The Housing Chronicles Blog: 2/1/09 - 3/1/09

Friday, February 27, 2009

Prepare for the coming battle for water

Due to its agriculture industry and far-flung suburbs, California has long been at the mercy of the water gods, and lately they've not been very friendly. With the Governor calling a water emergency, dramatically reducing output to the state's farms and with Nevada's Lake Mead at its lowest level ever, new development in outlying areas will be just as dependent on energy prices as it will be on the availability of water. Future conflicts between countries are expected to hinge on water supplies, and I expect we'll see similar ones here in the West. While we can in theory turn to converting sea water to fresh water, that will be far more expensive and drive up the cost for a natural resource most people in the U.S. have always thought of as almost free.

First, from an L.A. Times article on the Governor calling a water emergency:

Gov. Arnold Schwarzenegger today proclaimed a state of emergency because California is in the third year of a drought. His declaration sets the stage for additional steps to conserve water. Although precipitation is about 75% of normal for the year, key reservoirs, including the one in Oroville, are down to 35% of capacity.

In his proclamation, the governor uses his authority to direct all state government agencies to utilize their resources, implement a state emergency plan and provide assistance for people, communities and businesses affected by the drought...

The governor's order directs actions including:

* That all urban water users immediately increase their water conservation activities in an effort to reduce their individual water use by 20%.

* That the Department of Water Resources expedite water transfers and related efforts by water users and suppliers.

* That the department offer technical assistance to agricultural water suppliers and agricultural water users, including information on managing water supplies to minimize economic impacts and implementing efficient water management practices.

Next, from a Bloomberg News article on the serious water shortage hitting Lake Mead and what that means for those states which depend not only on its water, but the cheap electricity provided by Hoover Dam:

The crew is in a hurry. They’re battling the worst 10-year drought in recorded history along the Colorado River, which feeds the 110-mile-long reservoir. Since 1999, Lake Mead has dropped about 1 percent a year. By 2012, the lake’s surface could fall below the existing pipe that delivers 40 percent of the city’s water...

There’s no global marketplace for water. Deals for property, wells and water rights, such as the ones Mulroy must negotiate to build the pipeline, are done piecemeal. As the world grows needier, neither governments nor companies nor investors have figured out an effective and sustainable response...

Water upheavals are intensifying because the population is growing fastest in places where fresh water is either scarce or polluted. Dry areas are becoming drier and wet areas wetter as the oceans and atmosphere warm...

Yet local governments that control water face unyielding pressure from constituents to keep the price low, regardless of cost. Agricultural interests, commercial developers and the housing industry clash over dwindling supplies. Companies, burdened by slowing profits, will be forced to move from dry areas such as the American Southwest, Udall says.

“Water is going to be more important than oil in the next 20 years,” says Dipak Jain, dean of the Kellogg School of Management at Northwestern University in Evanston, Illinois, who studies why corporations locate where they do...

Over the Sierra Mountains from Las Vegas, Shasta Lake, California’s biggest reservoir, is less than a third full because melting snow that fed it for six decades is dwindling. A winter as dry as the previous two may mean rationing for 18 million people in Southern California this year, says Jeffrey Kightlinger, general manager of the Metropolitan Water District...

Robert Glennon, a University of Arizona law professor, says governments must provide enough water for human survival. Beyond that, only freely functioning markets can allot it to people who need it most, he says.

Fast-growing cities should buy from farmers who use water on marginal land, says Glennon, author of “Unquenchable” (Island Press, 2009). That would cut inefficiency caused by irrigating deserts, such as those around Las Vegas, to raise alfalfa or beef, he says.

Worldwide, about 60 percent of fresh water goes to irrigate crops through flooding, losing 70 percent of the moisture to evaporation, Lux Research says...

In 2005, after 19 years of negotiations, Los Angeles’s Metropolitan Water District signed a 35-year “dry year option” with the Palo Verde Irrigation District south of Las Vegas in California. Los Angeles pays 7,000 farmers to leave land fallow during droughts and ship their water to city residents. The city gives a one-time payment of $3,170 an acre (0.4 hectare) to farmers who sign up and then $630 per year for every acre not farmed..

Finding the water for casinos is one reason crews are working around the clock at Lake Mead.

In 2002 alone, lack of rainfall lowered the deep-blue waters by 24.6 feet, leaving white bathtub-ring-like marks on the brown cliffs and stranding docks half a mile from shore.

Today, the lake is 1,112 feet above sea level. Should it fall to 1,075 feet, the federal government would cut the water to seven states that depend on the Colorado River, according to an agreement they all signed in 2007. If that happens, the states would likely renegotiate a 1922 pact that divided up the river’s water rights in the first place, Mulroy says. Mexico’s allocation under a 1944 treaty could also change.

If the drought persists and more water is diverted from the Colorado, the lake could drop to 1,050 feet. That would prevent water from flowing into the intake pipe and cut 40 percent of Las Vegas’s supply -- the disaster Mulroy is trying to head off. Hoover Dam, completed in 1935 to regulate the river and form Lake Mead, wouldn’t be able to produce electricity for the 750,000 people it supplies in Los Angeles...

At 1,000 feet, the remaining intakes and the rest of the Lake Mead water would go. Because of climate change and population growth, chances of this are as great as 50 percent by 2026, the University of Colorado’s Udall says...

Click here for full story.

Recession deepens; California unemployment rate exceeds 10%

The U.S. economy fell into a much deeper recession than forecast during the fourth quarter of 2008. Much of this pain was felt in California, with its unemployment rate jumping to 10.1%.

First, from an L.A. Times article on the national economy:

Reporting from Washington -- The depths of the recession became much clearer this morning as the government announced that the economy shrank at a dramatic pace of 6.2% in the final three months of last year, the country's worst economic performance since 1982.

The Commerce Department sharply revised its earlier estimate of a 3.8% contraction in the fourth quarter for gross domestic product, the value of all goods and services produced by the economy. That initial figure was more optimistic than the 5% to 6% drop that most economists had predicted...

The only major sector to show an increase in spending was the federal government. It's spending was up 6.7%, highlighting the key role U.S. officials are playing in trying to keep the economy afloat, Gault said.

Next, from another L.A. Times article on California unemployment levels:

Reporting from Sacramento -- More than 1 in 10 California workers were unemployed in January, the largest percentage in nearly 26 years, the state reported today.

The 10.1% jobless rate is the highest since June 1983 and not far below the 11% record set in November 1982 at the worst point of a severe recession, according to the governor's office. Job losses escalated in January, with the state's unemployment rate jumping by 1.4 percentage points from a revised 8.7% for December...

Both numbers underscore that the U.S. and California economies are locked up because of a wrenching drop in demand for goods and services from businesses and consumers alike, economists said...

Obama's budget goes after mortgage interest deduction

I'm starting to feel a bit sorry for singles making over $200,000 and couples making over $250,000 per year, as it seems they're going to be paying the freight for a revamped health care system.

Meanwhile, much of the country continues to waddle around, hitting up McDonald's drive-through windows and avoiding regular exercise, thus driving insurance costs up for everyone. This will probably turn out to be one of the biggest political fights of Obama's first year.

