The Housing Chronicles Blog: 7/1/09 - 8/1/09

Monday, July 27, 2009

New home sales spike as prices fall, tax credits offered

Sales of new homes rose by an unexpectedly high 11% during June -- the largest monthly rise in eight years, according to the Commerce Dept.

HOWEVER (and this is an important note that's never noted in these stories), is that the sample size that's used in this report is quite small -- less than 4% of permit reporting places in the country.

Here's how it works: surveyors contact builders of new homes who have pulled permits in the 19,000 or so jurisdictions that issue building permits (cities and counties). They then contact these builders to find out if these permitted homes have sold. For those areas in which they don't directly contact permit reporting places or builders, they estimate.

That's why we see swings in these numbers when the numbers are re-verified a few weeks later, so I'd look for an adjustment downward in the weeks ahead. You heard it here first!

So can one month make a trend, or is this simply the result of people taking advantage of tax credits and low interest rates? From a story in the New York Times:

Sales of new homes in the United States posted their largest monthly gain in eight years in June, the government reported on Monday, a sign that the housing market is bottoming as buyers take advantage of lower prices.

The Commerce Department reported that new single-family home sales rose 11 percent in June, an increase that dwarfed economists’ expectations of a 3 percent increase. The pace of home sales rose to a seasonally adjusted rate of 384,000 a year, the highest level since November.

But the figures offered no sign that the housing market had returned to health.

Despite the monthly increase, sales of new homes were still down 21 percent from June 2008. The market is still swamped by a glut of for-sale houses. And new homes, facing competition from cheap foreclosures, are sitting on the market for close to a year before they sell, compared with a median time of six months on the market in 2007...

The figures were the latest evidence that a three-year slump in the country’s housing market was leveling off as prices fell back and some builders and buyers began to step tentatively back into the market. Earlier this month, the government reported that housing starts rose 3.6 percent in June from a month earlier, and a trade group reported that sales of previously owned homes also rose for another month.

“Sales are picking up a little,” a senior economist at 4Cast, David Sloan, said. “Whether it’s going to pick up any momentum is really the key. I think we have to be doubtful about that.”

On Tuesday, a closely watched measure of home prices will be released, offering some hints about whether the long plunge in housing values is abating. Economists are expecting a 17.9 percent year-over-year decline in prices in the Standard & Poor’s Case-Shiller Home Price Index.

Although new-home sales have risen for three months, many economists worry that rising unemployment, stagnant wages and continued tightness in lending markets will weigh down the housing market for the rest of the year...

"L.A. Business Today" up for national award

Last December, I was interviewed by a show called L.A. Business Today on Channel 35, a cable channel programmed by the City of Los Angeles. In my segment, we discussed a variety of real estate issues, including both the residential and commercial markets. The other segment was an interview with Mike Malin of The Dolce Group (owners of bars and restaurants).

If you misssed this segment and want to watch it, click here.

The good news is that this particular show has been named a finalist in its nomination category for the 2009 Government Programming Awards, which will be held in early October in 2009.

The bad news is that due to budget cuts, the City will no longer be able to fund production of this show. Instead, the City has given the producers the opportunity to sell sponsorships for the show -- the sort of commercial spots that one might see on a local PBS station (subject of course to approval by the City).

About the show: LA Business Today is a new talk program hosted by veteran TV reporters Bob and Sharon Jimenez. The two will be interviewing business leaders in Los Angeles who, collectively, drive the engine which makes Los Angeles among the most dynamic economic centers in the world. Bringing their combined sixty years of television interview skills to the show, Bob and Sharon Jimenez will open up the dialogue of business for viewers of LA Cityview 35, as they look at business and personal survival as our unique city copes with historic change.

This could be a great opportunity to get in front of a variety of city officials and decision makers in the local business community. If you're interested in sponsoring, please contact

Join MetroIntelligence for Beacon Economics' inaugural Los Angeles Economic Conference

If you didn't have the opportunity to register online for tomorrow's inaugural Los Angeles economic forecast conference at the Airport (LAX) Marriott, you can still register on-site for $100. (MetroIntelligence Real Estate Advisors is a sponsor of this event, and contributed the real estate sections to the conference book).

Here's what to expect:


Tuesday, July 28, 2009

Los Angeles Airport Marriott
5855 West Century Boulevard, Los Angeles, California 90045

Registration and Breakfast 7:30 AM
Program: 8:00-11:00 AM

Online registration is now closed.
Registration will be available at the event for $100.

