Tuesday, June 30, 2009

Is homeownership a good thing or not?

Lately we've been hearing from various economists on the value of homeownership in a society, arguing that due to the latest economic meltdown created from the housing bust that many people should remain renters forever. And that's a valid argument. But should that argument be extended to predict the end of the single-family home forever?

From my own experience, renters aren't as involved in community affairs as owners (in fact without the advantage of automatic sprinklers, grass and other greenery would die because many don't seem to even want to water the lawn), and for all of these arguments that 'if you put the same amount that you'd pay for a mortgage into an interest-bearing account' the chances of that happening across the board are so small it's almost laughable. For many people, buying and paying off a home over time is a time-tested strategy to build some wealth -- regardless of swings in the market over a 30-year period.

But don't take it from me. Listen to what Joel Kotkin has to say at Forbes.com:

Increasingly, conventional wisdom places the fundamental blame for the worldwide downturn on people's desire--particularly in places like the U.K., the U.S. and Spain--to own their own home. Acceptance of the long-term serfdom of renting, the logic increasingly goes, could help restore order and the rightful balance of nature.

Once considered sacrosanct by conservatives and social democrats alike, homeownership is increasingly seen as a form of economic derangement. The critics of the small owner include economists like Paul Krugman and Ed Glaeser, who identify the over-hot pursuit of homes as one critical cause for the recession. Others suggest it would be perhaps nobler to put money into something more consequential, like stocks.

Homeowners also get spanked by leading new urbanists, like Brookings scholar and urban real estate developer Chris Leinberger. He lays blame for the downturn not on unscrupulous financiers but squarely on aspiring suburban home buyers. "Sprawl," he intones, "is the root cause of the financial crisis."

(Note: For years, Leinberger led a well-known consulting company with multiple offices which specialized in master-planned communities, and for which I also consulted in the mid 1990s. One has to wonder how many such communities were built because of the supporting documentation his company created. Perhaps he simply had a change of heart and now realizes that sprawl wasn't the way to go, but I've never seen or heard anyone tie this rather obvious disconnect together).

If only we built more high-density, transit-oriented housing--which, incidentally, is not exactly thriving--the crisis could be happily resolved, he believes. This approach is echoed by big-city theoreticians like Richard Florida, who believes that both homeownership and the single-family house "has outlived its usefulness." In his "creative age," we won't have much room for either single-family homes or owners. Instead, we will be leasing our ever-more-tiny cribs--just like yuppies with their BMWs--as we wander from job to job.

(Note: Of course Florida lives in Canada, where there's no tax advantages to buying a home, so Candians have to bank on building equity by paying down a mortgage or hoping the value goes up. But it's still possible that the 'creative class' of whom he speaks won't want to be homeowners even with tax advantages).

Yet the recent real estate debacles should not obscure the tremendous positives associated with homeownership. Widespread and diffuse ownership of property has been a critical element in successful republics, from early Rome and the Dutch Republic to the foundation of the United States...

In virtually every country, this was largely a suburban phenomenon. People bought houses where land was cheaper, stores and schools newer. Here, too, people could transcend the often confining social limits of the old neighborhood. It was also, as the novelist Ralph G. Martin, noted "a paradise for children."

Through all this, the chattering class never lost its contempt for homeowners and their suburban refuges. Old gentry long disliked the idea of dispersed ownership of property--even if many got rich selling their own estates to developers. Aesthetes disliked the seemingly banal housing tracts "rising hideously," as Robert Caro put it, from the urban periphery...

Yet, despite the disdain, the dream of homeownership survived. Many boomers, who in their 1960s radical phase denounced suburban tracts as sterile and racist, meekly ended up buying homes there. So, increasingly, did middle-class minorities, whose rates of homeownership rose faster after 1994 than that of whites.

To be sure, the financial crisis has led to a sharp drop in levels of homeownership, as occurred in the last big recession of the early 1990s. In the future, some suggest that aging boomers will force the home market to collapse even more due both to the current mortgage meltdown and changing demographics.

Yet there are limits to how far homeownership will drop. Urban boosters, apartment-builders and greens--all advocates of expanding the renter class--tend to ignore several key facts. For one thing, the vast majority of boomers are holding onto their mostly suburban homes far longer than ever suspected. Many will remain there until forced into assisted living, nursing homes or the cemetery.

Then we have the X generation, who, if anything, has favored large homes and exurbs in large numbers. In addition, behind them lie the large cohorts of millenials, who according to surveys conducted by generational chroniclers Morley Winograd and Mike Hais, prioritize the ownership idea even more than their boomer parents do.

No doubt, the weak economy will slow this generation's push into the home market. However, by the next decade, as this generation enters the late 20s and early 30s, they will find their economic footing and be ready to enter the market for houses in a big way...

Home price declines flattening, but not evenly

Although the S&P/Case-Shiller national index is showing a flattening in the pace of price declines for the third month in a row, for various price ranges and different cities, the pain continues or is expected in the future. I'll be interviewing Dr. Shiller tomorrow at 12 noon (Pacific time) for my Housing Chronicles show on BlogTalkRadio.com, and I'm sure I'll be asking his opinion on these differences. From an L.A. Times story:

Home prices in 20 metropolitan areas were down 18% in April compared to the same month the previous year, according to the S&P/Case-Shiller home price index.

In the Los Angeles area, which includes Orange County, April home prices fell 21% from the previous year.

Los Angeles County and Orange County prices in April were down 42% from their 2006 peak, the index shows. The 20-city index was down 33% from its 2006 peak.

The Case-Shiller index had posted record year-over-year declines from October 2007 to January of this year. April's index was the third straight month in which the pace of price declines slowed slightly...

While Los Angeles area price declines have slowed, Charlotte, Chicago, Cleveland, New York, Portland and Seattle posted record year-over-year declines in April.

The worst year-over-year declines in April were in Phoenix (35%), Las Vegas (32%) and San Francisco (28%).

Los Angeles area price declines have varied substantially by price segments. The lowest-priced third of homes sold in April is down 54% in price from its peak, according to Case-Shiller; the middle third was down 42%; and the most-expensive third of homes sold was down 31%.

