"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.

Poll shows Americans almost evenly split on housing bailout

If you read the many housing blogs hosted by angry renters, you'd think that there was overwhelming resentment towards any bailout of people who bought more homes than they could reasonably afford. However, according to a recent poll conducted by CNN/Opinion Research, 49% of respondents actually support some type of special treatment for homeowners in danger of losing their homes vs. 48% against it. From a CNNMoney.com story:

Americans remain split on whether homeowners about to default on their mortgages should receive special treatment to help them keep their houses, according to a new CNN/Opinion Research Poll.

The poll finds 49% of Americans believe such homeowners should receive special treatment, while 48% feel homeowners should not get assistance. Three percent of those polled had no opinion...

Congress also appears split on the issue. On Wednesday, the House began debating Democrat-sponsored legislation that would let the government back loans for homeowners facing foreclosure and would reduce the principal owed on those mortgages. Many Republicans oppose the bill, and President Bush has threatened to veto it.

The proposed legislation would allow the Federal Housing Administration to insure up to $300 billion in new loans over four years.

In order to qualify, lenders would have to cut the debt to no more than 85% of the homes' appraised value. If the FHA-refinanced loans defaulted, the FHA would pay the lender the outstanding principal.

Foreclosed homes double as marijuana farms

According to Luke Mullins at his U.S. News & World Report blog The Home Front, those people concerned about nefarious activities taking place at the growing number of foreclosed homes across the country might have a point. In this case, a man with two homes in foreclosure was using them as a growing operation for his marijuana operation -- since he was arrested, one can only guess that he didn't have a prescription from his doctor for medical use of his crop.




From a story in the San Bernardino Sun:

A bank employee stumbled upon a foreclosed house used to grow marijuana, leading to the seizure of an estimated $4.5 million in drugs in two houses and an arrest Saturday.

Angel Wayhang Kou, 30, of Rancho Cucamonga was booked into jail on suspicion of cultivating marijuana, maintaining a residence for drugs, theft of utilities and conspiracy...

Narcotics officers seized more than 2,000 mature marijuana plants. Evidence there led police to another house used to grow marijuana in the 6200 block of Long Cove in Fontana, where officers found 500 mature plants and 150 harvested buds weighing more than 150 pounds.

Narcotics officers estimated the street value of the marijuana in the two houses at $4.5 million.

The five-bedroom houses sit in upscale neighborhoods and were rigged with state-of-the- art equipment...

Police said Kou stole about $100,000 in electricity from Southern California Edison between the two homes by bypassing electrical boxes.

Decker said Kou owned both homes, but both were in foreclosure.

The pros and cons of a bailout

The Wall Street Journal's David Wessel argues that if the government does anything about rising foreclosures due to unaffordable loans and negative equity, the Barney Frank plan about to be vetoed by the Bush Administration might be an experiment worth pursuing:

The latest flash point in the debate over the nation's bursting housing bubble is this: Since so many American houses are worth less than their mortgages, should the government do more to get lenders to settle for less than the full debt, even if it may cost taxpayers some money?

The White House and Treasury say "No!" House Financial Services Committee Chairman Barney Frank and other House Democrats, with the quiet backing of Federal Reserve Chairman Ben Bernanke, say "Yes!"

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already owe more than the current value of their homes. They are said to be "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won't, and are at risk of losing their homes...

In ordinary times, a lender shouldn't need prodding from the government to do what's in its self-interest. But these aren't ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many. No one in Washington wants to help the "speculators" who bought homes they don't live in or those who lent to them. And there's broad agreement that those who bought more house than they'll ever be able to afford are going to lose out. The debate revolves around the "preventable foreclosures."

Mr. Frank would offer lenders and eligible borrowers a deal: If the lender agrees to cut the debt so the homeowner owes no more than 90% of the house's current value, and the Federal Housing Administration (or an outfit to whom it outsources this) determines the homeowner can afford a new loan, then the lender gets rid of the mortgage and the FHA insures a new mortgage for the remaining balance.

The lender takes a hit, but gets rid of the risk that house prices will keep falling or the borrower will default on a new loan; the government picks up that risk. To create a cushion for the FHA, the lender has to chip in another 5% of the property's current value. The homeowner has to surrender some profits, if any, to the government when the house is sold...

The White House condemns this as a "bailout" and says it won't work. As the Treasury argued in a recent PowerPoint presentation: "Homeowners who can afford their mortgage but walk away because they are underwater are merely speculators." (It's a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.) But if not for the widespread decline in house prices -- "a relatively novel phenomenon," Mr. Bernanke labels it -- and the proliferation of no-money-down mortgages made with the acquiescence of regulators, these homeowners wouldn't be underwater.

