Foreclosure moratorium has historical precedent

Although many laissez-faire proponents continue to argue against any government intervention into the housing & mortgage crises in favor of Adam Smith's "invisible hand" letting free markets create their own solutions, some historians are pointing to the Great Depression, when moratoriums on foreclosures sometimes lasted many years. From a New York Times story:

The Bush administration recently announced a plan to delay foreclosures for some troubled homeowners for 30 days. Senator Hillary Rodham Clinton, in the race for the Democratic presidential nomination, has called for a 90-day moratorium on foreclosures.

But two state legislators have been quietly pushing for an even longer reprieve for homeowners in New York State: a one-year moratorium...

The measure would allow residents to remain in their homes while granting them time to work with lenders to modify their mortgages.

The bill is one of the most far-reaching state proposals to address the crisis in subprime lending and foreclosures, and it recalls the long-term foreclosure moratoriums that provided relief to homeowners in the 1930s during the Great Depression...

If it became law, the moratorium would be the first of its kind in New York State since 1933, when state lawmakers and Gov. Herbert H. Lehman imposed a moratorium of roughly one year on foreclosure on all real estate for which interest, taxes and other charges had been paid. That moratorium was renewed annually until 1949.

“Some people say, ‘Well, that’s too crazy,’ ” said Bertha Lewis, executive director of New York Acorn, referring to the proposed one-year moratorium. “We say, ‘Look, either we are in a crisis or we’re not.’ We have to do something in New York State. This crisis is real, just like it was real in 1933 during the Depression.”...

The bill’s proponents will have to allay concerns that a one-year moratorium might make mortgage lenders less inclined to extend loans to New York home buyers, by reducing their leverage over borrowers who do not keep up with payments. But the bill has received support not only from many Democrats, but also from Mr. Padavan’s fellow Republican lawmakers including State Senators James S. Alesi of the Rochester area, Martin J. Golden of Brooklyn and William J. Larkin Jr. of the Newburgh area of the Hudson Valley.

Mr. Padavan described the bill as an immediate, “common-sense solution” to the foreclosure crisis. “This is a freight train coming down the tracks,” he said, “and we’re just trying to slow it down so people can deal with the underlying problem.”...

Foreclosure delays and moratoriums have been proposed in other states. Last April, Gov. Deval Patrick of Massachusetts directed state banking officials to seek foreclosure delays of up to two months from lenders. The delays were sought on a case-by-case basis for any homeowner who had filed a complaint with state banking regulators. In Michigan, a group of activists has been pressuring Gov. Jennifer M. Granholm to impose a five-year foreclosure moratorium.

New York’s one-year moratorium, if passed, would not take effect on a case-by-case basis; it would be mandatory for court-ordered foreclosures. It would impose a one-year delay from the time a lender has proved its entitlement to foreclosure to the time the court order allows the foreclosure to proceed.

The bill, which has been referred to the Judiciary Committees of the Assembly and Senate, calls for the lenders and the homeowners in foreclosure cases to work out monthly payment schedules in the interim under terms that are “equitable and just.”

The goal of a payment schedule is to preserve the financial position of both parties, and a homeowner’s failure to adhere to the terms of the payment schedule could result in a lifting of the moratorium, the bill states.

“This is not a giveaway,” Mr. Padavan said. “We’re not paying these people’s mortgages for them.”

Builders Push for More Ways to Revive Market

Although the post-Super Bowl traffic at new-home communities throughout the U.S. is rising, tighter credit conditions are keeping cancellation rates at record levels and preventing potential buyers from obtaining mortgages. Consequently, politically connected builders and the NAHB continue to press for more ways to revive the long-flagging housing market in more constructive ways than threatening to withhold donations to political candidates, which was widely derided by Washington insiders as a bit childish and by others as proving a quid pro quo between industry and government. Frankly, however, what did builders have to lose at this point in the cycle? From Nation's Building News:

With reports from crucial markets around the country that the traffic of prospective home buyers has been picking up even as tighter mortgage financing conditions remain a hurdle for many, the NAHB Board of Directors at its Feb. 15 meeting in Orlando announced that the association will be making a major drive to pass individual pieces of legislation that will stimulate housing sales and help builders work down their unsold inventories...

At the top of the list of favorable developments have been Federal Reserve Board decisions that have slashed interest rates by more than two percentage points since September.

And only the week before the NAHB board meeting, the $168 billion economic stimulus bill passed by Congress contained several items that will help the ailing housing industry to at least some extent, Catalde said. High-priced housing markets that have been among those hit the hardest by the credit crunch are expected to benefit from provisions allowing the Federal Housing Administration to insure loans for up to $729,750 through the end of this year and allowing Fannie Mae and Freddie Mac to purchase loans up to that amount.

Businesses also received a boost from the stimulus package, he reported, with a 50% bonus depreciation in 2008 and more generous expensing rules...

Participating on a panel of economists at the International Builders’ Show (IBS) discussing the housing outlook, NAHB Chief Economist David Seiders said that the $117 billion worth of stimulus bill rebates that will be mailed out to tax payers should give the economy enough strength to avoid recession, but “the economy is in a really weak condition at the moment” and the one-time checks to consumers won’t produce much growth after the end of the year, when it will be up to housing to keep the upward momentum going.

In his Feb. 20 Eye on the Economy report, Seiders noted that falling mortgage interest rates in the prime market, falling house prices in some markets and growing income in most parts of the country have combined to boost housing affordability in recent months. Consumer surveys have been showing that a growing number of households believe that home buying conditions have improved recently, he added, providing “a glimmer of hope” for the housing industry...

“It must be recognized, first of all, that a substantial tightening of lending standards is occurring in all components of the home mortgage market, as recently documented by the Fed, and the tightening may make it impossible for prospective home buyers to obtain financing they can afford.

“Secondly, a record volume of vacant homes on the for-sale market inevitably will put persistent downward pressure on home prices, further sapping the quality of outstanding mortgage credit and making it even more difficult to refinance or restructure adjustable-rate mortgages facing payment resets. This problem, in turn, will bolster the alarming upsurge in mortgage foreclosures and dump even more inventory onto the for-sale market, stretching out the contraction in new housing production...

“The vast bulk of the housing decline is now behind us,” Seiders told convention-goers in Orlando. However, starts this year are projected by NAHB to slip another 22%, following a 26% drop in 2007. The decline is expected to be even more pronounced in single-family home production, which declined 30% in 2007 and is forecast to erode 27% further this year, he said.

