Sunday, November 30, 2008

2008 in review and a look ahead

When 2008 began, the common wisdom of the day was that 2008 would prove to be a difficult year, and that builders should prepare for a market rebound sometime in 2009. However, with the world falling into recession and federal government bailouts becoming a staple of daily news, it now looks like any sustained market rebound could very well be postponed until 2010. Yet before you look for the nearest window in which to jump out of, there do remain specific opportunities for builders who are willing to conduct detailed demand studies and plan for worst-case scenarios that have the potential to improve along with the economy.

The current recession, like any others, began with a large shock to the economy – in this case, correcting a large imbalance in real estate markets nationwide. But what’s making this shock even worse is that the combination of falling prices and tighter credit is preventing people from either refinancing their way out of trouble and staying put or simply selling their homes and perhaps changing both locales and careers. Moreover, career paths once considered safe havens – such as in government, finance or media – have become just as perilous as technology, entertainment or, as many of you well know, in real estate.

If that wasn’t enough with which to contend, this same lack of credit is beginning to force a correction in a related area -- consumer spending and savings. Over the last 12 or 13 years, American households have been saving little and spending more on newer cars, larger homes and the latest in consumer gadgets. Add to that the wealth effect from rising home values and fatter stock market valuations, and it’s not hard to see why contributions to 401k accounts and savings accounts declined as household debt rose while incomes remained mostly stagnant.

Consequently we’re in what the folks at Beacon Economics have dubbed ‘the mother of all hangovers,’ which in the short-run leads to something called the ‘paradox of thrift:’ as the savings rate goes up (which is good for household budgets) the overall economy shrinks due to less overall demand. Yet in the long run, these types of economic shifts are critical for an eventual recovery better able to leverage a productive workforce, great technology and solid investments in infrastructure.

So what’s ahead for the overall U.S. economy in 2009? At this point in time, the forecast calls for mostly more hangovers with occasional sunny days in particular markets. As forecast recently by Beacon, GDP is expected to continue declining through the third quarter of 2009 as excessive demand based on debt is wrung out of the economy.

Rising unemployment rates, which are being met by calls for a second stimulus package from the nascent Obama Administration, will continue to gradually increase, peaking at 7.8% in early 2010 before dipping back down by the end of that year. Fortunately, the fear of near-term inflation will be kept in check and rise only slightly to approach 1.29% per quarter by the end of 2010, although the entire amount of various federal bail-outs of the automobile, housing and other industries will also undoubtedly impact long-term inflation rates if the Federal Reserve continues to print money.

What that likely means for the new home market in 2009 is continued turmoil, although retiring NAHB chief economist David Seiders is hopeful for a mid-year rebound. Looking at the most recent figures, although the pace of annual new home sales rose slightly in September over August levels to 464,000 units, that level is still down by one-third from a year ago and marks the lowest September numbers since 1981 (just three years ago in the boom year of 2005, 1.3 million homes were sold.)

Even as builders continue to clamp down on production in an attempt to bring down inventory levels, at current sales rates, the number of unsold single-family homes – 394,000 -- would take just over 10 months to sell. Still, at a recent semi-annual construction forecast, Seiders was hopeful that 2009 would be a rebound year and finish up with a seasonally adjusted rate of 600,000 single-family sales. Of course he is also paid to be optimistic!

One thing on which most economists agree is the important role played by new home affordability. With a median selling price of just over $218,000 in September, the sharpest spikes in regional sales have been in markets suffering the steepest price drops, and the consensus is for prices not to fall more than another 10 percent in 2009.

It’s also in those same areas that builders, who have already cut prices just about as far as they can and still remain in business, continue to compete with foreclosures, which in the West can account for as much as 40% of existing home sales. Yet as one economist presenting at the NAHB forecast concluded, builders don’t have to convince everyone to buy a new home – just some people.

Thursday, November 27, 2008

Housing Chronicles to host 119th edition of the Carnival of Real Estate

Next week, The Housing Chronicles Blog will be hosting the 119th edition of the Carnival of Real Estate.

So what's a 'carnival?'

According to the site:

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

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

If you've written a blog post you'd like to submit, please do so by Sunday, November 30th and look for the winners sometime on Monday, December 1st.

Update on Nov. 30th:

P.S. I forget to mention that the official deadline for submitting is 3pm Eastern Time, or noon on the West Coast.

Monday, November 24, 2008

Now foreclosures of 'prime' borrowers rising sharply

Due to growing job losses among previously 'safe' industries (such as government), now it seems that foreclosures and defaults to 'prime' borrowers -- i.e., those with decent credit scores, offering down payments and willing to document their incomes -- are rising sharply. So what does this mean for the overall market? From an L.A. Times story:

Although soaring defaults on subprime loans and other dicey mortgages are a well-known cause of the country's financial crisis, delinquencies and foreclosures now are skyrocketing among "prime" borrowers -- people with good credit histories who documented their incomes when applying for their relatively straightforward mortgages.

