Housing starts jump far more than forecast

Housing starts, led mostly by the multi-family sector, rose to their highest level in 19 months to 685,000 units, or far better than the annual rate of 630,000 projected by surveyed economists. From a story in the Wall Street Journal:

Home construction last month increased 9.3% to a seasonally adjusted annual rate of 685,000 from October, the Commerce Department said Tuesday. The results were better than forecast. Economists surveyed by Dow Jones Newswires expected housing starts would rise by 0.3% to an annual rate of 630,000.

The increase in November was driven by a 25.3% increase in multi-family homes with at least two units, a volatile part of the market. Construction of single-family homes, which made up about 65% percent of the market, rose only 2.3%

Compared with the same month a year earlier, overall new-home starts in November were up 24.3%. They were still well below healthy levels, considered to be a pace of around 1 million to 1.5 million.

The Commerce data showed newly issued building permits, a gauge of future construction, rose 5.7% from a month earlier to an annual rate of 681,000, the highest since March 2010. Permits in November had been projected to fall 1.7% to an annual rate of 633,000.

Click here for entire story.

Is the lending faucet beginning to open?

According to a story in today's Wall Street Journal (via MarketWatch.com), the lending faucet may be finally squeaking open -- at least for certain commercial real estate projects. From the article:

An influx of fresh capital into U.S. commercial real estate is bringing some long-stalled development projects back to life and launching new construction of apartments, office buildings and shopping centers.

The moves show that the industry, in a deep slump just a year ago, has entered recovery mode—at least in the nation's largest and healthiest markets. Analysts say the improved economy is giving rise to pockets of demand for new commercial space, while low yields on other investments prompt investors to seek higher returns in real estate...

Of course, the U.S. still is dotted with thousands of stalled construction sites, ranging from struggling apartment projects on the Brooklyn, N.Y., waterfront to shells of buildings in suburban Sacramento, Calif. And it will take years to replace more than two million construction jobs, or about 30% of the 2006 peak, lost since the real-estate bubble popped...

But office buildings and other projects could help cushion the U.S. economy if public-sector building declines, as expected, due to government budget cuts and waning economic-stimulus aid...

Click here for entire article.

Some builders staying alive by working for banks

As I had written about in January of 2009, in which I suggested that some builders could keep their operations alive by taking on remodeling work and also working for banks to finish up half-finished project, it appears that's just what has happened. From a story in the Wall Street Journal:

Home builders in some of the nation's hardest-hit housing markets are going to work directly for banks, in a little-used arrangement that is helping to ameliorate conditions in some battered local economies.

The builders traditionally got loans from banks to build homes, but that credit has largely dried up. The contract work builders are getting is welcome as many of them struggle to stay afloat...

...builders from California to Florida are starting to contract their services to lenders, many of whom have been left holding unfinished homes after the original builder went belly up. While there are no data on the trend, many builders are taking this work for the first time, particularly in markets like Nevada, Arizona and California, says Stephen Melman, director of economic services for the National Association of Home Builders.

The trend helps preserve relationships between builders and lenders in a strained time for the two. In some of these situations, home builders are working for the same institutions that won't lend money to them. While banks have hired builders before for fees, the trend is more prevalent now as more financial institutions own foreclosed properties, experts said...

The shift also helps the banks. In Atlanta, Beazer Homes USA Inc. in November was selected by Hearthstone Inc., an institutional investor in Los Angeles, to build and market homes on 462 lots over the next two to three years after another builder on the job went out of business. Hearthstone President Mark Porath said the company initially faced selling the lots for a loss after the first builder went bust. Now with Beazer on board, Hearthstone stands to eke out a small profit, he said.

Beazer officials said the deal—its biggest ever with a bank—allows it to expand in a market they feel has growth potential without facing much downside risk. Beazer is being paid "more a fixed than variable" payment for its work, with some "upside" compensation if certain goals are met, said Beazer Chief Financial Officer Allan Merrill...

A rebound for apartment builders?