Despite the restrictions, the plan could allow some homeowners to get a deal they don't deserve; that's the unfortunate byproduct of any rescue. But the Treasury and Fed surrendered the let-the-market-work-it-out high ground when they agreed to risk nearly $30 billion of taxpayer money to shield Bear Stearns, its creditors and counterparties from losses.

This scheme might not work. Mr. Frank has crafted rules aimed at preventing those who can easily afford loans and those who haven't a prayer of paying a new loan from participating, leading the Congressional Budget Office to predict only 500,000 mortgages would be refinanced this way. Some administration experts suspect that's high; they doubt many lenders will play ball. In that event, it won't cost taxpayers much.

So, perhaps it's best considered a prudent experiment for coping with a bad situation that might get worse: Create a mechanism now so the bugs are worked out, in case home prices plunge more than anticipated and push millions more homeowners underwater.

Economic slump impacting more men than women

According to Business Week's Peter Coy, the current economic slowdown is impacting men more than women due to the nature of their jobs. So what does this mean for male breadwinners in the future? From the article:

From last November through this April, American women aged 20 and up gained nearly 300,000 jobs, according to the household survey of the Bureau of Labor Statistics (BLS). At the same time, American men lost nearly 700,000 jobs. You might even say American men are in recession, and American women are not.

What's going on? Simply put, men have the misfortune of being concentrated in the two sectors that are doing the worst: manufacturing and construction. Women are concentrated in sectors that are still growing, such as education and health care.

This situation is hardly good news for women, though. While they're getting more jobs, their pay is stagnant. Also, most share households—and bills—with the men who are losing jobs. And the "female" economy can't stay strong for long if the "male" economy weakens too much...

The share of all men aged 20 and over with jobs has fallen since last November, when private-sector employment peaked, going from 72.9% to 72.2% in April. For women the ratio rose, from 58.1% to 58.3%. The adult male unemployment rate has risen twice as much as the female jobless rate since November. Those figures from the BLS' household survey are echoed in its separate survey of employers.

To see why, go sector by sector. Manufacturing is over 70% male and construction is about 88% male. Meanwhile the growing education and health services sector is 77% female. The government sector, which has remained strong, is 57% female. The securities business, which is filled with high-paying jobs, is likely to be the next sector to get whacked—and more than 60% of its workers are men.

Men are having a harder time than women getting back on track after losing a job. "For a man to move from a $20- or $30-an-hour union job to being a Wal-Mart (WMT) greeter is devastating," says Claudia Goldin, a Harvard University labor historian. Men also shy away from some of the growing fields, such as nursing. Only about 10% of nursing students nationwide are male, notes Harriet R. Feldman, dean of the Pace University School of Nursing. Some retired nurses are actually going back to work because their husbands have lost jobs, says Lois Cooper, vice-president for employee relations and diversity at staffing firm Adecco Group North America in Melville, N.Y...

Over three-quarters of people who earned over $100,000 last year were men, says Queens College political scientist Andrew Hacker. In fact, although the pay gap between men and women has been gradually narrowing, it actually widened a bit over the past year. Median usual weekly earnings for men grew 4.6% from the first quarter of 2007 through the first quarter of 2008, vs. 3.1% for women.

That might be evidence that the jobs women are landing aren't necessarily good ones. Says Eileen Appelbaum, director of Rutgers University's Center for Women & Work: "We had an expansion of jobs for home health aides, retail clerks, child-care workers. They're low-wage, they're dead-end, and they don't have any benefits."...

There's no easy remedy for what ails the male economy. Edward J. O'Boyle, senior research associate at the Mayo Research Institute in West Monroe, La., says part of the solution is reviving manufacturing—a gargantuan task. On construction, he favors financial reforms to even out the booms and busts.

Economists are debating whether the overall economy is in a recession. For men, the evidence is clear.

KBHome declared greenest builder

According to the Calvert Group, an investment management firm, and the Boston College Institute for Responsible Investment, homebuilder KBHome is the builder adhering most closely to green building concepts. Although none of the builders studied are fully green, Centex, Pulte and Lennar were each singled out for specific items. From a BuilderOnline.com story:

KB Home ranks first among the largest public builders in terms of sustainability in the areas of energy, water, timber, and land use, according to a joint report released today by Calvert Group, an investment management firm, and the Boston College Institute for Responsible Investment.

But the report, which looked at builders' policies, programs, and performance in the areas above, also found that none of the firms qualified as fully green. "Of the 13 major home builders, only six had explicit commitments to environmental sustainability, energy efficiency, water conservation, or responsible land management, and no company published a comprehensive sustainability report," it stated.