Nationwide, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of this year, the latest period for which the Mortgage Bankers Assn. has figures, easily topping the previous record of 1.97% set in 1985.

In California, with a jobless rate topping 8% and home prices down more than 40% from their peak and falling, the situation is significantly worse, with 4.15% of prime loans seriously delinquent. That far exceeded peaks of about 2.6% reached in the recessions of the 1980s and 1990s...

By putting more foreclosed homes on the market, the trend is likely to further depress housing prices, intensify the mortgage-related crisis afflicting the financial system and exacerbate the recession most economists believe is already underway...

In California, delinquencies on prime mortgages could increase for years, said Christopher Thornberg, founder of consulting firm Beacon Economics in Los Angeles.

One reason, he said, is that home lenders became so complacent during the housing boom that they did little to qualify borrowers besides having computers check a few facts.

" 'Prime' lost a lot of meaning in the insanity of the last few years," said Thornberg, who was one of the first experts to foresee the housing downturn...

Click here for full story.

Did public builders destroy the market for private ones?

Boyce Thompson, Editorial Director for magazines such as Builder, Big Builder and Multi-Family Developer, has an interesting blog post online asking if the obsession by public builders to chase market share and improve their balance sheets ended up destroying the supply-demand balance of local markets. From his post:

There are many private builders out there who lay the blame for the housing boom, and subsequent bust, at the feet of public builders whom they say built homes and market share at any cost. These same builders, they argue, continued to pump out specs after the end came in an attempt to work off land inventory, at the expense of every other builder in the marketplace.

This argument holds some water. The publics did build up massive land inventory. They wanted to show The Street that they could feed a well-oiled home building machine that was cranking out 20 percent revenue growth, even in the face of mounting public resistance to development. Then, when the end came, they were forced to sell off land to generate cash. And they took impairments on what land they couldn't sell...

Click here for full blog post.

FHA-backed loans: the new sub-prime disaster?

Never underestimate the power of greed. That seems to be the lesson of a story published in Business Week magazine on former sub-prime mortgage players now simply transitioning their business models to loans backed by the FHA -- and by extension, the U.S. taxpayer. From the story (hat tip: Brian McDonald):

Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy...

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout.

Click here for full story -- but sit down first!

Review of "Financial Shock" now online at Inman News

My first writing assignment for Inman News, a book review of the book "Financial Shock" by economist Mark Zandi, co-founder of Moody's Economy.com, is now online. Since the book was published in the summer -- and therefore before the recent stock market swoons and other financial challenges -- I also interviewed Dr. Zandi by phone for his views on the recent events. What I like about Zandi, both over the phone and in his book, is his ability to speak in plain English about complex economic issues. From InmanNews.com:

When Mark Zandi, chief economist and co-founder of Moody's Economy.com, decided to write a book on the implosion of the subprime mortgage industry earlier this year, the global meltdown in the financial markets and impact to the overall economy had yet to surface. Yet because the book is so comprehensive, it still provides an excellent framework from which to understand the root causes of the crisis, from the mistakes made by Alan Greenspan to the rapid rise of irresponsible lenders who rewrote the rules of underwriting based on their own short-term interests...

Click here for full review.

Trying to price your home? Don't trust the various index readings.

For many months I've been having the same argument with economists who are forecasting home price reductions of up to 50% or more in previous bubble areas: that doesn't mean all neighborhoods in a particular region will suffer the same fate. Although that also doesn't mean that they'll escape unscathed, factors such as good schools, access to public transit and freeways and jobs are just as important today as they always were. Call it the 'battle of the indices,' but each methodology has its strengths and weaknesses, and the search is on for a system that is the most accurate. From a Wall Street Journal story:

The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month...

To address these discrepancies, indexes are going increasingly local. Other, less-well-known measures of home prices -- some of them available only to paying customers -- are adjusting to exclude homes sold by banks...

The numbers from home-price indexes are widely watched. The Federal Reserve uses them to measure the value of housing stock. Banks use them to determine whether mortgages are underwater and to estimate the value of homes they will have to sell after foreclosure.

But the indexes may be leading everyone astray. Just as respondents to election surveys are meant to stand in for the broader electorate, the homes being sold need to represent all homes. The problem is, producers of these price measures aren't sure that sale prices reflect the values of houses not on the market...

The Case-Shiller index includes properties that had subprime loans attached.

"That's the stuff that went down most substantially, and that's probably the stuff that went up most substantially," Prof. Case says.

The federal index, though, doesn't include such properties, instead accounting only for properties with financing from mortgage giants Fannie Mae or Freddie Mac. For that reason, many prefer Case-Shiller...

Most of the numbers that get headlines are based on metropolitan areas. Yet the housing-market picture can vary dramatically within the same region. Lynn, Mass., a suburb northeast of Boston, saw prices drop 10% in the second quarter compared with a year earlier, according to Wellesley's Prof. Case. Yet in the same period prices in Cambridge, just west of the city, rose 13%.

Integrated Asset Services, or IAS, sells estimates by neighborhood. "We are a lot more granular" than Case-Shiller and the federal index, Chief Executive David McCarthy said.

