Various fixes to the subprime mess

Although the recent legislation in Congress has been getting the most attention recently, others have floated some even more creative ways to fix the subprime market debacle. From a CNNMoney story:

First, tweaking the bankruptcy code:

Judges already have the power to shrink or vaporize many debts, like credit card balances and mortgages on investment properties. This idea, supported by Sens. Richard Durbin (D-Ill.) and Christopher Dodd (D-Conn.), would let judges reduce primary home loans as well.

The pros: The plan could save hundreds of thousands of people from foreclosure without costing taxpayers anything, say consumer advocates. And it's a minor change, so it could happen fast.

The cons: The Mortgage Bankers Association says its members would have to raise rates on all home loans by as much as 1.5 percentage points to compensate for the risk of court-imposed losses.

Next, introduce fixed-price housing that can't rise (or fall) over time:

John H. Vogel, a real estate economist at Dartmouth College, has a plan he says cures both the mortgage market and housing affordability. He proposes that the government buy up the mortgages of troubled borrowers and give them smaller mortgages, reflecting the drop in real estate values. The catch: The price of those houses would be forever fixed at their new loan amount.

The pros: The program could produce as many as 2 million affordable homes. Of course, owners wouldn't be able to profit in future housing booms. But they'd get a house at below-market prices.

The cons: Living next to a house that never goes up in value could decrease the value of your house as well. Buying up all the houses from the banks could cost as much as $200 billion. (In time, much of that would get paid back by borrowers.)

Create 'negative amortization instruments:'

The Office of Thrift Supervision (OTS) proposes creating negative amortization certificates (NACs). Say a bank agrees to write down a $250,000 mortgage to $200,000, relieving a borrower of $50,000 in debt. The government will then issue the lender NACs worth $50,000. When the homeowner sells, the first $50,000 in profit goes to repay the NAC. Anything above that, the seller keeps. If the home goes for less than $250,000, the bank gets all of the profits and the NAC disappears.

The pros: Banks would be more willing to cut borrowers a break because they would get an asset for doing so. Homeowners would get part of their debt relieved, a more affordable mortgage and the reduced risk of owing money when they sell the house.

The cons: If owners knew banks had first claims on profits, they'd have less incentive to renovate or maintain their homes. NACs would be hard to value - and the last thing we need is another hard-to-understand financial instrument.

A not-so-under-the-radar bailout (thanks to bloggers who continue to discuss it):

The Federal Reserve effectively buys up bad mortgage debt from banks (it has already started to do that by accepting impaired assets as collateral for loans to financial institutions). Struggling banks get cash from the government to keep them afloat.

The pros: Politicians could say they didn't bail anyone out even when they did. A cash infusion means banks could lend freely again. Mortgage rates should fall. That should bring more buyers into the market, slowing the drop in prices.

The cons: Taxpayers would foot the bill, which could run as high as $300 billion. Some borrowers could refinance, but many would lose their homes. That means more foreclosures. Real estate prices, while helped by cheaper financing, would probably still fall. But hey, score one for personal responsibility, making people bear the consequences of their mistakes - as long as they're homeowners and not financial executives.

That's because financial executives donate large sums to political campaigns -- yet another civics lesson about our broken system.

Apartment cap rates down; prices rise in 2007

According to our friends at apartment data provider RealFacts, 2007 was much better for the multi-family rental market than it was for new home sales. The company, which tracks apartment data for over 12,200 investment-grade apartments in multiple markets and states, is still crunching numbers for 2007 but has provided some preliminary conclusions in their latest newsletter:

Although 2007 has ended, we are still researching apartment sales transactions for that year. As of early March, we had found details of 1017 sales. Chances are we will find some more in the coming months, but we certainly have enough to spot some trends.

The first conclusion we can draw is that sales volume is more or less unchanged from the previous year. We have 1027 sales of complexes in the database for 2006, strikingly similar to the number of sales for 2007. Since our database covers 12.200 complexes, that suggests that 1% of apartment complexes change hands in a year.

