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.

Unemployment spikes in California, Oregon and Nevada

Job losses continued to mount in not just California in February (to 10.5% unemployment), but also rose in Nevada and Oregon to 20-year highs. First, from a Bloomberg News story:

California’s jobless rate surged in February to the highest level since 1983 while unemployment in Oregon and Nevada climbed above 10 percent for the first time in more than two decades.

Unemployment in California rose to 10.5 percent from 10.1 percent in January, its Employment Development Department reported today in Sacramento. Neighboring Oregon’s jobless rate rose a full percentage point to 10.8 percent, and Nevada’s increased to 10.1 percent.

“The West Coast is more heavily dependent on real estate and the decline there has been more pronounced” than in the rest of the U.S., said Sung Won-Sohn, an economics professor at California State University-Channel Islands in Camarillo, California. “We are not seeing any signs of stabilization in the job market.”

Unemployment across the nation may top 9 percent by the end of the year, according to economists surveyed by Bloomberg, and it could go higher. The national jobless rate rose to 8.1 last month, the highest in more than a quarter century, and the economy has lost 4.4 million jobs since the recession began in December 2007...

Meanwhile, on Monday California legislators in the Assembly couldn't muster the votes required to approve a provision that would have extended unemployment benefits by another 20 weeks. For many people, the benefits they now receive as a result of the last federal stimulus package will expire in mid-April, but if they take federal funds this time they'd have to adjust the law so part-time and seasonal employees would also be eligible, which would drive up unemployment taxes for employers.

Instead of doing nothing, why don't they just make the change in the unemployment law temporary like other states have done? Too obvious of a solution? From the L.A. Times:

After an hours-long partisan debate, Republicans in the state Assembly on Monday defeated a bill that would have authorized spending more than $2.5 billion in federal stimulus money to provide 20 weeks of extra unemployment benefits.

The bill would have provided extended benefits this year to an estimated 260,000 jobless Californians, including 74,000 whose unemployment checks are due to run out April 12. They are now eligible for up to 59 weeks of benefits...

Many Republicans said they voted no because they wanted more time to analyze the measure to make sure that it would not cost California taxpayers any money.

Democrats countered that the proposal by Assemblyman Joe Coto (D-San Jose) had to be rushed through the Assembly and the state Senate and to Gov. Arnold Schwarzenegger in time to meet next month's deadline, when about a fourth of the state's chronically unemployed are scheduled to lose benefits...

The California Chamber of Commerce and other business organizations have questioned whether increased eligibility might raise costs for employers by eventually forcing a hike in payroll taxes.

Assembly Democrats said they would bring the unemployment bill back up for another vote soon.

Why is mortgage fraud still a problem?

Over the weekend I received an email from an editor of the opinion page of the Washington, D.C. Examiner (a conservative publication) asking me about the impact of mortgage fraud on our economy. This was my response (from which he has asked to quote):

A few things come to mind about mortgage fraud:

1. Yes, I do think there was pervasive fraud at all levels of the mortgage process, from agents getting kick-backs from affiliated lenders to appraisers who couldn't get work unless they played along.

I also think there was fraud for construction loans, as I know some rather compliant consulting firms out there who would manufacture just about any story (which you can easily do with data if you know what you're doing) to assist builders and developers either get approval from corporate offices for projects or to include with loan applications to lenders. On further inspection, however, the conclusions were made out of thin air and based on 'rules of thumb' that simply didn't exist.

Believe me, when I dared to proclaim in the L.A. Times in July 2007 that sometimes builders didn't really do their homework and just hoped for the best, I'm sure I lost potential clients in the building industry. But I was also the type to tell clients, "Sorry, bud, this ain't gonna fly!"

2. I also think the fraud continues, and I have very grave concerns that we're not learning any lessons in this country. For example, I had read a story in Business Week that the same companies which sold sub-prime loans to the uninitiated have simply re-worked their business models to sell FHA loans. Well, guess what? FHA loans are also now going sour at a higher rate than anticipated, and could eventually need their own bail-out.

3. Not only that, but some appraisers who actually lost their licenses due to fraud are now back working for 'appraisal management companies' that are supposed to act as an objective liaison between lenders and agents. Only it doesn't quite work that way: agents can simply say, "assign me x appraiser" through this intermediary, and we're back to business as usual.