Click here for full story.

Builders asking for own $250 billion bailout

With bailout season in full swing, the nation's home builders are now asking for their own bailout -- a $250 billion package called 'Fix Housing First' that would combine more generous (and genuine) tax subsidies and funds to buy down mortgage rates to increase affordability. From a Wall Street Journal story:

The builders' lobby is ramping up its sales pitch for a $250 billion stimulus package called "Fix Housing First," arguing that financial markets won't recover until home prices stop falling. They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner's mortgage rate.

Congress resisted a similar effort to pass a larger tax credit earlier this year, instead creating a $7,500 credit for new-home purchases that had to be paid back over 15 years, effectively extending an interest-free loan.

Builders are promoting the campaign with full-page newspaper advertisements, but face an uphill battle, with critics suggesting the proposal is too expensive and that it too heavily promotes home purchases rather than addressing loan modifications for delinquent homeowners...

The homebuilders' proposal would offer home buyers a tax credit equal to 10% of the home's value, capping it at $22,000, nearly three times the $7,500 credit Congress offered to new buyers earlier this year. Builders say the earlier credit didn't work because it wasn't big enough and had to be repaid...

One idea with broader support -- but with a potentially bigger price tag -- is an interest-rate buy-down that would allow existing homeowners to refinance to lower rates. Chris Mayer, senior vice dean of Columbia Business School, has suggested that the government push interest rates down to 5.25% for homeowners who prove that they can afford to live in their new homes and can document their income.


Sunday, November 16, 2008

Upside-down builders holding on for dear life

Boyce Thompson, Editorial Director for Builder magazine, has a great story now posted online at the BuilderOnline.com web site. Entitled "Upside Down," it tells the story of how banks have been working with private builders when the value of their holdings fall below the loan amounts they've extended.

For the current issue of Builder & Developer magazine, I wrote about builders taking on the banks and who insist they're not being treated fairly. According to Boyce's story, however, the larger economic fall-out may have pushed lenders as far as they can go, which will likely mean far fewer builders when the dust finally settles.

In concert with the economists who head up Beacon Economics, MetroIntelligence has increasingly been working with banks, developers and builders to re-evaluate their land holdings and operations against forecasts of regional economic conditions, and we've been finding many of the same issues with our clients. From the story:

Three years into the worst housing downturn since the Great Depression, three dozen major builders have declared bankruptcy. Yet for every builder that has gone under, hundreds more are on life support, hanging on only because their lenders choose to look the other way...

Nearly everyone in the industry knows someone who remains in business, struggling mightily to generate enough cash to pay off debt and fund operations, only out of the good graces of a lender. From a financial perspective, these companies are upside down, without the assets to pay off their debts. As we move into the winter months, with builders and lenders both starved for cash, the pace of builder liquidations and bankruptcies is likely to markedly increase...

The banks, of course, would like an immediate repayment in full of loans they’ve made. But most builders don’t have the money, or the inclination, to do this, especially if they have gone to outside equity for funds, and those equity sources are looking for a 20 percent to 25 percent return.

“That leaves the banks with only three choices,” says one builder who has been negotiating with his banks for more than a year. “They can foreclose and pursue any guarantees, which is likely to put the builder out of business. They can continue funding the build-out of the neighborhood with the hope of maybe getting full repayment or minimizing their losses. Or they can accept a discounted repayment of the debt.”

Click here for full story.

Is private equity the answer to the lending squeeze?

With banks hoarding cash and other lending sources trying to remain afloat, some experts have suggested that private equity is the next likely source for development projects, as they've been tapped in the past. For now, however, much of that money remains on the sidelines as investors wait for a bottom that so far remains elusive. From a HousingZone.com story:

Reports have been surfacing that massive amounts of private equity funds are being pulled together to take advantage of the opportunity that the free fall of home and land values is providing. At the time this article was prepared, sources interviewed indicated that the majority of funds out there are sitting on the sidelines...

When these funds do come around, builders — as much as they want and need the cash to move forward with their developments — will want to be cautious. Private equity investors are not the same animal as the local community bank.

“There are different cultures. Builders are entrepreneurial. Financing people are bottom line. It's not like the good ol' days where things were done on trust...Finance people operate deal-by-deal. It's more black and white. Private equity firms are looking for a return, and there's a gap between what home builders have been used to and what these types of lenders are asking..."

Click here for full story.

What happens if the big 3 automakers collapse?

Over the past year, the building industry has been pretty vocal about the impact to the economy if home builders are allowed to go bust without any government intervention. With the domestic auto industry on the ropes, they're making a similar argument:

How to fix a building industry in turmoil

Last Thursday and Friday I attended the annual Building Industry Show (BIS) in Long Beach, CA. To be sure, this year's event was a somber affair, with a smaller exhibit space, fewer education classes (that were often sparsely filled), and a high ratio of exhibit staff to visitors. In other words, what could be expected from an industry in recession.

But I also saw some of the same faces that are industry fixtures -- people who manage to squeak through the bad times to excel in the good.

