Quoted in today's SF Chronicle story on the housing rebound

A story in the San Francisco Chronicle on the Bay Area's housing rebound was published today online, and will be featured in print for tomorrow's Sunday paper. A few takeaways:

Consider this: In both 2005 and 2006, builders pulled permits for about 15,000 new homes a year in the San Francisco metropolitan area (the counties of Alameda, Contra Costa, Marin, San Francisco and San Mateo), a little more than half of them being single-family houses and the rest apartments or condos. In 2009, just 3,550 permits were issued. By 2011 it was up to about 5,800....

As of August, builders have already taken out about 5,800 permits this year - as many as in all of last year - putting them on track to exceed last year's total by 50 percent. The San Jose metro area (the counties of Santa Clara and San Benito) had an even deeper plunge, going from roughly 6,000 new permits a year to only 1,100 in 2009. This year, it is on track for about 5,800 permits - almost back to its boom-time levels....

Patrick Duffy, principal at home-building consultant MetroIntelligence Real Estate Advisors, said he predicts that next year will see builders break ground on 800,000 to 1 million new homes nationwide, following this year's projected 600,000.

"House building has a big multiplier effect" on the economy, he said. "That's why we've been dragging along. Now housing is starting to pick up; that's a nice annual bump. It's really hopeful, but there's still some economic uncertainty out there."

You can read the entire story by clicking here.

A decidedly somber affair at this year's PCBC

Each year in June or July, tens of thousands of builders, suppliers and subcontractors converge on San Francisco's Moscone Center for the Pacific Coast Builders' Conference, but this year the total is down to just about 14,000 attendees (I also decided against attending this year due to a convergence of work deadlines). From the San Francisco Chronicle:

"California's home building industry is in the worst shape ever," said Horace Hogan, chairman of the California Building Industry Association, the trade group that puts on PCBC, and president of Brehm Communities, a Carlsbad (San Diego County) home builder, speaking at a news conference.

"Every builder I know has laid off most of their staff, and contractors and suppliers we've done business with for years have folded up shop." The show reflected that contraction. At the peak of the housing boom in 2006, it drew 35,000 attendees. Last year there were about 19,000. This year only 14,000 people came to Moscone. Even with a smaller exhibit floor, the aisles were noticeably underpopulated...

Hogan had a variety of grim statistics to tick off. Although the 65,000 housing starts in California in 2008 were the lowest ever recorded, "As bad as last year was, right now 2009 looks like it might even be worse," he said, citing projections of only 40,000 housing units this year. That sluggish pace means the loss of more than 360,000 jobs and $50 billion from the state's economy, he said.

California's $10,000 tax credit for people who buy a new home is something the builders would dearly like to see extended. They say not only does it help their industry, but it generates state and local taxes, creates jobs and stimulates the economy.

Sam Chandan, president and chief economist of New York's Real Estate Econometrics, had more downbeat news at a session on the economic outlook, predicting a huge wave of defaults in commercial mortgages.

"About $300 billion in commercial mortgages will come due between now and the end of 2009, and the same in 2010," he said. "We lack the capacity to refinance them. This will lead to a significant increase in defaults and delinquency rates for commercial mortgages..."

During the last downturn of the early 1990s in California, people could choose to find a job in another industry or move temporarily to Las Vegas or Phoenix to find work in the local building industry. But now with the entire economy in recession, there are few good substitutes.

And as for those commenters you always see online (probably sitting alone in their underwear) who quack, "Greedy builders! Had it coming! Get what they deserve!" please give it a rest, it's just not helpful, nor is it original. You could say the same thing about bloated governments, badly managed car companies, irresponsible bankers or media companies which haven't reacted quickly enough to the creative destruction fomented by technology. Like it or not, we're now in this together, and quacking out the same tired lines of schadenfreude is just boring.

"Shadow inventory" of foreclosures remain hidden from the market

One big topic lately in real estate circles has been the issue of bank-owned distressed properties, many of which they've kept off the market in order to keep housing prices from dropping even lower as well as to provide a more orderly clean-up process. Yet in a San Francisco Chronicle article, some experts think that the sheer number of these hidden foreclosures is certain to eventually make a bad situation even worse. So why are lenders keeping such assets hidden? From the article:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."...

Most observers say the recent fall-off in foreclosures came because California and many banks implemented foreclosure moratoriums in the fall, not because the problem has diminished...

So why aren't banks selling off their foreclosures?

Observers say several factors are at work.

-- The "pig in the python": Digesting all those foreclosures takes awhile. It's time-consuming to get a home vacant, clean and ready for sale. "The system is overwhelmed by the volume," Sharga said. "In a normal market, there are 160,000 (foreclosures for sale nationwide) over the course of a year. Right now, there are about 80,000 every month."

-- Accounting sleight-of-hand: Lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. "With banks in the stress they're in, I don't think they're anxious to show losses in assets on their balance sheets," O'Toole said.

-- Slowing the free-fall: Banks might be strategically holding back some foreclosures so prices don't fall as fast...