The foundation for the long-awaited housing recovery should begin with a stabilized sales volume in the second quarter of this year, followed by improvements in sales later in the year and in 2009, he said.

“The inventory overhang will delay the starts upturn to some degree,” he said, and the rebound, once it arrives, will be “muted” compared to some previous recoveries...

In its resolution on addressing the housing downturn and the mortgage credit crunch, the NAHB Board of Directors said that “while interest rate cuts by the Federal Reserve Board, efforts by the Administration to limit foreclosures and the recently enacted economic stimulus package are steps in the right direction, more needs to be done to stabilize the housing market and keep the economy moving forward.”

The directors called on Congress and the Administration to:

• Extend the increase in conforming loan limits for Fannie Mae and Freddie Mac to at least two years and link this effort to full reform legislation for the housing government-sponsored enterprises
  
  
• Modernize the FHA to further assist first-time and moderate-income buyers
  
  
• Create a menu of tax credits and other incentives to stimulate home sales and help reduce the inventory of unsold homes on the market
  
  
• Allow businesses to carry back net operating losses for five years to save jobs and help businesses weather the economic storm
  
  
• Expand and provide more flexibility for the mortgage revenue bond program
  
  
• Expand the definition of a qualified investment for a tax-deferred retirement account — such as an IRA or a 401(k) — to allow investment in a first-time home by purchasers, their parents or grandparents.

Fannie and Freddie to raise appraisal standards

Bowing to pressure from New York Attorney General Andrew Cuomo, GSE giants Fannie Mae and Freddie Mac have agreed to institute new standards for appraisals related to the loans they buy in order to avoid potential collusion between lenders and appraisers. While I'm sort of curious why this wasn't done years ago (and along the lines of the City of Los Angeles' self-congratulatory press release for finally getting around to synchronizing 75% of the city's traffic lights, with the remaining 25% along the routes I tend to travel), it's an important step in giving lenders the confidence to open up the credit lines for an eventual housing rebound. From an L.A. Times story:

Mortgage giants Fannie Mae and Freddie Mac agreed today to revamp their home-appraisal standards to eliminate the type of alleged fraud that contributed to the nationwide housing bubble.

In a legal agreement with New York Atty. Gen. Andrew Cuomo, the two companies said they would only purchase home loans from banks that follow rigid new rules setting out how home appraisals can be conducted.

Fannie Mae and Freddie Mac can't purchase loans from banks that use their own staff or affiliated companies to conduct appraisals, according to the guidelines. The rules also would bar mortgage brokers from selecting appraisers.

Amid the housing downturn, a critical spotlight has been turned on the home-appraisal process. Home appraisers are supposedly independent experts, but many have long complained that they are pressured to give sky-high valuations by mortgage brokers and lenders who collect fees based on the dollar value of loans they make...

Fannie Mae and Freddie Mac are government-chartered companies that buy mortgages from lenders, freeing the banks to make many more loans than they could if they kept the loans on their books...

In November, Cuomo filed a civil suit accusing a home-appraisal unit of Santa Ana-based First American Corp. of inflating the value of homes nationwide, thereby encouraging consumers to pay too much for them or to borrow against equity they didn't have. First American inflated the home values at the behest of home lender Washington Mutual Inc., alleged the suit, which is still pending.

Could the housing doomsayers be wrong?

Although the mission of Housing Chronicles is to provide a balanced portrayal of the housing market and related economics, that's not been easy to do lately, with various prognosticators calling for cataclysmic peak-to-trough pricing declines approaching 40 percent. So it's certainly nice to provide the occasional item that suggests that the doomsayers might be off the mark for a variety of reasons.

At the Motley Fool -- which has no reason to either support or discourage homebuilding activity -- writer Marko Djuranovic suggests that home prices in many areas may be reaching the bottom for this cycle for reasons that have not been previously discussed:

A recent BusinessWeek cover story touted the idea that housing prices could fall by another 25%. Although some areas are looking at a precipitous drop in prices, for the most part, current housing prices are nearing bottom. Forces other than loose lending standards and a corresponding spike in demand are responsible for the recent rise in housing prices, and these have not abated.

The BusinessWeek article used an index that tracks home prices as far back as 1890 to conclude that home values have historically risen annually from 0.2% to 0.8% above inflation. Using these trend lines, the article found homes to be significantly overvalued. But there are problems with drawing this inference.

First, today's homes are not the same homes that were built three decades ago. Census data show that in 1973 the median size for a newly built home in the U.S. was 1,525 sq. ft. In 2006 it was 2,248 sq. ft., a 47% increase.

Second, today's homes feature sturdier construction materials, more expensive siding, outdoor additions like in-ground pools, more complex wiring to support an increasing number of electronic devices, sophisticated heating and cooling systems, and larger kitchens (which translate to increased cabinetry). Simply, these are better homes -- and "better" here means more expensive to build.

Third, prices of inputs into the construction process are more expensive these days in relative terms. The bull market in basic materials that started several years ago has raised the costs of construction, and these costs have been passed on to the consumer.

Taking these factors into account implies that housing prices should have grown at least 2% above inflation in the past 30 years, putting the current median home price about where it should be.

The largely fixed expense of building today's homes gets us to the next reason why most homes are probably priced near their fair value. The table below shows gross margins for a collection of eight publicly traded homebuilders. (For homebuilders, gross margins represent the difference between the price at which the home sold and how much it cost to build, inclusive of any land acquisition costs. The cost of superintendents and sales staff to move the properties is not recorded here; it's a part of SG&A and often runs above 10% of revenue.)

	1998	1999	2000	2001	2002	2003	2004	2005	2006
DR Horton (NYSE: DHI)	19%	18%	20%	21%	20%	22%	24%	27%	24%
Centex	7%	9%	9%	10%	11%	10%	13%	14%	13%
KB Home (NYSE: KBH)	20%	20%	21%	21%	23%	23%	24%	27%	20%
Lennar (NYSE: LEN)	N/A	12%	11%	15%	15%	14%	14%	16%	7%
MDC Holdings (NYSE: MDC)	8%	11%	14%	14%	14%	14%	18%	17%	24%
Meritage Homes (NYSE: MTH)	20%	19%	20%	21%	19%	20%	20%	24%	21%
Ryland Group (NYSE: RYL)	19%	19%	18%	20%	23%	24%	25%	27%	23%
Toll Brothers (NYSE: TOL)	23%	23%	25%	27%	28%	28%	29%	30%	26%
Average	17%	16%	17%	19%	19%	20%	21%	23%	20%
Median	19%	18%	19%	21%	20%	21%	22%	25%	22%

Source: Morningstar.com, Yahoo! Finance.