I also ran into some former colleagues from Hanley Wood Market Intelligence, and we discussed some of our former and current competitors who remain busy only because they're willing to manipulate data and arrive at pricing & absorption recommendations requested by the client.

It's one thing to be aggressive and then add multiple caveats as disclaimers. It's quite another to offer recommendations on the financial feasibility of a multi-million dollar development that have no basis in reality.

Just so I'm clear on this practice: it is called fraud. Like Enron did when cooking the books, only worse because it's impacted an entire industry.

This practice of always blessing a client's project, no matter how unhinged from market fundamentals, was a direct contributor to the size of the housing boom and the degree of the bust.

I'm going to be talking a lot more about this unfortunate history in the months ahead, because I don't think the building industry can either recover or regain the trust of Congress or the home buying public until they're confident that a repeat of this same self-indulgent practice is eliminated.

That's also why I've been working a lot closer with Beacon Economics -- no one would ever accuse them of rolling over to spin bad news into gold for a client. The data is the data. Period. And that's also why they're gradually catching the eye of an industry that is sick and tired of being lied to. I'd say that's called capitulation. And it's a good thing.

I think Supreme Court Justice Louis Brandeis put it best when he opined, "Sunshine is the best antiseptic," and fewer places will that be more true in 2009 than upon Wall Street executives, bank officers and certain developers.

So if you're a builder, investor or a lender with a project that's gone bust, I urge you to hire some decent forensic accountants and a legal team who can help you piece together the history of whatever due diligence was done for a construction loan by the development team.

Was the feasibility analysis done in-house or was an outside and theoretically 'objective' company contracted? If a separate consultant was hired, what is the reputation of that company?

Have other projects on which a company consulted gone bust because the market changed or because their recommendations had no basis in reality even based on the boom-enriched valuations of the day?

Even better, hire a consultant with a reputation for objectivity to conduct a peer review analysis of previous market studies and determine whether the data available at the time of the analysis supported the final recommendations.

Only then can you learn from such mistakes and prevent future ones from taking place.

Builders asking some cities and HOAs to reconsider age restrictions

During the boom years, cities loved age-restricted communities (usually 55+) because seniors don't demand public school services, they trend to drive less, they ask less of their government and, best of all, calls to police departments for raucous parties tend to be rare when they end by 8pm.

Now, however, the very benefit that allowed these communities to sell at paces far beyond what was typical for an area -- the age restriction -- is starting to act as a anchor. Consequently, some builders are asking both municipalities and HOAs to rescind these age restrictions in order to spike sales. From a BuilderOnline.com story:

When the housing market was booming, age-restricted communities made business sense for builders, too. Most of the buyers owned their homes outright and had seen the value of those properties skyrocket. They could sell quickly and pay cash for their new homes.

Now, those buyers are stuck, unable to sell their current homes--or unwilling to do so at current home prices. As a result, builders who won government approvals based on restrictions that said at least one occupant of each unit would be at 55 years old now have projects that are dead in the water.

Some builders are trying to get relief from the restrictions so they can jump-start sales. Kalian Companies, a Red Bank, N.J.-based builder/developer, spent nearly a year working on revising the plans for Carriage Park at Bound Brook, a 144-unit condominium project in the town of Bound Brook. “When we bought it, we didn’t even think about not going age-restricted,” says company president Mazin Patrick Kalian. “Every project in New Jersey was getting approved age-restricted because the schools in New Jersey were so backed up.”

Click here for full story.

Wednesday, November 12, 2008

Homeowners still engaging in "Homeallucination"

According to a recent AP story, many homeowners throughout the country are still engaging in what economist Chris Thornberg of Beacon Economics has dubbed "homeallucination." It means that although home values around your neighborhood have fallen, somehow you think yours is different. Special. Somehow immune to declines. In other words, what your therapist might gently call "denial." From the story:

Despite dismal housing headlines and reports showing falling prices nationwide, owners in some once-hot areas still believe their home is gaining value or at least holding its own. And by hanging onto too-high expectations, sellers are unwittingly keeping the market from finding a bottom...

A recent Coldwell Banker report showed that more than three-quarters of its real estate agents surveyed said most sellers have unrealistic initial listing prices for their homes.

Likewise, an unscientific study released last week by real-estate Web site Zillow.com found that half of homeowners polled think their home's price has increased or stayed the same in the past year.

"We expected people to get a little more in touch with reality especially over the summer, because you couldn't turn on the TV or read the newspapers without seeing that home prices are falling," said Amy Bohutinsky, a spokeswoman for Zillow.com. "It was very surprising to see this kind of disconnect."...

Click here for full story.

CalPers realizes huge land investment losses

The pension fund for California public employees, commonly known as CalPers, made some huge bets on land investments in multiple states and was a primary source of funding for land developers. But as values for residential land has cratered, it looks like the fund will lose more than 100% of its investment as well as a steady exodus of top executives. From a Wall Street Journal story:

The nation's largest public pension fund, known as Calpers, is paying dearly for its ill-fated decision to become one of the most aggressive real-estate investors among public pensions.

