"The Post-American World" by Fareed Zakaria

Over the past several years, I've become a big fan of Fareed Zakaria, who currently serves as Editor for Newsweek International and has recently released a new book entitled "The Post-American World."

Fareed was a keynote speaker at last year's Pacific Coast Builder's Conference, and I was fortunate enough to speak to him before his speech and also to grab a quick photo op (my employer at the time, Hanley Wood Market Intelligence, was a primary sponsor of this event). While it's a terrible picture of me, it's the only one I have with him!

What I like about Fareed is his courage in telling unpleasant truths to a country which often prefers to distract itself with more temporary pleasures such as obsessing over American Idol's final 3, buying more home than can reasonably be afforded or running up other debt with the hope that the future will somehow make everything work out. These various distractions have come at a cost: whether we like it or not, other countries are rising up and challenging the United States' ability to dictate to the rest of the world -- but Fareed argues that not only is that a natural consequence of a growth of other countries' economies, but can also greatly benefit Americans and the values that make our society unlike any other in the world.

But first, here's a video clip from Fareed's interview with PBS' Charlie Rose earlier in the month:

So what does that have to do with housing? Quite possibly, a different standard of living and a change in what we expect from our homes and our communities.

Following are portions of an an excerpt published in the May 12th edition of Newsweek (the link also includes another video with Mr. Zakaria on the Newsweek website). And yes, while long, it's a very interesting read:

Americans are glum at the moment. No, I mean really glum. In April, a new poll revealed that 81 percent of the American people believe that the country is on the "wrong track."... There are reasons to be pessimistic—a financial panic and looming recession, a seemingly endless war in Iraq, and the ongoing threat of terrorism. But the facts on the ground—unemployment numbers, foreclosure rates, deaths from terror attacks—are simply not dire enough to explain the present atmosphere of malaise...

In America, we are still debating the nature and extent of anti-Americanism. One side says that the problem is real and worrying and that we must woo the world back. The other says this is the inevitable price of power and that many of these countries are envious—and vaguely French—so we can safely ignore their griping. But while we argue over why they hate us, "they" have moved on, and are now far more interested in other, more dynamic parts of the globe. The world has shifted from anti-Americanism to post-Americanism...

Well, consider this fact. In 2006 and 2007, 124 countries grew their economies at over 4 percent a year. That includes more than 30 countries in Africa. Over the last two decades, lands outside the industrialized West have been growing at rates that were once unthinkable. While there have been booms and busts, the overall trend has been unambiguously upward...

We are living through the third great power shift in modern history. The first was the rise of the Western world, around the 15th century. It produced the world as we know it now—science and technology, commerce and capitalism, the industrial and agricultural revolutions. It also led to the prolonged political dominance of the nations of the Western world. The second shift, which took place in the closing years of the 19th century, was the rise of the United States. Once it industrialized, it soon became the most powerful nation in the world, stronger than any likely combination of other nations. For the last 20 years, America's superpower status in every realm has been largely unchallenged—something that's never happened before in history, at least since the Roman Empire dominated the known world 2,000 years ago. During this Pax Americana, the global economy has accelerated dramatically. And that expansion is the driver behind the third great power shift of the modern age—the rise of the rest...

The post-American world is naturally an unsettling prospect for Americans, but it should not be. This will not be a world defined by the decline of America but rather the rise of everyone else. It is the result of a series of positive trends that have been progressing over the last 20 years, trends that have created an international climate of unprecedented peace and prosperity...

A team of scholars at the University of Maryland has been tracking deaths caused by organized violence. Their data show that wars of all kinds have been declining since the mid-1980s and that we are now at the lowest levels of global violence since the 1950s. Deaths from terrorism are reported to have risen in recent years. But on closer examination, 80 percent of those casualties come from Afghanistan and Iraq, which are really war zones with ongoing insurgencies—and the overall numbers remain small. Looking at the evidence, Harvard's polymath professor Steven Pinker has ventured to speculate that we are probably living "in the most peaceful time of our species' existence."...

Part of the problem is that as violence has been ebbing, information has been exploding. The last 20 years have produced an information revolution that brings us news and, most crucially, images from around the world all the time. The immediacy of the images and the intensity of the 24-hour news cycle combine to produce constant hype...

The threats we face are real. Islamic jihadists are a nasty bunch—they do want to attack civilians everywhere. But it is increasingly clear that militants and suicide bombers make up a tiny portion of the world's 1.3 billion Muslims. They can do real damage, especially if they get their hands on nuclear weapons. But the combined efforts of the world's governments have effectively put them on the run and continue to track them and their money...

Some point to the dangers posed by countries like Iran. These rogue states present real problems, but look at them in context. The American economy is 68 times the size of Iran's. Its military budget is 110 times that of the mullahs. Were Iran to attain a nuclear capacity, it would complicate the geopolitics of the Middle East. But none of the problems we face compare with the dangers posed by a rising Germany in the first half of the 20th century or an expansionist Soviet Union in the second half. Those were great global powers bent on world domination. If this is 1938, as some neoconservatives tell us, then Iran is Romania, not Germany...

Today's rising great powers are relatively benign by historical measure. In the past, when countries grew rich they've wanted to become great military powers, overturn the existing order, and create their own empires or spheres of influence. But since the rise of Japan and Germany in the 1960s and 1970s, none have done this, choosing instead to get rich within the existing international order. China and India are clearly moving in this direction. Even Russia, the most aggressive and revanchist great power today, has done little that compares with past aggressors...

The underlying reality across the globe is of enormous vitality. For the first time ever, most countries around the world are practicing sensible economics. Consider inflation. Over the past 20 years hyperinflation, a problem that used to bedevil large swaths of the world from Turkey to Brazil to Indonesia, has largely vanished, tamed by successful fiscal and monetary policies. The results are clear and stunning. The share of people living on $1 a day has plummeted from 40 percent in 1981 to 18 percent in 2004 and is estimated to drop to 12 percent by 2015. Poverty is falling in countries that house 80 percent of the world's population...

The global economy has more than doubled in size over the last 15 years and is now approaching $54 trillion! Global trade has grown by 133 percent in the same period. The expansion of the global economic pie has been so large, with so many countries participating, that it has become the dominating force of the current era. Wars, terrorism, and civil strife cause disruptions temporarily but eventually they are overwhelmed by the waves of globalization...

The combination of low inflation and lots of cash has meant low interest rates, which in turn have made people act greedily and/or stupidly. So we have witnessed over the last two decades a series of bubbles—in East Asian countries, technology stocks, housing, subprime mortgages, and emerging market equities. Growth also explains one of the signature events of our times—soaring commodity prices. $100 oil is just the tip of the barrel. Almost all commodities are at 200-year highs. Food, only a few decades ago in danger of price collapse, is now in the midst of a scary rise. None of this is due to dramatic fall-offs in supply. It is demand, growing global demand, that is fueling these prices...

It is an accident of history that for the last several centuries, the richest countries in the world have all been very small in terms of population. Denmark has 5.5 million people, the Netherlands has 16.6 million. The United States is the biggest of the bunch and has dominated the advanced industrial world. But the real giants—China, India, Brazil—have been sleeping, unable or unwilling to join the world of functioning economies. Now they are on the move and naturally, given their size, they will have a large footprint on the map of the future. Even if people in these countries remain relatively poor, as nations their total wealth will be massive. Or to put it another way, any number, no matter how small, when multiplied by 2.5 billion becomes a very big number. (2.5 billion is the population of China plus India.)...

As economic fortunes rise, so inevitably does nationalism. Imagine that your country has been poor and marginal for centuries. Finally, things turn around and it becomes a symbol of economic progress and success. You would be proud, and anxious that your people win recognition and respect throughout the world...

