California's Redevelopment Agencies: A Compromise?

Recently, new California Governor Jerry Brown suggested gutting the state's 400 Community Redevelopment Agencies in a bid to help balance the yawning budget deficit. One reason for that is because these agencies don't pay property taxes on their holdings, which adds up to billions on lost revenue each year. On the other hand, were it not for the incentives made possible by these agencies, many urban infill projects would be made impossible. Two colleagues of mine, Christopher Thornberg of Beacon Economics and G.U. Krueger of HousingEcon.com, argue that there should be a compromise for this very important -- and controversial - issue. From the Sacramento Bee:

On the pro-redevelopment side, there is a legitimate claim that these agencies have played an important role in helping to build California.

Developers wanting to invest in urban communities, particularly areas that are underdeveloped and need it the most, face daunting challenges. There are fights with local zoning boards, a potential lack of appropriate infrastructure for a specific project, and huge environmental remediation costs for urban land. Having a local redevelopment agency behind the effort can be an enormous help, as can the right to declare an area blighted, something a redevelopment agency has the power to do.

Some developers go so far as to say that the soft money from redevelopment agencies is the "make or break" difference in a project. This is especially true for affordable housing projects, which California desperately needs.

Redevelopment agencies also bring much-needed organizational principles to the table. A fancy entertainment zone will not be profitable without local draws such as sports venues and hotels. No single developer will be willing to make an investment unless others are willing to make them as well.

Redevelopment agencies act to coordinate these efforts. They guide the collective actions of multiple developers, provide technical expertise and take risks where local bureaucrats won't. Without this kind of central, guiding force, many profitable projects might never start at all. This is particularly true for very large projects – think Downtown Los Angeles Live.

There are also serious cons to the redevelopment argument. Brown and his supporters make valid points. Most basically, the idea that redevelopment must be funded during this period of intense fiscal crisis is simply wrong. Pick your standard cliché here – rearranging the deck chairs on the Titanic, or fiddling while Rome is burning. Clearly there are more pressing uses for the state's funds in the short run...

To read the entire opinion piece, click here: http://www.sacbee.com/2011/02/08/3384812/find-compromise-in-redevelopment.html#ixzz1DaO4Jsiy

Affordablility continues to improve in most metros

According to economist G.U. Krueger of HousingEcon.com, affordability ratios in the U.S. have reached record highs. Say what? Read more about this good news here.

How tight is new home inventory really?

G.U. Krueger, Principal Economist of HousingEcon.com 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.

Who are the buyers of land today?

Yesterday I spent the day in Orange County with G.U. Krueger, most recently the Chief Economist with Institutional Housing Partners, an adviser to CalPers. During the course of the day we met with a series of land brokers and Wall Street analysts in town to see how we might assist in their due diligence efforts, and this is pretty much where the market is today:

1. There are 3 types of buyers: builders, wholesalers and speculators, and each group is looking for different-sized deals in specific markets.

2. Most deals are small, often consisting of groups of finished lots (30-150) that wholesalers (often families or groups of friends) can then flip to builders when the market rebounds; given the past discounts on inventory, many builders are already starting to run out of such land but still prefer small, rolling take-downs that many banks aren't set up to provide.

3. Institutional money remains on the sidelines, waiting for other larger deals to happen before they jump in. Some hedge funds with longer time horizons (up to 10 years) are looking for more speculative plays, often in tertiary markets that could a higher reward given the greater risks, but these are still anecdotal.

4. Some opportunistic farmers are buying back land at agricultural values after having sold the same parcels to builders at inflated (residential land) prices.

Given some strands of good news, there are lots of buyers kicking tires, but deal flow is still very low due to sellers not yet capitulating on price. But as the FDIC continues to take over banks and put pressure on those still operating, you may see deal flow from banks increase over the next year as they're forced to get these non-performing assets off of their balance sheets.

The case for letting basic economics stabilize the housing market

I've often said that there are two ways to look at the housing market: as an individual investor and in the aggregate. These days, that means that although you may despair at seeing your paper equity evaporate as home prices decline, that's actually good for the housing market. It's also what Douglas C. Neff and Gerd-Ulf Krueger recently opined for the L.A. Times:

Although no one likes foreclosures, they are serving a number of valuable purposes, which are barely cited by the media or politicians. They are establishing a sustainable and affordable pricing floor, albeit low, in many markets. And before we label the prices as unduly low, we should note that they are returning pricing to the 2000-2002 pre-bubble levels. Foreclosures are also letting some borrowers out of very bad contracts, which often committed them to crushing monthly payments on loans unsupportable in the post-bubble pricing market... So what does the government need to fix at this point, when the market has almost completed its pricing adjustment work?...We have a simple suggestion: Congress or the states could pass laws that protect mortgage security servicers from lawsuits, giving them the freedom to negotiate new terms with the borrowers if that's what both parties want...

The fact is that some very important things tend to get done by tens of thousands of individuals who are already dealing with a huge range of individual situations: repricing housing, investing in the future and clearing the decks for an eventual recovery. It's called Economics 101 at work, and it's setting the stage for stabilization of housing in California.
Of course one trend whose impact remains to be seen is the huge crush of investors of foreclosed homes who plan to sell once prices start to rebound. Will that result in a second stage of pricing declines and more foreclosures? This is a topic I tend to discuss for an overview of the state housing market that will accompany the April report from the State of California Controller's Office. I will link to this report from the blog once it is published online.