Friday, October 31, 2008

Builders converting land to non-residential uses

Rather than wait for the moribund housing market to rebound, some builders and developers are instead looking to rezone their land for other uses, such as retail, office or industrial uses. So how successful is this strategy? A story on BuilderOnline.com explains:

The single-family housing market has come to a grinding halt, with land now being sold for 10 percent or 20 percent of what it was once worth. Left with the choice of either accepting the lower price or holding the land indefinitely, many developers are drawn by the appeal of converting lots or selling them for some other use, particularly in light of the fact that the commercial and industrial sectors are foundering far less than their residential counterparts...

Unfortunately, no matter what the current or future use of land may be, a sale may never take place. In this economy, any kind of land deal is difficult...

Rezoning your residential property as commercial, office, or industrial use may look enticing-especially with growing government support...

1) Quantify Demand. Commercial and industrial uses may look appealing, but you need tenants.

2) Know the Competition. Even if there's demand in the area, there may be a backlog of supply at other business parks that will doom a transition.

3) Sign Tenants. The best way to ensure you have tenants when you open is to have them when you break ground.

4) Don't Count on the Chains. Just because you have land at good prices, it's not a given that major chains such as Home Depot will be interested.

Click here for full story.


Thursday, October 30, 2008

Get free passes to this year's BIS (Building Industry Show) in Long Beach

If you wanted to attend this year's BIS (Building Industry Show) in Long Beach on November 13th and 14th but money's too tight, fear not. The BIA of Southern California is offering a free pass to building industry associates. Click here for details and to register.

Wednesday, October 29, 2008

Inland Empire economic outlook remains grim

According to a presentation this morning in San Bernardino, it looks like it's going to be tough sledding in the Inland Empire for the near future, with home prices continuing to decline and an economy in recession.

Such were the projections of speakers from Beacon Economics, which organized the conference and the University of Redlands, which acted a title sponsor (MetroIntelligence Real Estate Advisors was also a sponsor and authored the real estate sections of the report). From a story in the L.A. Times:

A panel of economists today offered grim predictions for the Inland Empire economy, including a rise in unemployment, a slide in manufacturing and a wave of foreclosures likely to continue for another two years.

Some of the numbers were staggering.

"There has been a 3,500% rise in foreclosures in the Inland Empire since 2005," said Brad Kemp, director of regional research for Beacon Economics, a research and consulting firm. "Most people want to think this housing drop is over, but it's going to continue."

A recovery, he said, is not expected until early 2011, the same year he thinks the housing crash will bottom out after home prices fall 28% to 32% more...

"California has been in a recession for almost a year now," said Christopher Thornberg, one of the founders of Beacon Economics, which produced the forecast. "This is not only a recession but a deep recession, and it's amazing how many people were denying it even when we were in the middle of it."

He said house prices must fall 40% to 50% to become affordable again. And when they do, it will be a long time before values go up.

"Housing markets don't bounce, they splat," he said. "We will be at the bottom for a while. The peak of foreclosures will be around for the next two to three years."

Recessions, he said, are a good thing because they "work the evil out of the system."...

Between 2000 and 2006, 315,000 jobs were created and 815,000 new residents moved in, according to the report. Home prices jumped 214% in Riverside County and 241% in San Bernardino County.

Many homeowners took out adjustable-rate mortgages that were foreclosed when the rates reset at a higher level. Home prices plummeted 35% in Riverside and 37% in San Bernardino Counties over the last year.

"Most of the downturn . . . will be experienced by the end of 2010, when median home prices are expected to be on order of $198,000 and $165,000 in Riverside and San Bernardino Counties respectively," the report said.

Click here for full story.


If you missed the presentation, you can find the conference materials here:

Tuesday, October 28, 2008

The end of prosperity?

Economist Arther Laffer was on HBO's "Real Time with Bill Maher" last Friday night promoting his new book "The End of Prosperity -- How Higher Taxes Will Doom the Economy -- If We Let it Happen" and defending what Maher said were the failures of his economic theories. You can watch that part of the show here:



Here's a short summary from the publisher on the book:

Since the early 1980s, the United States has experienced a wave of prosperity almost unprecedented in history in terms of wealth creation, new jobs, and improved living standards for all. Under the leadership of Presidents Ronald Reagan and Bill Clinton, Americans changed the incentive structure on taxes, inflation, and regulation, and as a result the economy roared back to life after the anti-growth, high-inflation 1970s.

Now the rest of the world is following the American economic growth model of lower tax rates, more economic freedom, and sound money. Paradoxically, one country is moving away from these growth policies and putting its prosperity at risk -- America.

On the eve of a critical presidential election, Laffer, Moore, and Tanous provide the factual information every American needs in order to understand exactly how we achieved the prosperity many people have come to take for granted, and explain how the policies of Democrats Barack Obama, Hillary Clinton, and Nancy Pelosi can cause America to lose its status as the world's growth and job creation machine.

The End of Prosperity is essential reading for all Americans who value our nation's free enterprise system and high standard of living, and want to know how to protect their own investments in the coming storm.

Sounds a bit hysterical, but realize he IS selling a book.

Laffer, who is famous for "The Laffer Curve," which posited that, in certain situations, a decrease in tax rates could result in an increase in tax revenues, has written an op-ed piece in The Wall Street Journal in support of his book (hat tip: L.A. Land):

Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book "Fooled by Randomness."...