Such divergent national perspectives always existed. But today, thanks to the information revolution, they are amplified, echoed, and disseminated...

The fact that newly rising nations are more strongly asserting their ideas and interests is inevitable in a post-American world. This raises a conundrum—how to get a world of many actors to work together. The traditional mechanisms of international cooperation are fraying. The U.N. Security Council has as its permanent members the victors of a war that ended more than 60 years ago. The G8 does not include China, India or Brazil—the three fastest-growing large economies in the world—and yet claims to represent the movers and shakers of the world economy. By tradition, the IMF is always headed by a European and the World Bank by an American. This "tradition," like the segregated customs of an old country club, might be charming to an insider. But to the majority who live outside the West, it seems bigoted...

Over the last 20 years, globalization has been gaining depth and breadth. America has benefited massively from these trends. It has enjoyed unusually robust growth, low unemployment and inflation, and received hundreds of billions of dollars in investment. These are not signs of economic collapse. Its companies have entered new countries and industries with great success, using global supply chains and technology to stay in the vanguard of efficiency. U.S. exports and manufacturing have actually held their ground and services have boomed.

The United States is currently ranked as the globe's most competitive economy by the World Economic Forum. It remains dominant in many industries of the future like nanotechnology, biotechnology, and dozens of smaller high-tech fields. Its universities are the finest in the world, making up 8 of the top ten and 37 of the top fifty, according to a prominent ranking produced by Shanghai Jiao Tong University.

A few years ago the National Science Foundation put out a scary and much-discussed statistic. In 2004, the group said, 950,000 engineers graduated from China and India, while only 70,000 graduated from the United States. But those numbers are wildly off the mark. If you exclude the car mechanics and repairmen—who are all counted as engineers in Chinese and Indian statistics—the numbers look quite different. Per capita, it turns out, the United States trains more engineers than either of the Asian giants...

But America's hidden secret is that most of these engineers are immigrants...Half of all Silicon Valley start-ups have one founder who is an immigrant or first generation American. The potential for a new burst of American productivity depends not on our education system or R&D spending, but on our immigration policies. If these people are allowed and encouraged to stay, then innovation will happen here. If they leave, they'll take it with them...

American society can adapt to this new world. But can the American government? Washington has gotten used to a world in which all roads led to its doorstep. America has rarely had to worry about benchmarking to the rest of the world—it was always so far ahead. But the natives have gotten good at capitalism and the gap is narrowing. Look at the rise of London. It's now the world's leading financial center—less because of things that the United States did badly than those London did well, like improving regulation and becoming friendlier to foreign capital...Twenty years ago, the United States had the lowest corporate taxes in the world. Today they are the second-highest. It's not that ours went up. Those of others went down...

American parochialism is particularly evident in foreign policy...Rather than narrowly obsessing about our own short-term interests and interest groups, our chief priority should be to bring these rising forces into the global system, to integrate them so that they in turn broaden and deepen global economic, political, and cultural ties. If China, India, Russia, Brazil all feel that they have a stake in the existing global order, there will be less danger of war, depression, panics, and breakdowns. There will be lots of problems, crisis, and tensions, but they will occur against a backdrop of systemic stability...

To bring others into this world, the United States needs to make its own commitment to the system clear. So far, America has been able to have it both ways. It is the global rule-maker but doesn't always play by the rules. And forget about standards created by others. Only three countries in the world don't use the metric system—Liberia, Myanmar, and the United States. For America to continue to lead the world, we will have to first join it...

Americans—particularly the American government—have not really understood the rise of the rest. This is one of the most thrilling stories in history. Billions of people are escaping from abject poverty. The world will be enriched and ennobled as they become consumers, producers, inventors, thinkers, dreamers, and doers. This is all happening because of American ideas and actions. For 60 years, the United States has pushed countries to open their markets, free up their politics, and embrace trade and technology...Yet just as they are beginning to do so, we are losing faith in such ideas. We have become suspicious of trade, openness, immigration, and investment because now it's not Americans going abroad but foreigners coming to America. Just as the world is opening up, we are closing down...

Generations from now, when historians write about these times, they might note that by the turn of the 21st century, the United States had succeeded in its great, historical mission—globalizing the world. We don't want them to write that along the way, we forgot to globalize ourselves.

Bush Admin. broadens its own housing rescue program

Following great criticism that it was offering no alternative other than to veto the housing rescue bill which passed the House of Representatives last week, the Bush Administration has expanded its own program which relies on the FHA. From a CNNMoney.com story:

While Congress grapples with how to help troubled homeowners, the Bush administration is expanding a more modest effort to help at-risk borrowers.

The Federal Housing Administration announced changes last week to FHASecure, a program launched in August in response to a housing crisis that threatened as many as 2.2 million borrowers of adjustable rate mortgages (ARMs) with foreclosure.

The changes - the agency's second attempt since April to broaden the scope of FHASecure - underline a debate that is front and center in Washington: What's the best way to rescue borrowers at risk of losing their homes as the nation faces one of the worst housing crises in decades?

The House - led by Democrats and Republicans in states hit hard by foreclosures - passed a contentious foreclosure-prevention package last Thursday that would back as much as $300 billion in mortgages. A key Senate panel could consider the bill as soon as this week, but it faces resistance from Republican lawmakers and a veto threat by President Bush.

At the same time, the FHA on Thursday loosened its rules setting out the criteria that borrowers must meet to obtain an FHA-insured mortgage...

In August, FHA originally said it hoped that FHASecure would refinance 80,000 ARMs for delinquent borrowers who would otherwise likely lose their homes.

But the FHA's own data shows that the program has so far helped fewer than 2,000 of those homeowners.

"The current FHASecure numbers are woefully inadequate," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, a community advocacy group. "It's not having an impact on the crisis."

The FHA, while acknowledging that it has helped fewer borrowers than it originally intended, says nearly 200,000 have gotten refinanced mortgages under FHASecure...

Until recently, FHASecure was available only to borrowers who fell into delinquency after low, teaser interest rates on their ARMs reset to much higher rates.

In April, the agency announced that it would no longer restrict the program to those borrowers. Instead, all subprime ARM borrowers who were no more than 60 days late - or 30 days late twice in a 12-month period - would be eligible for an FHA-insured loan, as long as the borrower had home equity, or cash, equaling 3% of the mortgage principal.

Also as part of this expansion, borrowers who were three months delinquent or late three times in a 12-month period qualified for FHASecure, but these borrowers needed to have 10% home equity or the cash equivalent. To enable borrowers to reach those loan-to-value ratios, lenders could voluntarily write down balances.

"The changes we have made with FHASecure will help us reach about 500,000 homeowners in total by the end of this year," said Roy Bernardi, the deputy secretary of the Department of Housing and Urban Development, which runs FHA, told the Federal Home Loan Banks Annual Directors Conference on April 29.

In the latest change, the FHA announced on Thursday that it would cover more people by pricing in the risk of default when screening potential borrowers.

Since its birth during the Great Depression, the FHA has charged all borrowers the same rate. Starting in July, the agency would initiate higher insurance premiums for borrowers with riskier credit profiles...

FHA-insured loans, even with insurance premiums, tend to be more reasonably priced than what borrowers would pay otherwise...After the added premiums are folded into the mortgage payment, the difference comes to only about $12 a month for that $150,000 loan...

The timing of the announcement coincided with the House passage of a bill sponsored by Barney Frank, one that takes a much more comprehensive approach to meeting the foreclosure crisis. Critics of the bill, including Bernardi of HUD, charge that it could cost taxpayers billions while the FHASecure program is relatively risk-free...

According to Frank's office, a stronger response to the foreclosure crisis is needed.