The lowest-priced homes in the Los Angeles area had more room to fall - they had also shown the largest price increases during the real estate bubble, with prices in that segment inflated by subprime lending...

Nontheless, because the mid-level and upper-price tiers depend largely on buyers moving equity from the entry-level tier, it's only a matter of time before we see price declines even out, and that process is already starting in certain markets.

Interview tomorrow with Robert Shiller, co-author of "Animal Spirits"

On Wed., July 1st at noon (Pacific time, 3pm Eastern time) I managed to snag an interview with Robert Shiller, Princeton University professor, co-founder of the S&P/Case-Shiller index and co-author of the new book "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism" for my Housing Chronicles show on BlogTalkRadio.com.

You can either listen to the first 15 minutes streamed live or listen to the podcast afterwards (I'll post a link). I'll be citing this interview for my upcoming review of the book for Inman News.

Saturday, June 27, 2009

Time to throw out the old rule books

“If You Don’t Create Change, Change Will Create You” – Anonymous

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one.

In today’s world, new rules are constantly being written by the brash and the creative, whether it’s Google’s transformation of the advertising world or the huge success of the CBS franchise “CSI.” For example, not only did CSI creator Anthony Zuiker have zero experience writing for television, he also didn’t realize that including flashbacks and quick cuts were both against long-standing industry convention.

Not knowing any better – because he never read the old, stale rulebook – he included both, thus giving the original series a pace and look that quickly sent it to the top of the ratings game and launched two spin-offs, one of which is the most-watched show in the world. So is that just dumb luck or a sea change that will cut across all industries?

I think that even more potent forms of creative destruction are about to envelope the building industry, and it won’t just be about building more in-fill product or scaling down home sizes and prices to meet today’s demand. These changes are going to alter everything from supply chain management to the way in which homes are marketed and sold, and those veterans who keep themselves otherwise occupied while waiting for someone to call and ask for their outdated skill set may be in for a long wait.

While there will certainly be some demand for the impressive homes of the past, we’re also quickly seeing a return to designs that meet needs more than wants. This is especially important for the groups of people mostly left behind during the last building boom such as families, seniors, the disabled and the homeless who can only afford to live in housing made possible by tax credits, low-interest bond financing and various other government programs.

For example, in upscale Thousand Oaks in California’s Ventura County, our staff is currently drafting a report in support of an affordable housing project that will help to house a variety of low-income families, homeless persons and the mentally disabled, many of whom now are mere numbers on a wait list that’s close to 600 families.

And who’s hoping to build this 60-unit project? A local non-profit that has managed over the last 30 years – mostly under the radar – to build, rehabilitate and fill 400 units and provide housing for 1,000 adults and 200 children. It’s that type of story (along with appropriate private and public incentives to make it happen) this industry really needs to start telling more of around a campfire – assuming, of course, that the old rulebooks are helping to provide the kindling.

Thursday, June 25, 2009

Why California can't be governed

Ever wonder why we Californians seem to have so much trouble governing our finances? Well, it wasn't always this way, and, as a 7th generation California native, I can personally attest to a huge variety of changes, instituted in large part by a populace that moved from *other* areas to then impose their own will on the rest of us (such as freebies for everyone but no way to pay for it).

Being lucky enough to be born when I was, I enjoyed a solid public education, a safe neighborhood, friends and neighbors who shared similar values, an enviable infrastructure and a state-supported university system that was among the best of the world.

When it changed, it just wasn't due to Prop. 13, although that was the start of it. I remember joining my family to protest the proposition (my first foray into politics), and when a cigar smoke-smelling Howard Jarvis waddled by and told my brothers and I, "Why don't you go home and learn to read?" I'm sure he didn't realize that home schooling would become the savior for many of today's families.

The L.A. Times has an opinion piece on what ails California, and it's a quite instructive. From the article:

After Proposition 13 passed, then-Gov. Jerry Brown and the Democrat-dominated Legislature realigned -- "tangled" would be more accurate -- the relationship between state and local governments by effectively shifting control of remaining property tax revenue to Sacramento. In a crisis atmosphere, they radically transformed California's political landscape, taking power and responsibility for health, welfare, schools and other local services away from city councils, boards of supervisors and school boards, thereby establishing today's chaotic maze of overlapping jurisdiction, which defies efforts at accountability...

Proposition 13 also ushered in an era of ballot-box budgeting, as fiscal initiatives became a favored special-interest tool to take control of public fund expenditures. A series of post-13 initiatives -- including measures creating the lottery, financing public schools by mathematical formula and earmarking revenues for special programs, from mental health to medical care -- established an exquisitely complex state budget calculus that has hamstrung the rational operations of government...

The once-a-decade process of redrawing political maps based on the census has created an increasingly partisan Capitol atmosphere. Reapportionment has become essentially an incumbent protection effort, as lawmakers craft districts that are either safely Democratic or safely Republican. In this way, the crucial contests are party primaries, not the general elections. Because primaries draw the most partisan voters, the most conservative Republicans and the most liberal Democrats tend to win the nominations that guarantee election in November. The dynamic locks in ideological polarization in Sacramento, where lawmakers have little motivation to compromise...

Despite the claims of backers, the 1990 term-limits initiative did not get rid of career politicians -- it simply changed the arc of their careers. Instead of spending decades in the same Assembly or Senate district seat, legislators position themselves for the next office -- or job as a lobbyist -- as soon as they arrive in Sacramento...

Since Proposition 13, state government has become increasingly dependent on volatile sources of revenue -- the sales, corporation and progressive personal income taxes -- that generate annual shifts in tax collections corresponding closely to the business cycle. When economic times are good, as during the dot-com and housing bubbles, money pours in and there's little political incentive -- in fact, term limits create a perverse disincentive -- for long-term financial planning. When revenues contract, the Capitol has rarely made real spending reductions, preferring to wait for the next boom...

California is one of only three states requiring a two-thirds legislative vote to pass a budget, one of 16 requiring a two-thirds vote to raise taxes -- and the only state to require both. The budget requirement has been in the Constitution since the New Deal; the tax restriction began with Proposition 13. In the polarized atmosphere of Sacramento, the two-thirds rules effectively hand a veto to the minority party. Under these conditions, stalemate and deadlock on key fiscal issues have become the political norm...