Generalizing about a database that covers so many different MSAs is dangerous, because it blurs the details of individual markets. But let’s live dangerously and say that prices per unit and per square foot have gone up in 2007 while cap rates have gone down. The following table summarizes the changes state by state,

	2007		2006
State	Av.CapRate	Av.PPU	Av.CapRate	Av.PPU
AZ	5.8%	$93,025	5.9%	$79,223
CA	5.3%	$181,161	5.1%	$177,043
FL	6.0%	$93,997	6.5%	$109,401
CO	5.0%	$92,605	4.9%	$90,587
IN	6.8%	$53,891	7.3%	$58,243
KS	6.5%	$74,709	6.8%	$86,192
MO	6.5%	$53,066	6.9%	$53,475
NV	5.3%	$123,987	6.0%	$123,386
NM	6.5%	$90,159	6.8%	$60,907
OK	6.4%	$33,879	7.2%	$39,309
OR	5.0%	$102,440	5.8%	$87,500
TX	6.8%	$62,379	7.3%	$60,268
UT	6.2%	$89,394	7.0%	$50,436
WA	6.0%	$122,720	5.2%	$110,528

To continue with this dangerous act of generalization, we can say that prices have been going up and cap rates down in the twenty-first century. The exception to the trend came in 2005, when prices went up so fast due to sales to condo converters that they fell in 2006. In future newsletters, we’ll look in more depth at sales in some specific markers, where there have been high numbers of transactions.

Want to sign up for this bi-monthly newsletter? You can subscribe here.

Most new home sales agents fail at follow-up

Having started my career on the residential side of the building industry as a field analyst who visited new home sales office, it's not hard to recall those sales agents who were deliberately lazy, surly or simply uninformed. From the woman who was waving her hands through the air to dry her nails to the pathological liar who claimed to be the builder's wife, when a builder is lucky enough to hire a great agent, they stand out. And they're also largely responsible for a project's success -- in fact, during my travels to the best-selling projects to discuss at building seminars, the one common thread they shared -- even more than location, price or design -- was a great team of agents.

So I'd imagine that an article by Builder magazine's Pat Curry entitled "Report: Most Builder Sales Agents Don't Follow Up with Prospects" is certain to put the heat on the aforementioned lazy, surly or uninformed agents:

At a time when builders need to make the most of every prospective buyer who walks through the door, a study of 50 new-home communities in Denver found that only about half the sales agents asked if they could follow up, 36 percent actually did it, and only 14 percent sent anything relevant to what the buyers said was important to them.

Even more shocking was this statistic: On 16 percent of the visits, no one even spoke to the shoppers, even though they stood in the sales center or model and clearly demonstrated interest-and even when they were the only visitor in the sales center. In 74 percent of the visits, the shopper was the only person in the sales center; in another 20 percent, there was one other shopper there...

Lest builders outside of Denver think the results don't apply to them, Dallas-based sales training consultant Bob Hafer says the lack of follow-up is a nationwide issue in home building.

"We take for granted that people will return. The process the buyer goes through is a process of elimination. They're really not in process of buying. They're in the process of elimination. .... If the sales agent doesn't participate at that moment, by default they get eliminated."...

One piece of information from the white paper that did surprise Hafer was the percentage of follow-up e-mail that the marketers reported as getting caught in spam filters, Hafer says. Lacking a personalized message tailored to the recipient, Red Tree estimated that 75 percent of the e-mails sent to them were caught in their spam filters.

They recommended following up by phone and personalized thank-you notes, as well as e-mail, and asking customers to clear the builders' e-mail address for delivery with their Internet provider. If the customer doesn't respond via e-mail early in the process, builders should abandon it for long-term communication.

Hafer says follow-up should start with a 10- to 15-second phone call immediately after a prospect leaves the office to thank them for coming in and to promise to be in touch within 24 hours to answer any questions they might have.

"When I ask most people, 'When do you follow up?' they say 'Three or four days, a week,'" Hafer says. "That's too late. Out of sight, out of mind. If people come into a sales center, they're serious. When they leave, they're negotiating with each other about whether it was close to what they wanted. ... If you don't follow up immediately, something else could attract their attention."

If a sales agent isn't sure what to say in a personalized follow-up phone call or e-mail, Miller recommends having the builder's marketing director prepare templates that sales agents can easily adapt to individual buyers' specific interests and questions.