From Inman News

Industry groups representing Realtors, home builders and mortgage lenders are up in arms over the Obama administration's proposal to roll back the itemized deduction rate for wealthy taxpayers -- including deductions homeowners can claim on mortgage-interest payments and other expenses associated with homeownership.

The rollback of the tax break wouldn't take effect until 2011, and would apply only to families earning more than $250,000 and individuals making $200,000 or more -- less than 4 percent of taxpayers in 2006.

The Obama administration, which floated the idea in releasing its proposed budget Thursday, says capping the itemized deduction rate for wealthy families and individuals at 28 percent would raise $318 billion over 10 years, expanding health insurance coverage while lowering health care costs.

But industry industry groups say the change would hurt home sales and prices at a time when homebuyers need incentives, not disincentives, to buy...

Click here for full story.

The neighborhoods of Los Angeles, defined

The L.A. Times has an interesting new interactive feature to help define (or redefine) the sprawling city's 87 neighborhoods. Note that this map doesn't include the numerous incorporated cities that surround or are adjacent to Los Angeles, such as Beverly Hills, West Hollywood and Burbank:

So far, Times staffers have laid out 87 communities within the city limits. Many of these include well-known smaller neighborhoods--such as Larchmont or Little Tokyo--which are listed under larger communities, at least for now.

Let us know what you think. As you explore the neighborhoods, you can leave comments and even draw the boundaries as you see them. For several weeks, we plan to listen as we finalize what will become The Times' standard for L.A. neighborhoods and the basis for more interactive projects to come.

What are really interesting to read are the comments from local residents on how they define their neighborhoods differently than the U.S. Census Bureau, from where these original maps were made. That's why the Times is inviting readers to use their mapping software to re-draw neighborhood boundaries.

Thursday, February 26, 2009

Prepare for higher taxes! Obama unveils budget blueprint.

President Obama unveiled his budget blueprint, which reverses Bush's tax cuts earlier in the decade, increases the wages subject to Social Security withholding and increases the long-term capital gains tax from 15% to 20%. Think he'll get it through Congress? From a Wall Street Journal story:

President Barack Obama delivered a $3.6 trillion budget blueprint to Congress Thursday that aims to "break from a troubled past," with expanded government activism, tax increases on affluent families and businesses, and spending cuts targeted at those he says profited from "an era of profound irresponsibility." The budget blueprint for fiscal year 2010 is one of the most ambitious policy prescriptions in decades, a reordering of the federal government to provide national health care, shift the energy economy away from oil and gas, and boost the federal commitment to education.

One war would end, as troops leave Iraq, while another would ramp up in Afghanistan. To fund it all, families earning over $250,000 and a variety of businesses will pay a steep price, but Mr. Obama implored Americans to own up to the mistakes of the past while accepting profound sacrifices...

The budget's introduction is likely to herald one of the fiercest political fights Washington has seen in years, waged on multiple fronts. Within minutes, Republicans were lambasting a document they called class warfare, designed to mire the nation in recession for years to come. Business lobbyists were girding for battle even before the budget's unveiling. Even Democrats are likely to blanch at cuts to agriculture and other programs that have been tried before – and have failed repeatedly...

As expected, taxes will rise for singles earning $200,000 and couples earning $250,000, beginning in 2011 -- for a total windfall of $656 billion over 10 years. Income tax hikes would raise $339 billion alone. Limits on personal exemptions and itemized deductions would bring in another $180 billion. Higher capital gains rates would bring in $118 billion. The estate tax, scheduled to be repealed next year, would instead be preserved, with the value of estates over $3.5 million -- $7 million for couples -- taxed at 45%...

Businesses would be hit, too. The budget envisions reaping $210 billion over the next decade by limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation. Another $24 billion would come from hedge fund and private equity managers, whose income would be taxed at income tax rates, not capital gains rates. Oil and gas companies would be hit particularly hard, with the repeal of multiple tax credits and deductions.

The federal government would take over most student lending. Managed care companies would lose their subsidies for offering Medicare plans. Farmers with operating incomes over $500,000 would see their farm subsidies phased out. And cotton storage would no longer be financed by the federal government.

What? No more cotton storage? Now that's just over the line.

Click here for full story (subscription required)

What's really going on with the economy?

Recession or depression? Inflation or deflation? A bend or a new trend?

Confused about the differing opinions regarding the economy from various pundits and economists? We asked Chris Thornberg, a founding principal of MetroIntelligence partner Beacon Economics, for his thoughts on what's really going on with the U.S. economy, featured below but also to appear in the March issue of Builder & Developer magazine.

For those of you who don't know him, Christopher Thornberg PhD, is an economist and a founding principal of Beacon Economics, an economic research and consulting firm. Chris and I have worked together since early 2008 on various real estate-related consulting projects, allowing us to provide a level of sophistication in modeling and forecasting which I believe was previously unavailable to the building industry. We don't just repurpose data from other sources, slap our brand on it and then send you an invoice -- we tell you what it really means.

"What's really going on with the economy?"

by Christopher Thornberg

Over the last several months, it’s been very easy to get caught up in hysterical headlines regarding the economy, or witness the ensuing panic among the world’s greatest drama queens -- otherwise known as Wall Street traders. But as I drive in Southern California to various meetings or hop on a plane to give a speech, the world still seems to be operating much as it always has. So what’s really going on?

When economic growth occurs, because it depends on the behavior and actions of human beings, it doesn’t do so smoothly: it arrives in trends and bends. Trends are based on long-run factors such as demographics, productivity, investments and public policy. Bends are based on short-run factors driven by imbalances, and a recession is simply a negative bend required to rebalance the economy to long-term trend lines.

Yes, we are clearly in a recession, one which was fully underway as early as the first quarter of 2008 (or even the fourth quarter of 2007) despite the ongoing denials at that time by most economists and politicians. And yes, this recession is different than some others in the past because it was caused by imbalances in not just one or two factors, but three: housing, finance and consumer spending.

When the housing pyramid finally collapsed in 2007, it did so because prices were seriously out of whack regarding household incomes and what a home might rent for on the open market. The building of this pyramid was fed by the ridiculous availability of easy credit to anyone who could fog a mirror, made possible by too much money sloshing around the world in search of an easy return. The titans of Wall Street, focused on short-term gains and enabled by ratings agencies to leverage borrowed money to ratios that were unsustainable, ignored the long-term ramifications of their financial alchemy simply because they could.

But so did the average American consumer, who collectively bid up the total value of U.S. assets to $80 trillion dollars, yielding a national price-to-earnings ratios (asset values vs. earnings) that was 25% to 30% higher than its long-term average. Consequently, the true sin of Wall Street isn’t that they robbed Baby Boomers of their plans for early retirement, but that they actually made them think it was possible at all. It may not make you feel better, but that extra wealth, which could total $20 trillion, was really never there in the first place.

So where do we go from here? To be certain, things are bad, but not as bad as pundits and politicians would have you believe. For one thing, the pullback in consumer spending is a good thing for an economic rebound because Americans need to re-learn how to save. So far they’re quick studies, with the savings rate already up to 4% -- about half of where it needs to be before it will again re-align with the appropriate amount of spending not financed by debt. Barring any more huge shocks to the economy, the general recovery – tepid as it will likely be – should occur around mid-2010. But between the peak and trough, we’re looking for an aggregate loss of 3.7% to U.S. GDP, so the pain will be real but essential to return the economy to long-term health.