I don't think we're going to fix the mortgage fraud problem until we see a some perp walks and major scofflaws going to prison. Otherwise I guarantee you we'll just see more of the same, and in that environment, why doesn't everyone just quit their jobs and become appraisers and mortgage brokers?

Lest anything think that response was too harsh, here's a summary from an AP story on mortgage fraud via the L.A. Times:

The mortgage industry, applying far more scrutiny after a tidal wave of defaults, reported a record number of mortgage fraud incidents last year, with Rhode Island making its first appearance as the nation's top fraud hot spot.

The number of mortgage fraud reports among loans made last year grew 26 percent from a year earlier, according to a study released Monday by the Mortgage Asset Research Institute.

The increase came as lenders dramatically tightened their standards, making it more difficult for borrowers to qualify for home loans without large down payments, solid credit and proof of their incomes...

The recession has also increased pressure on shady mortgage lenders and brokers -- as well as borrowers -- to lie on loan applications, according to the fraud report. "There's a lot more desperation, with the economy being what it is," said Jennifer Butts, one of its co-authors.

More than 60 percent of mortgage fraud cases last year stemmed from falsified applications, while 28 percent came from tax returns or financial statements, and 22 percent came from appraisals, the study said.

One fast-growing scheme, the report said, is coming from "foreclosure prevention specialists" who offer to rescue distressed borrowers and sometimes trick the borrower to sign over the deed to their house. While some states have recently toughened penalties for such scams, but only a few state attorneys general are able to seek criminal charges and jail time...

As awareness of the mortgage fraud problem grows, law enforcement agencies are stepping up their efforts to combat it. The FBI created a Washington-based national mortgage fraud team in December and has more than 1,600 open mortgage fraud investigations, more than double the number of such cases just two years ago.

With so many ongoing cases, FBI investigators are not focusing on individual borrowers but industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars.

Looking forward to seeing some perp walks!

Postcards from the recession: Silverlake

The economic malaise may be hitting Silverlake, an urban neighborhood north of downtown Los Angeles, less than in the Inland Empire, but due to its bohemian demographics of people who rely more on contract work than regular paychecks, further austerity measures are in order. Such as letting go of psychiatrists, chiropractors, pool men, maids and gardeners. Oh, the humanity! From an L.A. Times series:

Most of the people I know don't have regular jobs. They're writers, actors, musicians, artists, photographers and filmmakers. They also are middle-class taxpayers who carry mortgages and send their kids to public school...

But this is different. This is bad. Although no one I know is in foreclosure, my friends and neighbors are experiencing persistent economic erosion.

Census figures say that nearly 70,000 self-employed people work in the arts in Los Angeles. Their job losses won't show up in unemployment numbers because they don't have regular jobs to lose, but they're hurting...

Some folks are still working but doing lesser jobs at lower rates. An actor who had a network TV series two years ago is writing "webisodes" for an online comedy show. An editor who was doing indie feature films last year is struggling to get hired for direct-to-video horror movies. Magazine writers aren't getting freelance assignments because that work is being done by staff editors...

Some friends are selling out -- or trying to. An actor friend took advantage of his union's offer of help in getting a census-taking job; so did, on the day the test was offered, hundreds of his SAG peers. A musician friend who couldn't make ends meet finally decided to look for a job with a catering company; he stood in line for several hours, one of 300 people vying for the same half a dozen positions, shamed, he said, by the "hushed, defeated looks on the other applicants' faces."

Other friends are pulling up stakes. One actor pal moved to Phoenix for a "real" job. A gifted writer has decided to leave the state for a tenured teaching post, though it means leaving her family here. "It's scary to consider making such a big change," she told me. "But it's scarier standing still and hoping things will get better." Another writer, who works as a counselor, thought this was the year he and his set-designer husband could quit their day jobs, cash out and leave California. Now, he says, they can't sell their house without taking a loss.

But this paragraph really shows the pain hitting this area:

Still others have taken less dramatic steps. Some have fired gardeners, pool men or maids. They've saved money and gained new respect for the backbreaking work required to maintain their gardens and homes.

Postcards from the recession: Inland Empire

Over the last few weeks since the Obama inauguration, as the stock market continues to tank and economists can't agree on what to do, I've noticed an increase in people's anxiety levels (including mine, which I address with trips to the health club). In the past if you complained to an employee, you'd get a polite apology. Now they yell back or simply ignore it.

