The Housing Chronicles Blog: 4/1/08 - 5/1/08

Wednesday, April 30, 2008

The ripple effect of builder bankruptcies

A couple of weeks ago, the L.A. Land blog of the L.A. Times asked me to write a guest post in opposition to an article by Daniel Gross in Slate magazine. Gross had labeled the potential tax credit to builders -- which would allow them to extend the tax-loss carryback from two to five years for losses incurred in 2007 and 2008 -- as "peverse, absurd, and unwarranted."

But where I took special issue with his thesis was this idea: "Homebuilders should look to the capital markets first, rather than to the government, especially when their financial situation is serious but not critical. The stocks of potential beneficiaries of the expanded carrybacks—big homebuilders like Lennar, Pulte, and KB Home—have plummeted. But they're nowhere near bankrupt."

The problem is that Gross ONLY focuses on larger builders, and conveniently ignores the tens of thousands of smaller companies which simply don't enjoy that same access to capital.

So of course I hope he sees an interesting series of articles now posted at, which focuses on the ripple effect of builder bankruptcies on suppliers, contractors and homebuyers. Perhaps it's easy for him to sit in an armchair and wave his index finger at perceived flakes and scofflaws, but I'm not sure it's that obvious:

Andrew Maletich says hedoesn’t trust builders anymore. His company, Bolingbroke, Ill.–based flooring contractor RiteWay Tile & Carpet, got stiffed for $120,000 when Burnside Construction went bankrupt a year ago. RiteWay is also one of seven companies on the unsecured creditors committee in the Neumann Homes Chapter 11 case and had $850,000 in mechanics’ liens filed against 80 to 90 of Neumann’s homes his company helped build.

As 2008 began, Maletich’s mistrust spilled into his relationships with other builders, two of which owed RiteWay $240,000 and $98,000, respectively. “They’re all in trouble, and they’re all on the same string with me,” meaning he will file a lien against any builder that doesn’t pay RiteWay within 75 days of its being billed. (In Illinois, contractors have 90 days to file a lien after submitting an invoice.)...

Neumann Homes had been struggling financially well before it filed for bankruptcy. “We knew they were having trouble [because] they weren’t paying their bills, which unfortunately was ­normal from year to year with them,” says Jim Hoffman, who owns J & E Nursery, a landscaping contractor in Libertyville, Ill., which had worked with Neumann since 1999 and was owed $45,818 when the builder went bankrupt.

Contractors filed a torrent of mechanics’ liens against Neumann’s properties in February 2007, according to Merritt Credit Bureau, a Chicago-based research firm that prepares ­mechanics’ lien notices and claims. (A mechanic’s lien is a lien on property that secures the payment of debts ­related to materials and labor. Construction on that property cannot continue until liens are resolved.) By the time it entered Chapter 11 eight months later, Neumann had $12 million in lien-­related claims to contend with (out of $151 million in secured claims), to say nothing of $134 million in unsecured claims, some of that owed to contractors, too. As of late January 2008, 75 companies in eight Chicago-area counties alone had filed 2,214 mechanics’ liens naming Neumann as first defendant, and another 130 where the builder is named second defendant...

The mechanics’ liens are complicated by the fact that several were filed against homes Neumann had sold prior to filing Chapter 11. Others were filed against unfinished or unsold homes on properties that five of Neumann’s eight bank lenders took back in exchange for debt relief. (In mid-March, for example, Neumann turned over six developments to Residential Funding, its largest lender, which agreed to reduce Neumann’s $90 million debt to $13.6 million.) The banks themselves must now resolve these lien obligations before construction can resume on those properties, if they decide to continue building on the land they took back...

Several of Neumann’s 22 communities were unfinished when it filed for Chapter 11. The builder was active in two subdivisions in Antioch, Ill., where about half of the proposed 1,400 homes had been completed and another 50 were under construction. Jim Keim, the village’s acting administrator, said in early February that infrastructure, such as street lighting, and amenities, such as clubhouses and pools, hadn’t been installed. Performance bonds ensure that this infrastructure gets built, said Keim, “and we’ve had talks with bond agencies about forcing the start of that construction by the spring.”...

Some of Neumann’s trade creditors told Builder they’d be willing to take on construction work or finish uncompleted homes, as well as any new homes the banks decide to place on the properties they’ve retrieved. Contractors are ­reluctant to turn down business in a bad market, but they are more careful about which builders they’ll work with. “What’s important is communication between our clients and ourselves,” says Steve Schwarz Jr., vice president of operations for Chicago-based SS Schwarz Construction, one of Neumann’s secured trade creditors. “What we’re saying to builders is that if someone sells a house, we’re ready to jump in and build it.”

But Hoffman thinks the “toughest question” contractors are asking themselves is, “When do you draw the line and tell a client you don’t want to work with them?” If market conditions don’t improve soon, the answer could become moot. “Even before Neumann, we’d recommend that contractors give customers a 60-day window,” says Cooney of Avenue Incorporated, who serves as outside counsel for other contractors. “That’s when I’d start sending letters demanding payment. Since Neumann, people are taking heed of that advice.”

Next, the fall-out for buyers:

The scene is all too familiar.Empty lots not maintained. Government foreclosure stickers and “for sale” signs litter the landscape. Potholes and partially paved roads offer visitors an uneasy entrĂ©e into this decade’s version of Paradise Lost.

This time it’s the Gardens at Stonebriar, an 80-unit subdivision in Memphis, Tenn., a housing development a mile or so down the road from many of the large warehouses that have made Memphis a major distribution center.

Memphis has had its share of housing debacles, such as when big builders Beazer and Levitt and Sons left the region last fall. That was about the same time that prominent local builder Matthews Brothers pulled up stakes at Stonebriar....

The residents say builder-owner Mark Matthews left them high and dry, with no one to address their warranty issues, pick up the garbage, or build out the community’s amenities. Many took on subprime loans and now can’t make the mortgage payments. While a different builder, Regency Homebuilders, plans to build out the rest of the project, many initial buyers are furious about what’s happened.

“Regency will be building out the Matthews Brothers models, but for $10,000 to $20,000 less and loaded with tile floors, granite countertops, and tall cabinets in the kitchen,” says Lamont Bethea, who paid $224,500 for his two-story, five-bedroom, 3,000-square-foot home when he and his ­family moved in during April 2006...

...almost all the residents have warranty issues, but many of them didn’t pester the builder the way they should have. Now that more than a year has passed for many homeowners, it’s unlikely that the warranty company, 2-10 Home Buyers Warranty, will honor any more claims... the problem many of the homeowners ran into was that as the home builder began to fail during the summer and into the fall of 2007, Matthews would refuse to go into arbitration on a warranty claim.

...unless the builder goes into arbitration, the home buyer cannot file a warranty claim. The alleged strategy essentially worked, as many of the homeowners are now long past the one-year warranty period.

And, finally, the smaller builders:

Jaguar Boulevard is a long,lonely testament to what has happened to the housing market in Southwest Florida. Miles from even a traffic light, it slices through the subtropical scrubland of the eastern edges of Lehigh Acres. Yet there are new houses here, dozens and dozens of them, many of them owned by residents who work—but can’t afford to live—in Naples, one county to the south...

For every neatly tended stucco ranch home, there are three or four that have been abandoned in some stage of construction. Some jobs got no further than the rough plumbing coming out of the ground before the money ran out and the builder walked away. Others are finished, sitting sadly on lots choked with weeds and strewn with trash.

This is the mess that builders in the market are dealing with and working against...

The impact on the builders who are still in the market has been painful and far-reaching. Aside from ­having to compete against thousands of foreclosures, short sales, and vacant spec houses, they are struggling to find subcontractors to complete the houses they do have under contract...

The situation turned particularly dark in February when a construction superintendent for a local builder was jailed. Local news reports said he pulled a gun on a subcontractor who had been stiffed for payment on a window installation and showed up on the jobsite to pull them out.

It’s also created a sizable—and understandable—skepticism on the part of prospective customers, who worry that the builder will shut down before their house is finished and leave them in the lurch.