For the building industry, you’ll just have to be a bit more patient. Given how huge this last bubble inflated, it will take more time for the market to wring out its excesses, so the recovery for housing will probably be delayed until 2012. When housing does hit bottom, rather than experiencing a nice bounce like in the past, it will simply dribble on the ground until household finances and consumer sentiment catch up. Yet in the long run, lower prices are the best medicine for an industry that requires affordable housing in order to operate. For now, resist the urge to panic. There’s a reason why many people believe that the Chinese character for the word “crisis” translates as “danger plus opportunity," although others think it just means "crisis." Either way, patience and planning will eventually win out.

Want to know more about Beacon? Click here.

Want to know more about MetroIntelligence Real Estate Advisors? Click here.

Wednesday, February 25, 2009

Obama's mortgage plan: is it fair to taxpayers?

Feeling embittered that your tax dollars are going to be used to help people avoid foreclosure who made bad decisions? A 'dust-up' in the L.A. Times ponders the question.

First, from Richard Green at the USC Marshall School of Business and a director at the Lusk Center for Real Estate:

First, many borrowers who were responsible now find themselves in trouble because rapidly falling home prices in some areas have left them with mortgage balances that exceed their house value, because they have lost their job in the midst of a rapidly deteriorating employment market, or both.

The idea of allowing people to refinance into new loans backed by Fannie Mae and Freddie Mac at the current low interest rates -- even if the borrowers now have little or no equity -- makes a lot of sense to me.
Second, the costs of having even irresponsible borrowers default are large.

Recent work by a number of scholars has convinced me that foreclosed houses, once they reach some critical mass within a neighborhood, do substantial damage to the value of nearby houses. Foreclosed houses, moreover, are not well maintained and therefore harm neighborhood aesthetics. I think we must hold are noses and pursue policies that reduce foreclosures, which I believe the Obama plan will do...

On the opposing side, Christopher Thornberg, principal of Beacon Economics and formerly of the UCLA Anderson Forecast:

Taxpayers should resent the idea that their hard-earned money is going to bail out those who took on loans they clearly couldn't afford. They should also resent taxpayer money going to banks whose egomaniacal CEOs take on excessive risk to drive up their annual bonuses to absurdly high levels even as they buy $1,000 garbage pails and walk away rich from the ruin they leave behind.

But there is a large difference between the two situations from a public policy perspective.

When banks fail, the potential impact on the credit markets and money supply is enormous. This is a lesson well learned after centuries of banking crises. It is the reason we have a Federal Reserve bank system...

In short, if we are going to spend taxpayer money, I would suggest that we use it not to help people who spent beyond their means to keep homes they don't deserve, but to help those prudent families take advantage of falling prices by buying empty units. This prevents blight and rewards good behavior, not bad.

And if we really wish to not harm those who may have made a bad choice, how about another basic change: If they allow themselves to be foreclosed on quickly and efficiently, let's not allow any black marks on their credit records. Then they can start fresh and perhaps go buy one of those foreclosed units themselves.

In any case, policy debate aside, taxpayers have little to fear. Most folks out there that used subprime or Alt-A mortgages bought so far outside their means and are so far underwater that there is little that can be done for them within the limited means provided under Obama's bailout plan.

They don't qualify for Freddie or Fannie refinancing, and there is simply no way their loans can be modified to keep them in their houses. As such, I expect that little taxpayer money will actually be spent on the worst of the borrowers.

You can read the entire article here.

With whom do you agree?

Could the states hit hardest by the housing downturn bounce back faster?

Here's an interesting theory: Luke Tilley, a senior economist with IHS Global Insight, thinks that the states hit hardest by the downturn in housing -- namely California, Arizona, Nevada and Florida -- could recover faster than states in the mid-west -- such as Michigan, Ohio, Illinois and Ohio -- which have lost manufacturing jobs that may never return. From a story at

In a twist of irony, the states hit hardest by the now-burst housing bubble could be among the earliest to recover from the devastating recession that resulted, outpacing the rest of the United States as soon as 2011.

“They’ve had a steeper decline, but they will have a stronger recovery,” predicted Luke Tilley, senior economist for IHS Global Insight’s U.S. regional service, in a recent online presentation. He was, of course, referring to the “housing states” of California, Arizona, Nevada, and Florida, which benefited mightily in terms of tax revenue, population growth, and new jobs during the boom...

The good news is that in terms of home prices, California and Florida may be reaching the bottom in terms of home prices in the first quarter of this year, according to Tilley. (Other regional economists have less rosy projections, particularly for Florida.) He anticipates that Arizona will reach its low point in 2009’s second quarter, followed by Nevada in the third quarter.

Unfortunately, the jobs situation—always a lagging indicator for the economy—won’t crater until later this year, at the earliest, according to Tilley’s analysis. Nevada will be the first to slide to the bottom, with an unemployment rate of (ouch) 10.1% in 2009’s third quarter. Tilley expects the other three housing states—California, Arizona, and Florida—to reach the bottom as far as jobs in 2010’s first quarter, with “trough” unemployment rates of 10.5%, 8.8%, and 9.5% respectively.

When employment does rebound, though, these states should be able restart their economic engines relatively quickly with their choice of workers. In contrast, manufacturing states such as Michigan, Indiana, Illinois, and Ohio may never recover the factory jobs they have lost during this recession, said Mike Lynch, an economist with IHS Global Insight’s U.S. regional service...

Tuesday, February 24, 2009

President Obama explains his stimulus plan

If you happened to miss President Obama's State of the Nation speech tonight to Congress, you can find it online at numerous places (including here at CNN).

I thought there were numerous 'take away' points that would much discussed tonight and tomorrow, most of which were included in Andrew Sullivan's live blogging of the event:

9.37 pm. I like the historical references to using crises to make long-term investments: the ability to do two things at once:

In the midst of civil war, we laid railroad tracks from one coast to another that spurred commerce and industry. From the turmoil of the Industrial Revolution came a system of public high schools that prepared our citizens for a new age. In the wake of war and depression, the GI Bill sent a generation to college and created the largest middle-class in history.

This is lethal politics and strikes me as very much attuned to the mood of the public. And how great it is to have a president refer to American history with intelligence and acuity.

Click here for the entire blog post.

Click here for watch the speech on demand at

The best and worst markets for 2009

Wondering where the housing market might rebound first and/or perform best in 2009?

Builder magazine, in tandem with sister company Hanley Wood Market Intelligence, has researched and identified the top 15 markets. Texas and the Carolinas perform particularly well on this list. From the article:

To compile these lists, we analyzed the top 75 housing markets in the country. We ranked them based on population trends and job growth, perennial drivers of housing demand. We also examined what’s happened with home prices; many of the healthiest markets have managed to hold the line on home values. And finally, we considered the rate building permits, which may be the single best ongoing indicator of builder confidence in a market. We combined all these metrics to produce a score for each market.