After a couple of years in the doldrums, it looks like apartment builders are finally gearing up again for an anticipated leap in demand to occur once the economy rebounds and potential renters now doubling up with roommates (or living with their parents after boomeranging home after college) strike out on their own. From a Wall Street Journal story:

This year, real-estate investment trusts, or REITs, are expected to start close to $1 billion in new multifamily projects, according to real-estate research firm Green Street Advisors. While that still is less than average, it is a significant increase over the $100 million of development starts in 2009.

Analysts caution that the increase in construction doesn't mean there has been an improvement in the business. Apartment vacancy is at a record and unemployment, essential to the sector's health, remains elevated.

But operators are betting that limited new supply, combined with an improving economy, will lead to ideal market conditions nationwide starting in 2011 or 2012...

To be sure, there are risks. Given the multiyear construction window, companies have to start now to be ready in time. If the economy weakens further and recovery is delayed, landlords may be forced to keep rents low or offer free rent to get leases signed...

Landlords also are excited about demand. The 20-to-34 age group, prime renting age, is expected to increase by five million in the next decade, according to Hessam Nadji, managing director of Marcus & Millichap, a real-state-investment brokerage firm. People who moved home or who bunked with roommates during the downturn also might ink leases as the economy improves.

Moreover, construction costs "have fallen rapidly in the last two years," said Tom Toomey, chief executive of apartment owner UDR Inc. A unit that would have cost $300,000 to build two years ago could now be built for as little as $220,000, Mr. Toomey said...

Housing Chronicles hits 8.5 million headline views via BlogBurst

I'm pleased to announce that since February of 2008, The Housing Chronicles Blog has surpassed 8.5 million headline views through the blog syndication service BlogBurst. The breakdown of headlines is as follows:

Top 10 Publishers (All History) for Housing Chronicles

	Total Views
Reuters	8,011,522
FoxNews	196,568
Chicago Sun Times	194,504
Computer Shopper	85,773
Livestrong	17,102
IBS	5,203
Wall Street Journal	5,046
Palm Beach Post	719
usatoday.com	284
CT Green Scene	209

Thank you for reading!

FHA incurring larger loan losses, may require bailout

As previously warned about on this blog back in May ("The Next Housing Bust, Courtesy of the FHA"), with FHA loans now accounting for 23% of all loans -- up from 2.7% in 2006 -- the bill is coming due through increasing levels of defaults. But since FHA is such an important leg propping up the housing market, a future bailout or rising insurance premiums paid by borrowers may be in the offing. From a Wall Street Journal story:

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.

It isn't clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency...

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

Rising defaults have eaten through the FHA's cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago...

Some economists say the FHA's lending has been crucial to preventing a deeper bust in property. Thomas Lawler, an independent housing economist, said "the alternative could have been a complete meltdown of housing finance" that would have ultimately led to much larger losses. Critics have said the FHA, which has never had a chief risk officer, isn't able to manage such a large portfolio in an unstable market.

Policymakers have used the FHA to stabilize the housing market by pushing it to offer credit with far easier terms than that offered by most private lenders. For example, it will back loans with down payments as low as 3.5%...

Last year, the agency ended a program that allowed sellers to fund down payments. While that program accounts for around 11% of the FHA's loan book, it has generated 22% all loans that are seriously delinquent or in foreclosure.

In 2005, the FHA loosened its maximum loan-to-value limit on cash-out refinancing to 95%, from 85%. The agency moved that limit back to 85% earlier this year.

While most private lenders have raised lending standards and now require minimum 20% down payments, the share of borrowers who are able to make down payments of less than 10% hasn't changed in the last two years...