Most homebuilders operate without particularly high gross margins. Although there has been a steady rate of margin expansion since the late 1990s, note that margins in 2006 had already returned to 2003 levels, the beginning of the current housing boom.

Net margins for most builders are of course even smaller, and typically averaged in the mid- single digits prior to the latest building boom.

Thus, even a 3% drop in prices would bring builders' gross margins well below the levels seen in the previous recession, threatening their profitability. (Land costs, which are not tied to increased costs of construction, would have to fall substantially to negatively influence home prices -- a general rule of thumb is that, for most residential homes, land comprises only 20%-25% of total value.)

Of course in areas such as Southern California, land costs as a percentage of total value are much higher than the 20-25% range, often reaching up to 50%. That's why builders were focusing more on larger luxury homes -- it took the higher margins on the home itself to justify the higher land costs.

This is important because it creates a floor for the price at which homebuilders will be willing to create additional inventory. Buyers will thus be faced with builders willing to slash prices drastically on existing inventory but unwilling to offer similar discounts on future projects.

What does all this mean for the housing market? When the financial institutions rediscover how to assess effectively borrowers' default risks, the supply of existing homes will fall fairly quickly. And the moment that the supply of existing homes begins to shrink, potential first-time homebuyers will realize that between low interest rates and homes that sell at (or below) replacement cost, they can grab the deal of a lifetime.

I'd add to that group income property investors, who can snap up properties and carry them for less than what they'd get in rent, thus giving them instant positive cash flow and be positioned for future equity increases in the future as well as slowly paying down the mortgages.

In 1999, tech investors bid up pieces of paper that were backed by fictitious profits of economically stillborn companies. When the bubble burst, the search for the asset's true worth -- often close to zero -- was a painful one. But houses are a different type of asset; they depreciate slowly and meet a need for which there is plenty of demand: shelter.

Overall, the condition of the U.S. housing market is not nearly as bad as some analysts would have you believe. So, the entire homebuilding industry is worth a closer look.

Over at Mortgage Credit News, syndicated columnist Lou Barnes argues that the wrong parties are being blamed for the housing bust and the S&P/Case-Shiller index greatly over-states pricing declines:

The real causes of this credit crunch -- still called “subprime” -- and the recession it has spawned are the grotesque failure of structured-finance products on the Street, and failure of oversight by their regulators.
The strange story of mortgage-rate spike and reversal began with the January fable that mortgage-backed securities (MBS) issued by Fannie, Freddie, and Ginnie (the “GSEs”) had become too toxic for investors to hold. That notion made no sense here: these GSE/MBS are as good as Treasurys, no matter what the ultimate default rate of mortgages within (Ginnies are guaranteed by the Treasury, F&F clearly “too big to fail”). The GSE/MBS market is $4.5 trillion, the deepest and most liquid market for anything on the planet except US Treasurys.
Yet, traders said throughout February: “Too many MBS sellers.” The excess on the market was certainly not new loan production. Now we know who those sellers were: big banks and Street dealers, capital impaired, dumping the only liquid assets they have to make room for trash flooding back onto their balance sheets. The back-wash: the remains of deals they sold but agreed to support if “something went wrong.”...

The financial press is having a wonderful time ginning-up a housing depression, this week shrieking about new home-price data: “Decline in Home Prices Accelerates” (WSJ), emphasizing the Case-Shiller index, down 8.9% in ’07.
Case-Shiller is designed to magnify home-price declines. Mr. Shiller correctly called the stock market bubble (his book “Irrational Exuberance” appeared on the day of ’00 collapse), and has spent the last several years mis-applying financial-market principles to real estate, gleefully predicting a 30-40% national crash in home prices.
The design flaw: it captures only sales of homes, obviously heavy with distressed transactions. For the authentic story and great methodology, visit www.OFHEO.gov and its All-Transactions House Price Index, which includes repeat appraisals in refinances, by definition free of distress. By that measure, national home prices in the 4th quarter rose by .8%. Prices fell in only 11 states, and in only five of those were declines in excess of one percent. See page 21 of the report for its critique of Case-Shiller.
At the micro level, some spots are in horrible trouble: of OFHEO’s 291 Metropolitan Statistical Areas, 15 had price declines last year in the 10%-19% range (all CA and FL). And the national market is decelerating: of 39 states with positive appreciation in the 4th quarter, 32 had gains of less than 1%.
The key to this unpleasant situation: housing is sinking because of credit starvation, not the other way around, housing wrecking credit markets. No matter what it takes, the supply of credit must be restored to housing and the rest of the economy.
The public policy response is still frozen, Democrats trying to help families who cannot afford their homes to stay in them, Mr. Paulson refusing assistance to the financial system: “I’m not interested in bailing out investors, lenders, and speculators.”

March 4th issue of BuilderBytes published

Want to catch up on any housing-related stories you missed over the last two weeks? Then be sure to check out the March 4th issue of BuilderBytes.

Hope Now helps 1 million homeowners

The Hope Now coalition of lenders created by the Bush Administration reports that it has helped 1 million homeowners at risk of foreclosure. Of that amount, 278,000 actually saw their loans modified, while the remainder were put on repayment plans to make up for missed payments. So will this plan have long-term benefits or it is merely a band-aid? It depends on the borrower and their circumstances. From a CNNMoney.com article:

Hope Now, the foreclosure prevention coalition put together with the Bush administration's support, claims dramatic success in helping at-risk mortgage borrowers stay in their homes.

The groups has reworked more than 1 million mortgage loans since July, Treasury Secretary Henry Paulson said in a speech before the National Association of Business economists on Monday.

But of those borrowers, only 278,000 actually saw the terms of their mortgages modified. Their lenders either froze or reduced their interest rates, and may have reduced their balances as well to make loans more affordable.

The remaining home owners were put on repayment plans, which merely allow borrowers to make up missed payments by tacking them on to the life of the loan...

"The number of loans being modified shows progress," said Austin King, director of the Financial Justice Center for the Association of Community organization for Reform Now (Acorn), "but it's still not enough."

"The majority of the work-outs are still repayment plans, which are not going to [keep people out of foreclosure]," said King. "The reliance on repayment plans is one of the biggest failings of the lenders."

When borrowers are stretched so thin that a financial setback, such as unexpected medical bills or temporary job loss, puts them behind on payments it means they really don't have enough income to keep up their mortgage payments. And tacking on missed payments on to a loan just makes things worse, according to King. Many of those borrowers will default again.