The top 15, in reverse order:

15. Myrtle Beach, South Carolina
14. Wilmington, North Carolina
13. Charlotte, North Carolina
12. Denver, Colorado
11. Nashville, Tennessee
10. Washington, D.C.
9. Fayetteville, North Carolina
8. Indianapolis, Indiana
7. Seattle, Washington
6. Raleigh, North Carolina
5. Dallas, Texas
4. San Antonio, Texas
3. Ft. Worth, Texas
2. Austin, Texas
1. Houston, Texas

The magazine has also prepared a similar list of of the worst 15 markets for 2009, which you can read about here. In that case, Florida and the central valley portion of California join the list of usual suspects. From that article:

While virtually every major metro market took a blow last year, the weakest markets were decimated by an unprecedented and lethal combination of job losses, falling home prices, and rising foreclosures.

The fundamentals are so poor in many of these markets that they are likely to be among the last to recover from the national housing downturn. As you’ll find as you click through the list, the weakest markets for 2009 are comprised primarily of bust markets in Florida and California, along with a few rust-belt cities with longer-term economic difficulties.

The bottom 15, in reverse order:

15. San Francisco, California
14. Lakeland, Florida
13. Sacramento, California
12. Cleveland, Ohio
11. Miami, Florida
10. Reno, Nevada
9. Melbourne, Florida
8. Fresno, California
7. Ft. Lauderdale, Florida
6. Naples, Florida
5. Daytona Beach, Florida
4. W. Palm Beach, Florida
3. Pt. St. Lucie, Florida
2. Stockton, California
1. Detroit, Michigan

A housing recovery must first start with land values

For many people working in the business of developing and selling residential land, they’re hoping that 2009 is the year that buyers and sellers will finally be able to agree on a price and thus plan ahead for an eventual rebound. To be sure, the year 2008 was a terrible year to be in the land business: according to Real Capital Analytics in New York, the dollar volume of land sales in 2008 was just a fraction of the $37.07 billion reported in 2007.

One major reason for the sharp drop-off in activity – estimated at 75% through August of 2008 versus the same period of 2007 – was that buyers and sellers were not able agree on prices and terms. At the same time, potential buyers such as land developers, builders and hedge funds remained in ‘wait-and-see’ mode as they devoted most of their energy to simply holding onto what they already had.

Moreover, since many land sellers in 2008 were home builders looking to book losses before the end of the year in order to carry back tax losses for 2007 and 2006, objective price discovery became impossible when companies such as Lennar and D.R. Horton were getting rid of land holdings for as low as 25 cents on the dollar. Finally, with private capital hibernating, the few buyers out there with the capital to invest are looking to invest for long-term gains and are thus unusually patient to find the best deals.

That patience may be about to pay off.

According to Erik Christianson at The Hoffman Company in Irvine, California, land values for a standard 7,200-square-foot finished lot in the high desert of Los Angeles County, the low desert of Riverside County and various submarkets of the Inland Empire have fallen from 55% to 70% since the market last peaked in the fourth quarter of 2005. Similar declines have been reported in other sun belt markets such as Phoenix and Las Vegas. With raw land selling for close to its value for agricultural uses, the best potential deals today are for finished lots, entitled lots that are not yet improved and even standing inventory of home builders cut off by their lenders.

Moving into 2009, some brokers think that values have fallen almost low enough to capture the interest of not just the usual suspects, but vulture funds armed with nine-figure war chests set up especially by land development veterans to pounce at the right time. But for inexperienced hedge funds and private equity companies located far from where the land is located, they often must outsource their due diligence, purchase decisions and the development of their land portfolios to others. For them, the term ‘caveat emptor’ has rarely been more true.

For example, argues Les Whittlesea of Whittlesea-Doyle, which specializes in Southern California’s Inland Empire, a fund which insists it is only interested in larger parcels including 500 or more lots could easily miss better opportunities with fewer lots that are located closer to existing jobs and city infrastructure. Consequently, when the market rebound does happen, it will likely favor certain submarkets over others, but only a thorough analysis will separate the winners from the laggards.

Instead of finding the deals first and then conducting the analysis, it might be smarter for buyers to first rank a region’s submarkets before falling in love with a specific parcel and then having to justify it with economic smoke and mirrors. After all, sometimes the best opportunities come in smaller packages, but you wouldn’t know it unless you have your own – and objective -- guides to show you the way.

Monday, February 23, 2009

Determining the value of land

So how can builders compete 'when the land is free?' Well, according to the Calculated Risk blog, they can't -- at least not against REOs.

And it's not like land values haven't already corrected. Since the peak of the market in 4Q 2005 through 1Q 2009, finished lots in L.A. County have fallen by well over 60%. In Riverside County they're down by 60% to 75%. In San Bernardino County, down by 55% to 70%. And in the Coachella Valley, they're down by 60% to 75%.

Even with these price drops, there's still a disconnect between what buyers are willing to pay and what sellers -- mostly banks and some builders -- are willing to accept.

Into this mix are venturing hedge funds and private equity groups. My concern is that since most of them don't know much about land development, they're tapping the same executives who bought so much of the over-priced land that has decimated the industry in the first place. Falling in love with resumes, some seem to be glossing over basic performance benchmarks (i.e., "How many of your prior land deals went BK or to foreclosure?"). Given that it's now the taxpayers picking up the bill for these mistakes, it's a fair question. While the declining market certainly has played a role, in many cases it was a simple lack of proper due diligence that was the problem.

I'll be writing about the importance of the price of land -- and buyers and sellers agreeing on terms -- for my next column in Builder & Developer magazine.

Economist Krugman seconds the call to nationalize banks

New York Times columnist and economist Paul Krugman seconds Nouriel Roubini's call to nationalize the nation's largest banks, laying out his case in plain English. From his column:

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders...

To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.

But here’s the thing: the funds needed to bring these banks fully back to life would greatly exceed what they’re currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it’s basically putting up all the money, the government should get ownership in return...

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders...

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K....

What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.

Is it time to just nationalize the banks already?

For the last two weeks, we continue to hear various pundits and economists call for nationalizing the banks -- at least temporarily -- in order to fully admit the scale of the problems we face instead of the one-step-forward, two-steps-back tried so far. Now Dr. Nouriel 'Dr. Doom' Roubini, who is certainly no fan of preventing the free market from working, is suggesting that we may no longer have a choice. From a Wall Street Journal interview:

An idea he floated only last week -- that our "zombie banks" be temporarily nationalized -- aired first on, where he writes a weekly column. It has evolved, in the space of just a few days, from radical solution to almost received wisdom...

Mr. Roubini tells me that bank nationalization "is something the partisans would have regarded as anathema a few weeks ago. But when I and others put it in the context of the Swedish approach [of the 1990s] -- i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector -- it's clear that it's temporary. No one's in favor of a permanent government takeover of the financial system."

There's another reason why the concept should appeal to (fiscal) conservatives, he explains. "The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks."...

So, will the highest level of government be receptive to the bank-nationalization idea? "I think it will," Mr. Roubini says, unhesitatingly. "People like Graham and Greenspan have already given their explicit blessing. This gives Obama cover." And how long will it be before the administration goes in formally for nationalization? "I think that we're going to see the policy adopted in the next few months . . . in six months or so."

That long? I ask. "Six months from now," he replies, "even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness...