Amid the rapid decline in the housing market, the value of Calpers's investments in land and housing projects across the country had fallen 35%, to about $6 billion, as of June 30, according to recent performance results released Wednesday by the California Public Employees' Retirement System.

The losses are likely to be larger now because the values were based on appraisals completed at the end of March. Since then, land values have cratered nationwide, as evidenced by the bankruptcy-protection filing of one high-profile Calpers undertaking, the LandSource land venture in California. An investment vehicle funded by Calpers sank $970 million in that venture, which holds 15,000 acres outside Los Angeles.

For the quarter ended June 30, Calpers says it expects a loss even greater than 100% for its once high-yielding land and housing investments, thanks to its use of borrowed money on deals. The losses also dragged into negative territory the quarterly returns on its overall $22 billion real-estate portfolio, typically one of the pension fund's most profitable...

Calpers has been operating with interim officials in its two highest positions, as former Chief Executive Fred Buenrostro and former Chief Investment Officer Russell Read left midyear. Including them, seven of Calpers's 50 senior officials have left or intend to leave by year-end.

Click here for full story.

What if you don't qualify for the new loan modification plan?

Just because many critics contend that the new & streamlined loan modification program announced yesterday will leave many other homeowners out in the cold, that doesn't mean they're out of luck completely. First, who does qualify for a loan work-out based on the new rules? From the Wall Street Journal:

Under the FHA plan, lenders will modify interest rates or forgive a portion of the principal, to bring the ratio of mortgage payments, including homeowners' association dues, to 38% of income. Among the requirements for borrowers:

  • Must have a loan on a primary residence that was made before Jan. 1, 2008.
  • Must contact loan servicers and cooperate on supplying need information.
  • Must be at least 90 days behind on payments.
  • Must not have filed for bankruptcy protection.
  • Must certify that a hardship, such as job loss or illness, has affected their ability to repay, and that they did not purposely default to get a loan modification.
But what if you don't qualify -- say you can no longer afford the mortgage on a vacation home? From a WSJ.com story:

Here are some suggestions:

  • Contact a reputable credit counseling agency to see what your options are besides foreclosure. The Department of Housing and Urban Development links to free or low-cost counselors. The non-profit National Foundation for Credit Counseling has an online tool for locating members nearest your home.
  • Call your loan servicer to see who owns your loan; then call the lender to try to work out a deal. FHFA says that borrowers who don't meet the requirements for the new streamlined process can still be considered for loan modifications customized to their personal circumstances.
  • Sell a family car, take a second job, ask relatives for help or do whatever else you can to raise enough cash to pay the mortgage until the housing market improves. If zoning laws allow it, think about renting out rooms or a finished basement.
  • Consider a short sale, where a lender agrees to take less than the balance of the loan. You avoid foreclosure, though you may have to pay taxes on the shortfall. While short sales have become common in places where home prices have fallen precipitously, bear in mind that you must find a patient buyer, since many lenders are overwhelmed by short sales and are slow to respond to offers.
Click here to read full story.

Tuesday, November 11, 2008

The Housing Chronicles Blog turns 1

It was just over a year ago -- November 12, 2007 -- when I first launched The Housing Chronicles blog on the eve of the annual BIS (Building Industry Show) in Southern California. At the time the mission statement was the following, and it hasn't changed:

To share the reality of where the development industry (primarily housing, but also sometimes retail, office, industrial and other land uses) is headed, whether bad, really bad, about the same, slightly improving or finally showing some real life.

As I sit here on another BIS Eve, I wanted to thank the readers from throughout the world who have visited the site, sometimes finding it through a Google or a Yahoo search, other times from other blog links (mostly Patrick.net, Calculated Risk, Dr. Housing Bubble and Lansner on Real Estate), sometimes through automated blog readers, other times through links such as BuilderBytes, and occasionally simply by just stumbling upon it by accident.

Direct traffic to this blog slowly grew over the year and then suddenly leaped up to average from 7,500 to 8,000 unique visitors per month over the last couple of months, which is close to the circulation of the CBIA magazine for which I once wrote, California Builder (10,000). While not a big number by Internet terms, it's certainly nice to have a regular audience for my musings, rantings and links.

Want to advertise on this blog with banner ads, sponsored links or embedded links? Email me at info@metrointel.com or call 888-82-DEVELOP.

In February of this year, the blog joined syndicators BlogBurst and NewsTex in order to leverage their existing relationships with media-owned web sites and get some placement beyond the building industry.

For BlogBurst alone, it's been a great success, with editors from Reuters, Fox Business News and the Chicago Sun-Times regularly selecting posts for their sites. Occasionally, editors from The Wall Street Journal and USA Today would also select posts for online placement, but by far the biggest fan has been Reuters, with over 7.8 million 'headline views' (tech speak for placing a blog headline on a web page):

Top 10 Publishers (All History) for Housing Chronicles


Total Views
Reuters 7,845,527
FoxNews 155,469
Chicago Sun Times 122,924
Computer Shopper 25,505
Livestrong 17,053
IBS 5,203
Wall Street Journal 5,021
Palm Beach Post 716
usatoday.com 264
CT Green Scene 209

NewsTex has also recorded several hundred thousand placements, mostly on the Lexis Nexis service.

