answers to these vital questions. Both place the credit crash in historical context. Each author believes Wall Street and the financial community have far too much power. More controversially, both argue the fallout will result in a dramatic transformation of the U.S. economy. The Trillion Dollar Meltdown by Charles R. Morris deserves a spot on any bedside reading table. Morris, a former banker and sometime writer for The Atlantic Monthly, more than accomplishes his stated goal of telling his story "briefly and crisply." For instance, he manages to make clear both the mechanics of slicing and dicing collateralized debt obligations (CDOs) and why these and similar securitized credits and derivative securities went spectacularly bust. Bad Money by political analyst and author Kevin Phillips is more ambitious, tracing the current "global crisis of American capitalism" to the politics of peak oil, the rise of financial mercantilism, the triumph of market fundamentalism, and even the spread of religious conservatism...

Morris puts to rest any lingering notion that the credit crisis reflects merely an inflated housing market, let alone a simple subprime problem. He estimates that writedowns and defaults of residential mortgages, commercial mortgages, junk bonds, leveraged loans, credit cards, and complex securitized bonds could reach $1 trillion. (The International Monetary Fund recently picked that number for the global write-off.) The figure could double or triple should there be widespread market panic. Little wonder that the Federal Reserve Board has been working so hard to stave off financial contagion...

In essence, Morris traces America's credit madness to the rise of Chicago School free-market capitalism, best represented in the work of late Nobel laureate Milton Friedman. That ideology supplanted Keynesian liberalism, which gave government a key role in achieving low inflation, low unemployment, and fast economic growth...

Now, though, he believes Chicago free-market ideology is washed up, like Keynesian liberalism before it. "The current conservative, free-market cycle...seems to have long since foundered in the oily seas of gross excess," writes Morris.

Beneath the free-market paradigm, three trends conspired to create the great credit bubble. First, residential mortgages, leveraged buyouts, and other loans gravitated away from banks to global capital markets. Second, the securitization of everything meant that lenders ceased to care whether loans were good or not; they thought only about pocketing enormous fees. Third, portfolio managers' increased reliance upon quantification left them with a flawed image of reality—artificially tidy and apparently risk-free. A final culprit: former Fed Chairman Alan Greenspan, whom Morris faults for cheerleading the deregulated financial markets, allowing easy money to flourish, and failing to disabuse Wall Street of the notion that the Fed will always bail out the financial markets...

He also takes a stab at what might come next: a long-term decline of the U.S. economy, especially if political leaders and financial elites try to mask how deep the credit crisis runs. However, Morris holds out hope that better days lie ahead if elites exercise leadership in the mode of '80s Fed Chairman Paul Volcker, who slew inflation and restored trust to the U.S. economy. Nevertheless, Morris anticipates a nerve-wracking denouement...

The debate about the political significance and economic implications of the credit crash are just beginning. To varying degrees, these books stake out the arguments for returning to a world where finance serves society rather than the other way around.

Fed rate cuts helping sub-prime mortgage resets

It looks like the cuts by the Fed in interest rates have had a calming effect on potential sub-prime mortgage resets. From a story in the L.A. Times:

The great mortgage reset of 2008 isn't turning out quite as advertised.

Thanks to interest rate cuts by the Federal Reserve, payments on sub-prime loans with expiring "teaser" rates are going up only modestly when the loans start adjusting -- by just 1% on average last month, one study found...

Defaults and foreclosures are still rising, however -- it's just that the culprit isn't solely the payment shocks once feared.

Instead, industry experts put most of the blame on tumbling housing prices, which have left many borrowers owing more than their homes are worth after making little or no down payment, taking on second mortgages or sucking their equity dry through refinancings...

Lower short-term interest rates also help certain other adjustable-rate borrowers, including people with home equity lines of credit, which have interest rates at or close to the prime rate. The prime rate, which was 8.25% a year ago, was at 5.25% this week.

Holders of controversial "pay option" mortgages, which allow borrowers to pay so little that the balance rises, also will benefit.

Facing what was shaping up to be the worst wave of foreclosures since the 1930s, the Fed lowered its benchmark rate for short-term loans between banks by 1.25 percentage points in January and by an additional 0.75 of a percentage point March 18.

In response, the index for most sub-prime loans -- a European inter-bank lending rate known as six-month U.S. LIBOR -- fell to 2.4% on March 18, the lowest level in more than three years, a recent Standard & Poor's study noted.

The Federal Reserve cuts were aimed in part at stemming foreclosures and propping up the slumping housing market, which many economists believe has tilted the economy into recession.

But the reduction in interest rates hasn't revived the moribund sub-prime lending market, economist Morici said.

Big investors such as pension funds, burned on mortgage investments, now will buy only those mortgage bonds backed by the safest prime loans or guaranteed by government-sponsored entities. And that, Morici said, has cut off sub-prime lending to potentially worthy borrowers with some credit dings and also loans for self-employed people and others in the "alt-A" loan category between prime and sub-prime...

The Fed also has little control over long-term fixed mortgage interest rates. The average rate on a 30-year fixed-rate mortgage rose to 6.1% after the Fed reduced short-term rates in January because investors feared that the stimulus to the economy might fuel inflation. The rate had moved back down to 5.8% as of Thursday.

Consumer advocates said lower resets were no substitute for the five-year rate freeze that Treasury Secretary Henry M. Paulson Jr. had promoted back in December. Under that plan, many lenders had pledged to leave unchanged the teaser rates for sub-prime borrowers if their payments would become unaffordable because they were rising by 10% or more.

"The important thing for a family getting a [rate freeze] loan modification is that it provides long-term stability," said Kevin Stein, associate director of the California Reinvestment Coalition, who testified last week before the same House subcommittee as Deutsch. "Getting a temporary small increase based on a LIBOR index that can go back up in a few months is not going to do that."

Still, the lower resets are very real for what the industry describes as typical sub-prime borrowers. Their loans might start with an 8% rate for two years, the S&P study noted, then start adjusting twice a year to six-month LIBOR plus 6 percentage points. If LIBOR was 5%, the borrower would pay 11% interest on the loan...

After recent news articles questioned whether banks were properly reporting the interest rates used to calculate LIBOR, it crept back up a bit, to just over 3% last week.

But most sub-prime loans adjust by adding 5.5 or 6 percentage points to the index, meaning adjusted rates would be in the 8.5% to 9% range, not the double digits that had been feared last year when Paulson was promoting a "streamlined modification plan" to freeze the initial interest rates.

Sneak peek at the Builder 100 for 2007

Although public builder D.R. Horton retained its status as the #1 homebuilder by closings, private builder David Weekley homes surpassed Shea Homes for the first time as the top for-profit builder not publicly owned. From a BuilderOnline.com story:

Stop the presses: David Weekley Homes eclipsed Shea Homes as the biggest private for-profit builder in the country last year, according to Builder magazine’s Builder 100 survey. Companies in Builder magazine’s annual Builder 100 list, to be released online in early May, are ranked by closings...

Shea remained the largest private builder in terms of revenue, with $2.15 billion in revenue, followed by Weekley at $1.34 billion, and the Related Group, a Miami-based condominium builder, at $1.257 billion...

Company	Pct. change (v. '06 closings)	'07 Closings	'07 Revenue
Horton	-29%	37,717	10,171
Lennar	-33	33,283	10,187
Centex	-18	30,684	9,732
Pulte	-34	27,540	9,263
KB Home	-28	23,743	6,417
Hovnanian Enterprises	-26	14,928	5,334
NVR	-11	13,513	5,129
Beazer Homes	-35	11,366
The Ryland Group	-33	10,319	3,033
MDC Holdings	-38	8,195	2,933

Most Builder 100 companies recorded a double-digit decline in sales last year. Condo builders bucked the trend. The top 10 condo builders on the Builder 100 did about the same business in 2007 as they did in 2006.

For the second consecutive year, Miami-based Lennar Corp. topped the For-Sale Condo list, closing 3,136 units. Lennar was followed by The Related Group (2,082), MCZ Development (1,735), Epcon Communities (1734), and Centrum Properties (1,657), all condo specialists.

Virtually all of the The Related Group’s closings were in Miami and Ft. Lauderdale. Centrum Enterprises, which closed 691 for-sale condos in Miami last year, plans to enter two more states next year. Epcon projects that it will do even more condo business in 2008.

More bad news for homebuilders

Attendees at the NAHB Spring Construction Forecast were treated to even more bad news, courtesy of the latest new home stats from The Commerce Dept. From a BuilderOnline.com story by Ethan Butterfield:

New-home sales are down 8.5 percent from February and the months’ supply of new-homes rose to 11 months, a record-high, NAHB chief economist David Seiders told the several hundred audience members in attendance at the NAHB’s headquarters to a chorus of subdued groans and whistles.

And those numbers (http://www.census.gov/const/newressales.pdf) do not count cancellations, which many large builders are seeing at levels of up to 40 percent of sales. In other words, there is far more inventory of new homes than just 11 month’s worth, especially as home sales continue to decline...

Nariman Behravesh, chief economist for Global Insight, said Thursday that total financial losses from the subprime mortgage mess would be about $400 billion, but that only $250-$280 billion of that has been declared so far. That means there may be as much as another $150 billion in losses to come.

“There will be more bad news, and it could create a revisitation of this crisis, but it’s probably the case that the worst is over,” Behravesh said.

Still, housing is far from a recovery, he said. Consumer spending has slowed to a trickle in the first half of 2008, but will likely pick up with the fiscal stimulus’ tax rebates, then will likely trail off again, creating a “W”-shaped recovery, Behravesh said.

“What these rebates are doing is pulling growth forward from next year to this year,” he said.

And if energy prices continue to rise, the fiscal recovery may be undermined, Behravesh said...

Mark Zandi, chief economist for Moody’s Economy.com, said Thursday that 8.8 million home owners are now in just that negative equity position, and that number could rise to over 12 million without federal intervention.

And today’s American doesn’t have the savings to weather the storm, Zandi said.

“If there is any disruption to their income, they’ve got a real big problem,” he said, pointing out that major disruptions in income used to be if somebody lost their job, or there was a divorce or death in the family. Now, needing to replace a hot water heater is the equivalent, because people do not have the excess cash. “They are living on a tenuous financial edge, and they are going to end up in foreclosure, and add to that mountain of inventory.”

And consumers owe far too much money to creditors, with over $700 billion of debt (of all kinds, not just mortgages), in default or delinquency, Zandi said.

“That has more than doubled in the last couple of years, and that’s putting a lot of stress on the system,” he said.

Zandi, now an advisor for Senator John McCain’s Presidential bid, also pitched a three-pronged plan to save housing. First, a temporary tax credit for buying a home. Second, the Federal Reserve could hold reverse auctions for banks to allow credit to flow more cheaply, and so more freely to help the housing market regain its footing. Third, a mortgage write-down plan to save home owners from falling into foreclosure could be enacted...

“In times of crisis, we should use the triple-A credit of the United States,” Zandi said. “If they don’t, (the economic trouble) is not going to be short, it’s going to be a rather painful, prolonged downturn that extends through the rest of the decade.”

Zandi projects new-home sales to bottom in the second quarter of 2008, over 30 percent below their peak levels from the boom. New-home starts are likely to bottom in the second half of 2008 more than 60 percent below their peak level. Home prices will likely finish about 24 percent below their peak levels, and likely not until the second half of 2009, Zandi said.

Kimball Hill Homes files for bankrtuptcy, plan is approved

Earlier this week, Kimball-Hill Homes, a large builder based in Illinois, filed for bankruptcy, further demonstrating that this current downturn is certainly the most severe in a generation (or two). From a BuilderOnline.com story:

Despite having more than $60 million in cash, Rolling Meadows, Ill.-based Kimball Hill Homes filed voluntary Chapter 11 petitions for reorganization in the United States Bankruptcy Court in the Northern District of Illinois on Wednesday, April 23...

Unlike many companies that file for Chapter 11, Kimball Hill has the advantage of $60 million in liquidity, which eliminates the immediate pressure to secure first-priority, Debtor In Possession (DIP) incremental financing necessary to continue daily operations...

In addition to Kimball Hill, another 29 affiliated debtors also filed Chapter 11. The company’s financial service businesses are excluded from the filing.

The announcement is just another blow for the Chicago area market that has already sent Neumann Homes into bankruptcy and Kennedy Homes into serious financial distress and a lawsuit against its lenders...

Kimball Hill, which is active in five states, has been scrambling to improve operating performance during the downturn. By using aggressive marketing tactics and incentives, it reduced inventory in 2006. That same year, the company pulled out of the depressed Cleveland market to redeploy assets. Management cut cycle time, tightened inventory management, and scrutinized its urban projects in an effort to reduce costs.

But by last fall, when the company delayed filing its 10-K for the 2007 fiscal year-end of Sept. 30, it became clear that the Chicago area institution built by the Hill family was in dire straits. At the time, the company disclosed it was out of compliance with several covenants of its senior credit facility. Although Kimball Hill is a private builder, it carries some public debt, which carries with it an obligation to report financial results with the Securities and Exchange Commission...

A day later, the company's reorganization plan was approved. From another BuilderOnline.com story:

One day after officially filing a petition for Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Illinois, executives of Kimball Hill Homes received court approval for all of the company’s first day motions. Taken together, the approvals allow the company to continue normal operations.

On Thursday April 24, the Honorable Susan Sonderby granted permission to continue customer programs and warranties, pay employee wages and benefits, establish procedures to pay valid lien claims in the ordinary course of business, and to sell homes free and clear of all liens...

In the meantime, Kimball Hill is actively seeking investors interested in buying an equity stake in the company, including private-equity firms, hedge funds, and real estate funds, according to CFO Edward Madell in a court document. About 26 parties “continue to actively evaluate the prospect” of an investment in Kimball Hill, the document says.

The brighter side of falling housing prices

Due to falling prices in many markets, homes are becoming more affordable, allowing people long in hiding from rising prices to venture out again into the marketplace. From a story in the Wall Street Journal:

And now for the heartwarming side of the housing bust: It's helping some people buy homes that they couldn't afford a couple of years ago...

Still, many potential buyers are holding out for better deals. The Wall Street Journal's quarterly survey of housing-market conditions in 28 major metro areas points to continued downward pressure on prices in much of the country.

As usual, there is huge variation from town to town. In most of the country, inventories of unsold homes are no longer growing quickly, as they did in 2006 and 2007, but remain huge. The supply has shrunk modestly in Boston and Denver over the past year. But the number of for-sale signs continues to rise swiftly in the Portland, Ore.; Seattle; Raleigh-Durham, N.C.; San Francisco; and Washington areas.

The biggest gluts are in Florida. In the Miami-Fort Lauderdale area, the supply of single-family homes and condominiums is enough to last 34 months at the average sales rate of the past year. That months-supply figure is about 21 in Orlando, 18 in Tampa and Las Vegas, 17 in Detroit and 14 in Phoenix. A six-month inventory is generally considered a rough balance between supply and demand.

For condos alone in Miami-Dade County, the supply would last 45 months at the current sales rate.

Prices are coming down fast. Real-estate data company Zillow.com estimates that the median value for all homes in the 12 months ended March 31 fell 25% in the Las Vegas metro area, 19% in Miami and Orlando, and 16% in Phoenix. The typical value is still rising modestly in a few places, including the metro areas of Raleigh and Charlotte, N.C., Dallas and Houston. One hitch for house hunters, though, is that mortgage lenders have become much more restrictive with loans...

During the boom, home prices rose far faster than incomes. Home prices as measured by the S&P/Case-Shiller national index shot up 74% in the six years through 2006, while median household income rose 15%. (Neither figure is adjusted for inflation.) Now prices in many areas are adjusting back toward more affordable levels, a process that could take several years.

In an analysis of 330 metro areas in last year's fourth quarter, National City Corp., a banking concern, and Global Insight, an economic research firm, found that home prices were sharply overvalued in relation to household income and other factors in 21 metro areas, down from a peak of 58 metro areas in the second quarter of 2006.

Economists at the two firms look at home prices in relation to household income and other variables, including population density (an indication of how much land is available) and past differences in prices caused by factors like climate and schools. They then classify as "overvalued" metro areas where home prices are more than 33% above a level that could be explained by fundamental drivers of housing costs. Among areas where this analysis finds that home prices are still too high are Bend, Ore., Atlantic City, N.J., Miami, Honolulu and Portland, Ore.

In most of the country, "we're getting a return to normalcy" in the relation between home prices and incomes, says Richard DeKaser, chief economist at National City. But, he adds, prices may overshoot on the down side.

Economists at Goldman Sachs say home prices are likely to level off by late 2009. They also point to improving affordability. Goldman's chief U.S. economist, Jan Hatzius, says the share of a typical family's income needed to pay mortgage payments on a median-priced home averaged about 17.5% from 1993 to 2003, before jumping to 26% in 2006. The figure now has fallen to 20% and is likely to keep declining as home prices fall.

Mr. Hatzius estimates that average U.S. home prices have fallen 15% since the second quarter of 2006 and projects they will fall an additional 10% before stabilizing late next year. But he also sees a risk that home prices will fall further, particularly if the foreclosure problem proves worse than already expected.

Goldman estimates that foreclosures will add 1 million to 1.5 million homes to the for-sale market this year, compared with less than half a million a year before 2007.

Sometimes economists on housing have no clothes

In his latest Mortgage Credit News, columnist Lou Barnes takes Dr. Robert Shiller to task for predicting a 30% decline in home prices but offering no specifics:

The media are having a wonderful time mis-reporting housing conditions, ooing and ahhing every time Robert Shiller shouts “Fire!” in the theater. This week he predicted (again) a “30% decline in housing prices.” All of them, Robert? Uniformly? Average? Do the math: if half the nation’s homes stay price-flat, the other half must fall 60%. Is that it? Or did you mean to say decline 30% in a few places? Some individual projects are off more than 60% right now (an FL condo or two... AZ and CA land), but the worst dozen mini-metro areas have yet to decline as much as 20%.
In authentic data, OFHEO found that home prices measured by appraisal and weighted by location (CA more than ND; NY more than AZ and NV combined...) rose .6% from January to February. Sales of existing homes are sliding gently, but still moving at a five million annual clip. Sales of new homes are off 37% in the last year, down to a half-million, but that is good news -- the less new inventory, the better.

That's the problem with economists who try to opine on real estate markets without ever having worked in the trenches. In many cases, they simply don't know what they're talking about and the media, full of over-worked and/or lazy reporters, return to the same feedstock of quotes (i.e., Mark Zandi, Robert Shiller) for a line or two to make their story appear credible. Readers, not knowing any better, then believe it and act accordingly, apparently turning to guns and religion as salves.