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple...

The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.

But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it...

Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the "retirement test" for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.

The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.

These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.

Click here for the full story.

But remember -- he's selling a book.

L.A. home prices continue their descent

The most recent Case-Shiller numbers for August 2008 are out, and they're continuing to show sharp pricing declines from last year. But what's interesting to me is that the price declines -- at least so far -- have been far sharper for homes priced under $380,000 (-39%) than for those priced in the top third, or over $573,000 (-19% decline).

So can these higher-priced homes continue to hold their values, or are they destined to fall further to match the sharper decline in cheaper homes -- which have historically provided the required equity to move up to pricier homes? Given the economic fundamentals at work, I think it's just a matter of time before we see sharper declines at the higher end.

From an L.A. Times story
:

The Standard & Poor's /Case-Shiller index of home prices in 20 metropolitan areas was down 16.6% in August from the same month a year ago. Los Angeles and Orange County home prices were down 26.7% in August compared with August 2007...

Close behind in their August annual price drops were Miami (28.1%), San Francisco (27.3%) and San Diego (25.8%).

The smallest August yearly declines were in Dallas (2.7%) and Charlotte (2.8%).

In the Los Angeles area, lower-priced homes showed greater price declines than the high end of the market. The lowest-priced third of homes, those under $380,000, declined 39% in value in August compared with August 2007, according to the index. Prices of the top third of homes, those priced above $573,000, fell 19% in August compared with a year ago.

Lower-priced Los Angeles area homes dropped 42% from their fall 2006 peak price. The highest-priced third of Los Angeles area homes were down 21% from their peak in the summer of 2006.

Overall, Los Angeles area home prices were down 31% from their fall 2006 peak and matched spring 2004 prices.

Click here for full story.

Monday, October 27, 2008

L.os Angeles Times cuts 75 more jobs including real estate reporters

I just heard from a real estate reporter (and friend) at the L.A. Times that her job has been eliminated along with 74 others, including the former editor of the real estate section, with whom I had worked and had one of the best working relationships in my career(s), writing or otherwise. Click here for the coverage of the layoffs from the Times.

Although I know that it's a tough time for traditional newspapers, this is very sad news for Southern California because it leaves the Times -- the largest daily on the West Coast the #4 in the nation in terms of circulation -- with very little local or regional coverage of real estate.

While some would argue that blogs can take up the slack, I would in turn tell them that they really know nothing at all about blogging. Blogs are about citing other news stories and writing short articles, and not providing the sort of in-depth coverage that a large newspaper can do. And if everyone's blogging, then who writes the longer articles to cite? Oh, I know -- osmosis!

Regardless of whatever political arguments readers might have had with the Times (many found it too left-leaning in recent years), I don't think that extended to the real estate coverage. Given the terrible advice doled out by real estate agents, the CAR and other from the supply side of the real estate industry during the boom years, the dearth of an important source of objective information is truly a terrible thing irrespective of the economics cited for its demise.

One can only hope that some type of appropriate replacement -- such as a website or blog that provides high-quality, feature-length stories -- will eventually arrive on the web.

New home sales rise on price decline

Despite the wide prognostications by economists on further sales declines of new homes, the Commerce Dept. showed an increase in sales activity during September 2008 as prices continued to fall back to 2004 levels. Still, because the sample size for this particular report is fairly small -- and audits less than 5% of permit reporting places throughout the U.S. -- we could see revisions to the data next month. From a New York Times story:

Sales of new homes recorded an unexpected increase in September as median home prices dropped to the lowest level in four years.

The Commerce Department reported Monday that sales of new single-family homes rose 2.7 percent last month to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from the August level.

The median price of a new home sold in September declined 9.1 percent from a year ago to $218,400, the lowest price level since September 2004, a period when home prices were rising rapidly as the country experienced a five-year housing boom.

The surprising increase in September sales still left them 33.1 percent below the level of a year ago as the country is battered by the worst housing slump in decades.

Click here for full story.

Friday, October 24, 2008

An update on Mark Zandi's book "Financial Shock"

As one of my first freelance writing assignments for the real estate news syndicator Inman News, I'm going to be reviewing the book by Mark Zandi called Financial Shock: A 360ยบ Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis.

Zandi, who is also widely quoted as an economic expert in the national press as well as a consultant to the McCain campaign, has been better known as Chief Economist and co-founder of Moody's Economy.com, so he's in a particularly good position to write the book, which provides a comprehensive overview of the sub-prime crisis, the related fall-out and, more importantly, some policy prescriptions for how to avoid similar mistakes in the future.

However, since his book was printed in July it missed out on some of the recent events, so I thought it was important to interview Dr. Zandi for any updates. Some money quotes:

On whether or not a government bailout is a wise move:

"It's guarding against the downside risks, which are quite considerable...If we don't down this path quickly, then the policy choices will get overwhelmed by the magnitude of the problem."

On what's next for the homebuilding industry:

"I would expect it to go through a very significant rationalization, and expect to see more failures, although the big, publicly traded builders are still in business and I don't think that's going to change."

On what else needs to be done to fix the housing market:

"Another write-down plan should be implemented and keep on trying to forestall foreclosures...It's a reasonable way to go to write down the first mortgage to the point that it becomes affordable and guarantee the part that's written down to the lender."

