SoCal home values down to 2004 levels, but not everywhere

There's a story in today's L.A. Times citing the latest Dataquick statistics, and of course the news remains grim: sales down by 13.6% from last June and median prices falling by over 29%:

The median home sales price was $355,000 in June, down 29.3% from a year ago. Home values are now on par with what they were in early 2004... The volume of home sales did rise 3% from May, but analysts attributed that uptick to bargain hunters snapping up foreclosed homes at steep discounts. Foreclosed homes made up 41.1% of the homes sold in June, the first time the percentage has topped 40% in this real estate cycle. Last June, foreclosed homes made up just 7.3% of home sales... Price declines continued to be more severe in the Inland Empire, where overbuilding was more prevalent. But Los Angeles and Orange counties recorded median price declines of 24% and 23%, respectively, in June from a year ago. Year-to-year price declines in L.A. and Orange Counties had remained below 20% as recently as March.

However, these are still regional stats, and specific neighborhoods perform differently due to proximity to employment, transit, shopping and other factors. That's why I really liked the following map created by Tim Nebb, who blogs for the Los Angeles region for Redfin. Here's what he found:






I wanted to see at a glance how different areas of the Valley fared in this decline. So I used DataQuick’s Southern California home resale data for May as published in the Los Angeles Times and filtered it for Valley zip codes and cities. I combined and averaged the single-family home data - condo data excluded - for cities and neighborhoods comprising multiple zips like Glendale (8 zip codes), Burbank (5) and North Hollywood (4). Then I sorted the cities by per cent decline from the year before.

So is this accurate? For my particular piece of Sherman Oaks, I'd say yes. Maps like this are also a great opportunity for local papers such as the L.A. Times, the Daily News, etc., both in print and online. Assuming, of course, they have the staff to create them.

The late, great Los Angeles Times?

Although this isn't a housing-related post, since I've been recently writing a few freelance stories for the L.A. Times, the news of publisher David Hiller's departure today is certainly noteworthy, especially on the heels of the departure of a Chicago Tribune editor. From an AP story:

The Los Angeles Times says publisher David Hiller has resigned after 21 months at the helm of Tribune Co.'s largest paper.

The news comes the same day Chicago Tribune editor Ann Marie Lipinski resigned from Tribune's flagship paper, continuing a string of executive defections amid a broad cost-cutting effort at the company's papers nationwide.

Hiller was the third publisher to lead the Times since Tribune Co. bought the paper in 2000. Predecessor Jeffrey Johnson was ousted in late 2006 when he balked at trimming newsroom staff to cut costs.

The Times said two weeks ago it will cut 250 positions, including 150 in the newsroom. The paper did not immediately name a successor.

IndyMac now considered a hopeless case

In the aftermath of the IndyMac meltdown, analysts now think rescuing it from the financial abyss is pretty much impossible. IndyMac was a pretty big player in the new housing industry, and was prominent as a sponsor at many industry shows and functions, so it'll be interesting to see if Prospect Mortgage, which has offered to hire many laid-off IndyMac employees, will take its place. From an L.A. Times story:

A day after IndyMac Bancorp's decision to sharply curb its lending and lay off 3,800 employees, the mortgage company's shares tumbled toward oblivion Tuesday, with at least two analysts warning that no value remained for shareholders.

IndyMac, which specialized during the housing boom in loans for borrowers who didn't document their incomes, has been inundated by defaults.

It announced after the stock market closed Monday that regulators no longer considered it well capitalized. It said it would shut all home lending except for reverse mortgages, which help older people access their home equity, and refinancings for current customers...

Prospect Mortgage Co., a 2-year-old company backed by Chicago private equity firm Sterling Partners, said it would take over 60 to 75 of the Pasadena savings and loan's retail offices, putting about 750 IndyMac employees on its payroll.

The deal's terms weren't disclosed, but it wasn't expected to generate significant cash for IndyMac.

Earlier Tuesday, Paul Miller, an analyst at Friedman, Billings, Ramsey & Co., cut his price forecast for IndyMac stock from $1 to zero, citing the thrift's statement that it had failed in an effort to raise new capital.

"Next Stop, Receivership," was the headline on a note from Jason Arnold, an analyst at RBC Capital Markets who also reduced his price target to zero, from $1.50.

IndyMac "will not survive without a material capital injection," Arnold wrote, calling the prospect of one unlikely because regulatory restrictions and mounting losses had left IndyMac's business model "arguably in shambles."

Mortage regulators now plan to start regulating!

It may be a few years too late, but federal regulators are finalizing some new rules for mortgage lenders that would largely eliminate some of the loopholes with qualifying borrowers for adjustable rate mortgages as well as make it easier for them to refi into loans less onerous. From an L.A. Times story:

On Monday, the Federal Reserve is expected to require lenders to document borrowers' incomes and verify that they can afford their mortgage payments -- including the higher payments that come when adjustable-rate loans reset...

First proposed in December, the measures have been revised in recent months in response to public comment. Fed officials declined to describe the changes, but the regulations also are expected to limit bonuses paid to brokers for making subprime loans and restrict prepayment penalties for borrowers who want to refinance...

