The Housing Chronicles Blog: 1/1/09 - 2/1/09

Thursday, January 29, 2009

Has housing turned a corner?

So is December's rise in existing home sales the early sign of a market rebound or a statistical anomaly on the way to further declines? A story in Reuters ponders the question:

Until now, plunging home prices have been keeping many potential home buyers at bay because they were leery of buying an asset that was all but guaranteed to lose value, at least initially.

Now, though, prices appear to have fallen enough in some regions to make buying cheaper than renting, particularly in the West. Add with record low mortgage rates, demand has started to rebound...

Home prices have dropped so much in some areas of California that monthly mortgage payments on single-family detached homes are comparable to apartment rents.

And while distressed properties account for an abundance of sales around the country, the trend is nevertheless helping assuage one of the market's biggest banes: a huge supply of unsold homes.

Existing home sales across the United States rose 6.5 percent to an annual rate of 4.74 million units in December from a rate of 4.45 million in November, a National Association of Realtors report showed on Monday. That said, in 2008, existing home sales fell 13.1 percent to 4.91 million units -- the lowest since 1997...

"The report confirms our forecast that sales have bottomed," said Celia Chen, senior director of housing economics at Moody's in West Chester, Pennsylvania.

"The price discounting on foreclosures is helping draw down on inventories, particularly in the West where lower prices are helping pull in new buyers," she said.

Click here for full story.

Wednesday, January 28, 2009

When incentives backfire

During last Monday's presentation on the economy for the Orange County BIA, Chris Thornberg noted something about incentives that I had also seen echoed in an article for Fast Company magazine -- namely, that they often backfire when people only think about short-term goals.

As an example, one primary reason that a former employer of mine wasn't able to manage a specific division was because they didn't realize that since everyone was maniacally focused on individual monthly revenue instead of collaboration, not only did that prevent honest teamwork from forming, but ultimately let to the entire group's destruction. In the end, the efforts I made to strengthen the entire team through branding and promotion were usurped by those individuals who only saw incentives as a path to monthly riches, and thus in direct contrast to building a long-term organization. According to the Fast Company article, the world of sports is full of such examples -- as are real estate and finance:

Years ago, AT&T executives tried to encourage productivity by paying programmers based on the number of lines of code they produced. The result: programs of Proustian length.

Incentives are dangerous, and not just because people game them. They often yield collateral damage. Remember the tale of the Darwin Award winner who strapped a jet engine to his car, dreaming of a joyride for the ages, and then met his sorry end as a human flapjack on the side of a mountain? Incentives are like that jet engine. There's no question the engine will take you somewhere, fast, but it's not always clear where. Or what you're going to mow down on the way. Yet incentives are still the first resort of most managers, perhaps because they all think they're smart enough to create the perfect carrot...

To be fair, there are some contexts where one variable dominates. If you're employing a field sales rep who is selling a simple, self-contained product, then it probably makes sense to tie incentives to the sale. If you're traveling a long, straight road, the jet engine will get you there faster.

But chances are you don't live in a one-variable world. In your complicated, squishy, matrixed world, if you're dreaming up an incentive plan, you're almost certainly in the grips of a focusing illusion. You're trying to maximize or optimize or minimize something. And you may unwittingly find that when you maximize the length of your programmer's code, you end up minimizing your job tenure...

Click here for full story.

Miss the 2009 Economic Outlook for Orange County?

On Monday night there were about 550 people at the Irvine Marriott listening to economic analysis and forecasts by economist Chris Thornberg of Beacon Economics and his Director of Regional Research, Brad Kemp. I was fortunate enough to be able to introduce them and to suggest why the building industry needs forthright analysts and consultants now more than ever.

Firstly, if you missed the event you can still download their slide presentations here:

Thornberg: National Outlook

Kemp: Regional Outlook & Forecast

Please keep in mind that these forecasts are for "worst-case scenarios," so pricing declines for homes (both new and existing), falls in retail sales or increases in the unemployment rate may be less severe depending on a variety of factors. But if you consider that you're better off planning for a worst-case scenario and hoping for a better outcome, then of course you minimize your risk.

Secondly, the Orange County Register's Jeff Collins was there to report on the evening, and posted some of his thoughts on the Lansner on Real Estate blog:

Chris Thornberg, a former UCLA economics professor who co-founded Beacon, told homebuilders that while the overall economic outlook is bleak, hysteria about the U.S. marketplace is overblown. At worse, the financial picture is about as bad as the recession of 1982 and other severe recessions.

“2009 is going to be brutal. But it’s not that bad,” said Thornberg, who began predicting that a housing bubble was due to burst since at least 2003. “It’s not a depression. … This is sort of a normal, bad downturn.”

Other comments by Thornberg:

  • Mortgage meltdown: The collapse of subprime loans was due to reliance on CDO (collateralized debt obligations, a.k.a., mortgage-backed securities). The entire financial market was based on folks making short-run returns. That’s got to be fixed.
  • Liquidity crisis: It’s not a liquidity crisis, it’s just that lenders have no appetite for risk these days. “You can get business from the bank. You’ve just got to put skin in the game. … You can get money. You’ve just got to reduce their risk. That’s the new reality.”
  • Wealth effect: People stopped saving because they thought they were rich because their stock values and home values had gone so high. They actually never were worth what people thought they were, and assets merely are collapsing “back to normal values,” he said. Americans “just woke up from a 14-year frat party with the mother of all Bud Lite hangovers.”
  • Prop. 13: California isn’t a high-tax state. “It’s a dumb-tax state.” It places high income taxes on the wealthy who make up about 1 % of the tax base. The state instead should levy smaller tax hikes on a bigger tax base and it should eliminate Prop. 13, which is inequitable and limits revenues.
Click here for entire blog entry.

Builders increasingly taking on remodeling work

During a session at last month’s International Builders’ Show in Las Vegas, a presenter suggested that struggling builders could bring in some much-needed business by approaching banks to help remodel or repair foreclosed properties which had been damaged by angry borrowers. Say what? Work with the same type of enemy that’s been allegedly forcing private builders into foreclosure and bankruptcy?

And yet for those builders willing to expand their horizons, taking on such work is quickly becoming a means to keep core staff busy not only during the current recession, but act as a counter-weight in future downturns. As an aggregate number, this is big business: according to the NAHB, in 2007 total remodeling expenditures were estimated to be about $230 billion. Moreover, given the combination of an aging housing stock, millions of underwater homeowners unable to move or lose money, and demographics which increasingly favor aging in place, the future certainly suggests a robust business for room additions and upgrades.

So just how big could this opportunity be? Assuming the country successfully negotiates through the current economic downturn, the NAHB estimates that the value of remodeling jobs could approach $400 billion by 2015, or closing in on the estimated $455 billion in new construction. By 2020, it’s quite possible that the remodeling industry could even eclipse the value of new homes built annually. If that comes to pass, then the most successful home builders would be diversified entities with two separate divisions: one which develops new communities, and one which improves those which already exist.

Indeed, many smaller production and custom home builders have already adopted this model to keep their companies afloat. Another recent study from the NAHB reports that 50 percent of its builder members are now taking on remodeling jobs, and once they start up these divisions, it’s unlikely that they’ll simply shut them down when the market improves.

Of course for those builders venturing into this arena, the economies of scale which builders have historically enjoyed with various suppliers and subcontractors will certainly put pressure on existing remodelers, whose aggregate business fell by 4% in 2007. In 2008, according to Harvard’s Joint Center for Housing Studies, this decline is expected to have more than doubled to 9% and rise to 11% during the first quarter of 2009. And, since the remodeling industry grew by 40% in the last cycle, it’s expected to lose about one-third to one-half of that gain in this slump.