In the next few weeks, a blue-ribbon commission is set to recommend sweeping changes in the tax system to stabilize revenue collections. Voters last fall approved Proposition 11, which takes away the Legislature's power to draw its own districts in favor of an independent commission. Next year, as they elect a new governor, Californians also will vote on a system of "open primary" elections aimed at aiding moderates, and they also will probably decide on one or more initiatives to dump the two-thirds budget vote requirement.

California Forward, a bipartisan good government group financed by major foundations, is crafting proposals to conform government systems and processes to modern management methods. And the business-oriented Bay Area Council is pushing initiatives for a state constitutional convention, the first since 1879, to wipe the slate clean and build a new, rational structure for state government.

New home sales down by 1/3 from last year

As builders continue to compete -- generally unsuccessfully -- against heavily discounted foreclosures and are unable to obtain financing for new homes, sales of newly built units fell by 33% between May of 2008 and 2009. But is a bottom about to be reached? First, from an L.A. Times story:

The seasonally adjusted annual rate of new-home sales was down 0.6% from April and fell 32.8% from May 2008, amid a glut in housing. New-home sales in the West, however, were up 1.3% over April's adjusted annual rate...

The median sale price for a new home in May was $221,600, down 3.4% from a year earlier.

But in the battered Inland Empire, the pace of decline is showing marked signs of slowing. Yesterday I spoke with Lou Hirsh of the Riverside Press-Enteprise:

Inland new home sales in April were down 20 percent from April 2008. That is lower than the 28 percent year-to-date decline compared with the first four months of 2008, and the 41 percent decline seen for the period of May 2008 to April 2009.

"That tells me that we're getting closer to the bottom," said Patrick Duffy, a principal and analyst with MetroIntelligence Real Estate Advisors in Los Angeles.

Duffy said the cancellation rate on new Inland homes in April was 7.8 percent in April, versus 22 percent a year ago. Declines in inventory absorption rates and median asking prices are also less severe than at the same point of 2008...

National experts said that without bigger price cuts, builders may keep losing market share as the jobless rate and foreclosures climb, aggravating the drop in resale prices.

"Further increases in mortgage rates would be a huge concern amid rising unemployment and falling incomes," Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pa., said before the Commerce Department report...

Tuesday, June 23, 2009

Next book review: "Animal Spirits"

For my next book review for Inman News, I selected the book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism" by economists George Akerlof and Robert Shiller.

The reason I chose it was because few markets are more prone to human psychology than residential real estate, so I was hopeful that the book would provide some tools to real estate agents to educate potential buyers when deciding to enter into a deal.

I'm also trying -- so far unsuccessfully -- to grab 15 minutes of Dr. Shiller's time for a brief, 15-minute interview for my HousingChronicles show on BlogTalkRadio (and also to help with my review). Since I've interviewed the authors of nearly every book I've reviewed for Inman News and the L.A. Times -- including other noted economists such as Richard Florida and Mark Zandi, who regularly testifies in front of Congress -- I was thinking Dr. Shiller would be willing to do the same.

However, since the PR rep for his publisher is having zero luck scheduling this interview, if any readers of this blog have any sway with Dr. Shiller, you'd have my gratitude to intervene. While the lack of an interview certainly won't stop me from writing the review, I'd find it much easier to tie it directly to the Inman News audience with a few specific questions. After all, this isn't the type of book to which your average real estate agent would gravitate, so I had to talk my editor into letting me review it in the first place.

According to Amazon.com, here's a description of the book:

The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today.

Keynesianism, Reaganomics and Thatcherism? I can't wait!

Can't wait for the interview? Buy the book at Amazon.com (now only $9.99), or click on the widget below:

Next up on the To Do list: The Crumbling of America


In between the turmoil in Iran, the impending Gosselin divorce, a stock market that can't decide which way it wants to go and an attack on celebrity blogger Perez Hilton, it's hard to think of one more problem to be solved, but this one is important.

The History Channel is currently running a two-hour special entitled "The Crumbling of America," and what it shows is quite sobering. Even to bring up the country's crumbling infrastructure back to where it should be will cost -- you guessed it -- trillions! And who's to blame for this long-delayed maintenance?

Ultimately, we are -- because we think all taxes are bad and insist on electing politicians who are afraid to tell us inconvenient truths. And, as one expert on the show opines, people are going to die before we wake up to the consequences of our collective disinterest in what once made the United States what it was: an infrastructure that created the best efficiencies the world has ever known. Sadly, he's probably right. From the History Channel Web site:

America's infrastructure is collapsing. Tens of thousands of bridges are structurally deficient or functionally obsolete. A third of the nation's highways are in poor or mediocre shape. Massively leaking water and sewage systems are creating health hazards and contaminating rivers and streams. Weakened and under-maintained levees and dams tower over communities and schools. And the power grid is increasingly maxed out, disrupting millions of lives and putting entire cities in the dark. The Crumbling of America explores these problems using expert interviews, on location shooting and computer generated animation to illustrate the kinds of infrastructure disasters that could be just around the bend.

Friday, June 19, 2009

Beacon Economics launches national employment database

MetroIntelligence partner Beacon Economics has just launched the first national database of its kind on key employment statistics. Here's how Beacon describes it:

This month we are pleased to introduce the newly expanded California and U.S. Employment Report from Beacon Economics. Our datasite now covers key employment statistics in all 50 states. For each state, breakdowns are available by major regions and industries. See instantly how retail trade employment is doing in Colorado... find out which region of New York has the largest number of jobs... see how Florida's unemployment rate has changed over the past 6 months, year, or 3 years. Explore the detailed data available and gain new perspective on the nation's employment landscape.

I think this a great and easy-to-use service (and best of all: it's free!).

Check it out by clicking here.

So what do the folks at Beacon think about California?

Last month, Beacon Economics wrote in this employment report that the decline in California's unemployment rate in April was likely a statistical blip. This month's numbers confirm that suspicion.