Some of those new rules also may include restrictions on the use of the word "fixed" to describe the rate of a loan that may adjust in the future and prohibitions on brokers influencing the appraised value of homes.

Lenders also may be required to give borrowers at least 60 days before their loan rates reset, a period during which they can refinance without penalty.

Paul Leonard, director of the California office of the Center for Responsible Lending, said that many of the federal rules, as originally proposed, were too weak. For instance, he noted that some of the practices proposed by the Fed would apply only to subprime loans but not to other nontraditional mortgages, including so-called no doc and interest-only loans that also have high rates of default...

On the other hand, the Mortgage Bankers Assn. has expressed concern that the new rules could impose burdensome requirements on lenders that would result in higher costs for borrowers...

Also Tuesday, California Gov. Arnold Schwarzenegger signed into law a bill that represents the Legislature's first stab at trying to stem the tide of foreclosures.

The bill, which took effect immediately, requires lenders to give homeowners an early warning that their mortgages are heading toward default. The measure also gives renters an extra 30 days' notice to find a new place to live if their landlord is losing the property.

"Foreclosures not only devastate families, they hurt neighborhoods and depress our economy and our budget," Schwarzenegger said.

The bill by Senate President Pro Tem Don Perata (D-Oakland) also provides communities with a new weapon to combat blight created when homes are allowed to run down after being vacated. Local governments can now fine property owners who fail to maintain empty homes.

The story of builder incentives

My most recent article for the Los Angeles Times focuses on home builder incentives, to be published on July 6, 2008, which you can find online here. For vetting purposes, the Times asked me to verify that I had no builder clients when the story was being researched, written or published, which is true. These days, such clients are few and far between!

When I first pitched it after learning that even builders are confused by what their competitors are doing and referring to other company's tactics as 'gimmicks,' the Times already had a buyer in Orange County willing to be interviewed about his own experience and photographed in front of his new home (which is always by far the toughest part of writing a story) so I thought it'd be easy.

Nope!

Since this was a feature article, I couldn't bring any of my past expertise or opinions to it, but only rely on the facts and statements made by those I interviewed.

To make it as fair and balanced as possible, I contacted almost 10 entities besides the home buyer I interviewed, including the two builders in question, the Building Industry Association of Southern California, a real estate agent who represents buyers and has placed clients in new homes, a design center manager for a third builder, the research companies JD Power & Associates and MarketPointe Realty Advisors and, finally, the Dept. of Housing and Urban Development plus the County of Orange.

However, I've been a bit concerned about this story lately, because it didn't quite turn out to be what I wanted, which was a more balanced story on the pros & cons of how and why builders use incentives to move unsold homes (which can be great things when used prudently), but ended up questioning their very validity.

And why is that? Because I couldn't get either of the builders I contacted, nor the trade group which is supposed to represent them -- the BIA of Southern California -- to comment and, I had hoped, tell their side and explain how incentives benefit the buyer.

For one builder, after being forwarded to several people, I eventually submitted detailed questions in writing to their VP of Media Relations in the hopes of getting a similarly detailed response. For the other, I was referred to their Division President for Orange County after talking to the CEO's office.

And the response from both? NOTHING.

And why was the BIA also MIA on this? Is anyone home?!

For example, I'd imagine that had the builders responded, they would have said that the benefits of incentives for consumers include making homes more affordable through interest rate buy-downs or reduced closing costs, allowing buyers to upgrade to a larger model, move into a more upgraded home than they would otherwise, etc. I'd imagine that builders today treat buyers on a case-by-case basis and that one buyer's experience should not cast a pall over an entire organization. But because that's my assumption and not a fact in evidence, I couldn't write it.

Still, I couldn't simply kill the story because spokespeople were hiding under their desks, as that would then question my own objectivity as a published writer as well as my reputation in general. The story still had to be written, and simply state that they didn't return phone calls and emails to comment. From a PR perspective, I think that's always a mistake, but of course that's also their choice.

Frankly, I was very, very disappointed by the lack of response, and perhaps I was being naive by assuming that they'd be more willing to talk to me on the record versus a staff reporter without past experience in the industry.

Whether that's true or not, I had expected these public builders to explain their business practices regarding incentives during a very difficult time in the industry. They had a great opportunity to do so, but instead they passed.

Envisioning life with oil at $200 per barrel

When I first wrote about the theory of peak oil last fall, I thought it was at least a couple of years away. But now, for a variety of reasons, the potential impact of oil supplies becoming scarcer while demand increases is rolling out not in terms of years, but weeks. What does this mean for a society which (myopically) assumed cheap energy was something to be tapped forever? A story in the L.A. Times takes it on:

Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.

The pain would probably be particularly intense in Southern California, which is known for its long commutes and high cost of living. "Throughout our history, we have grown on the assumption that energy costs would be low," said Michael Woo, a former Los Angeles city councilman and a current member of the city Planning Commission. "Now that those assumptions are shifting, it changes assumptions about housing, cars and how cities grow."

Push prices up fast enough, he said, and "it would be the urban-planning equivalent of an earthquake."...