Despite these declines, since they’re less than those impacting the home building industry – with starts off by over 65% since the start of 2006 -- builders still see it as a comparatively safe business, and one in which partnering with larger remodelers makes sense. And when the market does rebound, it’s expected to grow at a 4% annual clip.

That growth, in turn, will also be good for both the private economy as well as federal, state and local governments. The NAHB says that for every $100,000 spent on residential remodeling, 1.30 jobs are created for additions and alterations and 1.25 jobs for maintenance and repairs. For public services, that same $100,000 provides nearly $28,500 in taxes and government revenue for additions and alterations and nearly $27,800 for maintenance and repairs, which in many states could make a dent in serious budget gaps.

As of the most recent American Housing Survey for 2007, the total U.S. housing stock totaled over 128 million units. But with a median age at that time of 34 years and over 41 million homes close to 50 years of age or older, perhaps the idea of approaching banks to help them maximize the value of their foreclosed assets doesn’t sound like such a bad idea at all.

Thursday, January 22, 2009

New home starts fall to all-time low

As the excess inventory of new homes built during the boom years continues to be slowly absorbed, the number of new homes started has fallen to an all-time low -- at least since records were first kept in 1959. From an AP story via the LA Times:

New-home construction plunged to an all-time low in December, capping the worst year for builders on records dating back to 1959.

The Commerce Department reported today that construction of new homes and apartments fell 15.5 percent to an annual rate of 550,000 units last month. That shattered the previous low set in November...

For all of last year, the number of housing units that builders broke ground on totaled just over 904,000, also a record low. That marked a huge 33.3 percent drop from the 1.355 million housing units started in 2007. The previous low was set in 1991.

The report also showed that applications for building permits -- considered a reliable sign of future activity -- sank to a rate of 549,000 in December, a 10.7 percent drop from the previous month...

The National Association of Home Builders/Wells Fargo housing market index, released Wednesday, dropped one point to a record 8 in January. The index was at 9 for the previous two months. Index readings higher than 50 indicate positive sentiment about the market. But the index has been below 50 since May 2006, and below 20 since April...

Wednesday, January 21, 2009

Banks foreclosing even on builders who never missed a payment

Imagine buying a new car for 10% down and a 5-year loan. As soon as you drive it off the lot, it immediately loses up to 25% of its value, which could technically mean that the value of the asset -- the car -- is worth less than the loan. Now let's say the bank is low on capital and, even though you've made all the payments on time, sends the repo man out (perhaps captured on a reality TV show) to grab your car in the middle of the night to re-sell because they'd rather get 75% of what they lent you now rather than risk the thought that you'd stop making your payments. Only they don't sell the car -- they just let it sit there and rust until its value plummets to almost nothing.

Sound far-fetched and unfair? Couldn't happen to you? Well, it is happening to private builders across the country, whose projects are being foreclosed upon even when they've never made a late payment. In fact, some builders contend that lenders encourage them to keep paying so they'll have nothing left for legal fees to fight the now-inevitable foreclosures. Expect some very nasty legal battles in the very near future about this.

So how is this good for the real estate industry, the country, or U.S. taxpayers? It isn't. It's due to bankers now under intense pressure from regulators to do something about real estate-related loans, even if building out a project could net more to them, the federal government, and ultimately, you. This is no longer about punishing greedy builders who over-built during the boom years. This is about something else entirely -- something Charles Darwin would likely appreciate. In the future, fewer builders could mean less competition -- meaning higher prices, fewer choices and crappier construction. From a New York Times story:

After riding high on one of the greatest housing booms in American history, the nation’s home builders today face a devastating reversal of fortune.

Although the housing crisis is nearly two years old, many banks had refrained from cracking down on small home builders.

They are starting to do so, and a wide swath of the industry could be forced out of business in the next few years. The trouble is concentrated especially in the Sun Belt, the scene of so much overbuilding.

Not only have new-home sales stagnated, but builders confront a rising wave of foreclosed properties coming to market at prices below the cost of building a new home. To move houses, they have to mark them down to less than the cost of construction.

The convergence of these problems is bringing many small and medium-size builders — who account for about 70 percent of new-home construction in the United States — to their knees...

No hard count exists of precisely how many builders have gone out of business since the downturn began. According to an estimate by the National Association of Home Builders, at least 20,000 builders — about a fifth of the total nationwide — have closed up shop in the last two years...

With the pullback accelerating, complaints among builders of hardball tactics and shoddy treatment by banks are mounting, as is a general sense of betrayal.

“The behavior of the banks is unprecedented,” said Mick Pattinson, a home builder from Carlsbad, Calif. who has organized a national coalition of builders to draw attention to what they regard as unreasonable treatment. “Yes, there was overleveraging in the industry. But the aftermath doesn’t need to have been as brutal as it has been.”

Some experts defend the banks, saying they are starting to do what is necessary to come to grips with the turmoil in real estate. For months, they have been under pressure from federal bank regulators and their own shareholders to curtail lending to a faltering industry...

In this climate, keeping loan payments up to date — something many builders are struggling mightily to do — is not necessarily any protection.Many loans in the building industry are of short duration, coming up for renewal at least once a year.

This allows banks to take a fresh look at the financial health of a borrower, as well as the assets securing their debt. A steep fall in cash flow or a decline in the value of the collateral — usually building lots or half-built houses — can mean an automatic default, whether a borrower has missed payments or not...

Click here for full story.

Renters gaining upper hand as vacancies rise

Although the rental market in Southern California started weakening over a year ago, the recession is now giving tenants the upper hand to renegotiate lease agreements -- even mid-stream -- in various markets around the country. In some areas such as downtown L.A. and Long Beach, previous conversion projects re-converted back into rentals and new condos dumped onto the marketplace at once can easily spike vacancy rates and require landlords to offer concessions they would've found previously unnecessary. From a Wall Street Journal story:

As the housing downturn deepens, rental rates are falling in many major U.S. cities, including New York and Los Angeles, and tenants are finding they have greater leeway to renegotiate their leases.

Early in the housing crisis, former homeowners were starting to rent again, supporting demand for rentals. Now, with more newly constructed condos being converted into rental units, landlords are struggling to keep buildings occupied. Apartment rents nationwide fell 0.4% in the fourth quarter from the third quarter -- the first drop since 2003, according to Reis Inc., a New York City-based real-estate research company. Apartment vacancies rose to 6.6% in the quarter from 5.7% a year earlier.

In some major cities, the declines have been far steeper. In Manhattan, rents fell on almost all kinds of apartments in 2008. Rents of studio apartments fell 7.4%, and rents of one-bedrooms and two-bedrooms in buildings without a doorman fell 5.5% and 5.6%, respectively, according to a report released Tuesday by the Real Estate Group of New York, a Manhattan-based brokerage firm. In Miami, 60% of rents decreased in the fourth quarter, and 45% of rents in Los Angeles declined. Rents did buck the trend in a few cities. During 2008, rents increased 2.3% in Pittsburgh and 4.2% in Houston...'

Some landlords and property managers say they have never encountered so many tenants looking to bargain. Mitchell Rattner, president of Home Equity Savers in Riverwoods, Ill., owns 50 condo complexes and homes around Chicago with a partner and says that requests by tenants to negotiate were almost unheard of until fairly recently. In the past 10 months, he's discounted two of his tenants' rents midlease to keep them from moving out. "If they're good payers, we will give them a discount," he says...