Many builders, including Paul Homes, have added remodeling to their portfolio of services, often working with their ­previous buyers to upgrade their homes, hoping to hang on until the market ­improves. They’re also slashing prices on whatever spec houses they have left, trying to build up cash reserves to tide them over until the market starts to rebound.

Larry Webb to step down as CEO of John Laing Homes

In a surprise announcement to employees last week, longtime CEO Larry Webb will step down as head of John Laing Homes. Anyone who's ever heard Larry speak or shared a dinner table with him would certainly remember him from his great stories, and I'm sure he will be missed, both at Laing and at building industry functions. From an article at

The official release has yet to come out, but last week John Laing Homes CEO Larry Webb notified employees and trade partners that he was leaving the company. The move was a surprise to many stakeholders; Webb had contracted to stay on as CEO for five years when United Arab Emirates-based Emaar Properties purchased John Laing Homes for $1.05 billion in 2006. Robert Booth, managing director for Emaar Canada, will succeed Webb as chief executive.

Webb, a 20-plus-year industry veteran, got his start at John Laing as a division president in 1995. His fiery and magnetic personality quickly moved him into greater leadership roles in both the company and industry. Webb plans to use his newly found free time to relax and enjoy more time with his family.

The passing of the torch from Webb to Booth will take place over the next four weeks.

Higher jumbo loan limits so far a failure

According to a story in The New York Times, the new rules which went into effect on April 1st (April Fool's Day, no less) have proved to be more mirage than reality, and have failed to do what Congress planned when they passed the legislation in February:

In early February, Congress gave beleaguered mortgage borrowers a rare cause for celebration. As part of the economic stimulus package, it passed rules intended to make it easier and less expensive for people to take out hefty loans in the nation’s costliest housing markets...

Instead, the effort to make it easier to get jumbo mortgages — loans over $417,000 — has yielded frustration and disillusionment.

Since the rules took effect April 1, many prospective borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected. Relief, they say, has been replaced by grief...

Under the new rules, a sizable number of jumbo loan would be treated by the mortgage industry in the same way as smaller conventional loans. This change — raising the ceiling for loans backed by government-sponsored housing finance agencies to nearly $730,000 in the nation’s costliest locations — was intended to bring rates down for more borrowers and stimulate the lending that is needed to get the economy moving again.

The goal of making most of these jumbo loans accessible was aimed not at helping subprime borrowers, those people with spotty credit histories. Rather, it was meant for borrowers with good credit and ample down payments, but who wanted to buy a house or refinance a home loan in the costliest housing markets, like New York, San Francisco, Anchorage, Baltimore, Edwards, Colo., and Jackson, Wyo...

But the real concern over this program’s failure goes beyond people seeking million-dollar homes. The danger, economists say, is in how a wave of foreclosures and rising inventory of homes for sale will deepen and prolong the economic downturn started by the subprime mortgage crisis...

Robert Edelstein, a professor at the Haas School of Business at the University of California, Berkeley, said that it is essential to a healthy economy that jumbo borrowers in these upper-tier markets are able to get financing. “There could be a contagion,” he said, as the subprime woes “move up the chain.”...

Despite an eager consumer base, it appears few such loans have been made, according to John Bancroft, executive editor of Inside Mortgage Finance. He expects activity to pick up as the market adjusts to the rules. “It’s going to take some time,” he said.

But time may run out at the end of the year, when the system is supposed to revert to the old rules. Not surprisingly, lenders and their secondary investors are hesitant about changing their business for a short time.

And rates have not dropped — at least not to the degree that many borrowers and mortgage brokers had expected. In some cases, “conforming” loans, so designated because they conform to the government-sponsored rules, are a full percentage point below the newly conforming jumbo loans intended to be covered by the new law...

The reason has to do with the way loans are sold and securitized. Conforming loans carry a lower interest rate in part because lenders can package and sell those loans as mortgage-backed securities directly to either Fannie Mae or Freddie Mac or to private investors who know that the housing finance agencies can buy them later. And some of those loans can be sold even before they are finalized because they qualify for the “to be announced” market that allows fixed-rate mortgage-backed securities to be traded freely as interchangeable commodities.

An influential trade group of the nation’s largest financial institutions, the Securities Industry and Financial Markets Association, recently made a key decision that some critics say has kept those rates from dropping. The association decided that loans above $417,000 — even those jumbo loans now considered by law as conforming — would not be eligible to participate in the “to be announced” market...

But critics in Congress counter that lenders and the mortgage-backed securities industry have dragged their feet.

2007 CalPers land partnership already in trouble

According to a Wall Street Journal article, a land partnership from early 2007 involving the California Employees' Retirement System (CalPers) has defaulted on a loan payment while restructuring $1.24 billion in debt:

A large California land partnership involving one of the largest U.S. pension funds has received a notice of default on a $1 billion loan after failing to meet certain terms of its lenders.

LandSource Communities Development LLC, a partnership that involves the California Public Employees' Retirement System, received the default notice Tuesday, amid talks to restructure $1.24 billion of debt. The partnership, which owns 15,000 acres in Southern California, had received an extension to meet its current loan terms, including a required payment, but the deadline expired on April 16. The default notice applies to about $1 billlion of the total debt...

Hundreds of lenders, including banks and institutional investors, hold the syndicated debt. Barclays Capital arranged the financing in early 2007. At the time, LandSource's assets were appraised at $2.6 billion.

Partnerships such as LandSource were a common way to own and develop land during the housing boom. They provided high returns to investors and lenders and a way for builders to keep highly leveraged land off their books. But the ventures have run into trouble as the value of undeveloped land has plummeted and as demand for new homes has eroded...

One problem with ventures such as LandSource is that they typically require builder partners to acquire land on a schedule, even if they don't need the lots. They also can require partners to contribute more equity if the land's value falls below a threshold.

Will the rapid decline in prices bring the bottom sooner?

Hat tip to the excellent L.A. Land blog for this find: According to the Center for Policy and Economic Research, $6 trillion in housing wealth will vaporize in 2008 due to the rapid decline in housing prices, which some argue could help the market finds its natural bottom sooner:

The Case-Shiller data released yesterday indicate the rate of house price decline is accelerating. The 20-city index declined 12.7 percent over the last year, while the 10-city index fell 13.6 percent. However, the annual rate of price decline over the last quarter was 24.9 percent in the 20-city index and 25.8 percent in the 10-city index. At this rate of price decline, the excesses of the housing bubble will have largely disappeared by the end of the year. At the same time, the price decline implies an incredibly rapid loss of wealth. In real terms, the rate of price decline in the 20-city index would imply a loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner.

Year over year prices are down by 17.2 percent in San Francisco, 19.4 percent in Los Angeles, and 22.8 percent Las Vegas. Over the last quarter, prices in these cities have declined at annual rates of 26.5 percent, 26.3 percent, and 40.8 percent, respectively. Prices are even falling sharply in less inflated markets. Prices in Boston are down 4.6 percent year over year, in New York by 6.6 percent, and in Washington by 13.0 percent. Over the last quarter, the annual rates of price decline have been 15.9 percent, 11.4 percent, and 26.8 percent, respectively.

The new homes sales data released last Friday are also consistent with the picture shown in the Case-Shiller index. Sales were down by 8.5 percent from the February rate and by 36.6 percent over the last year. The Northeast showed the sharpest decline with March sales down 19.4 percent from February and 64.6 from year ago levels. The weak sales levels in the Northeast were likely in part due to better than usual weather in the prior two months, which may have pulled some March sales forward. An inventory equal to 11 months of sales (which does not include canceled sales of homes that were never occupied) will provide substantial downward pressure on prices going forward. ..

All signs point to a continued sharp decline in the market, which should get us to the bottom sooner...

In the first quarter, the vacancy rate on ownership units hit a record 2.9 percent. Before the recent crash, the vacancy rate on ownership units had never exceeded 1.9 percent. The rental vacancy rate also rose, although at 10.1 percent it is still slightly below the record of 10.4 percent set in the first quarter of 2004. Not surprisingly, the West showed the biggest increase in vacant ownership units, with the rate rising from 2.6 percent last year to 3.2 percent this year. With record vacancy rates, the downward pressure on prices should continue for the foreseeable future.