Consumer spending has held up surprisingly well in the face of skyrocketing pump prices -- bolstered in part, perhaps, by federal tax rebates. But the same day the government reported a 0.8% rise in May consumer spending, a research firm said consumer confidence had plunged to its lowest level since 1980 -- hinting at the catastrophic effect another big gas price surge could have on retailers and customers

"The purchasing power of the American people would be kicked in the teeth so darned hard by $200-a-barrel oil that they won't have the ability to buy much of anything," said S. David Freeman, president of the L.A. Board of Harbor Commissioners and author of the 2007 book "Winning Our Energy Independence." BIGresearch of Worthington, Ohio, said more than half of Californians in a recent survey said they were driving less because of high gas prices. Almost 42% said they had reduced vacation travel and 40% said they were dining out less.... Nationwide, $200 oil and $7 gasoline would force Americans to take 10 million vehicles off the roads over the next four years, Jeff Rubin, chief economist at CIBC World Markets, wrote in a recent report...

As for the state's beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers...

Already Californians' mobility is being curbed. Traffic on the state's freeways fell almost 4% in April compared with a year earlier, and ridership on many subway and bus lines operated by the L.A. County Metropolitan Transportation Authority has risen in recent months. But a huge influx of riders would strain aspects of the system, MTA says, noting that many buses are overcrowded at rush hour now. Quickly adding capacity to meet demand from new riders wouldn't be easy, because new buses cost hundreds of thousands of dollars and take up to two years to deliver...

Dramatically higher transportation costs would usher in an era of virtual mobility, or zero mobility, for many workers. "We're seeing companies go to four-day workweeks, place increased emphasis on working at home, show bigger interest in setting up satellite offices -- anything that gets commute times down and gets people off the road," said analyst Rob Enderle of Enderle Group in San Jose. Videoconferencing, touted as "the next big thing" for years, would finally have its day, thanks to improved technology and a desperation to cut corporate travel budgets.

Telecommuting, or working from home, is easier than ever because of the spread of high-speed Internet access, said Jonathan Spira, chief analyst at Basex Inc., a business research firm in New York. In particular, workers in "knowledge" jobs that can be performed with computers and phones would benefit. But Gilligan of USC noted that lower-income workers tend to be in jobs that don't favor telecommuting, such as retail and food service.

Home swapping gains in popularity

Given the continuing state of the slow housing market, home swapping is starting to gain popularity as a way to trade places with someone else. From an article in the L.A. Times:

For years people have been swapping homes for vacations. Today, the idea of permanent exchanges is gaining support among disillusioned property owners struggling to sell in a glacial real estate market.

Although the number of completed trades isn't being tracked, interest is such that several home-swap websites have sprung up in the last year and now claim close to 40,000 combined swap listings nationwide. Others appear regularly on Craigslist.org...

Though the number of swap listings is still a small fraction of total property listings, website operators are confident they have hit upon a simple way to help ease today's market woes -- matching buyers and sellers.

"It's like a dating service for home sellers," said Greg Holt, chief executive and co-owner of Denver-based Pad4Pad. "We're bringing people together."

From St. Augustine, Fla., Sergei Naumov, creator and owner of GoSwap.org, agrees. "The concept works as simply as: 'I will buy your house if you buy mine.' "

These websites, along with others such as OnlineHouseTrading.com, DomuSwap.com and DaytonaHomeTrader.com, say once potential swappers feel they have the makings of a match and begin negotiating, they are on their own and the process runs much like any other real estate transaction.

Having decided to swap homes, both parties need to agree on the value of their respective properties and secure fresh mortgages. Any difference in value will be paid either in cash or by using funds from the new mortgage...

Pad4Pad's Holt said because both parties have already connected, he has found real estate agents willing to assist for a flat fee of about $700 instead of more costly percentage commissions.

Sites also suggest that people share the same title company to ensure that both deals go through simultaneously and that nobody is left holding mortgages on two properties.

California sues Countrywide

In a clear sign that government is taking the residential lending bust to a new level, California Attorney General (and former Governor) Jerry Brown has sued Countrywide Financial, arguing that the company set out to deliberately relax underwriting guidelines and deceive borrowers with Option ARM and other adjustable rate loans that were in fact financial ticking time bombs. From an L.A. Times story:

Countrywide Financial Corp. and its chief executive, Angelo Mozilo, were sued today by California Atty. Gen. Jerry Brown, who accused them of forcing thousands of Californians into foreclosure by deceptively marketing risky adjustable-rate mortgages to borrowers who didn't understand that their monthly payments would one day "explode."

In a complaint filed in Los Angeles County Superior Court, Brown alleges that Countrywide and its top executives, beginning in 2004, plotted to loosen or ignore lending standards so they could make more sub-prime mortgages and other adjustable-rate loans that were promoted by emphasizing low initial rates.

By deceiving borrowers about the risks of these loans, Countrywide's top executives sought to double the lender's share of the national mortgage market to 30%, mass-producing loans that could be sold off and transformed into complex bonds, the suit said...

The California suit, which also names Countrywide President David Sambol as a defendant, asks the court to order an end to what it calls the misleading and unfair practices, and demands that homeowners victimized by the alleged scheme have their money and property returned. The complaint doesn't specify what procedures might be used to accomplish this restitution.