It may be easiest to negotiate in cities like Miami and Las Vegas that have been hit hard by home foreclosures. There, renters are getting a boost from a "shadow supply" of rental units: Investors who have scooped up foreclosed homes are renting them out so they don't have to sell into a declining market. Such investors "are undercutting a lot of the normal rental rates so they can attract tenants quicker," says Elizabeth Olds, real-estate economist with Boston-based Property & Portfolio Research Inc.

In some California cities, vacancy rates are being boosted by the conversion of new condo projects into rentals, says Patrick S. Duffy, principal of MetroIntelligence Real Estate Advisors, a real-estate consulting firm based in Los Angeles. In downtown L.A., where there are a lot of new condos, the vacancy rate was almost 10% in the fourth quarter, compared with an L.A.-wide vacancy rate of 4.5%...

Click here for full story.

IBS Economic Forecast calls for difficult 2009

Reporting from the International Builders Show in Las Vegas - I attended the IBS Economic Forecast yesterday, and David Crowe, Chief Economist for the NAHB, as well as economists from Freddie Mac and PMI, are predicting a difficult 2009 as 1.5 unsold units (many of which are resales and not new homes) will take time to absorb. From a BuilderOnline story:

A subdued group of economists speaking at the International Builders’ Show in Las Vegas this morning agreed on one thing: the housing market will weaken still more in 2009.

“My forecast is built upon an imbalance of supply and demand,” said David Crowe, chief economist at the NAHB, who estimates the country currently has more than 1.5 million existing and new homes available for sale or for rent that no one wants or can afford to buy.

Frank Nothaft, chief economist at Freddie Mac, and David Berson, chief economist at The PMI Group, also spoke during the morning press conference.

Such excess inventory—the result of foreclosures and other factors--is hammering builders in specific and the housing market in general as home values slide. (Overbuilding by new-home builders is not a factor in this excess supply, according to Crowe, who said that less than one-third of those 1.5 million excess homes are new. “What builders are facing is an oversupply of homes not entirely of their making,” he said.)

Regardless of the reason, home prices are expected to weaken still more, particularly in major metropolitan areas, according to Berson, who suggested it may take two to three years for the housing market to stabilize. According to a proprietary index developed by PMI, 97 percent of the nation’s metropolitan statistical areas (MSAs) are at risk of having lower home prices in two years than they did in late 2008. For some of the most troubled markets—Riverside-San Bernardino, Calif., and many in Florida—the likelihood of having lower home prices is more than 99 percent.

Click here for full story.

Tuesday, January 20, 2009

Rising tension over homes rented out

Think you'll have no problem renting out a house until the market rebounds? It's a great idea if you can cover (all or most) or your costs, but in many areas of the country, there's a growing backlash from HOAs and some cities in response to complaints that many tenants are ruining the neighborhood. From a story in SmartMoney magazine (hat tip: Brian McDonald):

Renters: neighborhood contagion, or a lifeline to beleaguered homeowners? In growing numbers of American towns and subdivisions, that question has become anything but academic, as homeowners associations abruptly ban rentals. Blame it on the huge slump in the housing market. For owners who have to move or who own houses as investment properties, short-term rentals can bring in some cash and keep them from having to sell at a big loss.

But instead of greeting renters with hosannas, many towns and subdivisions are barring their doors, arguing that tenants usher in neglect, misbehavior and even violent crime. Almost 60 million Americans live in developments governed by homeowners associations, and by some estimates as many as 40 percent of those communities enforce restrictions that keep owners from becoming landlords.

Indeed, many associations are enacting even tighter anti-renter rules — even in the parts of the country hit hardest by falling prices. Often the backlash comes after the rowdy-tenant threat becomes a reality...

The conflicts help explain one of the more bitter ironies of the real estate scene. Even though demand for rentals is at an all-time high, there are now 18 million vacant housing units in the U.S., according to the Census Bureau. More than a third of those properties are being left vacant by their owners intentionally, a trend that’s being exacerbated by local renting rules. To be sure, some communities are easing restrictions in a bid to lure buyers. But other subdivisions are digging in their heels even as homeowners beg for relief...

Click here for full story.

Monday, January 19, 2009

Mortgage fraud UP in 2008?

Just when we thought that the miscreants who were largely responsible for the housing bubble & bust were gone from the mortgage lending industry, a story in the New York Times cites a report that says mortgage fraud actually rose by 45% during the second quarter of 2008 over 2007 levels. Considering lenders rarely pursue people who lie about their financial situations and instead bury their losses in higher fees and interest rates, is it any wonder borrowers and their enablers still try? From the story:

MORTGAGE volume may have fallen last year, but not incidences of fraud. In fact, according to a recent report from the Mortgage Asset Research Institute in Reston, Va., occurrences of fraud among loan officers, brokers and other industry professionals actually outpaced 2007 levels by 45 percent in the second quarter of 2008, the most recent reporting period.

The Research Institute, a consulting firm, does not release specific figures, which it compiles from surveys of lenders that make most of the nation’s mortgages each year.

The report, released in early December, found that 36 percent of the fraudulent mortgage activity involved loan professionals’ misrepresenting borrowers’ incomes, while another 20 percent involved misrepresentations of borrowers’ employment.

Lenders did not specify how much of this activity was simply stretching of the truth by loan professionals on the applications, categorized as “fraud for property,” as opposed to “fraud for profit” schemes, in which bogus loans are taken out to defraud lenders of money. Fraud for property is far more common.
Click here for full story.

Friday, January 16, 2009

Still time to sign up for the OC BIA Economic Outlook on Jan. 26th

Want to know the future of Orange County and the U.S. economy? There's still time to sign up for the 2009 Economic Outlook produced by the Orange County BIA Chapter on January 26th at the Irvine Marriott. Presenters will include Christopher Thornberg and Brad Kemp from Beacon Economics, with perhaps a small intro I've give explaining on why these guys should be on the speed call list for builders and developers.

Since this is the most-attended event for the OC BIA, they're offering 90 minutes of 'extended' networking, so bring your business cards!

For the event flyer, click here.

To register, click here.

My most recent column for Builder & Developer magazine now online

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

For the new year, I wanted to focus on what role many economic & feasibility consultants had in the housing bust:

When I first started writing market studies in the late 1980s, figuring out the demand for new homes in specific price ranges was a requirement for a full-fledged analysis. But by the late 1990s, as the market began to rebound and public home builders snapped up local companies, the only data many clients wanted to see were the prices and sales velocity of their top competitors...

Indeed, some companies offering consulting services to developers owe their entire growth strategies to their reputations for providing supposedly objective reports – at least from the unknowing point of view of compliant construction lenders – that would magically hit pre-set targets for prices and sales velocity...

Click here for entire column

Thursday, January 15, 2009

Reassessing the fundamentals of the building industry

Although I had touched on this same subject in a much briefer format for my most recent column for Builder & Developer magazine (including the mistaken belief that mathematical models alone can forecast future demand), Builder magazine writer John Caulfield has written a very detailed article on how the future building industry may look and what home builders, lenders and investors need to do to adjust to the new reality:

From the 1940s until very recently, U.S. housing policy consisted of two words: more homeowners. Everything from highway construction to taxation revolved around that goal. And the results were spectacular, as ownership rates went from 62.1 percent in 1960 to a peak of 69 percent in 2004. Equally spectacular—but with dire consequences—was how the “American Dream” mutated into “America’s Piggybank” and then “America’s Nightmare” within the last decade.