"We already acknowledged that there will be increased risk," said Steve Adamske, a Frank spokesman. "But the housing crisis is affecting the entire economy and will prolong any recession. FHASecure has not helped as many people as it needs to."

But will the expansion of FHASecure improve that record?

"It might save a few more borrowers," said Carr. "But in the context of reports of foreclosure filings up 112% this year, representing 600,000 homeowners, it's not nearly as robust as it has to be."

The Giant 400: Credit crunch helping manufactured home sales

According to Professional Builder magazine's "Giant 400" survey, sales of manufactured homes fell steeply during the recent housing boom and bust cycle, made even worse by the steep discounts 'site-built' builders were offering buyers. But as the credit crunch has eliminated most loans without some type of down payment, the lower cost of manufactured housing has re-made it as an affordable housing of choice in certain areas.
Site-built housing's downturn dragged the manufactured housing sector into the gloom the past two years, but now the sun is beginning to shine again for at least some in that industry. Part of the reason is the credit crackdown that has many site-builders tearing their hair.

"It's tough to sell any kind of housing when so many production site-builders are discounting wildly," explains Tom Beers, vice president of economics for Arlington, Va.-based Manufactured Housing Institute. "Our members complain about the strategies of the public home builders just as so many other builders do."

"But the last couple of months, we've seen single-section HUD Code shipments turn up dramatically. Both consumers and lenders have had a reality check," Beers says, "They can't put people into $500,000 homes anymore if they don't have a big down payment."

Single-section HUD Code homes are the most affordable product in ownership housing, with an average price of $35,000. A $2,000 down payment will work fine for such a home, while it may not work at all in the current tight credit environment for even the most affordable site-built homes.

Multi-section HUD Code homes and modular housing are still in the dumps, because both track closely to site-built. But even there Beers sees reasons for optimism. Multi-section HUD houses are assembled on-site and average $85,000 in price, without the lot and the decks and porches many people attach to them. The federal stimulus package now in Congress contains a provision to update FHA Title 1 mortgages, upping the loan limit from $48,000 to $70,000. If Congress passes that provision, Beers believes the mortgages will be used widely on multi-section as well as single-section HUD homes.

Modular manufacturers have carved a niche recently supplying modules to custom site-builders for assembly into expensive custom homes in rural areas. Those rural markets are not as bad as those in suburbia, and that market segment is not as interested in standing inventory homes. So even modular has hope.

Still, the best chance for manufactured housing is the HUD code single-section segment that's already rocking. Tighter credit is pushing people — who should have been customers all along, Beers says — back into HUD singles.

The Giant 400: Rental Units Take Center Stage

According to a story related to Professional Builder magazine's "Giant 400" survey, builders of rental housing sailed through 2007 while those building 'for sale' housing suffered:

Six of the 10 rental kingpins finished more units in 2007 than in 2006, while the single-family builders are all down.

"Rental is the flip side of ownership housing," says NAHB economist Dr. Bernie Markstein III. "Right now, with foreclosures rising and people reluctant to buy homes, the rental market is benefiting from the woes in ownership housing. Condo sales are falling for the same reasons as single-family detached, and when that happens in the condo market, a lot of those units wind up back in the rental market, at least temporarily." That phenomenon kept vacancy rates higher in some markets, but they're now dropping again...

Markstein predicts another upswing in luxury renters-by-choice in many markets. "Since home appreciation rates are likely to be flat for several years to come, there's not as much motivation for young, high-income couples to buy," he says. Such couples may opt for well-located rental apartments and put off owning a home until prices really start to recover.

The Giant 400: Largest Concerns for 2008

Calling it a "market in full flight," the editors of Professional Builder magazine's Giant 400 also surveyed builders on their top concerns for 2008:

Housing's giants list sales as their biggest challenge (64.9 percent of respondents), narrowly edging out fears related to the economy and interest rates (64.5 percent). Land issues are a distant fourth (26.4 percent), but land is actually the key component of this downturn — the Old Maid card no production builder wants to hold when people stop buying houses.

The high and mighty titans of the housing industry — publicly held builders like No. 1 ranked D.R. Horton and No. 2 Lennar — are humbled by holding too much land bought at the peak of the market, at prices now out of whack with falling home prices.

New York-based housing market analyst Ivy Zelman says this slump is far from over, predicting that by the end of 2008 the largest builder may have 20 percent fewer closings and revenue than in 2007. "It's ugly out there," Zelman says. "The public builders are challenged as never before, and most of the private builders are dependent on the banks for financing, and those banks are behaving irrationally right now."

If there's light in this tunnel, look for it to show first in Texas, which has the advantage of a vibrant, oil-driven economy and existing home prices that are still rising...

When the market does recover, it will be interesting to see if the largest builders can recover their momentum and resume growing. The public builders have laid off hundreds of good managers, who just might start their own companies when they have the chance.

Giant 400: The Land Impairments of 2007

In continuing coverage of Professional Builder magazine's "Giant 400" listing, land impairments were a huge deal for large builders in 2007 (and were generally taken right after earnings are reported):

Public home builders are not the only ones drowning in a sea of red ink flowing from vast tracts of impaired land. In the mid-2000s feeding frenzy, the largest public builders got their snouts in the trough of overpriced land deeper than any private builder. Just check out these descriptions from Wall Street stock analyst David Goldberg of UBS Securities of some of the most significant impairments since the early days of the housing crash in mid-2006:

Centex: $2.1 billion from land impairment charges (including $213 million in joint ventures), $454 million from forfeiture of option deposit and pre-acquisition costs, goodwill of $61 million

D.R. Horton: $1.6 billion of impairments on owned lots, $234 million from forfeiture of option deposits and pre-acquisition costs. Also includes $474 million of goodwill impairments.

KB Home: $1.6 billion of inventory impairments (including $215 million from joint ventures), $288 million of option impairments, goodwill write-offs of $108 million.

Lennar: $2.1 billion of inventory adjustments (including $623 million from joint ventures), $682 million of write-offs of option deposits, goodwill write-offs of $190 million. Excludes $740 million loss related to land sale to Morgan Stanley.

Stock analyst Carl Reichardt of Wachovia Securities says the public builders usually report their margin numbers before impairments for very good reason: "If they reported them after impairments, those numbers would be mostly large and negative."

However, Reichardt notes that reporting margin numbers before impairments does give a better picture of what's going on in the present tense. "Impairments really relate to future communities and homes rather than what the builder delivered in the most recent reporting period," he says. "Most of these companies have very small margins before impairments. If they include them, it flips over to huge negative margins. Let's face it, margins suck for these companies."

One industry insider, privy to senior management, estimated that if the current housing downturn persists into 2010, as many as half the Top 10 builders would not survive.

The Giant 400: The Year That Was 2007

With continuing coverage of Professional Builder's "Giant 400" listings of the country's homebuilders, editor Bill Lurz demonstrates that the pain of the housing bust actually hit the largest builders the hardest. There are even whispers that a prolonged slump lasting until 2010 would wipe out half of the country's top 10 builders:

It was probably inevitable that a housing boom that lasted 13 years would end with a cataclysmic contraction. And this is certainly one of those, a dangerous beast that will devour home building companies large and small. "It reminds me of the late '80s in Texas," says Don Horton, leader of our new No. 1 builder, Fort Worth, Texas-based D.R. Horton, "only this time, it's all across the country."...

Horton regained the top of the housing industry by strategically retreating, shrinking rather than growing. After becoming the first builder to ever top 50,000 closings (in 2005), and doing it again the next year, D.R. Horton fell to 37,717 closings in fiscal 2007 (-29.4 percent) and $9.6 billion in revenue — 34.1 percent less than the $14.5 billion it banked in 2006. Horton has cut its payroll by 60 percent since the peak of the market in 2005.