"Creative Destruction" gets sorely tested

Economist Joseph Shumpeter's theory that something called 'creative destruction' is in full force these days, impacting everything from real estate brokerages and newspapers to the American auto industry and even government. Against the grip of a painful recession, it's easy to dismiss the consequences of creative destruction as too much to bear, but in the long run, it's not only necessary for capitalism to thrive, but also for liberty as well. From an interesting opinion piece in the Wall Street Journal:

...it was Schumpeter who worried more than any other modern economist about what might be called the fragile condition of capitalism. He did so having lived through the economic horrors of Weimar, witnessed the terror of Soviet-style political economy, experienced the Depression -- and seen the chaos of World War II. Plenty of destruction, to be sure. His life's work concentrated on entrepreneurs renewing the economy through what he called "creative destruction."

If Schumpeter were alive today, he would surely ask, What caused this crisis? And, is this kind of scandal or drama endemic to the nature of capitalism itself? While a lot of attention has been given to the first question, I want to focus on the more ominous second one. Namely, how to save capitalism from a potentially fatal reaction to this crisis.

We need to remember that Schumpeter embraced capitalism not as a reaction or as the second-best solution to the unproductive reality of utopian economic planning. Rather, he saw capitalism as the foundation of two complementary forces. The first was economic expansion. The second was its role in protecting individual freedom...

As a general rule, only capitalism can create wealth and liberty at the same time. And, of course, capitalism can expand welfare faster than any other social or economic order has ever done.

However, given the pressures of the current crisis, a future where growth and freedom continue to jointly secure each other and anchor civil society is not assured. It seems that when economic contractions occur in their inevitable, yet unpredictable way, the critique of capitalism itself becomes more powerful and shrill...

Since the New Deal, Americans have come to see government as somehow the ultimate protector of their financial welfare. In reality, though, the evidence of the U.S. government behaving in this way during the New Deal is thin to say the least. Although it is largely forgotten now, much of the government's action during the Depression actually had a marginal impact on individual lives. Monetary expansion and technological innovation boosted the economy, while the "second" depression of 1937-1938 is widely understood as having been induced by Roosevelt's attempt to manipulate credit markets.

So what about the ultimate Schumpeterian challenge: Can capitalism be saved? France's President Nicolas Sarkozy in October 2008 proposed a brilliant formulation. He said: "The financial crisis is not the crisis of capitalism. It is the crisis of a system that has distanced itself from the most fundamental values of capitalism, which betrayed the spirit of capitalism."

No doubt, in the face of the continuing financial crisis, entrepreneurial capitalism is threatened. All over the world, people are giving greater emphasis to personal security. Their taste for assuming personal risk may be chastened, at least for the moment. This is an altogether rational and expected response.

Where that becomes troublesome, however, is the moment when government comes to be seen as the sole source of security. What we, the public, need to understand is that the best guarantor of security is not government. It's economic growth. While we want to believe otherwise, the cold fact is that government can't guarantee economic permanency. Nobody, and nothing, can.

Pragmatically speaking, we must figure out how to increase people's sense of security without making government itself bigger or more powerful...

Whatever road we choose, entrepreneurial capitalism cannot be revived or flourish if new government security programs end up attenuating the individual's ultimate responsibility to attend to his or her own welfare.

"Youth market" cities hitting midlife crisis

One of the greatest challenges for the building industry for the future lies in predicting population changes, especially for those 'youth-oriented' cities which not only attract 'the creative class,' but in so doing benefit from the higher education levels and innovation such people bring with them. Today, although younger people (especially age 25-39) continue to move to 'cool places,' there are fewer jobs for them -- a disconnect (hopefully temporary) that places like Phoenix or Portland now have to address. From a Wall Street Journal story:

The worst recession in a generation is disrupting migration patterns and overturning lives across the country. Yet, cities like Portland, along with Austin, Texas, Seattle and others, continue to be draws for the young, educated workers that communities and employers covet. What these cities share is a hard-to-quantify blend of climate, natural beauty, universities and -- more than anything else -- a reputation as a cool place to live. For now, an excess of young workers is adding to the ranks of the unemployed. But holding on to these people through the downturn will help cities turn around once the economy recovers...