  • Unemployment Hits Record High: On a seasonally adjusted basis, the state's unemployment rate hit 11.5% in May - the highest on record since these statistics have been reliably tracked. The number of people classified as unemployed in the state shot up to 2,138,000 from 2,065,477 in April.
  • State Employment Falls Back to '03 Levels: Total nonfarm employment in California dropped another 68.9 thousand in May. This 0.5% decline pushes employment in California back down to 2003 levels.
  • No Turnaround This Year: Despite the fact that we have seen positive indicators in other sectors of the economy, including equity markets and home sales, employment is typically a lagging indicator. We do not expect employment in California to show any turnaround this year

Thursday, June 18, 2009

A telling tale for wannabe landlords

I keep hearing stories of bored entrepreneurs buying up blocks of homes at a time in order to "hire a management company and rent them out!" Oh, if it were only so easy. Unfortunately, not all management companies are created the same. Last year I had to fire one for a variety of reasons including incompetence, unprofessional behavior and hiring shoddy subcontractors (in fact, I was thinking of pitching such a cautionary tale to the L.A. Times, but once I hired a new company I just wanted to be past the experience). But at least my property is local!

Newsweek writer Daniel McGinn, however, author of the book "House Lust," jumped on that out-of-state bandwagon a few years ago, buying up a duplex thousands of miles from his home in New York, and he's written a story on how that experience made him 'the accidental slumlord.'

Four years ago, at the height of the boom, I visited Pocatello to write a story for NEWSWEEK about how out-of-state investors had begun buying cheap rental properties there, drawn by ultralow sales prices and a solid rental market. (At the time, the average Pocatello home sold for just $98,000.)

A year later, while writing a book about the housing boom, I decided to dive in myself. In late 2006, after seeing only e-mailed photos, an appraisal and an inspection report, I paid $62,750 for a two-unit rental property in Pocatello, which is 2,450 miles from my Massachusetts home. I didn't expect to get rich; my main motivation was to have a good story for the book.

By that measure, the deal was a success; when House Lust came out in 2008, the chapter in which I described my early misadventures as a property magnate (an early tenant went to jail; my first property manager made off with $1,300) helped fuel reviews and interviews. But now, long after the buzz over the book has died down, I'm stuck with a house in Idaho—and friends who call me a long-distance slumlord...

Click here for the full story.

A decidedly somber affair at this year's PCBC

Each year in June or July, tens of thousands of builders, suppliers and subcontractors converge on San Francisco's Moscone Center for the Pacific Coast Builders' Conference, but this year the total is down to just about 14,000 attendees (I also decided against attending this year due to a convergence of work deadlines). From the San Francisco Chronicle:

"California's home building industry is in the worst shape ever," said Horace Hogan, chairman of the California Building Industry Association, the trade group that puts on PCBC, and president of Brehm Communities, a Carlsbad (San Diego County) home builder, speaking at a news conference.

"Every builder I know has laid off most of their staff, and contractors and suppliers we've done business with for years have folded up shop." The show reflected that contraction. At the peak of the housing boom in 2006, it drew 35,000 attendees. Last year there were about 19,000. This year only 14,000 people came to Moscone. Even with a smaller exhibit floor, the aisles were noticeably underpopulated...

Hogan had a variety of grim statistics to tick off. Although the 65,000 housing starts in California in 2008 were the lowest ever recorded, "As bad as last year was, right now 2009 looks like it might even be worse," he said, citing projections of only 40,000 housing units this year. That sluggish pace means the loss of more than 360,000 jobs and $50 billion from the state's economy, he said.

California's $10,000 tax credit for people who buy a new home is something the builders would dearly like to see extended. They say not only does it help their industry, but it generates state and local taxes, creates jobs and stimulates the economy.

Sam Chandan, president and chief economist of New York's Real Estate Econometrics, had more downbeat news at a session on the economic outlook, predicting a huge wave of defaults in commercial mortgages.

"About $300 billion in commercial mortgages will come due between now and the end of 2009, and the same in 2010," he said. "We lack the capacity to refinance them. This will lead to a significant increase in defaults and delinquency rates for commercial mortgages..."

During the last downturn of the early 1990s in California, people could choose to find a job in another industry or move temporarily to Las Vegas or Phoenix to find work in the local building industry. But now with the entire economy in recession, there are few good substitutes.

And as for those commenters you always see online (probably sitting alone in their underwear) who quack, "Greedy builders! Had it coming! Get what they deserve!" please give it a rest, it's just not helpful, nor is it original. You could say the same thing about bloated governments, badly managed car companies, irresponsible bankers or media companies which haven't reacted quickly enough to the creative destruction fomented by technology. Like it or not, we're now in this together, and quacking out the same tired lines of schadenfreude is just boring.

About that California economy...

Wonder just when the California economy is expected to revive itself? According to economists at Chapman University, although the recession may technically lift by the second half of the year, we won't feel better about things until 2010. First, from an L.A. Times story:

The Chapman forecasters expect nonfarm payroll employment in California to continue falling into next year before beginning to rebound in the fourth quarter of 2010. California will lose an estimated 437,000 jobs in 2009 and an additional 56,000 jobs next year, they said...

Job losses have spilled across all sectors as layoffs in the construction industry led to cutbacks at law firms, accounting firms and most other sectors, excluding health and education. Even as the economy turns around, cautious companies will probably be slow to begin hiring again, which will lead to a sluggish recovery in the state...

The Southern California median home price last month was $249,000, down 51% from May 2007, according to figures released Wednesday by MDA DataQuick of San Diego. It's the fifth straight month that median prices have hovered around $250,000, though May did show a slight increase in prices for the region.

Chapman forecasters expect home prices to strengthen in 2010 as banks become more willing to lend to prospective buyers and fewer new homes come on the market. Home prices will rise 0.8% in the state next year after falling 35% in the state in 2008, the economists say...

A few days earlier, the UCLA Anderson Forecast released its own projections on the local and regional economy, and pretty much rained all over Chapman's parade, citing increasing unemployment and an economy that won't bounce back until at least late 2011. Also from an L.A. Times story:

Despite some healing in the national economy, California still faces significant difficulty, in part because of the state's budget woes, economic forecasters at UCLA say.