During this period of excess, buyers agreed to—or were duped into—home purchases their incomes couldn’t afford, and owners used those homes like ATMs to perpetuate more lavish lifestyles. Builders and developers interpreted demographic data—particularly about Hispanic buyers—in ludicrously optimistic ways to justify their expansion ambitions. Mortgage companies sank their underwriting standards to new depths. And, inevitably, investors pounced on opportunities to exploit a thriving market, even as they ignored the quicksand upon which that market had been constructed...

Click here for full story.

California Governor Schwarzenegger gets serious about budget in State of the State address

As politicians dither and California continues to fight a $42 billion budget deficit, California Governor Arnold Schwarzenegger has requested that lawmakers forgo getting paid until a resolution is reached. From an L.A. Times story:

Describing California's monumental budget deficit as "a rock upon our chest," Gov. Arnold Schwarzenegger broke from tradition in his State of the State address today with a blunt vow not to advance any policy agenda this year other than resolving the state's fiscal crisis.

As lawmakers sat before him in the Assembly chamber, Schwarzenegger said they had put their partisan beliefs above the interests of Californians, and he asked them to forgo own their salaries if they fail to pass the next budget by the deadline in June...

"Addressing this emergency is the first and greatest thing we can do for the people," Schwarzenegger said. "The $42-billion deficit is a rock upon our chest, that we cannot breathe until we get it off. It doesn't make any sense to talk . . . about education, infrastructure, water, healthcare reform and all those things when we have this huge budget deficit."

Click here for full story.

My first post for the 'Developments' blog of the Wall Street Journal

I'm very pleased to report that, after several iterations during the editing process, my first blog post for the 'Developments' blog covering California trends has just been published:

Considering the amount of overbuilding that took place in California during the boom, some type of decline was necessary in order to bring supply and demand back into balance. The latest update on California building permits shows just how drastic that decline has been.

According to statistics from the California Building Industry Association (CBIA) (full report), the number of residential housing permits issued statewide in November fell to 4,544 — a 17% drop from the same period in 2007. For all of 2008 an estimated 64,000 building permits were issued — the lowest level since records were first kept in 1954. For single-family homes alone, 2008 will likely end up with less than 32,000 permits for a state of 36 million, marking a decline of well over 50% from 2007’s already low levels. (The report covers single- and multi-family residential permits.)...

Click for entire post here.

Many thanks to Christopher Thornberg at Beacon Economics for suggesting me to the Journal. He will also be a regular (if occasional) contributor on economic trends related to real estate, so be sure to look for his posts.

Have any ideas on posts you'd like to see? Email me suggestions at

Saturday, January 10, 2009

Retailers asking landlords to share their pain

As consumer spending tanks and retailers lick their wounds from one of the worst holiday shopping periods in decades, they're now asking landlords to share in their pain by lowering rent and other concessions. So how can retailers be so bold? Because they know that the combination of rising vacancies and debt coming up for renewal during times of tight credit give them the upper hand. From a Wall Street Journal story:

Retailers, having just struggled through one of the worst holiday shopping seasons in recent memory, are now trying to share the pain with their landlords.

Many stores are pushing to negotiate lower rents, warning that they mightn't be able to make it unless their costs are cut. Those in stronger positions are finding that the market's turmoil has provided them clout to haggle for lower lease rates...

The rush for concessions threatens to sap U.S. mall and shopping center owners' cash flow at a time when many are struggling to refinance debt coming due and cope with mounting store closures. General Growth Properties Inc., for example, the country's second-largest mall owner, has warned that it will have to seek bankruptcy protection if it can't renegotiate new debt terms with banks. While General Growth's problems are primarily due to its huge debt load, pressure on vacancy and rents are adding to its woes...

Landlords struggling with empty space from retail bankruptcies and contractions are particularly vulnerable to demands from their remaining tenants. A high vacancy rate or the loss of one or two anchor stores can doom a mall, because shoppers and new tenants go elsewhere, experts say...

Vacancy rates for malls and shopping centers in the 76 largest U.S. markets rose to 8.3% in the fourth quarter from 7.8% in the third, according to a survey set to be released Wednesday by market-research firm Reis Inc. That is the largest increase since 1999. Effective rents, which take into account landlord concessions like interior construction, fell for neighborhood shopping centers in 65 of the 76 markets Reis follows...

Click here for full story.

Fraud sleuth goes after Lennar's off-balance sheet finances

Well before the housing boom really took off, many builders began structuring land deals into joint ventures and other deals off their balance sheets, which was a practice I thought had to eventually bite back in the end. Now former felon Barry Minkow -- famous for his ZZZ Best stock swindle of the 1980s -- has turned his attention and his Fraud Discovery Institute against public home builder Lennar. From a Wall Street Journal story:

Shares of Lennar Corp. plunged Friday after a high-profile investigator raised questions on a Web site about the home builder's off-balance-sheet debt and a large personal loan taken out by a top company executive...

In a written report and Web video, Mr. Minkow criticized Lennar's practice of putting large amounts of debt in off-balance-sheet joint ventures, saying there is insufficient disclosure about them to investors. Lennar has about $4 billion in off-balance-sheet debt through 116 joint ventures and has typically given very few details about these arrangements.

The builder's chief financial officer, Bruce Gross, said in an interview, "we have full disclosure on our joint-venture debt. There is nothing concealed."

Mr. Minkow is a convicted stock-fraud felon who was imprisoned for his role in masterminding the ZZZZ Best stock swindle in the 1980s. Since his release, Mr. Minkow has won kudos from the Federal Bureau of Investigation for uncovering frauds on the Internet, in the real-estate field and elsewhere. His recent effort to expose executives and directors who embellish their academic credentials has led to several resignations of high-level officials. Other campaigns against public companies have had mixed impact...

Mr. Minkow also accuses Lennar of perpetrating a "giant Ponzi scheme" in its land deal with the California Public Employees Retirement System that landed in bankruptcy court. He said Lennar moved other joint-venture assets into the venture, known as LandSource and depleted the venture of cash before it imploded amid the housing downturn.

Click here for full story and responses from Lennar. At least they responded (something I couldn't get them to do when writing a story on builder incentives for the L.A. Times in 2007).

Friday, January 9, 2009

Attending the Int'l Builders Show in Las Vegas?

The 2009 International Builders Show is just days away (January 20-23 in Las Vegas). The Web site for Builder magazine has some interesting stories for any one planning to attend the show, as summarized below.

I will be attending this year on Tuesday, Wednesday and Thursday to cover the show for Builder & Developer magazine, so if you see me please feel free to introduce yourself and say hello.

  • How Green Is the Valley?

    The Southern Nevada Green Building Partnership might be a catalyst for reviving the Las Vegas market.

  • Show Home Tour

    Two very different show homes for the 2009 International Builders' Show in Las Vegas.

  • Information Age

    IBS '09 offers 250 educational programs during show week. These caught our attention.

  • Hot Products

    The exhibit floor is sure to be chock-full of good ideas. Here are a few to look out for.

  • First Time?

    The IBS will offer an orientation to first-time attendees and an a la carte fee structure to attract builders to the show.

  • Green Day, Take Two

    The NAHB follows up last year's successful launch of green building initiatives will a full slate of activities in 2009.

  • Coached Up

    Lou Holtz headlines the show as this year's keynote speaker.