Fortune 500 listing demonstrates public builder pain

This year's Fortune 500 list has been released, and the nation's top 8 public homebuilders lost a collective $5.8 billion on revenues of $67 billion in 2007, led by Pulte (-$2.26 billion) and Lennar (-$1.94 billion), which were the leaders in taking impairments for land write-downs and lower prices/incentives. Other builders realized lesser losses -- less than $1 billion -- including KBHome (-$929 million), DR Horton (-$713 million) and Hovnanian Enterprises (-$627 million).

Still, some builders on the list actually managed to squeak out a profit last year, led by NVR, which builds mostly as Ryan Homes ($334 million) and Centex ($268 million).

Not surprisingly, profit margins as a percentage of revenues were paltry or in negative territory, with a median of -9% and ranging from +6% (NVR) to -24% (Pulte Homes).

Want to know how each individual builder performed on this list? Click here for the searchable database.

Tuesday, April 29, 2008

Land developer Empire Land files BK

Empire Land, the land development firm founded by building veteran Jim Previti after selling his homebuilding company, Forecast Homes, to K. Hovnanian in 2001, has recently filed for bankruptcy to stave off its creditors. It's a tough time to be a land developer -- land is expensive to carry and can't be depreciated -- so even though Empire was one of the largest land holders in Southern California's Inland Empire, falling values have taken their toll. From an L.A. Times story:

Empire Land, an Ontario-based land development company, has filed for bankruptcy protection, joining at least a dozen home builders that sought protection from creditors in the last 10 months as home sales and prices slumped...

The closely held company listed assets and debt of $100 million to $500 million in its filing and asked for more time from the court to provide specific financial information. Developers including Tousa Inc., Levitt & Sons and Kimball Hill Inc. have sought bankruptcy protection since June, hurt by the housing crisis.

Empire Land and its affiliates build so-called master-planned communities, large-scale projects that include commercial buildings and schools, in California and Arizona. Empire Land had assets with a book value of about $106.4 million as of Jan. 31, according to the court papers.

Monday, April 28, 2008

Why Fed Chief Bernanke should keep cutting rates

Business Week Chief Economist Michael Mandel argues that Fed Chief Bernanke should continue cutting rates until the financial markets have stabilized:

We live in a boom and bust world—and it’s not the Fed’s fault. As we wait to see what the Fed does on Wednesday, one thing is clear to me: Bernanke and his crew need to keep cutting rates until the economy and the financial markets stabilize, and not worry about the naysayers.

Since the middle of the 1990s, I’ve followed a very consistent theme in my writings. I’ve argued that we live in a high-volatility, high-growth world. High-risk, high-return: The two things go together.

In the second half of the 1990s, we had the Information Revolution, the Internet, and the tech boom. Then we had the tech bust. All told, the combination of boom and bust moved technology—and the economy—much further and faster than pessimists would have predicted in 1995.

Then in this decade we had the China and India booms, along with the housing boom across much of the world. Followed, of course, by the housing bust—but unless the housing bust leads to a megarecession in the U.S., the combination of boom and bust will have moved the global economy much further and faster than pessimists would have predicted in 2001 or 2002.

These booms and busts are not caused by Fed policy, or indeed central bank actions. Rather, they are the natural working out of increasingly efficient financial markets, combined with the much faster transmission of information and ideas across national borders. And these are good things. Over the past ten years, through boom, and bust, and boom, and bust, global per capita incomes have soared...

It is not the Fed’s role to smooth out the boom and bust cycle. The Fed is not omniscient, it does not know what the “right” level for the economy and the markets are. The best that it can do is cushion the damage of the bust, both for businesses and for consumers.

The last 10-15 years have had plenty of minuses. Consumers took on a lot more debt than they should have, perhaps $3 trillion worth. The U.S. lost a lot more manufacturing than it should have. And the Chinese economy is probably shaping up for the mother of all busts after the Olympics.

But none of this can be blamed on the Fed. The central bank needs to take care of its particular responsibilities—taking action to keep the financial system intact. And if that means cutting rates again and again, that’s what it should do.

Big builders must get out of land development, economists say

Economists Carl Reichart (Wachovia) and David Goldberg (UBS) contend that the nation's largest homebuilders need to get back to their roots as manufacturing companies and continue to pull back from land development, which ties up capital and reduces potential efficiencies. From a story in the Nation's Building News:

The large, public builders will have to consolidate operations and focus more on construction than land development or risk facing “hyper-competition” with each other that could prolong the downturn, Wall Street analysts said at NAHB’s Spring Construction Forecast Conference in Washington, D.C. last week.

The analysts, Carl Reichardt, Jr., with Wachovia Capital Markets, LLC., and David I. Goldberg, with UBS, also said that widespread acquisitions and bankruptcies among the big builders were unlikely as a result of the downturn ― even though the big builders compete with each other in nearly every major market in the country and their overall market share has shrunk from a peak of 26% in 2006 to about 20% today.

The big builders currently operate in 78 metro markets. Ten or more big builders are competing against each other in 19 of the markets and at least six big builders are competing in nearly half the metro markets.

Reichardt said the top public builders have increased their liquidity during the downturn and are beginning to reduce their “store” count — the number of communities where they operate.

But he added that they still risked remaining in a price-based competition with each other that would “mute the recovery” and “compound the cyclical excesses” largely because most of the big builders based their run-up during the boom times on land and are in too many markets.

Goldberg said the public builders have “cut prices pretty drastically” to reduce their inventories, but that during the boom years most of the builders got more involved in development and buying raw land.

“The industry must change,” Reichardt said. "Right now, the home building industry is a land-based business.” The large builders, he said, must “shift back to their core markets” and core competencies of “building and contracting.”

Reichardt said the builders could have to get out of land development and adopt a “land lite” business model.

“The home building industry is really a manufacturing industry,” Reichardt said, adding that he hoped the big builders would “reinvent themselves by focusing on processes and efficiencies.”

Going forward, Reichardt and Goldberg said that land development might eventually be conducted by developers partnering with “land finders” — people with enough money to invest in land development. Both said there were enough land investors waiting for the market to turn...

Goldberg said the tighter lending standards now in effect will drive less liquid builders out of the industry, but that the public builders will be able to survive.

Reichardt said the downturn is pushing the big builders and the home building industry into a period of slower long-term growth and lower returns. "The growth phase will be much slower,” he said.

In the short run, Goldberg and Reichardt both expect the big builder share of the market to shrink, but they said that, over time, their share would begin to increase again.

Economists dissect the current housing market

There were three different economists opining at the NAHB Spring Construction Conference. All are hoping that the worst is behind us, but that builders need to adapt, Congress needs to act and sales need to increase so inventory levels are reduced; From the Nation's Building News:

The outlook for housing and the economy should be gradually brightening within a few months, but before there can be any assurance that the worst of the downturn is over, there needs to be a pickup in home sales, according to panelists at NAHB’s Spring Construction Forecast Conference on April 24 in Washington, D.C.

Residential production and sales this year have declined “more sharply than anticipated,” said NAHB Chief Economist David Seiders, and the situation for the U.S. economy “definitely has darkened,” with more than an even chance that it has lapsed into a “mild” and brief recession in the first and second quarters.

Seiders said that he continues to believe that new single-family home sales will stabilize during the middle of this year, paving the way for an upturn in late 2008 and in 2009 and leading to improvements in housing starts next year. However, “the sales side has to be off the deck before starts stabilize and move up,” he said...

Through March, Seiders said, NAHB surveys of 30 large builders accounting for 25% of sales nationwide, showed “no signs of stabilization, although the rate of the decline may be slowing.” Likewise, the NAHB/Wells Fargo Housing Market Index, which polls builders to gauge their opinion of current sales conditions and demand six months down the road, remains close to its record low recorded in December and “shows no recovery yet, implying further deterioration of sales.”

“We need demand to revive to turn around the market,” Seiders said, and he suggested that a temporary tax credit for home buyers, an approach being considered in housing and economic stimulus legislation on Capitol Hill, could help provide the impetus to boost sales and end the downward spiral in home prices that is the biggest concern for the health of the nation’s economy.