Yet another reason why bank nationalization is a good idea, Mr. Roubini continues, is that "we started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. J.P. Morgan took over Bear Stearns and WaMu. BofA took over Countrywide and then Merrill. Wells Fargo took over Wachovia. It doesn't work! You can't take two zombie banks, put them together, and make a strong bank. It's like having two drunks trying to keep each other standing...

How does Mr. Roubini think the media has covered the financial crisis? "The problem," he says -- after first stating to me that he intends "no offense!" -- "is that in the bubble years, everyone becomes a cheerleader, including the media. This is the time when journalists should be asking tough questions, and I think there was a failure there. The Masters of the Universe were always on the cover, or the front page -- the hedge-fund guys, the imperial CEO, private equity. I wish there had been more financial and business journalists, in the good years, who'd said, 'Wait a moment, if this man, or this firm, is making a 100% return a year, how do they do it? Is it because they're smarter than everybody else . . . or because they're taking so much risk they'll be bankrupt two years down the line?'

"And I think, in the bubble years, no one asked the hard questions. A good journalist has to be one who, in good times, challenges the conventional wisdom. If you don't do that, you fail in one of your duties."

Indeed, only needs to review the former covers of magazines such as Fortune, Forbes and Business Week to wonder why they didn't ask, "Exactly HOW are these people making this much money?"

In Las Vegas, all bets are off

During the last housing bust of the early 1990s that hit Southern California, many people in the building industry simply temporarily relocated to Las Vegas since it was still booming. For years, thousands of people moved to Southern Nevada for the job opportunities afforded by a growing casino industry and the sorts of services that a growing city needs. Has that now stopped? A story in The Economist asks the question:

The housing slump and high petrol prices do seem to be taking their toll. In the year to April, gaming revenue across Vegas was down by 3.3% from the year before. A dip in occupancy, usually an impressive 90-95%, has prompted hotels to cut room rates, reversing a steady rise in recent years to more than $135 a night on average. Sub-$100 deals at prominent Strip hotels have proliferated in recent weeks.

Though hotels are still coy about advertising these bargains, MGM Mirage, the biggest Strip operator, is reportedly nudging local newspapers to run stories about them. This has raised concerns over a possible price war. Nor can the city fall back on convention business, which has boomed in recent years.

Attendance fell by 7.1% in the first quarter compared with a year earlier—a worrying sign because conference-goers spend twice as much per trip as pleasure-seekers do, though things picked up a bit in April.
Las Vegas Sands Corp, the most convention-oriented of the big operators, posted an unexpected loss in the first quarter. Occupancy at its latest mega-hotel, the Palazzo, was a mere 79%. Harrah’s dipped into the red too...

All this coincides with the industry’s biggest-ever building spurt, raising the spectre of oversupply. Wynn Resorts is building a $2.2 billion follow-up to Wynn Las Vegas, the Encore, and MGM is spending $9.2 billion on a 76-acre project called CityCenter. More than 40,000 new rooms will become available in the next four years, triple the number Beijing is providing for the Olympics—and in a city that already has 7% of America’s hotel rooms...

The casino Titans are adept at dealing with shifts in demand, however. Led by Harrah’s, whose boss, Gary Loveman, is a former economics professor, they have become experts in collecting information about their customers and using it to tailor promotions. Gambling firms also have a knack for carving out new markets. And they are ramping up marketing efforts abroad...

If past downturns are a guide, a substantial number of Americans will head to Vegas rather than taking expensive holidays abroad, says David Schwartz of the Centre for Gaming Research. And the “whales”, as high-rollers are known, really are immune to economic fluctuations...

Some high-end casinos are doing even better this year than last, says Brian Gordon of Applied Analysis. This leaves some convinced that Vegas will once again defy the sceptics, just as it confounded those who argued that it would be hurt by competition from Californian gambling dens, or that the wave of mega-hotel openings in the 1990s would create crippling overcapacity.

History suggests that, in America’s gambling capital at least, supply creates its own demand.

Say goodbye to mezzanine debt

Over the last decade, a type of debt for development projects called 'mezzanine' -- which filled in the financial hole between a borrower's equity and the first mortgage -- was responsible for funding many residential and commercial development projects. But given the high default rates in the commercial sector, 'mezz' has become a four-letter word and may not return for a long time. From a Wall Street Journal story:

Firms made an estimated $50 billion to $75 billion in mezzanine -- dubbed "mezz" -- loans, debt that fills the gap between the borrower's equity and the first mortgage. Billions of dollars already have been lost and the figure is likely to balloon as the steep downturn in the commercial-property market deepens.

The losses are sending shock waves through the rough-and-tumble world of office buildings, shopping centers, hotels and other commercial properties, which are only now facing the full brunt of the recession. Mezz debt was one of the biggest culprits that enabled commercial real-estate investors and developers to participate in the broader speculative binge on Wall Street...

The attraction of mezz debt to investors was twofold: the rate of return on such debt -- once levered up -- was in the teens if the borrower kept current and, if the borrower defaulted, the investor in the debt would have the right to take over the property...

But that strategy isn't working in many cases because properties are no longer generating enough cash to cover the first mortgages, much less the mezz debt. For the mezz investors to take over the property, they would have to reach into their own pockets to pay debt service on the first mortgage...

Most recently, borrowers have begun to default on mezz loans, forcing the mezz investors to try to foreclose. But this isn't easy even in cases in which the mezzanine holders believe their position is worth something. Often the mezz debt is broken up into slices with different degrees of risk and claims on the property.

Also, for the mezz holders to take over the property, they often have to pay what is owed or refinance the first mortgage, a difficult feat in this credit-starved environment...

Click here for full story.

Friday, February 20, 2009

Will home prices fall too low in the short run?

As the housing bubble has deflated, during the first phase most of that loss was due to prices being too high relative to incomes or achievable rents. But as the economy has soured, home prices are now being pressured by higher unemployment rates, deflation and poor consumer confidence. The result? Prices could continue falling below their long-term mean, which could mean great deals for investors looking for properties which offer positive cash flow. From an L.A. Times story:

Southern California -- with home prices now at 2002 levels and falling -- is at the start of what is likely to be a long period of relatively affordable housing, economists and housing market analysts say.

Home prices are now below their historical average compared with incomes, putting them within reach of more people than they have been since about 2000, several studies show.

But that doesn't mean prices will stop falling soon, especially if jobs continue to vanish at their current pace.

After soaring during this decade's housing bubble, home prices recently fell back in line with what people earn -- and then kept falling...

Prices have now dipped below the level at which they'd be in line with the historical ratio of prices to incomes in California, said Christopher Thornberg, a Los Angeles economist who is principal of the consulting firm Beacon Economics.

Thornberg estimates the current median home value in California is $250,000. But wages are high enough -- and interest rates low enough -- that a median value of $290,000 would match historical norms, he said.

"If you're looking for a long-run opportunity, real estate is getting to that point," said Thornberg, who was an early predictor of the housing crash.

But it's not at that point yet...

Fearing for their jobs, many potential home buyers are putting off a purchase. Others simply can't buy anything because they are already out of work.

Thornberg forecasts that California home prices will fall until the middle of 2010, when they will begin to slowly creep up.