Job losses clearly becoming #1 economic issue

Worrying about the credit crunch and falling home prices? That's just so...2008. For 2009 we've got a new worry: a job market in free-fall. And since home prices and sales can't firm up until people have the income to support mortgages, it doesn't matter how low rates go. From a story:

Economists believe the recession is likely to get worse until the spiraling job losses and unemployment rate start to improve.

Record low mortgage rates won't lead to higher home values and increased home sales as long as 500,000 people a month are losing their jobs.

Rising unemployment will probably make banks even less willing to lend and also lead to increased defaults on a large range of existing loans.

And with more consumers losing, or worried about losing, their jobs, that should lead to a further pullback in spending. In turn, that will make it tougher for companies to increase their profits, which could lead to even more stock market losses.

If all that weren't bad enough, economists worry that that this will put more pressure on employers to lay off even more workers -- prompting the proverbial vicious circle that can make it so hard to get out of a bad economic downturn...

Even the people who have jobs are suffering. According to a recent survey by the Society for Human Resource Management, more companies are reporting that they are cutting pay of their employees in response to the difficult environment.

In addition, the average work week has been falling steadily during the past four months. A record 8 million workers that want full-time employment have only been able to get part-time jobs, according to the government's December labor report. That's up 37% from the total of so-called underemployed workers in August.

Pay hikes will be at best modest this year for many employees lucky enough to get increases. A survey by consultant Hewitt Associates found raises will be less than 3% for the first time in the study's 32-year history.

State and local governments are also making tough choices because of the recession, with many reporting big cutbacks in services and suggesting new taxes that could further hurt cash-strapped consumers...

Click here for full story.

Banks urge Paulson to bring back "TARP Classic"

Much like the disastrous "new Coke" product launch of 1985, banks are asking Treasury Secretary Hank Paulson to bring back "TARP Classic," which would've invested in toxic mortgages rather than buying up stock of weak institutions to shore up balance sheets. From a story:

Two months after Treasury Secretary Henry Paulson pulled the plug on his plan to buy troubled mortgage assets, the financial industry is pushing the government to reconsider.

Since the Troubled Asset Relief Program, or TARP, took effect in October, Treasury has spent $267 billion buying preferred stock in financial institutions and auto companies, the agency said Thursday.

Paulson has said the capital infusions have stabilized the financial sector.

But the economy has taken a sharp turn for the worse in recent months, as credit has become less available and companies and consumers have cut back on their spending.

Meanwhile, U.S. banks continue to hold hundreds of billions of dollars of mortgage-backed securities that, if downgraded, could lead to another round of damaging writedowns.

That's why some observers want the Treasury to return to the premise of the original bailout and move toxic assets off banks' balance sheets...

Click here for full story.

Apartment rents now falling across the U.S.

Although rents in many places of Southern California started falling at least 12 months ago, it's been more recently that the declines have shown up in multiple markets throughout the U.S. Bad news for flippers hoping to earn cash flow until the market rebounds, but generally good news for potential renters. Some advice for landlords: if you keep your rents slightly under the market and resist the urge to push them up as high as possible, you'll keep your tenants longer, which will more than even out for vacancies you'll suffer over the long run.

First, from a Bloomberg News story:

U.S. apartment rents fell in the fourth quarter from the third as the national vacancy rate climbed to a four-year high of 6.6 percent, Reis Inc. said.

Job losses and lower wages are cutting into the pool of potential renters in their twenties and thirties, defying the expectation that apartments would benefit from the housing slump, the New York-based research firm said.

Asking rents fell 0.1 percent from the previous quarter, to $1,052 on average, their first quarter-to-quarter decline in almost six years. They rose 2.4 percent from a year earlier. Effective rents, what tenants actually paid, fell to an average $996 last quarter, down 0.4 percent from the prior quarter and up 2.2 percent from a year earlier...

Next, from an L.A. Times story:

After rising for several years, rents in the Los Angeles area are declining because of the economic recession and depressed home prices, researchers, real estate agents and property managers say.

The lower local rents match a national trend, according to a report released Wednesday showing apartment rents fell in 54 out of 79 U.S. metropolitan areas in the fourth quarter of 2008. Softening rents add another obstacle to a housing market recovery, economists say, because tenants with low rent payments feel less urgency to buy a home...

Los Angeles apartment rents fell 0.7% in the fourth quarter, the first decline since 2001, although overall rents for the year were up slightly over 2007.

Property owners and real estate agents say the supply of rental units has climbed in the last year. Overbuilding during the real estate boom added vacant units to the rental pool, and some home sellers discouraged by the moribund real estate market are renting their houses or condominium units rather than trying to sell. Foreclosures add both supply and demand to the rental market, as foreclosed homes become rentals and former owners seek places to rent.

Declining incomes and rising unemployment also mean people have less to spend on rent.

Mark Verge, owner of the property listings service Westside Rentals, said he'd seen rents fall faster in the last three months than at any time since he founded the company 13 years ago.

"I used to have to beg owners to lower rents. Now they ask me, 'What do you think I should lower it to?' " Verge said.

Verge said his service had 24,000 units listed for rent -- a 33% increase from the 18,000 he had at this time last year.

Rents had been holding up in the early part of last year, Verge said, as property owners accustomed to annual rent hikes continued to ask for relatively high amounts. In recent months, however, owners have found they must lower rents or let their units lie vacant, Verge said...

Finally, from the Lansner on Real Estate blog:

It may take landlords awhile to catch on, but rising vacancies should result in lower apartment rents in 2009, a local Grubb & Ellis Co. manager says.

Grubb & Ellis, a Santa Ana-based national commercial brokerage, issued its 2009 outlook saying that Orange County is the third-best multi-family market to invest in out of 56 U.S. apartment markets.

But Kurt Strasmann, Grubb’s regional managing director in Newport Beach, said the high ranking is due more to Orange County’s “long-term fundamentals” (good job growth, diverse economy, etc.) rather than prospects for landlords in the coming year.

Rents will be affected by two contradictory trends, the Grubb outlook said:

  • The pool of renters is increasing because foreclosures have forced more homeowners into apartments and because many would-be homebuyers are waiting for home prices to fall further.
  • There’s also been an increase in supply as more houses and condos that don’t sell are leased out. Many new college grads unable to find work are doubling up with room-mates or moving back home, decreasing the pool.

The great California fiscal earthquake

Some of you may remember the recall of former California Governor Gray Davis in 2003, soon to be replaced by grunting action start Arnold Schwarzenegger, who swept into office promising reform and conservative ideals. Davis was booted out of office mostly for being blamed for huge spikes in electricity rates -- when energy traders held the state hostage -- but he had also overseen an increase in state spending beyond growth in population and inflation during his term and was viewed as ineffectual.

A friend of mine was a top adviser to Davis at the time, and told me that Davis' biggest flaw was not standing up to his critics and fully explaining his decisions. When Schwarzenegger visited my friend's office and declared it a "perfect place for a (cigar) humidor," he knew things were going to be quite different moving forward.

So were Californians simply (a) unrealistic; (b) immature; (c) clueless or (d) silly to swoon over a well-meaning and likable Schwarzenegger, or were the state's future fiscal crises simply inevitable?

First, a story in Time magazine explains (hat tip:

As 2009 settles in, California isn't quite the golden state anymore. School districts are expected to lose billions of dollars in financing for improvements and development, and health-care services for the elderly, infirm and poor will likely deteriorate. State employees are facing payroll cuts, unpaid leaves and a hiring freeze. Money for firefighting in parched Southern California is drying up, as is financing for levees in flood-plagued northern environs of the state. And that's just for starters as California faces a budget deficit of more than $41 billion over the next 18 months...