Bailing out the undeserving sometimes necessary

There's an excellent article by Peter Gosselin in today's L.A. Times on the question of a mortgage bailout that would likely aid the undeserving. I've been predicting a federal bailout since the beginning of the year because although it may not be the economically 'fair' thing to do, the reality of politics tell a much different story (call me a cynic if you must).

In fact, the U.S. has a long history of bailing out a few of the guilty when the costs of doing nothing punishes everyone, and this is something which many armchair bloggers and commentors have yet to appreciate. Stomping one's feet and yelling, "No Bailout!" simply isn't going to work unless it's accompanied by a rational discourse on the harm that would be caused (i.e., artifically high housing prices, higher borrowing costs in the future, etc.). Is it 'unfair' to those who didn't participate in the greed that led to the mess? Absolutely. But whoever said life was fair? Just look to history (from the article):

The House and Senate are beginning to consider proposals for federal intervention on a massive scale. In effect, the government would take over many of the risks now borne by lenders, borrowers and investors -- offering to revamp and then guarantee about 1 million troubled mortgages in an effort to shore up plunging home prices.

The change would come in two stages. The first would be the likely passage Tuesday of a modest bipartisan housing aid package in the Senate.

Next would come action over a period of months on measures to guarantee $300 billion or more in revamped mortgages...

The proposals also are likely to raise the ire of mortgage industry lobbyists and investors in mortgage-backed securities, who want any effort to ease the crisis to be voluntary and small scale.

Nevertheless, calls for passage of one of the measures or something similarly sweeping are growing increasingly insistent as lawmakers and many economists conclude that something must be done to end the real estate price plunge quickly if the economy is to right itself.

And, contrary to what many Americans may think, government action on such a dramatic scale would not be new or even all that unusual. Washington has taken similar-size steps during economic crises of the past.

Repeatedly in the nation's history, from the savings and loan scandal of the 1980s to the Depression of the 1930s and the financial panics of the 18th and 19th centuries, Washington has stepped in when large numbers of ordinary citizens were threatened with financial devastation...

In almost every instance, action came only after long, agonized debate, particularly over the question of whether the beneficiaries of government action were in trouble through no fault of their own.

And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore...

The S&L industry had gone on a lending rampage, but most of its bets had gone bad. The government seized the assets of 1,000 S&Ls, sold off half a trillion dollars' worth of property and spent $124 billion of taxpayer money paying deposit insurance to the institutions' customers, as well as aiding those few institutions that were considered salvageable.

Many depositors were ordinary people whose life savings were threatened. But others were speculators who simply made bad investment decisions -- often with the assistance of S&L executives.

The government set aside the question of who was deserving of aid, deciding that leaving it to market forces to work through the problem would have hurt many innocent savers and been a long-term drag on the economy...

During the late 18th and 19th centuries, Congress passed four major bankruptcy laws in the wake of financial panics. In each case, the measure released debtors -- deserving or otherwise -- from some of their obligations so they could get back on their feet and become productive members of society again.

In the 1790s, the newly formed federal government finally decided to pay off most of the debts accumulated by the states during the Revolutionary War, despite complaints that speculators in war bonds would benefit.

Distasteful as many found it, paying off the debts was deemed crucial to establishing the new government's credit at home and abroad.

A similar decision-making process appears to be underway in the current housing crisis...

Across the political spectrum, the consensus is that Washington has done little to help ordinary Americans affected by the entwined housing and financial crises...But pressured by the Fed's aid to financial players, the demands of economically strapped voters and the sense that key lawmakers may have come up with a way to parry the deserving/undeserving distinction, Congress is about to take up proposals that could greatly expand the scope of federal action...

Under similar proposals by Frank and Dodd, Washington would empower another New Deal-era agency, the Federal Housing Administration, to run a new mortgage guarantee program. Dodd is chairman of the Senate Banking Committee.

To participate, the lender would have to cut the principal of a troubled mortgage to 85% of a home's current, diminished market value. The FHA would take 5% of the new, lower amount as a fee. Homeowners would get the remaining 10% as equity to give them a stake in paying off the renegotiated mortgage.