The local housing market is now in what economists call the "overshoot" stage, when a mid-priced home sells for less than it typically would based on median incomes. Even though homes become relatively affordable, the real estate market tends to linger for years at below-average prices as joblessness persists or buyers shy away...

Meanwhile, the affordability picture continues to improve. DataQuick reports the typical monthly mortgage payment Southern California buyers committed themselves to paying last month was $1,081, down from $1,239 the previous month and $1,940 a year ago. Adjusted for inflation, current payments are 51% below typical payments in the spring of 1989, the peak of the previous real estate cycle. They are 59.9% below the current cycle's peak in June 2006.

Thursday, February 19, 2009

Will the Obama housing plan work?

According to a story at, some industry analysts contacted for a story on the Obama plan to address the failing housing market remain unimpressed, although there are some kernels of promise. From the story:

After slashing the much sought after $15,000 tax credit for all primary residence home buyers to $8,000 for first-time home buyers only, the government has now released a plan that analysts say will do little to bolster the ailing housing market.

The two-phase plan seeks to refinance mortgages for 4 million to 5 million "responsible" homeowners and reduce payments for another 5 million "at-risk" homeowners through loan modifications. And while analysts say the plan won't completely fail, the likelihood of it standing up to its much-touted potential is questionable...

Said David Goldberg, analyst at UBS Investment Research: "Although non-distressed homeowners with LTVs in the specified range [80-105%] will benefit, we believe foreclosures among this group would have been minimal regardless."

Some even ask whether moving forward with this phase of the plan could potentially draw more negative market action.

"While we think the government is doing this in order to avoid helping those borrowers who engaged in the riskiest behavior during the boom years, this policy runs the risk of simply postponing foreclosures and dragging out the downturn," wrote Citigroup analyst Josh Levin...

UBS's Goldberg questioned the execution of the program, saying that while this loan modification plan has some degree of built-in incentives--more money goes to the lender if the borrower stays current and the loan is modified prior to delinquency--the complexity of the incentive structure will make it difficult to navigate.

Moving forward, housing market analysts are also concerned about the upcoming spring selling season, with Rehaut forecasting continued weak results due to the lack of consumer confidence, abolishment of seller-funded down payment assistance programs, and the failed $15,000 tax credit proposal. He does, however, point to the record length and magnitude of the current downturn as a relative positive, as it signals that the market should be close to an eventual trough...

"The one aspect that remains unclear is the possibility of bank-cram down legislation making its way into law potentially including protection from investors for servicers that pursue principal reductions," (Ivy) Zelman wrote. "In the event that such legislation was passed and principal reduction becomes more prominent, we believe the tsunami of future foreclosures could be substantially mitigated."...

"The Great Housing Bubble"

I'm in the middle of reading "The Great Housing Bubble" by Lawrence Roberts, who also runs the very popular Irvine Housing Blog. Like me, Roberts works in the building industry, and, despite a title that might imply it's looking backwards at the housing bubble, it is really more of a textbook primer on how to be a savvy real estate investor.

I'll be reviewing it officially for publication soon, but for now I just wanted to cite it as an interesting -- and timely -- read on how markets behave and what investors can do to protect themselves.

John Laing Homes files for Chapter 11 BK

John Laing Homes, which was bought by Dubai-based Emaar Properties for $1.1 billion in 2006 and then poured another $600 million into the home builder, pulled its funding in 2008 as the U.S. market continued to deteriorate, making it only a matter of time before Laing was forced to file for bankruptcy. This marks one of the largest private builder bankruptcies so far in this downturn.

On a side note, for my January column in Builder & Developer magazine, I discussed the ramifications of supposedly objective real estate consultants working during the boom years who deliberately bid up achievable prices by proposed new home communities in order to obtain more work from clients. I know of one division of John Laing Homes that was one of those clients, in which the consultants would claim that new housing in mostly built-out areas could command premiums of up to 50% over neighboring properties simply because they were new (whereas the rule of thumb is more like 20% to 25%).

From a story:

The handwriting was on the wall for John Laing Homes. Earlier this year, the Southern California-based builder stopped building and selling homes in several markets, laid off employees, and hired a business consultant experienced with Chapter 11 bankruptcies.

And today Laing filed for bankruptcy in U.S. Bankruptcy Court in Delaware, seeking protection from tens of thousands of creditors and between $500 million and $1 billion in liabilities. It says it has more than $1 billion in assets...

WL Homes, which does business under the Laing name, is owned by Dubai-based Emaar Properties, which recently posted a loss for 2008’s fourth quarter due to its struggling U.S. businesses. The foreign parent, which has invested more than $600 million in the U.S. builder since its 2006 purchase, indicated in December that it would no longer fund Laing on an unsecured basis, leaving the builder in a precarious financial position.

SoCal home sales rise as median prices back to 2002 levels

Dataquick is reporting that sales of existing homes throughout Southern California rose by nearly 53% between January of 2008 and 2009 as prices declined to a median of $250,000 -- down by over 50% from the peak reached in 2007 and close to the median price of $242,000 last noted in February of 2002. Still, 60% of these sales were for foreclosed homes in areas (generally inland) in which bargain hunters abound. From the press release:

Southern California home sales climbed above year-ago levels for the seventh consecutive month in January as bargain-hungry buyers flocked to inland areas pounded by foreclosures and deep discounts. Increased affordability in some of those neighborhoods spurred record or near-record resale activity, while many pricier coastal towns again posted some of their slowest sales in two decades.

Foreclosures continued to play a leading role in the market, accounting for nearly 60 percent of all homes that resold, according to San Diego-based MDA DataQuick, a real estate information service. Sales of newly built homes were the lowest for a January in at least 21 years - partially a reflection of how difficult it is for builders to compete with discounted foreclosures in the inland growth areas.

A total of 15,227 new and resale houses and condos closed escrow in the six-county Southland last month. That was down 23.6 percent from 19,926 in December but up 52.5 percent from 9,983 in January 2008. A decline of 20 to 30 percent between December and January is normal...

The median price paid for all homes combined last month was $250,000, down 10.1 percent from $278,000 in December and down a record 39.8 percent from $415,000 in January 2008. Last month's median was the lowest since it was $242,000 in February 2002. January's median was 50.5 percent below the peak $505,000 median reached in spring and summer of 2007.

The median sale price - the point where half of the homes sold for more and half for less - has eroded consistently for 19 months. Its steep decline stems not only from falling home values but from changes in the types of homes selling. Increasingly, sales over the past year have involved foreclosure properties, and a growing share has been in the lower-cost inland areas. At the same time, sales in pricier coastal towns have remained sluggish, in part because of problems associated with the cost and availability of financing for high-end real estate.

So-called jumbo financing, formerly defined as mortgages over $417,000, represented about 40 percent of all purchase loans before the August 2007 credit crunch. Last month just 9.2 percent of Southland purchase loans were for more than $417,000. Conversely, a popular form of financing for first-time buyers, government-insured FHA mortgages, rose to a record 40.4 percent of January home purchase loans.