In December, unable to wait for a budget solution any longer, the state pre-emptively canceled $3.8 billion for 2,000 public infrastructure projects, such as new prisons, veterans' homes and highways...

If the state runs out of cash by mid-February, as has been predicted, hundreds of state vendors, such as electrical-supply wholesalers, food-service companies and building- and grounds-maintenance firms, will be sent IOUs from the state government...

California has found itself in this financial quagmire as a result of a perfect storm of events. "It really has been a combination of things that have created the monstrosity that we are now in," says Barbara O'Connor, director of the Institute for the Study of Politics and Media at Sacramento State University. She cites inflation, population growth and mandates (like Proposition 13, which placed a limit on state property rate taxes that resulted in restrictions on tax increases) as having a snowball effect over the course of 30 years. Add these to California's extremely high foreclosure rate and a global recession (approximately 1 in 4 jobs in the state has international-trade ties), and the deficit quickly adds up. In the past, the state would borrow or sell bonds to bridge the gap, but with the current credit crunch, few investors are willing to offer assistance...

Click here for full story.

Next, a big reason for the state's quandary is the way in which it creates its annual budget. That's why a group called California Forward is working to institute changes in the budget process. Led by co-chairs Thomas McKernan (CEO of the Auto Club) and Leon Panetta (the former Congressman and Clinton White House Chief of Staff whom President-elect Obama has tapped to head the CIA), they recently commissioned Beacon Economics to produce a report on what lies ahead for the state given reduced income due to the housing bust and the recession.

You can find the intro letter signed by McKernan and Panetta here.

You can find the entire report by Beacon Economics here.

If you're a California resident, I urge you to read this report -- and then contact your local State Senate and State Assembly representatives for your input.

Citigroup approves of mortgage cram-downs

In a move that could set the stage for other large lenders to follow suit, Citigroup has announced its support of legislation to allow bankruptcy judges to alter the terms of mortgages, including reductions of principal. From a New York Times story:

In a move that would help troubled homeowners, Citigroup agreed to support legislation that would let bankruptcy judges adjust mortgages for at-risk borrowers, leading Congressional Democrats said on Thursday...

Members of the House and Senate said Citigroup had agreed to drop its opposition, providing no future mortgages are covered by the law.Citigroup, which is receiving more than $300 billion in bailout assistance, says that it is open to measures that would help homeowners...

The revised bill that Citigroup endorsed would allow bankruptcy judges to adjust the principal payments or interest rates on existing loans. Judges could also extend the terms on mortgage loans, according to the language of the bill, which would force lenders to take losses without a say in bankruptcy court proceedings...

No other bank has broken ranks with the industry on the proposed bill. Mr. Durbin said he hoped the move by Citigroup, should other banks and financial trade associations take the same stance, would lead to backing by enough Democrats and moderate Republicans to push the bill through.

Click here for full story.

Tuesday, January 6, 2009

Investors returning to California's Inland Empire

The rapid decline in prices in the Inland Empire is now starting to draw various investors, who either buy/flip, buy/fix up/flip or buy/rent for cash flow. From an article in the Riverside Press Enterprise:

After retreating in fear from housing's sudden collapse, those who buy homes as an investment are reappearing in Inland Southern California's beaten down marketplace.

Sharply discounted foreclosed properties are luring back the first wave of professional investors and amateurs, both those hoping to "flip" for a quick buck and those wanting to buy and hold for a future rebound...

The process of "flipping" is still risky, many experts warn, since the investor has to take into account that home values continue to fall, which could erode anticipated profits from a resale..

Brokers say most prospective investors, many of whom were burned by waiting too long to sell properties before prices plummeted, still remain timidly on the sidelines.

Mike Novak-Smith, a broker-agent with Re/Max Results in Moreno Valley who specializes in selling repossessed houses, said since the summer he has seen an influx of investors, who he said now account for about 30 percent of his buyers. He said most seem to be novices, while the more seasoned are waiting for prices to fall further.

Investors also must cope with government regulations designed to rein them in. Fannie Mae and Freddie Mac enforce a limit of four homes per borrower, and the Federal Housing Administration requires the seller of a house purchased with an FHA-insured mortgage to have owned it at least 90 days...

The rekindling of investor interest is bad news to some people who blame investors for having fueled the recently burst real estate bubble.

Investors say they are generally targeting the cheapest and most dilapidated houses nobody else wants and turning them into the nicest-looking houses in the neighborhood...

Not everyone agrees that investors perform a public service.

John Marcell, an Upland mortgage broker, said the FHA will lend up to $35,000 to first-time buyers for repairs or improvements. He said he worries that investors will again inflate home prices by flipping.

Marcell also said that investors who buy houses for income and future appreciation will contribute to an oversupply of rentals.

Prudential California Realty agent Marni Jimenez said in competition for houses, investors generally have an edge over first-time buyers. She said that is because investors come with a substantial down payment.

Investors also tend to have conventional financing that lenders prefer over the FHA mortgages that are geared for entry level buyers that take longer to arrange.

Inland economist John Husing said investors who are buying bank-owned houses for rental income further deteriorate neighborhoods and attract crime. "It is a great strategy for the investor but a disastrous strategy for the community," Husing said.

The End of Wall Street

The Wall Street Journal Web site has an interesting three-part video piece entitled "The End of Wall Street."

Chapter One: Why it Happened

Chapter Two: Why it Happened

Chapter Three: What Happens Next

Monday, January 5, 2009

Hispanics a primary victim of mortgage fraud and foreclosures

Having walked through model home complexes during the boom years when sales agents would attempt to explain sub-prime and Option ARM loans to Hispanic buyers who didn't seem to fully understand the ramifications of their signatures, I'm sure the procedure at the lender's office went something like this: "Just sign here. We'll fill out everything for you. Housing always goes up. Have a nice day!"

The problem with such irresponsible lending practices? Foreclosures. Lots of 'em. And it seems that part of the problem was due to other Latinos viewing an untapped demographic and creating their own version of ponzi king Bernard Madoff in order to earn fat commission checks. From a Wall Street Journal story:

For years, immigrants to the U.S. have viewed buying a home as the ultimate benchmark of success. Between 2000 and 2007, as the Hispanic population increased, Hispanic homeownership grew even faster, increasing by 47%, to 6.1 million from 4.1 million, according to the U.S. Census Bureau. Over that same period, homeownership nationally grew by 8%. In 2005 alone, mortgages to Hispanics jumped by 29%, with expensive nonprime mortgages soaring 169%, according to the Federal Financial Institutions Examination Council.

An examination of that borrowing spree by The Wall Street Journal reveals that it wasn't simply the mortgage market at work. It was fueled by a campaign by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos...

When the national housing market began unraveling, so did the fortunes of many of the new homeowners. National foreclosure statistics don't break out data by ethnicity or race. But there is evidence that Hispanic borrowers have been hard hit. In part, that's because of large Hispanic populations in areas where the housing bubble was pronounced, such as Southern California, Nevada and Florida.

In U.S. counties where Hispanics account for more than 25% of the population, banks have taken back 6.7 homes per 1,000 residents since Jan. 1, 2006, compared with 4.6 per 1,000 residents in all counties, according to a Journal analysis of U.S. Census and RealtyTrac data...

...a close look at the network of organizations pushing for increased mortgage lending reveals a more complicated picture...Lawmakers and advocacy groups pushed hard for the easy credit that fueled the subprime phenomenon among Latinos. Members of the Congressional Hispanic Caucus, who received donations from the lending industry and saw their constituents moving into new homes, pushed for eased lending standards, which led to problems.