Unemployment in the state will reach 12.1% by the end of this year and will not return to single digits until late in 2011, economists predicted in the quarterly UCLA Anderson Forecast, which was set to be released today...

Construction jobs, which fell 12% in 2008, are expected to drop more than 15% this year as demand continues to fall for both residential and commercial development. Already, activity has dropped so dramatically in the state that developers are now under-building for the size of California's population, sowing the seeds of another housing bubble, the report said...

Bill Watkins, executive director of California Lutheran University's Center for Economic Research and Forecasting, agreed with the Anderson group that California faces a rougher road than the rest of the nation.

"California's economy is quite a bit weaker than the U.S. economy, and we don't expect to see a recovery any time soon," he said. The state will not come out of recession until the second half of 2011, he predicted...

So who's right and who's wrong? Well, UCLA insisted there was no recession until it was so painfully obvious they had no choice to reverse themselves (and without ever admitting any fault), and Chapman was so off on their projections for Orange County that the local BIA group decided to give another economic forecasting group a try for awhile. I guess we'll have to wait until 2011 to see!

Wednesday, June 17, 2009

Lending for builders to remain tight until at least 2010

It's interesting these days to listen to economists or pundits who read through reams of data and declare, "There's plenty of credit -- just not at the price you want!" and then actually sit down with those who are trying to get deals done, and it's a very different story.

Yesterday some colleagues and I had lunch with a wealthy private investor (who claims to have access to $1.5 billion cash and another $500 million in other sources), and for people like him, the lack of credit -- which he doesn't need -- is providing him with some great opportunities, although he also remains on the sidelines because the spread between what sellers want and what buyers are offering is in the 25% range. For now, and likely through 2010, most buyers of land and many commercial properties will be families and groups of friends with money to invest, because credit is expected to remain tight for at least another 12 months. From a BuilderOnline.com story:

Builders immediately saw banks tighten up credit last fall, when the financial crisis began, and the government’s billion-dollar bailout to the banking industry seems to have had little effect. Builders can’t get money to buy land. They can’t get loans to develop lots. They can’t convince banks to joint-venture with them on partially finished developments, even when the bank already owns the land and would have minimal risk...

Unfortunately for builders, the current tight credit situation is likely to continue into 2010, according to experts interviewed by BUILDER in recent weeks. The reasons are myriad: a struggling economy, capital pressures, consumer credit problems, banking consolidation, and regulatory and accounting uncertainties, and of course, falling home prices...

Unfortunately for builders seeking capital, real estate loans represent a major factor in those losses.
Last year, banks reported net charge-off rates of 0.99% for all loans and 0.73% for real estate loans for the first quarter. This year, those figures doubled, to a net charge-off of 1.94% for all loans and 1.44% for real estate loans.

A similar trend occurred in noncurrent loans, which are at least 90 days past due. Overall, banks said 3.77% of all loans were noncurrent in the first quarter of this year, compared to 1.72% one year ago. A prime offender? Real estate, where the percentage of noncurrent loans jumped from 2.21% in 2008’s first quarter to 4.89% for 2009’s first quarter. Within that category, construction and development lending is the most troubled, with nearly 11% of such loans more than 90 days past due.

Even worse from the banks’ perspective, the bulk (61%) of the industry’s current $7.7 trillion in loans outstanding is in real estate loans, including $567 billion in construction and development lending...

Many banks, already weighed down by significant numbers of real estate owned (REO) properties, are wary of adding any additional land investments to their books, even in relatively low-risk joint ventures where the bank supplies the REO land and builders simply construct the homes.

Just like builders and homeowners, falling land values have eroded the value of banks’ land assets, forcing them to raise capital to protect against potential losses. In this declining market, they must also boost their reserves enough to satisfy bank examiners, who expressed worries about commercial real estate lending exposure at banks as early as 2006...

Accounting rules add another wrinkle. For accounting and financial risk reasons, regulators may not approve of a bank’s continued involvement in a real estate project and want the lender to realize any gains or losses as soon as possible. As a result, banks are doing everything they can to exit land deals quickly because if the project drags on (which is certainly likely in today’s weak market and struggling economy), bankers may need to account for that dirt differently due to its “troubled status,”...

Lack of resources may be another issue, particularly at smaller banks. At the same time as builders are begging and pleading for funding, lending institutions are dealing with a host of other challenges requiring time and resources—new credit card laws, personal and corporate bankruptcies, foreclosures, and mortgage modifications. They simply may not have the people, time, or expertise to carefully evaluate a builder’s proposal, no matter how promising.

The future of homebuilding is -- spiritual?

Pollster John Zogby has some interesting advice for builders attending the Pacific Coast Builders' Conference in San Francisco this week: move away from marketing quantity in favor of quality of life. That's because there's a sea change among the American consumer that's expected to continue well beyond this recessionary cycle. From a BuilderOnline story:

Pollster John Zogby, speaking at this week's PCBC in San Francisco, argued that for a growing percentage of the population the American dream is defined by spiritual rather than materialist goals. His polls show that 46% of the American public defines the American dream by quality of life rather than quantity of possessions. Builders, he said, won't be able to "function properly" unless they get to know these buyers intimately, whether through market research or living among them...

Zogby outlined four pools of people who share this spiritual connection. A sizable portion of the population, he said, is now working for less. They have de-emphasized what they own or where they live to define themselves. "They are the new American consumer," he said, adding that these are smart consumers who will shop for bargains but save money to buy something nice they really want. It's a mistake to try to reach this group by marketing fantasy; reality is what appeals to them.

A second cohort of 9 to 10 million Americans has done very well in life, but it is now making a conscious decision to stop materialist behavior. They may decide not to do a 4,000 square foot addition because they aren't fully utilizing the 5,000 square foot home they already have. They don't want the hassle of owning even more. "There's a real movement toward simplification," Zogby said.

Aging baby boomers, 78 million strong, are a third source of secular spiritualism. Many who believe they changed the world when they were 19 are now looking for a second act as they turn 60. Zogby suggested that this generation, instead of looking forward to retirement, is searching for "encore living," a way to spend the remaining years of their life giving back to society through volunteer work and other endeavors.