Indeed, the trend has appeared to continue. Between 2005 and 2007, only eight metropolitan areas -- many of them bigger -- added more college-educated migrants of any age than did Portland, the nation's 23rd largest metro area, according to an analysis of Census data by William H. Frey, a demographer at the Brookings Institution. A more detailed breakdown by age isn't yet available, but Mr. Frey and other demographers say the bulk of the movers are likely between the ages of 25 and 39, the most mobile age group by far...

Portland isn't discouraging the young and educated from coming, though the glut of workers puts more stress on city services. One of the most important factors in a city's economic success is the education level of its work force, says Harvard University economist Edward Glaeser. Cities such as Detroit and Cleveland that have exported college graduates in recent years are trying to retain them with everything from internship programs to building artists' lofts.

"I'm hopeful people will stick around," says Portland mayor Sam Adams. "Even if they come to my city without a job, it is still an economic plus."...

The next housing bust, courtesy of the FHA

I've continued to read warning signs of an impending disaster at the FHA, which now underwrites about one-third of all mortgages (up from about 2% during the boom years). Could taxpayers soon be on the hook for another bail-out -- this time of FHA? From an opinion piece in the Wall Street Journal:

Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.

The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent -- nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in "serious delinquency," which means at least three months overdue.

The FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost. By law FHA must carry a 2% reserve (or a 50 to 1 leverage rate), and it is now 3% and falling. Some experts see bailout costs from $50 billion to $100 billion or more, depending on how long the recession lasts...

The bill that passed last summer more than doubled the maximum loan amount that FHA can insure -- to $719,000 from $362,500 in high-priced markets. Congress evidently believes that a moderate-income buyer can afford a $700,000 house. This increase in the loan amount was supposed to boost the housing market as subprime crashed and demand for homes plummeted. But FHA's expansion has hardly arrested the housing market decline. The higher FHA loan ceiling was also supposed to be temporary, but this year Congress made it permanent.

Even more foolish has been the campaign to lower FHA downpayment requirements. When FHA opened in the 1930s, the downpayment minimum was 20%; it fell to 10% in the 1960s, and then 3% in 1978. Last year the Senate wisely insisted on raising the downpayment to 3.5%, but that is still far too low to reduce delinquencies in a falling market...

In a rational world, Congress and the White House would tighten FHA underwriting standards, in particular by eliminating the 100% guarantee. That guarantee means banks and mortgage lenders have no skin in the game; lenders collect the 2% to 3% origination fees on as many FHA loans as they can push out the door regardless of whether the borrower has a likelihood of repaying the mortgage. The Washington Post reported in March a near-tripling in the past year in the number of loans in which a borrower failed to make more than a single payment. One Florida bank, Great Country Mortgage of Coral Gables, had a 64% default rate on its FHA properties.

The Veterans Affairs housing program has a default rate about half that of FHA loans, mainly because the VA provides only a 50% maximum guarantee. If banks won't take half the risk of nonpayment, this is a market test that the loan shouldn't be made...

A major lesson of Fan and Fred and the subprime fiasco is that no one benefits when we push families into homes they can't afford. Yet that's what Congress is doing once again as it relentlessly expands FHA lending with minimal oversight or taxpayer safeguards.

Cities increasingly holding lenders responsible for maintaining foreclosures

With cash-strapped cities lacking the funds (or really the responsibility) to maintain foreclosed units, some are getting quite serious about chasing down the scofflaws -- even if that means threatening an East Coast banker with a crime. And the few billions that the stimulus plan offered cities to clean up derelict housing? A veritable drop in the bucket. From a Wall Street Journal story (subscription required):

Officials at a Citigroup Inc. office in St. Louis placed a call to this desert town recently. The bank had caught word that Indio was coming after the lending giant with fines and threats of criminal charges. The offense: an algae-infested swimming pool at 79760 Eagle Bend Court.

Citigroup wound up in charge of the foreclosed home, one of thousands of such properties it was managing across the country. But last year, Indio passed a law that allowed it to charge banks with a criminal misdemeanor if they allowed a home to fall into disrepair...