On a regional basis, however, builders looked a little better. The report specifically cited Centex for its marketing of Energy Star-rated homes in California and Nevada, Pulte for its energy efficiency efforts in the West, and Lennar for its use of solar technology in California.

Overall, the report ranked builders in the following order:
1. KB Home
2. D.R. Horton and Pulte
4. Centex
5. Lennar
6. Ryland
7. Beazer
8. Meritage
9. Toll Bros.
10. K. Hovnanian
11. MDC Holdings and Standard Pacific
12. NVR

For more information, visit www.calvert.com/Pdf/7776.pdf.

"Bulletproof" markets also getting hit by a slower market

It seems that even cities once considered somewhat immune to the housing bust -- such as Seattle, Portland and Charlotte, NC -- are now succumbing to national pressures. From a CNNMoney.com story:

Some of the last, best housing markets - the ones that continued to climb even as the rest of the country cratered - have turned south lately.

Seattle, Portland Ore., Charlotte, NC, and Salt Lake City all posted home price gains during 2007, even as more than half of the 150 markets tracked by the National Association of Realtors registered declines. Now they've joined the losers.

"What the numbers are saying is that the trend is broadening out," said Michael Larson, a real estate analyst with Weiss Research. "[The downturn started with] the markets that had flown the highest. When the speculative bubble popped, those got hit first. These [bulletproof] markets are now getting hit for traditional economic reasons."...

Unlike bubble markets such as San Francisco and Miami, these areas actually remained affordable for most residents despite years of price appreciation.

For example, the median home price in Seattle, the most expensive of the four, was $370,000 in February. And about a quarter of all homes sold there during the last three months of 2007 were affordable to families earning the area's median household income of nearly $76,000, according to the Housing Opportunity Index from Wells Fargo (WFC, Fortune 500) and the National Association of Home Builders.

In Portland 28.8% of homes sold were affordable in the last quarter of last year; in Salt Lake City the figure was 35.4% and in Charlotte it was 62.9%. Compare that with Miami, where only 13% of homes sold were affordable for most people, or San Francisco where only 7.9% of homes fell into that category.

Each of these bulletproof markets has whethered the housing crisis better than most cities, and will likely recover more quickly than others thanks to their own unique characteristics.

All of them avoided the speculative runup that fueled so many bubble cities, but their local economies are perhaps the biggest factor in keeping them afloat. In Seattle, software and aerospace jobs have kept things humming, while high-tech and telecom have done the same for Portland, and banking and tech companies have boosted Charlotte....

And they all have geography on their side as well. Charlotte, which is home to the headquarters of Bank of America (BAC, Fortune 500) and Wachovia (WB, Fortune 500), has also seen an influx of retirees from the north who moved to Florida and then left the Sunshine State after property taxes and insurance soared in the wake of severe hurricanes. The trend is dubbed the 'halfback' phenomenon since the retirees are moving halfway back to where they started.

Similarly, Californians escaping the crush and the high cost of living there invaded the Pacific Northwest, according to Lennox Scott, CEO of John L. Scott Real Estate, one of the largest brokers in the area.

That migration changed Seattle, making it a destination city...

Portland has experienced a similar phenomenon on a smaller scale; it consistently finishes high on surveys of most livable cities.

Both towns have also pursued policies of managed growth, limiting the land that can be developed, which has also helped housing prices hold up. "We don't have the ability to expand supply easily," said Scott, "especially in the affordable price ranges."

Salt Lake City has fewer such restrictions, but steep growth in its population, which is up about 14% since the 2000 census, has kept housing demand high.

Now the credit crunch that has made getting a mortgage harder for everyone is hitting even the strongest markets.

"What's driving housing activity everywhere today is national forces," said Patrick Newport, a real estate economist with Global Insight, a consulting group. Indeed, U.S. foreclosures spiked 112% in the first three months of 2008.

But the fundamental local conditions that have helped keep these relatively strong should help them bounce back sooner than most.

Is the housing crisis nearly over?

Despite the regularity of bad news about the housing market, two writers in the Wall Street Journal argue that we may in fact be hitting a bottom for the housing slump. First, from Brett Arends:

Is it time, at long last, to head down to Florida to start looking at homes?

Maybe.

And the nearby chart shows one reason why.

It comes from Wellesley College Prof. Karl E. Case, one of the leading experts on the housing market in the country. And it suggests we may be at, or near, the bottom of the housing crash.

Of course, even if he's wrong we won't know for sure for many months.

But new housing starts have at last slumped below the seemingly magical one million mark. That happened in March. Every time that has happened in the last 50 years, it proved to be the bottom of a recession...

There is no guarantee this market will be the same but the similarities with the past are striking. Each boom peaked at around the same level of 2.5 million starts as well...