Miami-based Lennar Corp., last year's No. 1, fell farther, dropping 32.9 percent in closings to 33,283, and dropping 36.3 percent in revenues to $9.5 billion — to land at No. 2. Dallas-based Centex Corp., Bloomfield Hills, Mich.-based Pulte Homes and Los Angeles' KB Home round out the top five, the publicly held group of huge companies we used to call Supernovas. All are now losing ground at an astonishing rate. None of them look particularly super these days.

As the overall ranking shows, this downturn is hitting the largest giants hardest, and the bottom line is that non-giants are gaining market share of total U.S. housing completions for the second consecutive year. That trend is likely to continue...

A year ago, we were amazed at how a housing market downturn reshuffled the Giant 400, noting that 154 builders dropped five positions or more, and 137 rose by at least five slots. Of course, we had no idea then that this year's rankings would make that volatility pale in comparison. This year, 108 builders rose by 20 or more positions, and 86 dropped a similar distance...

Last year, the theme of our coverage of the Giant 400 was the "selective" nature of the housing downturn — that Texas and the Carolinas were untouched in 2006, which allowed builders in those states to climb the rankings at the expense of many in California and Florida. This year, it's obvious that Texas and the Carolinas have not escaped the downturn, but builders there are still relatively better off. And we can also see that rental housing is beginning to act counter-cyclically to for-sale housing. Run your finger down the rankings poster in search of firms with big position increases. You'll find most are either rental housing specialists or Texans...

And here's the shocker: some Texas builders are growing — a few of them by a lot. Examples include Austin entry-level specialist Main Street Ltd., which climbed 53 places (from 205 to 152) on the strength of unit growth from 991 to 1,008, with revenues up from $126 million in 2006 to $133.1 million in 2007. And Peter Shaddock's Sotherby Homes rose 71 spots (192 to 121) as Dallas closings went from 306 to 383 and revenues from $132.3 million to $163.6 million...

The Giant 400:

Professional Builder calculates the Giant 400 rankings by using a two-step process. First, the top 400 production building firms are ranked according to housing units closed in the previous calendar year (or the company's most recent fiscal year). This year, the 400th company closed 82 homes in 2007 (down from 115 last year). But since dollars — not units — are what builders put in the bank, we do another sort, by revenues, to finalize the rankings.

The editors of PB believe this two-step process is a better way to identify the true giants of housing rather than a one-step sort based on either revenues or units. Revenue, after all, is the way the world measures the size of any business. But down at the bottom of the list, we think true production builders should make it into the rankings at the expense of high-end, semi-custom builders with high average sale prices but few units.

Professional Builder magazine unveils the Giant 400

The two largest national magazines serving the building industry -- Builder and Professional Builder -- both compile rankings of the largest builders in the U.S. each year, although their methodologies differ. Whereas Builder magazine ranks builders by closings and focuses mostly on the top 100 (as well as the 'next 100'), Professional Builder ranks their listing by revenue and expands it to the "Giant 400." Both surveys are released in May.

In the first of several articles, Senior Editor Bill Lurz discusses the state of the market for these 400 builders and what they're seeing ahead on the horizon:

When we ask builders, analysts and housing industry consultants what they think about the future, they seem to have radically different views. For instance, Colorado-based consultant Chuck Shinn believes recovery will bring drastically different housing products and new kinds of building companies.

Shinn says the public builders should be land developers or builders, but not both. He offers NVR's land-light business model as one alternative, then says the big builders can't see the wave of the future in community development because they are blind to anything that doesn't fit the demands of their production machines.

"We already have land developers taking market share by developing mixed-use projects that put many services within walking distance of homes," Shinn says. "People don't want to drive to Starbucks," he charges. "They want to walk." He believes successful communities in the future will blend commercial and retail space with a 60/40 mix of small-lot detached homes and high-density multifamily, with average prices settling some 30 percent lower than in most of today's developments.

He also believes large private builders, backed by big equity investment funds, will soon be a powerful force and that new technology will drive mass customization into every sales office.

San Francisco-based Wachovia Securities stock analyst Carl Reicardt endorses the wisdom of the largest builders taking lessons from NVR as a way to avoid another decade of extreme volatility... "The big public builders know Wall Street cares more about sustainability of growth than a high percentage of change in that rate over time. Wall Street rewards predictability," Reichardt says.

"When you put land in the home building equation as part of the profit center, you throw predictability right out the window.

"It sounds — now — like the other public builders want to reshape their companies to be more like NVR," he says. "But the cynics will tell you it's bull." As soon as the market turns, they will get right back into development, Reichardt charges.

"They can't give up that land margin. These guys are like drunks on a bender. NVR is all about becoming more efficient constructors of housing and getting rid of the risk and volatility associated with land. But these other builders will never do it."

Reichardt, however, has a different vision from Shinn's about the future of housing products. "I don't for a moment think we'll see the end of distant suburban subdivisions," he scoffs. "Even if gas goes to $9 a liter. ... What I don't understand is the beige boxes. Why does the design aesthetic have to be so bad?

"You can see the direction the next generation wants to move," Reichardt says, "and it's modern."

The Giant 400:

Professional Builder calculates the Giant 400 rankings by using a two-step process. First, the top 400 production building firms are ranked according to housing units closed in the previous calendar year (or the company's most recent fiscal year). This year, the 400th company closed 82 homes in 2007 (down from 115 last year). But since dollars — not units — are what builders put in the bank, we do another sort, by revenues, to finalize the rankings.

The editors of PB believe this two-step process is a better way to identify the true giants of housing rather than a one-step sort based on either revenues or units. Revenue, after all, is the way the world measures the size of any business. But down at the bottom of the list, we think true production builders should make it into the rankings at the expense of high-end, semi-custom builders with high average sale prices but few units.

Housing Chronicles celebrates 6-month anniversary

Today The Housing Chronicles Blog celebrates its 6-month anniversary!

When I launched the blog back on November 12, 2007, I had a simple mission: (1) to cover the news stories about housing and economics that I was reading already in print and online; (2) to provide balanced coverage from the perspective of a building industry insider; (3) to interact with other bloggers and reporters covering the real estate beat; and (4) to (hopefully) promote what we do at MetroIntelligence Real Estate Advisors.

First, the metrics: while traffic to the HousingChronicles.com site itself isn't huge by Internet standards, it does continue to grow and should hit 3,000 unique visitors this month, giving the site an Alexa rating -- which ranks the tens of millions of sites on the Internet by visitors -- of 632,132 over the past week and 978,750 over the last three months (generally a rating under 100,000 certifies a site for bragging rights, but I'm happy with anything under 1 million). Over the past 3 months, that Alexa rating has risen by over 3.3 million slots, so thank you to all the visitors who are continuing the discover the blog.

A few months ago I decided to syndicate the blog to services such as BlogBurst, Sphere, and NewsTex, which means that other viewers find my postings on other sites such as Reuters, Fox Business News, The Wall Street Journal, CNN and many others. Although this certainly impacts traffic to the blog site itself, the 5.3 million headline views Housing Chronicles has received from BlogBurst alone makes it a tremendous promotional vehicle.

But blogs also receive traffic from other blogs as well -- and so I must thank Patrick.net, Calculated Risk, Lansner on Real Estate, Dr. Housing Bubble, FinancialWebRing.org, among others, for providing links to my site which have brought me a lot of new visitors.

Housing Chronicles has also been cited twice by the Carnival of Real Estate for two different postings submitted for their weekly contest, which has brought more exposure and traffic.

In addition, I need to thank Nick Slevin, who runs Peninsula Publishing, edits the bi-weekly BuilderBytes newsletter and has also given me my own column at his flagship publication, Builder & Developer.