Last month's foreclosure resales - homes resold in January that had been had been foreclosed on in the prior 12 months - represented 58.3 percent of all resales, up from 56.2 percent in December and 28.6 percent a year ago. At the county level, foreclosure resales ranged from 46.0 percent of January resales in Orange County to 71.2 percent in Riverside County. In Los Angeles foreclosure resales were 51.9 percent of resales; in San Diego 55 percent; San Bernardino 67.3 percent and in Ventura County 49.1 percent...

Sales Volume Median Price
All homes Jan-08 Jan-09 %Chng Jan-08 Jan-09 %Chng
Los Angeles 3,398 4,532 33.4% $458,000 $300,000 -34.50%
Orange 1,286 1,806 40.4% $520,000 $370,000 -28.80%
Riverside 1,939 3,320 71.2% $331,500 $195,000 -41.20%
San Bernardino 1,111 2,532 127.9% $298,500 $162,000 -45.70%
San Diego 1,826 2,459 34.7% $429,000 $280,000 -34.70%
Ventura 423 578 36.6% $477,750 $335,000 -29.90%
SoCal 9,983 15,227 52.5% $415,000 $250,000 -39.80%

Wednesday, February 18, 2009

Obama announces detailed housing rescue plan

This morning President Obama announced details of his plans to help 9 million homeowners avoid foreclosure. First, a summary from the L.A. Times:

Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than it is worth. The White House says this could reduce monthly payments for up to 5 million homeowners.

Create incentives for lenders to modify subprime loans at risk of default or foreclosure. For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment. Participating lenders also will be required to cut payments to no more than 31 percent of a borrower's income. Up to 4 million homeowners could benefit.

Keep mortgage rates low for millions of middle-class families seeking new mortgages. Using money already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to buy Fannie and Freddie mortgage-backed securities to maintain stability and liquidity in the marketplace. The department, through its existing authority, will provide up to $200 billion in capital for this purpose.

Pursue reforms to help families avoid foreclosure. The administration will continue to support changing bankruptcy rules so judges can reduce mortgages on primary homes to their fair market value, as long as the borrower sticks to a court-ordered repayment plan. As part of the $787 billion stimulus package that Obama signed into law on Tuesday, the administration will award $2 billion in competitive grants to communities experimenting with innovative ways to prevent foreclosures.

If you missed the press conference, you can watch it below:

Monday, February 16, 2009

Be glad you're not facing foreclosure in Dubai!

The economic miracle that once defined the UAE city of Dubai during the boom years is now facing an even more serious economic crash. For foreigners who bought properties, losing a job and facing foreclosure means more than bad credit -- it also could mean being sent to debtor's prison. From a New York Times story:

With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

The government says the real number is much lower. But the stories contain at least a grain of truth: jobless people here lose their work visas and then must leave the country within a month. That in turn reduces spending, creates housing vacancies and lowers real estate prices, in a downward spiral that has left parts of Dubai — once hailed as the economic superpower of the Middle East — looking like a ghost town.

No one knows how bad things have become, though it is clear that tens of thousands have left, real estate prices have crashed and scores of Dubai’s major construction projects have been suspended or canceled. But with the government unwilling to provide data, rumors are bound to flourish, damaging confidence and further undermining the economy.

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams (about $272,000). Some say it is already having a chilling effect on reporting about the crisis...

Some things are clear: real estate prices, which rose dramatically during Dubai’s six-year boom, have dropped 30 percent or more over the past two or three months in some parts of the city. Last week, Moody’s Investor’s Service announced that it might downgrade its ratings on six of Dubai’s most prominent state-owned companies, citing a deterioration in the economic outlook. So many used luxury cars are for sale , they are sometimes sold for 40 percent less than the asking price two months ago, car dealers say.

Dubai’s roads, usually thick with traffic at this time of year, are now mostly clear. Some analysts say the crisis is likely to have long-lasting effects on the seven-member emirates federation, where Dubai has long played rebellious younger brother to oil-rich and more conservative Abu Dhabi. Dubai officials, swallowing their pride, have made clear that they would be open to a bailout, but so far Abu Dhabi has offered assistance only to its own banks...

Click here for full story.

Also, a video from DW-TV shows what's happening there:

60 Minutes covers the World Savings option ARM fiasco

Last night, 60 Minutes covered the story of a mortgage salesman named Paul Bishop with World Savings, who discusses some of the standard practices of the day at a company which heavily promoted toxic Option ARM loans and other no-doc alternatives. The damage so far? $37 billion and counting.

Three years before the housing market crash, Paul Bishop says he warned his superiors at World Savings - the nation's second largest savings and loan company - that many of the mortgages they were granting were misleading and predatory.

Watch CBS Videos Online

So why didn't he or anyone else step up in a public way? Because, at least in my own experience, when people have mortgages and car loans to pay and kids to feed, looking the other way becomes the most practical (and cowardly) way to keep a job. As someone who regularly speaks his mind, I can personally attest to the perils of losing clients who simply went elsewhere to find someone willing to play ball (and you can thank numerous bankruptcies of development deals for that short-sightedness).

So is this country ready to start listening to people willing to ignore petty politics in search of the truth? That certainly remains to be seen. Perhaps seeing some former executives of those companies engaging in fraud (i.e., mortgage companies, Wall Street companies, ratings agencies and certain consultants) doing the perp walk for a nice long prison sentence would get the ball rolling in that direction?

Sunday, February 15, 2009

Job losses escalating worldwide

The good news is that we're not alone in this recession. The bad news is that escalating job losses elsewhere in the world are creating instability that the U.S. director of national intelligence claims is a larger threat than terrorism. From a New York Times article:

Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs. High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France...

Just last week, the new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.

“Nearly everybody has been caught by surprise at the speed in which unemployment is increasing, and are groping for a response,” said Nicolas VĂ©ron, a fellow at Bruegel, a research center in Brussels that focuses on Europe’s role in the global economy.

In emerging economies like those in Eastern Europe, there are fears that growing joblessness might encourage a move away from free-market, pro-Western policies, while in developed countries unemployment could bolster efforts to protect local industries at the expense of global trade.

Indeed, some European stimulus packages, as well as one passed Friday in the United States, include protections for domestic companies, increasing the likelihood of protectionist trade battles...

Millions of migrant workers in mainland China are searching for jobs but finding that factories are shutting down. Though not as large as the disturbances in Greece or the Baltics, there have been dozens of protests at individual factories in China and Indonesia where workers were laid off with little or no notice. The breadth of the problem is also becoming apparent in Taiwan, where exports were down 42.9 percent last month, compared with a year ago, the steepest plunge in Asia...

Calls for protectionism have resonated among a fearful public. In Britain, refinery and power plant employees walked off the job last month to protest the use of workers from Italy and Portugal at a construction project on the coast. Some held up signs highlighting Prime Minister Gordon Brown’s earlier promise of “British jobs for British workers.”...

Even India, whose startling rise to the forefront of the global economy was portrayed in the hit movie “Slumdog Millionaire,” has hit a wall. About 500,000 people lost jobs between October and December 2008, according to one recent analysis...

Many newer workers, especially those in countries that moved from communism to capitalism in the 1990s, have known only boom times since then. For them, the shift is especially jarring, a main reason for the violence that exploded recently in countries like Latvia, a former Soviet republic...

Click here for full article.

Are Fannie and Freddie deliberately sending borrowers to FHA?