Disneyland rolls out "Innoventions" house of the future

Disneyland launched the first iteration of their Innoventions house at Tomorrowland earlier this week. So will people actually use these technologies in their own homes? Hard to say. From an L.A. Times article:

Big Spender has given you an inside peek into the lifestyles of the rich and famous: a Rolls-Royce rental for $7,500 a day; truffle cheese for $65 a pound; and a pearl necklace for Fido for $2,325. This week, though, we visit 360 Tomorrowland Way, a 5,000-square-foot home inside Disneyland. The Innoventions Dream Home, which opens late this month, is stocked with the latest technology -- stuff that, in some cases, even that black American Express card can't buy.

Mirror, Mirror on the wall, who's the fairest of them all? You are, of course. And you look fabulous in that black dress; no, wait, the red one! At the Dream Home, the preprogrammed Magic Mirror is loaded with every piece of clothing and accessory in your closet. Just stand in front of the mirror, click on the clothes and see how you look. Price? Keep dreaming; it's still being developed...

Next, from BuilderOnline.com:

It wasn't so long ago that your standard "graphical user interface" was quarantined to a computer monitor and relegated to whichever part of the house your hard drive occupied. But in the Innoventions Dream Home, which debuts this week at Disneyland in Anaheim, Calif., user interfaces have officially migrated beyond the confines of the black box and keyboard, taking the form of interactive tabletop displays, wall-mounted touch screens, and virtual bulletin boards in just about every room of the house.

Built by Taylor Morrison, the concept home features digital home automation, streaming media, and gobs of other techno-fabulous goodies, courtesy of Microsoft, HP, and technology integrator LifeWare. Think digital photo albums, appliances that "talk" to each other, magic mirrors, and wireless everything. The house even has rooms that "recognize" individual family members and morph their surroundings (changing, for example, temperature, lighting, artwork on the walls, and music on the sound system) according to the taste of whomever is occupying the room.

So what are the chances people will actually start asking for these innovations in the homes they buy? I guess we won't know, at least not for now.

Large spike in California unemployment

Unemployment rates in California hit 6.8% during the month of May -- the 5th worst in the country and certainly a huge spike of 1.5 percentage points from just a year ago. From an L.A. Times story:

California's unemployment rate jumped in May to 6.8%, its highest level in almost five years, reflecting the continued loss of construction and finance jobs in the wake of the real estate collapse. The state Employment Development Department reported today that joblessness rose six-tenths of a percentage point from last month and a dramatic 1.5 percentage points higher than a year earlier... California's May unemployment rate was the fifth highest in the nation, behind Michigan, Rhode Island, Alaska and Mississippi, according to the U.S. Bureau of Labor Statistics... The report said California posted a net loss of 10,900 jobs in May from the month before, mostly in construction... The employment scene, though mostly grim, is not all bad. Congress is expected to extend unemployment benefits to nine months from six, and the president is likely to sign the measure into law by July 4, said Andrew Stettner, deputy director of the National Employment Law Project, a research and advocacy group for lower-wage workers. And some industries gained jobs statewide since April, adding a net 9,000 jobs, including in education and health services, natural resources and mining and information.

Dipping your toes into buying foreclosures

Looking to profit from other people's pain by investing in foreclosures? It's the American Way, right? Well, not so fast, at least according to a story in the L.A. Times:

With 700,000 bank-owned homes on the market, and another one million in some state of foreclosure, according to RealtyTrac, an Irvine, Calif., provider of foreclosure listings, you might be tempted to add a distressed property to your portfolio.

Beware. Buying a home in foreclosure is not for the meek. Those with an appetite for risk, however, will find the tumultuous market stocked with plenty of investment opportunities...

Whether you're looking to flip a home, buy into a neighborhood you couldn't otherwise afford or planning to rent the home, you, like these big companies, must have heaps of cash on hand.

There are properties that can be turned within a few months, but the overall market is still slow. Even if you have a renter lined up or have enough money for a 10% to 20% down payment, you should be ready to weather a depressed market for another two or three years.

Go to the county assessor's office and study recent sales for price-per-square foot and time spent on market to determine what sort of price you can expect at resale. Be conservative. If you are renting, calculate a capitalization rate, and subtract 10% or more of the annual yield for maintenance and depreciation. Make sure that your endeavor is still profitable if you incur two to three years of carrying costs and depreciation.

It's also crucial to remember that bad loans that plagued speculators and unprepared borrowers don't simply disappear when distressed owners sell their properties. Unless the property goes through foreclosure auction and becomes bank-owned, outstanding liens and fees are simply transferred to the new owner. If you plan to buy out of pre-foreclosure, make sure the property has a clean title; otherwise you'll just be trading places with the distressed homeowner...

However you do the math, the most important thing to keep in mind is that the investment has to be worthwhile--even if you can't sell the home at your desired price for two or three years and the current housing market deteriorates a further 10% to 20%.

Short sales not that easy

For those who think that short sales are easy -- when banks accept less than the full amount owed on a mortgage to avoid foreclosure -- L.A. Times writer Diane Wedner offers up some cautions, including great patience with the banks for a response:

RESIDENTIAL short sales sound like a picnic: Owners need to sell their homes for less than they owe, lenders forgive the difference and buyers grab a good deal.