The fourth group of spiritualists is inclined toward personal sacrifice. "One of the great untold stories of the last 25 years is the revolution in recycling," said Zogby, who did some of the early survey work with local governments that revealed a latent desire to recycle. "Americans are looking for the next wave of sacrifice," he said, suggesting that it will be in the area of sustainability. "We are citizens of the planet Earth."

Besides appealing to buyers looking for spiritual fulfillment, Zogby recommended that builders pay close attention to the behavior of Generation Y, which are 18- to 30-year-olds.

These are America's first global citizens, he said, citing polls that show 56% have a passport and travel abroad, and one fourth say they expect to live and work in a foreign country within their lifetime. This group communicates through social networks with friends from foreign countries. They follow international sports. They may marry people from foreign countries. They are a mobile group that wants to cluster in urban areas. They will have an average of four jobs before they turn 30.

"They may not want to live in the same place forever," said Zogby, arguing that this demographic will create new forms of shared homeownership to accommodate their mobile lifestyle.

Tuesday, June 16, 2009

Los Angeles Economic Conference set for July 28, 2009

In conjunction with Pepperdine University and the L.A. Chamber of Commerce, MetroIntelligence partner Beacon Economics has announced their inaugural Los Angeles Economic Conference for July 28, 2009 at the Los Angles Airport Marriott (near LAX).

Want to register? Click here. MetroIntelligence is also offering clients and blog readers a special discount code for this event -- email us at info@metrointel.com!

WHAT'S NEXT LA?
THE ROAD TO ECONOMIC RECOVERY

Tuesday, July 28, 2009

Los Angeles Airport Marriott
5855 West Century Boulevard, Los Angeles, California 90045

Registration and Breakfast 7:30 AM
Program: 8:00-11:00 AM

Tickets:
$75 through Friday, July 24, $100 thereafter
Limited Seating

Beacon Economics, the Graziadio School of Business and Management at Pepperdine University, and the Los Angeles Area Chamber of Commerce have joined forces to launch a new, annual Los Angeles economic forecast conference. Join us at the inaugural event on Tuesday, July 28 as we provide a thought-provoking look at where the national, state, and Los Angeles economies are headed.

Leading economic forecasters, top academic researchers, and a high-profile CEO panel make this a "must see" event for decision makers from across private industry and the public sector. The buzz has already begun...and seating is limited...so register today!

Featured Speakers


Christopher Thornberg
Founding Principal
Beacon Economics

Linda A. Livingstone
Dean
Pepperdine University
Graziadio School of
Business and Management

Brad Kemp
Director
Regional Studies
Beacon Economics

John Paglia
Assoc. Professor
Pepperdine University
Graziadio School of
Business and Management

Industry and the '09 Recession:
CEO Insights Panel


Dr. Ronald Sugar
CEO
Northrup Grumman
(invited)

Maria Contreras-Sweet
Founding Chairwoman
Proamerica Bank

Dr. Bob Chu
President
Kaiser Permanente Southern California
(invited)

Moderator
(To Be Announced)



Get Answers to 2009's Burning Questions...
  • The stock market is screaming a "V" but bonds "U." What will this recovery look like for the state, the nation, and Southern California?
  • Home sales are up, but so are mortgage delinquencies. Which will matter more to the housing market recovery?
  • The Feds giveth but the state taketh away. How will the Golden State's budget turmoil affect Los Angeles?
Registrants receive:
  • 2009 Los Angeles Economic Forecast Book
  • 1 year of quarterly updates to the Los Angeles forecast

Monday, June 15, 2009

June column for Builder & Developer magazine now online

My column for the June issue of Builder & Developer magazine is now online. The subject this month is on the current state of real estate journalism, and what builder & developers can do to encourage more balanced reportage from not just traditional reporters, but also from bloggers as well.

I wrote it because I was mourning the passing of L.A. Times reporter Annette Haddad, whom I think really did want to get a story right and include all of the necessary angles. But I also wanted to impart some tips I learned from my own freelance writing experience for the Times, when getting a builder to comment for a story was akin to ordering manna from heaven. In other words, close to impossible.

Since I know it's certainly not in any company's best interest -- in any industry -- to prefer to see the the line "Company x didn't return calls for comment" published for all to see, I can only assume such reactions are due to poor communication, management or both.

You can read that column here. For the entire June issue's table of contents, click here.

Thursday, June 11, 2009

These federal deficits were years in the making

Lately, it seems to be the criticism du jour to pin the entire (rising) federal deficit at the feet of Barack Obama, who has only been in office since January.

Meanwhile, I continue to get somewhat unhinged email blasts from some of my more conservative friends who, quite frankly, don't know what they're talking about when they drone on about Obama's policies being the end of civilization as we know it (as well as the apparent end of baseball and apple pie). Of course I want to reply, "Perhaps you should get that pesky bankruptcy off your credit report before throwing stones at Obama's fiscal house!" but I'm simply too polite to do so.

And, while I'm certainly no fan of the entire array of the policy prescriptions of the Obama Administration (and think his lack of a business background is beginning to show), the truth is that these deficits took years to build up, and they won't disappear simply because Sarah Palin is now pulling a new string on her back that quacks, "I told you so!" From a New York Times story:

There are two basic truths about the enormous deficits that the federal government will run in the coming years.

The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.

The New York Times analyzed Congressional Budget Office reports going back almost a decade, with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II. This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it...

The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.

The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas...

The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.

That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.

And something that won't be addressed simply by "Drill, baby, drill!"

Wednesday, June 10, 2009

Feasibility consultants sharply discounting fees

I got a phone call yesterday from a friendly competitor of mine, and apparently the desperation that has afflicted much of the real estate world has now started to impact the world of real estate consultants -- those firms which are hired by builders, developers, lenders and municipalities to conduct (supposedly objective) research on the feasibility of proposed development projects.

This is interesting to me because the same companies which advised me to "never, ever" discount fees or risk making what we do a commodity item, have discounted so steeply that it seems they're doing whatever they can to simply keep the lights on and the rent paid on the commercial space they've rented. Not all, but certainly some.