But Barnes isn't finished yet with the media:

Yelling “Fire!” is a bad idea, but so is telling the audience to stay seated when smoke is pouring from the ventilator. Headline stories all week long: the Crunch is over, credit markets are improving. Irresponsible nonsense.
Distress is measured by interest rate spreads between safe stuff and not, and availability of credit. We have seen nothing more than a pullback from panic: the 2-year T-note has run up from 1.70% to 2.36%, sensible as the Fed at 2.25% is about to pause its rate cuts (keep some dry powder, guys). The Treasury/junk spread has contracted from no-market 8.6% to merely disastrous 7%. Retail mortgages are still 2.50% above Treasurys, almost a point out of line, and no real market for Jumbos or any other securitized credit. Tax-exempt munis paid 1% over taxable Treasurys last month, and now pay the same -- improving from schizophrenia to clinical depression. The international bank-to-bank Libor spreads are still widening...

Lost in housing and “subprime” myopia, and domestic navel-gazing: the global rise of terrible inflation, nothing like it since the 1970s. $120 oil will have its consequences. Here, wages capped by foreign competition, food and energy inflation is slowing the economy; Asia/Emerging are in a runaway spiral. Recent annualized figures: China 9%, India 7% (doubled in six months), Philippines 6.9%, Vietnam 19.4%, Singapore 6.5%, Russia 12.7%, South Africa 9%, Saudi Arabia 8.7% (highest since the ’82 oil spike).
There are only three antidotes: the mad good fortune of a commodity collapse, or central-bank induced slowdown, or the ultimate violence of market-induced slowdown.

What happens to land use if oil prices double by 2012?

I've blogged before about the impact of rising oil prices on land use patterns and the popularity of suburban communities, but it's only been since gas prices in California have been approaching and exceeding $4.00 per gallon that it's become a primary issue.

According a story at Breitbart.com, demand from developing countries in Asia and Eastern Europe will more than make up from any reduction in demand from the U.S., sending oil prices up to $150/barrel by 2010 and $225/barrel by 2012. Clearly, an economy long dependent on cheap oil will have to adjust drastically if gas prices also rise to $6 or $8/gallon:

The price of oil is likely to hit 150 dollars (Canadian, US) a barrel by 2010 and soar to 225 dollars a barrel by 2012 as supply becomes increasingly tight, a Canadian bank said Thursday.

The CIBC report says the International Energy Agency's current oil production estimates overstate supply by about nine percent, since it wrongly counts natural gas liquids -- which are not viable for transportation fuel -- in its numbers.

Analyst Jeff Rubin in his report noted accelerating depletion rates in many of the world's largest and most mature oil fields. He estimates oil production will hardly grow at all, with average daily production between now and 2012 rising by barely a million barrels per day...

"Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," said Rubin.

"Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years, almost doubling from current levels."

The CIBC report also notes that while production increases are at a virtual standstill, global demand continues to grow.

An expected drop in demand in the United States due to higher prices and a weak economy will be more than offset by demand growth in developing nations, it says.

Rubin cites, for example, the recent launch of Tata's 2,500-dollar car that will allow millions of households in India to soon own automobiles.

He also notes that car sales last year were up 60 percent in Russia, up 30 percent in Brazil and up 20 percent in China.

Transport fuel now accounts for half of the world's oil usage.

Although US oil consumption is likely to fall by over two million barrels a day over the next five years as pump prices rise, he says, more drivers on the road in Russia, China and India will surely pick up the slack in demand.

Want to read my article on transit-oriented housing from last year? You can find it here (although it was written when I was still working with Hanley Wood Market Intelligence). If you need to get ahold of me now, try pduffy@metrointel.com

White House rejects Democratic housing package

The Bush Administration does not agree with the housing package proposed by Democrats, arguing that it puts taxpayers at risk. From a CNNMoney story:

A top housing official said Thursday that the Bush administration "strongly opposes" a Democratic housing rescue package, calling it a bailout that would expose taxpayers to excessive risk.

Deputy Secretary of Housing and Urban Development Roy A. Bernardi also indicated that President Bush would veto a bill sending $15 billion to states for the purchase and rehabilitation of foreclosed properties.

The comments, in separate letters to lawmakers, were the most forceful rejection yet by the Bush administration of Democrats' housing aid plans. And they were the clearest indication to date that the White House intends to put up a vigorous fight against a bill to let the Federal Housing Administration take on as much as $300 billion in new mortgages for financially strapped homeowners...

The Bush administration has previously questioned the scope and structure of the plan, although it backs the central concept: adjusting FHA's rules so more homeowners can refinance into government-backed loans.

An administration program, called FHASecure, made similar changes, but it is limited to borrowers who have good credit and histories of making their payments on time. It also doesn't require lenders to accept losses on existing mortgages.

Doing so, Bernardi wrote, would "significantly limit lender participation."

Frank has been working to draw Republican support for his plan, which he says has a good chance of becoming law this year.

But first, Democrats will have to deal with strong GOP philosophical objections to any measure that inserts the government into the housing maelstrom - especially one that could help people who are victims of their own irresponsible decisions.

"It will unfairly benefit a few homeowners and many investors and speculators at the expense of millions of careful borrowers and renters," said Rep. Spencer Bachus, R-Ala. "The message that we risk sending to financial institutions and individuals is that when they willingly take on excessive and ill-advised risk, the government will ride to their rescue."

Is there really gold in building green?

“Our greatest responsibility is to be good ancestors.”
-- Dr. Jonas Salk, developer of the polio vaccine

It was in early 1977 when a newly elected President Jimmy Carter donned a cardigan sweater on national television, urged Americans to do the same and then asked them to turn down their thermostats to conserve energy. But who could guess that he was on the forefront of a movement towards resource sustainability that would take another 30 years to coalesce? Not only has green building and conservation emerged as the most important trend in homebuilding, but according to some experts will help drive the U.S. economy once the current recession eventually rebounds.

So how can builders and developers hope to capture both the imagination and the dollars of homebuyers given the enormous complexity of ‘green’ building? Primarily through consistent and comprehensive education, not only for those executives making design decisions, but also for buyers throughout the entire marketing and sales process.

Fortunately, that hurdle has become much easier thanks to standards and practices adopted by the federal government (Energy Star, Building America), U.S. Green Building Council (LEED), American Lung Association (Health House), Masco (Environments for Living) and others. Not to be outdone, the NAHB officially launched its own National Green Building Program at this year’s International Builder’s Show. The hope for this plan is in providing a much-needed framework for a variety of local green building programs already operating throughout the country, many of which were started in association with local HBA/BIA groups as early as the mid-1990s.

The timing couldn’t be better: according to the NAHB 2007-2008 Consumer Preference Survey as analyzed by Jonathan Smoke at HousingIntelligence.com, nearly 90% of respondents are concerned about the impact their homes have on the environment. Yet because only 16% are willing to pay extra to address that concern, homebuilders would be wise to first target those consumer segments actually willing to spend a premium. Fortunately, Smoke thinks three of his defined consumer groups fit into this category, including “Feature and Location,” “Elite” and “Active Adult Elite” buyers, who share in common a desire for quality, prestige and community. To further increase the odds of success, he suggests builders focus on top-rated green items including Energy Star-rated windows, energy-certified appliances and generous insulation while getting rid of now-dated design features such as two-story foyers which are expensive to heat and cool.

In terms of marketing green building, selling the benefits more than the technology is the key, especially when they coincide with consumers’ existing focus on rising energy costs, an epidemic of allergies and asthma and the importance of sustainability. That’s also when partnering regionally with a local BIA makes sense; by leveraging its membership base, a local or statewide association can tap major product manufacturers as sponsors and create advertising campaigns that would be far too expensive for one builder to pursue alone. In Atlanta, for example, the “EarthCraft House” green building program developed by the local HBA in conjunction with the NAHB Research Center has become its own popular brand suggesting higher quality. In fact, recent buyers cited the EarthCraft certification as one of their top three reasons for buying a new home.

For those harried sales agents already under pressure to explain the specifics of a home plan and neighborhood, when it comes to explaining green building – or green mortgages, which allow buyers to qualify for higher loan amounts when they’re buying energy-certified homes -- it’s best to let simple displays in the model homes and colorful collateral in the sales office do the talking.

With some clever design elements, that collateral could easily double as a benefits list for comparison shopping – and pity the poor builder who thinks green building is just another fad, because they’re now in the minority. In a 2007 survey conducted by Professional Builder, 70% of homebuilders agreed that this is a trend that’s here to stay, and of those respondents, 83% considered it extremely important to their marketing strategy which has had a positive impact on sales.

Gold in building green? It certainly looks so -- and makes us good ancestors in the process.

Homebuilders making it expensive to cancel

Over the last ten years, most builders were generally fairly lenient with refunding deposits as long as they thought another buyer would soon appear who wouldn't be stuck with any weird design choices or pricey installed upgrades. But as the cancellation rate for new homes has soared to well over 30% -- and even 40% for some builders -- buyers hoping to cancel for any variety of reasons are finding that the fine print they didn't read sometimes also meant they were signing a promissory note for the deposit, making it much harder for them to walk if they think a better deal is on the horizon. From a Washington Post story:

Builders typically ask for 10 percent of the contract price as a deposit, said Harvey S. Jacobs, a Rockville real estate lawyer and owner of Stress-Free Settlements. "If you can get away with paying less, great," he said. "But they ask for 10 percent." Builders also typically ask for additional cash to cover the price of options and upgrades.

In addition to the cash deposit, builders frequently ask buyers to sign a promissory note for an equal amount of money, Jacobs said. That note comes into play only at closing, when it becomes payable out of the buyer's mortgage. It's a liability that lies dormant but that serves to double the amount of cash the buyer has at stake if he pulls out of the deal.

Those promissory notes are builders' attempts to stem that wave of cancellations. If buyers are willing to forfeit $50,000 to walk away from a $500,000 home sale, maybe being on the hook for $100,000 would keep them in the deal. "I'm definitely seeing more letters saying, 'We're going to enforce your promissory note if you don't close,' " Jacobs said.

What's more worrisome, Jacobs said, is that many people don't even realize they have signed such a note, just one page among the many included in a sales contract.

(Ed.) Does NO ONE read documents they're signing anymore? I think this excuse is starting to get a little out of hand. But I digress...

The first opportunity you have to read a builder's sales contract and the accompanying documents (which can be just as important -- and binding -- as the contract itself) could very well be when you are being asked to sign them...

Never sign a contract while you're sitting in the sales office. When you're writing a deposit check for tens of thousands of dollars, and signing a contract worth hundreds of thousands, you really deserve a few days to have the specifics looked at by your own real estate lawyer...

Arthur G. Kahn, a partner with the Brincefield, Hartnett & Kahn law firm in Alexandria, said the procession started in fall 2006.

Sometimes, there are technical aspects to the contract that could become a convincing argument for a refund, he said. For example, he cited a "relatively arcane and complex statute," the Interstate Land Sales Full Disclosure Act. With some exceptions, it requires developers to register subdivisions of 100 lots or more with the Department of Housing and Urban Development. If the development is covered under that law, buyers are supposed to be given a disclosure document, called a "property report," before they sign a purchase contract.

Registration "is a time-consuming process, and you're not allowed to market until HUD has approved the registration of the project," Kahn said. Especially during the real estate boom, he said, some developers didn't want the delay. If the developer should have registered with HUD or should have given the buyer the property report but failed to do so, that could be a route out of the deal and toward a refund...

There are other avenues lawyers might take to recover deposits. For example, contracts often allow builders as long as two years to complete construction. But, especially with condo projects, some deliveries have been closing in on that two-year deadline. No rational buyer wants to pay 2006 prices for a condo now. These deals are ripe for cancellation. Your argument for getting back the deposit may focus on the details about when that two-year clock started ticking, and when the home qualified for an occupancy permit.

Are homebuilders asking Congress for too much?

In a recent post, I discussed a recent presentation by reps from the NAHB on how the credit crunch is now impacting loans for land purchases, development and construction.

My friend Brian, a banker with a mid-sized regional bank, took issue with this story and has written a response, which follows below:

To broaden sources of AD&C credit, Mitchell called for:

• Fannie Mae to ramp up activity in its AD&C loan purchase program and for Freddie Mac to create a similar program. Federal Home Loan Banks to improve AD&C liquidity by accepting housing production loans as collateral for the secured advances they make to member institutions. These institutions were not set up to be collateral lenders. Collateral lending represents a much higher tier of risk taking than cash flow lending. The source of repayment for these loans is the completion and sale of the project, not an individual's capacity to repay a loan over time. This would incrementally worsen the risk profile of these psuedo-government agencies over time, resulting in higher insurance costs for all depositors, which would be required to increase the reserves associated with the much higher loan loss rates associated with AD&C loans. Simply put, he is asking the tax payers to bear equity risk of banks and developers.
  
  
• The Federal Housing Administration to help increase competition in the AD&C market by insuring the construction portion of these loans in order to attract new originators such as mortgage banking companies. “As in the case of the end-loan mortgage market, FHA could be a crucial stabilizing force in AD&C lending in turbulent times such as these,” said Mitchell. Looking to add to the basket of implicit government guarantees. The developer and bank should assess these risks up front. He wants to create a securitization mechanism for construction loans. Securitizations ultimately depend on cash flow for repayment, and not project completion and resale. Looking for Wall Street to be collateral lenders made possible by Uncle Sam's mitigation of repayment risk through an implicit guarantee that would make securitiaztion possible.
  
  
• Wall Street specialists to develop a prototype private security instrument for AD&C loans. In particular, changes to tax provisions relating to Real Estate Mortgage Investment Conduits and Taxable Mortgage Pools could be helpful in securitizing construction loans. Wall Street doesn't go to Washington when it wants to develop new products. Again, security instruments are repaid from cash flow, not resale. Wants third parties to assume risks that builders arguably cannot quantify themselves. If the builders and banks are incapable of quantifying and valuing this risk (as they are now), then the he wants Washington to legislate a better fool theory.
  
  
• Banking regulators to take a balanced approach when evaluating bank lending, especially in regard to AD&C loans. “Small businesses, including small builders, are vital to the economy, and arbitrary or unreasonable regulatory restrictions would only serve to harm many builders, and potentially, many banks,” said Mitchell. “It would be ironic and tragic to have the positive work of the Fed undone by bank regulators taking a totally different vision and approach when it comes to lending matters.” Lambast the Activist Judges if you don't agree with their ruling and seek to throw them out. The regulators are concerned with individual bank and aggregate banking system solvency. The Fed is concerned with monetary policy and keeping markets liquid. These objectives are not necessarily counter to each other.

SoCal homebuilders averaging one sale per month

Thanks to Regional Sales Director Greg Doyle at new home data provider Hanley Wood Market Intelligence, I've got some great stats to share for the first two months of 2008 versus the same time of 2007 as well as the last 12-month period for Southern California. Greg, who comes to Hanley Wood with a considerable background in homebuilding and analysis, oversees the counties of Los Angeles, Ventura and Kern, and can be reached at 310-791-6157 x 201 or gdoyle@hanleywood.com.

For January and February of 2008, net sales fell by over 60% from last year to under 3,000 homes, although single-story condos performed worse (-68%) than townhomes (-53%) and single-family homes (-59%).

One big reason for the fall? Cancellation rates, which spiked up to 20% versus 12% last year. Consequently, average sales per project now average just 1.01 per month versus 2.58 a year ago (hence the industry layoffs).

Median asking prices fell by 13% from a year ago to $421,990 versus $485,900, although condo prices actually rose by nearly 5%; townhome/duplex prices plummeted by 26% and single-family asking prices are down by 15% from the first two months of last year.

Declines in the median asking price per square foot closely tracked total prices except for condos, which fell by less than 1% to $399 versus over 17% to $204 for all sectors combined.

Although the number of unsold new homes under construction has fallen by 20% from a year ago, as homes are finished up they become known as "standing inventory," and that category has risen by nearly 66% from a year ago, with standing townhomes/duplexes up by nearly 133%.

Want to see the entire Summary Statistics report for Southern California? Visit the reSOURCES section of the MetroIntelligence website (free registration required).

Want to know more about the data that Hanley Wood collects? Contact Greg Doyle for Los Angeles/Ventura/Kern, Catherine La Femina for San Diego/Orange County or Kathryn Boyce for Northern California. You can find all contact numbers for the various offices here.

Credit crunch increasingly impacting homebuilders

Not surprisingly, loans for builders to purchase land or fund land development and home construction is also being impacted by the general credit crunch. From a story in the Nation's Building News:

The mortgage credit crunch has spilled over into land acquisition, land development and home construction (AD&C) lending, increasing the challenges faced by builders in the current housing downturn, NAHB told the Congress last week...

Residential AD&C loans are used to purchase land; develop lots; build a project’s infrastructure such as streets, curbs, sidewalks, lighting, and sewer and utility connections; and construct homes.

Presently, funding for viable residential development and construction projects has been severely limited or blocked entirely at federally insured depository institutions, which are the sole source of housing production credit for the small businesses that comprise most of the home building industry, Mitchell told lawmakers.

“The current financing quagmire for home builders vividly illustrates the importance of developing additional sources of AD&C credit,” said Mitchell. “Furthermore, there is no secondary market for residential AD&C loans where community banks and thrifts could turn to help manage their balance sheets and obtain liquidity for additional lending.”

He noted that a viable secondary market for AD&C loans would directly benefit builders and lenders by transferring risk away from lenders; increasing the availability of funds so that projects could be more reliably completed; and mitigating the devastating impact of equity calls on builders, or transfers of partially completed projects to banks under capital and/or regulatory pressure.

To broaden sources of AD&C credit, Mitchell called for:

• Fannie Mae to ramp up activity in its AD&C loan purchase program and for Freddie Mac to create a similar program.
  
  
• Federal Home Loan Banks to improve AD&C liquidity by accepting housing production loans as collateral for the secured advances they make to member institutions.
  
  
• The Federal Housing Administration to help increase competition in the AD&C market by insuring the construction portion of these loans in order to attract new originators such as mortgage banking companies. “As in the case of the end-loan mortgage market, FHA could be a crucial stabilizing force in AD&C lending in turbulent times such as these,” said Mitchell.
  
  
• Wall Street specialists to develop a prototype private security instrument for AD&C loans. In particular, changes to tax provisions relating to Real Estate Mortgage Investment Conduits and Taxable Mortgage Pools could be helpful in securitizing construction loans.
  