As home prices have declined, he said, “underwater” mortgages with balances exceeding the value of the home have been adding to the deterioration of loan quality that began in the subprime sector last summer. This is “bad for the financial markets,” he said, and could result in further tightening of lending standards, yet more foreclosures and even softer housing demand.

Economists participating in the conference were fairly optimistic that the downward turn in housing prices, while substantial, will taper off before it takes a toll on the longer-range outlook for the economy, but nobody can know for sure, they said...

Nariman Behravesh, chief economist for Global Insight, cited a “sizable risk,” perhaps 30%, that the U.S. will experience a double-dip recession in 2009 because the fiscal stimulus enacted by Congress will pull growth into 2008 that otherwise would not have occurred until next year.

However, the current recession, like the one that occurred in 2001, is far different from those preceding it in the 1970s and 1980s, which were precipitated by high inflation, tightening by the Federal Reserve and rising interest rates.

In 2001, he said, “manufacturers were hammered, but housing was doing okay.” Today, just the opposite is happening, with U.S. export growth strong. Core inflation remains “reasonably stable” at 2.25% and looks headed back into the Federal Reserve’s 1% to 2% tolerance range.

The financial crisis precipitated by the subprime meltdown last summer “is off the front pages,” he said, “and things are calming down a bit; the worst may be behind us.”

The financial markets “woke up last August to the fact that there was a lot of toxic waste out there,” he said. Of the estimated $400 billion in global losses caused by the subprime problem, about $270 billion to $280 billion has already been declared, leaving about $100 billion in write-downs that the markets will have to face and probably be able to handle.

Behravesh added that he is “a little skeptical” of talk about the U.S. today facing the worst financial crisis since the Great Depression. At the height of the S&L crisis 20 years ago, 2,700 financial institutions failed, he said, compared to “very few” so far today.

Also, the Fed “has really cranked things up to calm the financial markets,” including its rescue of investment bank Bear Sterns and stimulative interest rate cuts, which most likely will include an additional one-half percentage point reduction in the federal funds rate before this summer. “I would have to give high marks to the Fed for crisis management,” he said...

Behravesh did, however, cite downside risks to his relatively upbeat forecast for the economy. Among signals that are “flashing yellow or red,” housing remains “a long way off from recovery,” consumer spending “has come to a halt” and will remain weak next year, and, most worrisome, the recovery will be “tepid” once it starts.

Housing sales should start turning around during the second half of this year, he said, concurring with Seiders, and house prices will continue to decline in the next year or so even as housing production improves...

Jim Glassman, managing director and senior policy strategist with J.P. Morgan Chase & Co., noted that the three out of four Americans who now believe that the nation has entered into a recession may well be correct if by that they mean that the economy is “not so great. But if you mean that the wheels are coming off the wagon, I don’t think so.”

If the economy were really falling apart, he said, job layoffs would be accelerating to 500,000 to 600,000 a week; they recently have been in the mid-300,000 range.

“The elephant in the room,” Glassman said, “is what’s going on with home prices,” which is still causing “a lot of stress in the financial markets.”

Home prices are down about 12% since the height of the housing boom in 2005 and incomes have grown 14%, bringing “prices relative to income to about where they were in 2003” during this year’s first quarter, he said. “We have flushed out most of the excess.”

Glassman said his guess is that home prices will decline 5% or so further, but gloomier forecasts foresee another 15% to 20% drop, and what will actually happen is probably somewhere in between those two views. “By fall, we will start to see that most of this is over,” he predicted, but he conceded that he wished he knew “where home prices would settle out.”

Once the economy does show signs of stabilizing, Glassman said it would be a mistake for the Fed to quickly reverse course on interest rates, as some have suggested it should do, because the financial markets will be going through a difficult transition for some time, and this will require a “different monetary policy.”

Last summer’s financial crisis was precipitated by investors discovering that they had assets with exposure to credit risks they hadn’t been thinking about, and this has challenged the concept of securitized finance that has taken hold, he said. It will take a decade to restructure the system and restore the confidence of investors and provide them with the transparency to see where the risks lie...

Glassman also said that prospective home owners will have to return to how their parents bought homes and start saving more money for a downpayment.

“The customer you have known for the past 20 years is not the customer you will know in the next 10 years,” he said, as the economy transitions into a new era that “won’t feel like it has as much oomph.”

The best news for the economy, he said, is that the emerging economies, largely in Asia, are doing fine and providing strong demand for U.S. exports and providing U.S. companies with “spectacular levels of profits.”

“The world has never seen such great economic performance since the dinosaurs,” Glassman said, and as a result, the winds are shifting in favor of regions of the U.S. that rely heavily on exports, including Michigan.

In NAHB’s latest housing forecast, new single-family home sales are projected to decline 21.8% this year, to 605,000, before climbing 18% in 2009 to 714,000.

Total housing starts are forecast to decline 29.5% to 948,000 in 2008 and rise 10.8% to 1.05 million next year. Most of this year’s decline will be concentrated in single-family production, which is expected to drop by 37.1% to 653,000 homes.

Housing Chronicles cited in most recent Carnival of Real Estate

Many thanks to Joshua Dorkin at for citing our latest entry to The Carnival of Real Estate on his Real Estate Investing for Real blog, "Is there really gold in building green?"

Vacant homes set new record

Those holding out hope for a rebound in the housing market will have to be patient, as the percentage of vacant homes in the country has set a new record. Look for builders to continue pulling back on new construction as incentives seem to be lost on buyers waiting for the bottom to hit. From an AP story:

The percentage of vacant homes for sale in the U.S. set a new record high in the first quarter of this year, the government said Monday.

The Census Bureau report shows that 2.9 percent of U.S. homes _ excluding rental properties _ were vacant and up for sale, compared with 2.8 percent in the fourth quarter of 2007. It was the highest quarterly number in records going back to 1956.

That works out to 2.28 million properties, up from 2.18 million in the same quarter last year, according to the report.

The West had the biggest gain in vacancy rates among homeowners, rising to 3.2 percent in the January-March period from 2.6 percent in the same quarter a year earlier. Vacancy rates inched up in the Northeast and remained steady in the Midwest and South. The national vacancy rate, including new and existing homes, has been steadily rising since mid-2005...

The Census Bureau's report also said that the U.S. homeownership rate remained at 67.8 percent in the first quarter, down from a peak of 69.2 percent at the end of 2004.

The housing market's five-year boom is quickly becoming a faint memory, as sales and home prices have fallen dramatically over the past two years in once hot areas such as California and Nevada.

Last week, a Commerce Department report said sales of new homes plunged in March to the slowest pace in 16 1/2 years.

Centex Corp., Pulte Homes Inc., Hovnanian Enterprises Inc. and other builders have been caught with unsold properties over the past year as mortgages became harder to get, sales slowed and the economy soured.

Builders have slashed prices, but the discounts have done little to lure buyers who are holding out, uncertain about when the price-drop will stop.

The National Association of Realtors reported last week that sales of existing homes also fell in March, dropping by 2 percent, with prices declining on a year-over-year basis by 7.7 percent.

Saturday, April 26, 2008

Backlash against housing bailout continues to grow

Ever since the issue of sub-prime and Option ARM loans arose to lead the housing market into its historic crash, I've been asking the simple question, "Why would someone sign something they didn't read or understand?" One common reply is, "Well, not everyone's like you, some people simply relied on their brokers and agents to explain it to them."

Fine. But there's a growing consensus among the anti-bailout crowd that you can't claim to be a responsible adult in the U.S. today and not read what you sign. From a story at CNNMoney:

Why should American taxpayers have to pay to bailout reckless lenders and borrowers?

The website, launched just last week, has a vitiation demanding that Congress not pass any bailout programs that reward risky borrowing and lending. To wit: "Let the free market sort it out!"

The petition is gathering 40 to 50 signatures per hour, according to spokesman Adam Brandon, who adds that the site is already getting 15,000 visitors a day...

"A third of the American public rents," Brandon pointed out. "They're saying 'I've been saving for a mortgage for years. I could have jumped in on a subprime loan too. Now I'm going to have to pay for a government bailout."...