Borrowers would have to prove that they had the financial wherewithal to keep up with the now-lower monthly mortgage payments. Those who couldn't prove they could pay would be ineligible for the program. If borrowers failed to pay the new, smaller mortgage, Washington would do so.

There were hints last week that by making the proposed program voluntary, having the government guarantee but not actually buy up houses or mortgages, and by slapping requirements on both lenders and borrowers, the proposal could fly politically.

Boyce Thompson asks crowd of builders "A Good Time to Buy?"

While I routinely check out Boyce Thompson's blog, I actually found the latest entry courtesy of Patrick.net. Boyce Thompson is the longtime Editorial Director for Hanley Wood titles such as Builder and Big Builder. What struck me was the headline: "A Good Time To Buy?" in which Boyce describes a speaker at a recent Hanley Wood conference:

A speaker at the conference Builder magazine is putting on this week had the audacity to say that he didn't think now was a good time to buy. He said that prices for new and existing homes are likely to continue falling this year, given that foreclosures are on the rise and the number of homes for sale is going to continue climbing...

It's a good thing tomatoes weren't served for breakfast, because the contrarian speaker would have been littered with them. Builders, it's abundantly clear, are sick and tired of hearing any negative takes on current market conditions. After all, they are fighting a life-and-death battle to keep their companies afloat. And one of their major leadership objectives is to prop up morale within their companies, especially among salespeople.

Spoiler alert: that speaker to whom Boyce was referring was himself.

Now Boyce is a smart guy who definitely knows about homebuilding from a macro-economic perspective, and I used to share the podium with him regularly when I was with the Market Intelligence division of Hanley Wood (he discussed national trends, and Market Intelligence consultants discussed local conditions).

But Boyce has also never been a homebuilder, he's always been a writer & editor, and I'm sure that's partly why his audience of builders didn't like what he had to say (plus they probably didn't expect the publishers of a trade journal to pile on, but their advertisers are manufacturers and suppliers, not homebuilders).

Still, that doesn't mean Boyce's speech was off point, but builders are an extremely sensitive group these days (and who wouldn't be considering the avalanche of bad news over the past 18 months), so he was certainly taking a risk in forcing some bad medicine on some unwilling ears.

I can certainly sympathize with Boyce -- every time I talk to a reporter I wonder if I've said something that will anger a potential client (it's certainly happened before), but if I'm seen as just another talking head for the industry then reporters won't call me -- in other words, a Catch-22.

More from his blog about this speech:

Later in the program the usual shots were taken at newspaper articles that contribute to negative consumer psychology. Private builders got their digs in about public builders that ruined the market by pursuing 20 percent annual growth at the behest of the public capital markets. Some speakers criticized cash-strapped builders desperate to sell homes by offering six-figure discounts that condition every buyer in the market to ask for concessions...

It's important that builders not "smoke their own," so to speak, that they not confuse what they are telling potential buyers and their employees with what they really believe. Most housing organizations, including the NAHB, are calling for a decline in housing sales and starts this year. Mortgage rates may be historically low, and recent moves to liberalize FHA credit and allow Fannie Mae and Freddie Mac to buy more high-priced mortgages may help. But probably not until later in the year...

At the same time, builders need to reach out to more potential new home buyers, even people who may have cancelled a previous new home contract. A far more sophisticated approach to demographics is required; we need to reach submarkets that aren't served by the existing home market. Rest assured, there are buyers out there who still need to move, who still need to buy a new home. We need to find them and convince them that our communities are ideal places to live.

The boldface above was mine: in my own experience, builder largely ignored detailed demographic supply/demand analyses in their market studies during the boom (at least in terms of what they asked from us; perhaps they did more detailed analyses in-house or had them produced from another source, although I doubt it). That's also why I blogged last week about Jonathan Smoke and his work at HousingIntelligence.com -- because he's ready and willing to delve much deeper in the demographics & psychographics of demand than most builders, lenders and investors have seen. Such detailed analysis could probably prevent another boom-and-bust cycle that was based not on actual demand but other ancillary reasons and pressures.