In the Inland Empire, there's already a breakdown in civil order starting - something that's already being seen in England and other European countries (wait until Spain's unemployment level hits 20%).

This is a level of generalized anxiety I've never seen in my adult lifetime. And when a woman hangs herself rather than getting evicted from her rental home, you know things are different. From an L.A Times story:

At night, I can hear the soft thumps as the rats land on my roof. They launch themselves from the branches of the apricot tree because they want to get inside my attic, into a house with heat...

Last week, a woman stole a pair of shoes right off my neighbor Maria's front porch. Maria woke her son, who ran down the street and confronted the woman. She threw the shoes back at him. After a pair of clippers disappeared from my yard, I've started taking ladders and anything else of possible worth inside at night...

Last year, after the price of copper skyrocketed, metal theft was rampant; thieves stole catalytic converters from parked cars, brass plaques from headstones and monuments, faucets and bushings from fire hydrants, copper wire from schools and parks. Thieves strip foreclosed homes, identifying them by "Bank Owned" signs in the dead lawns. Water heaters, copper pipes, electrical equipment -- all torn from walls and floors, homes destroyed.

I haven't slept well for about a year. For a while, I woke up at night to check on my daughter's Honda, which was broken into repeatedly. We knew it was a prime target. But recently it was stolen from in front of her friend's house, in the 15 minutes she left it to go inside...

Down the block, my neighbors -- waitresses and home day-care workers and contractors and retired people -- are all nervous about whether they'll have jobs tomorrow. One neighbor sold many of her belongings last year in a series of yard sales, trying to make house payments; her husband, an adult-education teacher, was furloughed for the summer, and his hours for this school year were cut. They are filing for bankruptcy.

A few days ago, police were at Maria's; someone had tried to carjack her son at gunpoint for his truck...

Earlier that morning, police arriving to evict a woman found her dead. A woman in her 30s, in a rental house, who'd lost her job some months before and was being evicted, had hanged herself.

And this is just one person's story.

The impact of half-finished projects in California

One primary reason I've been banging the drum that there just wasn't enough proper due diligence done on new home projects during the boom (or what was done could be considered fraudulent due to the manipulating of data leading to patently false conclusions) was the impact on these half-finished projects to surrounding neighborhoods.

Whether in Hollywood, Oakland or out the suburbs of the Inland Empire, everyone suffers for the actions of relatively few people. And while many projects were ceased simply because of a lack of funding, some should never have been built in the first place due to lack of demand at the price points required to buy the land. From an L.A. Times story:

Nearly 250 residential developments with a combined total of 9,389 houses and condominiums have been halted in California, according to research firm Hanley Wood Market Intelligence. The units, worth close to $3.5 billion, were in various stages of development.

Now, many are in bankruptcy or have been foreclosed by lenders. Developers have halted sales on an additional 370 new-home developments -- about 30,000 units worth $11.9 billion...

In Hollywood, a chain secures a seven-story building still sheathed in yellow insulation panels and surrounded by steel scaffolding.

The Madrone condominium and retail complex at Hollywood Boulevard and La Brea Avenue had been scheduled for completion this spring.

But the developer, John Laing Homes, stopped answering its phones weeks ago and on Feb. 19 filed for Chapter 11 bankruptcy protection.

Across the street, Tony Boon worried about the effect on Pink Pepper, a Thai restaurant he manages. He had hoped that residents, shoppers and employees at the complex would stop in for meals. Now his customers gaze out on the stagnant site.

"It should have been a beautiful building, but it's just kind of an eyesore," he said...

On the edge of Old Pasadena, the Pasadena Athletic Club and an office building on Fair Oaks Avenue were demolished to prepare for a six-story hotel, condominium and retail project. Work halted last year when financing fell through, the developer's attorney said.

The dirt lot sits empty, surrounded by a chain link fence and green plastic netting.

In the Lincoln Heights neighborhood of Los Angeles, the contractor stopped work more than a year ago on Fuller Lofts, a $20-million transformation of a 1920s-era Fuller Paint warehouse into condos on San Fernando Road.

The developer, Livable Places, has gone out of business and blames high construction costs, tightening credit for home buyers and a glut of competition...