If only. This is one picnic that requires a long wait for dessert. The only "short" thing about short sales, buyers and sellers say, is one's patience.

"The waiting is torture," said Mark Shandrow, a Keller Williams Realty agent in Long Beach who specializes in such transactions. "The banks are overwhelmed with short-sale requests, and some make sellers wait five months for an answer." That answer, in many cases, he added, is "no."

Yet despite the obstacles to successful short sales -- lenders holding the first and second mortgages don't agree on the terms, buyers often ditch the deal midstream or banks nix the agreement just before escrow closes -- they're on the rise. Countrywide Financial Corp. of Calabasas, the largest U.S. home lender, reports a nearly 60% increase in those transactions nationwide in April, the latest month for which statistics are available, from the same period a year earlier...

The reason for the rise, experts say, is that as more financially strapped homeowners fall behind on their mortgage payments -- and see their homes' values plummet to less than what they owe -- they're turning to short sales as an alternative to foreclosure. Banks, once loath to take on short sales because, among other reasons, they were understaffed for the application onslaught, are tackling them now mainly because they're more cost-effective than foreclosures.

"Banks aren't happy about short sales," said Sherri Frost, a senior loan officer with Sherman Oaks-based Metrocities Mortgage, "but they have few options."

Unlike a foreclosure, in which the lender takes ownership of a property after a borrower misses several payments, a short sale is a transaction in which the owners, not the bank, sell the home; they receive no proceeds from the sale. In a foreclosure, the defaulting owner may receive sales proceeds once the lender has been paid, if the amount exceeds that of the outstanding loan.

If a short-sale borrower owes $500,000 on a home, the bank may accept a payoff amount of $450,000, the amount a buyer has offered to pay. The sellers need not be in default -- meaning they stopped making mortgage payments -- in order for a lender to consider a short sale, but they must be able to show a real hardship to receive the debt forgiveness, which may have tax consequences...

It sounds straightforward, but the short-sale road is a long one. Once sellers have an offer, they must assemble a package to present to the bank, including a "hardship letter" explaining why they had to put the house up for sale -- loss of employment, a spousal death, a divorce, a disability or a mortgage resetting, for example -- and asking the bank to accept a short sale, according to a Countrywide spokeswoman.

The sellers also must provide income verification, their most recent bank and income-tax statements, the listing history of the house and other documentation. Then comes the wait. And frequent follow-up calls to the bank to make sure the file isn't buried...

Sometimes, while awaiting a bank's decision, interest rates go up and buyers no longer qualify for a previously approved loan because their lock-in rates expired. Worse yet, a seller may get an initial approval from the bank, but in the eleventh hour the bank adds a contingency that skewers the deal, or pulls the plug without explanation, agents say...

Lenders will not accept short-sale offers that are far below market value. To the contrary, many banks "net about 90% of the current market value" on many of these sales, agent Shandrow said. Also, the homes usually are sold as is, which sometimes can mean a missing kitchen sink, ripped-out bathroom fixtures and stained carpets.

Marty Rodriguez, a Century 21 agent in Glendora, says she won't take a short-sale offer to the bank unless it's reasonable. "The negotiator doesn't want to look at 12 offers," Rodriguez said. "He wants the best, highest and the most qualified ones."

Buyers looking for bargains should wait until short-sale and foreclosure prices are down about 35% from the peak market in their search area, said James Joseph, owner of Century 21 Ambassador in Brea and Whittier.

"Short sales and foreclosures are the nails in the floor of the market," Joseph said. "That's where the bargains are."

Housing woes now impacting community banks

Local community banks have long been an important source of financing for various homebuilders from those building custom homes to subdivisions. And, although these banks shied away from the sub-prime mortgages that have been decimating large, national banks, the housing slowdown is increasingly impacting community banks as builders short on cash are defaulting on construction loans. From the L.A. Times:

Home-mortgage specialists may have been the first lenders to suffer for their roles in financing the housing bubble. But, as foreclosures rise and home prices fall, many smaller banks and thrifts that backed residential developers and home builders are watching black ink turn red and are spending uncomfortable amounts of time with regulators. The financial institutions also are enduring jabs from critics who say they tossed lending standards out the window...

Residential construction loans, which generate big fees, were especially profitable for smaller banks -- until housing collapsed in places like the Inland Empire, where prices are down more than 30% from their highs, and the Central Valley, where some former boom markets are off more than 40%. Raw land on which Ontario-based Empire Land installed roads, sewers and utilities, expecting to then sell it to builders, has declined even more.

"In the Inland Empire, we're hearing land is going for 20 or 30 cents on the dollar" of its appraised value when the loans were made, said RBC Capital Markets analyst Joe Morford.

According to data tracker Foresight Analytics of Oakland, 15.8% of single-family home construction loans were at least 30 days delinquent in Riverside and San Bernardino counties last quarter, up from just 1.7% a year earlier. The delinquency rate was 14.7% in Los Angeles County, 14.9% in Orange County and 15.4% in Ventura County. It was 30.4% in Merced County, near Sacramento...