One way I think they're making do these days is with what my business partners at Beacon Economics and HousingEcon and I call 'the data dump.' Rather than tie together various indices with a useful narrative and attempt to *accurately* forecast when sales or prices might stabilize, they think their clients -- much like a newborn baby in a crib looking at a shiny mobile -- will be so pleased with reams of data depicting tables and charts that they'll never bother to read whatever narrative was included, nor will they ask questions if the data doesn't support the conclusions. In other words, it's often simply a report for the file.

That's why now, more than ever, clients get what they pay for when selecting consultants of any type, whether it's an attorney, an accountant, a financial analysts or a market feasibility expert. After all, it's just not realistic to waltz into Target or WalMart and expect to get the same quality you might find at Nordstrom or Saks.

We saw that happened during the boom years, with the data dumps masquerading as genuine analysis -- global economic meltdown and unemployment of over 80% in the state's building industry. And let's try not to repeat that, shall we? It's more than just price alone.

Some outlying areas of SoCal down to 1989 price levels

There's an interesting story in the L.A. Times about prices in certain outlying submarkets -- such as Lancaster/Palmdale or Hemet/San Jacinto -- falling to levels not seen since 1989 (and that's not even adjusting for inflation). Although many investors have been swarming into flip for a quick profit, those who bought a year ago have still taken about a 10% haircut, and more price declines may follow as the second and third waves of foreclosures (related to Option ARM re-sets and job losses) take hold later this year. In some cases, however, these prices are so low that if your home caught fire and you had to re-build, you'd pay twice as much. From the story:

Properties in several areas are selling for less than they did 20 years ago, and that's not even counting the effects of inflation.

The reversal is a bonanza for some first-time buyers. They're nabbing houses for less than what their parents paid in the late 1980s, jumping into a real estate market that has become a kind of economic time machine...

Home prices across most of Southern California have not fallen nearly as far. The median price in the six-county area was $247,000 in April, about what it was in 2002.

But in 14 Southland ZIP Codes, mainly desert communities in the Antelope Valley and Inland Empire, median prices have fallen below levels recorded in April 1989, according to MDA DataQuick, a San Diego real estate information service.

That means thousands of homes in those neighborhoods -- even houses barely 20 years old and in decent shape -- have lost every dime of their appreciation, giving back not just the gains of the recent bubble but steady increases logged over a generation...

Prices also tumbled below 1989 levels in neighborhoods in Palmdale, Hemet, Barstow, Desert Hot Springs, Victorville, Highland, Santa Ana and Oxnard, according to DataQuick. Several other inland communities, including parts of Moreno Valley, Banning and Rialto, had median prices that were only slightly above 1989 levels and below the April 1990 median...

Tuesday, June 9, 2009

Miss the Inland Empire Economic Forecast Conference?

If you missed the Inland Empire Economic Forecast Conference hosted by Beacon Economics on May 19th in Redlands, fear not -- you can still download a copy of the conference book (MetroIntelligence wrote the sections on residential and commercial real estate) as well as .pdf version of each speakers' PowerPoint files:

Conference book

Chris Thornberg's presentation (national trends)

Brad Kemp's presentation (regional trends & forecast)

Johannes Moenius (Inland Empire housing)

Jim Brulte (history of liberal vs. conservative ideology)


John Rossi (California water delivery system & issues)

Reverse mortgages could be the next scam for many

As less-than-honest mortgage brokers look for their next victims after the sub-prime debacle, a U.S. bank regulator is now warning seniors about reverse mortgages, a subject I wrote about for the L.A. Times in February of 2008.

What can seniors do to protect themselves? From a story at CNNMoney.com:

Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population, top U.S. bank regulator John Dugan said Monday.

Dugan, who heads the Office of the Comptroller of the Currency and supervises some of the nation's largest banks, said regulators are crafting guidelines to ensure that robust consumer protections are in place for reverse mortgages...

Reverse mortgages are complicated loans targeted at homeowners who are at least 62 years old, and allow older Americans to live off the equity in their homes as they age.

In a reverse mortgage, the homeowner receives money from the lender, which does not have to be repaid as long as the borrower lives in the home...

The great majority of reverse mortgages are insured by the Federal Housing Administration and pose limited credit risk. But Dugan said a different class of reverse mortgages -- "proprietary" products -- offer less consumer protections.

Dugan said that as the elderly American population grows, there could be a significant pickup in demand for proprietary reverse mortgages, which he said bear significant similarities to the type of subprime products that helped fuel the housing boom and bust, resulting in a widespread credit crisis and recession...

He said regulators need to set more standards for proprietary reverse mortgages. Regulators also need to be vigilant about misleading marketing and need to crack down on any lenders who try to bundle a reverse mortgage with other financial products, such as an annuity or life insurance product, Dugan said.

Is there a VAT in our future?

Worried about the rising federal debt? You should be, because even after the current stimulus plan has passed, future spending on entitlements such as Social Security and Medicare will continue to far exceed revenues. Since increasing income taxes on those making over $250,000 (and even below) will still not be enough to close the gap, some experts from both the left and right portions of the political spectrum are suggested that the U.S. might soon have the type of VAT tax that's long been standard in Europe. From a Fortune story:

The bill is far too big for only the rich to pick up. There aren't enough of them. America will have to lean on citizens far below the $250,000 income threshold: nurses, electricians, secretaries, and factory workers. Within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt, about $90,000 more than last year. What the Obama administration isn't telling Americans is that the only practical solution is a giant tax increase aimed squarely at the middle class. The alternative, big cuts in spending, aren't part of the President's agenda...

The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals...

What will shock America into action is the prospect of fiscal collapse, which will grow more vivid each year. In 2008 federal borrowing accounted for 41% of GDP, about the postwar average. By 2019 the burden will double to 82% by the CBO's reckoning, reaching $17.3 trillion, nearly triple last year's level. By that point $1 of every six the U.S. spends will go to interest, compared with one in 12 last year. The U.S. trajectory points to the area that medieval maps labeled "Here Lie Dragons." After 2019 the debt rises with no ceiling in sight, according to all major forecasts, driven by the growth of interest and entitlements. The Government Accountability Office estimates that if current policies continue, interest will absorb 30% of all revenues by 2040 and entitlements will consume the rest, leaving nothing for defense, education, or veterans' benefits...