Mortgage lenders appear to have regarded Latinos as a largely untapped demographic. Many were first or second-generation U.S. residents who didn't own homes. Many Hispanic families had multiple wage earners working multiple cash jobs, but had no savings or established credit history to allow them to qualify for traditional loans...

Mortgage brokers became a key portion of the lending pipeline. Phi Nguygn, a former broker, worked at two suburban Washington-area firms that employed hundreds of loan originators, most of them Latino. Countrywide and other subprime lenders sent account representatives to brokerage offices frequently, he says. Countrywide didn't respond to calls requesting comment.

Representatives of subprime lenders passed on "little tricks of the trade" to get borrowers qualified, he says, such as adding a borrower's name to a relative's bank account, an illegal maneuver. Mr. Nguygn says he's now volunteering time to help borrowers facing foreclosure negotiate with banks.

Many loans to Hispanic borrowers were based not on actual income histories but on a borrower's "stated income." These so-called no-doc loans yielded higher commissions and involved less paperwork...

These days, James Scruggs of Northern Virginia Legal Services is swamped with Latino borrowers facing foreclosure. "We see loan applications that are complete fabrications," he says. Typically, he says, everything was marketed to borrowers in Spanish, right up until the closing, which was conducted in English.

Click here for full story.

Diagnosing (economic) depression

With all the rhetoric (and blog posts) about a potential economic depression, The Economist offers a means to diagnose the differences between a recession, a depression and a Great Depression. From the story:

THE word “depression” is popping up more often than at any time in the past 60 years, but what exactly does it mean? The popular rule of thumb for a recession is two consecutive quarters of falling GDP. America’s National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. But there is no widely accepted definition of depression. So how severe does this current slump have to get before it warrants the “D” word?

A search on the internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months...

Before the 1930s all economic downturns were commonly called depressions. The term “recession” was coined later to avoid stirring up nasty memories. Even before the Great Depression, downturns were typically much deeper and longer than they are today (see right-hand chart). One reason why recessions have become milder is higher government spending. In recessions governments, unlike firms, do not slash spending and jobs, so they help to stabilise the economy; and income taxes automatically fall and unemployment benefits rise, helping to support incomes. Another reason is that in the late 19th and early 20th centuries, when countries were on the gold standard, the money supply usually shrank during recessions, exacerbating the downturn. Waves of bank failures also often made things worse.

But a recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%...

Where does that leave us today? America’s GDP may have fallen by an annualised 6% in the fourth quarter of 2008, but most economists dismiss the likelihood of a 1930s-style depression or a repeat of Japan in the 1990s, because policymakers are unlikely to repeat the mistakes of the past. In the Great Depression, the Fed let hundreds of banks fail and the money supply shrink by one-third, while the government tried to balance its budget by cutting spending and raising taxes. America’s monetary and fiscal easing this time has been more aggressive than Japan’s in the 1990s.

However, these reassurances come from many of the same economists who said that a nationwide fall in American house prices was impossible and that financial innovation had made the financial system more resilient. Hopefully, they will be right this time. But this crisis was caused by the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. Policymakers will not make the same mistakes as in the 1930s, but they may make new ones.

Click here for full story.

10 questions on the housing market

Last month I was asked by the North American Retail Hardware Association to answer 10 questions about the housing market in 2009 for the January issue of the association's magazine, "Hardware Retailing."

You can find .pdf version of the article by clicking here, but I've also republished these 10 questions and answers below:

  1. What can and should the Obama administration and Congress do to turn around the stalled housing market?

While I would expect to see a continuation of some solutions that the Federal Reserve, Congress and the White House has been attempting to address a stalled market and rising foreclosures, I think an Obama Administration will begin to take a more active role instead of the all-volunteer ideas espoused so far.

First, both the Hope for Homeowners and FDIC programs will only help buyers behind on their mortgages, so it completely ignores homeowners who are struggling to keep up with payments on credit cards, drawing down savings, or borrowing from relatives. That needs to change.

Secondly, I keep hearing rumors of the FHA working with the same sub-prime lenders that led to the outsized boom in the first place. Since we can ill afford to have FHA fall like another mortgage domino, the Obama Administration needs to appoint a mortgage regulatory czar and provide adequate funding to root out fraud and corruption wherever it exists.

Thirdly, laws will need to be passed to allow mortgage servicers to modify loans so they’re not sued by the multiple investors who own mortgage securities. Currently, servicers are prohibited to make any changes that could materially and adversely impact these bond holders. For example, if servicers could offer a shared-appreciation mortgage in which buyers give up future equity gains in exchange for a more affordable loan, both lenders and borrowers could benefit. As an added bonus, those buyers who can afford to continue to make payments but are under water may think twice before asking for loan modifications.

Fourthly, it looks like the Obama Administration will likely change bankruptcy laws to allow judges to modify mortgage loans at risk of foreclosure, also called a ‘cram down.’ This could include reducing principal, interest rates, or extending the mortgage term. Whatever their solutions, I would not expect to see them continue to be voluntary, because those ideas haven’t worked very well so far. And why should they? No one wants to volunteer to lose money!

  1. Are you in favor of first-time home buyer tax credits or providing a government buy-down of mortgage interest rates for home purchases? What other consumer housing incentives should be adopted?

I’m in favor of incentives that work and achieve the goal of re-starting a largely frozen market. The problem with the existing $7,500 tax credit is that it’s more of a loan that has to be paid back as opposed to a genuine credit for taking the risk of buying a home, so it’s done very little to spark the market. Home builders are now floating the idea of a larger tax credit that would never have to be paid back, thereby giving buyers an additional incentive to buy now as opposed to later, and the National Association of Realtors supports keeping the credit at the current level but also removing the requirement that it be paid back.

Similarly, any rate buy-downs would probably need to have some clear termination date – such as mid-2009 – in order to move potential buyers off the fence today. Some other incentives that might work include allowing buyers to immediately use that tax credit money for a down payment, re-instituting down payment assistance programs that are tied to buyers’ credit ratings, and making permanent higher FHA loan limits in high-cost areas that could re-set next year to lower levels. Of course that also assumes that FHA underwriters are closely monitoring buyers’ ability to pay off these pricier mortgages.

  1. Will we start to see the housing market turn around during 2009 or will recovery be delayed until 2010?

Since we’re already seeing existing home sales in certain markets starting to rebound due to dramatically lower prices, I think you’ll see a pricing floor sometime towards the end of 2009. However, once that occurs you’ll probably see prices stay flat through 2010 and 2011 and start to rise again by 2012. I guess it really depends on your definition of ‘recovery.’ For the new housing market, I don’t think you’ll see any meaningful increase in starts until 2010.

  1. What are the projections for housing starts and existing home sales in 2009 and 2010?

That depends on who you ask. The National Association of Realtors, the trade group for real estate brokers, is projecting a rebound for existing home sales of nearly 5% in 2009 to 5.19 million. Of course this follows two years of declines of over 12% in home sales. By 2010, the NAR is saying that sales will rise by another 7% to 5.55 million as pent-up demand from the past few years begins to be met.

The NAR is also projecting housing starts to continue falling in 2009 by nearly 22% as builders keep the lid on new releases while mopping up inventory, which would total about 731,000 units. They’re saying a rebound for starts won’t occur until 2010, and even then it will be fairly weak, approaching a rise of 6% to 772,000 units.