Beacon Economics, the Graziadio School of Business and Management at Pepperdine University, and the Los Angeles Area Chamber of Commerce have joined forces to launch a new, annual Los Angeles economic forecast conference. Join us at the inaugural event on Tuesday, July 28 as we provide a thought-provoking look at where the national, state, and Los Angeles economies are headed.

Leading economic forecasters, top academic researchers, and a high-profile CEO panel make this a "must see" event for decision makers from across private industry and the public sector.

Get Answers to 2009's Burning Questions...
  • The stock market is screaming a "V" but bonds say "U." What will this recovery look like for the state, the nation, and Southern California?
  • Home sales are up, but so are mortgage delinquencies. Which will matter more to the housing market recovery?
  • The Feds giveth but the state taketh away. How will the Golden State's budget turmoil affect Los Angeles?
Registrants receive:
  • 2009 Los Angeles Economic Forecast Book
  • 1 year of quarterly updates to the Los Angeles forecast

Wednesday, July 22, 2009

No California recovery until 2011?

In a particularly pessimistic report, the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp. tell us to not expect an economic rebound in California until 2011. Of course in the past, Kyser was often more on the optimistic side, so perhaps this shift to the dark side is an attempt to reclaim some street cred. From an L.A. Times story:

Unemployment in California and Los Angeles County will increase well into 2010, continuing to exceed the highest levels since at least the end of World War II, according to a local economist whose projections for the Southland economy are among the most negative to date.

Continued sluggishness in key industries such as construction, retail, international trade and hospitality will keep the state from a full recovery until 2011, said the report, released by the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp...

California's jobless rate, which was 11.6% in June, will average 12.6% next year, according to Kyser, who also projected that Los Angeles County's unemployment rate will be even higher, averaging 12.8% in 2010. The county's jobless rate was 11.3% last month.

Home construction will continue to fall, and the commercial real estate market will go through more distress as vacancies climb, the report predicts. As a result, it says, Los Angeles County will lose 168,000 jobs this year, led by the manufacturing sector, which is projected to shed 38,800 positions.

Some areas outside Los Angeles County are expected to fare even worse.

In San Bernardino and Riverside counties, where unemployment already tops 13%, the jobless rate will climb next year to an average of 14.7%, the forecast said...

Even quiet Ventura County is in for a rough ride, pulled down by layoffs at corporate giants Countrywide Financial and Amgen. The county will shed 5.1% of its jobs in 2009, pushing average unemployment for 2010 to 10.3%, the forecast said. Ventura posted a jobless rate of 10.2% last month, up from 5.9% in June 2008...

The Kyser Center report may be a little too glum, said Esmael Adibi, an economist at Chapman University in Orange.

"To me, it looks very pessimistic," Adibi said. Kyser predicts the state will lose 694,000 jobs this year, but Adibi's figure is 37% lower, at 437,000 jobs lost.

Monday's resolution of the state's budget crisis is more reason to be optimistic about the future, Adibi said, especially because the governor didn't raise taxes. The psychological effect of the agreement shouldn't be underestimated, he said. What's more, federal stimulus money will buffer some of the cuts in education and transportation...

Kyser did not agree that the budget fix would help matters. Losses in revenue will continue to dog municipalities throughout the state, he said, potentially even pushing some into bankruptcy. Budget cuts will make it even more difficult to create jobs...

The Kyser Center forecast also measures the health of key economic drivers in Southern California, including aerospace, trade and motion picture production.

Some of the key drivers are in danger of shrinking permanently, Kyser said. Aerospace could shrivel if the Defense Department cuts funding for Boeing's C-17 cargo aircraft program and commercial air travel continues to lag. As international trade stays slow, ports in Canada and Texas and on the East Coast will try to lure business from Los Angeles. Production in the motion picture industry is increasingly taking place out of state, and cutbacks in advertising are hurting the broadcast TV industry.

Perhaps hardest hit is apparel and textile manufacturing, once a key regional driver. In Los Angeles County the industry will shrink 14% between 2008 and 2010, shedding 13,300 jobs, the report said.

Taming those 'animal spirits' for a housing rebound

It seems that there’s just nothing better than an old-fashioned boom-and-bust cycle in the housing market to reveal what economist John Maynard Keynes dubbed ‘animal spirits’ in the middle of the Great Depression. Harnessed appropriately, it fuels the ‘na├»ve optimism’ that builders and developers require to place risky bets on new developments, when a constant barrage of economic externalities can derail even the best-laid plans.

But when these spirits turn dark – as they have in this ‘Great Recession,’ aggregate human psychology can prevent lenders from lending, consumers from spending and homebuyers from venturing into sales offices far beyond what traditional economics alone would dictate.