The hard-line approach is part of this town's attempt to gain leverage over some of the nation's largest lenders. A couple of years ago, Indio was a real-estate bonanza. Old date farms were closing down, sprouting subdivisions in their places. Today it's a different scene with one in 10 houses either in default or foreclosure...

Lenders say that such repairs and upkeep are part of the normal course of business, and that Indio's ordinance hasn't prompted any special actions. A Washington Mutual spokesman said local real-estate agents send in photos of bank-owned properties so the lender can watch for disrepair from afar. A Fannie Mae spokeswoman said the lender's first goal is to "stabilize neighborhoods." New York Mellon said its role as trustee didn't merit citations from Indio.

Even before the mortgage crisis erupted in full, big cities like Cleveland and Buffalo had fashioned laws of their own to browbeat banks into taking care of urban blight. Now some small towns are also taking matters into their own hands.

Indio's neighbors Palm Springs, Desert Hot Springs and Cathedral City each pushed ahead with laws much like Indio's. The town's own ordinance was fashioned off a 2007 law from Chula Vista, a city south of San Diego which began fining lenders up to $1,000 a day for unsightly or dangerous code violations such as broken windows...

City officials say they ginned up a campaign to notify the banks about the new law, but few took action. "The banks were trying to test us to see if we were serious about this," says Jason Anderson, a code-enforcement officer in Indio.

Countrywide, one of the biggest lenders in the area, initially just tried to make the problem go away by writing checks, say city officials. Instead of attending to the upkeep on the properties, they'd ask, "How big was the fine?" Mr. Anderson recalls.

City officials say Countrywide has since become one of the most proactive lenders, contracting local real-estate agents to monitor properties and paying for gardeners to handle the upkeep. "There's considerable financial incentive for the bank" to maintain properties, a Countrywide spokesman said...

California's $10,000 tax credit helping new home builders

You've got to chalk one up for the California Building Industry Association's lobbying arm, since they definitely had a hand in crafting the $10,000 tax credit for buyers of new homes in the state. In fact, the program has been so successful that the development community has suggested lifting the $100 million cap on the tax credit program.

Yet others argue that since foreclosures are a much bigger problem in the state, creating an artificial stimulus for new home sales only prolongs the inventory correction.

I would argue that the issue is a bit more complex than that, and if we can devise a plan to help some builders limp along with a core operation until the market rebounds while also focusing even more on getting rid of existing home inventory (mostly foreclosures), then that's perhaps the optimal solution.

From a Wall Street Journal story:

California's hard-hit home builders say they're pouring more foundations and hiring more workers this spring, partly because of a state tax credit of as much as $10,000 for buyers of new homes.

Nationally, the Commerce Department said Friday that new-home sales fell 0.6% to an annual rate of 356,000 units in March, a sign the free fall in new-home sales may be over. In the West, home-builder sales rose 15%, likely reflecting a boost from California's new-home credit.

Now, less than two months after the new-home credit became available, some lawmakers in California's financially strapped government are proposing to eliminate the $100 million limit on the total amount of credits that home buyers can tap...

Despite the industry's enthusiasm, some economists say the credit is doing little to fix what truly ails California -- one of the nation's largest residential markets -- because it doesn't encourage the sale of foreclosed houses that are weighing on prices. Economists warn that if the tax credit is expanded too much, it could exacerbate the housing glut here...

Other states are considering their own subsidies to supplement the recently enacted $8,000 federal credit for certain first-time buyers of existing or new homes. But California has one of the most robust tax credits targeting new-home purchases...

The Californian Building Industry Association, which led the lobbying effort for the credit, estimates that each new-home sale generates $16,000 in tax revenue from construction workers' income, as well as from sales taxes paid on appliances and furnishings, among other home-related items...

About one-third of the $100 million tax credit allocation has been already claimed, according to the state Franchise Tax Board, which administers the program. At this rate, lawmakers expect the pool could be gone by early summer, well before the program is scheduled to end in February 2010.