Incidentally, contrarians will also love Tuesday's gloomy first quarter news from leading homebuilding D.R. Horton and from federally sponsored home loan giant Fannie Mae. Both announced massive losses following write-downs. Fannie is holding a $4 billion cash call and both slashed their dividends. You often see these kinds of capitulations at a market bottom, though of course you can see them on the way down as well...

Prices may still fall further. Yet if you are tempted to keep waiting for homes to get a lot cheaper, there are several reasons to think that might not happen.

First, there are too many other bargain hunters out there.

Second, the falling dollar has made these homes even cheaper to foreign buyers. There are plenty of people in Europe for whom Florida is now a bargain.

Third, interest rates are low right now. I hesitate to give my fellow Americans any extra incentive to borrow yet more money, but you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won't last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.

Finally, in an age of weak currencies and rising inflation, "real" or "hard" assets are in demand. That should include land, bricks and mortar.

Next, from an opinion piece by hedge fund manager Cyril Moulle-Berteaux:

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability...

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

But what about the 30% decline in prices that many economists say is still forthcoming? Nonsense, says Moulle-Berteaux:

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading...

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Fed Chair Bernanke makes his case for gov't intervention

Federal Reserve Chair Ben Bernanke outlined some of his reasons for government intervention in the housing bust in a speech at Columbia Business School, arguing that steep price declines and foreclosures carry a high risk of imperiling the overall economy. From a CNNMoney.com story:

Foreclosure filings of all kinds - delinquency notices, auctions sale notices and bank repossessions - were up 112% during the first three months of 2008 compared with the same period a year ago. Community advocates and policy makers are worried that the problem will worsen as the interest rates on as many as 1.8 million mortgages reset this year.

"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy," concluded Bernanke. "Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."

In explaining the forces behind the problem, Bernanke cited the "increasing role" of declines in home values. He unveiled a series of "heat maps" that showed delinquency rates, job losses and home price changes.

Unemployment statistics, according to Bernanke, do not explain the increased delinquencies of many areas, including California, Florida and parts of Colorado, where foreclosure filings have increased even when unemployment generally have fallen...

The wave of foreclosures sweeping the nation are driven in part by a nearly unprecedented decline in home prices and require a concerted government and private-sector response, Ben Bernanke, chairman of the Federal Reserve, said Monday...

Bernanke pointed to the use of so-called piggy-back loans in helping drive foreclosures. These loans, which required low down payments or none at all, were used with increasing frequency during the bubble years to enable borrowers to purchase homes in high-priced states.

Because of price drops, many of the borrowers are now "upside-down," meaning they owe more than their homes are worth. Many of the owners had counted on the idea that their home values would continue to soar, increasing their home equity, which they could then tap to pay their bills. Now, they can't afford to pay off their mortgages and they have no assets to rely on.

In the past, said Bernanke, lenders and companies that service loans were "used to dealing with mortgage delinquencies related to life events such as unemployment or illness. . . . A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue."

In some cases, such as when the value of a home has fallen below the mortgage balance, a writedown of principal may be the best solution, according to Bernanke, although, he added, to be effective they must be targeted to cases facing the highest risks of foreclosure...

Bernanke outlined the steps that the Federal Reserve was taking to try to minimize the impact and scope of the foreclosure crisis.

The response includes working with community groups trying to acquire and restore vacant properties; encouraging lenders and mortgage servicers to work with at-risk borrowers; and developing new lending standards to prevent some of the abusive lending practices of the past from continuing.

The Fed, according to Bernanke, has worked closely with the Hope Now alliance - an industry foreclosure-relief effort spurred on by the Bush administration - to support help for troubled borrowers, develop protocols to standardize loss-mitigation approaches and improve reporting standards.

Bernanke also threw his support behind the expanded use of the Federal Housing Administration (FHA) and government-sponsored enterprises such as Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) to address problems in mortgage markets.

Opening up the lending markets has already helped thousands of at-risk borrowers to refinance into lower cost loans and save their homes, Bernanke said.

Vacancies disproportionately impacting newer homes

It looks like homes built after 2000 are disproportionately impacted by rising vacancies, yielding rates of over 10% versus 2.9% for all homes vacant but available for rent. From a New York Times story (hat tip to Patrick.net):

The Census Bureau reported that 2.9 percent of homes intended for owner occupancy were vacant at the end of the first quarter. That figure had begun to rise even during the housing boom, a little-noticed byproduct of the aggressive construction of homes encouraged by easy credit. Before 2006, that figure had never exceeded 2 percent.