Finally, a closing note from Boyce:

It's important for builders as business managers to separate what they want customers to believe from what they know to be true. Everyone today needs to be planning for the worst and hoping for the best...Go ahead, throw tomatoes.

"Best & worst places for housing prospects"

I've been talking a lot lately to Jonathan Smoke, who runs a collection of building industry-related websites including HousingIntelligence.com. He also maintains his own blog, and in a recent post discusses the best and worst places for housing prospects. According to the blog post:

We’ve updated our Prospects Index calculations based on the latest historical data and forecasts for key housing metrics, including market equilibrium, economic outlook, home price risk, and long-term home price appreciation. So it’s time to feature our new best and worst places for housing prospects.

Before we get into the list, it’s important to note our emphasis on prospects. Our index calculations are meant to give a picture of what we expect these markets to be like in 3-5 years. While the market equilibrium is current, the other variables are based on the most recent forecasts out for five years.

For a more complete list, see the post: you might be surprised!

Senate moves forward on bi-partisan housing bill

Finally recognizing that spending time on political posturing while the housing market continues to tank is not an ideal re-election strategy, key Senators have reportedly agreed on a plan to spur the housing market with compromises on both sides. Compromises? In the Senate? Wow, this must be serious. From the Wall Street Journal:

Key senators agreed on a $15 billion bipartisan plan to spur the housing market, a surprisingly fast compromise that shows how political momentum is shifting toward a more aggressive response to the struggling economy...

Democrats, for their part, dropped a bankruptcy provision opposed by Republicans, even though it was a major part of their housing agenda. They, too, are under pressure to show accomplishments this year, amid low public-approval ratings for Congress. They may try to add the provision as an amendment, but it faces an uphill fight.

Democrats also agreed to halve funds for counseling at-risk homeowners to $100 million. Republicans accepted $4 billion in block grants for communities to buy and refurbish foreclosed properties, and they agreed to a smaller tax credit for homeowners than they initially wanted.

The plan would raise the size of loans backed by the Federal Housing Administration to $550,000 and increase the down-payment requirement to 3.5% from 3%. The bill doesn't include a controversial Democratic proposal to give the FHA the ability to insure $400 billion in mortgages. Sen. Chris Dodd (D., Conn.), the concept's sponsor, said he will hold hearings later on the idea.

The legislation includes a $6 billion tax break for home builders and other troubled companies, an additional $10 billion of mortgage-revenue bonds that states can issue for refinancing and for first-time home buyers, and a provision to allow an estimated 28 million homeowners who don't itemize their taxes to get a deduction on their property taxes. In addition, people buying a residence facing foreclosure would get a two-year, $7,000 tax credit...

The White House continues to oppose funding the purchase of foreclosed homes and the tax credit for home buyers.

New & stricter Fannie Mae loan guidelines issued

For those homeowners facing foreclosure walking away from homes thinking they'll just jump back in with no consequences in a couple of years, FannieMae has some news: no problem, as long as it's been 5 years since a foreclosure (the rule used to be 4) and a minimum FICO score of 580. From a story in the Wall Street Journal:

Fannie Mae announced a new round of tightening in its standards for home mortgages it buys or guarantees.

The government-sponsored provider of funding for home loans told lenders Monday it will require a minimum credit score of 580 for most loans it buys on an individual basis. Credit scores, which range from 300 to 850, are designed to measure borrowers' likelihood of repaying loans. In the past, Fannie had no minimum score. The company said it will still acquire loans with lower credit scores in certain circumstances.

Among other changes announced to lenders, Fannie also said it will increase the period needed for borrowers to "re-establish" their credit history after a foreclosure to five years from four years. Fannie said it would allow shorter recovery periods for borrowers with "documented extenuating circumstances" that caused the foreclosure.

Separately, Fannie last week told loan servicers -- companies that collect loan payments -- that they can increase their forbearance period on delinquent borrowers to as much as six months from four months to allow more time to seek alternatives to foreclosure. Fannie hopes that move will reduce the number of loans on which it needs to recognize losses, though it may be only delaying the pain in some cases.