  
• Banking regulators to take a balanced approach when evaluating bank lending, especially in regard to AD&C loans. “Small businesses, including small builders, are vital to the economy, and arbitrary or unreasonable regulatory restrictions would only serve to harm many builders, and potentially, many banks,” said Mitchell. “It would be ironic and tragic to have the positive work of the Fed undone by bank regulators taking a totally different vision and approach when it comes to lending matters.”

Collateral damage from unfinished new home projects

When I was recently asked by the blog L.A. Land to defend the temporary change in the tax law to allow builders to recapture taxes paid in the boom years to help them weather the bust, I did so partly to gauge the sentiments of the blog's readers. The results? A big PR headache for builders, as the mail ran 40:1 against any type of bailout.

But one of the reasons I defended the 'bailout' was because when a builder goes bust, it's not just the executives and employees who are punished -- it's also the vast army of subs and suppliers, not to mention homebuyers who were buying into what they thought would be a new -- and finished -- community. While the anti-bailout folks would casually dismiss this as Rumsfeldian 'collateral damage,' I think it's a bit more complicated than people either realize or want to know. From an MSNBC story:

As America’s housing market has foundered, homeowners who bought into newly rising projects at just the wrong time have found themselves marooned in stalled, abandoned or largely unoccupied developments with little place to turn, placing a strain on them and municipalities forced to pick up the pieces.

Experts say it’s one of the least examined aspects of the housing downturn, and one that has struck many parts of the country, from areas like Las Vegas, which experienced rampant speculation and overbuilding, to cities where construction was more restrained such as the Jersey Shore and Philadelphia...

One third of over 200 cities surveyed have seen an increase in abandoned or vacant properties in their communities as well as other forms of blight, according to a report released last month by the National League of Cities in Washington.

Nearly 60 percent said lenders have not offered to help cities deal with the fallout from foreclosures and other problems in housing.

“In more cases, cities are picking up the slack by maintaining the homes, mowing the lawns and making sure that neighborhoods with abandoned housing are safe,” said Christiana McFarland, research manager at the league’s Center for Policy and Research. “It’s a strain on resources.”

More than 25,000 vacant and abandoned properties cost eight Ohio cities at least $63 million, as local governments deal with job losses and the foreclosure crisis, according to a February report commissioned by ReBuild Ohio, a coalition of local government, nonprofit and civic groups...

Like abandoned and foreclosed homes, unfinished houses and projects are not merely community nuisances. They also contribute to the glut of inventory dragging down the market...

When fewer than half of the units in a project have been sold, the developer usually retains control of the homeowners association, diminishing the clout of residents if they wish to get things done.

The next wave of mortgage problems: Option ARMS

I remember when I was first offered an Option ARM mortgage, and it almost seemed too good to be true, so I dug a little deeper, and discovered that I'd only end up paying $50 per more for a traditional, fully amortizing, 30-year fixed note at under 6%. Frankly, I think most brokers tended to vastly under-estimate the potential downsides of these loans to borrowers (i.e., negative amortization and a loan that re-sets when the rising loan balance gets to a certain level) because they earned more in commissions than they would from other programs. Despite the news of rising foreclosures, some analysts are warning that there will be a new wave of Option ARM re-sets around the corner. From an article in Slate:

The most common subprime loans were known as "2/28" in the industry: 30 years, including a two-year teaser rate before the interest rate rose. Now these loans have reset, and we're seeing the fallout.

But prime borrowers, too, got loans that started out with low payments; if you bought or refinanced your house in the last few years, it's not unlikely that you have one. With an "option ARM" loan you have the "option" (which most borrowers happily take) of paying less than the interest; the magic of "negative amortization." The loan grows until you hit a specified point—the exact point varies with the lender; with Countrywide, it'll come after about four and a half years—when the payment resets to close to twice where it was on Day 1.

Just two banks, Washington Mutual and Countrywide, wrote more than $300 billion worth of option ARMs in the three years from 2005 to 2007, concentrated in California. Others—IndyMac, Golden West (the creator of the option ARM, and now a part of Wachovia)—wrote many billions more. The really amazing thing is that the meltdown in California is already happening and virtually none of these loans have yet reset...

When those dominoes start falling next year, we may or may not have a subprime bailout plan, and the discussion will start about how to bail out this next tranche of borrowers. The bailout plans on the table now, such as the one put forward by Barney Frank (one of Congress' genuinely cogent financial minds), are reasonably based on the principle of bringing payments down to a point that homeowners can afford.

But where prices fall 40 percent to 60 percent, all that goes out the window. Why? Because in expensive locales like San Diego, tens of thousands of people with 100 percent loan-to-value mortgages and option ARMs are living in homes in which they have no equity and on which they owe a lot more than the house is worth...

If you're one of the "homedebtors" (a fantastic neologism coined by the anonymous blogger IrvineRenter on the Irvine Housing Blog) in this position, you might start thinking very seriously about just how attached you are to the wisteria vine snaking over the basketball hoop on your garage. That's what a lot of other California borrowers will be doing.

The luckiest of those are the ones who used option ARMs to buy a house. For them, walking away is easy: Their loans are "nonrecourse," and the lenders can't go after them for more than the value of the house. The choice is harder for those who used the loans to refinance. The quirks of real-estate law regarding refi loans make it possible (though not necessarily easy) for lenders to try to get back more money even after taking the house.

If you think, however, that should make lenders a lot happier, forget it. LoanSafe's Bedard says that even in this group, most of the option ARM borrowers he talks to—some of them living in $800,000 houses—are already considering walking away from their deeply depreciated homes as soon as the rates reset.

Bet on this: Whatever moral qualms are being urged on borrowers to keep them from walking away from their mortgages, they'll count for a lot less than the economic reality facing borrowers whose homes have fallen in value by half. Lenders had no reservations about selling borrowers loans with rising payments that would be poisonous in a rising market. Now it seems borrowers have no reservations about leaving those lenders with the risks they begged to take...

Of course, all those people stuck between rising mortgages and falling prices are free to follow Paulson's advice: Keep making payments on an outsized mortgage, and take a bullet for the greater economic good. Fortunately for them, and perhaps unfortunately for the economy, a lot of them will come to the realization that they just don't have to.

Sorry, but this housing bust isn't that special

According to a story in the Financial Post of Canada (hat tip: Patrick.net), a new report issued by Goldman Sachs concludes that the current housing bust is well in line with those experienced by other countries in the past and price declines are the consequence of a boom which disconnected from the fundamentals:

The United States may be suffering its worst housing bust since the Great Depression but by international standards it's not so special.

A new report by Goldman Sachs suggests the United States is going through a garden variety housing downturn that will involve a sharp slowing in overall economic growth and a sluggish recovery that equity markets will nevertheless sniff out well ahead of time...

The biggest decline in price terms was the Netherlands which posted a 50% decline in prices in the early 1980s, Finland at 49% and Japan at 44%. Together with slumps in Sweden and Spain, these are considered the "Big Five" crashes and were accompanied by banking crises, saw significant public bailouts, had fiscal costs ranging from 4% to 24% of GDP, and caused great economic damage.

On average, real house prices tended to fall about 30% and only bottomed after six years.

Interestingly, almost every country has had two busts including Canada, which also posted a 16 quarter 21% price decline in the early 1980s, the U.K., Germany and Japan.

As Goldman expects the United States to end up with a cumulative house price decline of 30% to 35% - prices are down about 11% so far - over the next 18 months, its slump looks comparable to the international experience...

There are some differences however.

Nominal short-term interest rates seem to have peaked before real house prices peaked and easing began about a quarter later than the experience of other OECD busts.

U.S. equity prices have also been atypical, rising even after the initial price bust and only acknowledging the damage a year after the bust began in late 2006.

In general, equity prices tended to peak nearly two years ahead of house prices. The trough in equity prices occurred on average around five quarters after the bust began, ahead of the trough in GDP and well before the housing bust ended.

Of course there is always a chance the current U.S. bust ends up making the Big Five the Big Six crashes but Goldman does not expect so - so far.

California foreclosures push prices down by 26%

Increasing rates of foreclosures in California helped push sales prices down by 26% in March from a year ago as housing bust continues to unravel. From an AP story:

A glut of foreclosed homes helped prompt a 26 percent plunge in California home prices in March, spotlighting a trend that experts said is likely to keep squeezing the struggling market for at least several more months.

More than 38 percent of California homes sold in March had been foreclosed at some point during the previous year, DataQuick Information Systems said in its survey released Thursday.

That helped drive the state's median home price down to $358,000, from $484,000 in March 2007, when the market peaked, DataQuick said.

In addition, the number of new and resale houses and condos sold last month plummeted 38.3 percent from a year earlier to 24,565...

Foreclosed homes in the state sell for about 15 percent less than non-foreclosed homes in the same neighborhoods, bringing all prices down, he said.

Riverside and San Bernardino counties — a rapidly growing region known as the Inland Empire — were particularly hard hit. Foreclosures accounted for 56 percent of the sales last month in Riverside County, where the median price of a home fell 27 percent to $306,250.

The nationwide foreclosure glut is expected to worsen in May and June as two- and three-year introductory interest rates expire on homes purchased in 2005 and 2006..

The foreclosure glut has hit California especially hard. The state ranks only behind Nevada — and just ahead of Florida, Arizona and Colorado — in the percentage of households in foreclosure, according to RealtyTrac's March rankings.

April 18th edition of Builder Bytes released

Looking for a great summary of the latest news impacting homebuilding and real estate? Then check out the latest edition of Builder Bytes, published by our friends at Peninsula Publishing. Some interesting links from the latest release:

Bush Names SBA Head Preston as Housing Secretary
Bloomberg.com
April 18 (Bloomberg) -- President George W. Bush today named Steven C. Preston secretary of U.S. Housing and Urban Development, replacing Alphonso Jackson, who resigned amid a federal criminal probe into contracts awarded by the agency.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aT7
CwhXMkAtw&refer=home

Tenn. housing agency creates rental property Web site
Nashville Business Journal
The Tennessee Housing Development Agency has created a free Web site for owners and managers of rental property to list housing.
http://www.bizjournals.com/nashville/stories/2008/04/14/daily1.html?q=housing%20news

Democrats unveil housing rescue plan
AP Associaes Press
WASHINGTON (AP) — Homeowners buckling under their mortgage payments would be allowed to refinance into more affordable government-backed loans under a proposal introduced by a House committee chairman Thursday.
http://ap.google.com/article/ALeqM5hTPEQZyeqPg80iIH0uvvPz6Lz3mgD903RM782

McCain seeks aid for some homeowners
Yahoo Newss
NEW YORK - Republican Sen. John McCain called for federal aid for well-meaning homeowners who can't pay their mortgages, an attempt to fend off criticism that he has been indifferent to the housing crisis and the market upheaval it has spawned.
http://news.yahoo.com/s/ap/20080410/ap_on_el_pr/mccain_economy

Beazer Homes launches eSmart green building initiative

Although some builders are partnering with local builder's associations to brand their green building efforts, Beazer Homes has announced their own, called eSmart. The first Top 10 builder to do so, it comes right on the heels of a national branding campaign announced by the NAHB in February at the Int'l Builder's Show. I'd certainly look for other large builders to follow suit. From the press release:

Beazer Homes USA, Inc. (NYSE: BZH), one of the nation’s top 10 homebuilders, today launched eSMART by Beazer Homes™, the first comprehensive program of its size designed to increase energy and water efficiency, and improve indoor air quality, for every home it builds.

The innovative program combines high-performance products from GE, Honeywell, Moen and others with industry-approved green building practices, and is designed to have an immediate impact on the home’s annual operating costs. The new eSMART features will be made available at no additional cost to buyers.

Going forward, every newly-started Beazer home will include products designed to increase energy and water efficiency, including Honeywell FocusPRO™ Programmable Thermostats, GE EnergySmart™ compact fluorescent light bulbs (CFLs), GE Energy Star® dishwashers and MOEN water-saving bathroom faucets and showerheads. Additionally, each new Beazer home will incorporate products designed to improve indoor air quality, including air filters with a higher minimum efficiency rating value (MERV), and carpets and paints that emit lower volatile organic compounds (VOCs)...

eSMART by Beazer Homes™ will provide homeowners immediate annual energy savings when compared with a similar home built without these features. For example, converting the typical 3-bedroom, 2½-bath Beazer home to EnergySmart™ CFLs will save homeowners approximately $331 in annual energy and replacement costs* (at 9.7 cents/kWh).

According to Callahan, Americans’ expectations about energy efficiency in new home construction are changing. Some 66 percent of consumers polled by Beazer Homes in March 2008 report being more conscious of the environment and the need to conserve natural resources today than they were five years ago. And nearly three-quarters (73 percent) said that builders need to do more to make an affordable "green" home available to the average American. Driving this point home, two-thirds of survey respondents ranked the importance of energy-saving features, such as programmable thermostats and CFLs, on par with higher-end kitchen features when making a new home purchase decision.

The perils of hiring a property manager

My apologies for the somewhat sparse blogging this week, but I've been very distracted with a small income property I have here in Southern California. Although one of my tenants and my management company have long been at odds, it wasn't until recently that I saw firsthand the enormous problems that can arise when you put your trust into a property management company that's interested in the fees but not so interested in earning it properly.

I only mention this because I think this is a timely story in a market in which people have (a) bought properties to rent out in order to build equity (over time, of course); and (b) are intending to sit on homes now under-water and rent them out until the market rebounds. In fact, hiring the wrong management company can cause financial and legal disasters, so look for a future post (or article) on what to look for when hiring such a company.

Housing Chronicles passes 5 million headline views, mostly via Reuters

Since signing up with the BlogBurst service in early February of this year, the Housing Chronicles blog has just passed the 5-million headline view mark. Most of these posts have been picked up by the Reuters.com website, followed by the Chicago Sun-Times, Fox Business News and the Wall Street Journal.

Through another service called Sphere, posts have also appeared on websites for The Washington Post, CNN.com as well as the Wall Street Journal. While it's difficult to predict the future of blogs, the success of these syndicators as well as the large investment in blog networks by groups like Forbes.com and InmanNews.com tells me that blogs are definitely becoming growing members of traditional online media.

No credit history but you pay your bills? No problem!

Despite the media largely covering those people who borrowed more than they could afford, there's another sub-set of people who have paid off mortgages and shun credit cards. Consequently, when they or others lacking a standard credit record apply for credit -- a huge group estimated at 70 million adults and also including immigrants, new college grads and the newly divorced or widowed -- they're often turned down because lenders can't estimate the risk.

Fortunately, 'alternative credit bureaus' such as Lexis Nexis and TransUnion, First American Credco and others are jumping to serve this market of the so-called "unbanked." From a story in Business Week:

Financial firms like PRBC, credit report processor First American Credco, data provider LexisNexis, and credit bureau TransUnion are scrambling to fill that void with new products and services that cater to this emerging niche, the so-called unbanked. Traditional credit bureaus usually collect data on credit cards, auto loans, and other types of consumer debt. By comparison, these alternative players gather payment information that isn't reported to the typical data collectors, including cell-phone bills and rent. Increasingly, banks are using that sort of information to help vet potential borrowers...

Collecting and verifying all that data is no easy task. Consumers often stuff rent receipts and electricity bills in an old shoe box or a filing cabinet—if they keep them at all. At PRBC, founded by Chairman Michael Nathans more than a decade ago, home buyers enter their payment histories on the Web site, providing the firm with bank-account data and faxing supporting documents or receipts. Then PRBC, which charges customers a $65 fee, hires an outside firm to do a background check and ensure that the information is legitimate. Rival LexisNexis, which is paid by lenders, pores through public documents to find phone records, auto deeds, and other pieces of a consumer's financial life.

Each company slices and dices the data differently. Some, like PRBC, LexisNexis, and eBureau dump the information into their own mathematical models to come up with a score, not unlike Fair Isaac's FICO, the traditional three-digit scoring system that rates customers on their credit-card and other debt histories. The goal is the same: to help lenders assess whether a customer will make good on a loan...

But while more banks are using the data provided by these alternative credit bureaus in their underwriting process, big lenders remain hesitant to adopt the new credit scores...

Some lenders take their cues from mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). While both use FICO scores in their underwriting, the government-sponsored firms won't use the alternative credit scores until there's more historical data on how well they predict whether consumers will make their loan payments. Critics argue there isn't a large enough sample size in some studies to know whether the data are statistically significant.

But as companies collect more data and mine the information for behavioral patterns, industry experts believe alternative scores will gain wider acceptance. LexisNexis has found that borrowers who stay at the same address for years pay back their loans more frequently than folks who move around. Another study from policy group PERC that looked at 7.5 million people showed that consumers who make timely utility payments tend to be low-risk borrowers.

New housing construction plummets as foreclosures rise

Continuing to pull back from offering new housing product, builders pulled the fewest annualized permits since early 1991 while housing starts fell by 12% during March. Meanwhile, foreclosure activity continues to rise, expected to reach a peak in the 3rd and 4th quarters of this year as ARM payments reset. From two stories (here and here) at MSNBC:

Home building projects started in March fell by 11.9 percent to a lower-than-expected annual rate while building permit activity, a sign of future construction plans, was off 5.8 percent, a government report on Wednesday said.

The Commerce Department said housing starts set an annual pace of 947,000 units in March, lower than the 1.02 million expected by economists. The February starts figure was revised upward to 1.075 million from the 1.065 million originally reported...

Building permits fell by 5.8 percent to an annual rate of 927,000, the slowest pace since a 916,000 rate set in April 1991. Economists polled by Reuters had forecast March permits at 970,000 after the 984,000 rate of February...

The onslaught of homes facing foreclosures has yet to ebb, a research report showed Tuesday, with bank repossessions skyrocketing last month as more troubled homeowners mailed in their keys and walked away.

And the worst isn’t over: The wave of adjustable-rate loans resetting to higher rates will crest in May and June. And that’s expected to push more homeowners into default and foreclosure in the third and fourth quarters of this year, according to RealtyTrac Inc. of Irvine, Calif...

The overall foreclosure rate is 5 percent higher than in February, which saw an unexpected month-to-month decline over January. March marked the 27th consecutive month of year-over-year increases in national foreclosure filings.

That meant one in every 538 households received a filing during the month. Forty-four percent were households that slipped into default for the first time and more than a fifth were homes banks took back...

between 750,000 and 1 million bank-owned properties will hit the market this year, or about a quarter of the homes up for sale. In some areas, these properties will continue to slow sales and depress prices further...