For home buyers, the credits mean big savings, as home prices keep falling and mortgage rates are near historic lows. Certain first-time home buyers in California can qualify for a combined $18,000 in state and federal credits on new homes, which had a median price of $339,990 in February.

Commercial loan losses starting to escalate

Given the huge job losses and the retailing brands going out of business, it's little surprise that commercial real estate landlords would be taking a hit. And how that damage seems to be escalating. So what will 2009 look like for them? From a story in the Wall Street Journal:

The delinquency rate on about $700 billion in securitized loans backed by office buildings, hotels, stores and other investment property has more than doubled since September to 1.8% this month, according to data provided to The Wall Street Journal by Deutsche Bank AG. While that's low compared with the home-mortgage delinquency rate, it's just short of the highest rate during the last downturn early this decade...

Some experts say it now looks as if the current commercial real-estate slump will rival or even exceed the one in the early 1990s, when bad commercial-property debt played a big role in dragging the economy into a recession. Then, close to 1,000 U.S. banks and savings institutions failed. Lenders took about $48.5 billion in charges on commercial real-estate debt between 1990 and 1995, representing 7.9% of such debt outstanding.

Since late 2007, a total of 47 banks and savings institutions have failed, of which a dozen or so had unusually high commercial-mortgage exposure. Foresight Analytics in Oakland, Calif., estimates the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn. The research firm projects that more than 700 banks could fail as a result of their exposure to commercial real estate.

Commercial property may not be hit as hard as many fear if the economy pulls out of recession more quickly, driving up rents and occupancy rates. And greater availability of financing -- a key goal of the Obama administration -- could lift property values...

Commercial real-estate debt is potentially more dangerous to the financial system than debt classes such as credit cards and student loans because of its size. The Real Estate Roundtable, a trade group, estimates that commercial real estate in the U.S. is worth $6.5 trillion and financed by about $3.1 trillion in debt. Partly because the commercial real-estate debt market is nearly three times as big now as in the early 1990s, potential losses in dollar terms loom larger...

Click here for full story.

A false floor for housing prices?

Although the government efforts to support the housing market seemed to have created a potential bottom in the future for housing prices, could that be a false bottom that leads to a trap door if the overall economy doesn't improve or the government runs out of stimulus money? From a Wall Street Journal story:

In response to gigantic government efforts to support the mortgage market, house prices are showing signs that they mightn't have much further to fall.

But prices have to be built on more than cheap financing. Indeed, government leverage could set the stage for another downdraft if the wider economy doesn't recover fast...

Sharply lower house prices and ultracheap mortgages were bound to spark bargain hunting. Government intervention in credit markets has helped push down rates on standard, fixed-rate, 30-year mortgages to 4.85%. That is the lowest level since Freddie Mac's records began in 1971. After months of decline, house prices jumped 1.7% in January from December, according to the Federal Housing Finance Agency.

This was a small sign the vicious circle in housing can be broken. Policy makers fear the more prices fall, the more likely it is that underwater borrowers choose to default, increasing foreclosures and forcing prices down even further...

However, two countervailing forces could thwart a rally.

First, borrowers mightn't want to take on more mortgage debt while personal balance sheets are still stressed, something not reflected by the affordability index. At the end of last year, personal disposable income covered 75% of household liabilities. In 1991, it was 114%.

Second, rising unemployment could continue to take a heavy toll. It makes the employed more cautious about large purchases, but unemployment does most damage by driving foreclosures higher -- even among borrowers with sounder personal balance sheets...

Even Fannie Mae's 2005 mortgages, most of which should have been conservatively underwritten, are suffering unusually high default rates.

Given this backdrop, the government will be tempted to keep stepping up mortgage subsidies. The risk: Buyers are lured in by artificially cheap financing, only to find the house-price floor subsequently gives way.

From the Geithner's mouth: "My plan for bad assets"

Mindful that everything he does will be analyzed, dissected and criticized by various pundits, reporters, politicians and economists, Treasury Secretary Tim Geithner has written an op-ed piece for The Wall Street Journal explaining his plan for the bad assets held by the nation's banks:

Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure.

