Monday, December 21, 2009

Outlook for 2010 and beyond

Given the depth of the Great Recession’s impact on the housing industry, most insiders are hoping for that long-awaited economic rebound which will finally provide some solid flooring to our decimated industry. And some may get their wish, although the recovery will be uneven, slow and prone to a variety of unknown risks which accompany any forecast.

Since most of the economic growth noted in the third quarter of 2009 was due to fiscal stimuli such as the homebuyer tax credit and Cash for Clunkers programs, it still remains to be seen if the economy can rebound without any government training wheels.

In their latest economic forecasts, our partners at Beacon Economics are calling for growth in U.S. GDP of about 2% in 2010, fueled mostly by increased business investments related to higher savings rates, and a closing trade gap. Yet as tax cuts from the Bush years begin to expire in late 2010 and early 2011, if there is not a double-dip recession, 2011 could see a slow growth rate close to 0%. Thankfully, it seems that unemployment levels may have peaked at around 10% and will gradually decline to 5.5% by 2013.

One wild card which remains is that of ‘shadow inventory’: with 1.7 million homes scheduled for potential sale due to defaults and foreclosures at the end of September 2009 – up by 55% over the past year – any housing recovery will remain in limbo until the supply of discounted foreclosures is largely exhausted.

Still, there is a significant silver lining to declining prices, which is that of sharply rising national affordability levels, which have recently been averaging close to or over 70%. Since cheaper home prices and falling rents mean greater mobility, candidates for jobs will find it much easier to relocate than would have been possible during the height of the boom years.

For those builders working in the commercial sectors, most of that pain is yet to come, especially since changes in the Financial Accounting Standards Board (FASB) rules give banks more leeway to ignore short-term declines in asset values, commonly referred to as “extend and pretend.”

In practical terms, what that means is that banks will avoid taking back commercial properties until the one-two punch of rising vacancy rates and falling rents forces property owners into default on current loans. For cash-rich investors with the fortitude to wait and conduct appropriate due diligence, however, 2010 could bring some of the best opportunities in years.

Another wild card is that of the huge surplus of cash – about $1 trillion – sloshing around in the reserve accounts of the nation’s banks and originally employed to avoid financial Armageddon. Assuming the Federal Reserve can stomach higher interest rates and a stronger economy can mop up this extra liquidity, inflation can be held in check, but it will require a careful balancing act in a highly politicized time in which there are no good guides to follow.

Finally, there are always a series of economic risks which could upset most forecast scenarios, which include a lack of private sector buyers of mortgage-backed securities after the federal government steps back from the market, a weakening dollar leading to a trade war, a rising federal debt, higher tax rates, a bear market for Treasury bonds, persistent high unemployment, geopolitical conflict and a foreign government defaulting on its debt. In other words, the usual suspects.

But fear not. When the impacts from the Great Recession are over, the U.S. will emerge stronger, healthier and with a more stable economy yielding realistic asset prices. Consumers will save more, leading to more balanced trade and a return to steady growth of about 3% per year. And ultimately, the nation’s quality of life will remain one of the best in the world.

Happy (early) 2010!

Sunday, December 20, 2009

Latest column for Builder & Developer now online

My column for the December issue of Builder & Developer magazine is now online.

For this year-end column, I focused on how demographic changes in the U.S. population -- becoming older and more diversified -- will require home builders to adapt accordingly. An excerpt:

Over the past 30+ years, most of the new homebuilding activity was to follow the demands and tastes of the 78-million-strong Baby Boomer generation, from starter homes and move-up housing to vacation homes, retirement communities and even condominiums in urban locations.

But according to a series of presentations at the ULI Fall Conference & Urban Expo last month in San Francisco, demographic changes in the U.S. will force many builders and developers to change how they build for a population that is getting increasingly grayer (older) and browner (more diversified).

In addition, the 70-million-strong Generation Y, having largely grown up in quiet suburbs requiring cars to run simple errands, have morphed into a gadget-obsessed cohort whose penchant for urban-oriented, walkable communities and cynicism for traditional marketing techniques will require an entirely new skill set from an industry that has long relied on precedent in the hopes that each new rebound will be much like the last. Maybe not this time...

Click here for entire column.

Friday, December 11, 2009

Massive CityCenter Las Vegas complex to open next week





Having covered Las Vegas as a consultant (and for a homebuilder) over the last 15 years, I've gotten to know the city -- and The Strip -- pretty well, and made it a point to visit and stay at various resorts whenever I visited.

One thing that always struck me as curious was the unbridled optimism behind the massive projects which continuously seemed to spring up, as if the "If you build it, they will come" mantra could just live on forever even as growth in visitor traffic began to slow. Back in late 2006, when a friend had considered buying a high-rise condo in Vegas, I begged him not to, as I could see the crash that was about to come in the not-too-distant future.

Now, as Vegas remains mired in one of the weakest economic environments over the last century, the $8.5 billion CityCenter project -- the largest private development ever built -- is set to open. In their defense, of course, these projects are planned far in advance of economic swings, so it's not like they planned to open at a time of 10% national unemployment, a more guarded consumer spending less on travel on airlines cutting back on flights. But they did nonetheless.