Nevada clocked in the worst foreclosure rate for the 15th straight month. Last month, one in every 139 households received a foreclosure-related notice, nearly four times the national rate. The number of properties with a filing increased 24 percent over February and 62 percent over the previous March.

California had the second-highest foreclosure rate in the country. One in every 204 California households received a foreclosure-related notice. The state had 64,711 properties facing foreclosure, the most of any state and more than double last year’s total.

In Florida, 30,254 homes reported at least one filing, down nearly 7 percent from February, but up 112 percent from the year before.

Rounding out the states with the highest foreclosure rates were Arizona, Colorado, Georgia, Ohio, Michigan, Massachusetts and Maryland.

Was the departing HUD chief to blame for the housing mess?

Recently I've been seeing more blame for the housing & mortgage crisis laid at the feet of the Bush Administration's relentless focus on increasing homeownership rates with a type of USSR-type attitude of "The ends justifies the means" that ignored potential consequences. According to a story at MSNBC, the primary culprit of that policy was departing HUD chief Alphonso Jackson:

In late 2006, as economists warned of an imminent housing market collapse, housing Secretary Alphonso Jackson repeatedly insisted that the mounting wave of mortgage failures was a short-term "correction."

He pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down. He issued a rule that was criticized by law enforcement authorities because it could increase the difficulty of detecting and proving mortgage fraud.

As Jackson leaves office this week, much of the attention on his tenure has been focused on investigations into whether his agency directed housing contracts to his friends and political allies. But critics say an equally significant legacy of his four years as the nation's top housing officer was gross inattention to the looming housing crisis...

During Jackson's years on the job, foreclosures for loans insured by HUD's Federal Housing Administration (FHA) have risen and default rates have hit a record high...

Jackson, who declined to be interviewed, will be remembered as a Cabinet secretary so committed to carrying out President Bush's goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis, according to interviews with more than 30 current and former HUD officials and housing experts, and a review of numerous HUD documents and audits...

In the policy arena, Jackson quickly made known his loyalty to Bush and his determination to help increase the number of U.S. homeowners by at least 5 million. Loans by FHA-approved lenders accounted for less than 10 percent of the overall market in the past five years, but its loan programs were supposed to be targeted to low- and moderate-income individuals, many of them first-time buyers.

In 2006, Jackson proposed plans to modernize the FHA lending process. Backed by the White House, his proposal would allow FHA lenders to offer loans with no down payment, eliminating the long-standing 3 percent minimum. Lenders also could increase the size of the loan to cover the median home price in high-cost areas. High-risk borrowers could qualify by agreeing to pay higher premiums.

Jackson said the goals were to encourage first-time home buyers and to help the FHA compete with the booming subprime market. In an online White House forum in 2007, he said the FHA "is undergoing a historic transformation to give homebuyers who do not qualify for prime financing a better alternative to high-cost, high-risk loan products."...

Members of Congress who oversee HUD said Jackson's emphasis on pushing homeownership -- without many brakes -- ignored the root of the mortgage crisis.

"Homeownership appears to be a bigger priority in the administration than affordability and foreclosure," Sen. Christopher S. Bond (R-Mo.) told Jackson at a recent hearing. He added: "I'll tell you quite frankly, I think the emphasis on homeownership helped to drive the foreclosure crisis we're now in. . . . All these wonderful ideas . . . didn't do them any good when we put them in housing they couldn't afford."...

Inside HUD, numerous staffers said, Jackson made clear that he believed overregulating and investigating mortgage lenders could harm the president's homeownership goals...

Enforcement seemed to be a low priority for HUD in both staffing and budget, according to agency observers. David Berenbaum, executive vice president at the National Community Reinvestment Coalition, an association working to prevent foreclosures and abusive lending, said HUD is supposed to be the government's lead enforcer of fair-lending laws. The laws prohibit financial discrimination and exploitation of minority borrowers, who took out a disproportionate share of the subprime loans. Berenbaum said HUD largely paid nonprofits to monitor compliance with fair-lending laws...

Jackson had insisted he would stay in office until the end of Bush's term. But last month, several Democratic senators who hold HUD's purse strings called for his resignation. He had refused to answer their questions about allegations that he was engaged in political favoritism and cronyism. A federal grand jury is investigating whether Jackson lied to Congress about his involvement in contracts and whether he steered millions of dollars in government work at the Virgin Islands and New Orleans housing authorities to his friends...

Sen. Patty Murray (D-Wash.), head of the Senate Appropriations subcommittee that oversees HUD, said March 21 that Jackson had become unfit to lead the agency.

"We are in the midst of a national housing crisis," she said. "The allegations of cronyism and favoritism against Secretary Jackson are a worsening distraction at HUD at a time when we must have a credible housing secretary that is beyond suspicion."

Sounds like a different version of the Katrina fiasco all over again.

Let's hope when people vote in November for President they'll consider more than just someone with whom they'd want to share a beer, because we've seen the consequences of that type of vacuous analysis over and over again -- disaster.

Apartment rents seemingly unrelated to housing prices

According to the source Rentomatics.com -- which pulled from its 8 million apartment listings -- rents for apartments varied greatly during 2007, rising in San Francisco but falling in Phoenix, thus proving that real estate is actually a lot more complicated than simple calculations involving incomes, prices and rents. In places like Phoenix, it wasn't an over-supply of apartments that hit median rents, it was an over-supply of new, single-family homes that compete with apartments for the same tenants. From an MSNBC story:

A curious thing happened during 2007 while the mortgage market was imploding: Median apartment rental prices in major cities shifted dramatically, dropping by up to nine percent in some markets — Phoenix — and rising as much as 14.6 percent in others — San Francisco — according to data released from Newton, Mass.-based Investment Instruments Corporation...

To calculate these prices, Investment Instruments culled data from among eight million entries in its Rentometer and Rentomatic rental listing directories, said Allison Atsiknoudas, Investment Instruments’ CEO. While prices for single-family homes and condos have declined or slowed between 2007 and 2008 in major markets, the rental market hasn’t necessarily followed suit...

ONE-YEAR CHANGE

Median rents for the first quarters of 2007 and 2008, with the percentage change in valued for 12 metro areas. Area 2007 2008 Change Atlanta $1,007 $986 -2.1% Austin $936 $907 -3.0% Boston $1,593 $1,645 3.3% Chicago $1,328 $1,355 2.0% Las Vegas $1,053 $1,056 0.2% Los Angeles $1,638 $1,699 3.8% Miami $1,411 $1,368 -3.0% New York $1,606 $1,751 9.0% Phoenix $1,035 $939 -9.3% San Francisco $1,579 $1,810 14.6% Seattle $1,098 $1,211 10.3% Washington, DC $1,608 $1,687 4.9% All metros $1,324 $1,368 3.3%

Source: Rentomatic.com

Atsiknoudas says that when rent prices move less than three percent (in either direction) per year, then a market is basically “stable.” Larger fluctuations — such as Phoenix’s nine percent drop— indicate instability or unusual circumstances. Atsiknoudas says that cities with the largest price hikes — New York, Seattle, and San Francisco — can attribute that to steady population growth driven by relocating job seekers. But that means renters, both new to town or long a part of it, are paying the price...

“There’s definitely no rental market growth here,” says Mark Forrester, a partner with Hendricks & Partners in Phoenix. “The effective rent has dropped, though the street prices haven’t changed.”

What he means by that, he says, is that landlords may advertise one price but what a tenant actually pays is often lower, especially if the landlord offers a “concession” such as one month free for those who sign a 12-month lease — a tactic that landlords didn’t use in 2007 but which is now “pretty common,” he says...

Forrester says that the rental market in Phoenix has been impacted not by an oversupply of apartment properties, but by an oversupply of single-family homes. The city can accommodate about 30,000 new homes per year, he said, but between 2005 and 2007 about 60,000 were built annually and many were acquired by investors to function as rentals or for quick resales. A local decline in home values means many of these homes are unable to sell. Faced with mortgage payments, the homes’ developers or owners then attempt to rent them as a way to cover costs, which creates a “shadow market” for rentals that competes with the regular apartment market, he says.

With vacancy high, deals are available on single-family homes...

Atsiknoudas says that, for the next six months anyway, she expects markets with stable pricing may continue to show price increases. Forrester says he thinks the market will begin repairing itself around 2009.

60% of those polled not looking for a home but still say a good time to buy

According to a poll commissioned by the AP & AOL Money & Finance, 60% of people polled said they won't be buying a new home within the next 2 years. A similar amount, however, declared that now is a good time to buy. More from this story at CNNMoney:

A growing majority say they won't buy a home anytime soon, the latest sign of increasing pessimism about the nation's housing crisis, a poll showed Monday.

In a vivid sketch of how the sputtering real estate market is causing distress throughout the country, the Associated Press-AOL Money & Finance poll found that more than a quarter of homeowners worry their home will lose value over the next two years.

Fully one in seven mortgage holders fear they won't be able to make their monthly payments on time over the next six months...

Sixty percent said they definitely won't buy a home in the next two years, up from 53% who said so in an AP-AOL poll in September 2006. At the same time, just 11% are certain or very likely to buy soon, down from 15% two years ago.

The growing reluctance to dip into the housing market seems to stem partly from worry that housing prices will continue falling -- good if you're buying a house but bad if you have to sell one...

The number envisioning falling prices in their area has grown to one in four, while four in 10 think prices will rise, a decrease from two years ago. Expectations for rising prices are highest in the South, with Westerners likeliest to predict they will drop.

Underscoring the public's unsettled feelings, the number saying local housing prices are about right has fallen to 35%. Half say homes are overpriced - especially in the Northeast - while those saying housing is underpriced have doubled to one in 10, particularly Midwesterners...

One in 10 have adjustable rate mortgages, half of the number who said so two years ago. These mortgages generally start at a low interest rate and are later adjusted to market conditions - which has often meant steep, unaffordable boosts that have forced many to refinance or even lose their homes...

The public anxiety is in reaction to an economy that is veering toward recession and losing jobs even as the housing market sputters badly. Foreclosures have soared to record highs, mortgage rates have increased, sales of existing and new homes have fallen and home values have dropped.

Gus Faucher, director of macroeconomics for Moody's Economy.com, a consulting firm, estimated that 9 million homeowners owe more on their home than it's worth. He said his company believes home sales are at or near bottom and home values will continue to fall until early next year.

Even so, he said, many people bought their homes before the run-up in values that started around 2001 and remain in good shape...

--The biggest worriers are those expecting to buy soon. Of that group 43% frets that their home's value will drop in the next two years, compared with 25% of those not expecting to buy shortly.

--59% think now is a good time to buy.

--Half think this is a very tough time for first-time buyers, an increase from two years ago.

--Nearly two-thirds think it's harder for first-home buyers than it was five years ago.

S&P warns of risks to Fannie and Freddie

S&P is issuing a warning that financial pressure on GSEs Fannie Mae and Freddie Mac could require a government bailout far larger than the $29 billion in mortgage assets assumed by the Federal Reserve from Bear Stearns. From a CNNMoney article:

A deep recession could force mortgage-finance titans Fannie Mae and Freddie Mac to require a federal bailout large enough to hurt the U.S. government's top-grade credit rating, Standard & Poor's warned Monday...

The financial stress Fannie (FNM) and Freddie (FRE, Fortune 500) face poses a far larger risk to the government than the $29 billion in mortgage assets taken on by the Federal Reserve to avoid the bankruptcy of investment bank Bear Stearns Cos, the credit rating agency said.

Still, S&P analysts see a bailout of Fannie and Freddie as unlikely and point out that U.S. officials "are focused on avoiding a deep and prolonged recession."...

While the government isn't obligated to assist Fannie or Freddie in a financial emergency, many on Wall Street believe it would bail them out if there is a collapse. The idea that they are "too big to fail" enables the two companies to borrow relatively cheaply by issuing top-rated securities backed by mortgages.

Aiding Fannie and Freddie, plus the government agencies that back home loans and student loans could add up to 10% of gross domestic product, the total value of all goods and services produced within the United States, S&P said...

Encouraged by regulators and politicians intent on keeping more homeowners from defaulting, Fannie Mae and its smaller government-sponsored sibling Freddie Mac have expanded their roles in the stricken housing market. The companies together must provide as much as $200 billion in new funding for home loans in exchange for getting their risk cash cushions reduced. The government requires them to keep a certain amount on reserve to guard against risk.

Over the past year, Fannie and Freddie's share of new mortgages has been soaring, as Wall Street investors have backed away from all but the safest mortgage-related securities. Their market share of new mortgages rose from 46% in the second quarter of 2007 to 80% in January, S&P said.

Who's your DEVELOPMENT?

In his new book “Who’s Your City?” author Richard Florida -- who brought us the 2002 national best-seller “The Rise of the Creative Class” -- argues that not only is the choice of where to live the most important decision someone can make, but those who match their interests and personalities to specific cities tend to find the best-matched careers, spouses and friends. Frankly, I think this concept should be marketing catnip for homebuilders, allowing them to leverage these ideas (and roadmap included in the book), arm themselves with increasingly sophisticated demographic data and decide, both for their companies and their buyers, exactly ‘Who’s Your Development?’

I had the chance to talk with Dr. Florida when reviewing his latest book for the Los Angeles Times, and a major theme he discusses is the changing nature of what people want from a community. In many urban areas, for example, time has steadily been on the rise --even more than money -- as the primary resource for people to live happy and fulfilling lives. Explains Florida, “It’s not about the price of oil, it’s about the time cost of commuting, and meeting people, and leveraging those networks within solid neighborhoods close to employment centers.”

Although “Who’s Your City?” focuses its research at the citywide level, Florida and his team provide specific examples of how different neighborhoods have distinct personalities. For example, a slowly revitalizing Koreatown in Los Angeles might be an ‘urban mosaic’ characterized by ethnic restaurants and relatively cheap rents, whereas Tyson’s Corner, Virgina or California’s Silicon Valley would be two of the country’s best-known ‘edge cities’ in which single-family homes with larger-than-average lots mix with plenty of local employment and shopping opportunities.

But what if you want to identity an area’s personality to a more specific level – say a specific neighborhood that’s defined not just by existing residents, but also those who might be attracted to a future vision? That’s when someone like Jonathan Smoke and two of his companies, BlueSmoke and HousingIntelligence.com, can assist. Smoke, as a former SVP for corporate strategy and innovation at Atlanta-based Beazer Homes (and before that their Chief Information Officer), has tapped these experiences to create a national resource of data and analysis oriented towards the supply side of the building industry.

In fact, we were so impressed with Smoke’s work at Housing Intelligence that MetroIntelligence has added his company to our increasing roster of strategic alliances (including the regional economics consulting firm Beacon Economics) to provide the building industry with a comprehensive menu of research options backed by experience in the trenches as well as the academic credentials of several PhD economists.

With the company motto “Don’t Just Guess,” Smoke and his team have partnered with Claritas (a division of Nielsen) to create a proprietary system to estimate demand models he says are far more accurate than what most builders and consultants currently use. Instead of reviewing what he calls ‘demonstrated demand’ models -- defined as homes already sold and review past performances instead of those of the present or future – his company focuses on current and projected demographics, preferences and lifestyles and translates that information into estimated demand for any variety of product types, price range or geographic areas.

Moreover, instead of attempting to cram these households into the existing limited array of ‘entry-level’ to ‘luxury’ consumer segments, Smoke has developed a set of eight categories that focus more on personality traits than just incomes alone. Consequently, he says his segments are more adaptable to markets that can change over time for a variety of reasons, and are especially useful to assist those developments failing to meet their projected absorption models.

Explains Smoke, “It’s important for the best use of dirt, for designing product, for marketing and promotional purposes, and be able to adjust as market conditions change due to a new competitor or any host of externalities.”

Want to identify the ‘who’ of your proposed or existing developments? Contact us or visit our website for more details on Jonathan Smoke’s consumer groups and how he’s part of a national trend to redefine consumer segmentation for the building industry.

L.A. Times book review of "Who's Your City?"

My book review of Richard Florida's latest work "Who's Your City? How the Creative Economy is Making Where to Live the Most Important Decision of Your Life" is currently online at the L.A. Times website and also available in print in the Sunday, April 13th edition.

Florida, who rose to prominence with his best-seller "The Rise of the Creative Class," translates his ideas on how cities attract the types of open-minded innovators who start companies and develop unique communities into a roadmap for individuals to decide whether they should stay in place, move to a different neighborhood or even an entirely different region of the U.S. -- or world.

Although Florida doesn't currently have any clients who are developers or homebuilders, we're hoping at MetroIntelligence to find a way to work with his company, The Creative Class Group, to bring his ideas and data to our own clients so they can develop communities that are as distinct as the buyers to whom they market. More on that later.

Looking for a quick and easy way to determine your own priorities in a neighborhood? Then be sure to check out www.whosyourcity.com.

Jury says buyers responsible for real estate decisions

A couple of months ago there was an important lawsuit by the buyers of a home in Carlsbad who insisted that their real estate agent didn't tell them the home they bought was overpriced. The case went to trial, with the jury deliberating for only two hours before deciding that, like many other things, buying real estate is truly caveat emptor, or 'buyer beware.' From a North County Times story as noted on the L.A. Land blog:

It took a jury less than two hours Thursday afternoon to unanimously clear a real estate agent accused of failing in his duties to a couple he helped buy a tony Carlsbad home...

After about a week of testimony at the Vista courthouse, the panel of 10 women and two men rejected Marty and Vernon Ummels' arguments that they overpaid $150,000 for their home near the Four Seasons Resort Aviara.

The Ummels say that the $1.2 million price tag for the upscale coastal Carlsbad home they bought in 2005 could not be justified, especially when other houses on the street were selling for much less ---- vital information the couple said they didn't get until after the close of escrow.

The Ummels said Little had failed them and thus owed them the amount they felt they overspent.

But the jury found that Little had not breeched his responsibility to the couple as their agent, nor had he been negligent.

"Mr. Little did what he was supposed to do," jury forewoman Wendi Brick said. "The bottom line is that you (as a buyer) are responsible when you sign a contract and purchase something."

IMF warns against possible global recession

Declaring that the housing & mortgage crisis has mushroomed into the worst global financial shock since the Great Depression, the Int'l Monetary Fund is now estimating the chance of a worldwide recession at 25% and hints that governments may have no choice but to bailout banks and borrowers before the situation is solved. From a story at The Guardian found through Patrick.net:

The US mortgage crisis has spiralled into "the largest financial shock since the Great Depression" and there is a one-in-four chance that it will cause a full-blown global recession, the International Monetary Fund warned yesterday.