Houses can be rented out, of course, even if they had been intended to be lived in by the owner, but the rental market also has high vacancies now. Over all, 10.1 percent of homes intended for rental are vacant. That rate is a little below the record level hit in 2004, but it is still higher than it ever was before the construction boom of this decade.

The figures include both single-family homes and apartments. In rentals, the vacancy rates are almost equal for homes and apartments. But in the owner market, the vacancies are much more concentrated in condominiums. In buildings with five to nine units — like many garden apartment buildings — the condominium vacancy rate is an unprecedented 15.2 percent. That is up from 12.2 percent at the end of 2007. Before 2006, that rate had never been as high as 10 percent.

Even worse news for those who bought new homes or apartments in recent years is that the vacancy rates in those properties are far higher than they are in older buildings. For homes and condominiums built after March 2000, the vacancy rate for homes intended for owner occupancy is 10.2 percent, up from 8.8 percent at the end of 2007.

For rental units, the figures are even greater. There, 25.2 percent — or one of every four — of housing units built since the spring of 2000 are vacant.

Vacancy rates vary by market, of course. At the end of 2007, areas with the highest vacancy rates in housing intended for owner occupancy fell into two categories: Rust Belt areas like Detroit, Cleveland and Akron, Ohio, and former boom areas like Orlando and Tampa in Florida, and Las Vegas. Although home prices have fallen sharply in parts of California, only the Sacramento area shows high vacancy levels...

Residential construction’s share of the economy fell to 3.8 percent in the first quarter, down from a peak of 6.3 percent in the first quarter of 2006, when home prices were nearing their highs. But that figure is not far below the average figure for the 1990s, 4.1 percent, and well above the low of 3.3 percent, reached in the first quarter of 1991 after the last major housing market setback.

Private builders increasingly under duress

Recently I've been hearing increasing reports of subs and suppliers not getting paid by homebuilders. In the case of Barratt, it's been due to cash flow problems resulting from its longtime lender, Bank of America, declining to provide new financing. From a BuilderOnline.com article:

This week, Barratt American expects to have short-term loans in place, secured through the sale of “unencumbered assets,” to shore up a cash-flow problem caused by a significant decline in its business. That decline recently led Barratt’s primary lender, Bank of America, to cut off the Carlsbad, Calif.-based builder after a 28-year relationship.

“I call it ‘constructive default,’ ” says Mick Pattinson, Barratt’s president and co-owner, who spoke with BUILDER on Friday. “We’re not in default, but the bank wouldn’t renew our two loans.” He explains that his company had a $125 million credit facility with Bank of America, of which $100 million were available when the bank informed Barratt seven months ago that it would not go forward with its lending. Barratt drew another $30 million of that facility, although at higher interest rates, until Pattinson balked at the expense and found himself without a line of credit to tap...

“We’ve been stymied without cash,” Pattinson tells BUILDER. His company’s inability to pay its bills has triggered more than 40 lawsuits filed mostly by subcontractors with liens against the company’s assets that guarantee payment for labor and materials.

Pattinson confirmed he has been in London seeking private equity money, where “we’ve been getting a good reception.” (Pattinson is British and Barratt was once based there.) He is confident that he’ll find new financing from overseas sources, and can settle disputes with vendors or contractors. “They understand how we got here, and we’ve had relationships with some of them for 10, 15 years.” The bigger problem for his company, and builders in general, is that domestic capital has dried up. “Right now, you couldn’t get cash from a bank to build a house if your life depended on it,” he laments.

What irks Pattinson is how Bank of America rewarded his company’s decades-long loyalty by throwing Barratt under a bus the minute business went soft. “When times were good, we had banks lining up in our lobby for our business, but we told them we were with Bank of America. Now, when times are bad, we get screwed. The banks are a disgrace.”

Do we need a new & improved New Deal?

Princeton Professor Alan Blinder argues in the New York Times that the best lessons to be taken away from the latest boom-and-bust cycle is a need for some kind & gentle regulation that provides just enough guidance so the greedy don't get carried away by future misadventures:

An inordinate share of the dodgiest mortgages granted in recent years originated outside the banking system. They were marketed aggressively, sometimes unscrupulously, by mortgage brokers who were effectively unregulated; we have now lived to regret that arrangement. The need for a federal mortgage regulator — including a suitability standard for mortgage brokers — is painfully obvious.

Next, we should resist calls to scrap the “originate to distribute” model, wherein banks originate mortgages, which are then packaged into mortgage pools and turned into mortgage-backed securities that are sold to investors around the world. This seemingly convoluted model has given the United States the world’s broadest, deepest, most liquid mortgage markets. And that, in turn, has meant lower mortgage interest rates and more homeownership. These are gains worth preserving.