A VAT...would tax such a giant pool of purchases that a relatively low rate of 10% to 15% could generate the revenues needed to pay for Obama's agenda and balance the budget. The VAT, which would be imposed like a federal sales tax, is paid along the chain of production by wholesalers and retailers. The cost is passed to consumers in the form of higher prices. For the Democrats, the problem with the VAT is that it falls heavily on the middle class and low earners, who use a far higher portion of their incomes to buy things than the rich do. Some of the sting can be removed by exempting food and clothing from the VAT or sending rebates to lower-income households. But the middle class would be a big target in any event...

Click here for entire story
.

Some unintended consequences of the new appraisal law

Although it's just been over one month since the Home Valuation Code of Conduct went live, there's already some concern that the law -- which requires that lenders set up a sort of 'third wall' in between lenders and appraisers -- has resulted in some unintended consequences, such as randomly assigning appraisers to value areas in which they have little or no expertise. From a story at BigBuilderOnline.com:

The new code, a pet project of former HUD secretary Andrew Cuomo, was an attempt to secure the independence of real estate appraisers, who, say the code's supporters, have been under continual pressure from lenders, mortgage brokers, real estate agents, and even home builders to inflate values. Under the new code, lenders have set up firewalls between their loan departments and their either internal or third-party appraisal services if they wanted be able to sell the loans on the secondary market to either Fannie Mae or Freddie Mac...

The pain points for builders when it comes to appraisal issues mostly fall into three categories that add up to one outcome: further price erosion.

First, builders have complained that under the new rules, lenders are selecting appraisers from a generic pool, which is resulting in what they feel are inaccurate valuations. Prior to the code's implementation, many lenders had appraisers assigned to specific projects and submarkets. Now, builders have argued, appraisers are being assigned work on a random basis, so fewer of them come equipped with specific knowledge of the submarket or project, which in turn, is affecting appraisal values..

The second issue, for builders, is that appraisers have begun factoring foreclosures and short-sales into their comparative analyses. Many builders felt that was unfair because by mixing distress properties with true market rate properties, values would be driven down more than they already have been.

The third concern related to appraisers' obligation to indicate whether they believe the properties being assessed are in declining markets or not. Builders questioned not only whether giving a forward-looking snapshot of the markets was reasonable but also were curious to know to what extent labeling a market as in decline could negatively affect the loan's funding...

My review of "Real Estate and the Financial Crisis" now online

My review of the book "Real Estate and the Financial Crisis: How Turmoil in the Capital Markets is Restructuring Real Estate Finance"by economist and real estate writer Anthony Downs is now online at Inman News.

For now, here's an excerpt from the review:

As a senior fellow at the well-respected Brookings Institution, a Washington, D.C., think tank with decades spent studying real estate markets, Downs didn't have to rely much on outside experts: in fact, he said that most of his research was conducted on the Internet. He cautions, though, that for the research novice it's often difficult to distinguish between fact and fiction on the World Wide (and wild) Web.

Downs, with 26 other books and more than 500 articles to his credit, has taken readers down similar paths before, including 2007's "Niagara of Capital: How Global Capital Has Transformed Housing and Real Estate Markets" as well as "An Economic Theory of Democracy" (1957) and "Inside Bureaucracy" (1967), the latter two of which are considered academic classics.

Consequently, although the book is designed somewhat like a textbook in format -- including nine chapters and various subsections -- the author's narrative gift for telling stories about complicated economic and political issues makes his latest release easy to both skim and read in greater detail (you may find yourself jotting down notes in the margins). He doesn't "dumb down" the subject matter like a populist real estate book with an exclamation point in the title might do...

Towards the end of the book, Downs gets out his economic crystal ball to peer ahead into the future, and what he sees still remains a bit murky: a credit crunch lasting another one to three years, the real estate capital market gradually improving as investors grow impatient with other asset classes, but a timeline that will depend greatly on how the broader stock market fares in comparison.

Within that context, the author assigns probabilities to four potential future scenarios, including a weak U.S. recession and a speedy recovery by the end of 2009 (15 percent chance); a bad U.S. recession in 2009 and tight credit through 2010 (65 percent); a more serious recession lasting throughout 2010 resulting in a collapse of the dollar and higher interest rates (8 percent); and a recession lasting two to three years including massive federal spending, ongoing inflationary pressures and high interest rates (12 percent).

So what is Downs' latest update from my interview with him? A 65 percent chance of a two-year recession (lasting into 2010), and new housing production levels lower in 2009 than in 2008.

Let's just hope that it's this scenario that turns out to be true and not the one which leads to rampant inflation, high interest rates and a dollar collapse.

I also interviewed author Downs for my show at BlogTalkRadio, which you can either listen to here or by clicking on the audio player on the right margin of this blog.

Want to buy this book? Click here or on the link below.


Monday, June 8, 2009

How would YOU end California's budget deficit?

Yes, I've been a bit remiss about blogging lately, but that's because impacts of the recession have left me personally distracted, which meant that the poor Housing Chronicles blog was temporarily sent to the corner. The income properties I have which have helped me weather the current storm also saddled me with multiple occupancies to fill as well as various maintenance items to address (new carpet, paint, repairs, etc.). Although renters always want their entire deposits returned, they seem to forget that ripping out something from a wall (and taking out plaster with it) does indeed incur a cost. At the same time, rents have softened just as more inventory (some of it shadow) has been dumped onto the marketplace.

Now as a former renter, I have a pretty good idea of what to do to attract tenants (spruce it up, advertise like mad, price under market, offer rent specials, offer unusual benefits such as free on-site laundry, be flexible), but it's hard to do all of that, run a consulting practice AND continue to blog regularly. So if you missed my snark, I do apologize, but things are now largely back under control, so blogging should resume at its normal pace today. But when I blog about changes in home prices or rents, etc., I'm also experiencing it at the same time.

So just as I've been managing my own revenue vs. surplus/deficit scenario, I learned about an interesting interactive feature on the L.A. Times Web site on the decisions YOU might make to balance the budget. I went through the exercise and managed to get a small surplus of about $800 million. Want to check it out? Click here.