Secondly, the new contacts I've made: I've met some very smart and interesting people via the blogosphere -- like Peter Viles, who runs the L.A.Land blog for the Los Angeles Times and allowed me a guest blog spot a few weeks ago. Or Jonathan Lansner, who runs the Lansner on Real Estate blog for the Orange County Register. These two guys run excellent blogs that focus not just on their local markets, but also national trends that impact Southern California.

Or Jonathan Smoke, who founded HousingIntelligence.com and BlueSmoke and became an alliance partner with MetroIntelligence and runs the Housing Intelligence blog. Or Sean O'Toole, who founded ForeclosureRadar.com and runs the ForeclosureTruth blog.

Or real estate agent Judy Graff, who runs the San Fernando Valley Real Estate blog and Alice Cook, a self-described "angry renter" from the United Kingdom, who runs the UK Bubble blog.

And of course Luke Mullins, an Associate Editor for U.S. News & World Report who blogs at The Home Front.

The next six months should be even better for Housing Chronicles, including moving to a multi-author platform so you'll be hearing from more voices than just my own, and the syndication of selective blog postings to the website for Builder magazine, Builderonline.com (hopefully any day now!).

I've learned that maintaining a regular blog is much more than a hobby -- it's a commitment that forces me to keep up on real estate news and trends, which also makes me a much better (and informed) consultant. Most bloggers don't just blog -- those who do so for newspapers and magazines wear the blogging hat in addition to many others -- so I've developed great respect for those men and women who get up early -- or stay up late -- to add their unique voices to the blogosphere. It just wouldn't be the same without them.

Thanks for visiting!

May 3rd edition of Builder Bytes released

The May 3rd edition of BuilderBytes was released last week. Among the highlighted stories:

Anaheim to postpone residential builders' fees
ocregister.com
The city approves a temporary program that moves back payment deadlines.
Anaheim The City Council voted unanimously to temporarily delay housing development fees to spur residential construction during the tough real estate market.
Mayor Curt Pringle said he wanted developers "to understand that in this city, they don't have to pay all those fees upfront."
http://www.ocregister.com/articles/city-fees-housing-2026084-developers-anaheim

Overall Performance Metrics Make Case for Going Green
ENR.com
Long-awaited confirmation that buildings constructed to sustainability standards of the U.S.Green Building Council’s LEED system generally perform better than uncertified buildings has arrived thanks to two recent studies. Looking at energy savings, occupancy rates, sale price and rental rates, they found that LEED buildings use an average of 25% to 30% less energy than non-LEED buildings.
http://enr.ecnext.com/coms2/article_nebuar080409

Home Builders' Association of Northern California Opens Urban
Home Builders' Association
SAN FRANCISCO--The Home Builders Association of Northern California, the Bay Area's largest association of home builders and a noted source of public information on home buying issues that affect the public, has opened an urban division at 660 Mission Street in San Francisco. "We have opened a new urban division with an office in San Francisco to address – in part - the city's initiatives toward higher density housing," said Joseph Perkins, HBANC President & CEO.
http://www.businesswire.com/portal/site/google/?ndmViewId=news_
view&newsId=20080501005125&newsLang=en

Builders' creativity rises as housing market slumps
wtol 11
TOLEDO -- Spring is usually a great time to sell a home, but, these days, not so much. In fact, the nation's homebuilders report the lowest number of home sales in more than 16 years.
http://www.wtol.com/Global/story.asp?S=8239021

Seminar on controlling costs in Irvine, CA -- May 29, 2008

Jonathan Smoke with BlueSmoke and HousingIntelligence.com recently invited me to speak with him at a luncheon at the Irvine Marriott on Thursday, May 29th, as part of an all-day seminar hosted by Hyphen Solutions, the building industry's provider of choice for scheduling and supply chain management.

This special business forum -- "Controlling Costs When You (and Your Suppliers) are Stretched Thin" -- will feature experts from homebuilders such as Shea Homes, Ryan Homes, Taylor Morrison and Standard Pacific as well as reps from GE, Black & Decker, SelectBuild and BlueSmoke on establishing the types of common technological standards and relationships with suppliers to survive in a tough market.

For the luncheon portion, MetroIntelligence will be partnering with BlueSmoke/Housing Intelligence on showcasing the tools and technologies we're using to bring market research consulting into the 21st century using specific examples for Orange County and Southern California.

If you're a homebuilder and want to know how to increase absorption at current developments by analyzing your best prospects, learn about the Orange County's best-selling projects or hear when this market is set to rebound, then don't miss this lunch!

But don't wait -- RSVP by May 15th, 2008, as space is limited to just 75 builder participants.

To register for this free seminar hosted by Hyphen Solutions and Professional Builder magazine, click here for a .pdf brochure or email Judy Brociek at Jbrociek@reedbusiness.com.

Anatomy of a building boom & bust cycle

Builder magazine is celebrating its 30th year compiling the Builder 100 list, and as part of that there's a very interesting article by Ethan Butterfield on exactly what happened during this last cycle. Whereas the mindset over the last decade was 'big and diversified' would even out cyclical highs and lows, that turned out to be more wishful thinking than business fact. From the article:

After the record-setting highs and equally historic lows of the last 36 months, builders must take away one lesson: The housing market is still cyclical. Despite the quotable stylings of D.R. Horton CEO Don Tomnitz and others during the peak of the housing boom, averring that the nation’s large public builders were recession-proof, they proved not to be.

The large public companies, it was argued by the builders as well as by some industry experts and observers, had expanded their product lines to hit more corners of the ­market, and had broadened their reach through geographic expansion into new and different types of markets, making them impervious to fluctuations in local markets and in the greater economy.

But a quick look at this year’s Builder 100 numbers clearly demonstrates that builders both large and small, and public and private alike, remain subject to industry and economic cycles. Nobody is bigger than the cycle...

The Builder 100 struggled through what everyone is euphemistically calling a “difficult” year, with sales down 23.96 percent nationally. That sales were off was predictable, and that Builder 100 companies also saw a slowdown was no surprise. But Builder 100 companies saw a greater drop in closings (28.16 percent) than the overall market, with the Next 100 (down 32.60 percent) and the 10 largest builders (down 28.50 percent) feeling the biggest losses in closings year-over-year.

In the last housing downturn, which hit its nadir in 1991, Builder 100 companies saw their revenues shrink from $34.2 billion in 1989, to $30.7 billion in 1990, to a low of $24.2 billion in 1991. But the 21.17 percent decrease in total Builder 100 revenue from 1990 to 1991 pales in comparison to the 34.99 percent revenue ­decline the Builder 100 felt between 2006–2007. (Up to 1990, Builder calculated the Builder 100 based on housing starts, not ­closings. There is no way to tell how large of a closings decrease the Builder 100 saw at its last trough.)

Overall, the housing market saw new-home starts shrink 14.92 percent from 1.193 million in 1990 to 1.015 million units in 1991. In the ­current recession, total new-home starts shrank 24.74 percent from 1.80 million in 2006 to 1.35 million in 2007, according to the NAHB...

Big builders that had seen multiple housing cycles ebb and flow knew to be more cautious buying land during the recent boom. David Weekley, chairman of Houston-based David Weekley Homes, saw builders with large land positions go ­belly-up during the 1980s in Texas and pushed his company to go slower this time.

But not everyone took a judicious approach to land acquisition. Builders of all sizes were promoting their long land positions in 2005 and 2006 as major positives, thinking that land would only continue to increase in value, and that they were smart to lock in as much as they could at ­whatever price they could get before it got even more expensive. It turned out they were buying at the crest of the wave. The land they acquired was worth less than they paid for it almost instantly.