Of course no one ever says, "We really didn't know what we were doing. Our timing, prices and sales assumptions were all 100% guesswork." Such honesty would be refreshing!

Click here for full story.

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...

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.

Who will benefit most from the stimulus package

The unemployed, first-time homebuyers and most tax payers will all benefit from the stimulus compromise package. From a summary in the L.A. Times:

For most Americans, aid would show up most directly in a simple tax credit.

Workers making less than $75,000 a year would get a $400 credit for 2009 and 2010. Couples making up to $150,000 would get $800.

Higher-income taxpayers would see smaller credits. Individuals making more than $100,000 a year and couples making more than $200,000 would not get the credit.

In addition, 24 million middle-income Americans would be spared from paying higher income taxes under the alternative minimum tax...

First-time home-buyers could qualify for an $8,000 tax credit.

The credit is slightly larger than the $7,500 credit in existing law, but it is substantially less than a proposal in the Senate bill that would have boosted the credit to $15,000 and broadened the eligibility.

In addition, the compromise bill waives a requirement that the tax credit be repaid. The credit applies only to homes bought between Jan. 1 and Aug. 31 of this year.

Homeowners who install new doors, windows or furnaces to make their home more energy efficient would be able to get as much as $1,500 back through new tax breaks...

Many people paying for college would get a $2,500 tax credit for tuition and other education-related expenses, such as books and computers...

Millions of Americans receiving unemployment benefits would see a $25 increase in their weekly checks, up from the average benefit of $200.

Unemployment benefits would last 46 weeks under the deal, up from 26 weeks. Some people in high-unemployment states, including California, could receive benefits for 59 weeks.

People who lose a job would receive help in retaining their employer-sponsored health insurance.

Under current COBRA law, jobless workers can keep their insurance if they pay the full cost of the premium, which can exceed $1,000 a month for a family.

Under the stimulus bill, the federal government would pay 60% of that premium for nine months. Individuals who earned more than $125,000 a year and couples with incomes greater than $250,000 would not be eligible.More indirectly, millions of the nation's poorest residents would get help as states use billions of dollars in new federal aid to maintain Medicaid, special education and Head Start programs.

State and local government employees, many of whom are facing layoffs as states slash budgets, may get to keep their jobs.

Doctors, nurses and hospitals that often wait months for the government to pick up the tab for Medicaid patients could see some relief.

New home starts fall to all-time low

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

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

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

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

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

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

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

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

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

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

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

Click here for full story.

Apartment rents now falling across the U.S.

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

First, from a Bloomberg News story:

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

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

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

Next, from an L.A. Times story:

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

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

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

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

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

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

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

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

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

Finally, from the Lansner on Real Estate blog:

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

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

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

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

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

The end of the 'McMansion?'

When my younger brother was recently visiting for the holidays, he was expressing disdain for a well-known film producer with an enormous home measured in the tens of thousands of square feet. In the interests of family peace, I decided not to remind him of his own 4,000-square-foot, 3-level McMansion on a 1/3-acre plot of land near Philadelphia, which he now admits is much more home than he needs for a family of four.

But I think he's onto something -- having experienced the associated costs with owning and maintaining a large home, the housing bust is now having an impact on the very design of homes. Since it stands to reason that builders must innovate if they expect buyers to purchase new homes rather than the perfectly good 3-year-old homes built by the same companies, what might new homes look like over the next few years? A story in the L.A. Times ponders the question:

...History hints that this downturn could change our tastes. Homes built in the 1940s and '50s, for example, were usually smaller and simpler than large, frilly Victorians that had been in style before the Great Depression and World War II. Materials remained scarce for years after the war, and returning veterans, boosted by mortgage assistance provided under the GI Bill of Rights of 1944, bought Levittowns full of simple new houses as quickly as they could be made.

Virginia McAlester, author of the classic "A Field Guide to American Houses," said that after this recession she expects smaller homes built closer together, but with more attention to their positioning on the lot to better preserve privacy and the occupants' access to a little spot of nature...

"We are going to have far more small houses and attached houses," she predicted. The cost of building the roads, sewers and utility lines to serve compact neighborhoods is lower. Soundproofing will become more important when buyers are living closer to their neighbors or to retail and commercial properties...

Some large suburban houses might be turned into multifamily homes, just as many large homes of the late 1880s and early 1900s were converted into duplexes once lifestyles grew more spare.