Even many mortgage modifications have shortcomings and may also simply delay default. If low teaser rates on hybrid adjustable rate mortgages are simply extended for a year or two, borrowers may still fall behind when the rates do finally reset, according to King.

"For modifications to work, they have to make the loans more affordable [permanently]," he said.

In addition to lender cooperation, Paulson also noted in his speech that homeowners have to seek help out if they need it. He noted that lenders only get a 2% - 3% response rate when they contact struggling home owners. The Hope Now alliance, which includes Citigroup (C, Fortune 500), J.P. Morgan (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and many other banks, has a 20% response rate.

Still, he noted that leaves 80% of at-risk borrowers without a plan. "If borrowers don't ask for help, they will have to bear the consequences," Paulson said, "which may very well mean losing their homes when that could have been prevented."

In other words, avoiding the issue would be the worst plan of action for many.

I personally know of someone who was at risk of foreclosure on a home in the Antelope Valley desert area north of Los Angeles, but after his lender reduced his interest rate substantially, it allowed him to save $700 per month on the mortgage payment, so now he can afford the house and wait for values to rebound to refinance or sell.

Contacting a lender really can work for some borrowers in trouble.

Vacant Home Inventory at Record High

Due to tight credit and high cancellation rates at new-home communities nationwide, the inventory of newly built homes that remain vacant stands at about 200,000 -- the highest level noted since the Commerce Dept. started tracking this data in 1973. While most builders have dramatically scaled back their operations and ceased building out new communities, in order to get some cash flow to maintain their core operations many have no choice but to complete existing projects. Apparently that doesn't sit well with many recent homebuyers, but given the choice between appeasing critics or staying solvent, which would you choose? From a Bloomberg story:

Almost 200,000 newly constructed single-family homes are sitting empty in the U.S., the most since Commerce Department statistics began in 1973. Partially completed developments reduce revenue for cities and towns and hurt businesses, said Nicolas Retsinas, the director of Harvard University's Joint Center for Housing Studies. Rising foreclosures and falling property values may cut tax revenue by more than $6.6 billion for 10 states, including New York, California and Florida, the U.S. Conference of Mayors said in a November report...

About 370,000 new homes are for sale because people who initially contracted to buy them backed out, according to estimates in a Feb. 15 report from analysts at New York-based CreditSights Inc. An additional 216,000 homes are under construction, according to Commerce Department data.

In January 1973, the number of finished new homes for sale was 97,000, when the U.S. population was about 212 million, according to the U.S. Census Bureau. In December 2007, 197,000 completed homes were on the market and in January 2008 there were 195,000. The current population is 303.5 million...

Homebuilders can't wait. They're cutting prices even further than last year and some are courting real estate brokers and using auctions to get rid of homes. They usually rely on their own staff to sell properties.

``It's a desire for the companies to do whatever is necessary to retrench and put themselves in a position to succeed when the residential markets turn more favorable,'' said Keven Lindemann, director of the real estate group at SNL Financial in Charlottesville, Virginia.

The five largest U.S. builders had almost 8,900 completed homes for sale at the end of their most recent quarters, according to data compiled by Bloomberg.

D.R. Horton Inc., the second-biggest U.S. builder, held an ``UnAuction'' on Feb. 16 and Feb. 23 with prices cut as much as 50 percent at 23 developments in Southern California.

Pacific West Cos., a Reno, Nevada-based builder, said this month that it's offering a ``risk free'' price guarantee to buyers in its California communities...

Builders such as Los Angeles-based KB Home and D.R. Horton of Fort Worth, Texas, are seeking out real estate agents to bring buyers to developments, said Joellen Chappell, sales manager at Century 21 M&M and Associates in Stockton, California. Century 21 realtors are now getting commissions of as much as 4 percent for a sale.

Tapped out of home equity, more Americans turning to credit cards

In a sign that U.S. households are not bringing in sufficient income to cover living expenses and debt payments, many are increasingly relying on credit cards as home equity lines become drawn down, frozen or harder to get. But the biggest change from the past is that mortgages have lost their first-tier position in terms of payment priority in favor of paying car payments and keeping credit cards current. From a USA Today story:

Credit bureau analyses of consumer payment data show that financially squeezed borrowers have begun paying their credit card and car bills before their mortgages. That's a striking reversal from the norm, one that reflects rising desperation. It suggests that some people essentially have given up trying to stay current with their mortgages and instead are focused on using credit cards to squeak by.

If the trend persists, many economists say, it could accelerate mortgage losses and further drag down the economy.

Rising living costs, along with cheap and plentiful credit, have led consumers to rely more on plastic to pay for necessities they can't live without — and luxuries they don't want to do without. But as the economy weakens, consumers are starting to spend less on discretionary items, such as furniture and electronics, and more on such necessities as groceries and gas, according to government data. Such items increasingly are showing up on credit card bills...

Magnifying the problem has been the shrinking availability of a major alternative to credit cards: home equity loans. As home values have sunk, homeowners have found it tougher to qualify for such loans. So they've turned elsewhere, especially to credit cards, to cover daily expenses...

The danger is that "The economy has relied on the consumer to keep it afloat for the last seven years, and there's no more gas in the tank of the consumer," says Howard Dvorkin of Consolidated Credit Counseling Services in Fort Lauderdale. "They've got nothing to give."...

During the housing boom, too many people took out mortgages they couldn't afford. Many now owe more on their houses than they're worth. Some are defaulting on their mortgages — figuring they'll lose their homes anyway — even as they keep paying credit card and auto bills, credit counselors say.

"A lot of people are exhibiting a kind of fatalistic behavior to their mortgages," says Douglas Hammond, outreach programs director at Alliance Credit Counseling. "They can't make their mortgage payment, so why (try to) make it at all? 'Let's keep my car, make my payment on my credit card, so I have some way of feeding my family.' "

When consumers are "pushed to the wall" and forced to choose between paying the mortgage or credit card bill, Chessen says, those who are likely to lose their homes may choose their credit cards, because "They still need to heat their homes, put food on their tables and fill their cars with gas."...

This reversal in payment priorities helps explain why the rise in credit card and auto loan defaults — which occur when lenders give up trying to recover a debt — hasn't matched the pace of mortgage defaults. Credit card defaults, while rising fast, are still in line with historic averages.

As the economy has worsened, card issuers have become more selective about offering credit to new customers, and in a growing number of cases, are shrinking card holders' credit limits. Yet they're still sending more solicitations to existing credit card customers. In 2007, issuers increased their solicitations to existing customers by 15.6%, advertising rewards and other perks to promote spending, according to Mintel, a firm that tracks such mailings.