The fact that builders bought too much land for too much money is not the reason for the downturn. In most cases, though, land is the root cause of builders’ most pressing financial problems. The costs associated with buying, developing, and holding on to land are enormous, and the amount ­borrowed for it and still owed is preventing the builders from being able to borrow more money to keep their companies afloat...

Years’ supply of land among the 12 big builders has gone down over the last year as builders let go of options and sold off owned lots to try and cut costs. Despite all of the land that has changed hands, though, the calculated years’ supply of land at the current rate of sales has not dropped nearly as much as the total count of lots controlled because home sales have decreased considerably. The median years’ supply of land in 2005 among the 12 builders was 7.1 years; in 2008 it was 6.5.

Many builders and home building consultants are now talking up the benefit of optioning land and limiting the risk associated with buying it outright, because so many builders holding large positions of owned land are struggling to unload it and are giving much of it back to their creditors...

One builder holding that contrarian mindset is Pulte Homes, based in Bloomfield Hills, Mich. Pulte had 52 percent of its lots optioned in 2005, but began 2008 with just 14 percent optioned, according to ­Zelman’s research. Pulte has moved to offload its land to cut costs over the last two years, reducing options held from 188,800 lots to 19,950, but only cutting its owned land count from 173,800 lots to 120,888 over the same period.

“If you get rid of all your land, you don’t have the ability to earn on it,” says Pulte CEO Richard Dugas. “If you hold your land, and you have the financial strength to hold it, and you rightsize the value of it, like we have through the write-off process, you can still benefit from that land.”

Dugas says Pulte has too much land today and that the market slowdown is to blame. But Dugas believes Pulte has the financial strength to hold the land it chooses to and will benefit later.

“We are not looking to sell our valuable land at 10 or 20 cents on the dollar, which is the asking price from these vulture funds that want to take advantage of opportunities,” he says. “Any piece of land we walk away from through a preac-­quisition write-off of those option lots, are those we can never recapture any value from unless we buy them back in the future. The land we write down in value is still there. And we still have the ability to get value for that when the market improves.”...

A company has to have financial backing to be able to hold onto land and wait for the market to come back, but very few companies have that luxury. The real lesson to be learned on land is the lesson Weekley learned in Texas in the 1980s, not to overextend your land purchases, Ara Hovnanian, CEO of Hovnanian ­Enterprises, based in Red Bank, N.J, still contends.

“Whether it’s deposits or price or quantity of land, it’s a time to be cautious,” he says. “It was a difficult call to make at that time, because the housing industry seemed so immune to what would normally have caused a slowdown.”...

It seemed everyone believed the market had outgrown its cyclical nature and would only keep going up.

As the market took off, the combined revenues of the top 10 Builder 100 companies shot up from $21.6 billion in 1998, to $92.9 billion in 2005. As the overall market for homes increased, America’s largest builders grew to accommodate the demand. The same top 10 builders increased their share of the overall new-home market from 9.40 percent (of 941,000 units) in 1998 to 20.97 ­percent (of 1.38 million units) in 2005. Their market share increased again in 2006 to 25.70 percent...

In a scenario similar to what ­happened to technology companies, which were infused with huge amounts of investor cash during the dot-com boom of the 1990s, home builders had to show growth to appease Wall Street analysts, and buying other companies accomplished that in the quickest amount of time. Many of the acquired companies were in the ­hottest markets in the country. The builders thought it was a sure thing since land and home values in those areas kept going up.

And they were wrong.

White House gives mixed signals on housing bill

If we ever had a "decider" in the White House, apparently that doesn't extend to the best ways to address the housing bust or even to negotiate in good faith on a compromise bill. From the New York Times:

Even as the housing foreclosure crisis deepens, legislation to rescue homeowners and their lenders appears to be in significant political jeopardy.

The bill, which passed the House on Thursday, is quickly becoming a casualty in a battle between the Bush administration, which says it opposes any taxpayer bailout that would only further encourage risky lending practices, and Democrats who say that homeowner assistance is the only way to contain the damage to the broader economy.

Despite pledges by the White House and Democrats to work together, the bill produced partisan recriminations the day after it passed the House. Democrats are charging that the administration has sent mixed signals on whether it even wants a bill. In a twist, Democrats sought to claim the support of Ben S. Bernanke, the Federal Reserve chairman, who this week called on Congress to help mortgage holders. That claim prompted a spokeswoman for Mr. Bernanke to deny that he was favoring any piece of legislation over another.

The Democrats also said that Treasury Secretary Henry M. Paulson Jr. appeared at first to encourage their bill, or at least not stand in its way. But Mr. Paulson’s spokeswoman vehemently denied that...

The measure now goes to the Senate, where it faces opposition among Republicans who have tapped into a broad wave of bailout resentment in states less affected by the crisis. And the failure of the House to adopt it by a veto-proof margin is likely to further embolden recalcitrant Republicans in the Senate who have so far managed to block action, Democratic supporters of the measure said on Friday.

Senator Christopher J. Dodd, the Connecticut Democrat who heads the Banking Committee, said Friday that he was hoping to quickly complete negotiations with the ranking Republican on the committee, Senator Richard C. Shelby of Alabama, and have the committee vote on a measure next week...

Under the voluntary plan that was approved by the House, borrowers at risk of default would be able to refinance their loans at a more affordable 30-year fixed-rate mortgage insured by the Federal Housing Administration.

In exchange for avoiding foreclosure, lenders would have to agree to reduce the principal balance. The borrowers would pay a monthly insurance fee that would go to a fund to protect taxpayers from losses. A consensus was emerging on Friday that if Congress adopted a measure, it would likely be far more modest than the one passed by the House, which itself has been criticized by housing groups for being too small.

Still, there is a clear split among Republicans, and perhaps within the administration, over how to proceed. Last month, Senator John McCain, the presumptive Republican nominee for president, sharply pivoted and called for government aid to homeowners in danger of losing their homes.

His plan was more modest than the Democratic plan. But it was notable because, only a month earlier, he had warned against broad government intervention to solve the mortgage crisis, saying it was “not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

Democratic strategists said the change reflected the importance on the electoral map of states like Florida, Ohio and Michigan, all hit hard by the crisis...

After administration officials engaged in talks with House Democrats over their measure, President Bush said on Wednesday that he would veto it. The Democrats say they made several changes sought by the administration in an effort to gain its support. But in a statement of administration policy, the White House said the legislation was burdensome and prescriptive.

“It would force the Federal Housing Administration and taxpayers to take on excessive risk, and jeopardize F.H.A.’s financial solvency,” the statement said.

Even lawmakers who have criticized some elements of the House measure said they were hearing mixed signals from the Bush administration.

“I was surprised by the White House threatened veto,” said Senator Mel Martinez, a Florida Republican who served earlier in the Bush administration as the secretary of housing and urban development. “The White House message has not been consistent.”

Mr. Martinez said that the “obtuse” nature of the veto threat suggested to him that the administration had issued it as a negotiating tactic.

"Jingle mail" appears to have been overstated

According to two stories in the New York Times and L.A. Times, the prevalence of 'jingle mail' -- which describes borrowers in foreclosure moving out and mailing their keys to the bank -- has been vastly over-estimated by the blogosphere. You mean to say angry renters who run blogs and are chomping at the bit for 50% price declines have overstated this phenomenon? Say it ain't true! First, from the New York Times:

Millions of Americans are “upside down” on their mortgages — they owe more on their homes than their homes are worth. So far, however, there is little evidence that people who have the means to pay are walking away from their homes as values sink.

The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet “jingle mail,” the term for those tinkling packages of keys, appears to be far rarer than many seem to think.