On the current economy:

"I think we've been in a recession for a year and will be through next summer -- about the worst we've experienced since the end of WWII, although perhaps not as bad as the 1982 downturn. I would expect unemployment rates to peak at 8% by early 2010."




As stocks and home prices crater, apartment market remains strong

I'd imagine that some apartment investors with long-term bets on the rental market are feeling somewhat vindicated by the news that, at least according to data tracker RealFacts (an alliance partner to MetroIntelligence and Beacon Economics), rents and occupancy levels continued to hold up during the third quarter of 2008. From an AP story via the L.A. Times:

Apartment rents, as well as apartment occupancy, across the country were virtually unchanged in the third quarter of 2008, according to RealFacts, a San Francisco-based apartment data research firm.

And while more than a million homes have been lost to foreclosure in the last two years and with banks readying for another 1.5 million repossessions, apartment buildings have remained solvent. To date, there have been virtually no foreclosures on large apartment buildings, according to RealFacts...

In the San Francisco Bay area, with one of the highest housing prices in the country, average rents for the third quarter were $1,637, or 1.2 percent higher than the $1,618 they cost per month in the second quarter.

In the Riverside-San Bernardino area of southern California, which has one of the highest foreclosure rates in the country, rents were $1,157 in the third quarter, slightly down from $1,162 in the second.

And in the Las Vegas area, also hit hard by foreclosures, rents were $887 in the third quarter and $886 in the second...


The data collected by RealFacts comes from more than 3 million apartments in complexes of 100 units or greater.

Click here for full story.

Inland Empire Economic Forecast Conference on October 29th in San Bernardino

Next Wednesday, October 29th, is the fourth and final annual conference for 2008 produced by Beacon Economics, this time at the following location:

National Orange Show Events Center
Valencia Ballroom
689 South "E" Street, San Bernardino, California

Space is limited though, so if you want to go be sure to pre-register here or click on the link on the upper right-hand side of this blog.

Special offer for The Housing Chronicle Blog readers: email me at pduffy@metrointel.com for a code you can use when registering to save $50 off of registration (normally $150).

This event will focus on the Inland Empire. MetroIntelligence Real Estate Advisors is again participating in this event as a sponsor, including writing the real estate section for the conference books.

Want to learn more and attend? Read on:

Where do some of California's most renowned and straight-talking economists think local, state, and national economies are headed in 2009?

The Inland Empire: Ground zero in California's housing bust and recording massive numbers of foreclosures...

  • Will the region suffer a long-run downturn or will demographic forces stimulate a quick recovery?
  • Any sign of a bottom? When will builders see new demand?
  • Are woes in the residential housing market spilling over into the retail and office sectors?.
  • How will local government handle revenue shortages?

The State: California hit harder than the nation as a whole...

  • Do the harder hits imply a quicker recovery?
  • Will the Federal housing bill do anything to stabilize California's residential markets?

The Nation: Recovery, continued doldrums, or worse yet to come...

  • Wall Street wreckage: what does it mean for the broader economy?
  • Is the inflation boogie man really about to jump out of the closet?
  • Has the Fed avoided a major banking sector collapse?

Featured Speakers


Jon Haveman
Founding Principal
Beacon Economics

Christopher Thornberg
Founding Principal
Beacon Economics

Stuart Dorsey
President
University of Redlands

Johannes Moenius
Associate Professor
University of Redlands


California's Budget Blues: Special Panel on Fiscal Reform


Jim Brulte (invited)
Former California State Senator
State of California

Daniel Mitchell
Professor and Ho-Su Wu Chair in Management
UCLA

Fred Silva (moderator)
Fiscal Affairs Advisor
Beacon Economics

Beacon Economics is pleased to announce that it has joined forces with the Inland Empire's University of Redlands in hosting its 2nd annual Inland Empire Economic Forecast Conference. Beacon’s track-record of truth-seeking economic analysis and the University of Redland's reputation academic rigor promise a candid, thought-provoking, and practical discussion. The event is already generating a buzz, and seating is limited. So reserve today!

Attendees also receive Beacon's new 2008 Inland Empire Economic Forecast Book. This original, in-depth look at the region’s labor markets, income, real estate markets, demographic trends, and other indicators, is a valuable and enduring resource for anyone facing important economic and financial decisions over the next year.

Click here to register.

Thursday, October 23, 2008

Bush Administration planning more help for homeowners

Due to a combination of rising foreclosures and criticisms that the recent bailout packages did little to address homeowners at risk of default, the Bush Admin. is proposing more help on the way. From a New York Times story:

With foreclosures mounting, Bush administration officials said Thursday that they were preparing to step up efforts to help struggling homeowners.

A senior policy maker told a Senate committee that the administration was working on a plan under which the government would offer to shoulder some of the losses on loans that are modified.The insurance program could cost tens of billions of dollars, according to a person briefed on discussions about the plan, and would be run by the Treasury Department under the $700 billion financial rescue bill Congress passed earlier this month...

Details of the plan are expected in the next week or two. Ms. Bair told senators that policy makers were contemplating creating standardized loan modification practices that would be used by mortgage servicing firms, which handle billing and collection on behalf of investors and banks. Loans modified under those principles would qualify for a partial federal guarantee.