Not surprisingly, the trade group representing U.S. home builders, or the National Association of Home Builders, is a bit more bullish on the timing and trajectory of an improvement in home building activity. Their chief economist, David Seiders, is projecting annualized housing starts to hit bottom at 740,000 units in the first quarter of 2009 before rising to 835,000 units by the end of the year. But it’s really 2010 that he’s eyeing, projecting 1.1 million housing starts by the end of the year.

I’d say the reality lies somewhere in between the two groups: not as rosy as NAHB would hope, but it’s possible that a rebound will be more pronounced than the NAR is projecting. Nonetheless, builders should not be looking for the types of rebounds they’ve experienced in the past – this recovery will take longer and be much more gradual than in the past.

  1. Affordability conditions have long been a driving factor in housing sales. What is the outlook for affordability in 2009?

The outlook for home affordability in 2009 will be better than it’s been in four years. While no one likes to see the value of their homes decline, in the long run the marked improvements in affordability will provide the best engine for a market rebound. With short-term interest rates at new lows and the government suggesting they’re examining ways to bring rates for 30-year mortgages down to just 4.5%, 2009 could prove to be a great time to buy for those who see housing as a long-term investment.

According to the Housing Opportunity Index produced by the NAHB and Wells Fargo Bank, 56.1% of all new and existing homes sold during the third quarter of 2008 were affordable to families earning the national median income of $61,500. At the peak of the housing boom, that same index stood at just 40.4%, so in just four years national affordability has risen by over 16 percentage points.

Of course these affordability numbers vary greatly by region. In places like Ohio and Michigan, 80% to 90% of families can afford the median-priced home, whereas in certain markets such as New York, San Francisco and Los Angeles, affordability ranges from 10% to 20%. Yet in previous ‘bubble’ places such as California’s San Diego or Ventura County, affordability has skyrocketed to well over 30% as prices have plummeted.

Looking forward to 2009, if median prices continue to fall 10% to 15% as many economists forecast and rates stay low, affordability will only continue to improve, especially for the first-time buyer.

  1. With the government taking control of Fannie Mae and Freddie Mac, what impact will that have on the housing industry and the ability of consumers to get a mortgage?

In theory, the government nationalization of these two mortgage giants was necessary to prevent a total melt-down in the mortgage market. After all, once the private mortgage insurers started pulling out of the market, Fannie and Freddie were forced to back up to 80% of the mortgage market, which caused fees to consumers to rise.

With the government now attempting to re-energize the mortgage securitization market and investing $200 billion in the companies, buyers should look for lower rates, reduced fees, more wiggle room for buyers at risk of foreclosure, and some type of stabilization in housing prices versus a complete free-fall. The downside, of course, is to the U.S. taxpayer, who will ultimately pay higher taxes and face cuts in federal services to fund these bailouts. Ultimately, the goal is to prompt private mortgage insurers to re-enter the marketplace, but that won’t happen until the foreclosures have been adequately addressed.

  1. Which areas of the country have been impacted the most by the housing crisis? Which areas have been least affected?

The areas most impacted by the housing boom – and bust – have been the sun belt states such as California, Nevada, Arizona and Florida where you saw more over-building and speculative activity. To a certain extent, mini booms – and busts – were also evident in the Washington, D.C. area (which also includes Maryland and Virginia), Boston and some suburbs of New York City. And then of course you’ve got a state such as Michigan, whose housing market has been suffering not due to speculative activity, but because it’s part of the ‘rust belt’ and is directly impacted by troubles in the automobile industry.

One state that was seemingly immune to the housing bust was Texas, although its sales have also been declining recently due to the tighter credit environment. Yet once credit starts to flow more freely, Texas should rebound quickly as well as many parts of the mid-west, much of the northwest and the southeast. Although the housing bust was to a certain extent a national phenomenon, its impact continues to be disproportionately felt in the sun belt states noted earlier.

  1. Do you have any insights into when home prices will hit bottom and begin increasing in value again?

The silver lining of rising foreclosures – which now account for 40% of the market nationally – is that they’ve forced prices down faster for existing homes than what’s been experienced in previous downturns. Consequently, many experts believe that home prices in many markets will hit bottom by the end of 2009, whereas other areas won’t hit that trough until 2010. Moreover, whereas many areas will experience another 10% to 15% decline, some regions that are still priced too high relative to incomes or achievable rents may see steeper declines over the next two years. Bear in mind, however, that these estimates are for entire regions – in certain exurbs of major metropolitan areas, the damage has already occurred and you may not see further pricing declines.

As for increasing in value again, this recession is likely to turn into something more ‘u-shaped’ than ‘v-shaped,’ and what that means for housing prices is a lengthy bouncing along the bottom until late 2012. However, in those areas in which foreclosed inventory is quickly mopped up by investors, with builders dramatically cutting down on new supply, prices may firm up and begin to rise – albeit slowly – prior to 2012.

  1. As a general rule, when the housing market slumps the home remodeling market picks up, but that has not been the case during the current slowdown. Are there any hopeful signs that remodeling activity will pick up in the near term?

Another big difference with this housing slump versus past ones is that in order to keep their skeleton crews on staff, home builders are increasingly taking on remodeling work. What this means for existing remodelers is an even tougher environment at a time when the value of home owner improvements fell by 4% in 2007. In 2008, according to Harvard’s Joint Center for Housing Studies, this decline is expected to more than double to 9% and rise to 11% during the first quarter of 2009. And, since the remodeling industry grew by 40% in the last cycle, it’s expected to lose about one-third to one-half of that gain in this slump.

Despite these declines, since they’re less than the declines impacting the home building industry – which are off by 65% since the start of 2006 -- builders still see it as a comparatively safe business.

In fact, according to the NAHB, half of the builder members are now taking on remodeling jobs, and once they start up these divisions it’s unlikely that they’ll shut them down when the market improves. If anything, they make keep them around to help bolster the bottom line when the market slumps again. For existing remodelers, this might be a good opportunity to reach out to home building companies for joint venture or strategic partnership arrangements, because when the market rebounds, it’s expected to grow at a 4% annual clip.

Looking ahead past the slump, given the increasing age of the country’s existing housing stock and demographic shifts that support remodeling, the value of remodeling jobs is expected to approach $400 billion by 2015, or closing in on the estimated $455 billion in new construction. By 2020, it’s quite possible that the remodeling industry could even eclipse the value of new homes built annually.

  1. Builder confidence continues to decline as overall uncertainty about the economy negatively impacts consumer behavior. Will builders experience increased difficulty in securing access to necessary capital or will the credit markets begin to open up soon?

That largely depends on whether a builder is public or private. For private homebuilders, the relationship between them and their lenders has become so strained that over 140 builders throughout the country have teamed up to form the Building Industry Coalition for Economic Recovery. One of their primary goals is to force lenders to allow them to finish up existing projects rather than force them into foreclosure, which they say can mean a huge difference on the value they can extract from the project (i.e., 40 to 60 cents on the dollar versus 20 to 30 cents).

More recently, builders have asked for congressional support for mortgage ‘cram downs,’ in which bankruptcy judges will be allowed to modify loan terms in order to prevent foreclosures. This marks a sharp reversal for home builders, who previously resisted this idea because it would alienate lenders. Yet given the strained relationships with their own construction lenders and President-elect Obama’s support of such an idea, we might see ‘cram down’ legislation enacted in 2009. In addition, an Obama Administration might start attaching strings to bailing out banks, thereby forcing them to open the lending spigots to businesses including home builders instead of hoarding it as cash reserves.