Subprime customers — among the most profitable for banks because of the high rates and fees on their cards — saw a 41% jump in direct-mail credit card offers in the first half of 2007, the latest period for which figures were available, compared with the same period the year before, Mintel found.

It's a matter of time, some analysts say, before financially squeezed consumers max out their credit cards and start defaulting in larger numbers.

"My guess is that you'll see increasing numbers of people walking away from credit card debt the same way that they're walking away from the mortgages," says Ken McEldowney, an executive director at Consumer Action, a consumer advocacy group.

Launch of a new industry: mortgage-related lawsuits

Like NASCAR entrants gunning their engines awaiting the green light, attorneys are gearing up for what could be one of the biggest legal paydays in history: the subprime debacle. From an L.A. Times story:

First came the sub-prime mortgage boom. Next was the bust. Now, as surely as day follows night, come the lawsuits.

All large-scale financial scandals spawn mountains of litigation, but the sub-prime fiasco stands out because of the complexity of the system that funneled more than $1 trillion from investors around the world through Wall Street and mortgage lenders to borrowers with dicey credit.

As losses mount on those loans, the scene of the blame game is shifting to the courts.

Sub-prime borrowers are suing loan brokers and lenders, accusing them of deceptive practices. Wall Street firms that bought now-delinquent sub-prime loans are trying to force lenders to buy them back.

Investment-bank shareholders are going after those firms' managers, saying they took excessive risks by loading up on bonds backed by sub-prime mortgages. And investors are suing money managers whose sub-prime-laden funds have suffered hefty losses...

In all, the 278 civil sub-prime-related cases filed in federal courts last year already amounted to half of the 559 actions brought during the entire savings-and-loan crisis from 1989 to 1995, according to research firm Navigant Consulting Inc...

The data don't include the unknown number of suits filed in state courts -- or the probes by federal and state regulators and prosecutors, who are bearing down on many of the key players in the mortgage industry, looking for evidence of wrongdoing.

The sub-prime meltdown is likely to overtake the S&L crisis as the civil litigation record-holder this year, Nielsen said...

In one novel case that began in January, the city of Cleveland sued 21 major banks under Ohio's public nuisance law, accusing them of reckless lending that is burdening the city with a mass of foreclosures...

Of course, as with most legal free-for-alls tied to financial blowups, most of those suing in the sub-prime mess aren't hoping to go to trial. The goal is compensation in an out-of-court agreement...

Some companies are bracing for possibly being on the hook for sizable settlements. State Street said recently that it would record a $618-million pre-tax loss to cover potential legal liability stemming from sub-prime losses in some of its investment funds.

Many homeowners who believe they were defrauded by sub-prime lenders, as well as small investors with related losses, are likely to end up in class-action lawsuits with hundreds or thousands of others.

Although participating in class actions saves the time and cost of pursuing cases individually, plaintiffs typically recover only pennies for each dollar of losses they allegedly incurred, legal experts note.

A wild card in the litigation frenzy is whether the numerous investigations by state and federal prosecutors turn up proof of wrongdoing that could bolster suits by investors, homeowners and others.

The Securities and Exchange Commission, the Justice Department, the FBI and many state attorneys general all are conducting sub-prime-related probes. Partly because companies feel compelled to cooperate with regulators, the government may have the best chance of uncovering incriminating evidence, experts said...

A key issue in many cases is sure to be whether the lenders and securities underwriters fully disclosed the risks to borrowers who took out sub-prime loans or to investors who bought securities backed by them...

The banks are likely to argue that sub-prime bonds were bought by sophisticated investors who understood the dangers and that it was impossible to foresee the turmoil that upended the housing market.

But if government regulators show that banks didn't adequately disclose the risks, it "would put this litigation into an entirely different and far more serious category," said Jonathan Macey, a securities-law professor at Yale University.

"That would take these from 'kind of improbable to win' to 'How many zeros are we talking about on the check?' "

The dark side of reverse mortgages

One week after the article I wrote on reverse mortgages for the Los Angeles Times was published, the New York Times also takes a look -- although the tone of that story is more focused on the perils of unscrupulous companies which sometimes try to sell unsophisticated seniors on annuities and other financial instruments they don't understand -- with potentially dire consequences. This is why it is so important to get expert, objective advice -- other than from the company offering the reverse mortgage. And just go for the reverse mortgage alone -- other financial instruments such as annuities can always be considered after the sale is complete:

As the United States has become an older nation, reverse mortgages have grown into a $20-billion-a-year industry, with elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier. In surveys, many borrowers say reverse mortgages have improved their lives and provided money they needed for retirement.

But hundreds of people who have sought reverse mortgages — in lawsuits, surveys and conversations with elder-care advocates — have complained about high-pressure or unethical sales tactics they say steered them toward loans with very high fees. Some say they were tricked into putting proceeds of their loans into unprofitable investments, while sales agents pocketed rich commissions...

“We make potential borrowers talk to a counselor to make sure they understand what they are doing,” said Renée Shadel, an investigator with the Washington state attorney general’s office. “These can be great loans for some people, but only if they understand them.”

But critics say these counseling sessions are often brief and unhelpful. Some elderly borrowers, for instance, said their sessions lasted only 10 minutes, rather than the 60 to 90 minutes most counselors say they need to explain the loans.

Critics say some sessions are so brief because reverse mortgage companies are paying for the advice. One of the largest reverse mortgage counseling companies, Money Management International, often asks lenders to pay for providing advice to the lender’s clients, according to a company spokeswoman.

Money Management International, which is a nonprofit company, received $900,000 from reverse lenders last year. By regulation, counselors may not charge clients, though they are allowed to seek support from lenders...

A survey released last year by AARP, formerly known as the American Association of Retired Persons, of more than 1,500 reverse mortgage borrowers found that almost one in 10 were urged to buy other financial products, like annuities.

Lawsuits against reverse mortgage companies, including the nation’s largest, Financial Freedom Senior Funding, contend that those firms helped pressure older Americans into bad investments.

In court filings, companies have denied those claims.

“Financial Freedom is not involved in selling annuities, does not recommend annuities, and won’t even allow borrowers to use reverse mortgage proceeds to buy an annuity at closing,” said Joel Schiffman, the company’s general counsel. “We only pursue a reverse mortgage when it is in a senior’s best interest.”