Many readers agree, expressing outrage at the idea of seeing their taxes used to keep people in homes they never should have purchased...

Many people would prefer the government do nothing at all to prop up the housing market -- especially those hoping to buy in a more affordable market.

Patrick Killelea has been blogging about the housing bubble at for four years from San Francisco, where it takes a not-so-small fortune to buy.

"Bailouts reward bad behavior. I've been diligently saving, denying myself lots of things so I can afford to buy, yet the government is saying we have to keep all these people in their homes," said the Web site programmer and author. "Well, wait a minute! Why can't I spend more than I can afford and have the government bail me out."... is another newly minted site devoted to the bailout backlash. "I just got really angry," said blogger Morgan Ward Doran, an L.A.-based attorney who isn't professional involved with the housing industry. "Everyone I hear from is against the bailouts."

Doran argues that lenders, brokers and home builders all made huge profits by overbuilding houses pushing through poorly underwriten loans, and now they want taxpayers to cushion their fall.

Indeed, there is a provision in the Senate bailout bill that would give extensive tax breaks to home builders, which has some people especially incensed...

Most people who are against bailouts trust the market more than the government.

The fastest way to return to normalcy is to let the market work, according to's Adam Brandon. He acknowledges that the impact on some homeowners will be devastating, but that things will get even more painful if we don't let the free market work its magic.

"I feel terrible for people losing their homes," said Brandon, "but the sooner we let the market sort this out, the sooner we can get back to growth. When the government gets involved, it can delay the inevitable."

Much more to the credit crunch than sub-prime loans

There's a review of two different books on the credit crash in the April 28th edition of Business Week magazine: "The Trillion Dollar Meltdown" and "Bad Money." Both books posit that the credit crash is due more to the excess power of Wall Street and the financial community than sub-prime loans, which were merely a symptom of a style of free-market capitalism that got out of control. So what will the consequences be? Certainly some pain -- but not until those in power admit the extend of the problem. From the BusinessWeek website:

Are you confused about how so much American debt could vaporize so fast, threatening to take down the global financial system? Are you wondering what should be done to prevent another systemic crisis in the markets? Are you puzzled over what it all means? Two recent books offer answers to these vital questions. Both place the credit crash in historical context. Each author believes Wall Street and the financial community have far too much power. More controversially, both argue the fallout will result in a dramatic transformation of the U.S. economy. The Trillion Dollar Meltdown by Charles R. Morris deserves a spot on any bedside reading table. Morris, a former banker and sometime writer for The Atlantic Monthly, more than accomplishes his stated goal of telling his story "briefly and crisply." For instance, he manages to make clear both the mechanics of slicing and dicing collateralized debt obligations (CDOs) and why these and similar securitized credits and derivative securities went spectacularly bust. Bad Money by political analyst and author Kevin Phillips is more ambitious, tracing the current "global crisis of American capitalism" to the politics of peak oil, the rise of financial mercantilism, the triumph of market fundamentalism, and even the spread of religious conservatism...

Morris puts to rest any lingering notion that the credit crisis reflects merely an inflated housing market, let alone a simple subprime problem. He estimates that writedowns and defaults of residential mortgages, commercial mortgages, junk bonds, leveraged loans, credit cards, and complex securitized bonds could reach $1 trillion. (The International Monetary Fund recently picked that number for the global write-off.) The figure could double or triple should there be widespread market panic. Little wonder that the Federal Reserve Board has been working so hard to stave off financial contagion...

In essence, Morris traces America's credit madness to the rise of Chicago School free-market capitalism, best represented in the work of late Nobel laureate Milton Friedman. That ideology supplanted Keynesian liberalism, which gave government a key role in achieving low inflation, low unemployment, and fast economic growth...

Now, though, he believes Chicago free-market ideology is washed up, like Keynesian liberalism before it. "The current conservative, free-market cycle...seems to have long since foundered in the oily seas of gross excess," writes Morris.

Beneath the free-market paradigm, three trends conspired to create the great credit bubble. First, residential mortgages, leveraged buyouts, and other loans gravitated away from banks to global capital markets. Second, the securitization of everything meant that lenders ceased to care whether loans were good or not; they thought only about pocketing enormous fees. Third, portfolio managers' increased reliance upon quantification left them with a flawed image of reality—artificially tidy and apparently risk-free. A final culprit: former Fed Chairman Alan Greenspan, whom Morris faults for cheerleading the deregulated financial markets, allowing easy money to flourish, and failing to disabuse Wall Street of the notion that the Fed will always bail out the financial markets...

He also takes a stab at what might come next: a long-term decline of the U.S. economy, especially if political leaders and financial elites try to mask how deep the credit crisis runs. However, Morris holds out hope that better days lie ahead if elites exercise leadership in the mode of '80s Fed Chairman Paul Volcker, who slew inflation and restored trust to the U.S. economy. Nevertheless, Morris anticipates a nerve-wracking denouement...

The debate about the political significance and economic implications of the credit crash are just beginning. To varying degrees, these books stake out the arguments for returning to a world where finance serves society rather than the other way around.

Fed rate cuts helping sub-prime mortgage resets

It looks like the cuts by the Fed in interest rates have had a calming effect on potential sub-prime mortgage resets. From a story in the L.A. Times:

The great mortgage reset of 2008 isn't turning out quite as advertised.

Thanks to interest rate cuts by the Federal Reserve, payments on sub-prime loans with expiring "teaser" rates are going up only modestly when the loans start adjusting -- by just 1% on average last month, one study found...

Defaults and foreclosures are still rising, however -- it's just that the culprit isn't solely the payment shocks once feared.

Instead, industry experts put most of the blame on tumbling housing prices, which have left many borrowers owing more than their homes are worth after making little or no down payment, taking on second mortgages or sucking their equity dry through refinancings...

Lower short-term interest rates also help certain other adjustable-rate borrowers, including people with home equity lines of credit, which have interest rates at or close to the prime rate. The prime rate, which was 8.25% a year ago, was at 5.25% this week.

Holders of controversial "pay option" mortgages, which allow borrowers to pay so little that the balance rises, also will benefit.

Facing what was shaping up to be the worst wave of foreclosures since the 1930s, the Fed lowered its benchmark rate for short-term loans between banks by 1.25 percentage points in January and by an additional 0.75 of a percentage point March 18.

In response, the index for most sub-prime loans -- a European inter-bank lending rate known as six-month U.S. LIBOR -- fell to 2.4% on March 18, the lowest level in more than three years, a recent Standard & Poor's study noted.

The Federal Reserve cuts were aimed in part at stemming foreclosures and propping up the slumping housing market, which many economists believe has tilted the economy into recession.

But the reduction in interest rates hasn't revived the moribund sub-prime lending market, economist Morici said.

Big investors such as pension funds, burned on mortgage investments, now will buy only those mortgage bonds backed by the safest prime loans or guaranteed by government-sponsored entities. And that, Morici said, has cut off sub-prime lending to potentially worthy borrowers with some credit dings and also loans for self-employed people and others in the "alt-A" loan category between prime and sub-prime...

The Fed also has little control over long-term fixed mortgage interest rates. The average rate on a 30-year fixed-rate mortgage rose to 6.1% after the Fed reduced short-term rates in January because investors feared that the stimulus to the economy might fuel inflation. The rate had moved back down to 5.8% as of Thursday.

Consumer advocates said lower resets were no substitute for the five-year rate freeze that Treasury Secretary Henry M. Paulson Jr. had promoted back in December. Under that plan, many lenders had pledged to leave unchanged the teaser rates for sub-prime borrowers if their payments would become unaffordable because they were rising by 10% or more.

"The important thing for a family getting a [rate freeze] loan modification is that it provides long-term stability," said Kevin Stein, associate director of the California Reinvestment Coalition, who testified last week before the same House subcommittee as Deutsch. "Getting a temporary small increase based on a LIBOR index that can go back up in a few months is not going to do that."

Still, the lower resets are very real for what the industry describes as typical sub-prime borrowers. Their loans might start with an 8% rate for two years, the S&P study noted, then start adjusting twice a year to six-month LIBOR plus 6 percentage points. If LIBOR was 5%, the borrower would pay 11% interest on the loan...