But the model needs some nips and tucks. A far less radical, though still regulatory, approach would require both originating banks and securitizers to retain some fractional ownership of each mortgage pool. Keeping some “skin in the game” should accomplish two things: make the banks and securitizers more attentive to the creditworthiness of the underlying mortgages, and reduce the tendency to play “hot potato” with mortgage-backed securities.

And while we’re on the subject of M.B.S., we must end the regulatory fiction that off-balance-sheet entities like conduits and S.I.V.’s are unrelated to their parent banks. (S.I.V. stands for structured investment vehicle, if you must know, but please don’t ask me the difference between it and a conduit.) Since last summer, we have seen one financial giant after another brought to its knees by losses that originated off balance sheet...

Because securities firms are now under the Fed’s protective umbrella, they must start operating as safely and soundly as banks. That means both closer supervision and less leverage...We should all take a deep breath here, because sharply reducing the leverage of securities firms, to bring it close to that of banks, will be a major change in the financial landscape. It will, for example, substantially reduce the profitability of investment houses and, therefore, reduce their scale. But that’s the price you pay for access to a publicly financed safety net...

Next come ratings agencies, whose recent performance has drawn criticism. The good news is that they are making good-faith efforts at change. They are improving their analytics, and guarding against conflicts of interest by hiring ombudsmen and submitting to independent third-party reviews...My Princeton colleague Dilip Abreu suggests paying ratings agencies with some of the securities they rate, which they would then have to hold for a while. Robert Pozen, head of MFS Investment Management, wants independent investors in the conduits to hire the agencies instead. Another idea would have a public body, like the S.E.C., hire the agencies, paying the bills with fees levied on issuers. If you have a better idea, write your legislators...

Everyone knows we live in a world of giant multinational financial institutions, huge cross-border flows of capital and increasingly globalized markets. Such an environment demands ever closer international cooperation and coordination among the world’s major financial regulators. But today’s level of international cooperation is wholly inadequate to the need. Perhaps the current worldwide financial crisis will finally persuade the world’s financial regulators that lip service is not enough...

...let’s be clear about the purposes of all these New Financial Deal reforms. They would not banish speculative bubbles from the planet. After all, there have been bubbles for as long as there have been speculative markets. But with each bursting bubble, new flaws in the system are exposed.

Peering behind the U.S. economic curtain

Despite the seemingly good news that the U.S. has avoided a technical recession, there's actually a bit more to it than that. From a story by BusinessWeek's Peter Coy:

...the cut in the federal funds rate they announced on Apr. 30—a quarter-point, to 2%— probably won't be enough. Senior U.S. economist Paul Ashworth of London-based Capital Economics predicts the Fed will be forced to cut the funds rate to 1% by summer's end. The U.S. economy remains in dire need of aid, and the financial system, while no longer in flames as it seemed to be a couple months ago, is still smoldering. At the same time, inflation, aside from food and energy, is more a theoretical threat than a real one. Core prices rose just 2% from the first quarter of 2007 through the first quarter of 2008, going by the Fed's own favorite measure of inflation (the personal consumption expenditure deflator, excluding food and energy)...

In fact, though, the U.S. economy is weaker than is apparent from the 0.6% annual rate of growth in gross domestic product, which was reported before the Fed's statement. Much of the growth came from an accumulation of inventories—goods that were put on the shelf rather than sold. Final sales to domestic purchasers, which excludes inventory accumulation, actually fell 0.4%. It was the first such decline since 1991.

Indeed, the U.S. may well be in a recession despite the positive GDP report. First-quarter growth could be revised downward as more data come in. Even if the GDP news doesn't get worse, the business-cycle arbiters of the National Bureau of Economic Research could declare the current mess to be a recession in hindsight based on weakness in income, industrial production, and employment...

...many sectors of the economy are doing fine. By stimulating exports, the weak dollar is giving a lift to farmers, miners, and manufacturers. Procter & Gamble and General Motors both reported strong overseas earnings on Apr. 30. The health-care sector is cruising along as well...

Other sectors, though, are desperately weak, in particular financial services and housing. Residential construction fell at an annual rate of 26.7% in the first quarter, the worst in 27 years. The number of vacant single-family homes and condos rose to nearly 2.3 million in the first quarter, a record. Consumer confidence is in the pits, hurting retailers.

And despite the efforts of Bernanke & Co., there's still plenty of stress in the financial system. Banks are charging one another a big premium over the fed funds rate for loans, reflected in the elevated London interbank offered rate. One reason: They're hoarding cash to guard against incurring more loan losses or being forced to take assets back onto their balance sheets...