As finance ministers and central bankers arrived in Washington to discuss ways of tackling the crisis, the IMF warned, in its twice-yearly World Economic Outlook, that governments might be forced to step in with more public bailouts of troubled banks and cash-strapped homeowners before the crisis was over.

"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system," it said...

With the US sliding into such a recession, there is mounting pessimism about the ability of the rest of the world to escape unscathed. The IMF shaved its forecast for growth in the global economy by half a percentage point, to 3.7% for this year, and by 0.6% - to 3.8% - for 2009.

Although the Washington-based body expects most emerging economies to continue to grow strongly over the next two years, it admits that efforts to tackle the knock-on effects of the credit crunch could be hampered by fast-growing commodity prices. "Inflation has picked up around the globe, mainly reflecting sharp increases in food and energy prices," it said....

However, the IMF said more taxpayers' cash may still need to be spent to unblock the markets. "Given the serious risks coming from sustained financial market dislocations, the recent legislation to provide additional fiscal support for an economy under stress is fully justified, and room may need to be found for some additional support for housing and financial markets."

Simon Johnson, IMF research director, presenting the report in Washington, described such bailouts as an essential "third line of defence", after interest rate and tax cuts, for governments struggling to prevent a deep recession.

He said the main risk to the global economy over the next year was the emergence of a vicious circle, as house prices continued to fall, dealing a fresh blow to the world's banks, and creating a damaging feedback loop...

The IMF's downbeat analysis creates a gloomy backdrop for policymakers arriving in Washington to discuss ways of easing the credit squeeze. Such is the concern about problems in the financial markets that a range of radical options is on the table. These include greater disclosure of losses on sub-prime assets by banks; firmer regulation of credit-rating agencies, and - more controversially - plans for taking some of the risky mortgage-backed assets at the heart of the crisis on to government balance sheets.

A more balanced view on the housing mess

Yesterday I was asked to provide a guest post on the LA Times blog "LA Land" to offer an opposing view to a recent article by Daniel Gross in Slate magazine lambasting the proposed tax break for homebuilders. My point was that it didn't seem fair to punish an entire industry of nearly 5 million workers for the actions of a much more limited number of executives, sales people and lenders who contributed to the housing bubble and, ultimately, the bust.

That post was followed by over 30 comments, most of which blasted me for being naive, stupid, wrong, and all other sorts of things one would expect from a controversial subject (and many of which I've shared today in previous posts on this blog). With that said, however, my own personal view is a bit more balanced, and I submitted that opinion earlier today as a comment to my original post. I've re-printed that comment below:

Hey Peter:

Thanks again for the chance to offer an opposing view yesterday to that of Daniel Gross regarding the proposed tax break for builders (which passed in the Senate but looks unlikely to pass in the House).

You asked me to provide a view in opposition to that of Mr. Gross, and that's exactly what I did, using the same types of defenses I've heard and read from homebuilders and homebuilding association. Plus, I did think that by focusing exclusively on the largest public builders he wasn't necessarily including smaller builders as well as the army of suppliers and subcontractors that do most of the actual building.

I've been keeping a close tab on the comments, and have been re-posting some of the more impressive ones on my own Housing Chronicles blog -- if I'm going to be raked over the coals it's much better coming from those who know how do it!

You've definitely got a smart and well-educated audience (more so than on some other housing blogs I read), with the best comments coming from 'baruza,' 'JohnnyB,' '150 Multiple Choice Questions,' 'arroyo grande' and 'LA,' with the funniest by far coming from 'bottom line.' And whoever 'Brian' is, you sounded so much like my banker friend Brian that I thought it was his post (it wasn't), but what a great comment!

Ok, here's what I REALLY think from a more balanced perspective: from a PR standpoint, many builders have been their own worst enemies, and if they want to re-earn the trust of the general public it simply can't be 'business as usual' anymore.

Firstly, if they want taxpayers to help them through this cash crunch, there should be some strings attached, namely stop avoiding subcontractors and suppliers to whom you owe money and don't insult them with offers of 25 cents on the dollar (which is something I heard last night after my original post).

Secondly, you'll probably have to disband these in-house mortgage operations that in many instances forced buyers to assume loans that weren't competitive so they could grab the incentives being offered. That trust is now lost and unlikely to be regained anytime soon.

Incentives should be offered on their own and not tied to anything else. Beazer Homes, which got into a lot of trouble with their in-house mortgage arm, now refers loans to Countrywide and, according to a design consultant I met the other night, says they don't attach incentives to a Countrywide loan.

Thirdly, they're going to have to provide far greater transparency (and education) throughout the entire sales process, including firing lazy/greedy/uninformed sales agents who were simple order takers during the boom. I can't tell you how frustrated I'd be listening to a sales agent attempt to explain mortgage terms to potential buyers without telling the full story.

Fourthly, we really need to license mortgage agents and brokers, force them to act as fiduciary agents for their borrowers and provide more funds to regulators so they have the muscle to pursue those who deliberately steer clients into the wrong types of loans (such as Option ARMs) because they pay a higher commission.

Fifthly, we've got to recognize that one reason this boom got out of hand was the Bush Administration's 'hands-off' policy towards regulating the housing and mortgage markets; by blindly chasing higher ownership rates they lost sight of just HOW that was happening (i.e., speculators, sub-prime mortgages, fraud, etc.). The fact is we may need some more regulation for this industry and builders may have to accept that if they expect any special treatment by the taxpayers.

Finally, one commentator said that it doesn't matter what the Fed or federal government will do, since this problem is simply too large to contain, and that may be true. The best we can hope for is a somewhat orderly realignment of housing prices against incomes and associated rents, and strict penalties for those who perpetrated fraud on sales contracts and loan documents.

There is still a lot of pain ahead, but for those who keep informed and stay on top of trends, there will be good deals now only now, but certainly in the future. It just depends on your individual circumstances.

Comments from my post at LALand, Part II

More comments from my guest blog post yesterday at LALand:

------------------------------------------------

I thought this one definitely summed it up -

Peter,
After reading the comments all that I could think of was lions, very hungry lions and Patrick Duffy. Did you warn him of what was to come. Will he read the comments.
Thanks for offering the lions a meal. They enjoyed it.

Posted by: dilbert dogbert | April 11, 2008 at 07:28 AM

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On your first point, you are being naive. Many public builders had divisions that were writing mortgages (Centex, and Lennar, for example). If they did not thoroughly investigate the lendees, that is really their problem and they have no excuse.

Also, excuse me if I have no sympathy for the builders on another point - They TURNED THEIR BACK ON THE AMERICAN CONSTRUCTION WORKER. I have spoken to many people who used to make a nice living working construction for houses. Those jobs are now of the 7 dollar an hour variety and are performed nearly exclusively by illegal immigrant labor. Now these American workers don't have the jobs they were skilled at, and the American government gets no income tax from these under-the-table laborers. Oh, and on top of that, all of the board members paid themselves handsomely as well as took generous amounts of stock options. If these companies need help, then they should have a private offering and the well paid board members can reinvest in their dreary business.

Posted by: tony | April 10, 2008 at 06:10 PM

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"It’s because of the issues with the credit market that
nonspeculators can’t sell their homes either."

Patrick Duffy makes the argument for "good" vs "bad" builders.
Dumb pity play. It doesn't matter what their motives were,
they were all chasing the inflated price of the market making
higher and higher profits per square foot of building. Now they
simply need to sell the unsold square footage in its traditional
profit range.

The price of building a home between
2000 and 2007 didn't increase much more the
general inflation. If builders chased the price of
land (which many did) then they were taking risks
that weren't prudent. They can now sell for the
actual cost per sq.foot and the actual value of land
and accept no profit or even a loss. Why is this so
difficult to understand? People lose money in
investments, everyday. This is exactly the same
scenario, just on a bigger scale. I say, let all markets
correct and only pour on Fed liquid to put out resulting
fires, not threatened ones. And when the trouble
actually hits, bailout those affected who had no part in
this RE run-up. Let the speculators get on the back
of the line.

Posted by: firesale | April 10, 2008 at 07:43 PM

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We should bail out everybody who has ever made a bad decision, and make it retroactive to, say, the 1960s when a lot of bad decisions were made. The first thing I want is reparations for the useless humanities degree I earned. And I'd like to be bailed out for the countless bad investment decisions I've made over the past 20 years. I mean, why did I ever sell Intel, Dell and Microsoft back when they were in single digits? Why was I forced to do that? It was economic forces beyond my control that brought me to my sorry state. Oh, yeah, I'd like a bailout for yesterday's unfortunate decision to order the chicken marsala instead of the Kobe beef.

Posted by: Zeon | April 11, 2008 at 12:02 PM

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ah, ah, ah BULLSH!T!!!!!!! Duffy calls out all the anti-bailout guys such as Gross for the need to "shoot (sic) from the brain rather than the hip" and states these comments are lacking in "rational discourse". This guy is so arrogant it makes me choke. Who is irrational?

Greed, ignorance, stupidity, any way you paint it, it is still not the obligation of the taxpayer to make up for any one of those pitfalls of private commerce.

And tell me again, how LTCM, the S&L bailout or the airlines are analogous to home builders? How is the failure of the weakest home builders going to create a cascade effect into a downward spiral for the US economy? I don't think so. These home builders can't build and sell any more homes regardless of a bailout.

All this would be doing is moving losses from private industry to ME! I got enough of my own losses, they can keep theirs.

Posted by: pathetic | April 11, 2008 at 12:32 PM

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Funny... I don't remember the home builders paying extra taxes when the sales pace and profits were breaking all previous records. If we're going to give them a tax break now, that should come with a caveat that we get to tax the hell out of them they start feeding a bubble and destabilizing the entire economy. It's only fair.

Posted by: NoWayinLA | April 11, 2008 at 02:40 PM

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Mr Duffy, to use a basketball term, you need to come strong in this house. That was some weak "stuff" you brought in here and predictably you are getting it swatted back in your face.

Posted by: Digitalian | April 11, 2008 at 09:49 AM

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I did, however, get one comment in support:

"It’s because of the issues with the credit market that nonspeculators can’t sell their homes either..." Patrick is right about this. The market stopped dead in August because lenders stopped making loans. Now that lending has picked up somewhat, so has sales activity.

There is a simple reason why builders build homes: consumer demand. Whether those consumers are flippers or not, and even if the reasons for the demand weren't sound, there is no denying that there has been a huge demand, fed by easy credit, that has lead to lots of new homes.

Posted by: sfvrealestate | April 11, 2008 at 11:36 AM

Senate housing bill passes but expect the House version to be different

Although the Senate passed a bill yesterday to help prop up the housing market, experts say to expect significant changes in the House version still being debated. Whereas the Senate bill focuses more on builders and lenders but not homeowners (i.e., supply side), the House version takes an opposite tack. From a AP via MSNBC story:

The Senate on Thursday passed a bipartisan package of tax breaks and other steps designed to help businesses and homeowners weather the housing crisis.

The measure passed by an impressive 84-12 vote, but even its supporters acknowledge it’s tilted too much in favor of businesses such as home builders and does little to help borrowers at risk of losing their homes.

The plan combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes.

The measure, titled the Foreclosure Prevention Act, will be significantly redrawn by House critics who say it favors businesses such as home builders instead of borrowers...

Democrats failed to win approval of ideas such as giving people threatened with losing their homes the right to seek more favorable loan terms from their lenders in bankruptcy courts. At the same time, a proposal to have the government back up refinanced loans for people facing foreclosure has yet to win GOP support.

The White House opposes the plan but has not issued an explicit veto threat. It says parts of the legislation would make the problem worse by depressing some home values, and that the measure inappropriately uses taxpayer money to bail out lenders saddled with foreclosed houses.

The House is likely to reject key portions of the Senate measure, including $25 billion over three years in tax breaks for money-losing businesses such as home builders. A plan adopted Wednesday by a key House panel dropped that idea as well as the tax credit for purchasers of foreclosed homes...

The $25 billion tax break the plan offers to homebuilders and other businesses absorbing heavy losses and the energy tax package were both dropped from an economic rescue plan enacted in February. Critics of those proposals said they were overly expensive and would not stimulate the economy.

But deepening public worries about the housing crisis appear to have emboldened lawmakers to swell the $9 trillion deficit to pay for the measures.

The $7,000 tax credit for the purchase of foreclosed homes, opponents argue, would unfairly reward purchases that would have happened anyway while possibly devaluing other homes. It also could give banks an incentive to foreclose on homes by subsidizing purchases of such properties...

A House bill takes a far different tack, steering tax breaks toward first-time home-buyers and investors in low-income rental housing. The measure is likely to be paired with a broader housing rescue package being drafted by Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, that would have the FHA step in to back $300 billion in refinanced loans for 1 million or more homeowners who otherwise might face foreclosure.

Under a similar plan by Dodd, the FHA would insure up to $400 billion in loans.

The Bush administration countered those plans Wednesday with its own, far narrower, proposal. It would expand an existing FHA program to allow more homeowners who are facing large rate hikes to refinance into more affordable government-insured loans.

Comments from my post at LALand, Part I

Yesterday I was asked to provide a guest post on the LA Times blog "LA Land" to offer an opposing view to a recent article by Daniel Gross in Slate magazine lambasting the proposed tax break for homebuilders. My point was that it didn't seem fair to punish an entire industry of nearly 5 million workers for the actions of a much more limited number of executives, sales people and lenders who contributed to the housing bubble and, ultimately, the bust. I have a brother who's a subcontractor to builders, and he, like many others, wouldn't necessarily have the staying power to wait for new builders to emerge should a large portion of an entire industry go bankrupt.

From the 17 comments currently posted, my post was certainly controversial, with almost all of them calling me everything from "naive" to "idiotic." But these aren't nut cases spouting out emotional rhetoric -- many comments are very well written and take me to task with a number of valid points. One thing is clear -- builders have a huge PR debacle on their hands that will follow them for years, and if they hope to regain the trust of the public they're simply going to have to change the way they do business. Because when your own suppliers and subs hate you, it's time for something different.

Some of the best comments so far:

1. Even if they weren't greedy, that's not the question. Firms that make bad business decisions aren't entitled to ex post protection because they had good motives.

2. See 1

3. This is the crux of his argument and really all it amounts to is two wrongs make a right. He offers no evidence for why "the risks to the economy outweigh those clucking on about 'moral hazards.'" It's simply assumed: circular argument at its worst. All large homebuilders do is reduce the building cost for new homes. They employ very few people directly, and they don't generate many jobs. The people they contract with to actually do the building will be out of work with or without these tax breaks because there is simply an oversupply and lack of demand for their services. If these companies go bankrupt, when demand for new construction homes returns, people would simply have to pay a slightly greater price for them, or in the very unlikely event demand were to return anytime soon to 2002-2005 levels new companies of exactly the same sort could be formed--and hopefully the new ones could do a better job managing the risks of the business. Same goes for the everyman worker he is disengenously pitching as the beneficiary here. Times were good for many people the last few years and now they're not. If they didn't spend recklessly they should have been able to save some money to get through times. If anything, this is a much better argument for extending unemployment benefits to all, than just giving a break to home builders.

4. Yes, we all feel for these people but see 1 again and see 4. Industries go belly up from lack of demand. It happens.

5. In theory yes, Congress could extend it to any company, but they're not, and why is that? Could it be because of the concentrated interest of the builders lobby, disproportionate to their size and importance in the overall economy? Many people have gotten fired this year, and would surely love to get a break against past income from the years when they had a job, but only homebuilders are getting it. Why? Because they have a lobby.

It's good to have an open exchanged on this, but it's still total dreck anyway you slice it.

Posted by: baruza | April 10, 2008 at 05:43 PM

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"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate”

Not all... They know who they are.

"Secondly… It’s because of the issues with the credit market that nonspeculators can’t sell their homes either…”

You’re cartin’ before da horsie on this one. They can’t sell because the homes are WAY overpriced and folks are finally wising up. You should be telling the banks to be transparent, keep proper books and deal with this “issue” asap.

"Thirdly… Remember… $15 billion…? Or the $3.6… the $4.5… the $1.5…? Although there was plenty of outrage accompanying the $124-billion bailout of S&Ls during 1986-1995, the potential consequences of doing nothing were far more serious.”

All those examples except the last were chump change (is Keating over there?). Oh… those “potential consequences” again. The interconnected, lattice work of counter party interests… pull out this string and the tapestry unwinds to a pile of worthless thread. Right. Seems a little thinning of the herd would be a good thing at this point. Way, way, way too many businesses operating as speculative investment banks, overleveraging to the absurd and making dishonest profits off of hard working citizens.

"Fourthly, ...Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction…”

Most of these immigrant construction workers hired during the bubble replaced multi-generations of contractors and hard working folks that like working with their hands and building solid houses for their fellow Americans… young folks working summer construction jobs to make it through college, etc. Point is, there’s plenty of empathy to go around in this mess… but, that doesn’t mean my tax dollars should prop up this current crop. However you want to slice and dice it, all builders combined did create a glut of homes on the market, they all charged too much, they hired cheap labor at American’s expense and they all made significant profits for many years.

"Finally, this tax break oriented towards home builders is in theory available to any company facing current financial losses after years of profits… giving innocent companies… some much-needed breathing room to stick around for the eventual rebound.”

So, us millions of “innocent” individuals/families currently priced out of this over-priced housing market don’t finally deserve some “breathing room” in the form of lower home prices. You want to support bailouts that payout tax dollars to the wealthy few and as part of a larger bailout that seeks to prop up these high home prices as long as possible.

Sounds like typical shill-speak.

Posted by: JohnnyB | April 10, 2008 at 06:41 PM

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Wow, Duffy sounds just like a Realtor, which means he's some combination of four things.

1. Seeing only what he wants to see.
2. Lying to try and help his cause.
3. Stupid.
4. Wrong.

And without meaning to he points out the biggest hazard, the implied government bailout for businesses who are in trouble regardless of the reason. (and why don't they help out the car industry? Or travel agents? Or US companies getting eaten alive by free trade?

The fact that has been proven by all the government "action" so far remains, this problem is simply too big for Washington to solve. They're throwing 200 billion at a multi-trillion dollar problem and frankly having a heap of unintended consequences.

Funny how all these financial "geniuses" fail to see the obvious.

Posted by: 150 Multiple Choice Questions | April 10, 2008 at 07:43 PM

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Holy moly Duffster, you're cracking me up, LOL. I couldn't hardly get past your 1st point, might we examine it, please?

"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications.