With both Fannie Mae and Freddie Mac adding tough new restrictions for the loans they're willing to buy -- including larger down payments, higher credit scores and extra fees for buyers of condominiums and duplexes -- it almost seems as if regulators are trying to steer more buyers into the arms of the FHA, which offers down payments as low as 3.5% and looks more at debt levels than credit scores. Of course in order to sell a condo unit, it has to be located in a building approved by FHA. So is this just more government stupidity or is there actually a plan here? From the Nation's Housing column the L.A. Times:

Under Fannie's and Freddie's new guidelines, even applicants who assumed that their FICO scores would get them favorable rates will be charged more unless they can come up with down payments of 30% or higher...

Applicants who seek to buy a condominium and cannot come up with a 25% down payment will be hit with a three-quarter point add-on penalty, no matter how high their credit score, simply because they are not buying a traditional detached, stand-alone home.

Buyers of duplexes, in which one unit is owner-occupied and the other is rented, will be charged a flat 1% add-on from Fannie, even if they've got FICO scores above 800 and make 50% down payments. Refinancers who take cash out at settlement also will be forced to pay extra -- as much as three points if they've got low credit scores and modest equity stakes...

Charles McMillan, president of the National Assn. of Realtors, complained in a letter to the Federal Housing Finance Agency, the regulator of Fannie and Freddie, that individual fee increases were not only unjustified but in combination they could also seriously deter home purchases. McMillan said "a borrower with a credit score of 670 making a 20% down payment for a condominium would have the fee raised from 150 basis points [1.5%] to 350 basis points [3.5%] -- more than double" under Fannie Mae's new schedule...

Where's all this headed? Absent congressional intervention or new marching orders from the companies' regulator, the add-on fees are here to stay. But there's an alternative readily available for just about anyone who wants to avoid the fees: FHA mortgages, where down payments go as low as 3.5% and credit scores are not an issue for most applicants.

Saturday, February 14, 2009

Beacon Economics announces San Diego Economic Forecast conference for April 14th

Beacon Economics, a partner to MetroIntelligence Real Estate Advisors, has announced the first of several Economic Forecast conferences to take place in San Diego on April 14th. MetroIntelligence will be researching and writing the real estate-related sections of the forecast books which all attendees receive. Want to register or find out more? Click here.

Is President Obama up to solving the economic crisis?

Given that the bi-partisan cooperation hoped for by President Obama lasted all of perhaps 10 minutes, economist Paul Krugman is voicing a concern that many others have echoed: is Obama up to the task? From Krugman's column in the New York Times:

Mr. Obama’s victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama’s postpartisan dreams...

In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts. And the rhetorical response of conservatives to the stimulus plan — which will, it’s worth bearing in mind, cost substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged...

And the ugliness of the political debate matters because it raises doubts about the Obama administration’s ability to come back for more if, as seems likely, the stimulus bill proves inadequate...

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We’ve just seen how well that worked...

Over all, the effect was to kick the can down the road. And that’s not good enough. So far the Obama administration’s response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It’s early days yet, but we’re falling behind the curve.

Should we be worried?

Click here for full article.

How the economic crash will re-shape America

Dr. Richard Florida, author of such books as "The Rise of the Creative Class" in 2002 and "Who's Your City?" in 2008, has written a very interesting article in the Atlantic Monthly positing that the current economic crash is different from most others which came before it because it has the capacity to re-shape the geographic demographics and land use patterns of the U.S. Like the Great Depression of the 1930s, he thinks it will usher in a different way of living, spending and investing.

Florida is definitely an interesting guy. I interviewed him by phone when writing a review of "Who's Your City?" for the L.A. Times, and besides being the head of the Martin Prosperity Institute at the Rotman School of Management, at the University of Toronto, and writing a regular column for the Toronto Globe & Mail, he also heads a private consulting firm, the Creative Class Group. From the article (which is quite lengthy, so I suggest definitely clicking on the link here to read it in its entirety):

No place in the United States is likely to escape a long and deep recession. Nonetheless, as the crisis continues to spread outward from New York, through industrial centers like Detroit, and into the Sun Belt, it will undoubtedly settle much more heavily on some places than on others. Some cities and regions will eventually spring back stronger than before. Others may never come back at all. As the crisis deepens, it will permanently and profoundly alter the country’s economic landscape. I believe it marks the end of a chapter in American economic history, and indeed, the end of a whole way of life...

The crisis has exposed deep structural problems, not just in the U.S. but worldwide. Europe’s model of banking has proved no more resilient than America’s, and China has shown that it remains every bit the codependent partner of the United States. The Dow, down more than a third last year, was actually among the world’s better-performing stock-market indices. Foreign capital has flooded into the U.S., which apparently remains a safe haven, at least for now, in uncertain times...

...the recession, particularly if it turns out to be as long and deep as many now fear, will accelerate the rise and fall of specific places within the U.S.—and reverse the fortunes of other cities and regions.

By what they destroy, what they leave standing, what responses they catalyze, and what space they clear for new growth, most big economic shocks ultimately leave the economic landscape transformed. Some of these transformations occur faster and more violently than others. The period after the Great Depression saw the slow but inexorable rise of the suburbs. The economic malaise of the 1970s, on the other hand, found its embodiment in the vertiginous fall of older industrial cities of the Rust Belt, followed by an explosion of growth in the Sun Belt...

...The housing bubble was the ultimate expression, and perhaps the last gasp, of an economic system some 80 years in the making, and now well past its “sell-by” date. The bubble encouraged massive, unsustainable growth in places where land was cheap and the real-estate economy dominant. It encouraged low-density sprawl, which is ill-fitted to a creative, postindustrial economy. And not least, it created a workforce too often stuck in place, anchored by houses that cannot be profitably sold, at a time when flexibility and mobility are of great importance...

The foreclosure crisis creates a real opportunity here. Instead of resisting foreclosures, the government should seek to facilitate them in ways that can minimize pain and disruption. Banks that take back homes, for instance, could be required to offer to rent each home to the previous homeowner, at market rates—which are typically lower than mortgage payments—for some number of years. (At the end of that period, the former homeowner could be given the option to repurchase the home at the prevailing market price.) A bigger, healthier rental market, with more choices, would make renting a more attractive option for many people; it would also make the economy as a whole more flexible and responsive.

Next, we need to encourage growth in the regions and cities that are best positioned to compete in the coming decades: the great mega-regions that already power the economy, and the smaller, talent-attracting innovation centers inside them—places like Silicon Valley, Boulder, Austin, and the North Carolina Research Triangle...

What will this geography look like? It will likely be sparser in the Midwest and also, ultimately, in those parts of the Southeast that are dependent on manufacturing. Its suburbs will be thinner and its houses, perhaps, smaller. Some of its southwestern cities will grow less quickly. Its great mega-regions will rise farther upward and extend farther outward. It will feature a lower rate of homeownership, and a more mobile population of renters. In short, it will be a more concentrated geography, one that allows more people to mix more freely and interact more efficiently in a discrete number of dense, innovative mega-regions and creative cities...

To be certain, these themes echo what Florida has already discussed in his previous books. Whether or not these theories will come to pass, of course, remains to be seen.