Besides the shadow foreclosures, yet another wave of distressed properties is in the pipeline. These are homes with delinquent payments for which the banks appear to be prolonging the foreclosure process. Some of that could be because they're negotiating with homeowners about loan modifications or other ways to keep them in the home. But banks also could be deliberately foot-dragging for the same three reasons listed above.

Click here for entire article.

Although San Francisco California's strongest economy, home prices still falling

According to a conference on October 21st at the Hyatt Regency in San Francisco (for which MetroIntelligence authored the real estate sections), the region's economy remains the strongest in the state and is not expected to experience a repeat of the tech-related bust earlier in the decade. Although home prices in the City of San Francisco are not expected to decline as other parts of the state, the neighboring counties of San Mateo and Marin are projected to suffer some additional pain through 2009. From a story in the San Francisco Chronicle:

Home prices and taxable sales will fall in the San Francisco metropolitan area while rents rise and unemployment climbs.

But the 1.8 million residents of Marin, San Mateo and San Francisco counties still live in California's strongest economic region and should suffer less from the housing bust than the rest of California, says a forecast being issued Tuesday. "Things will be rough here, but not nearly as rough as the Inland Empire (in Southern California) or in Contra Costa County," said Chris Thornberg with Beacon Economics...

The 113-page report calls the three-county metropolitan area "the strongest economy in the state of California at the moment," but warns that it still will be hurt by the housing collapse that has crippled the global financial system and undermined the world economy.

The forecast tries to predict economic conditions in the three-county zone through the first quarter of 2010 and suggests that:

-- Home prices will fall roughly 25 percent from their peak.

-- Taxable sales will drop by 10 percent across the region.

-- Payrolls will shrink by 2.5 percent over the next two years.

-- Rental rates are likely to continue to rise, particularly in San Francisco, where 60 percent of households are renters...

Economic softness is expected to hit commercial real estate, which had begun to recover from the dot-com bust. But the forecast assumes that the region's prestige and proximity to Silicon Valley will merely slow the growth of rental rates in the metropolitan area - put at 11 percent last year - rather than lead to a collapse.

"Rent growth is expected to fall to just 1 percent over the next year, although over a five-year horizon it should average a more moderate 3.5 percent in the region," according to the forecast.

But individual renters will get no such relief as the region's relative economic strength and desirable lifestyle draws job seekers and shrinks the vacancy rate which, at about 4.3 percent, is among the lowest in the state. "Over the last two years, average asking rents have continued to rise," noted the report, which expects the landlords' market to continue for now.

Click here for full story.

If you missed the conference, you can still download the book and the presentations here:

• San Francisco Economic Forecast Book (PDF - 39M)
• Christopher Thornberg Presentation (PDF)
• Jon Haveman Presentation (PDF)
• Fred Silva Presentation (PDF)
• Event Agenda (PDF)
• Speakers' Bios (PDF)

CAR predicts home prices will decline by 6% in 2009, sales up by 12%

I've not been a big fan of the California Association of Realtors' (CAR) ability to forecast market trends over the past few years, mostly because they've been so off the mark. When the market changed on a dime from boom to bust -- something I'd predicted in early 2006 -- their economist, Leslie Appleton-Young, basically begged for more time to think of some new terms to describe what was happening. Now we know why (from a story in the Riverside Press-Enterprise, which covers part of the Inland Empire):

Association President William E. Brown said a misunderstanding of the depth of the nation's credit crisis led the association to mistakenly predict a year ago that the median price of a resale home in California would drop only 4 percent in 2008. In its latest forecast, the association assumes that the current economic recession will last through the second quarter of 2009 and then the economy will begin a "turnaround."

So what kind of turnaround? Read on:

The association predicts that in 2009 the median home price in California will decline 6 percent to $358,000 from a projected median of $381,000 this year. Sales of existing single-family homes in 2009 are projected to increase 12.5 percent to 445,000 from 395,600 in 2008. That would build on a 12-percent surge in home sales this year, which has been fueled by steeply discounted foreclosed properties.

So how realistic is this forecast? From what I've been reading, it's pretty optimistic in terms of pricing increases, although the sales projection seems reasonable due to lower prices:

However, Patrick Duffy, principal for MetroIntelligence Real Estate Advisors in Los Angeles, said the association's prediction of a 6 percent further decline in the state's home prices next year seems "optimistic" and what he would expect from an organization whose members have an interest in promoting home buying. Duffy said other economic forecasts predict California home prices to fall next year by 10 percent to 15 percent.

This opinion was based on what I've read and heard from economists I respect, some of whom are also quoted in the story:

Michael Carney, director of the Real Estate Research Council of Southern California, said he expects price declines next year in Riverside and San Bernardino counties will be greater than the 10 percent he is predicting for the state as a whole because of this region's large glut of bank-owned houses and job losses.

And then of course there's our own West Coast version of "Dr. Doom" Roubini named Chris Thornberg, and here's what he had to say about the forecast in the San Francisco Chronicle:

Sales will likely climb by about the amount the group predicts, thanks to the bargains presented by increasing foreclosure sales, but its price forecast is too rosy, said Chris Thornberg, founder of Los Angeles research firm Beacon Economics.