Start off with the 2nd sentence. Whenever anyone says 'In fact,' the whopper may well be coming their way, in this case it sure is, in spades! Let me get this straight, you say good guy builders were trying like all git out to help build homes & phony speculators were lying to sales agents, on sales agreements, & on 1003's to loan officers & brokers. Pat, sober up, back away from the crack pipe, or stop trying to do stand-up comedy.

Your statement is laughable & idiotic because anybody in ANY PART of the home ownership chain, from developer to builder to lender to real estate agent to appraiser to pest inspector to escrow officer to structural inspector to ad infinitum KNOWS that the builder has ALMOST ALL the control, they employ their own hand picked real estate agents on sight, have cut their own deals with two or three APPROVED LENDERS, & control the escrow process down to the last iota.

Let me spell it out for you, folks in the industry that have worked 100's if not thousands of transactions aren't likely to be buffaloed by a newbie flipper, or a speculator of ANY shade, lol, and they'll NEVER fool an underwriter.

I did like you using 'clucking' & 'ranting' though. Can I get a symphony of 200 tiny violins for those poor, deceived, country bumpkin builders that just fell off the lumber truck next to the construction site, please?

Posted by: bottom line | April 11, 2008 at 01:12 AM

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Mr. Duffy's argument falls apart completely when looked at closely.

"The argument that all builders overbuilt to simply assuage their own greed is simply inaccurate".

Mr. Duffy then goes on to cite the National Association of Home Builders, certainly an unbiased source. He claims that homebuilders were victims -- of lying speculators. Right. In fact, homebuilders were only too happy to sell to anyone who could get a contract. As was pointed out in earlier replies, the largest of these homebuilders had their own sales and financing arms, so they had multiple incentives to sell at inflated prices to whomever.

"Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that nonspeculators can’t sell their homes either..."

What does that have to do with a tax credit for homebuilders? The reason people can't qualify for mortgages now is that sanity has returned to lending. No longer can fog a mirror, stated income, no documentation, pick a payment financing qualify you to buy a home. Now you actually have to prove you have a job and will be able to make payments, as well is put some skin in the game.

"Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy outweigh those clucking on about 'moral hazards,'"

The argument here seems to be five wrongs make a right. I don't happen to agree with any of the bail out the sites, but for arguments purposes -- the airlines business was affected by a terrorist attack, not their own greed; Long-Term Capital Management and Continental Illinois were not bailed out, they disappeared; Chrysler got a loan, which they paid back early; and Savings & Loans also disappeared -- in the bail out was to protect depositors.

"By only considering the financial strength of large builders such as Lennar or Pulte, he completely dismisses the fates of the tens of thousands of builders and remodelers..."

But in fact, it is precisely these large builders that will get the tax break. First, they are the ones that speculated, buying land and sinking money into thousand home plus developments that have now cost them hundreds of millions of dollars. Second, they're the ones that are required under accounting rules to mark these assets down. Your local homebuilder who may have bought land has no such requirement. He has two choices, sit on the land and wait until things improve, or sell it. It is these large public homebuilders who have to mark their assets to market, that will be able to take advantage of this tax loss carry back.

"Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction, filled by people who had no say in how the large public builders ran their businesses". As other respondents have pointed out, the home building industry achieved a remarkable feat. They were able to outsource their workforce without ever leaving home. Nearly three quarters of all jobs in the home building industry have been filled by immigrants, mostly illegal. Don't ask me to cry for Argentina (or Mexico, or Guatemala, or Honduras). Ask the Americans that used to hold those jobs, at good wages, whether they think the homebuilder should be bailed out.

"Finally, this tax break oriented towards home builders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fallout from the attacks of 9/11/01..."

Again, he conflates self caused problems with a terrorist attack. But his point about this being available to other companies is correct. But who are the companies that are now having huge losses, after years of stupendous profits? Those who caused this bubble, and its subsequent pop! So in addition to homebuilders -- mortgage lending companies, banks and investment banks will all be able to share in the riches. Meanwhile, the deficit burden on our children and grandchildren grows and grows.

Finally, let's look at what the effects of a wave of homebuilder bankruptcies be? What do these homebuilders consist of? They usually have a small administrative staff, a staff of construction managers, and a sales force. They outsource most of the building cavities to subcontractors. Many of them are "virtual builders", with only administrative and sales staff.

Their assets consist of raw land, improved land, and housing inventory. It's not like they have factories. If they went bankrupt, what happens? The lenders seize their land and inventory, and look for buyers. A number of people lose their jobs, but whoever buys it and eventually develops the property will hire those experienced people.

There is virtually no barrier to entry in the home building industry. Anybody who can scrape up the money can buy land and hire staff to develop and build. So if Pulte, KB and Lennar went out of business tomorrow, somebody would be there to purchase foreclosed assets from the bank, and eventually develop the property.

Methinks Patrick Duffy should take his DVD set of Dallas and watch his namesake, rather than penning superficial op-ed pieces.

Posted by: Brian | April 11, 2008 at 04:39 AM

Is the FHA up to the task of rewriting mortgages?

Over the last 10-15 years, FHA loans became scarce because private lenders were offering much more flexible terms than what FHA requires (i.e., 3% down, stricter debt limits, fixed-rate mortgages, etc.). Now that the FHA is being floated as the most promising candidate to re-write those loans at risk of foreclosure, however, some people are sending up warning flags that the federal government has completely thought this through. From a CNNMoney.com story:

At the center of all of Washington's efforts to rescue the battered housing markets is the formerly obscure Federal Housing Administration.

But it's not clear whether the agency is up to the task or whether it will need a taxpayer-funded rescue of its own.

The agency currently backs $385 billion in mortgage loans, but that figure could double in the coming year if some of leading proposals in the White House and Congress go through...

Even FHA officials concede they don't know if the agency can handle the increased role. The FHA has been a small lifeboat helping a select group of home buyers, but it could be overwhelmed by the rush of new borrowers trying to climb aboard...

The FHA is a New Deal-era agency that helped create the modern mortgage market. The FHA program is intended for mortgage borrowers with weak credit or little or no cash, who may not be able to otherwise get an affordable mortgage.

Borrowers get FHA loans from private lenders, just as they would any other mortgage. FHA offers insurance to cover lenders if those borrowers, who pay a small insurance premium to the FHA every month, default on the loan. The FHA uses those premiums to cover the lender in the event of foreclosure.

During the housing boom in recent years, FHA's share of mortgages fell to only 7% of mortgage loans outstanding in 2007. Now that the mortgage market has collapsed, the FHA is suddenly the only choice for many borrowers and lenders....

About 150,000 borrowers have refinanced under a new program called FHASecure in the past six months. Launched in September, this program is aimed at subprime borrowers facing steep mortgage rate resets that they couldn't afford. That volume compares to the total of 425,000 loans the FHA backed in its previous fiscal year.

What's more, the loan limit on FHA loans was increased in March, which will further expand FHA's portfolio...

But Federal Deposit Insurance Corp. Chairman Sheila Bair acknowledged the risks inherent to the Frank plan in her testimony before Congress on Wednesday, saying no one knows if FHA premiums will be able to cover the increased risk of FHA's expanded mission.

"Losses that exceed the funds available in the reserve would have to be covered by taxpayers," she warned.

Those concerns were echoed by FHA Commissioner Brian Montgomery during the same hearing.

"The FHA should not be forced legislatively to compromise its fundamental criteria at the future expense of the taxpayer," he said. "The FHA currently is self-sustaining. As you know, few government programs can claim the same. We do not want to cross that line, particularly at a time when we are most needed."

The agency began backing increasingly risky loans even before this crisis hit. The cost of potentially bad loans insured by the FHA was estimated at $7.5 billion as of Sept. 30, up from $3 billion a year earlier and just $1.9 billion a year before that....

Some experts back the idea of making the FHA more aggressive, even if it will eventually require a taxpayer bailout.

"We sometimes refer to these proposals as stealth bailouts," said Seiberg, "because they don't necessarily require money today, but they may require funds down the road."

Seiberg and other economists agree that there's a risk of a taxpayer housing bailout no matter what FHA does.

"Congress may decide that it wants FHA to take more risk because it doesn't require [the government] to appropriate money up front, and it may not require money on the backside if we're able to turn this crisis around," said Seiberg.

"But if you can't turn this crisis around, if home price declines continue for two or three years, all lenders will be in trouble, and so will the FHA."

My guest blog post over at L.A.Land

I received a great invitation this morning by blogger & journalist Peter Viles, who runs the L.A. Land blog for the Los Angeles Times' website (and which I understand has become the hottest blog for that paper).

Thank you, Peter, for the opportunity! For those of you not familiar with Peter's blog, it's quickly become one of my daily must-reads for stories I might otherwise miss and from which I now frequently quote.

From Peter's intro:

This blog has been teeing off on the proposed tax break for homebuilders, and this morning I gave the blog over to Daniel Gross' rant that the tax break is "perverse" and "absurd.I thought it only fair to invite someone from the other side of the debate to weigh in. That said, here is guest blogger Patrick Duffy, who blogs at HousingChronicles.com.

Click here for the post at LALand.

It'll be very interesting to see what kind of comments (and tomato-throwing) I get. I may also re-print some of the more odious comments over the next day or two.

Here's the post in full, but I'd suggest checking in first with LALand so you get the entire back story first:

While I can understand and sympathize with bloggers, readers and journalists such as Daniel Gross who remain adamantly opposed to any alleged special treatment of homebuilders at potential taxpayer expense, such emotionally wrought arguments conveniently ignore both rational discourse and historical precedent.

Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications. No matter how many safeguards they put in place to clamp down on speculative activity – borne out of a similar scenario in the late 1980s when flipping houses in between phases became a new sport – speculators knew that builders weren’t really in the business to enforce such contractual provisions, so they took the risk anyway. And other than a few lonely voices in the blogosphere, the conventional wisdom at cocktail parties was that such activity was a sure-fire way to build long-term wealth. Lesson learned: never trust people drunk on either alcohol or their own supposed genius.

Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that non-speculators can’t sell their homes either, which is a serious handicap in a country that was built on freedom of movement in between job opportunities.

Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy outweigh those clucking on about ‘moral hazards,’ which seems a specious argument considering the chronic epidemic of morally questionable behavior of Wall Street, pop culture and U.S. politics in general. Remember September 2001, when Congress approved $15 billion in aid to the airlines? Or the $3.6 billion for Long Term Capital Management in 1998, the $4.5 the FDIC provided for Continental Illinois in 1984 or the $1.5 billion in loan guarantees for Chrysler in 1980? Where was the outrage then? Although there was plenty of outrage accompanying the $124 billion bail-out of S&Ls during 1986-1995, the potential consequences of doing nothing were far more serious.

Fourthly, in his piece “A Tax Break for Bubble Heads” in the online Slate magazine, Daniel Gross’ opinionated rantings run a bit loose with the facts. By only considering the financial strength of large builders such as Lennar or Pulte, he completely dismisses the fates of the tens of thousands of builders and remodelers who can’t, as he says, ‘look to the capital markets first’ and can’t ‘dilute the shareholders, not the taxpayers.’ In fact, according to the most recent Builder 100 ranking in 2006, nearly three-quarters of homes sold that year were not built by big public builders, but a variety of small and large private companies, to whom the capital markets are now largely closed. Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction, filled by people who had no say in how the large public builders ran their businesses. From his comfortable writer’s perch, however, Mr. Gross would simply label that ‘market capitalism.’ I wonder if he repeated that same phrase to the group of long-time Newsweek writers recently forced to take a buyout and leave?

Finally, this tax break oriented towards homebuilders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fall-out from the attacks of 9/11/01, giving innocent companies – such as the country’s 155,000 building industry suppliers and the 58,000 homebuilders not in the top 10 – some much-needed breathing room to stick around for the eventual rebound. In fact, perhaps Mr. Gross should take a hiatus from his writing duties and work for that fictitious builder of affordable housing he cites in Wichita. Such an experience would likely help him start shooting from his brain instead of his hip.

States trumping the feds on providing mortgage aid

Growing weary of waiting for the glacial pace of the federal government to address the mortgage crisis (it wasn't until last week that the Fed even admitted there was a recession), state governments are jumping in with aid even if it means conflicting with mortgage lenders. From a Wall Street Journal story:

State governments are acting more aggressively to help homeowners avoid foreclosure, frustrated by what they view as the federal government's inadequate response to the mortgage crisis. But some of the programs are putting states at odds with mortgage lenders.

Ohio officials announced Tuesday that they had enlisted more than 1,000 local attorneys to work with certain borrowers free of charge to try to block foreclosures.

Wednesday, an Illinois lawmaker introduced a bill, backed by the state's governor, that would impose a moratorium of as long as 60 days on foreclosures. The measure would apply only to borrowers who enter housing counseling and is meant to give them more time to work out a deal with lenders.

Maryland Gov. Martin O'Malley signed emergency legislation Thursday to give borrowers at least 150 days to cure defaults, effectively creating a short-term moratorium on foreclosures. The state also is requiring mortgage-servicing companies to provide the names of borrowers whose adjustable-rate mortgages are about to reset to higher rates, and it is asking companies to stop levying late fees and other charges on borrowers whose request for a loan workout is being evaluated.

The state actions come as Congress considers a variety of plans to aid the housing market, including a $15 billion plan that includes a tax credit to buyers of properties facing foreclosure and grants for communities to buy and refurbish foreclosed properties. But there is little in the plan that would help individual borrowers facing foreclosure, and state officials say they can't wait for federal help...

These latest efforts by states are more aggressive -- and in some cases more controversial -- than earlier programs, most of which provided counseling services or offered to refinance certain home loans into state-backed mortgages with better terms. However, the counseling and refinancing programs aren't helping as many homeowners as hoped, in part because borrowers seeking state help tend to be in such bad financial shape that their situations don't lend themselves to easy solutions.

As a result, the programs are targeting more troubled borrowers. Beginning May 1, borrowers in Massachusetts will have 90 days to cure any defaults before their mortgage company can initiate a foreclosure. Massachusetts officials have already obtained 30- to 60-day delays in the foreclosure process for more than 630 borrowers facing the loss of their homes. More than half were able to avoid foreclosure through modifications, refinances, short sales and other initiatives, state officials say.

Under Ohio's new legal effort, pro bono attorneys will counsel certain homeowners facing foreclosure, try to broker deals with mortgage companies, and represent borrowers in mediation or in court.

"There are defenses to many more of these proceedings than we ever thought," said Ohio Attorney General Marc Dann. For instance, the party bringing the foreclosure action may not own the mortgage, he said, or attorneys may be able to show that the mortgage was "fraudulently induced."

Such efforts "will help promote the conversation between borrowers and lenders," said Paul Richman, vice president of state government affairs for the Mortgage Bankers Association. "It's something we don't have a problem with so long as it's not being used to create unnecessary and frivolous delays in the legal process." However, the association opposes foreclosure moratoriums.

Condo hotels among the worst investments during the boom

During the height of the real estate boom in Las Vegas, we looked at two sites for a developer interested in building condo-hotel projects. But rather than simply look at other similar projects in the area and call it a day -- which was common for many amateurish market studies -- we undertook a much deeper analysis of the lodging market in order to ascertain occupancy rates, future supply, the level of visitors, how many visitors were there for business versus pleasure, how long they stayed and how much they paid for their rooms in order to translate that into a potential carrying costs for a mortgage, HOA, taxes and insurance. Then we also looked at what visitors would pay to rent out condominiums that weren't related to a hotel or its services.

Our conclusion? A very risky proposition unless the property was flagged under an international luxury hotel brand such as the Ritz-Carlton, Mandarin Oriential or Four Seasons due not just due to over-supply, but a complete lack of transparency on pricing and potential income from renting out these units through the hotel. When developers deliberately hide information such as this from appraisers and consultants (which was a fairly common occurrence at Las Vegas high-rise projects and forced us to pretend to be buyers), it's hard to believe they were being honest to buyers regarding actual income from joining the rental pool. After all, how can you provide such estimates to buyers when you've done no such analysis on your own?

What buyers didn't know was that they were gambling as much with buying a condo-hotel in Las Vegas as they were in the casinos, only they knew the rules of the casino. From a Wall Street Journal article:

For many investors, the condo hotel may go down as the Pets.com of the real-estate bubble.

Many buyers purchased the hotel rooms from developers hoping to get paid every time the room was rented. But condo hotels, which account for as much as 10% of all hotel rooms under construction and a much greater percentage in resort markets such as Orlando, Fla., and Las Vegas, are coming back to haunt many of the people who bought the units, the developers that constructed the buildings, and the operators hired to run the hotels.

Some projects also are being brought to the attention of regulators by investors...

"It's been a very bad investment," said Moji Adekunbi, a 47-year-old engineer, who bought a $550,000 condo-hotel unit in the Signature at the MGM Grand in 2005 in Las Vegas, where one of every four hotel rooms being developed is a condo-hotel unit. Mr. Adekunbi counted on the cash flow from renting out his unit more than covering his $3,000-a-month mortgage payment, leaving him with a tidy profit.

He said the developer's sales staff led him to believe that the hotel would have 94% occupancy and $350-a-night rates, Turns out, he said he is netting only between $400 and $1,800 a month before his mortgage payment.

"I am in so much debt. I don't know how long I can sustain this," Mr. Adekunbi said. Making matters worse, many markets for these rooms are weak, meaning owners might lose much of their investment if they sell.

Representatives for the developer and the hotel operator said hotel-rental projections weren't discussed with customers before they bought their units, and some buyers made their own assumptions about rental income. "Some people's assumptions didn't pay off, and they are trying to find someone to blame," said MGM spokesman Alan Feldman.

"...projections weren't discussed with customers before they bought their units..."

Oh, really? Then exactly how were buyers convinced to spend the 25% to 30% premium to buy a hotel-condo unit versus a traditional condo? Financial osmosis? In my experience, sales agents routinely ventured such guesses, so I'd be surprised if MGM was the sole exception.

More from the story:

During the real-estate boom, many Americans scrambled to buy anything they could -- office condos, warehouse condos and high-rise residential condos, which are crowding the skyline of cities such as Miami.

But condo hotels were one of the most dangerous investments of them all. Hotels are risky investments in real estate because occupancy can swing with the weather or the economy. Developers loved condo hotels. "It minimized the upfront risk to the developer, and shifted it to the individual unit owners," said Mark Lunt, a lodging analyst at Ernst & Young. Many developers said they insisted that buyers regard condo hotels as vacation homes that they would use rather than income-producing investments...