Regulators are now aggressively requiring banks to write down the value of questionable loans and to raise more capital to make up for those write-offs. That creates a pinch for banks, one that is apparent in their regulatory filings.

Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."

Other Inland Empire-based construction loan specialists also are feeling the pain.

Corona-based Vineyard National Bancorp, with $2.3 billion in assets, lost $70 million in its last two quarters, and its stock is down 82% from a year ago. It has blamed inland housing loans, though it also specializes in another tricky business, financing builders of expensive custom homes in West L.A., the South Bay and coastal Orange County. Its executives declined to be interviewed...

Home builder troubles haunted even City National Corp. of Beverly Hills, the Southland's largest commercial bank with more than $15 billion in assets. City National avoided the riskier segments of home-mortgage lending and suffered none of the losses on mortgages and bonds backed by home loans that have plagued larger competitors.

But City National's clients have always included home builders, and the bank paid the price as losses on builder loans contributed to a 22% drop in first-quarter earnings. That was despite the fact that such loans made up only 5% of the company's $11.8-billion loan portfolio, and few of them were made in the Inland Empire or Central Valley, CEO Russell Goldsmith said.

Gas prices forcing people out of suburbs

Although this trend of people moving back to urban areas has been happening for several years, it will likely be rushed by rising gas prices, which means that suburban areas without decent public transportation options will likely take a bigger hit. First, from a CNNMoney.com story:

It may seem a bit drastic, but more and more people are taking what is perhaps the ultimate step in cutting gas prices: They're moving...

Factors like distance from work, access to public transportation, and proximity to shopping are gaining ground on square footage and whether or not the home has a yard and pushing people into more densely packed areas.

"The high cost of gas is cited as a driving factor in increased interest in urban living," said Jim Gillespie, chief executive of Coldwell Banker, a national realty franchise. "Over the past several years we've seen a boom in downtown living all over the country."

It seems like the people actually making the move so far seem to be renters as opposed to owners, as not renewing a lease is obviously much easier than selling a home.

While their wallets may be happy, whether the quality of life is improving for the people who move is debatable.

"I went from a beautiful home with a big back yard to an itty-bitty studio apartment," said Erinn Thomas, who moved from a suburb of Reno, NV, to the downtown area to save on gas. "But it's what I had to do to eat."...

Next, from an L.A. Times article:

Rising gas prices may be the latest ailment afflicting the housing market, as figures released Monday showed Southern California home prices plunging 27% in May from a year ago and falling even more precipitously in distant suburbs.

Outlying areas like the Antelope Valley and the Inland Empire have long appealed to people who were willing to accept a burdensome commute for the chance to own a better house. But buyers are increasingly factoring gasoline costs into their purchase decisions, said Dan Griffith, a Rancho Cucamonga-based real estate agent...

Price drops were especially steep in far-flung suburbs. The median price fell 38% in Lancaster and 42% in Palmdale, compared with 23% in Los Angeles County overall.

San Bernardino County saw prices drop by 31%, but it was worse in the remote town of Victorville, where values declined 43%.

Christopher Leinberger of the Brookings Institution, a Washington think tank, says home values in these so-called exurbs may continue to languish long after urban markets begin to recover, thanks to higher gas costs.

"Under the old model we have lived with for the past 50 years, you could drive away from major employment concentrations until you could qualify for a house because cheap energy costs made it possible," Leinberger said. "Now as energy prices go up, the housing prices out there on the fringe take a major hit.".

Gov't Board rejects Grand Avenue project delay

The developers of the Grand Avenue project, The Related Companies, which had sought another 8-month delay for the $3 billion project in downtown Los Angeles, were recently rejected by the city-county government board overseeing the project and given a much shorter reprieve to August 15th. Expected to redefine the area surrounding downtown's Music Center and Disney Hall, apparently the board wants to explore its other options, including re-bidding the project out to another developer and scaling down the plans even though it hand-picked Related four years ago, in part due to its great success with the Time Warner headquarters near New York's Columbus Circle. So could this be a case of government not understanding economics and hoping for a magic wand solution? Possibly. Wouldn't it be better to delay the entire project and build it as planned rather than jump-start something boring? From an L.A. Times story:

The government board overseeing the $3-billion Grand Avenue project on Monday unexpectedly rejected the developer's request for an eight-month delay to begin construction on the development across from the Walt Disney Concert Hall. While both sides said they remain optimistic that the sprawling downtown Los Angeles development is on track, the vote is the strongest sign yet that government officials are growing concerned over repeated delays and hope to keep a tight rein on the developer they handpicked for the project almost four years ago.

Instead of approving developer Related Cos.' requested delay until February, the joint powers authority approved a motion by Los Angeles County Chief Executive William T. Fujioka giving the developer until Aug. 15. That's a much shorter period than expected, though one that could be extended when the authority -- made up of city and county officials -- meets in July...

...one county supervisor, Michael Antonovich, suggested that the Frank Gehry-designed project be scaled back because of real estate market conditions. "Given the stark economic climate," said Paul Novak, a planning deputy for Antonovich, "our best approach may be less of a 'grand' vision than the plan previously approved by the county and the city."