"The decline of 6 percent sounds like something of a pipe dream," he said. "The shear amount of momentum there is ... just phenomenal, and I find it hard to believe it's going to basically bottom out that quickly."

Thornberg believes prices will fall by at least 10 percent, and possibly as much as 15 percent.

Do home auctions always reveal the true market price?

Over the weekend there was an auction at a mid-rise condo project in the Bay Area's Oakland called Eight Orchid. According to a report by the San Francisco Chronicle, accepted bids were 25 to 34 percent below the original list prices, leading many market watchers to conclude that this simply determines the actual market value for not only these condos, but implies that similar discounts should be applied to all properties in the area. But is it really that simple? From the story:

The coordinators of Sunday's auction of 41 units at the new Eight Orchids condominium midrise in Oakland billed the event as a means of finding the actual market value for such homes. If true, the results may be bad news for developers and great for buyers.

Among the dozen transactions recorded by The Chronicle, sales prices ranged between 25.3 and 34 percent off the original asking price. That's well below the 16.9 annual percent drop in median resale condo values or the 21.2 percent decline for all new homes in Alameda County, according to a February report from DataQuick Information Systems.

"The market has definitely humbled us," said Stuart Gruendl, chief executive officer of project developer BayRock Residential of Oakland. "But at the same time, our heads are above water and the property is succeeding."

He said the total sales amount was within 5 percent of what he expected to receive for all of the properties, adding that they moved at least a year's worth of inventory in a few hours...

All 41 of the homes put up for auction received bids above the minimum. Escrow is scheduled to close in five to 35 days. Winning bidders were contractually obligated to complete the purchase, but if they find a means of backing out, other participants may be contacted.

Ken Stevens, chief executive officer of the West Coast division of Accelerated Marketing, said the auction would be used to establish the price for remaining homes at Eight Orchids...

More difficult to evaluate is what the auction will mean for the broader Oakland or East Bay market, experts say. People evaluating the market will certainly note the comparables - or sales prices of recently traded nearby properties - and buyers or their brokers could use them when making offers, providing additional negotiating leverage.

"All those auctions will end up in some appraiser's book," said Christopher Thornberg, an economist with Beacon Economics of Los Angeles...

Still, developers and sellers aren't likely to drastically mark down their units based on one afternoon auction for a single building. The perception - or at least explanation - could be that Eight Orchids might have set its prices too high to begin with or that it may have limited appeal because it is near Interstate 880 and the Alameda County and Oakland city jails.

"That kind of discount could be attributed to their location, as much as to the overall market and credit situation," said Patrick Duffy, principal with MetroIntelligence Real Estate Advisors in Los Angeles...

Side effects to financial medicine

Writing in the San Francisco Chronicle, Kathleen Pender argues that the experiments currently being conducted by the federal government to rescue the financial markets aren't immune to their own -- and often unforeseen -- perils. In other words, like drugs, there could be side effects:

It would be nice if the federal government would fess up about the potential side effects of the medicine it has been delivering in increasing doses to the financial markets.

That might be hard to do, considering that most of these experimental remedies are being invented on the spot and unleashed on the market without a bit of the rigorous testing required of new drugs.

But make no mistake: If the feds succeed in preventing a financial collapse, there will be a price to pay...

Economists say they are likely to include some combination of higher taxes, higher interest rates, higher inflation, slower economic growth and a weaker dollar.

Let's remember for a moment what got us into this predicament.

After the stock market crash in 2000 and the terrorist attacks in 2001, the Federal Reserve kept interest rates too low for too long. The federal funds rate stayed at 1 percent throughout 2003, long after the 2001 recession had ended.

Low rates fueled speculation in housing and the creation of new mortgages and mortgage-backed securities that were sloppily underwritten, poorly rated and widely misunderstood. Hedge funds and other investors used these securities to borrow money to buy other assets, creating a mountain of debt atop a small slice of fragile collateral.

Banking regulators, Congress or the Bush administration could have stepped in to restore some sanity to the markets but declined to do so in the name of homeownership and free enterprise...

"We are going to nationalize the mortgage market," says Ken Rosen, chairman of the Fisher Center for Real Estate at UC Berkeley, consultant and hedge fund manager. "It's the outcome of not regulating at the right time."

Economists say they are likely to include some combination of higher taxes, higher interest rates, higher inflation, slower economic growth and a weaker dollar.

As much as he dislikes it, Rosen says, it's the right thing to do in the short run. "If they did not stop the credit crisis, we would have something much worse - a meltdown like we had in the '30s," he says. But "it's not a good thing in the long run."

Rosen predicts that when all is said and done, there could be as much as $1 trillion worth of losses in the financial system. He predicts that investors will bear 60 percent of the losses and the government could shoulder the rest...

To pay for these losses, the government will have to raise taxes, sell more debt or both.

Near term, Rosen predicts that the Fed will have to keep cutting interest rates to prevent further weakness in housing and the economy. That will put further downward pressure on the dollar. A falling dollar will fuel inflation because imports, oil and other commodities will cost more.

Long term, the government will have to raise interest rates to entice foreigners to buy our debt.