In other words, if homeowners defaulted on their loan again, part of the loss would be borne by the government. It was unclear whether investors or homeowners would have to pay premiums for that protection.


Click here for full story.

Greenspan finally admits he's not invincible

Following months of rhetorical obfuscations reminiscent of his past Federal Reserve meeting minutes that mostly served to deflect mounting criticisms of his now-infamous laissez-faire philosophy, Alan Greenspan finally issued a mea culpa and admitted that he might have been wrong about the housing bubble, although you had to listen closely to catch it. From an L.A. Times story:

Former Federal Reserve Chairman Alan Greenspan told Congress today he was in "shocked disbelief" at the breakdown of credit markets that has triggered "a once-in-a-century credit tsunami" inflicting great damage on the U.S. economy.

"This crisis ... has turned out to be much broader than anything I could have imagined," Greenspan told the House Oversight and Government Reform Committee in his first congressional appearance since financial markets began melting down last month. "Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment."

Greenspan, who stepped down as Fed chairman on Jan. 31, 2006, after nearly 20 years in the position, reiterated comments he made early this year about his surprise that financial markets had allowed the credit crisis to develop. And under questioning he admitted that the crisis showed flaws in his strong free-market ideology .

Click here for full story.

Builders for Obama?

Although the home building industry tends to be somewhat fiscally conservative -- especially in the executive ranks -- this year it's become much more complex, with some builders actually admitting to voting for -- drum roll, please -- a Democrat (The Housing Chronicles Blog is remaining apolitical in this particular race.) From a BuilderOnline story:

Builders tend to be a fairly reliably Republican crowd, but the factors influencing the 2008 election seem to have pushed them into new political territory, based on interviews BUILDER did this week with a dozen builders around the country...

Not surprisingly, builders cited the state of the housing market and global economy as a significant factor in their voting plans for president. But many also expressed frustration at the lack of real solutions to the housing crisis being offered by either Republican John McCain or Democrat Barack Obama...

Several builders said that extremism was not what they wanted in their next president. "I will support whichever candidate is less likely to be swayed by the extreme factions in their party. I'm equally leery of ultra-left Democrats and ultra-right Republicans, and I don't want anyone in the White House who will put social issues ahead of stewardship of the economy," said McGuiness, who said he plans to vote for Obama. "McCain seems to be courting the extreme elements in his own party more so than Obama is in his; McCain, once in, may very well return to being as independent-minded as he once was, but we have to accept the possibility of [Sarah] Palin ending up president, and I think she is part of the extreme element I don't want in charge."

The pick of Palin as vice president also dismayed John Gavenas. An independent voter, he serves as vice president of land planning and development at Avatar Properties in Florida, and like the other builders interviewed for this story, stresses that his political opinions are his own and do not reflect the views of his company or colleagues. "The possibility of Palin leading this country is an unthinkable option, and McCain's choice of her as his vice president seriously undermines his credibility. Less than two years' experience as governor of the least populous state in the union; 700,000 people; and zero foreign policy experience (got her passport last year?); not to mention a lackluster education and a far-right religious agenda," Gavenas told BUILDER via e-mail. "How could this be a serious choice for any other than the rock-bottom base of the Republican Party?"

Click here for full story.

Wednesday, October 22, 2008

Housing Chronicles hits 8 million headline views

I'm very pleased to report that traffic to The Housing Chronicles Blog has continued to increase, especially over the last month. At the same time, our syndication deal with BlogBurst since February of 2008 has helped us to recently reach the 8 million headline view, mostly on the Reuters website.

Top 10 Publishers (All History) for Housing Chronicles


Total Views
Reuters 7,709,403
FoxNews 152,420
Chicago Sun Times 120,050
Livestrong 17,053
Computer Shopper 11,476
IBS 5,203
Wall Street Journal 5,017
Palm Beach Post 715
usatoday.com 263
CT Green Scene 209

BlogBurst has also announced the beta testing of a "new & improved!" syndication service that will expand the publishers carrying blog content, of which this blog is currently participating.

Thanks to all the readers who continue to visit this blog, we do appreciate it!

Although San Francisco California's strongest economy, home prices still falling

According to a conference on October 21st at the Hyatt Regency in San Francisco (for which MetroIntelligence authored the real estate sections), the region's economy remains the strongest in the state and is not expected to experience a repeat of the tech-related bust earlier in the decade. Although home prices in the City of San Francisco are not expected to decline as other parts of the state, the neighboring counties of San Mateo and Marin are projected to suffer some additional pain through 2009. From a story in the San Francisco Chronicle:

Home prices and taxable sales will fall in the San Francisco metropolitan area while rents rise and unemployment climbs.

But the 1.8 million residents of Marin, San Mateo and San Francisco counties still live in California's strongest economic region and should suffer less from the housing bust than the rest of California, says a forecast being issued Tuesday. "Things will be rough here, but not nearly as rough as the Inland Empire (in Southern California) or in Contra Costa County," said Chris Thornberg with Beacon Economics...

The 113-page report calls the three-county metropolitan area "the strongest economy in the state of California at the moment," but warns that it still will be hurt by the housing collapse that has crippled the global financial system and undermined the world economy.