It is precisely this type of phenomenon that economists Robert Shiller (the Yale University professor and co-founder of the S&P/Case-Shiller Index) and Nobel Laureate George Akerlof (a professor at UC Berkeley), discuss in their recent book, “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.”

Having recently read this book to review for the Inman News service, I also thought its lessons were appropriate for the building industry, given that it was housing which sparked the economic maelstrom in which we still find ourselves. As an adjunct to the review, I was also able to interview Dr. Shiller for a new show I’m hosting on, The Housing Chronicles.

A primary thesis of the book is the failure of macro-economic theory over the past generation to properly account for these animal spirits, which can be subdivided into confidence, fairness, corrupt/anti-social behavior, the illusion of how money really works, and the stories that people and societies tell themselves to explain their place in the world. Somewhat like the 2005 book “Freakonomics,” the authors then apply these theories to questions ranging from why countries fall into depressions to why real estate markets seem to always go through cycles.

So what’s the solution to prevent these spirits from again running amuk? For starters – and jump-started by the combination of a newly liberal White House and a somewhat compliant Congress – the authors think we’re on the precipice of a major shift in macro-economic policy. Instead of the hands-off approach which catapulted Ronald Reagan to the Presidency more than a generation ago, tomorrow’s economy will involve a lot more regulation.

Yet in order to prevent this regulation from stomping out the entrepreneurial energy which will lead to a rebound, Shiller and Akerlof also suggest that both individuals and government will have to learn how the economy truly works, and then apply that knowledge to such vexing questions as investing in stocks or real estate, the practical administration of Social Security or healthcare, and how to balance financial goals against life’s many other decisions.

For builders and developers, this shift could also provide a great opportunity to revive or initiate seminars (or Internet-based webinars) on money management, how to appropriately budget for a homebuying purchase, and how to ignore those animal spirits which arise from short- or medium-term changes in the market in pursuit of a longer-term goal: that of paying off a house in which to live.

Monday, July 13, 2009

Economist Mark Zandi says recession will end this year

Economist Mark Zandi, co-founder of Moody's and author of the book Financial Shock (which I reviewed last November for Inman News), hosted a webinar last Friday on the state of the economy, and he thinks the recession will officially be over by the end of 2009. From a story:

First, the good news. Mark Zandi, chief economist for Moody’s, believes the Great Recession will end this year.

If that’s true, that will surely be welcomed by just about everyone. During this difficult economic period, more than 8 million jobs have been lost. Housing starts have dropped to an annualized level of 500,000 units, down from more than 2 million in 2005. Banks large and small have failed...

Now the bad news for builders. “Housing will not be an early source of growth in this recovery,” said Zandi. “That’s very different from past recoveries,” when housing has typically been a leading indicator of economic growth.

But as the economy regains its footing this year and next, Zandi said growth will happen—and quickly. In 2010’s fourth quarter, for example, he forecasts housing starts to return to an annualized pace of 1 million units, and a 1.6-million-unit annualized level in 2011’s fourth quarter. “Once we work through the impediments to demand, I do think we’ll see substantial pickup in economic activity in 2011 and 2012,” he said.

Still, housing represents a major risk to Zandi’s view that the recession—generally defined as two consecutive quarters of decline in real gross domestic product (GDP)—is nearly finished. If home prices continue to fall and foreclosures continue to rise, the recession will linger. “This is the one I am most worried about,” said Zandi, who is concerned that the Obama foreclosure mitigation efforts will not be successful—or successful enough. “I am increasingly worried that these impediments [to refinancing and modifying mortgages] cannot be overcome.” (The economist did not address these obstacles or what the solutions might be during the teleconference.)

That would seem to bode ill for places such as California, where housing’s boom has turned into a foreclosure bust. But Zandi, who developed a reputation as a housing bear earlier this decade, sounded more upbeat than one might expect about the Golden State, where the state has begun issuing IOUs. “California will probably turn with the rest of the United States,” he said. “The housing problems there were much less severe than in Florida, and Californians have been conditioned to believe that if they buy housing at low prices, they will be rewarded over a 10-year period. … They are more willing and able to get into the housing market.”

Zandi also had positive words for Texas, which has been a major market for builders large and small. “Texas will recover more quickly,” he said. “It doesn’t have the serious housing overhang that California and Florida have, and energy will be a source of growth for the state.”

Floridians, on contrast, should brace themselves for a long, slow walk back to economic health. “Florida will be one of the last states to get out of the recession,” Zandi predicted. It has a serious oversupply of housing, both single-family and condos, particularly in South Florida. “Migration flows have dried up. It’s very reliant on travel and tourism, which will remain impaired [economically].”