Builders admit no strong rebound until 2010

The latest outlook from the National Association of Home Builders foresees a full recovery in the housing sector being delayed until 2010. While this date has been largely debated by economists and other housing experts, I can't recall any other time before this when the NAHB has actually agreed with the assessment. From a CNNMoney.com story:

Demand for new homes may not return to normal levels until next decade, according to the latest outlook from the National Association of Home Builders.

"Traditionally when housing has been in a recession, it recovers very quickly. We don't see that happening this time," said Jerry Howard, CEO of the builders' trade group. "It could be 2010 before we see sustainable, long-term stability in the home building sector."

As recently as the end of 2007, the trade group was forecasting a pick-up in the demand for new homes in the second half of this year.

But Howard said the best case scenario now calls for stabilization in the market in early summer, with no signs of improvement until early next year...

...with the construction slowdown now spreading beyond housing, home builders and contractors won't be able to keep workers busy by branching out beyond residential construction as they did last year.

Howard said this year's spring selling season for homes is already shaping up to be a bad one. And while he praised legislation now gaining steam in the Senate aimed at helping demand for foreclosed homes, he said the effort is too late to make a difference this year.

"While we congratulate the Senate for taking the bull by the horns now, it would have been much more helpful for the economy in this calendar year if they had done this in the stimulus bill," he said, referring to the more than $150 billion in tax rebates passed by Congress in February...

Still, the new legislation would help hombeuilders since part of the bill calls for tax relief for many homebuilders. The bill would allow homebuilders and other firms affected the by the mortgage meltdown, such as investment banks, to use losses in 2008 and 2009 to get back taxes they owed over the previous four years. That's a change from the two years allowed under current tax law.

That provision, if passed, will cost the government between $6 billion and $28 billion in future tax revenues, according to a range of estimates. It's uncertain just how much of that money builders would see but the sector is expected to be one of the biggest beneficiaries of the bill.

Howard said many smaller privately held builders are not likely to make any money this year. So the tax credit proposed in the legislation is crucial for them.

And it will be helpful for the industry leaders too. Luxury home builder Toll Brothers (TOL, Fortune 500) is the only one of the larger, publicly traded homebuilders expected to report a profitable quarter during calendar 2008...

Builders lost out on the chance of getting even more help though. Provisions that would have given a tax credit for those buying new homes sitting vacant for a long period of time were cut during the final negotiations on the bill Wednesday.

Big homebuilders marketing their staying power to buyers

I got a call yesterday from a reporter for Bloomberg News, who was writing about large, public homebuilders in the Chicago area taking out display ads that focused on their financial strength to last through this housing recession. It's certainly a good idea to do so, especially if you consider that bankrupt builders can't address warranty issues or answer customer service phone lines. For more sophisticated buyers, they could easily peruse the financial filings of public builders through annual reports and quarterly SEC filings, which are often available on their websites under "Investor Relations," not to mention reading various analyst reports by conducting various Internet searches.

But it also occurred to me that buyers should also consider just how good that customer service is, as well as building quality, design and dealing with in-house mortgage operations. Thankfully, each year the research firm JD Powers comes out with its builder rankings -- something which a top-ranked builder such as Centex pays six figures per region to JD Powers for the right to broadcast their rankings to potential buyers. However, if you want to see which builders performed the best on the 2007 rankings, you can simply visit their website for more details and which builders topped the list for various regions.

From the September 2007 press release:

Even in the midst of a downturn in the housing market, Centex Homes receives the Platinum Award for Excellence in Customer Satisfaction and ranks highest in 14 of the 34 largest home-building markets in the United States—more than any other new-home builder in 2007—while Pulte Homes, including its Del Webb and DiVosta brands, ranks highest in 11 markets, according to the J.D. Power and Associates 2007 New-Home Builder Customer Satisfaction Study^SM released today...

Besides Centex and Pulte, other builders topping market rankings include: David Weekley Homes (which ties with Centex in Austin); Granville Homes (headquartered in Fresno, Calif.); Huntington Homes (Dallas, Texas); Mattamy Homes (Oakville, Ontario, Canada); Shea Homes (Walnut, Calif.); Standard Pacific Homes (Irvine, Calif.); Tim Lewis Communities (Citrus Heights, Calif.); Van Metre Homes (Washington, D.C.); and John Wieland Homes (Atlanta, Ga.).