Some regulators and lawmakers, however, have said that more safeguards are needed, including giving borrowers more information about alternatives to reverse mortgages, disclosing fees more clearly and providing more government money to counselors, so that they do not seek payments from lenders.

New laws governing reverse mortgages are under consideration in Congress, though lobbyists for some lenders are mounting strong opposition, Congressional staff members say.

I hate to see reverse mortgages get such a bad rap due to some unscrupulous lenders; for many seniors it really is a life-saver and provides a type of financial freedom that prevents them from having to lean on family members.

A leaner (meaner) economy

As the U.S. economy continues to compete more in a worldwide economy, it seems that the old rules for finding and keeping a job no longer necessarily apply. College education? Nope. Master's degree? Depends what it's in -- and even then it may not help. At the same time that the country continues to reel from the worst housing bust since the Great Depression, many companies are simply refusing to hire new bodies -- and those which do have become increasingly picky. From a New York Times article:

Across the nation, the labor market has been deteriorating. Many companies, long reluctant to add workers, are hunkered down and waiting for improved prospects, engaged in what Ed McKelvey, a senior economist at Goldman Sachs, calls “a hiring strike.” Americans with jobs are taking cuts to their work hours; those without jobs are staying out of work longer, or accepting positions that pay far less than they earned previously.

Teenagers are struggling to land minimum-wage jobs at fast-food restaurants, because those positions are increasingly being filled by adults. And those with poor credit are finding that this can disqualify them from getting a job....

Indeed, the increasingly anemic job market comes on the heels of six years of economic expansion that delivered robust corporate profits but scant job growth. The last recession, in 2001, was followed by a so-called jobless recovery. As the economy resumed growing, payrolls continued to shrink.

Even as job growth accelerated in 2005 and 2006 before slowing last year, it was not enough to return the country to its previous level. Some 62.8 percent of all Americans age 16 and older were employed at the end of last year, down from the peak of 64.6 percent in early 2000, according to the Labor Department.

“The economy never got its groove back after the tech bubble burst,” says Mark Zandi, chief economist at Moody’s Economy.com. “We’re still feeling fallout from the collapse of the tech economy and the accounting scandals. There are still psychological scars for the managers affected. Managers are less interested in taking risks.”...

Government data show that the labor market has weakened in recent years for nearly every demographic group. Women as well as men; whites, blacks, Hispanics and Asian-Americans; teenagers and the middle-aged; high school graduates and those with college degrees. In terms of employment as a percentage of population, all remain below the level reached before the last recession.

The source of this weakening and what it says about the overall, long-term health of the economy are the subject of fractious debate.

Some economists argue that the labor market has merely settled back to earth after years of ridiculously aggressive investment in technology, which created far more jobs in the 1990s than could be sustained.

“This is a return to normal,” says Robert E. Hall, an economist and senior fellow at the Hoover Institution, a conservative research group at Stanford.

But others conclude that the sluggish job market reflects long-term, systemic forces reshaping the American economy. It represents, they say, the underbelly of the so-called new moderation that has made recessions less frequent and less severe.

Traditionally, the American economy has often expanded in extreme cycles. In periods of growth, companies hire aggressively. When they sense a slowdown, they cut back, laying off workers and curtailing investments, amplifying the ripples of retrenchment. Now, however, companies aim to keep their work forces lean all the time....

In 1994, 30 million people were hired into new and existing private-sector jobs, according to the Labor Department. By 2000, the number of hires had expanded to 34 million. A year later, in the midst of the recession, hiring slackened to 31.6 million, while layoffs winnowed the work force.

In 2003, with the economy again growing, layoffs slowed, but the private sector hired only 29.8 million — a figure that has nudged up only a little in the years since.

Rather than hire and risk having to fire in another downturn, companies added hours for those already on the payroll and relied more on temporary workers, said Mr. McKelvey, the Goldman Sachs economist. Manufacturing companies continued to automate, to squeeze more production out of the same number of workers, while shifting jobs to lower-cost countries like China and Mexico. For lower-skilled workers, that intensifies the competition for the jobs that remain.

“Now, you’re not only competing against the guy next door,” Mr. McKelvey says. “You’re competing against the guy across the water.”

Some economists say the weakness of hiring in recent years may protect those with jobs against the usual impact of a recession: Many companies are so lean that the unemployment rate may not increase much...

Before 1990, it took an average of 21 months for the economy to add back the jobs shed during a recession, according to an analysis by the Economic Policy Institute and the National Employment Law Project, a worker advocacy group. Yet in the last two recessions, in 1990 and 2001, it took 31 months and 46 months, respectively, for employment levels to recover fully.

In the recessions of the early 1980s and the early 1990s, the ranks of the so-called long-term unemployed — those out of work for 27 weeks or more — jumped to well above 20 percent of all unemployed people. But in both cases, that share eventually settled back to close to 10 percent of the unemployed.

After the 2001 recession, however, the long-term share stayed above 20 percent from the fall of 2002 until the spring of 2005. In the months since, it has never dipped below 16 percent. In January, 18 percent of those unemployed had been without work for at least 27 weeks, according to the Labor Department.

P.S. Despite attempts by Democrats by extend unemployment benefits to those still looking for work in the much-publicized stimulus bill passed in February, Republicans voted that part down, suggesting that unemployment only serves to keep the unemployed idle. Perhaps they should try reading the papers? Just a thought.

How did so many people miss the housing bubble?

Several years before the housing bubble burst, there were a few lonesome voices in the media -- such as Yale's Dr. Robert Shiller and former UCLA Anderson Forecast's Chrisopher Thornberg (now with Beacon Economics) -- insisting that there would be serious consequences to pay for rising home values that had no connection at all to underlying economic fundamentals. In the aftermath comes the obvious question: how did such an important story stay for so long under the radar? Dr. Shiller has an answer, which he provides in the New York Times:

ONE great puzzle about the recent housing bubble is why even most experts didn’t recognize the bubble as it was forming.

The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks.

Were all these people stupid? It can’t be. We have to consider the possibility that perfectly rational people can get caught up in a bubble. In this connection, it is helpful to refer to an important bit of economic theory about herd behavior.

Three economists, Sushil Bikhchandani, David Hirshleifer and Ivo Welch, in a classic 1992 article, defined what they call “information cascades” that can lead people into serious error. They found that these cascades can affect even perfectly rational people and cause bubblelike phenomena. Why? Ultimately, people sometimes need to rely on the judgment of others, and therein lies the problem. The theory provides a framework for understanding the real estate turbulence we are now observing.