Novak suggested that the joint powers authority should revisit various components of the project, including the high-end retail stores and the five-star hotel. Grand Avenue is the linchpin in the effort to revitalize downtown L.A. and to bring in more affluent residents and retailers.

The development would rise around some of the city's landmark cultural institutions, including Disney Hall, the Museum of Contemporary Art and the Music Center. Related California President Bill Witte said after the meeting that his company would "just continue to work with the committee." The Grand Avenue project's first phase -- which includes a shopping center, hotel and two residential towers -- was once slated to be completed in 2009. But that date was shifted to 2011.

Now, Related wants to push the opening to 2012. Witte has said the delay in beginning construction would allow Related to finalize thousands of pages of construction documents before work begins. Because nearly 70% of building costs for the project would be for concrete and steel, completion of those documents may allow the developer to avoid overruns later.

Related has struggled to find the funding to get the project off the ground. The California Public Employees' Retirement System pulled out of Grand Avenue last year, saying it had too much investment in downtown. But a fund controlled by Dubai's royal family has invested $100 million in Grand Avenue, and Related is seeking an additional equity partner for the project. Grand Avenue is one of several major developments around the nation that have been delayed because of the credit crunch.

In Seattle, developers recently shelved plans for a $7-billion development, citing the poor economy. Huge projects in Las Vegas, Phoenix and New York City have also been scaled back or delayed, including part of the Gehry-designed Atlantic Yards in Brooklyn and a $14-billion development of the area around Penn Station on Manhattan.

How will the future U.S. economy look?

There's an interesting column in the L.A. Times by "Market Beat" writer Tom Petruno, in which he argues that despite the past chatter about a return to a 30's-style Depression or 70's-style "stagflation," there are some important distinctions about today's world economy which means we're even more likely to forge some new ground:

It would be handy for investors if Wall Street could agree on which decade the U.S. economy is about to relive.

But increasingly, no period from the last century seems to fill the bill...

Three months ago, there was plenty of talk about repeating the 1930s -- maybe not quite so horrific, but with many of the same destructive trends: rocketing unemployment, collapsing consumption and widespread asset devaluations.

It's still early in our housing-centered mess, but it's clear that the economy thus far has shown remarkable resilience given the ravaged state of our financial system...

If the '30s aren't the right template, how about the 1970s? Now, as then, commodity prices are surging, led by oil. That has stoked fear of inflation leaping into double digits -- the most enduring painful memory of the '70s other than leisure suits.

This week, two major companies announced price increases that had that ugly '70s feel to them.

Dow Chemical Co. -- which annually sells more than $50 billion worth of chemicals, plastics and other stuff worldwide -- said it would boost prices as much as 20% effective Sunday. Dow cited the "extraordinary rise in energy and related raw material costs."

And Eastman Kodak Co. on Friday said it would raise prices on certain products up to 20% July 1.

Just how many of those increases will stick remains to be seen, however. Because one of the cold realities of a slower economy is that pricing power is harder to come by, unless you've got something that the world just can't do without...

But there's a bigger reason to doubt that a '70s-style inflation spiral could take hold this time around: It takes two to spiral -- meaning, you need rising wages to give consumers the wherewithal to pay higher prices and create the vicious cycle of one feeding the other.

Wage growth? Now? Have you asked for a raise lately?

Unlike in the '70s, when cost-of-living increases for workers were routine, they now are "more the exception than the rule," says Paul Kasriel, an economist at Northern Trust in Chicago.

What's more, labor unions are far less powerful now than they were then, he notes, which limits the effect on wages in general from union-negotiated pay contracts.

Of course, real incomes weren't growing much in the early part of this decade, either. But consumption got a big assist in that period from the housing boom, as people cashed out some or all of their home equity. We know what happened to that trend.

Add to all of the above the downward pressure on wages of many U.S. workers from the effects of globalization (i.e., more competition all around the globe).

So this is good news? My pay isn't going up, and that will eventually help bring down inflation? It is, no doubt, a bitter pill. And at least in the near term, globalization could well make inflation worse.

America's status as a debtor nation means we have, in effect, transferred a huge amount of our wealth to the rest of the world. The slide in the dollar's value, one byproduct of that wealth transfer, means other peoples' purchasing power has risen while ours has fallen.

So even as we cut back on gasoline use, much of the rest of the world is more able to pay up for oil. That will help keep the price elevated until either global demand eases or supplies increase, or both. And higher energy costs will continue to make it difficult for formerly low-cost exporters (such as China) to keep a lid on prices of manufactured goods.

Still, in the long run, globalization should reduce the chances of sustained, '70s-style inflation by favoring innovators worldwide. The best way to keep prices in check is to make sure the best goods and services -- including ours -- can quickly find their way into the marketplace.

The flip side is that, by keeping our doors open to cash-rich foreign investors, we may help keep the value of our assets (including houses) from deflating as much as they otherwise might have, given our own financial struggles of the moment.

So it's not the '70s all over again, nor the '30s. It's a very different world, and we're making it up as we go along.