We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place...

We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans...

However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury...

Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation...

We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession...

But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms...

Falling prices boosting sales of existing homes

We've certainly been seeing this trend here in California, and now it appears it's also gone national: as prices plummet, home buyers (many investors hoping to hold on and rent homes out for cash flow) rush into the market. So does that potend a bottom or is this market still feeding on itself? From a Wall Street Journal story:

Home resales rose 5.1% to a 4.72 million annual rate from 4.49 million in January, the National Association of Realtors said Monday. About 45% were foreclosure and short sales.

The large number of these distressed property sales is driving prices lower. The median price for an existing home fell 15.5% last month to $165,400. Falling prices depress demand, contributing to the high inventory that is a factor keeping prices down. Inventories of previously owned homes rose 5.2% at the end of February to 3.8 million available for sale, which represented a supply of 9.7 months at the current sales pace...

Fannie Mae tightens rules on mortgages for new condos

As if the demand for new condominiums units hasn't tanked enough, Fannie Mae is throwing an additional wrench into the system by toughening up lending requirements. From a Wall Street Journal story:

Just as a flood of new condominiums are scheduled to hit the housing market this year, Fannie Mae has added restrictions making it more difficult for developers to sell their units.

The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won't back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.

The new policy became effective March 1, and most lenders have started to implement Fannie's guidelines. Freddie Mac, Fannie's chief rival, hasn't yet followed Fannie's lead.

Fannie says the new rules protect borrowers from buying units in buildings that have a high risk of failure while also preventing the companies -- and taxpayers, given that Fannie and Freddie are operating under government conservatorship -- from throwing good money into troubled developments. Developers can petition Fannie for an exemption from the rule, and so far more than 50 exceptions have been made...

Moreover, Fannie and Freddie are both set to increase fees on condo buyers next month. Buyers without at least a 25% down payment will have to pay closing-cost fees equal to 0.75% of their loan, regardless of the borrower's credit score. The companies say these fees are necessary to protect against higher default rates...

The new rules have left developers in limbo. Some are turning their buildings into rental apartments -- at least in the near term -- on the expectation that they won't be able to sell the units anytime soon. Others are selling units in auctions, often at prices discounted steeply enough to entice cash buyers.

Some developers are seeking creative ways to finance units. Asset-management firm New Oak Capital, based in New York, has begun working with developers to offer seller-financing by recycling existing capital from investors and lenders to fund loans that can be sold to investors or lenders once secondary markets recover...

In extreme cases, developers also are beginning to use Chapter 11 bankruptcy protection to restructure and use their remaining capital to provide seller financing. "It's not that there's not demand for the condo; you just can't get the financing," says Craig Rankin, a bankruptcy lawyer representing the principals of West Millennium Group, which has 12 condo projects in Southern California including the Brockman, an 80-unit condo conversion of a historic building in downtown Los Angeles.

Some are turning to their construction lenders to provide seller financing. Projects with multiple buildings are "re-phasing" their development plans to treat each structure as its own condo. Others are offering rent-to-own purchase plans...

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Redevelopment of downtown L.A. put on ice

Urban redevelopment is rarely a pretty picture. That's because real estate cycles tend to interrupt the dreams of those builders and developers with the vision to reinterpret a downtown area. Although San Diego now has an enviable, walkable downtown, it certainly didn't get there overnight -- it took at least two (and perhaps three) redevelopment cycles to get it where is is today, and Long Beach has been trying to decide what works and what doesn't since I lived there and attended high school.

So it comes as no surprise to me that the redevelopment of downtown Los Angeles -- which could easily fit many downtown areas into one of its submarkets -- is not going to occur in just one cycle. It will be a long, drawn-out process, but perhaps that's a good thing, because five years from now homebuyers are going to be wondering how expensive it's going to be to rip out all of those granite countertops and stainless steel appliances in favor of the next big trend. From a Wall Street Journal story:

The largest private landowner in downtown Los Angeles said it may have to file for bankruptcy protection, the latest sign of how the credit crunch has frozen a multibillion-dollar revitalization of the city's downtown...