Mr. Bikhchandani and his co-authors present this example: Suppose that a group of individuals must make an important decision, based on useful but incomplete information. Each one of them has received some information relevant to the decision, but the information is incomplete and “noisy” and does not always point to the right conclusion.

Let’s update the example to apply it to the recent bubble: The individuals in the group must each decide whether real estate is a terrific investment and whether to buy some property. Suppose that there is a 60 percent probability that any one person’s information will lead to the right decision.

In other words, that person’s information is useful but not definitive — and not clear enough to make a firm judgment about something as momentous as a market bubble. Perhaps that is how Mr. Greenspan assessed the probability that he could make an accurate judgment about the stock market bubble.

The theory helps explain why he — or anyone trying to verify the existence of a market bubble — may have squelched his own judgment.

The fundamental problem is that the information obtained by any individual — even one as well-placed as the chairman of the Federal Reserve — is bound to be incomplete. If people could somehow hold a national town meeting and share their independent information, they would have the opportunity to see the full weight of the evidence. Any individual errors would be averaged out, and the participants would collectively reach the correct decision.

Of course, such a national town meeting is impossible. Each person makes decisions individually, sequentially, and reveals his decisions through actions — in this case, by entering the housing market and bidding up home prices.

This theory poses a major challenge to the “efficient markets” view of the world, which assumes that investors are like independent-minded voters, relying only on their own information to make decisions. The efficient-markets view holds that the market is wiser than any individual: in aggregate, the market will come to the correct decision. But the theory is flawed because it does not recognize that people must rely on the judgments of others.

NOW, let’s modify the Bikhchandani-Hirshleifer-Welch example again, so that the individuals are no longer purely rational beings. Instead, they are real people, subject to emotional reactions.

Furthermore, these people are being influenced by agencies like the National Association of Realtors, which is conducting a public-relations campaign intended to show that putting money into housing is a reliable way to build wealth. Under these circumstances, it’s easy to understand how even experts could come to believe that housing is a spectacular investment.

It is clear that just such an information cascade helped to create the housing bubble. And it is now possible that a downward cascade will develop — in which rational individuals become excessively pessimistic as they see others bidding down home prices to abnormally low levels.

And if that happens -- look for tremendous buying opportunities. So how do you recognize a decent buying opportunity? When it's (a) cheaper to buy than to rent the same unit (factoring in all carrying costs and allowing for vacant periods); (b) you've got a low vacancy rate for renters among your competitors and an ample pool of qualified renters; and (c) you've got a good location within reasonable distance to drive or take public transit to employment centers, shopping and other services.

Study shows subprime losses could have wider impact

Beyond the many billions of dollars in losses reported by mortgage lenders, banks and other investors, there could be additional fall-out from the subprime mortgage debacle in the form of tighter credit available to everyone. From a Wall Street Journal article:

Mortgage losses, compounded by contemporary risk-management and accounting practices, could prompt banks and other lenders to shrink their lending and other assets by $2 trillion, a study concludes.

The resulting withdrawal of credit could knock one to 1.5 percentage points off economic growth, compounding the impact of collapsing home construction and softer consumer spending due to lower home wealth, the study said. It was presented Friday at a forum in New York on the Federal Reserve organized by the Brandeis International Business School and the University of Chicago Graduate School of Business...

In the initial stages of the crisis, some optimists noted that early estimates of subprime losses of $50 billion to $100 billion were about the same as one bad day in the stock market.

But the latest study argues the losses will be far larger -- about $400 billion -- and cause much more damage than if they had occurred in stocks or corporate bonds. That is because about half the losses will be borne by banks and other highly leveraged institutions, which hold equity and other capital of just 4% to 10% of total assets.

For each dollar of loss not made up for by new capital, these institutions will have to shrink their balance sheets by $10 to $25 by reducing lending or selling securities. They would do that not just in order to keep their capital ratios steady, but also to raise those ratios to align with risk-management practices...

The authors calculate mortgage losses three ways: by extrapolating losses on earlier subprime mortgages to more recently issued mortgages and adjusting for a 15% cumulative decline in home prices; by looking at the size of losses discounted by prices of derivatives based on subprime mortgages; and by extrapolating the experience of California, Texas and Massachusetts with large home-price declines. All three methods yielded total losses (defaulted loans minus value recovered from foreclosed homes) of about $400 billion.

After examining the mortgages' distribution, they concluded about half is held by "leveraged" institutions such as banks, thrifts, securities dealers and Fannie Mae and Freddie Mac. Based on recent experience, they calculate such institutions on average will want to boost their capital-to-asset ratios 5% because of increased risk. Even assuming they offset half their losses by raising $100 billion in new capital, these institutions still will try to shrink their assets, now about $20.5 trillion, by about $2 trillion.

The study helps quantify a phenomenon called the financial accelerator, first coined by Federal Reserve Chairman Ben Bernanke as an academic and now a major factor in his decision recently to speed up interest-rate cuts. Mr. Bernanke told Congress this past week that the accelerator is "perhaps even more enhanced now than usual in that the credit conditions in the financial market are creating some restraint on growth. And slower growth, in turn, is concerning to financial markets because it may mean the credit quality is declining."

Philanthropists seeking targeted ways to address foreclosures

Philanthropic groups as diverse as the Ford Foundation, The MacArthur Foundation and Living Cities are increasingly seeking ways to address the rising trend of foreclosures through highly targeted means. From a WSJ article:

Some of the nation's wealthiest philanthropies are turning their attention to the growing foreclosure crisis, which some fear could usher in the type of urban blight that devastated pockets of American cities in the 1970s and 1980s.

How to tackle it isn't clear. "Every big funder is out there trying to figure out how to participate in systemic responses," says George McCarthy, a senior program officer with the Ford Foundation. The problem, he says, is that "no one can figure out where the opportunity lies" and how philanthropic dollars can be spent most effectively.

The Ford Foundation, which has about $12.8 billion in assets, is looking to fund programs aimed at reducing the number of homes that wind up in foreclosure, perhaps by making it easier for homeowners to get mortgages modified.

Meanwhile, Living Cities, a consortium of major foundations and financial institutions working to revive inner cities, is considering funding programs to keep borrowers in their homes and get abandoned properties back into use....

he amount of money charities are setting aside to assist is relatively small when compared with the scope of the mortgage crisis. As of the end of January, some 2.3 million mortgage loans were delinquent and another 505,000 were in default, according to Moody's Economy.com economic research firm.