The forecast tries to predict economic conditions in the three-county zone through the first quarter of 2010 and suggests that:

-- Home prices will fall roughly 25 percent from their peak.

-- Taxable sales will drop by 10 percent across the region.

-- Payrolls will shrink by 2.5 percent over the next two years.

-- Rental rates are likely to continue to rise, particularly in San Francisco, where 60 percent of households are renters...

Economic softness is expected to hit commercial real estate, which had begun to recover from the dot-com bust. But the forecast assumes that the region's prestige and proximity to Silicon Valley will merely slow the growth of rental rates in the metropolitan area - put at 11 percent last year - rather than lead to a collapse.

"Rent growth is expected to fall to just 1 percent over the next year, although over a five-year horizon it should average a more moderate 3.5 percent in the region," according to the forecast.

But individual renters will get no such relief as the region's relative economic strength and desirable lifestyle draws job seekers and shrinks the vacancy rate which, at about 4.3 percent, is among the lowest in the state. "Over the last two years, average asking rents have continued to rise," noted the report, which expects the landlords' market to continue for now.

Click here for full story.

If you missed the conference, you can still download the book and the presentations here:


Friday, October 17, 2008

Commercial property market following residential market trends

From the Wall Street Journal:

The next shoe? After years of plunging residential property valuations, commercial real estate is heading into the danger zone as office vacancies rise, stores close and hotel bookings fall.

This could mean another body blow to already struggling financial institutions. Alan Todd, head of research on commercial-mortgage-backed bonds at J.P. Morgan Securities, projects commercial-property losses of as much as $250 billion over the next 10 years, or about 7% of the $3.4 trillion outstanding debt. That would rival the roughly 9% cumulative loss rate during the real-estate carnage of the early 1990s.

Commercial real-estate values have fallen since the beginning of the credit crunch, by as much as 20%, due to more expensive and less available financing. Financial institutions have already taken more than $15 billion in commercial property-related write-downs this year.

There are bullish points. Unlike the early 1990s, the commercial market hasn't suffered years of overbuilding. Defaults on commercial real-estate debt remain less than 1%, compared with more than 10% at the worst point of that earlier collapse. Rents and vacancy rates have so far remained solid, enabling most properties to pay their debt service...

Click here for full story.


Government about to file charges against subprime lending fraud

While it lasted, working as a mortgage broker was a sure-fire way to make good money without the need for a license or even a high school diploma. Of course what went along with that was a great deal of fraud, and it looks like we're about to hear of various indictments being handed out to the scofflaws. From an AP story via MSNBC.com:

The top federal prosecutor in Los Angeles indicated Thursday that charges are coming soon from a sweeping investigation of banks and subprime lenders for their role in the U.S. mortgage crisis.

"I think we are going to see some fairly dramatic results in the near future," U.S. Attorney Thomas O'Brien told The Associated Press. "Mortgage fraud is an extremely important issue to me and to the people of this district."

A grand jury is investigating at least three mortgage lenders — Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc.

Thirty-four lawyers currently are looking at mortgage fraud and other white-collar crimes, now one of O'Brien's top priorities.

The government is pursuing a "surgical approach" in its investigations and hopes to streamline its prosecutions by seeking indictments with only three or four counts, instead of spending several years seeking additional charges.

The future of new homes is smaller

Good-bye McMansions in the suburbs -- the new homes of the future are likely be smaller, denser and built closer to jobs (finally!). Some builders have already started downsizing the plans they offer, while others will be slower to adapt because their entire business model (i.e., Toll Bros.) is predicated on luxury, move-up housing. From an AP story via MSNBC:

When the U.S. housing market hit the skids, homebuilders like KB Home that thrived by offering large homes and expensive amenities began to rethink their home designs with an eye toward making smaller, less costly homes.

Three years into the downturn, that trend appears to be intensifying, as many builders scramble to make their wares palatable and affordable to first-time buyers and compete with a trove of preowned homes and deeply discounted foreclosed homes on the market...

The trend in smaller homes is a reversal of more than two decades of expanding floorplans, during which median size single-family went from less than 1,600 square feet to more than 2,200 square feet.

That steady drive by builders to erect increasingly bigger homes peaked during the housing boom. Derided by some as McMansions, these super-sized homes packed with amenities helped drive up home prices even more...

Click here for full story.

Lead bank pushing for liquidation of land developer LandSource

Barclays Bank, the lead lender for land developer LandSource, is calling for an almost-immediate liquidation of its assets. From a BigBuilderOnline story:

Barclays Bank, representing the lead creditors of LandSource, filed a plan in bankruptcy court on Monday Oct. 13 calling for liquidation of the giant land development company by auctioning off all its assets within 120 days of the court's approval and distributing the proceeds among creditors.

The move seems an abrupt about-face for Barclays, which, shortly after LandSource filed for Chapter 11 bankruptcy court protection in June, agreed to provide the California-based company with debtor in possession financing to keep its doors open and employees paid for a year during the reorganization...

Click here for full story.

Office market in Southern California market now softening

The commercial real estate market, which was once thought somewhat immune to the bust of the residential sector, is now starting to feel the pinch from a slowing economy. First it was the retail sector -- which relies on consumer spending -- and now it's starting to impact office rents and vacancy levels in preferred areas of Southern California also once considered more resilient. From an LATimes story:

In a sign that the economic slowdown is affecting Southern California businesses, the rents on office space are down slightly over last year, and vacancy rates are up.