Finally, Builder magazine recently started featuring this blog on a special page on their web site, which they should start promoting very soon.

All in all, not bad for a year's work. I hope you do find the blog interesting, and please continue to visit often!

If you want to know more about the man behind the blog, visit www.metrointel.com.

And if you want to discuss any real estate consulting services you may need anywhere in the U.S., call me toll-free at 888-82-DEVELOP.

Publisher of Builder magazine launches HousingCrisis.com blog


Building industry publisher Hanley Wood and their Construction Pulse group launched a new web site on the housing crisis a couple of months ago, and after a competitive naming contest, the winner turned out to be -- drumroll, please -- housingcrisis.com (ok, I'm sure the name was dedicated by the availability of web site URL addresses). That's how Housing Chronicles was named, too.

Here's how the authors describe the purpose of the blog:

A unique source for what you need to know about the real estate and construction economy--with helpful news, data, and conversation about your smartest options. We'll highlight exclusive articles, related stories, and linked resources real-time so that you'll have information you need, hopefully a step ahead of the moment you need it.

Of course I like them because they linked to this blog without me even having to ask. What good manners!

New mortgage rescue plan falls short

Although a new plan announced by the White House to streamline loan modifications for mortgages held by Fannie Mae and Freddie Mac, critics contend that it will only help a small portion of homeowners and ignores those with sub-prime and Option ARM loans. From a CNNMoney.com story:

The federal government's plan to streamline modifications of troubled loans held by Fannie Mae and Freddie Mac won't help the majority of people threatened with foreclosure, experts said.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.

The interest rate could be lowered to as little as 3% for five years. After that, it would increase by 1 percentage point a year until it hits either the market rate or the original interest rate, whichever is lower, officials said.

Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

Click here for full story.

Monday, November 10, 2008

Realtors suggest how to fix housing market

Realtors have an idea that they think will jump-start the ailing housing market. No, it's not a new multi-media campaign with the tag line "Now's a great time to buy a home." It's for the federal government to purchase loan points for new borrowers so interest rates would be 1% lower, thereby propping up housing values. Of course there are also detractors. From a Time magazine story (hat tip: Brian McDonald):

The National Association of Realtors is lobbying for the government to artificially lower mortgage rates by purchasing loan points for homebuyers. They say the program would cost $100 billion, and could raise home prices by as much as 4% nationwide. Anyone buying a house for primary residence would be eligible for the mortgage-rate buydown, which would lower a purchaser's loan rate by 1% for the life of the loan. They say the incentive should be made available for the next 12 months...

But some housing market economists question the wisdom of the move. They say helping people who may buy houses in the future is not where the government should be providing assistance.

Click here for full story.

Obama will likely have to expand housing plan

Due to ongoing turmoil in the housing and credit markets, President-elect Obama's plans to fix the housing mess will probably need some serious expanding. From AP via MSNBC:

President-elect Barack Obama is inheriting the worst housing recession in a generation, and the proposals he outlined on the campaign trail won't fix it, so there will be many tough decisions ahead.

His plan includes a 10 percent mortgage tax credit for homeowners who don't itemize their taxes, and a change in the bankruptcy law to allow judges to modify mortgages for financially distressed homeowners...

But those proposals will have a minimal impact on the more than 4 million homeowners who are behind on their mortgages. They probably won't prop up home prices, which are down 18 percent from the peak. Nor will they bolster the confidence of consumers who have lost their jobs or are afraid they will. And Obama's plan won't make banks more willing to lend to consumers with less than perfect credit scores, or tiny down payments.

Reversing the real estate spiral will be an enormous feat.

Click here for full story.

Thursday, November 6, 2008

L.A. office market increasingly softening

So far most of the pricing reductions in the L.A. housing market have been due to lack of easy credit and unaffordable prices, not the economic slowdown. That will be phase 2. Yet it looks like the fall-out from the banking crisis and the slowing economy are having an impact on the L.A. office market, with analysts predicting it to only get worse from here. From a Wall Street Journal story:

...brokers say the property market in and around the city is bracing for even tougher times as budget-conscious companies are looking to trim real-estate costs. Already-declining demand for office space in the Los Angeles region, one of the country's largest office markets, is expected to accelerate, says Whitley Collins, senior managing director of the Los Angeles region brokerage for Jones Lang LaSalle Americas Inc.

He sees a worst-case scenario in which metropolitan area companies over the next 12 months could put as much as 10 million square feet of office space back on the market and rents could decline by as much as 25%. "We're seeing a softening, but we're not nearly seeing the softening we'll see," Mr. Collins says.

Click here for full story.