After recent news articles questioned whether banks were properly reporting the interest rates used to calculate LIBOR, it crept back up a bit, to just over 3% last week.

But most sub-prime loans adjust by adding 5.5 or 6 percentage points to the index, meaning adjusted rates would be in the 8.5% to 9% range, not the double digits that had been feared last year when Paulson was promoting a "streamlined modification plan" to freeze the initial interest rates.

Friday, April 25, 2008

Sneak peek at the Builder 100 for 2007

Although public builder D.R. Horton retained its status as the #1 homebuilder by closings, private builder David Weekley homes surpassed Shea Homes for the first time as the top for-profit builder not publicly owned. From a story:

Stop the presses: David Weekley Homes eclipsed Shea Homes as the biggest private for-profit builder in the country last year, according to Builder magazine’s Builder 100 survey. Companies in Builder magazine’s annual Builder 100 list, to be released online in early May, are ranked by closings...

Shea remained the largest private builder in terms of revenue, with $2.15 billion in revenue, followed by Weekley at $1.34 billion, and the Related Group, a Miami-based condominium builder, at $1.257 billion...


Pct. change (v. '06 closings)

'07 Closings

'07 Revenue

















KB Home




Hovnanian Enterprises








Beazer Homes



The Ryland Group




MDC Holdings




Most Builder 100 companies recorded a double-digit decline in sales last year. Condo builders bucked the trend. The top 10 condo builders on the Builder 100 did about the same business in 2007 as they did in 2006.

For the second consecutive year, Miami-based Lennar Corp. topped the For-Sale Condo list, closing 3,136 units. Lennar was followed by The Related Group (2,082), MCZ Development (1,735), Epcon Communities (1734), and Centrum Properties (1,657), all condo specialists.

Virtually all of the The Related Group’s closings were in Miami and Ft. Lauderdale. Centrum Enterprises, which closed 691 for-sale condos in Miami last year, plans to enter two more states next year. Epcon projects that it will do even more condo business in 2008.

More bad news for homebuilders

Attendees at the NAHB Spring Construction Forecast were treated to even more bad news, courtesy of the latest new home stats from The Commerce Dept. From a story by Ethan Butterfield:

New-home sales are down 8.5 percent from February and the months’ supply of new-homes rose to 11 months, a record-high, NAHB chief economist David Seiders told the several hundred audience members in attendance at the NAHB’s headquarters to a chorus of subdued groans and whistles.

And those numbers ( do not count cancellations, which many large builders are seeing at levels of up to 40 percent of sales. In other words, there is far more inventory of new homes than just 11 month’s worth, especially as home sales continue to decline...

Nariman Behravesh, chief economist for Global Insight, said Thursday that total financial losses from the subprime mortgage mess would be about $400 billion, but that only $250-$280 billion of that has been declared so far. That means there may be as much as another $150 billion in losses to come.

“There will be more bad news, and it could create a revisitation of this crisis, but it’s probably the case that the worst is over,” Behravesh said.

Still, housing is far from a recovery, he said. Consumer spending has slowed to a trickle in the first half of 2008, but will likely pick up with the fiscal stimulus’ tax rebates, then will likely trail off again, creating a “W”-shaped recovery, Behravesh said.

“What these rebates are doing is pulling growth forward from next year to this year,” he said.

And if energy prices continue to rise, the fiscal recovery may be undermined, Behravesh said...

Mark Zandi, chief economist for Moody’s, said Thursday that 8.8 million home owners are now in just that negative equity position, and that number could rise to over 12 million without federal intervention.

And today’s American doesn’t have the savings to weather the storm, Zandi said.

“If there is any disruption to their income, they’ve got a real big problem,” he said, pointing out that major disruptions in income used to be if somebody lost their job, or there was a divorce or death in the family. Now, needing to replace a hot water heater is the equivalent, because people do not have the excess cash. “They are living on a tenuous financial edge, and they are going to end up in foreclosure, and add to that mountain of inventory.”

And consumers owe far too much money to creditors, with over $700 billion of debt (of all kinds, not just mortgages), in default or delinquency, Zandi said.

“That has more than doubled in the last couple of years, and that’s putting a lot of stress on the system,” he said.

Zandi, now an advisor for Senator John McCain’s Presidential bid, also pitched a three-pronged plan to save housing. First, a temporary tax credit for buying a home. Second, the Federal Reserve could hold reverse auctions for banks to allow credit to flow more cheaply, and so more freely to help the housing market regain its footing. Third, a mortgage write-down plan to save home owners from falling into foreclosure could be enacted...

“In times of crisis, we should use the triple-A credit of the United States,” Zandi said. “If they don’t, (the economic trouble) is not going to be short, it’s going to be a rather painful, prolonged downturn that extends through the rest of the decade.”

Zandi projects new-home sales to bottom in the second quarter of 2008, over 30 percent below their peak levels from the boom. New-home starts are likely to bottom in the second half of 2008 more than 60 percent below their peak level. Home prices will likely finish about 24 percent below their peak levels, and likely not until the second half of 2009, Zandi said.

Kimball Hill Homes files for bankrtuptcy, plan is approved

Earlier this week, Kimball-Hill Homes, a large builder based in Illinois, filed for bankruptcy, further demonstrating that this current downturn is certainly the most severe in a generation (or two). From a story:

Despite having more than $60 million in cash, Rolling Meadows, Ill.-based Kimball Hill Homes filed voluntary Chapter 11 petitions for reorganization in the United States Bankruptcy Court in the Northern District of Illinois on Wednesday, April 23...

Unlike many companies that file for Chapter 11, Kimball Hill has the advantage of $60 million in liquidity, which eliminates the immediate pressure to secure first-priority, Debtor In Possession (DIP) incremental financing necessary to continue daily operations...

In addition to Kimball Hill, another 29 affiliated debtors also filed Chapter 11. The company’s financial service businesses are excluded from the filing.

The announcement is just another blow for the Chicago area market that has already sent Neumann Homes into bankruptcy and Kennedy Homes into serious financial distress and a lawsuit against its lenders...

Kimball Hill, which is active in five states, has been scrambling to improve operating performance during the downturn. By using aggressive marketing tactics and incentives, it reduced inventory in 2006. That same year, the company pulled out of the depressed Cleveland market to redeploy assets. Management cut cycle time, tightened inventory management, and scrutinized its urban projects in an effort to reduce costs.

But by last fall, when the company delayed filing its 10-K for the 2007 fiscal year-end of Sept. 30, it became clear that the Chicago area institution built by the Hill family was in dire straits. At the time, the company disclosed it was out of compliance with several covenants of its senior credit facility. Although Kimball Hill is a private builder, it carries some public debt, which carries with it an obligation to report financial results with the Securities and Exchange Commission...

A day later, the company's reorganization plan was approved. From another story:

One day after officially filing a petition for Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Illinois, executives of Kimball Hill Homes received court approval for all of the company’s first day motions. Taken together, the approvals allow the company to continue normal operations.

On Thursday April 24, the Honorable Susan Sonderby granted permission to continue customer programs and warranties, pay employee wages and benefits, establish procedures to pay valid lien claims in the ordinary course of business, and to sell homes free and clear of all liens...

In the meantime, Kimball Hill is actively seeking investors interested in buying an equity stake in the company, including private-equity firms, hedge funds, and real estate funds, according to CFO Edward Madell in a court document. About 26 parties “continue to actively evaluate the prospect” of an investment in Kimball Hill, the document says.

The brighter side of falling housing prices

Due to falling prices in many markets, homes are becoming more affordable, allowing people long in hiding from rising prices to venture out again into the marketplace. From a story in the Wall Street Journal:

And now for the heartwarming side of the housing bust: It's helping some people buy homes that they couldn't afford a couple of years ago...

Still, many potential buyers are holding out for better deals. The Wall Street Journal's quarterly survey of housing-market conditions in 28 major metro areas points to continued downward pressure on prices in much of the country.

As usual, there is huge variation from town to town. In most of the country, inventories of unsold homes are no longer growing quickly, as they did in 2006 and 2007, but remain huge. The supply has shrunk modestly in Boston and Denver over the past year. But the number of for-sale signs continues to rise swiftly in the Portland, Ore.; Seattle; Raleigh-Durham, N.C.; San Francisco; and Washington areas.