In some parts of the region, office buildings that once housed mortgage lenders and other housing-related businesses stand 20% empty, according to brokerage Cushman & Wakefield. Even in desirable Santa Monica, vacancies have almost doubled as companies have shunned the coastal area's still-pricey digs in favor of cheaper rents elsewhere in the region.

Experts say the decline in rents and the jump in vacancies portend trouble, even in those parts of the region -- such as L.A.'s Westside -- where the market is still relatively stable...

Click here for full story.

New home construction falls to 6-decade low

For those folks who think that home builders are only worsening the problem of unsold homes by continuing to add new inventory, new stats out by the Commerce Department show what we've already seen behind the scenes: starts have fallen to a six-decade low. From an AP story via the LATimes:

Construction of new homes plunged by a bigger-than-expected amount in September as builders slashed production yet again, putting the country on track to build the fewest homes this year in more than six decades.

A barometer of future building also dropped, falling to the weakest level in more than 25 years. Analysts blamed the renewed swoon on the financial crisis which erupted with force this fall, raising new anxieties among potential home buyers and making it harder for builders to get construction loans.

The Commerce Department reported Friday that construction of new homes and apartments dropped by 6.3 percent last month, a much bigger decline than the 1.6 percent decrease that had been expected. It pushed total production to a seasonally adjusted annual rate of 817,000 units. That's the slowest pace since January 1991, when the U.S. was in a recession and going through a similar painful housing correction...

Click here for the full story.

Thursday, October 16, 2008

"Dr. Doom" Roubini peers ahead

With an opinion piece published in the Toronto Globe & Mail entitled "Yes, Chicken Little, the sky is really falling," Dr. Noriel Roubini has some advice for a global financial system in crisis, and warns of what might happen if the right solutions are not applied (hat tip: Patrick.net):

The rich world's financial system is headed toward meltdown. Stock markets have been falling most days, money markets and credit markets have shut down as their interest-rate spreads skyrocket, and it is still too early to tell whether the raft of measures adopted by the U.S. and Europe will stem the bleeding on a sustained basis...

The delusion that economic contraction in the U.S. and other advanced economies would be short and shallow – a V-shaped, six-month recession – has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession – such as the one experienced by Japan after the collapse of its real-estate and equity bubble – cannot be ruled out...


As we have seen in recent days, it will take a big change in economic policy and very radical, co-ordinated action among all economies to avoid disaster. This includes:

Another rapid round of interest-rate cuts of at least 150 basis points on average globally;
A temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut are distinguished from distressed but solvent institutions that must be partially nationalized and given injections of public capital;
A rapid reduction of insolvent households' debt burden, preceded by a temporary freeze on all foreclosures;
Massive and unlimited provision of liquidity to solvent financial institutions;
Public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
A massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash- strapped local governments;
An agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors' surpluses to avoid disorderly adjustment of such imbalances.

Anything short of these co-ordinated actions may lead to a market crash, a global financial meltdown and worldwide depression. The measures adopted by the U.S. and Europe are a start. Now they must finish the job.

Now you all go out and have a nice day, ya hear?

San Francisco Peninsula economic forecast conference on Tuesday, October 21st

Next Tuesday, October 21st, is the third of four economic conferences produced by Beacon Economics, this time at the San Francisco Hyatt Regency. Space is limited though, so if you want to go be sure to pre-register here or click on the link on the upper right-hand side of this blog.

Special offer for The Housing Chronicle Blog readers: email me at pduffy@metrointel.com for a code you can use when registering to save $50 off of registration (normally $150).

This event will focus on the San Francisco metropolitan region of the Bay Area, including the counties of San Francisco, Marin and San Mateo. MetroIntelligence Real Estate Advisors is again participating in this event as a sponsor, including writing the real estate section for the conference books.

Want to learn more and attend? Read on:

Where do some of California's most renowned and straight-talking economists think local, state, and national economies are headed in 2009?

San Francisco: So far, relatively stable and holding...

  • The region has avoided Wall Street style financial-sector layoffs... but can it continue?
  • Can SF dodge the housing bullet?
  • Are woes in the residential housing market spilling over into the retail and office sectors?.
  • How will local government handle revenue shortages?

The State: California hit harder than the nation as a whole...

  • Do the harder hits imply a quicker recovery?
  • Will the Federal housing bill do anything to stabilize California's residential markets?

California's Budget Blues: Is reform possible? A special discussion with California Forward

  • Critical mass: Has the time come to change the state budget process?
  • What should be included in a budget reform agenda?

The Nation: Recovery, continued doldrums, or worse yet to come...

  • Wall Street wreckage: what does it mean for the broader economy?
  • Is the inflation boogie man really about to jump out of the closet?
  • Has the Fed avoided a major banking sector collapse?