Builders dusting off old mortgage programs

USDA loans. 'Sweat equity.' These are just two programs being re-enlisted by builders hungry for buyers. From a BigBuilderOnline.com story:

With seller-funded down payment assistance programs being eliminated and the government's $7,500 tax credit to buyers having little effect on the market, some builders are "dusting off the books," as Kim Shelpman, president of Holiday Builders put it, and returning to past loan programs such as USDA rural housing and sweat equity loans.

"[These programs] are a unique way to get someone in as a buyer," Shelpman said in an interview during this week's Big Builder '08 conference, adding that projects in areas where these loans are available are moving inventory.

Click here for full story.

Finding the down payment in a time of scarcity

With mortgages requiring more skin in the game and down payment charities a thing of the past, how are home buyers coming up with enough of a down payment to qualify? According to a story at BuilderOnline.com, a mix of education and creativity certainly can't hurt:

With the elimination of seller-funded down-payment assistance and nearly all loans requiring at least a small down payment, home buyers--and the builders who sell to them--have to figure out how to come up with thousands of dollars at closing.

It’s a big challenge, but builders are making it work.Across the country, builders, lenders, and real estate agents are educating buyers on their options. For most buyers, the method is an aggressive savings program that starts when the contract is signed.

Click here for full story.

Latest article on builders taking on the banks now online

For my latest column in Builder & Developer magazine, I covered the Building Industry Coalition for Economic Recovery's efforts to force banks to deal fairly. From the article:

With the federal government partially nationalizing the banking system, large investment banks a thing of the past, more bank failures on the horizon and nervous lenders still hoarding cash, it’s hard to predict what the future holds for the building industry. But if the recently formed Building Industry Coalition for Economic Recovery (www.pathtosolutions.com) has anything to say about it, the chaos in financial circles certainly shouldn’t be taking down developers and homebuilders with it.

The coalition, formerly named the “Homebuilders’ Coalition for Responsible Bank Behavior” (www.pathtodefault.org) was formed earlier this year in San Diego by a collection of private builders, attorneys and work-out specialists, and hopes to force lenders to play by a consistent set of rules versus what the group’s members say have been a series of contrived defaults that have led not only to foreclosed projects, but hibernating or bankrupt development companies. At the same time, the coalition’s 110 members (as of October 2008) – whom are now geographically dispersed across the country – are focused on assembling the type of intelligence required to warn other builders about to face similar circumstances.

Click here for full article.

Getting real about valuing land

With builders continuing to write down the value of loans (and banks then in calling loans when the collateral falls), attaching a number to the worth of undeveloped land has become increasingly difficult. Can you believe a land broker, who may want a high value for the commission? Can you believe a consultant who is under pressure to come in with a high value to get more work? I'd say believe whomever is willing to tell you the truth, because you can't address what you don't admit (i.e., the housing bust right before it happened). From a BuilderOnline.com story:

Home builders around the country have been swamped this year with news reports of public builders selling land for some fraction of its peak worth to get out from under the carrying costs on loans now worth more than the land's value.

Those large builders have teams of number crunchers and a roster of well-paid consultants and financial advisors to help them evaluate what their land might be worth, and what they might be able to get for it in a sale...

"We've been hearing all this stuff about how land is selling at 40 cents on the dollar, 60 cents on the dollar--that doesn't matter...It really needs to be selling at 15 cents on the dollar. And that's not even for raw land. That's for a combination of raw and finished lots."

While builders have been writing down the value of their own lots to be able to sell homes closer to market prices, the prices of lots for sale have not come down nearly as far, so very little land is being sold and even fewer new developments are breaking ground.

Click here for full story.

Monday, November 3, 2008

Bottom-feeders: Start your engines!

With home prices falling sharply enough to start cash flowing as investment properties or throwing off enough of a profit to make a purchase (and renovation) make sense, so-called 'vulture investors' are starting to enter the marketplace -- first as well-financed groups buying groups of homes from bank at 50% off peak prices, but now as individual investors thinking they've found an opportunity.

Sounds good, right? Not so fast, and it's not as easy as it looks -- and certainly more difficult than it was when credit was easier. From a Washington Post story:

More people are tossing around the idea of picking up an investment property, lenders and real estate agents have told me. "I'm finding a lot of people asking about them," said Jerry Bartlett, owner of a Jobin Realty brokerage in Kingstowne. Not many can pull it off, though.

Bartlett sends them to get financing before he will even start working with them. "They come back distraught," he said. The lines of credit they thought they could tap may not be there anymore; the credit rating that they thought was pretty good may not be high enough now; their down payment may be shy by 10 percent or more...

The first requirement is cash. Rick Eul, a vice president with Bank of America Mortgage in Annandale, said investors need at least 20 to 25 percent of the price as down payment. "Two years ago it was like, 'Do you have a pulse?' " he said. No longer. It's back to the pre-boom standards of creditworthiness -- or even a tad tighter...

You will have to prove to the loan officer that you have enough income to handle monthly payments on both the investment property and your own home.

If you have a signed lease and have already cashed your tenant's check for the first month's rent and the security deposit, you will still get credit for no more than 75 percent of the rent as income. (That's all you should count on. The remaining 25 percent normally gets eaten up by repair expenses, vacancies and other costs.)...