The biggest gluts are in Florida. In the Miami-Fort Lauderdale area, the supply of single-family homes and condominiums is enough to last 34 months at the average sales rate of the past year. That months-supply figure is about 21 in Orlando, 18 in Tampa and Las Vegas, 17 in Detroit and 14 in Phoenix. A six-month inventory is generally considered a rough balance between supply and demand.

For condos alone in Miami-Dade County, the supply would last 45 months at the current sales rate.

Prices are coming down fast. Real-estate data company estimates that the median value for all homes in the 12 months ended March 31 fell 25% in the Las Vegas metro area, 19% in Miami and Orlando, and 16% in Phoenix. The typical value is still rising modestly in a few places, including the metro areas of Raleigh and Charlotte, N.C., Dallas and Houston. One hitch for house hunters, though, is that mortgage lenders have become much more restrictive with loans...

During the boom, home prices rose far faster than incomes. Home prices as measured by the S&P/Case-Shiller national index shot up 74% in the six years through 2006, while median household income rose 15%. (Neither figure is adjusted for inflation.) Now prices in many areas are adjusting back toward more affordable levels, a process that could take several years.

In an analysis of 330 metro areas in last year's fourth quarter, National City Corp., a banking concern, and Global Insight, an economic research firm, found that home prices were sharply overvalued in relation to household income and other factors in 21 metro areas, down from a peak of 58 metro areas in the second quarter of 2006.

Economists at the two firms look at home prices in relation to household income and other variables, including population density (an indication of how much land is available) and past differences in prices caused by factors like climate and schools. They then classify as "overvalued" metro areas where home prices are more than 33% above a level that could be explained by fundamental drivers of housing costs. Among areas where this analysis finds that home prices are still too high are Bend, Ore., Atlantic City, N.J., Miami, Honolulu and Portland, Ore.

In most of the country, "we're getting a return to normalcy" in the relation between home prices and incomes, says Richard DeKaser, chief economist at National City. But, he adds, prices may overshoot on the down side.

Economists at Goldman Sachs say home prices are likely to level off by late 2009. They also point to improving affordability. Goldman's chief U.S. economist, Jan Hatzius, says the share of a typical family's income needed to pay mortgage payments on a median-priced home averaged about 17.5% from 1993 to 2003, before jumping to 26% in 2006. The figure now has fallen to 20% and is likely to keep declining as home prices fall.

Mr. Hatzius estimates that average U.S. home prices have fallen 15% since the second quarter of 2006 and projects they will fall an additional 10% before stabilizing late next year. But he also sees a risk that home prices will fall further, particularly if the foreclosure problem proves worse than already expected.

Goldman estimates that foreclosures will add 1 million to 1.5 million homes to the for-sale market this year, compared with less than half a million a year before 2007.

Sometimes economists on housing have no clothes

In his latest Mortgage Credit News, columnist Lou Barnes takes Dr. Robert Shiller to task for predicting a 30% decline in home prices but offering no specifics:

The media are having a wonderful time mis-reporting housing conditions, ooing and ahhing every time Robert Shiller shouts “Fire!” in the theater. This week he predicted (again) a “30% decline in housing prices.” All of them, Robert? Uniformly? Average? Do the math: if half the nation’s homes stay price-flat, the other half must fall 60%. Is that it? Or did you mean to say decline 30% in a few places? Some individual projects are off more than 60% right now (an FL condo or two... AZ and CA land), but the worst dozen mini-metro areas have yet to decline as much as 20%.
In authentic data, OFHEO found that home prices measured by appraisal and weighted by location (CA more than ND; NY more than AZ and NV combined...) rose .6% from January to February. Sales of existing homes are sliding gently, but still moving at a five million annual clip. Sales of new homes are off 37% in the last year, down to a half-million, but that is good news -- the less new inventory, the better.

That's the problem with economists who try to opine on real estate markets without ever having worked in the trenches. In many cases, they simply don't know what they're talking about and the media, full of over-worked and/or lazy reporters, return to the same feedstock of quotes (i.e., Mark Zandi, Robert Shiller) for a line or two to make their story appear credible. Readers, not knowing any better, then believe it and act accordingly, apparently turning to guns and religion as salves.

But Barnes isn't finished yet with the media:

Yelling “Fire!” is a bad idea, but so is telling the audience to stay seated when smoke is pouring from the ventilator. Headline stories all week long: the Crunch is over, credit markets are improving. Irresponsible nonsense.
Distress is measured by interest rate spreads between safe stuff and not, and availability of credit. We have seen nothing more than a pullback from panic: the 2-year T-note has run up from 1.70% to 2.36%, sensible as the Fed at 2.25% is about to pause its rate cuts (keep some dry powder, guys). The Treasury/junk spread has contracted from no-market 8.6% to merely disastrous 7%. Retail mortgages are still 2.50% above Treasurys, almost a point out of line, and no real market for Jumbos or any other securitized credit. Tax-exempt munis paid 1% over taxable Treasurys last month, and now pay the same -- improving from schizophrenia to clinical depression. The international bank-to-bank Libor spreads are still widening...

Lost in housing and “subprime” myopia, and domestic navel-gazing: the global rise of terrible inflation, nothing like it since the 1970s. $120 oil will have its consequences. Here, wages capped by foreign competition, food and energy inflation is slowing the economy; Asia/Emerging are in a runaway spiral. Recent annualized figures: China 9%, India 7% (doubled in six months), Philippines 6.9%, Vietnam 19.4%, Singapore 6.5%, Russia 12.7%, South Africa 9%, Saudi Arabia 8.7% (highest since the ’82 oil spike).
There are only three antidotes: the mad good fortune of a commodity collapse, or central-bank induced slowdown, or the ultimate violence of market-induced slowdown.

Thursday, April 24, 2008

What happens to land use if oil prices double by 2012?

I've blogged before about the impact of rising oil prices on land use patterns and the popularity of suburban communities, but it's only been since gas prices in California have been approaching and exceeding $4.00 per gallon that it's become a primary issue.

According a story at, demand from developing countries in Asia and Eastern Europe will more than make up from any reduction in demand from the U.S., sending oil prices up to $150/barrel by 2010 and $225/barrel by 2012. Clearly, an economy long dependent on cheap oil will have to adjust drastically if gas prices also rise to $6 or $8/gallon:

The price of oil is likely to hit 150 dollars (Canadian, US) a barrel by 2010 and soar to 225 dollars a barrel by 2012 as supply becomes increasingly tight, a Canadian bank said Thursday.

The CIBC report says the International Energy Agency's current oil production estimates overstate supply by about nine percent, since it wrongly counts natural gas liquids -- which are not viable for transportation fuel -- in its numbers.

Analyst Jeff Rubin in his report noted accelerating depletion rates in many of the world's largest and most mature oil fields. He estimates oil production will hardly grow at all, with average daily production between now and 2012 rising by barely a million barrels per day...

"Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," said Rubin.

"Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years, almost doubling from current levels."

The CIBC report also notes that while production increases are at a virtual standstill, global demand continues to grow.

An expected drop in demand in the United States due to higher prices and a weak economy will be more than offset by demand growth in developing nations, it says.

Rubin cites, for example, the recent launch of Tata's 2,500-dollar car that will allow millions of households in India to soon own automobiles.

He also notes that car sales last year were up 60 percent in Russia, up 30 percent in Brazil and up 20 percent in China.

Transport fuel now accounts for half of the world's oil usage.

Although US oil consumption is likely to fall by over two million barrels a day over the next five years as pump prices rise, he says, more drivers on the road in Russia, China and India will surely pick up the slack in demand.

Want to read my article on transit-oriented housing from last year? You can find it here (although it was written when I was still working with Hanley Wood Market Intelligence). If you need to get ahold of me now, try

White House rejects Democratic housing package

The Bush Administration does not agree with the housing package proposed by Democrats, arguing that it puts taxpayers at risk. From a CNNMoney story:

A top housing official said Thursday that the Bush administration "strongly opposes" a Democratic housing rescue package, calling it a bailout that would expose taxpayers to excessive risk.