With that said, I can't wait to see this project in person, but until you can they've developed a very expensive Web site that will help you tour the entire 67 acres, with links to the Web sites for each individual hotel, condo project and mall property. What will be most interesting it to see how the non-gaming hotels -- of which there are three -- will fare, given that gambling revenues remain an important way to hotel companies to make cash. Will the receipts from hotel room, dining and spa services and retail stores be enough to make this a go in the long run? Only time will tell.

In the meantime, L.A. Times architecture critic Christopher Hawthorne summarizes his findings after a personal tour.

Thursday, December 10, 2009

Could housing come back with a vengeance?

Due to the extremely low production of new housing units in the U.S., for the last couple of years it's not been keeping up with implied demand as the result of new households forming. For now, those new potential households are back home living with family, doubling up with roommates or staying in college to get that Masters Degree. But eventually as the economy rebounds, so to will the need for new housing. In the following video interview, Morningstar's resident expert Eric Landy explains why:

Tuesday, December 8, 2009

Top 10 Must-Know Real Estate Trends for 2010

Tighter lending. More foreclosures. Falling prices in some markets, while others stabilize. None of these trends should come as a surprise, but FrontDoor.com has rounded them all up in a single article. So what are they?

#1: Still a Buyer's Market
#2: More Buyers Entering the Market
#3: More Foreclosures to Come
#4: Stabilizing Home Values -- in Some Places
#5: Lending Standards Still Tight
#6: Rising Mortgage Rates
#7: A Conflicted Construction Market
#8: Tricky Appraisal Rules
#9: Smoother Short Sales
#10: Cash is King

For more details on each of these trends -- or the entire article -- click here.


Housing Chronicles post cited by Carnival of Real Estate

I am pleased to announce that The Housing Chronicles Blog has again been cited by The Carnival of Real Estate for a post on how demographic changes between now and 2050 will mean a U.S. that's much grayer (older) and browner (more diversified). Click here for that post. Here's an excerpt:

Over the past 30+ years, most of the new homebuilding activity was to follow the demands and tastes of the 78-million-strong Baby Boomer generation, from starter homes and move-up housing to vacation homes, retirement communities and even condominiums in urban locations.

… demographic changes in the U.S. will force many builders and developers to change how they build for a population that is getting increasingly grayer (older) and browner (more diversified).

Many thanks to the "River Banks to Cornfields" blog for citing the post!

Wednesday, December 2, 2009

The Economist presents "The World in 2010"

Each year, The Economist magazine publishes "The World in" annual book of predictions, and the 2010 version is now available online.

From the editor's intro:

The good news about 2010 is that the world will emerge from recession and the post-crisis economic landscape will become clearer. Less cheerful is what that landscape will look like.

The rich world, burdened by debt and high unemployment, faces a long, hard slog. Governments will confront difficult decisions on how fast to start withdrawing the huge support they provided to keep the financial system going. Voters will vent their anger when given the chance at the polls—kicking out Labour in Britain in May and perhaps even depriving Barack Obama of a Democratic majority in the House of Representatives in America’s mid-term elections in November. Businesses will hardly feel much better, but they can at least begin to focus on strategies for future growth, rather than tactics for short-term survival...

For a summary of links to the various stories in this publication, click here.

L.A. Times combines "LALand" blog with general business blog

Having had little luck maintaining the success of the blog "L.A. Land" upon the departure of journalist and blogger Peter Viles (and now the departure of housing writer Peter Hong), the Times has decided to combine the blog into its general business blog called "Money & Co." While it's better than getting rid of real estate-related postings altogether, I think it also proves that without a dedicated voice behind a blog that it will eventually wither away:

LA Land
has moved to a bigger, brighter, newer home. You can now find it in our Money & Company blog.

You will still be able to find all the real estate news, foreclosures, and Hot Property pieces, but now in our uber-business blog.

Before you click the link, make sure to bookmark the new url: http://latimesblogs.latimes.com/money_co/real_estate/

FHA loan requirements to get stricter

Owing to growing concerns about FHA reserves (and a potential taxpayer bailout), in the near future those borrowers seeking FHA loans will have to pony up larger down payments (up from the current 3.5%) and have higher credit scores. From the L.A. Times:

Home buyers will have to pay more cash upfront to get a mortgage backed by the Federal Housing Agency -- including, possibly, coming up with a larger minimum down payment -- and will need to achieve higher minimum credit scores under changes announced today by Housing and Urban Development Secretary Shaun Donovan...

He wants to make those and other changes because a recent audit has shown that the FHA's reserves have fallen below mandated levels as the agency has become a larger part of the housing market. The percentage of mortgages insured by the FHA has soared from 6% in 2007 to almost 30% this year. The FHA insures mortgages made with as little as 3.5% for a down payment and has become vital in a housing market where credit remains tight and borrowers' bank accounts have been depleted by the financial crisis.

In Southern California, the number of FHA-backed loans has soared, becoming a crucial source of financing for first-time home buyers, particularly those snapping up foreclosed homes. FHA loans made up 38.3% of all Southland purchase loans in October, up from 32.5% a year earlier and just 2% two years prior, according to MDA DataQuick, a San Diego real estate research firm. Riverside County had the region's highest rate of FHA loans, at 49.2% of the market...