You will also need a credit score of 720 or better, Uhl said.

Plan to pay a higher interest rate than on your own home loan. Interest rates for investors are now running about one percentage point higher than those for owner-occupied homes.

Click here for full story.



Developer defaults on $365 million Beverly Hills land loan

Robinsons-May Outlet Center, anyone? Perhaps that may be the solution at the now closed-down department store site in Beverly Hills that was planned for luxury high-rise condos. But with the developer defaulting on a $365 land loan, now the entire project is in peril.

Hmm, I wonder who did the market study justifying the price paid for the land to get the loan? It would be interesting to see what assumptions were made and if any outside consultants could be on the legal hook for any obviously optimistic recommendations made only to ensure the clients paid the consulting fees (I have some ideas who the scofflaws might be).

In many cases, if one wasn't willing to cooperate and recommend certain prices and absorption levels, one didn't get the consulting gig. To stay open and keep staffs busy, some of the larger shops simply looked the other way (and likely swallowed Ambien to sleep at night).

From a Wall Street Journal story:

Underscoring the deepening woes in commercial real estate, a high-profile British developer has defaulted on a $365 million loan for prime land it bought in Beverly Hills last year as part of a plan to build luxury condominiums.

In recent weeks, CPC Group Ltd., founded by Christian Candy of London's Candy & Candy development-management firm, has been roiled by the collapse of its partner in the project, Iceland's Kaupthing Bank, which was taken over by the Icelandic government. It also has faced a lack of construction financing as banks have pulled back from a fast-deteriorating market...

CPC bought the eight-acre site, wedged between Wilshire and Santa Monica boulevards, for $500 million in April 2007. Just four years earlier, the parcel had traded hands for less than $50 million.

So the land went up in value by a factor of 10 in four years?? How can that be justified using any sane economic fundamentals? Like I noted before, Ambien.

Click here for full story.

JP Morgan Chase steps up with own foreclosure solution

Banker JP Morgan Chase, one of the stronger banks in the U.S., launched its own counter-offensive to address soaring foreclosures on Friday, including hiring more staff, a new review process to avoid unnecessary foreclosures and a moratorium on new default filings for 90 days until its plan is up and running. So will this plan work or is simply more smoke and mirrors? From a CNNMoney.com story:

The bank will step up its efforts to offer mortgage modifications for borrowers at risk, institute an independent review process to eliminate all unnecessary foreclosures and hire and train more staff to handle the added caseload that the plan will generate.

Most important, it will not put any delinquent loans into the foreclosure process during the 90 days it takes to implement its new plan.

JP Morgan Chase expects to help 400,000 families keep their homes during the next two years by working out $70 billion worth of loans. The company says its housing rescue efforts have already helped 250,000 families holding about $40 billion in loans.

Click here for full story.

McCain vs. Obama: where they stand.

As a final note before tomorrow's election, Builder magazine has an article summarizing the stands of both John McCain and Barack Obama. Although many builders typically vote along strict Republican lines, some well-known builders such as Toll Bros.' Bob Toll and Eli Broad, founder of Kaufman & Broad, support the Democratic nominee. If nothing else, that should make for interesting conversations at industry functions! From a BuilderOnline.com story:

With no end to the housing downturn in sight, with banks and investment firms hemorrhaging billions of dollars, then failing, and the federal government offering more than $1 trillion and counting to try and stem the tide of the credit crisis, the next president of the United States may hold the future of the country in his hands. Many businesses and individuals are hurting, but the home building industry has more at stake than most.

To say that this election is important to builders would be an understatement of the greatest magnitude; the economy is in a full-fledged nose dive, and builders need a president to restore the American people’s confidence, create new jobs, and right the capsized economy before people will start buying homes in large numbers again...

Finding real answers in the candidates’ whistle-stop promises and scripted answers to softball questions is difficult at best. To provide clarity on the candidates’ positions, Builder first asked readers to rank their top concerns on a 1 to 10 scale with 1 being the highest priority and 10 being the lowest. Then we distilled the candidates’ positions on some of those issues. Our survey revealed that many of you rate the energy and credit crises most important, with immigration, infrastructure development, affordable housing, and green building rounding out the list of your chief domestic concerns.

Read on to find out where McCain and Obama stand on several of your top issues.

Click here for full story.


Saturday, November 1, 2008

Housing Chronicles joins website for Builder magazine


Several months ago, I pitched the editor of Builder magazine to start carrying The Housing Chronicles Blog as an addition to their existing website. After months of planning and ironing out technical issues, the blog went live over the last week, along with blogs covering other topics such as process improvement and green building techniques. You can find the entire of collection of blogs here, so please check them out.

So what is Builder magazine? Although Builder is published by the media company Hanley Wood, it is actually the official magazine of the National Association of Home Builders, and as such, is mailed to its over 140,000 builders, subcontractors, architects and suppliers and maintains a related website, www.builderonline.com.