Featured Speakers


Jon Haveman
Principal
Beacon Economics

Christopher Thornberg
Principal
Beacon Economics

Sean Randolph
President
Bay Area Council Economic Institute

California's Budget Blues: Special Panel on Fiscal Reform


Ted Egan
Chief Economist
Office of Economic Analysis
City and County of San Francisco

Sunne Wright McPeak
President and CEO
California Emerging Technology Fund

Fred Silva (moderator)
Fiscal Affairs Advisor
Beacon Economics



Beacon Economics is pleased to announce that it has joined forces with the Bay Area Council Economic Institute (BACEI) in hosting its 2nd annual San Francisco Economic Forecast Conference. Beacon’s track-record of truth-seeking economic analysis and the Bay Area Council’s reputation as the voice for Bay Area business promise a candid, thought-provoking, and revealing discussion. The event is already generating a buzz, and seating is limited. So reserve today!

Attendees also receive Beacon's new 2008 San Francisco Economic Forecast Book. This original, in-depth look at the region’s labor markets, income, real estate markets, demographic trends, and other indicators, is a valuable and enduring resource for anyone facing important economic and financial decisions over the next year.

CAR predicts home prices will decline by 6% in 2009, sales up by 12%

I've not been a big fan of the California Association of Realtors' (CAR) ability to forecast market trends over the past few years, mostly because they've been so off the mark. When the market changed on a dime from boom to bust -- something I'd predicted in early 2006 -- their economist, Leslie Appleton-Young, basically begged for more time to think of some new terms to describe what was happening. Now we know why (from a story in the Riverside Press-Enterprise, which covers part of the Inland Empire):

Association President William E. Brown said a misunderstanding of the depth of the nation's credit crisis led the association to mistakenly predict a year ago that the median price of a resale home in California would drop only 4 percent in 2008. In its latest forecast, the association assumes that the current economic recession will last through the second quarter of 2009 and then the economy will begin a "turnaround."

So what kind of turnaround? Read on:

The association predicts that in 2009 the median home price in California will decline 6 percent to $358,000 from a projected median of $381,000 this year. Sales of existing single-family homes in 2009 are projected to increase 12.5 percent to 445,000 from 395,600 in 2008. That would build on a 12-percent surge in home sales this year, which has been fueled by steeply discounted foreclosed properties.

So how realistic is this forecast? From what I've been reading, it's pretty optimistic in terms of pricing increases, although the sales projection seems reasonable due to lower prices:

However, Patrick Duffy, principal for MetroIntelligence Real Estate Advisors in Los Angeles, said the association's prediction of a 6 percent further decline in the state's home prices next year seems "optimistic" and what he would expect from an organization whose members have an interest in promoting home buying. Duffy said other economic forecasts predict California home prices to fall next year by 10 percent to 15 percent.

This opinion was based on what I've read and heard from economists I respect, some of whom are also quoted in the story:

Michael Carney, director of the Real Estate Research Council of Southern California, said he expects price declines next year in Riverside and San Bernardino counties will be greater than the 10 percent he is predicting for the state as a whole because of this region's large glut of bank-owned houses and job losses.

And then of course there's our own West Coast version of "Dr. Doom" Roubini named Chris Thornberg, and here's what he had to say about the forecast in the San Francisco Chronicle:

Sales will likely climb by about the amount the group predicts, thanks to the bargains presented by increasing foreclosure sales, but its price forecast is too rosy, said Chris Thornberg, founder of Los Angeles research firm Beacon Economics.

"The decline of 6 percent sounds like something of a pipe dream," he said. "The shear amount of momentum there is ... just phenomenal, and I find it hard to believe it's going to basically bottom out that quickly."

Thornberg believes prices will fall by at least 10 percent, and possibly as much as 15 percent.






When will prices hit bottom?

Although it's certainly true that home prices have fallen much more quickly than pundits had anticipated, that doesn't mean they've yet hit bottom. So when will they do so? It largely depends on the market, the severity of over-building and affordability ratios. From a New York Times story:

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.

In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.

Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers...

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.

In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody’s Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country. Economy.com’s calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif...

To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.

Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)...

Click here for full story.

Wednesday, October 15, 2008

Partial nationalization of banking system likely to mean fewer competitors

Armed with a $250 billion blank check to invest in U.S. banks, the federal government is poised to play financial God in a way that's not been done before. So will its impact help pick winners from losers or prop up weaker banks that would otherwise fail? From an LA Times story:

By flooding the U.S. banking system with hundreds of billions of dollars in cheap capital, the government could find itself funding the most dramatic change in the nation's financial landscape since the deregulation drive of the 1980s.

That's because the Treasury secretary and bank regulators will decide which banks get an infusion of government money, and which will be denied. Many of the nation's 8,400 banks -- especially the smaller and weaker among them -- may be allowed to fail or be swallowed by bigger rivals, industry analysts say...

The program is also likely to hasten the evolution of the country's financial system from a conglomeration of community banks into a network of bigger, interconnected institutions, said Timothy J. Yeager, a former economist for the Federal Reserve Bank of St. Louis and a finance professor at the University of Arkansas.

But not everyone agrees. Gerard S. Cassidy, managing director of bank equity research at RBC Capital Markets, said he believed the program would help some weaker banks stay in business, because they will be eligible for the same favorable terms the big banks will get for government capital...

Click here for full story.

San Francisco South Bay economic conference tomorrow, October 16th

Tomorrow is the second of four economic conferences in San Jose produced by the unusually objective Beacon Economics (meaning no spin at these events!). Space is limited though, so if you want to go be sure to pre-register here or click on the link on the upper right-hand side of this blog.