At the Trump International Hotel & Tower in Las Vegas a group of condo-hotel owners are clamoring to rent out their own hotel units using their own operator because they said Trump takes too much of the rental revenue. A Trump spokesman said the company's rental agreements are competitive with other condo-hotel rental-management companies in the area.

In other condo-hotel developments, a few buyers are talking to the SEC, alleging possible securities fraud, according to their attorneys. One issue could be whether developers sold these units as investments, which should have been registered with the SEC or other regulators. In some cases, lawyers said, a real-estate offering may be comparable to a security if the offering creates expectations of profits resulting from the efforts of a third party. An SEC spokesman declined to comment.

Historically, the SEC has suggested it wouldn't take enforcement actions against a condo-hotel developer as long as the company didn't provide prospective buyers with projections of income or expected occupancy, among other conditions.

Many developers were careful not to market condo hotels as investments, but "many others find it difficult to restrain themselves from creating expectation of investment returns and cash flow," said Rob Webb, a senior hospitality partner in the Cleveland office of law firm Baker & Hostetler LLP, which has represented condo-hotel developers in cases where buyers have tried to rescind their contracts. "All you have to do is find the developer's newspaper ads, and it could be a devastating blow."...

They were always trying to preach to people that the market is hot. This is a no-brainer. You'd better get in quick," said Mr. Trombley, 40 years old, who spent most of his career with the Minnesota Twins and Baltimore Orioles. In 2005, Mr. Trombley, along with five friends and family members, bought five units in the development for a total of about $2.2 million, according to his attorney, Bruce Barnes, taking out loans to finance the entire purchase price.

Mr. Trombley estimates the four units he holds are worth at best 40% of the original purchase price, he said. Carrying costs, meanwhile, are running about $14,000 a month.

Can you say 'class action lawsuit?' All it takes is finding that single ad or getting corroborating testimony and perhaps those buyers can form a class.

Various fixes to the subprime mess

Although the recent legislation in Congress has been getting the most attention recently, others have floated some even more creative ways to fix the subprime market debacle. From a CNNMoney story:

First, tweaking the bankruptcy code:

Judges already have the power to shrink or vaporize many debts, like credit card balances and mortgages on investment properties. This idea, supported by Sens. Richard Durbin (D-Ill.) and Christopher Dodd (D-Conn.), would let judges reduce primary home loans as well.

The pros: The plan could save hundreds of thousands of people from foreclosure without costing taxpayers anything, say consumer advocates. And it's a minor change, so it could happen fast.

The cons: The Mortgage Bankers Association says its members would have to raise rates on all home loans by as much as 1.5 percentage points to compensate for the risk of court-imposed losses.

Next, introduce fixed-price housing that can't rise (or fall) over time:

John H. Vogel, a real estate economist at Dartmouth College, has a plan he says cures both the mortgage market and housing affordability. He proposes that the government buy up the mortgages of troubled borrowers and give them smaller mortgages, reflecting the drop in real estate values. The catch: The price of those houses would be forever fixed at their new loan amount.

The pros: The program could produce as many as 2 million affordable homes. Of course, owners wouldn't be able to profit in future housing booms. But they'd get a house at below-market prices.

The cons: Living next to a house that never goes up in value could decrease the value of your house as well. Buying up all the houses from the banks could cost as much as $200 billion. (In time, much of that would get paid back by borrowers.)

Create 'negative amortization instruments:'

The Office of Thrift Supervision (OTS) proposes creating negative amortization certificates (NACs). Say a bank agrees to write down a $250,000 mortgage to $200,000, relieving a borrower of $50,000 in debt. The government will then issue the lender NACs worth $50,000. When the homeowner sells, the first $50,000 in profit goes to repay the NAC. Anything above that, the seller keeps. If the home goes for less than $250,000, the bank gets all of the profits and the NAC disappears.

The pros: Banks would be more willing to cut borrowers a break because they would get an asset for doing so. Homeowners would get part of their debt relieved, a more affordable mortgage and the reduced risk of owing money when they sell the house.

The cons: If owners knew banks had first claims on profits, they'd have less incentive to renovate or maintain their homes. NACs would be hard to value - and the last thing we need is another hard-to-understand financial instrument.

A not-so-under-the-radar bailout (thanks to bloggers who continue to discuss it):

The Federal Reserve effectively buys up bad mortgage debt from banks (it has already started to do that by accepting impaired assets as collateral for loans to financial institutions). Struggling banks get cash from the government to keep them afloat.

The pros: Politicians could say they didn't bail anyone out even when they did. A cash infusion means banks could lend freely again. Mortgage rates should fall. That should bring more buyers into the market, slowing the drop in prices.

The cons: Taxpayers would foot the bill, which could run as high as $300 billion. Some borrowers could refinance, but many would lose their homes. That means more foreclosures. Real estate prices, while helped by cheaper financing, would probably still fall. But hey, score one for personal responsibility, making people bear the consequences of their mistakes - as long as they're homeowners and not financial executives.

That's because financial executives donate large sums to political campaigns -- yet another civics lesson about our broken system.

Apartment cap rates down; prices rise in 2007

According to our friends at apartment data provider RealFacts, 2007 was much better for the multi-family rental market than it was for new home sales. The company, which tracks apartment data for over 12,200 investment-grade apartments in multiple markets and states, is still crunching numbers for 2007 but has provided some preliminary conclusions in their latest newsletter:

Although 2007 has ended, we are still researching apartment sales transactions for that year. As of early March, we had found details of 1017 sales. Chances are we will find some more in the coming months, but we certainly have enough to spot some trends.

The first conclusion we can draw is that sales volume is more or less unchanged from the previous year. We have 1027 sales of complexes in the database for 2006, strikingly similar to the number of sales for 2007. Since our database covers 12.200 complexes, that suggests that 1% of apartment complexes change hands in a year.

Generalizing about a database that covers so many different MSAs is dangerous, because it blurs the details of individual markets. But let’s live dangerously and say that prices per unit and per square foot have gone up in 2007 while cap rates have gone down. The following table summarizes the changes state by state,

	2007		2006
State	Av.CapRate	Av.PPU	Av.CapRate	Av.PPU
AZ	5.8%	$93,025	5.9%	$79,223
CA	5.3%	$181,161	5.1%	$177,043
FL	6.0%	$93,997	6.5%	$109,401
CO	5.0%	$92,605	4.9%	$90,587
IN	6.8%	$53,891	7.3%	$58,243
KS	6.5%	$74,709	6.8%	$86,192
MO	6.5%	$53,066	6.9%	$53,475
NV	5.3%	$123,987	6.0%	$123,386
NM	6.5%	$90,159	6.8%	$60,907
OK	6.4%	$33,879	7.2%	$39,309
OR	5.0%	$102,440	5.8%	$87,500
TX	6.8%	$62,379	7.3%	$60,268
UT	6.2%	$89,394	7.0%	$50,436
WA	6.0%	$122,720	5.2%	$110,528

To continue with this dangerous act of generalization, we can say that prices have been going up and cap rates down in the twenty-first century. The exception to the trend came in 2005, when prices went up so fast due to sales to condo converters that they fell in 2006. In future newsletters, we’ll look in more depth at sales in some specific markers, where there have been high numbers of transactions.

Want to sign up for this bi-monthly newsletter? You can subscribe here.

Most new home sales agents fail at follow-up

Having started my career on the residential side of the building industry as a field analyst who visited new home sales office, it's not hard to recall those sales agents who were deliberately lazy, surly or simply uninformed. From the woman who was waving her hands through the air to dry her nails to the pathological liar who claimed to be the builder's wife, when a builder is lucky enough to hire a great agent, they stand out. And they're also largely responsible for a project's success -- in fact, during my travels to the best-selling projects to discuss at building seminars, the one common thread they shared -- even more than location, price or design -- was a great team of agents.

So I'd imagine that an article by Builder magazine's Pat Curry entitled "Report: Most Builder Sales Agents Don't Follow Up with Prospects" is certain to put the heat on the aforementioned lazy, surly or uninformed agents:

At a time when builders need to make the most of every prospective buyer who walks through the door, a study of 50 new-home communities in Denver found that only about half the sales agents asked if they could follow up, 36 percent actually did it, and only 14 percent sent anything relevant to what the buyers said was important to them.

Even more shocking was this statistic: On 16 percent of the visits, no one even spoke to the shoppers, even though they stood in the sales center or model and clearly demonstrated interest-and even when they were the only visitor in the sales center. In 74 percent of the visits, the shopper was the only person in the sales center; in another 20 percent, there was one other shopper there...

Lest builders outside of Denver think the results don't apply to them, Dallas-based sales training consultant Bob Hafer says the lack of follow-up is a nationwide issue in home building.

"We take for granted that people will return. The process the buyer goes through is a process of elimination. They're really not in process of buying. They're in the process of elimination. .... If the sales agent doesn't participate at that moment, by default they get eliminated."...

One piece of information from the white paper that did surprise Hafer was the percentage of follow-up e-mail that the marketers reported as getting caught in spam filters, Hafer says. Lacking a personalized message tailored to the recipient, Red Tree estimated that 75 percent of the e-mails sent to them were caught in their spam filters.

They recommended following up by phone and personalized thank-you notes, as well as e-mail, and asking customers to clear the builders' e-mail address for delivery with their Internet provider. If the customer doesn't respond via e-mail early in the process, builders should abandon it for long-term communication.

Hafer says follow-up should start with a 10- to 15-second phone call immediately after a prospect leaves the office to thank them for coming in and to promise to be in touch within 24 hours to answer any questions they might have.

"When I ask most people, 'When do you follow up?' they say 'Three or four days, a week,'" Hafer says. "That's too late. Out of sight, out of mind. If people come into a sales center, they're serious. When they leave, they're negotiating with each other about whether it was close to what they wanted. ... If you don't follow up immediately, something else could attract their attention."

If a sales agent isn't sure what to say in a personalized follow-up phone call or e-mail, Miller recommends having the builder's marketing director prepare templates that sales agents can easily adapt to individual buyers' specific interests and questions.

Bailing out the undeserving sometimes necessary

There's an excellent article by Peter Gosselin in today's L.A. Times on the question of a mortgage bailout that would likely aid the undeserving. I've been predicting a federal bailout since the beginning of the year because although it may not be the economically 'fair' thing to do, the reality of politics tell a much different story (call me a cynic if you must).

In fact, the U.S. has a long history of bailing out a few of the guilty when the costs of doing nothing punishes everyone, and this is something which many armchair bloggers and commentors have yet to appreciate. Stomping one's feet and yelling, "No Bailout!" simply isn't going to work unless it's accompanied by a rational discourse on the harm that would be caused (i.e., artifically high housing prices, higher borrowing costs in the future, etc.). Is it 'unfair' to those who didn't participate in the greed that led to the mess? Absolutely. But whoever said life was fair? Just look to history (from the article):

The House and Senate are beginning to consider proposals for federal intervention on a massive scale. In effect, the government would take over many of the risks now borne by lenders, borrowers and investors -- offering to revamp and then guarantee about 1 million troubled mortgages in an effort to shore up plunging home prices.

The change would come in two stages. The first would be the likely passage Tuesday of a modest bipartisan housing aid package in the Senate.

Next would come action over a period of months on measures to guarantee $300 billion or more in revamped mortgages...

The proposals also are likely to raise the ire of mortgage industry lobbyists and investors in mortgage-backed securities, who want any effort to ease the crisis to be voluntary and small scale.

Nevertheless, calls for passage of one of the measures or something similarly sweeping are growing increasingly insistent as lawmakers and many economists conclude that something must be done to end the real estate price plunge quickly if the economy is to right itself.

And, contrary to what many Americans may think, government action on such a dramatic scale would not be new or even all that unusual. Washington has taken similar-size steps during economic crises of the past.

Repeatedly in the nation's history, from the savings and loan scandal of the 1980s to the Depression of the 1930s and the financial panics of the 18th and 19th centuries, Washington has stepped in when large numbers of ordinary citizens were threatened with financial devastation...

In almost every instance, action came only after long, agonized debate, particularly over the question of whether the beneficiaries of government action were in trouble through no fault of their own.

And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore...

The S&L industry had gone on a lending rampage, but most of its bets had gone bad. The government seized the assets of 1,000 S&Ls, sold off half a trillion dollars' worth of property and spent $124 billion of taxpayer money paying deposit insurance to the institutions' customers, as well as aiding those few institutions that were considered salvageable.

Many depositors were ordinary people whose life savings were threatened. But others were speculators who simply made bad investment decisions -- often with the assistance of S&L executives.

The government set aside the question of who was deserving of aid, deciding that leaving it to market forces to work through the problem would have hurt many innocent savers and been a long-term drag on the economy...

During the late 18th and 19th centuries, Congress passed four major bankruptcy laws in the wake of financial panics. In each case, the measure released debtors -- deserving or otherwise -- from some of their obligations so they could get back on their feet and become productive members of society again.

In the 1790s, the newly formed federal government finally decided to pay off most of the debts accumulated by the states during the Revolutionary War, despite complaints that speculators in war bonds would benefit.

Distasteful as many found it, paying off the debts was deemed crucial to establishing the new government's credit at home and abroad.

A similar decision-making process appears to be underway in the current housing crisis...

Across the political spectrum, the consensus is that Washington has done little to help ordinary Americans affected by the entwined housing and financial crises...But pressured by the Fed's aid to financial players, the demands of economically strapped voters and the sense that key lawmakers may have come up with a way to parry the deserving/undeserving distinction, Congress is about to take up proposals that could greatly expand the scope of federal action...

Under similar proposals by Frank and Dodd, Washington would empower another New Deal-era agency, the Federal Housing Administration, to run a new mortgage guarantee program. Dodd is chairman of the Senate Banking Committee.

To participate, the lender would have to cut the principal of a troubled mortgage to 85% of a home's current, diminished market value. The FHA would take 5% of the new, lower amount as a fee. Homeowners would get the remaining 10% as equity to give them a stake in paying off the renegotiated mortgage.

Borrowers would have to prove that they had the financial wherewithal to keep up with the now-lower monthly mortgage payments. Those who couldn't prove they could pay would be ineligible for the program. If borrowers failed to pay the new, smaller mortgage, Washington would do so.

There were hints last week that by making the proposed program voluntary, having the government guarantee but not actually buy up houses or mortgages, and by slapping requirements on both lenders and borrowers, the proposal could fly politically.

Boyce Thompson asks crowd of builders "A Good Time to Buy?"

While I routinely check out Boyce Thompson's blog, I actually found the latest entry courtesy of Patrick.net. Boyce Thompson is the longtime Editorial Director for Hanley Wood titles such as Builder and Big Builder. What struck me was the headline: "A Good Time To Buy?" in which Boyce describes a speaker at a recent Hanley Wood conference:

A speaker at the conference Builder magazine is putting on this week had the audacity to say that he didn't think now was a good time to buy. He said that prices for new and existing homes are likely to continue falling this year, given that foreclosures are on the rise and the number of homes for sale is going to continue climbing...

It's a good thing tomatoes weren't served for breakfast, because the contrarian speaker would have been littered with them. Builders, it's abundantly clear, are sick and tired of hearing any negative takes on current market conditions. After all, they are fighting a life-and-death battle to keep their companies afloat. And one of their major leadership objectives is to prop up morale within their companies, especially among salespeople.

Spoiler alert: that speaker to whom Boyce was referring was himself.

Now Boyce is a smart guy who definitely knows about homebuilding from a macro-economic perspective, and I used to share the podium with him regularly when I was with the Market Intelligence division of Hanley Wood (he discussed national trends, and Market Intelligence consultants discussed local conditions).

But Boyce has also never been a homebuilder, he's always been a writer & editor, and I'm sure that's partly why his audience of builders didn't like what he had to say (plus they probably didn't expect the publishers of a trade journal to pile on, but their advertisers are manufacturers and suppliers, not homebuilders).

Still, that doesn't mean Boyce's speech was off point, but builders are an extremely sensitive group these days (and who wouldn't be considering the avalanche of bad news over the past 18 months), so he was certainly taking a risk in forcing some bad medicine on some unwilling ears.

I can certainly sympathize with Boyce -- every time I talk to a reporter I wonder if I've said something that will anger a potential client (it's certainly happened before), but if I'm seen as just another talking head for the industry then reporters won't call me -- in other words, a Catch-22.

More from his blog about this speech:

Later in the program the usual shots were taken at newspaper articles that contribute to negative consumer psychology. Private builders got their digs in about public builders that ruined the market by pursuing 20 percent annual growth at the behest of the public capital markets. Some speakers criticized cash-strapped builders desperate to sell homes by offering six-figure discounts that condition every buyer in the market to ask for concessions...

It's important that builders not "smoke their own," so to speak, that they not confuse what they are telling potential buyers and their employees with what they really believe. Most housing organizations, including the NAHB, are calling for a decline in housing sales and starts this year. Mortgage rates may be historically low, and recent moves to liberalize FHA credit and allow Fannie Mae and Freddie Mac to buy more high-priced mortgages may help. But probably not until later in the year...

At the same time, builders need to reach out to more potential new home buyers, even people who may have cancelled a previous new home contract. A far more sophisticated approach to demographics is required; we need to reach submarkets that aren't served by the existing home market. Rest assured, there are buyers out there who still need to move, who still need to buy a new home. We need to find them and convince them that our communities are ideal places to live.

The boldface above was mine: in my own experience, builder largely ignored detailed demographic supply/demand analyses in their market studies during the boom (at least in terms of what they asked from us; perhaps they did more detailed analyses in-house or had them produced from another source, although I doubt it). That's also why I blogged last week about Jonathan Smoke and his work at HousingIntelligence.com -- because he's ready and willing to delve much deeper in the demographics & psychographics of demand than most builders, lenders and investors have seen. Such detailed analysis could probably prevent another boom-and-bust cycle that was based not on actual demand but other ancillary reasons and pressures.

Finally, a closing note from Boyce:

It's important for builders as business managers to separate what they want customers to believe from what they know to be true. Everyone today needs to be planning for the worst and hoping for the best...Go ahead, throw tomatoes.

"Best & worst places for housing prospects"

I've been talking a lot lately to Jonathan Smoke, who runs a collection of building industry-related websites including HousingIntelligence.com. He also maintains his own blog, and in a recent post discusses the best and worst places for housing prospects. According to the blog post:

We’ve updated our Prospects Index calculations based on the latest historical data and forecasts for key housing metrics, including market equilibrium, economic outlook, home price risk, and long-term home price appreciation. So it’s time to feature our new best and worst places for housing prospects.