Freddie Mac, the big government-sponsored mortgage company, estimates that just 0.14 percent of the defaulted mortgages in its portfolio involved properties that were abandoned by borrowers. Fannie Mae, another mortgage company, puts the figure in the single digits. Both companies deal in relatively conservative loans, so the total rate may be somewhat higher. Industry officials say they have no way of knowing for sure...

The low numbers from Freddie Mac and Fannie Mae are consistent with past housing busts, like the ones that occurred in Texas in the 1980s and in the Northeast and California in the early 1990s. Homeowners typically do not walk away from homes they live in unless they are unable to pay the mortgage, usually because of job loss, a death in the family, divorce or a big jump in their monthly payments. Real estate speculators, of course, do abandon properties when prices fall.

In fact, researchers say the rich are no more or less likely to walk away — “ruthlessly default” is the economic term for it — than those of more modest means. A person’s credit history is usually a better indication of how he will behave than his income. How much money a person put down on the house when he bought it also makes a difference...

An estimated 9 million American households, or 10.3 percent of all single-family homes, owe more than their home is worth, according to Moody’s Economy.com. By comparison, 4.8 percent of home loans were in foreclosure or delinquent by 60 days or more at the end of last year, according to the Mortgage Bankers Association.

For a variety of reasons, most homeowners find walking away difficult and expensive.

A foreclosure can make it hard for borrowers to get other loans and sometimes even an apartment. Economists refer to these as “transaction costs” that offset the benefit borrowers might get from defaulting on an underwater home loan.

Lenders can also pursue deficiency judgments against borrowers to recoup the difference between what is owed on the debt and what the property is sold for after foreclosure. Such claims are time-consuming and expensive to win, so most lenders do not pursue them...

In an attempt to reduce the incentive to default, Fannie Mae recently increased to five years, from four years, the time borrowers have to wait after a foreclosure to get another Fannie Mae loan. The company will make exceptions under extenuating circumstances.

The Bush administration has said that the only people who deserve housing relief are those who cannot pay, not those who will not pay...

Jon Madux, a founder of the site YouWalkAway.com, which helps borrowers leave their homes, said a majority of the site’s clients default because of financial hardships. But in the Southwest and Florida, more of its customers are investors who bought multiple condos or houses and are now not able to find renters or sell for more than they owe.

The Mortgage Bankers Association estimated that the owners of 18 percent of the homes in foreclosure as of September 2007 did not live in those properties. Many used riskier loans, which are defaulting faster than more conventional mortgages.

Next, from the L.A. Times article:

...media reports and Internet postings are rife with stories about the trend and a supposed sea change in American attitudes toward debt. But there's a major problem with all this talk about the phenomenon of solvent homeowners "walking away": There doesn't appear to be any hard evidence that it's actually happening.

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce numbers figures.

Nor could the Mortgage Bankers Assn., the leading trade group for housing lenders. Spokesman John Mechem said he believed that walkaways by homeowners who could afford their payments were "becoming more prevalent." But he said that was based on "anecdotes we're hearing from our members and what we're reading in the newspapers."

Bank of America Chairman and Chief Executive Kenneth Lewis, whose company is acquiring mortgage lender Countrywide Financial Corp., complained about "a change in social attitudes toward default" in an interview with the Wall Street Journal in December.

In response to questions from The Times, Bank of America spokesman Terry Francisco said the bank had seen indications that some homeowners were taking pains to keep their credit card accounts current at the expense of their mortgage balances, often by raiding their home equity lines to pay their cards, a reversal of traditional customary customer priorities.

But he said the bank did not have "firm figures" on how many homeowners were unnecessarily defaulting on their mortgages...

At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing "folklore" about residential walkaways but said that the phenomenon was more likely connected to investors than people who live in their homes, or "owner-occupants."

"The vast majority of borrowers we find have been acting in good faith," she said. "If they get behind, they are interested in working with their lender."

Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

Marks and others assert that mortgage bankers have an incentive to blame the rise in delinquencies and foreclosures on borrowers skipping out on obligations they're financially able to meet, because that diverts attention from the lenders' own role in the mortgage crisis...

Experts say some supposed owner-occupants who are "walking away" may in fact be speculators in disguise: buyers who acquired properties as investments to resell for a fast profit. Investors, unlike genuine homeowners, will treat their purchases strictly as economic transactions; their decisions to abandon payments shouldn't be seen as a sign that American homeowners no longer feel obligated to pay their debts, says Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA's Anderson School of Management...

"If it's correct that there's a change in behavior, all the default and credit risk models will have to be recalibrated," Gabriel said. But he added: "I have not seen one shred of data that conclusively or systematically speaks to that point." On the contrary, analyses of the most troubled segments of the mortgage markets suggest that the problem is still rooted in borrowers' financial distress rather than their cynicism.

In a survey issued this week of Alt-A mortgages originated in 2006 and 2007 -- these are nonstandard mortgages often marketed to buyers with less-than-prime credit -- Fitch Inc. analysts found that a rise in delinquencies could still be traced to "borrowers who purchased a home they could not afford or those engaged in mortgage fraud for the purpose of property speculation." Legitimate homeowners, the analysts said, "rarely view the home as a short-term investment ... they do not default based solely on a drop in value."

Fitch has also found a high level of misrepresentation in loan applications "by borrowers, brokers, and other parties." When Fitch analysts subjected 45 sub-prime loans to detailed examination late last year, they found "the appearance of fraud or misrepresentation in almost every file," a situation they termed "disconcerting at best" in a report in November.

Some 66% involved "occupancy fraud" -- that is, the borrower misrepresented his or her intention to live in the home, rather than to buy it as an investment. That finding underscores the possibility that bankers are blaming owner-occupants for the more common, and not unexpected, phenomenon of "walking away" by real estate investors.

Rising gas prices changing American lifestyles

When gas rose past $2/gallon, it was no problem for many because, after adjusted for inflation, it was still reasonably priced. Even as it passed $3/gallon it elicited more complaints than changes in behavior, but that is all changing with $4/gallon (or more) gasoline. I think it's fair to presume that the changes we're seeing in lifestyle -- including more carpooling, rising interest in public transportation and walking/bicycling -- will also have a profound effect on where people choose to live. Hello, urban infill! From a USA Today story:

Record high gas prices are prompting Americans to drive less for the first time in nearly three decades, squeezing family budgets and causing major shifts in driving habits, federal data and a USA TODAY/Gallup Poll show.

As prices near — or in some places top — $4 a gallon, most Americans say they are cutting back on other household spending, seriously considering buying more fuel-efficient cars and consolidating their daily errands to save fuel.

Americans worry that steep gas costs are here to stay: eight in 10 say they doubt today's high prices are temporary, the poll finds. It's the first time such a large majority sees pricey gas as a long-term problem.

The $4 mark, compounded by a sagging economy, could be a tipping point that spurs people to make permanent lifestyle changes to reduce dependence on foreign oil and help the environment, says Steve Reich, a program director at the Center for Urban Transportation Research at the University of South Florida...

The average price of a gallon of gas nationwide is $3.65 — the highest ever, adjusted for inflation. California's average: $3.90 a gallon. The federal Energy Information Administration (EIA) expects a $3.66 per-gallon average this summer...

February was the fourth consecutive month in which miles driven in the USA fell, an analysis of Federal Highway Administration data show. There hasn't been a similar decline since 1979, when shortages created long lines at pumps...The decline, while small, is significant because the U.S. population and number of households, drivers and vehicles grow by 1% to 2% a year...

In 2004 and 2005, about one-third of Americans said they cut spending because of rising gas prices. In the new poll, 60% say they are trimming other expenses. Half of households with incomes below $20,000 say they face severe hardships because of soaring gas prices. Three-fourths of households making $75,000 or more also are changing how they use their cars...