Nevertheless, moves by foundations could provide quick funding for programs operated by local governments and nonprofit groups at a time when federal solutions have been slow to materialize. This week Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, floated a plan that would allocate as much as $10 billion in loans to states to buy foreclosed or abandoned properties, along with $10 billion in Federal Housing Administration guarantees to allow people delinquent in payments to refinance into more-affordable mortgages. But it isn't clear whether such proposals will reach fruition. Meanwhile, city and state officials say the situation is growing bleaker and that they need to act now...

In the 1970s and 1980s, many cities were hurt when the loss of manufacturing jobs and an economic downturn drove residents to move away. Investor-owners abandoned properties in the face of rising inflation and higher fuel costs, and many ended up in the hands of local governments. Foundations, community groups and others eventually helped return many of these properties to productive use.

This time around, assisting troubled homeowners is turning out to be particularly difficult and costly because many are in such bad financial shape. The large volume of problem loans has stretched the resources of housing counselors and mortgage-servicing companies. Arranging for broad-based loan workouts or purchases of foreclosed properties has also proved difficult, in part because so many mortgages were packaged into securities, sliced and diced and sold to investors.

The Ford Foundation is considering an investment in a program being developed by Consumer Credit Counseling Service of Greater Atlanta that would give its counselors access to mortgage-pooling and servicing agreements, and the authority to fashion loan modifications for certain borrowers who've fallen behind on their payments. Mortgage servicing companies that participate in the program would agree in principal to execute the group's recommendations...

Another program Living Cities is looking at was proposed by the Center for New York City Neighborhoods, a nonprofit recently created to address the subprime mortgage crisis. The program wants to quickly reach borrowers at risk of foreclosure and get them into loans that they can afford. Already the Open Society Institute, funded by George Soros, is spending $1 million in each 2008 and 2009 on efforts including counseling, legal assistance and borrower education. The Open Society Institute has committed to spending a total of $10 million on mortgage-related programs over the next two years.

The Chicago-based John D. and Catherine T. MacArthur Foundation, with assets of $6.8 billion, is stepping up its support for organizations it already funds, such as Neighborhood Housing Services of Chicago, a nonprofit organization that works with financially distressed homeowners, and the Woodstock Institute, which is analyzing foreclosure data. It is also helping the City of Chicago look at ways to put foreclosed homes back into use as quickly as possible.

The foundation is also considering using program-related investments -- low-cost loans for charitable purposes -- to help develop financial instruments to make it easier for people to stay in their homes, or rent or buy foreclosed properties. The investments could also fund organizations that would make bulk purchases of foreclosed properties. Over the past 30 years, the foundation has invested more than $500 million in affordable housing and community development.

In Detroit, the Kresge Foundation recently provided a $500,000 grant to Southwest Housing Solutions for housing counseling and the negotiation of loan workouts. The Kresge Foundation expects to spend $2 million to $3 million on foreclosure-prevention programs this year. It is looking at ways to support the purchase and maintenance of vacant properties and to help people hurt by foreclosures find other housing.

Homebuilder CEOs still wary despite stock bounce

Despite the rise in many homebuilding stocks since the beginning of 2008, many CEOs remain unconvinced that a market rebound is yet in the cards. From a MarketWatch story that also quotes many CEOs at this week's Wachovia Home Building & Building Products Manufacturers Conference:

Housing-sector stocks -- left for dead just a couple months ago -- have been on a surpising tear recently.

An exchange-traded fund tracking the group, iShares Dow Jones U.S. Home Construction closed Thursday up more than 20% over the previous three months.

So why are so many market watchers, and even executives in the business, still so glum? Despite the recent run-up in builder shares, a number of imposing hurdles remain for the industry at the epicenter of the economy's mortgage-related earthquake.

Industry insiders are holding back from proclaiming a housing bottom until the market works its way through the huge overhang of unsold homes -- and until buyers feel more confident that a new house won't end up being worth less a month after they purchase it...

Even Toll Bros., which caters to affluent home buyers and enjoys one of the most recognizable brands in the industry, hasn't been immune to the housing downturn. This week the Horsham, Pa.-based company said it swung to a quarterly loss of nearly $100 million. Like other builders, Toll booked large write-downs on inventory and depreciating land assets.

Even though some markets are showing limited signs of recovery, "I'm not willing to say as of this call that we're back," Toll said this week...

More ominously, Toll's closely watched results for the January quarter suggest the key sales period that unofficially runs from Super Bowl Sunday to Memorial Day is off to another lackluster start this year...

Indeed, other observers have been baffled by the recent surge in home-builder stocks.

"There is no sign yet that the bottom is near; we look at the rally in home-builders' stocks in utter bewilderment," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd...

To be sure, in housing downturns of the recent past, the builder sector has rallied before the housing market bottomed, most notably coming out of the correction in the late 1980s and early 1990s. The stocks have posted gains so far in 2008, even though new-home sales continue to sink.

Some argue that interest-rate cuts and the government's efforts to stimulate housing have for the moment overshadowed problems in the mortgage and credit markets, not to mention recession talk and surging oil prices.

Along with the inventory glut, builder CEOs say one of the biggest challenges is weak buyer confidence.

"Buyers are hesitant now. They're waiting on the sidelines for great incentives and further price reductions," Toll said this past week at an industry conference in Las Vegas sponsored by Wachovia. "What we have to overcome is the feeling among consumers that to buy a house today is to catch a falling knife," the CEO said. "We need to restore the feeling that this is not a depreciating asset."

When asked what leading indicator to watch to signal a housing recovery, Toll said cancellation levels, which he pegged at between 30% and 35% for the industry, need to stabilize and come down.

Although home-builder stocks have been knocked down to bargain-basement valuations, it's not clear if they've bottomed yet. Some analysts who've recommended dipping a toe in the shares over the past year have been burned as the stocks continued to fall before their recent snapback.

The question, of course, is whether this is a suckers rally or that a legitimate bottom has yet to be reached.

Those who worry that there's more pain to come cite the length and euphoria of the decade-long housing boom that ended with the bubble popping in 2005.

Paul Puryear, a respected industry analyst at Raymond James & Associates, urges caution.

"We don't see anything fundamentally that gives us encouragement," Puryear told CNBC.

He said inventory data, which are the key metric in the outlook for housing, are getting worse. The recent rally in home-builder stocks was driven in part by efforts in Washington to rouse the housing market, and also short-covering by hedge funds and other traders that have bet heavily against the sector, he said.

"There is no fundamental reason to be a buyer [of builder stocks]," Puryear said. "It's for high-risk players only right now ... and a very tricky environment for these stocks."