"There is actually a pattern of building out there that is called manor houses," she said. From the front, they look like traditional houses, with a single entry. But the structure may incorporate two to five homes within, with separate entries tucked away on the sides of the building. "It's been found to be a way of putting affordable housing into an area," McAlester said.

Certainly that would provoke NIMBY wars and probably require changes to some local zoning laws, but breaking up homes into many units could be a way to preserve values if there aren't enough people willing to bear the burden of big-house upkeep by themselves.

Click here for full story.

The best architecture in Southern California

Whether or not you agree with the findings of an architecture panel commissioned by the L.A. Times, the winners of the Top 10 'best homes' (i.e., architecturally significant) certainly provide an interesting glimpse of L.A.'s residential history over the last 100 or so years.

Click here for full story.

Loan work-outs now available before missing mortgage payments

Up until this point in the mortgage crisis, borrowers had to be behind on their payments before lenders would even consider re-working a loan. Now, however, more lenders are allowing 'early workouts' when a wage earner loses a job, thus imperiling a mortgage soon down the road. From Kenneth Harney's column via the L.A. Times:

Here's some good news for homeowners facing tough financial times: You no longer have to miss two to three months of payments before your mortgage firm can modify your unaffordable loan terms.

Fannie Mae, the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees, now will allow borrowers who face financial difficulties to request "early workout" loan alterations, even if they've never been late.

Fannie's policy change has the potential to help thousands of people who are losing jobs or facing layoffs as the recession crunches onward. Most lenders and loan servicers traditionally have declined to intervene in mortgage problems until borrowers are 60 to 90 days late. So-called loss mitigation staffs may then try to work out solutions through techniques such as rescheduling back payments or extending the loan term.

Under Fannie Mae's revised approach, servicers of the company's loans will be required to inform borrowers that if they are "reasonably" certain that changes in their income will cause them to miss mortgage payments, they might qualify for an advance loan modification -- before they fall behind.

Borrowers who qualify will enter into a trial period of reduced payments, usually for four months. If they make payments on time during the trial, the modified mortgage terms could be made permanent.

Click here for full story.

Many Downtown L.A. condos becoming rentals

The L.A. Times is reporting on a shift in downtown housing that many local economists and consultants have been predicting for close to two years. Due to too many condos chasing buyers (and deeply flawed demand studies), many are converting to rentals, some until the market rebounds and others permanently. So is this necessarily a bad thing? It depends on who you ask. From the story:

In the midst of a downturn in the real estate market, some developers are finding that they no longer can sell condos in buildings that even a year ago would have been quickly snapped up. Flummoxed by a precipitous drop in qualified buyers, they are choosing to rent out their buildings instead.

It's happening in downtown Los Angeles, and to a lesser degree in Hollywood and the San Fernando Valley -- areas where high-density housing has sprung up in recent years.

And the shift raises questions about some of the fundamental assumptions surrounding urban development. Instead of buyers who can afford the hefty down payments and mortgages, some of these developments are now attracting renters who need only put down rents of $1,500 to $4,500 a month...

Jan Lin, a professor of sociology at Occidental College, said the change is "something that you should be a little cautious about if you are a planner or city official concerned about the social fabric."

Property owners are typically more invested in their neighborhoods and push for urban transformation that will better the neighborhood and increase their equity.

But the owners of rental buildings are usually absentee owners, not residents of the area in which they are invested, Lin said, and don't necessarily have the same dedication to bettering the neighborhood that condo owners often do...

But the revitalization of downtown was sparked much less by homeowners, said developer Tom Gilmore, whose conversion of old bank buildings along Main Street into rental lofts nearly a decade ago helped spark the revival.

It was renters -- a mix of artists, young couples looking for urban adventure and professionals who worked downtown -- who began to build the loft scene that eventually led to new restaurants, bars and galleries, as well as luxury condos.

Gilmore said downtown needs a mix of renters and owners.

Click here for full story.

Home builders reverse course on court-ordered loan modifications

Things are looking so bleak for the nation's home builders that they've recently changed course, and now support allowing bankruptcy judges to order mortgage holders to modify loan terms to avoid foreclosure. From an L.A. Times story:

Bankruptcy judges would be able to reduce payments and principal for homeowners with troubled mortgages under a proposal that appeared to be gaining momentum Wednesday...