Most of those polled expect things to get worse: 54% say they expect gas prices to reach $6 a gallon in the next five years.

For now, they are rethinking the ways they get around, where they buy a home and what they do for fun.

Private equity money attacks rent-controlled apartments

Having once worked for a company owned by a private equity fund, I personally know the obsession with maximizing profits, often at the expense of ancillary items -- such as long-term brand building or marketing efforts -- that don't easily show up on P&L statements. So it didn't really surprise me to see this story in the New York Times accusing developers backed by private equity money of using questionable tactics to force out long-time residents who currently benefit from rent control laws in order to hike them to market-rate levels:

Private investment firms have been amassing what may seem like unusual stakes in New York real estate: they have bought hundreds of apartment buildings with thousands of rent-regulated units across the city that produce decidedly meager returns. As regulatory filings and promotional materials show, the companies expect to generate higher returns quickly by increasing rents after existing tenants vacate their units. Their success depends upon far higher vacancy rates than are typical in rent-regulated apartments in New York.

Some residents and tenant advocates say that they began seeing what they consider a pattern of harassment of low-income tenants this year and suspect that it is a result of the new owners’ business models. Tenants have been sued repeatedly for unpaid rent that has already been received by the landlords; they have been sent false notices of rent bills, lease terminations and nonrenewals; and they have been accused of illegal sublets.

The companies dispute the charges of harassment and say they are protecting their rights.

Nevertheless, tenants must answer the notices in court, but many have responded by moving out, court documents indicate. When they vacate the apartments, the owners can increase the rents substantially...

Private investment funds have boomed in recent years, buying companies they considered undervalued in industries as diverse as communications, hotels and energy, streamlining operations and then selling them at a profit. For example, private equity firms have bought nursing homes, often slashing expenses and reducing staff to increase their profit.

New York provides an unusual opportunity because it is one of the few cities with a large inventory of apartments whose rental rates are regulated and kept below market levels...

These companies often make clear that raising rents is crucial to their financial goals. On its Web site, Normandy Partners states “the increased institutional appetite for New York City rent-stabilized housing transactions” and adds: “There is a near-term opportunity to increase cash flow by converting rent-stabilized apartments to market rate as tenants vacate units.”

The companies say that they are not harassing tenants and that they are only trying to protect their rights by enforcing legitimate rules governing regulated apartments.

But the New York City Rent Guidelines Board says the vacancy rate on rent-regulated apartments is 5.6 percent each year. Buildings with vacancy rates far higher suggest resident harassment, tenant advocates say.

Vacancy rates have risen above 20 percent in some buildings owned by Vantage Properties; in some Normandy buildings, the rates exceed 30 percent...

When an apartment becomes vacant, rents can climb as much as 20 percent. When that rent rises above $2,000, regulations no longer apply, and tenants must pay market prices.

To generate returns expected by private equity investors and to pay off the debt used for their purchases, tenant advocates say that managers of the properties are intimidating residents in the hopes of forcing them to leave so that rents can be raised...

Rent-regulated apartments account for 57 percent of the total in the Bronx, 42 percent of the apartments in Brooklyn, 59 percent in Manhattan, 43 percent in Queens and 15 percent of those on Staten Island, the Guidelines Board says. Many of the buildings bought by private equity investors are in neighborhoods that are being gentrified..

In a group of buildings in Queens with 2,124 apartments, Vantage has filed almost a thousand cases in housing court against tenants since October 2006, according to Robert McCreanor, director of legal services at the Immigrant Tenant Advocacy Project of the Catholic Migration Office in Sunnyside.

Mr. McCreanor said he searched public records for similar actions by the previous landlord. He found no more than 350 in any year...

Normandy Partners, with almost 2,000 rent-regulated apartments in 42 buildings in the Bronx, East Village and Sunnyside Queens, is another significant landlord backed by private equity. It is a partner with Vantage in 1,650 units in Queens, the Bronx and Brooklyn.

Mr. Dulchin said the Normandy Partners’ buildings have also had high turnover — more than 30 percent — since they were purchased by the investors.

A spokesman for Normandy declined to comment.

Pinnacle Group is a third big developer that has joined forces with a private equity firm, Praedium Capital of Chicago. In December 2006, Pinnacle settled a suit brought by the New York attorney general’s office accusing it of rent-gouging. Pinnacle paid $100,000 without admitting to or denying the accusations. The company did not return a phone call seeking comment.

Responding in part to indications that harassment is systemic, Mayor Michael R. Bloomberg signed legislation in March making it illegal for a landlord to file repeated and baseless court proceedings to force a tenant to vacate an apartment.

Builders seeing a pricing trough through 2012

By their very natures, homebuilders are typically an optimistic bunch, but gathering at this week's Builder 100 conference in Scottsdale, Arizona, they're trying to be more realists than optimists and foresee a pricing rebound delayed until 2012. From a BuilderOnline.com story:

The downturn in home building will end around the end of 2009, with a three- or four-year trough to follow that will last as long as the next president's term in the Oval Office, said KB Home president and CEO Jeff Mezger, Wednesday at the BUILDER 100 Conference in Scottsdale, Ariz.

Mezger said that building activity would pick up during the trough, but that prices would not start increasing until the trough ends, sometime after 2012.

Tom Eggleston, president of C.P. Morgan, based in Indianapolis, said roughly the same, though he pegged the bottom to be at the end of 2008, with a trough lasting through 2012...

As to who was to blame for the housing downturn, the CEOs, including Meritage Homes chairman and CEO Steve Hilton, said there was enough blame for anyone attached to home building. The Federal Reserve Board caused interest rates to fall too far, mortgage lenders offered exotic products that pulled too many people in, consumers were greedy and bought too much...

That excess inventory, still being worked through, had led housing starts to plummet since 2005, begging the question, what is a true sustainable level of new-home starts. The Harvard Joint Center for Housing Studies, as well as the National Association of Home Builders pegs the level of total new-home starts to be 1.9 million per year. But many analysts have argued that number is far too high-considering that the peak in housing starts before the most recent bust was just 2.068 million in 2005.

Eggleston said single-family detached housing starts will be 630,000 units this year, and in four years will grow to 825,000-down from the peak of 1.7 million in 2005. Eggleston said he hoped to see that number grow to 1 million sooner rather than later.

Hilton suggested that the sustainable level of total new-home starts was between 1.5 and 1.7 million, meaning the industry built between 1.5 and 2 million new homes too many during the boom.

Mezger said the 30-year average for new-home starts was 1.2 million. Mezger also blamed the housing recession on, "affordability and pricing."

All three men agreed that builders are facing stiff competition from foreclosed properties currently...

Mezger and Hilton admitted frustration with their sales processes and teams.

"It puts my hair on fire," Mezger said, noting that his salespeople do not follow up with potential customers nearly well enough. "It's (now) a condition of employment."

Hilton put the blame on builders for not investing more in training.

"We have nobody to blame but ourselves," he said. "We became a victim of our own success."

The executives said they and other builders were being far more cautious about any future land purchases and were more likely to buy smaller parcels, though they disputed the notion that builders would move en masse to a business strategy that called for buying no land.

After admitting to having to discount and slash prices to move homes, these building leaders said that they are no longer about growing as large as possible...

Hilton said Meritage is now chasing profits, not revenues. The company is in 12 markets and is not interested in expanding that number, but rather growing share to be 5 percent of each market...

Mezger said KB currently has an average of a 4 percent market share in its current markets (having left Washington, D.C., Chicago, and Indianapolis), and that he wants to see the company hit 6 percent to 8 percent of each market. Once it reaches that goal, then KB might look to expand, Mezger said.