Deputy Secretary of Housing and Urban Development Roy A. Bernardi also indicated that President Bush would veto a bill sending $15 billion to states for the purchase and rehabilitation of foreclosed properties.

The comments, in separate letters to lawmakers, were the most forceful rejection yet by the Bush administration of Democrats' housing aid plans. And they were the clearest indication to date that the White House intends to put up a vigorous fight against a bill to let the Federal Housing Administration take on as much as $300 billion in new mortgages for financially strapped homeowners...

The Bush administration has previously questioned the scope and structure of the plan, although it backs the central concept: adjusting FHA's rules so more homeowners can refinance into government-backed loans.

An administration program, called FHASecure, made similar changes, but it is limited to borrowers who have good credit and histories of making their payments on time. It also doesn't require lenders to accept losses on existing mortgages.

Doing so, Bernardi wrote, would "significantly limit lender participation."

Frank has been working to draw Republican support for his plan, which he says has a good chance of becoming law this year.

But first, Democrats will have to deal with strong GOP philosophical objections to any measure that inserts the government into the housing maelstrom - especially one that could help people who are victims of their own irresponsible decisions.

"It will unfairly benefit a few homeowners and many investors and speculators at the expense of millions of careful borrowers and renters," said Rep. Spencer Bachus, R-Ala. "The message that we risk sending to financial institutions and individuals is that when they willingly take on excessive and ill-advised risk, the government will ride to their rescue."

Tuesday, April 22, 2008

Is there really gold in building green?

“Our greatest responsibility is to be good ancestors.”
-- Dr. Jonas Salk, developer of the polio vaccine

It was in early 1977 when a newly elected President Jimmy Carter donned a cardigan sweater on national television, urged Americans to do the same and then asked them to turn down their thermostats to conserve energy. But who could guess that he was on the forefront of a movement towards resource sustainability that would take another 30 years to coalesce? Not only has green building and conservation emerged as the most important trend in homebuilding, but according to some experts will help drive the U.S. economy once the current recession eventually rebounds.

So how can builders and developers hope to capture both the imagination and the dollars of homebuyers given the enormous complexity of ‘green’ building? Primarily through consistent and comprehensive education, not only for those executives making design decisions, but also for buyers throughout the entire marketing and sales process.

Fortunately, that hurdle has become much easier thanks to standards and practices adopted by the federal government (Energy Star, Building America), U.S. Green Building Council (LEED), American Lung Association (Health House), Masco (Environments for Living) and others. Not to be outdone, the NAHB officially launched its own National Green Building Program at this year’s International Builder’s Show. The hope for this plan is in providing a much-needed framework for a variety of local green building programs already operating throughout the country, many of which were started in association with local HBA/BIA groups as early as the mid-1990s.

The timing couldn’t be better: according to the NAHB 2007-2008 Consumer Preference Survey as analyzed by Jonathan Smoke at, nearly 90% of respondents are concerned about the impact their homes have on the environment. Yet because only 16% are willing to pay extra to address that concern, homebuilders would be wise to first target those consumer segments actually willing to spend a premium. Fortunately, Smoke thinks three of his defined consumer groups fit into this category, including “Feature and Location,” “Elite” and “Active Adult Elite” buyers, who share in common a desire for quality, prestige and community. To further increase the odds of success, he suggests builders focus on top-rated green items including Energy Star-rated windows, energy-certified appliances and generous insulation while getting rid of now-dated design features such as two-story foyers which are expensive to heat and cool.

In terms of marketing green building, selling the benefits more than the technology is the key, especially when they coincide with consumers’ existing focus on rising energy costs, an epidemic of allergies and asthma and the importance of sustainability. That’s also when partnering regionally with a local BIA makes sense; by leveraging its membership base, a local or statewide association can tap major product manufacturers as sponsors and create advertising campaigns that would be far too expensive for one builder to pursue alone. In Atlanta, for example, the “EarthCraft House” green building program developed by the local HBA in conjunction with the NAHB Research Center has become its own popular brand suggesting higher quality. In fact, recent buyers cited the EarthCraft certification as one of their top three reasons for buying a new home.

For those harried sales agents already under pressure to explain the specifics of a home plan and neighborhood, when it comes to explaining green building – or green mortgages, which allow buyers to qualify for higher loan amounts when they’re buying energy-certified homes -- it’s best to let simple displays in the model homes and colorful collateral in the sales office do the talking.

With some clever design elements, that collateral could easily double as a benefits list for comparison shopping – and pity the poor builder who thinks green building is just another fad, because they’re now in the minority. In a 2007 survey conducted by Professional Builder, 70% of homebuilders agreed that this is a trend that’s here to stay, and of those respondents, 83% considered it extremely important to their marketing strategy which has had a positive impact on sales.

Gold in building green? It certainly looks so -- and makes us good ancestors in the process.

Monday, April 21, 2008

Homebuilders making it expensive to cancel

Over the last ten years, most builders were generally fairly lenient with refunding deposits as long as they thought another buyer would soon appear who wouldn't be stuck with any weird design choices or pricey installed upgrades. But as the cancellation rate for new homes has soared to well over 30% -- and even 40% for some builders -- buyers hoping to cancel for any variety of reasons are finding that the fine print they didn't read sometimes also meant they were signing a promissory note for the deposit, making it much harder for them to walk if they think a better deal is on the horizon. From a Washington Post story:

Builders typically ask for 10 percent of the contract price as a deposit, said Harvey S. Jacobs, a Rockville real estate lawyer and owner of Stress-Free Settlements. "If you can get away with paying less, great," he said. "But they ask for 10 percent." Builders also typically ask for additional cash to cover the price of options and upgrades.

In addition to the cash deposit, builders frequently ask buyers to sign a promissory note for an equal amount of money, Jacobs said. That note comes into play only at closing, when it becomes payable out of the buyer's mortgage. It's a liability that lies dormant but that serves to double the amount of cash the buyer has at stake if he pulls out of the deal.

Those promissory notes are builders' attempts to stem that wave of cancellations. If buyers are willing to forfeit $50,000 to walk away from a $500,000 home sale, maybe being on the hook for $100,000 would keep them in the deal. "I'm definitely seeing more letters saying, 'We're going to enforce your promissory note if you don't close,' " Jacobs said.

What's more worrisome, Jacobs said, is that many people don't even realize they have signed such a note, just one page among the many included in a sales contract.

(Ed.) Does NO ONE read documents they're signing anymore? I think this excuse is starting to get a little out of hand. But I digress...

The first opportunity you have to read a builder's sales contract and the accompanying documents (which can be just as important -- and binding -- as the contract itself) could very well be when you are being asked to sign them...

Never sign a contract while you're sitting in the sales office. When you're writing a deposit check for tens of thousands of dollars, and signing a contract worth hundreds of thousands, you really deserve a few days to have the specifics looked at by your own real estate lawyer...

Arthur G. Kahn, a partner with the Brincefield, Hartnett & Kahn law firm in Alexandria, said the procession started in fall 2006.

Sometimes, there are technical aspects to the contract that could become a convincing argument for a refund, he said. For example, he cited a "relatively arcane and complex statute," the Interstate Land Sales Full Disclosure Act. With some exceptions, it requires developers to register subdivisions of 100 lots or more with the Department of Housing and Urban Development. If the development is covered under that law, buyers are supposed to be given a disclosure document, called a "property report," before they sign a purchase contract.

Registration "is a time-consuming process, and you're not allowed to market until HUD has approved the registration of the project," Kahn said. Especially during the real estate boom, he said, some developers didn't want the delay. If the developer should have registered with HUD or should have given the buyer the property report but failed to do so, that could be a route out of the deal and toward a refund...

There are other avenues lawyers might take to recover deposits. For example, contracts often allow builders as long as two years to complete construction. But, especially with condo projects, some deliveries have been closing in on that two-year deadline. No rational buyer wants to pay 2006 prices for a condo now. These deals are ripe for cancellation. Your argument for getting back the deposit may focus on the details about when that two-year clock started ticking, and when the home qualified for an occupancy permit.