The perils of the collective shrug

One thing I've found quite curious is that despite unemployment in the building industry estimated as high 80%, there just doesn't seem to be much anger among the rank and file who lost their jobs due to greed, short-term gains and, if the New York Times is to be believed, in part due to the veritable crime wave created by Beazer Homes with its mortgage subsidiary.

I call this "the perils of the collective shrug," and I think it's dangerous because it means we're learning few lessons from this last cycle of boom and bust. Despite its importance to the economy, the building industry for housing is actually small enough that expressing an opinion (as I do here) could alienate future employers (or clients). And expressed anger simply doesn't pay for the mortgage, the car payment or the college tuition.

Although some of the industry's media companies do attempt to maintain some objectivity in their reporting, they also must be mindful of their advertisers -- mostly suppliers to homebuilders -- as well as to homebuilding executives they can't afford to alienate if they want to interview them, throw their face on the cover of a future issue or get them to speak at an affiliated conference.

That's also why I don't think you'd ever see this article by the New York Times' Floyd Norris on the behavior of Beazer Homes -- and its aftermath -- in an industry publication. I think that's sad, because perhaps if insiders boldy went on the record -- and consequences be damned -- we could prevent such things from happening again.

As such an insider, I certainly can't condone what went on at Beazer as well as at many other homebuilding companies whose mottos all seemed to be "See no evil, hear no evil, speak no evil," and if I could apologize on behalf of an industry which tends to look the other way, shrug its shoulders and effectively say, "What are you gonna do?", I would. But I'm only one voice.

From the article:

For years, Beazer Homes USA was much more than a builder of houses. It was a veritable crime wave.

The company defrauded buyers, particularly poor people being sold homes they could not afford. It defrauded the federal government by getting government-guaranteed mortgages for those buyers. It created subdivisions now dominated by dozens of foreclosed homes.

And while it was at it, Beazer lied to shareholders about how much money it was making. First, it lied by claiming it was making less than it was. Then it lied by hiding losses when the housing bubble began to burst. To keep the lies going, the government says, the company prepared fraudulent documents to mislead its auditors.

Last week, Beazer settled the legal problems stemming from its crimes. It entered into a remarkably generous deferred prosecution agreement with the Justice Department, in which the company will pay $15 million, and perhaps more if it manages to earn profits enough and does not decide to file for bankruptcy... Beazer’s crime wave might have gone on longer than it did but for a North Carolina newspaper, The Charlotte Observer, which in 2007 reported what had happened in some sad subdivisions outside Charlotte. Fraud was committed in numerous ways, and now some of those subdivisions are filled with empty, foreclosed homes...

Mr. McCarthy, the chief executive, is paying a penalty. He agreed to contribute the after-tax balance of the $600,000 bonus the company paid him for fiscal 2008, when Beazer posted a net loss of $952 million, or $24.69 a share. The shares trade for less than $2 each, and have slipped since the deferred prosecution agreement was announced.

In announcing the deferred prosecution agreement, the Justice Department said that had it sought more money it might have risked driving the company into bankruptcy, costing the jobs of innocent people, and it praised the company for getting rid of the people responsible for the crimes. The determination of who was responsible evidently is largely based on the company’s own investigation, which was shared with the government but not made public.

The charges the company admitted say the accounting fraud and the defrauding of the homebuyers were under way by 2000, and continued until 2007.

I have no reason to believe that either Mr. McCarthy or anyone on the board understood the crimes the company was committing, year after year.

But Mr. McCarthy was running the company for the entire period, and the junior member of the board, Peter G. Leemputte, became a director in 2005. If neither Mr. McCarthy nor any board members had any inkling of what was going on, they were not doing a very good job, to say the least...

If a boss can preserve his deniability about crimes committed by his company — perhaps by showing little curiosity about just how the profits are being earned when he is taking in millions from cashing in stock options — then he can escape being held accountable if the crimes are eventually uncovered.

Or, as Sergeant Schultz used to say on the television sitcom “Hogan’s Heroes,” “I see nothing. I know nothing.”

Do mortgage modifications even work?

For months we've been hearing that the sticking point in modifying mortgage loan terms is that servicers didn't want to get sued by the multiple owners of a mortgage due to securitization. But according to an article in The Economist, there's very little difference in the rate of loan mods whether they were securitized or not. Moreover, most lenders still prefer to foreclose, in large part because borrowers in arrears have more incentive to catch up on the loan without a modification. From the article:

A new study* by a trio of Federal Reserve economists finds that very few delinquent mortgages are modified overall, and that securitised loans are as likely to be renegotiated as those on lenders’ books.