This event will focus on the South Bay region of the San Francisco East Bay (i.e., Silicon Valley). MetroIntelligence Real Estate Advisors is participating in this event as a sponsor, including writing the real estate section for the conference books.

Want to learn more and attend? Read on:

Where do some of California's most renowned and straight-talking economists think local, state, and national economies are headed in 2009?

The South Bay: Technology is booming, but can it offset housing and consumer blues...

  • Will coastal areas dodge the housing bullet?
  • Are woes in the residential housing market spilling over into the retail and office sectors?.
  • How will local government handle revenue shortages?

The State: California hit harder than the nation as a whole...

  • Do the harder hits imply a quicker recovery?
  • Will the Federal housing bill do anything to stabilize California's residential markets?

California's Budget Blues: Is reform possible? A special discussion with California Forward

  • Critical mass: Has the time come to change the state budget process?
  • What should be included in a budget reform agenda?

The Nation: Recovery, continued doldrums, or worse yet to come...

  • Wall Street wreckage: what does it mean for the broader economy?
  • Is the inflation boogie man really about to jump out of the closet?
  • Has the Fed avoided a major banking sector collapse?

Featured Speakers


Jon Haveman
Founding Principal
Beacon Economics

Christopher Thornberg
Founding Principal
Beacon Economics

Sean Randolph
President
Bay Area Council Economic Institute

California's Budget Blues: Special Panel on Fiscal Reform


Lawrence Stone
County Assessor
County of Santa Clara

Chuck Reed
Mayor
City of San Jose

Fred Silva (moderator)
Fiscal Affairs Advisor
Beacon Economics


Beacon Economics is pleased to announce that it has joined forces with the Bay Area Council Economic Institute (BACEI) in hosting its 2nd annual South Bay Economic Forecast Conference. Beacon’s track-record of truth-seeking economic analysis and the Bay Area Council’s reputation as the voice for Bay Area business promise a candid, thought-provoking, and revealing discussion. The event is already generating a buzz, and seating is limited. So reserve today!

Attendees also receive Beacon's new 2008 South Bay Economic Forecast Book. This original, in-depth look at the region’s labor markets, income, real estate markets, demographic trends, and other indicators, is a valuable and enduring resource for anyone facing important economic and financial decisions over the next year.
Click here to register.

Tuesday, October 14, 2008

Bush Admin. announces partial nationalization of banking system

Ah, I love the smell of socialism in the morning, it smells like -- Europe. But is that necessarily a bad thing in order to save the banking system? From an L.A. Times story:

Bush administration officials today unveiled a dramatic partial nationalization of the U.S. financial system, a series of "unprecedented and aggressive steps" to pour at least $250 billion into the banking system and expand federal insurance protection in the largest government intervention since the 1930s...

The strategy closely resembles the path taken by Britain and the European Union, a route credited with reviving faltering stock markets there. The Dow Jones industrial average shot up more than 300 points shortly after it opened this morning, though the large gains later eased. Markets across Europe were soaring, as they did earlier in Asia.

Administration officials released the details of the massive government intervention, whose broad outlines began emerging Monday. They said the programs are intended to be temporary, lasting from one to five years with built-in expiration dates.

The centerpiece is a $250-billion infusion of cash into the banking system. Roughly half will go to nine large U.S. banks and financial institutions that agreed to participate after meetings with Paulson on Monday. Among them are Citigroup, Wells Fargo and Bank of America. The other half of the money will be made available to medium and smaller banks in the coming days.

In exchange for the cash, the federal government will get preferred, nonvoting shares in the banks, with a fixed dividend of 5% for five years, increasing to 9% after that. The goal is to provide money to banks at a fairly low cost for five years to get credit flowing though the financial system...

Click here for full story.

Monday, October 13, 2008

New report says San Francisco East Bay housing won't rebound until 2014

According to Beacon Economics' latest report on the San Francisco East Bay, this region's housing market isn't expected to rebound soon. They're predicting that won't happen until 2014. From a story at the Contra Costa Times:

The East Bay economy may have to endure two more years of tough conditions before it fully rebounds, a disquieting new report predicts.

Even worse, a recovery for California's housing market will lag even that distant timeline, economists Jon Haveman and Christopher Thornberg, partners with Beacon Economics, told a Bay Area Council Economic Institute meeting in downtown Oakland this week.

"The housing market will not resume growing until 2012," Haveman said in an interview after his presentation. "Then it will just sit there for a few more years. We won't see any significant appreciation in the housing market in the East Bay and California for five years."

It will be the non-housing parts of the East Bay economy that will help the region extricate itself from a significant downturn.

But more pain looms ahead of the East Bay before that rebound occurs, according to the economists.

"The years 2007 and 2008 have been difficult years for the East Bay," Thornberg and Haveman wrote in their report that was presented Wednesday night. "Our forecast is that 2009 and 2010 will be equally difficult, with an earnest recovery beginning in 2011..."

Click here to read the entire story.

If you weren't able to attend this conference in person, you can still view the conference materials online (MetroIntelligence Real Estate Advisors was responsible for the real estate sections of the conference books as part of an ongoing partnership with Beacon):

Entire Conference Book

Chris Thornberg Presentation (U.S. & state overview)

Jon Haveman Presentation (regional overview)

Fred Silva Presentation (state fiscal affairs)

Speakers' biographies