The fear of more losses is justified. Contango Capital Advisors CEO George Feiger predicts that losses will soon spread beyond residential mortgages to commercial real-estate loans and then on to weaker parts of the corporate sector, such as companies that have undergone leveraged buyouts. And Feiger notes that banks suffering losses will be forced to cut back on new lending.

That's why the Fed may need to cut more. By reducing the federal funds rate, it can lower banks' borrowing costs so their profit margin on lending goes up. Retained profits will give them the capital base they need to lend more, juicing economic growth.

Inflation hawks worry that rate cuts will cause inflation to become entrenched. But the slow increase in the core rate of inflation over the past year shows that soaring food and energy prices have yet to spill over into the rest of the economy. In the case of energy, there's one obvious reason: Spending on gasoline depresses the economy by taking money out of consumers' wallets and sending it abroad. The same goes for imported food.

Another reason inflation continues to remain under control is that, contrary to appearances, the Fed has not pumped up the money supply to combat economic weakness. It has offset its new kinds of lending to commercial and investment banks by simultaneously draining money from the banking system. The core money supply, known as M1, grew just 0.2% in the year through March. And even at 2%, the fed funds rate is not highly stimulative, given that it's no lower than the year-over-year core inflation rate.

The Fed has quelled the panic that prevailed in the financial markets until recently. But it still has to nurse an economy weighed down by massive bad debts. That is likely to require a period of easier money. Don't put away those fire hoses quite yet.

How Google spurs innovation

Yes, I know Google has little to do with homebuilding (other than advertising options), but there's an interesting interview with its CEO, Eric Schmidt in the latest issue of Business Week magazine. If you ever want to insult builders, call them "lemmings," but there is a certain truth that many homebuilders copy each other's designs, marketing plans and merchandising strategies when something works -- and why not? If strategies like model homes, full-color brochures and interactive websites help to sell homes, why not copy the leaders who institute them first?

So how can a company with a more staid culture hope to innovate? At Google, the fact that they allow employees to dedicate 20% of their time to new ideas is the commitment they need to keep ahead of their rivals. As a big fan of many Google products -- including this blog, their advertising programs, the new GrandCentral phone service and their famous search technology (Google is in fact my home page) -- they're clearly doing something that works:

Many companies, says Chief Executive Eric Schmidt, can skirt downturns entirely by coming up with innovations that change the game in their industries—or create new ones. (When asked if Google's strategy would change as the economy heads into a likely recession, he replied: "What recession?")...

The story of innovation has not changed. It has always been a small team of people who have a new idea, typically not understood by people around them and their executives. [This is] a systematic way of making sure a middle manager does not eliminate that innovation. If you're the employee and I'm the manager, and I sit down and say, "Our product's late, and you screwed up, and you gotta work on this really hard," you can legally say to me, "I will give you everything I've got, 80% of [my time]."

It means the managers can't screw around with the employees beyond some limit. I believe that this innovation escape-valve model is applicable to essentially every business that has technology as a component...

We make an explicit decision to favor the end-user. [We] do not say, "Newspapers should be happy. Advertisers should be happy. Telcos should be happy. Competitors should be happy." Those are fine if we can do it. But it's all about end-users...

The No. 1 thing we do require is: You can do whatever you want as long as you track it. We have very sophisticated measurement systems at every stage of launch. We have what is called trusted testers. Then beta test, which is forever. We do these 1% launches where we float something out and measure that. We can dice and slice in any way you can possibly fathom.

What's more important than the absolute number is the relative growth rate. High growth solves virtually all problems. If the growth rate is low, or negative, you've got a serious problem...

You have to have a set of necessary conditions for innovation to occur. To start with, you have to listen to people...

Innovation comes from places that you don't expect.

The flaws of home price indices

One of the ironies of journalism is that those who work in an industry -- and generally know it the best -- are typically prohibited from writing for mainstream newspapers or websites due to actual or perceived conflicts of interest. So when a source such as S&P/Case-Shiller or the NAR releases its numbers tracking the market, those figures are generally reported as fact with little regard to their accuracy.

Thankfully, a recent article at MarketWatch argues that some of these widely reported numbers may be skewed due to methodologies that aren't taking into account some of today's market anomalies:

Top officials with the National Association of Realtors and Standard & Poor's, which issues the S&P/Case-Shiller Home Price Index, agreed this week their monthly reports are giving imprecise readings of price changes at all levels -- national, state and regional -- due to rare market conditions that are skewing survey results.

The NAR reported last week that U.S median home prices fell 7.7% in March from a year ago. The decline resulted largely from a market anomaly -- a steep decline in costlier home sales due to tighter lending standards and high jumbo-mortgage rates, coupled with a foreclosure-driven spike in cheaper homes...