Such reform is also supported by key advisors to president-elect Barack Obama, including former Treasury Secretary Lawrence H. Summers, who will be chairman of the National Economic Council in the new administration.

On Tuesday, Jerry M. Howard, chief executive of the National Assn. of Home Builders, said his group would no longer oppose the proposal. Continuing home foreclosures and the economic recession have opened the group to previously off-limits ideas, he said.

"The situation's deteriorated so much [that] every proposal needs to be considered," Howard said...

Howard said his group's newfound flexibility on the issue was "a huge acknowledgment by the home-building community that in this crisis, old doctrines don't necessarily fly." He said the builders would be most likely to agree to a temporary expansion of bankruptcy provisions, not a permanent one.

Builders will not oppose court-ordered mortgage modifications because they could keep more people in their homes, which in turn would mean fewer foreclosures flooding the market. Competition from cheap repossessed houses has made it difficult for builders to sell their vacant, surplus homes in many areas, Howard said.

Conyers' bill would empower bankruptcy judges to order reductions in mortgage principal, waive prepayment penalties and stop or modify interest rate changes on adjustable-rate mortgages. Judges could also extend the length of mortgages to 40 years. Such measures would apply to mortgages on primary residences...

Click here for full story.

L.A. Times architecture critic calls L.A. Live a bust

Just when many Angelenos were on the verge of clinching a potential icon that would represent downtown Los Angeles in the 21st century with L.A. Live, L.A. Times architecture critic Christopher Hawthorne considers the second phase a bust, offering us this:

Even by the rather forgiving standards of a city whose leaders -- and whose public, for that matter -- demand little from developers when it comes to civic-minded design, the project is relentlessly focused on creating its own wholly separate commercial universe: a brighter, more strategically frenzied place than the world outside its doors...

The trouble is that the new buildings -- designed by RTKL, a Baltimore-based firm that also created the master plan for L.A. Live -- have almost nothing to say to or about downtown Los Angeles. Clad in glass and panels of metal and limestone, they are adamant in their sleek placelessness.

Their primary concern is matching, in palette and spirit, the Staples Center next door (which, not coincidentally, is also an AEG property). When you get right down to it, their architecture is fundamentally not really architecture at all but an extensive series of armatures on which the developer and its tenants can hang logos, video screens and a sophisticated range of lighting effects.

"...not really architecture at all but an extensive series of armatures?" As my 7-year-old niece would say, "How rude!" But maybe he's trying to make a larger point:

For decades, we have largely built the city with a kind of all-or-nothing zeal, pouring money and architecture into stand-alone projects of increasingly massive scale and failing to coax developers to knit them into their neighborhoods with any real care.

For cities, the benefit of a gargantuan new development is not only the boost it gives to the tax base but also, in urban terms, its spillover effect -- energy and people flowing into the surrounding area. The entirety of the AEG development downtown -- Staples plus L.A. Live -- is designed like an airtight cruise ship, turning not a welcoming face but the architectural equivalent of a massive hull to the neighbors. Its spillover effect may be measured not in gallons but in drops...

Click here for entire article.

It's official! R-E-C-E-S-S-I-O-N!!

Despite the denials of economists related to certain trade groups or otherwise required to offer sunny forecasts over the past year, it looks like the U.S. has been in a recession for about one year, something many of us had known but didn't necessarily have the comprehensive data to back it up. From an L.A. Times story:

The economy's yearlong downturn, officially declared a recession Monday, could last well into next year or even beyond, challenging the government to devise new responses as traditional methods show limited results.

The National Bureau of Economic Research, the private body charged with determining the onset of a recession as well as its endpoint, said Monday that the current downturn met its definition of a recession: "a significant decline in economic activity spread across the economy, lasting more than a few months."

The downturn began, the bureau said, at the end of last year as businesses started slashing jobs -- which they have done every month this year...

A psychology of fear has gripped businesses and consumers and is likely to prolong the recession, said Lee Ohanian, a professor of economics at UCLA.

"This one has a potential to be longer and deeper than other postwar recessions," he said. "People are very, very scared and worried. In my opinion the government has created much more uncertainty about the economy than it should have done. So it's really hard to tell how long this recession could last."

Government officials reiterated that they would do what was required to turn the economy around.

Well, at least as long as they can continue issuing debt.

Click here for full story.