The economists looked at a sample of mortgages in a huge data set that covers 60% of America’s residential-mortgage market. Less than 3% of seriously delinquent borrowers got a mortgage modification that reduced their monthly payments in the year after they got into trouble. Less than 8% of them got any kind of modification at all. Differences between securitised mortgages and others were scant. Lenders of all stripes clearly prefer to foreclose on delinquent borrowers. Repossession proceedings were begun in half the cases and completed in one-third of them...

My review of "Animal Spirits" now online

Recently, I had the opportunity to interview Dr. Robert Shiller, the Yale University professor and co-author of the new book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," which is now online at BlogTalkRadio. You can also access that interview by clicking on the BlogTalkRadio player on the right hand margin of this blog.

That review was published today by Inman News, which can find by clicking here. An excerpt:

Ever wonder why a seemingly slam-dunk deal suddenly gets thrown off the rails even though none of the terms have changed?

Perhaps you should blame "animal spirits" gone awry, a term economist John Maynard Keynes coined in the middle of the Great Depression to describe the type of "naive optimism" that is a necessary ingredient for businesses to invest, for entrepreneurs to take risks -- and for potential homebuyers to sign those documents at the closing table.

Left to their own devices, however, these same spirits can fall dramatically, thus becoming a psychological barrier to a properly functioning economy.

In their recent book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," economists George A. Akerlof, a Nobel laureate and professor from University of California, Berkeley, and Robert J. Shiller, co-creator of the Standard & Poor's/Case-Shiller Index for home prices and a professor at Yale University, spent over five years researching, dissecting and explaining the importance of these animal spirits in the global economy.

It is their conclusion that longstanding theories of "rational expectations" and "efficient markets" are so flawed on their own that any credible economic models must take into account these spirits to avoid future catastrophes.

Read the entire interview here.

Friday, July 10, 2009

How tight is new home inventory really?

G.U. Krueger, Principal Economist of and an alliance partner to MetroIntelligence Real Estate Advisors, has also contributed an article to the July issue of Builder & Developer magazine on the question of new home inventory.

Whereas many pundits continue to focus on remaining lots in current phases, G.U. argues that the supply in the future phases of active developments will still eventually be released to the marketplace, and thus should not be ignored.

An excerpt:

...there is “inventory is tight” chatter again pointing to declining new home inventory in various markets throughout the U.S. For example, in Southern California’s Riverside County, according to Hanley Wood Market Intelligence there were just 800 units of new home inventory -- or barely eight weeks of supply at the end of April 2009.

Thus, the implication is that in eight weeks or so we are going to be whole again.

However, new home inventory is only a small part of the story. By April 2009, there were an additional 1,159 homes under construction in Riverside County, and lots earmarked for future construction numbered another 21,000 units -- a number which has been dropping but is still large. This future supply is significant because it is a type of pent-up supply which can be easily activated. Consequently, total buildable lot supply reached 25,000 units in April 2000, a 60-month supply at current sales rates -- not quite as tight as local pundits are proclaiming...

Click here to read the entire article.

July column for Builder & Developer magazine now online

My column for the July issue of Builder & Developer magazine is now online. For this month, the focus is on the need to discard the old rule books in order to thrive in an industry which, like many others, continues to undergo creative destruction in the way it works. An excerpt:

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one...

You can read the entire article here.

Friday, July 3, 2009

Say bye-bye to the California tax credit for new homes

It looks like the very popular tax credit program of up to $10,000 to encourage sales of new homes in California has now been cut off and unlikely to be renewed due to the state's considerable budget problems. Word has it that the tax credit -- even more than the $8,000 program offered by the federal government for all homes -- was instrumental in helping to spike sales in new homes of all price ranges. From an L.A. Times story:

California is cutting off applications for a tax credit that was designed to promote sales of new homes.

The Franchise Tax Board said it would stop taking applications for the tax credits at midnight Thursday.

The program offered $100 million in credits to about 10,000 consumers who buy homes that have never been occupied. The credit is equal to 5% of the purchase price or $10,000, whichever is less.

Buyers must occupy the homes for at least two years immediately after the purchase.

The tax board expects to have received 12,000 applications.

Wednesday, July 1, 2009

Interview with Robert Shiller now online at BlogTalkRadio

My interview with Robert Shiller, author of the new book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism" is now online at BlogTalkRadio. You can also listen to the interview by clicking on the widget on the right hand margin of this blog.

This interview will be accompanying my upcoming review of the book for the syndicated news service Inman News.