The S&P/Case-Shiller index, which Tuesday posted a 12.7% decline for February, is skewed for two reasons of its own -- it tracks just 20 major markets, many among the hardest hit, and its "repeat sales" survey by design pulls in individual homes both bought and sold in the last few years. Many of those are now being dumped by distressed homeowners and investors who bought at peak market prices and face higher mortgage-rate adjustments...

As reported Tuesday, the S&P/Case-Shiller Home Price Index's12.7% decline in February was the largest drop since its creation in 2001. Despite that index's limited seven-year history, the Associated Press reported that home prices "plunged by a record" percentage and "at their fastest rate ever."

The glaring discrepancy in this case is that 17 of the 20 metro areas posted record annual declines, and yet 78% of the 330 metropolitan regions that NAR tracks reported price increases in the latest period -- and that despite the acknowledged downward bias in current price readings.

S&P Index Committee Chairman David Blitzer acknowledged his organization's overall and metro-market readings paint an incomplete picture. For that reason, he said, the report now charts price changes in 17 of the markets at three specific levels - low-, mid- and high-priced homes -- to provide a clearer assessment.

In the high-priced San Francisco area in February, for example, homes priced below $512,000 fell 32% in value from a year ago, while homes priced from $512,000 to $750,000 fell 21% in value and those over $750,000 fell 6%...

If homeowners want to determine their property's value, it's never been more critical to take the measure of recent sales by home-price level in their town or city neighborhood.

"Just like saying the average nationwide temperature today is 57 degrees doesn't tell you anything, the same is true for real estate prices," Yun said. "The only way to tell what your own home is really worth is to look at local-market conditions, do Internet research and utilize professionals (such as licensed appraisers) to help determine the value of your home."

Jonathan Smoke at HousingIntelligence.com also blogged about this same thing today, with some other good points made:

To make proper conclusions about nearly anything housing related, you must be able to understand the neighborhood level context, and by neighborhood I mean at least as granular as the zip code, but ideally more lower like census tract or block group or actual subdivision. And at that granular level you need to know:
• What has sold and for what price?
• Who lives there and who is moving there?
• What can you learn about the type of customers and what they are buying?
• What’s the current inventory?
• What are the relevant trends?

So to do this, we must go beyond admitting that just home price data are flawed—almost all existing housing information resources are flawed...

We need granular home sales and home price data. By granular I mean down to the neighborhood.

We need to be able to slice and dice home sales and home prices by existing vs. new, size of home, features of home, and type of home.

We need to track home builders and their market share, price per square foot and more.

We need to track permits and existing inventory.

We need to track real consumer-driven demand, not the demand most people settle for (what sold last year)...

Right now I am raising investment capital so I can properly license all necessary data and complete the development to make this a reality. We know how to do it, so it’s only a matter of time.

If you are interested in investing or simply want to put your name on an interest list for access to this kind of housing intelligence, please contact us and let us know of your interest. And stay tuned, as we will make progress quickly.

Builder's brands not relevant in today's market?

According to an article posted at BuilderOnline.com, today's buyers not only don't care about a builder's brand, they don't even want to hear about it, which should tell you something about the uphill PR hill builders will need to climb in the next few years. What they DO want is a sales agent who appears to be a good listener:

Sales consultants advising home building CEOs about their salesforces have a buzzworthy catch phrase, “You were born with two ears and one mouth, and you should use them in that proportion.”

Harsh? Maybe. But to sell in today’s housing market, salespeople need to start conversations with clients, learn about them, build relationships, and by doing all of that, sell the right house to the right buyer, home building sales consultants say.

Customers don’t want to feel hustled, says Jon Fogg, former vice president of sales for Centex Corp. and now a partner at consulting firm The Berke Group in Atlanta.

“Customers have told us they are offended by this process and would like [salespeople] to spend time learning about them and their problems, not dump a bunch of features and benefits on them,” Fogg says.

Potential buyers also don’t want to hear about the builder’s brand, says Berke Group founder and CEO Martin Freedland.

“They don’t give a damn; it’s the nicest way I can say it,” Freedland says...

Selling homes with a system that worked wonders during the boom years, by greeting prospective clients, qualifying them, and constantly trying to close during initial conversations is now a doomed strategy, Freedland says...

Builder salespeople must get their heads around not trying to force transactions. Sales operations and strategies must be ­customer-based and geared toward selling to customers’ wants and needs, versus selling the builder to the customer. Salespeople have to earn the right to sell a customer a home, Freedland says...

Salespeople weren’t the only ones disinterested in improving sales skills during the boom. Builders did not feel the need to spend a lot of money or time on sales training. Now they must invest in training their salesforce to become better listeners...

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.