"A property tax base that moves with you"

My latest feature article for the real estate section of the Los Angeles Times on Propositions 60, 90 and 110 was published yesterday. Somewhat to my surprise for such a California-specific story, it's also been reprinted (at least on the websites) for other Tribune Co. papers including the Chicago Tribune, Baltimore Sun, Newsday and The Morning Call.

I want to thank those who made this story possible. Firstly, it would have not been possible without an email pitch to me from Realtors Barry and Serene Sulpor, who also put me in contact with John and Rose Osten, the couple featured in the piece. John was a great interview subject and gave me lots of financial details from which to work and tell his story of how these tax-saving measures worked for him.

Thanks again to others to whom I spoke for the article, including agents Lana Fears and Carey Ann Parker, Riverside County Assessor Larry Ward and Board of Equalization member Michelle Steel. Without their participation, there would have been no story to tell.

It's very hard to get people to talk on the record for newspaper articles, so if/when a reporter ever calls you for insight or a quote, please participate!

Luxury home prices in SoCal now also falling

According to a story in the L.A. Times, prices of luxury homes are also starting to feel the impact of a slower market. Although owners of pricier homes can withstand pricing declines longer than entry-level buyers with resetting mortgages, eventually the rich need to sell too and must lower prices in order to make a sale:

The rich may indeed be like the rest of us. Prices of their homes are now falling too.

Gated mansions and hillside estates have held their own through most of the real estate slump, but data released Monday showed big drops in the region's most exclusive neighborhoods...

Expensive markets often resist declines for several reasons. Sellers in high-priced areas often have a large amount of equity in their homes or own them outright. That makes them more able to sit on their houses and ride out a market downturn than people desperate to unload a house with a mortgage they can't handle.

But with the passage of time, sellers who want to move but have been waiting for a market turnaround grow weary of waiting, Berkeley professor Davidoff said.

"It's like being in a teakettle. People eventually want to get out," he said...

But some affluent buyers say high prices, not tough credit standards, are keeping them from purchasing a home. It's simple, they say: Just as in the under- $500,000 market, buyers will come forward in expensive neighborhoods when prices fall.

Simon Lee, a commercial real estate investor who has been shopping for a house in Bel-Air, Pacific Palisades and Brentwood, said he believes prices in those areas are still inflated in today's market.

"I think it needs a major adjustment, 25% or 30%," he said.

Lee said he was among a small group of bargain hunters scouring these Westside neighborhoods for homes priced under $2 million.

"I see the same people every week at the open houses," he said.

How did CalPERS so misjudge land investments?

There's a story in the L.A. Times about how CalPERS -- the California Public Employees' Retirement System -- misjudged the California land market by investing $1 billion in a land partnership that controlled 15,000 lots along Interstate 5 in the Santa Clarita Valley.

So what happened? First, from the Times story:

CalPERS, the nation's biggest public pension fund, and its partners acquired a controlling interest in 15,000 acres of undeveloped land in the Santa Clarita Valley early last year, before the meltdown in the housing market. The land, once owned by Newhall Land and Farming Co., was appraised at $2.6 billion at the time of the CalPERS investment but has dropped considerably in value since then.

Caught in a credit crunch, CalPERS and its partners in LandSource Communities Development are in talks with a loan syndicate headed by Barclays Capital Inc. to restructure $1.24 billion in debt. LandSource received a notice of default on April 22 after missing a payment of an undisclosed amount, and a Standard & Poor's online newsletter, citing anonymous sources, predicted that LandSource would file for bankruptcy this month.

CalPERS' LandSource investment is likely to pay off in the long run as continued growth in the Southern California economy increases pressure to build north of the San Fernando Valley...

CalPERS' potential problems with developing Newhall Ranch could reach beyond current difficulties with tight credit and an economic slowdown, said Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. Because of escalating gasoline prices and longer commute times, Newhall Ranch might be too far from central Los Angeles to function as a traditional bedroom community, Gabriel said.

"Residential development in the future is going to look different than in the past. We're in a new energy price environment," he said. "The emphasis is going to be on reducing commutes and carbon emissions."

The article makes some good points at the end, namely that we're now in a different environment for development planning than we were even a year ago.

Two years ago I spoke with a Wall Street fund also looking to invest in Santa Clarita Valley land, and at that time the conventional wisdom was that the area -- with a lot of local employers -- could probably ride out a downturn better than outlying areas such as the Antelope Valley or the Inland Empire. What no one counted on was the credit crunch and its aftermath, which has resulted in sharply lower land prices due to the lack of financing for both development and the home mortgages builders require in order to develop and sell homes.

Why no one saw this coming will be a great case study for the future, but to imply that CalPERS didn't due its due diligence with the best information available at the time simply isn't true. Not only will this change how communities are developed and financed, but will also undoubtedly impact the nature and scope of feasibility studies.

An update on the "Is Standard Pacific for Sale?" Post

I blogged earlier this week about a story in the L.A. Times theorizing that builder Standard Pacific might be for sale. Last night at a networking event, I got an update: there was a conference call on the company's most recent earnings, and as part of that call, management discussed that a sale was one of many possibilities available to the company, but that there were no plans to do so. The Times article made it seem like they were moving in that direction, but my source said it was stated simply because public companies are obligated to divulge all possibilities to their shareholders.