It is the latest shoe to drop for Los Angeles's downtown district, which has been the focus of a decade-long renewal project designed to convert old warehouses and office buildings into lofts, high-rise residential towers and an entertainment and retail district.

Major pieces already are in place, such as the Staples Center sports complex at the south end and the Frank Gehry-designed Walt Disney Concert Hall at the north end. The first phase of L.A. Live, an entertainment complex, opened in December. And developers have added thousands of new condominiums and rental apartments.

But some plans have stalled, threatening the goal of building out the surrounding area. The Related Cos., a national developer, missed a city deadline to break ground on a $3 billion condo and retail corridor. The first phase of the project, once slated to be completed this year, probably won't be finished before 2012 because the developer hasn't been able to secure financing. Related says the project is on hold temporarily...

And, as in other cities, the condo market has been hurt by slow sales. Condo prices in downtown Los Angeles fell to less than $400 per square foot in the fourth quarter of 2008, down $100 from the previous year, according to CB Richard Ellis...

Unlike in Miami or San Diego, the downtown area doesn't have a large supply overhang. Real-estate brokerage Marcus & Millichap forecasts that 39 new condo and 394 rental units will be added to the downtown market this year.

But while the district's troubles may reflect economic headwinds that have battered real estate nationally, some experts say downtown has also suffered from too many high-priced developments. "The price points that were projected aren't sustainable," said Raphael Bostic, a real-estate professor at the University of Southern California. "The prices you have to charge now make the returns relatively unattractive."

Home builders now competing mostly against foreclosures

The Wall Street Journal is covering a story I've been discussing with clients and at conferences for about 18 months now (better late than never!), which is how difficult it is for home builders to compete with foreclosures that are sold at substantial discounts. From the story:

In many markets, "we are no longer competing with other builders. We are competing with foreclosures," said Steve Ruffner, president of the Southern California division of KB Home.

Sales of used homes are actually rising in some regions because of foreclosures, but new-home sales fell to a four-decade low in January, down 77% from their peak in summer 2005. Altogether, home builders sold houses at a seasonally adjusted annual rate of 309,000 units in January, down from a peak of 1.4 million in July 2005.

Home builders are confronting the competition from foreclosures at a difficult time in their history. Small builders are dying by the dozens, while some large companies are staying afloat by cutting expenses and scrambling to restructure debt.

President Barack Obama's foreclosure-prevention plan is likely to help stem the supply of bank-owned houses somewhat, and the administration's proposed budget would extend builders a lifeline through a lucrative tax break. But the foreclosure problem won't disappear...

Home builders' responses to the foreclosure threat vary. Los Angeles-based KB Home is focusing on building smaller, lower-priced houses that can compete with foreclosures head on. The builder has shrunk its house size from an average of 3,200 square feet during the housing boom to an average of 1,600 square feet in many markets today...

Dallas-based Centex, on the other hand, says it's not trying to beat lenders on price. Instead, the nation's third largest builder by volume is trying to entice buyers with perks like mortgage interest rates as low as 4.25%, energy-efficient designs and warranties...

D.R. Horton also offers incentives, including covering the buyer's closing costs, and touts a $10,000 California tax credit for buying a new house. And it notes that buyers often need to spend money to fix up foreclosed properties before they can move in...

Another strategy: build in new neighborhoods that aren't filled with vacant, bank-owned houses. "In general, we try not to compete with foreclosures," said Centex Chief Executive Tim Eller. "It's not all about price, it's about value. Buyers determine value by the look and feel of the neighborhood."...

Analysts question how low builders can go before building a house costs more than they can charge for it. In some markets in California and Florida, builders have reached that point and have stopped building.

Prepare for higher taxes! Obama unveils budget blueprint.

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

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

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

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

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

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

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

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

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Is it time to just nationalize the banks already?

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

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

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

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

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

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

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

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

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

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