Before we get into the list, it’s important to note our emphasis on prospects. Our index calculations are meant to give a picture of what we expect these markets to be like in 3-5 years. While the market equilibrium is current, the other variables are based on the most recent forecasts out for five years.

For a more complete list, see the post: you might be surprised!

Senate moves forward on bi-partisan housing bill

Finally recognizing that spending time on political posturing while the housing market continues to tank is not an ideal re-election strategy, key Senators have reportedly agreed on a plan to spur the housing market with compromises on both sides. Compromises? In the Senate? Wow, this must be serious. From the Wall Street Journal:

Key senators agreed on a $15 billion bipartisan plan to spur the housing market, a surprisingly fast compromise that shows how political momentum is shifting toward a more aggressive response to the struggling economy...

Democrats, for their part, dropped a bankruptcy provision opposed by Republicans, even though it was a major part of their housing agenda. They, too, are under pressure to show accomplishments this year, amid low public-approval ratings for Congress. They may try to add the provision as an amendment, but it faces an uphill fight.

Democrats also agreed to halve funds for counseling at-risk homeowners to $100 million. Republicans accepted $4 billion in block grants for communities to buy and refurbish foreclosed properties, and they agreed to a smaller tax credit for homeowners than they initially wanted.

The plan would raise the size of loans backed by the Federal Housing Administration to $550,000 and increase the down-payment requirement to 3.5% from 3%. The bill doesn't include a controversial Democratic proposal to give the FHA the ability to insure $400 billion in mortgages. Sen. Chris Dodd (D., Conn.), the concept's sponsor, said he will hold hearings later on the idea.

The legislation includes a $6 billion tax break for home builders and other troubled companies, an additional $10 billion of mortgage-revenue bonds that states can issue for refinancing and for first-time home buyers, and a provision to allow an estimated 28 million homeowners who don't itemize their taxes to get a deduction on their property taxes. In addition, people buying a residence facing foreclosure would get a two-year, $7,000 tax credit...

The White House continues to oppose funding the purchase of foreclosed homes and the tax credit for home buyers.

New & stricter Fannie Mae loan guidelines issued

For those homeowners facing foreclosure walking away from homes thinking they'll just jump back in with no consequences in a couple of years, FannieMae has some news: no problem, as long as it's been 5 years since a foreclosure (the rule used to be 4) and a minimum FICO score of 580. From a story in the Wall Street Journal:

Fannie Mae announced a new round of tightening in its standards for home mortgages it buys or guarantees.

The government-sponsored provider of funding for home loans told lenders Monday it will require a minimum credit score of 580 for most loans it buys on an individual basis. Credit scores, which range from 300 to 850, are designed to measure borrowers' likelihood of repaying loans. In the past, Fannie had no minimum score. The company said it will still acquire loans with lower credit scores in certain circumstances.

Among other changes announced to lenders, Fannie also said it will increase the period needed for borrowers to "re-establish" their credit history after a foreclosure to five years from four years. Fannie said it would allow shorter recovery periods for borrowers with "documented extenuating circumstances" that caused the foreclosure.

Separately, Fannie last week told loan servicers -- companies that collect loan payments -- that they can increase their forbearance period on delinquent borrowers to as much as six months from four months to allow more time to seek alternatives to foreclosure. Fannie hopes that move will reduce the number of loans on which it needs to recognize losses, though it may be only delaying the pain in some cases.

Builders admit no strong rebound until 2010

The latest outlook from the National Association of Home Builders foresees a full recovery in the housing sector being delayed until 2010. While this date has been largely debated by economists and other housing experts, I can't recall any other time before this when the NAHB has actually agreed with the assessment. From a CNNMoney.com story:

Demand for new homes may not return to normal levels until next decade, according to the latest outlook from the National Association of Home Builders.

"Traditionally when housing has been in a recession, it recovers very quickly. We don't see that happening this time," said Jerry Howard, CEO of the builders' trade group. "It could be 2010 before we see sustainable, long-term stability in the home building sector."

As recently as the end of 2007, the trade group was forecasting a pick-up in the demand for new homes in the second half of this year.

But Howard said the best case scenario now calls for stabilization in the market in early summer, with no signs of improvement until early next year...

...with the construction slowdown now spreading beyond housing, home builders and contractors won't be able to keep workers busy by branching out beyond residential construction as they did last year.

Howard said this year's spring selling season for homes is already shaping up to be a bad one. And while he praised legislation now gaining steam in the Senate aimed at helping demand for foreclosed homes, he said the effort is too late to make a difference this year.

"While we congratulate the Senate for taking the bull by the horns now, it would have been much more helpful for the economy in this calendar year if they had done this in the stimulus bill," he said, referring to the more than $150 billion in tax rebates passed by Congress in February...

Still, the new legislation would help hombeuilders since part of the bill calls for tax relief for many homebuilders. The bill would allow homebuilders and other firms affected the by the mortgage meltdown, such as investment banks, to use losses in 2008 and 2009 to get back taxes they owed over the previous four years. That's a change from the two years allowed under current tax law.

That provision, if passed, will cost the government between $6 billion and $28 billion in future tax revenues, according to a range of estimates. It's uncertain just how much of that money builders would see but the sector is expected to be one of the biggest beneficiaries of the bill.

Howard said many smaller privately held builders are not likely to make any money this year. So the tax credit proposed in the legislation is crucial for them.

And it will be helpful for the industry leaders too. Luxury home builder Toll Brothers (TOL, Fortune 500) is the only one of the larger, publicly traded homebuilders expected to report a profitable quarter during calendar 2008...

Builders lost out on the chance of getting even more help though. Provisions that would have given a tax credit for those buying new homes sitting vacant for a long period of time were cut during the final negotiations on the bill Wednesday.

Big homebuilders marketing their staying power to buyers

I got a call yesterday from a reporter for Bloomberg News, who was writing about large, public homebuilders in the Chicago area taking out display ads that focused on their financial strength to last through this housing recession. It's certainly a good idea to do so, especially if you consider that bankrupt builders can't address warranty issues or answer customer service phone lines. For more sophisticated buyers, they could easily peruse the financial filings of public builders through annual reports and quarterly SEC filings, which are often available on their websites under "Investor Relations," not to mention reading various analyst reports by conducting various Internet searches.

But it also occurred to me that buyers should also consider just how good that customer service is, as well as building quality, design and dealing with in-house mortgage operations. Thankfully, each year the research firm JD Powers comes out with its builder rankings -- something which a top-ranked builder such as Centex pays six figures per region to JD Powers for the right to broadcast their rankings to potential buyers. However, if you want to see which builders performed the best on the 2007 rankings, you can simply visit their website for more details and which builders topped the list for various regions.

From the September 2007 press release:

Even in the midst of a downturn in the housing market, Centex Homes receives the Platinum Award for Excellence in Customer Satisfaction and ranks highest in 14 of the 34 largest home-building markets in the United States—more than any other new-home builder in 2007—while Pulte Homes, including its Del Webb and DiVosta brands, ranks highest in 11 markets, according to the J.D. Power and Associates 2007 New-Home Builder Customer Satisfaction Study^SM released today...

Besides Centex and Pulte, other builders topping market rankings include: David Weekley Homes (which ties with Centex in Austin); Granville Homes (headquartered in Fresno, Calif.); Huntington Homes (Dallas, Texas); Mattamy Homes (Oakville, Ontario, Canada); Shea Homes (Walnut, Calif.); Standard Pacific Homes (Irvine, Calif.); Tim Lewis Communities (Citrus Heights, Calif.); Van Metre Homes (Washington, D.C.); and John Wieland Homes (Atlanta, Ga.).

Overall, customer satisfaction levels have remained steady since 2006. Markets experiencing the largest customer satisfaction improvements include the Central Valley, Calif.; Jacksonville, Fla.; Minneapolis; and Nashville...

Centex Homes ranks highest in 12 markets, while Pulte Homes ranks highest in eight markets. For more information on New-Home Quality Study rankings, please click here.

The study results include the following key findings:

• Overall, home quality has improved since 2006. The typical new-home buyer reports 13 problems with their new home in 2007, a 7 percent decrease from 2006.
• New-home buyers in Minneapolis report the highest new-home quality levels—averaging 7 problems per home—while new-home buyers in Washington D.C. report the lowest quality with 19 problems per home, on average.
• The four problem areas that detract most from home-buyer satisfaction are: sidewalk, driveway and foundation cracks; crooked walls; visible carpet seams; and landscaping.

What does L.A. want to be when it grows up?

One of the most common complaints about Southern California is its infamous sprawl -- I once sat next to a young guy on a plane from Ohio embarking on his first visit to California, and as we were flying into LAX from the east he was amazed at how long we flew over built-out areas before landing.

But the primary reason we have sprawl is because those who live in the currently developed areas fight increased density, so new development is pushed further outward. With politicians fearing urban constituents and builder's associations unwilling to embrace one type of building over another, we remain stuck in a stalemate of short-term interests and, frankly, a type of cowardice that has in the past prevented long-term planning (which is also why we don't have better public transit or a more fully developed freeway system in Southern California).

And yet that may be changing: over the past ten years, recent decisions by the L.A. City Council have been in far greater support of increased density to house increasing population growth that will occur even if existing families simply stay put (i.e., new births). From an interesting overview in The Economist:

Los Angeles has long epitomised car-oriented sprawl. As early as 1946 the historian Carey McWilliams judged it “a collection of suburbs in search of a city”. So rare are neighbourhoods where basic needs can be met without hopping into a car or bus that estate agents tout the few where they can as “walkable”. Urban planners elsewhere routinely invoke the city as an example of what to avoid. Yet even as they struggle to avoid becoming like Los Angeles, cities such as Atlanta, Phoenix and San Jose are copying it by spreading out and, hydra-like, growing new centres.

The original metropolitan miscreant is now trying to reform itself so fundamentally that Joel Kotkin, an urbanist at Chapman University, compares it to rewriting a DNA code. Last summer the city council changed zoning rules to allow tiny apartments to be built in and around downtown Los Angeles. On March 19th it rejected a plan to put 5,600 homes on the city's northern frontier, signalling that the metropolis must now grow up, not out. From next month developers will be allowed to build blocks of flats up to 35% bigger than previously, so long as they include some cheap housing...

“You're beginning to see a neighbourhood revolution,” says Zev Yaroslavsky, one of Los Angeles' shrewdest and most powerful politicians. He gives warning that outraged citizens may add an initiative to the ballot next year that would block dense housing projects, “smart” or not. Mr Yaroslavsky knows about the power of ballot initiatives. He sponsored one in 1986 that cut the size of most new office buildings in half, and another in 1998 that virtually halted subway construction.

Planners retort that Los Angeles will continue to grow, and it is better to build new apartments on run-down commercial streets than plonk them next to bungalows or bulldoze virgin land. They are particularly keen to put people next to express bus lines or subway stops. At present few use Los Angeles' skeletal rail system—259,000 journeys are made each day, compared with 1.2m bus journeys—and the network is growing painfully slowly. If the subway cannot reach the people, the thinking goes, the people must be brought to the subway.

This theory is the bedrock on which the new North Hollywood is being built. Near the office construction site a 14-storey block of flats (it seems enormous in the San Fernando Valley) has already appeared, and others will follow. The hope is that residents will both live and work there, or walk a few hundred yards to the local subway stop. But Cary Adams, a local resident, notes the developers are hedging their bets: two giant car parks are also scheduled for construction. This is, indeed, the genetic flaw in Los Angeles' new DNA.

A big reason Angelenos drive everywhere is that they can park everywhere, generally free. Businesses must provide parking spaces according to a strict schedule. This raises the cost of doing business and hugely lowers the cost of driving. Free parking is, as Donald Shoup of UCLA put it in a recent book, “a fertility drug for cars”.

Consider the roughly 29,000 people who live in Los Angeles' historic downtown. In the past few years a mixture of childless professionals and students have moved into new lofts. They have access to southern California's best public-transport network, and are the sort of people you would expect to take advantage of it. Yet last year a consortium of local property owners revealed that just 11% normally did so, while another 17% generally walked. Almost everybody else drove.

The politicians and planners are gambling that, by arranging Angelenos in a more conventional pattern, they can change their behaviour. Perhaps it will work. But if they are wrong, an already crowded city will simply gum up.

And when it does, you might have Mr. Yaroslavsky to blame. But why should he care? Those who live in the suburbs and outside of either his district or the city limits can't vote him out -- and that, in a nutshell, is why transportation and land planning in Southern California is such a mess.

Centex unloads 8,500 lots for 17 cents on the dollar

It looks like someone has actually stepped up to catch that 'falling knife' of real estate values we've been hearing about for a couple of years. In a deal announced late Monday by Centex Homes, they're selling 8,500 lots -- many of which are located in hard-hit states such as California and Nevada -- to a joint venture of three capital management firms focused on real estate in order to purge themselves of 10% of their lot holdings and to raise some much-needed capital. From Forbes.com coverage:

Centex Homes, a subsidiary of Centex (nyse: ctx - news - people ), announced late Monday that it will decrease its total lot holding by 10% to reduce its land supply and raise capital. Dallas, Tex.-based Centex will sell 8,500 lots to a joint venture called Corona Land Company which is led by RSF Partners and includes Farallon Capital Management and Greenfield Partners...

Centex said the book value of the properties sold was approximately $528 million, with no more exact figure available. The original cost basis of the land was an estimated $935 million, said Paul Puryear, an analyst from Raymond James. Selling that land for $161 million translates to deep discounting, Puryear said, where Centex got 17 cents on the dollar for its original purchase. That’s not particularly good news for the residential construction and mortgage financing company. But it meets the firm’s near-term goals of freeing up capital and unloading lots and real estate with long lead times...

It’s also a “first step towards rationalization of the marketplace,” Puryear said, adding there are buyers to “catch the falling knife” willing to put money down.

Bernanke finally admits the obvious: a recession

Fed Chairman Ben Bernanke has finally dipped his toes into the waters of reality, admitting that real gross domestic product "could even contract slightly." He also discussed revealed his thoughts on managing inflation versus propping up the sicker parts of the economy, including rescuing Bear Stearns from an almost-certain wipe-out. From an L.A. Times story:

Federal Reserve Chairman Ben S. Bernanke warned this morning that threats to the economy are far from over, with unemployment on the rise, prices for food and fuel growing, and real incomes on the wane...

The Fed chairman said he considered inflation to be a secondary threat to the economy, citing a leveling off of commodities prices in the futures markets, especially for oil. And he said that he expects the economy to be on the rebound by the end of the year....

Bernanke also defended the Fed's decision last month to underwrite the buyout of troubled Wall Street brokerage Bear Stearns by JPMorgan Chase -- a decision that led the central bank for the first time in more than 70 years to make loans to non-banks.

"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence," Bernanke explained. "Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."

So what about homeowners on trouble? That one was handled by committee chairman Chuck Schumer:

"The administration was all for government action in the case of Bear Stearns, but what about government action to help homeowners?" Schumer asked in opening remarks. "Yes, Bear Stearns was in trouble, but millions of homeowners are also in trouble. Yes, Bear Stearns needed government intervention, but what about government intervention for homeowners?"

MetroIntelligence announces alliance with Beacon Economics

We're pleased to announce a new strategic alliance with Beacon Economics, which is a research and consulting firm specializing in analyses of real estate markets, local economic development, and public and private policy issues.

Beacon Economics organizes economic forecast conferences and advises city governments, financial institutes, real estate firms, and businesses

So why is this such a great fit?

Because whereas Beacon provides an excellent '30,000-foot' overview of real estate markets, the strength of MetroIntelligence is at the 5,000-, 500- and 50-foot levels such as submarkets, neighborhoods and specific projects.

Beacon brings some distingushed academic credentials to the mix: founding partners Jon Haveman and Chris Thornberg, both well-known PhD economists, bring experience from the Public Policy Institute of California and the UCLA Anderson Forecast to the table and are quoted almost daily by both regional and national press.

Combined, MetroIntelligence and Beacon can address any of your real estate consulting needs with a level of experience few can match. We've also got some more exciting alliances in the discussion phase, so please check back to this blog for updates.

If you're in need of an immediate consulting proposal, please contact us directly at 888-82-DEVELOP or email us a pduffy@metrointel.com. We can consult on any land use at any location in the U.S. and beyond.

Do home auctions always reveal the true market price?

Over the weekend there was an auction at a mid-rise condo project in the Bay Area's Oakland called Eight Orchid. According to a report by the San Francisco Chronicle, accepted bids were 25 to 34 percent below the original list prices, leading many market watchers to conclude that this simply determines the actual market value for not only these condos, but implies that similar discounts should be applied to all properties in the area. But is it really that simple? From the story:

The coordinators of Sunday's auction of 41 units at the new Eight Orchids condominium midrise in Oakland billed the event as a means of finding the actual market value for such homes. If true, the results may be bad news for developers and great for buyers.

Among the dozen transactions recorded by The Chronicle, sales prices ranged between 25.3 and 34 percent off the original asking price. That's well below the 16.9 annual percent drop in median resale condo values or the 21.2 percent decline for all new homes in Alameda County, according to a February report from DataQuick Information Systems.

"The market has definitely humbled us," said Stuart Gruendl, chief executive officer of project developer BayRock Residential of Oakland. "But at the same time, our heads are above water and the property is succeeding."

He said the total sales amount was within 5 percent of what he expected to receive for all of the properties, adding that they moved at least a year's worth of inventory in a few hours...

All 41 of the homes put up for auction received bids above the minimum. Escrow is scheduled to close in five to 35 days. Winning bidders were contractually obligated to complete the purchase, but if they find a means of backing out, other participants may be contacted.

Ken Stevens, chief executive officer of the West Coast division of Accelerated Marketing, said the auction would be used to establish the price for remaining homes at Eight Orchids...

More difficult to evaluate is what the auction will mean for the broader Oakland or East Bay market, experts say. People evaluating the market will certainly note the comparables - or sales prices of recently traded nearby properties - and buyers or their brokers could use them when making offers, providing additional negotiating leverage.

"All those auctions will end up in some appraiser's book," said Christopher Thornberg, an economist with Beacon Economics of Los Angeles...

Still, developers and sellers aren't likely to drastically mark down their units based on one afternoon auction for a single building. The perception - or at least explanation - could be that Eight Orchids might have set its prices too high to begin with or that it may have limited appeal because it is near Interstate 880 and the Alameda County and Oakland city jails.

"That kind of discount could be attributed to their location, as much as to the overall market and credit situation," said Patrick Duffy, principal with MetroIntelligence Real Estate Advisors in Los Angeles...