Overall, customer satisfaction levels have remained steady since 2006. Markets experiencing the largest customer satisfaction improvements include the Central Valley, Calif.; Jacksonville, Fla.; Minneapolis; and Nashville...

Centex Homes ranks highest in 12 markets, while Pulte Homes ranks highest in eight markets. For more information on New-Home Quality Study rankings, please click here.

The study results include the following key findings:

• Overall, home quality has improved since 2006. The typical new-home buyer reports 13 problems with their new home in 2007, a 7 percent decrease from 2006.
• New-home buyers in Minneapolis report the highest new-home quality levels—averaging 7 problems per home—while new-home buyers in Washington D.C. report the lowest quality with 19 problems per home, on average.
• The four problem areas that detract most from home-buyer satisfaction are: sidewalk, driveway and foundation cracks; crooked walls; visible carpet seams; and landscaping.

What does L.A. want to be when it grows up?

One of the most common complaints about Southern California is its infamous sprawl -- I once sat next to a young guy on a plane from Ohio embarking on his first visit to California, and as we were flying into LAX from the east he was amazed at how long we flew over built-out areas before landing.

But the primary reason we have sprawl is because those who live in the currently developed areas fight increased density, so new development is pushed further outward. With politicians fearing urban constituents and builder's associations unwilling to embrace one type of building over another, we remain stuck in a stalemate of short-term interests and, frankly, a type of cowardice that has in the past prevented long-term planning (which is also why we don't have better public transit or a more fully developed freeway system in Southern California).

And yet that may be changing: over the past ten years, recent decisions by the L.A. City Council have been in far greater support of increased density to house increasing population growth that will occur even if existing families simply stay put (i.e., new births). From an interesting overview in The Economist:

Los Angeles has long epitomised car-oriented sprawl. As early as 1946 the historian Carey McWilliams judged it “a collection of suburbs in search of a city”. So rare are neighbourhoods where basic needs can be met without hopping into a car or bus that estate agents tout the few where they can as “walkable”. Urban planners elsewhere routinely invoke the city as an example of what to avoid. Yet even as they struggle to avoid becoming like Los Angeles, cities such as Atlanta, Phoenix and San Jose are copying it by spreading out and, hydra-like, growing new centres.

The original metropolitan miscreant is now trying to reform itself so fundamentally that Joel Kotkin, an urbanist at Chapman University, compares it to rewriting a DNA code. Last summer the city council changed zoning rules to allow tiny apartments to be built in and around downtown Los Angeles. On March 19th it rejected a plan to put 5,600 homes on the city's northern frontier, signalling that the metropolis must now grow up, not out. From next month developers will be allowed to build blocks of flats up to 35% bigger than previously, so long as they include some cheap housing...

“You're beginning to see a neighbourhood revolution,” says Zev Yaroslavsky, one of Los Angeles' shrewdest and most powerful politicians. He gives warning that outraged citizens may add an initiative to the ballot next year that would block dense housing projects, “smart” or not. Mr Yaroslavsky knows about the power of ballot initiatives. He sponsored one in 1986 that cut the size of most new office buildings in half, and another in 1998 that virtually halted subway construction.

Planners retort that Los Angeles will continue to grow, and it is better to build new apartments on run-down commercial streets than plonk them next to bungalows or bulldoze virgin land. They are particularly keen to put people next to express bus lines or subway stops. At present few use Los Angeles' skeletal rail system—259,000 journeys are made each day, compared with 1.2m bus journeys—and the network is growing painfully slowly. If the subway cannot reach the people, the thinking goes, the people must be brought to the subway.

This theory is the bedrock on which the new North Hollywood is being built. Near the office construction site a 14-storey block of flats (it seems enormous in the San Fernando Valley) has already appeared, and others will follow. The hope is that residents will both live and work there, or walk a few hundred yards to the local subway stop. But Cary Adams, a local resident, notes the developers are hedging their bets: two giant car parks are also scheduled for construction. This is, indeed, the genetic flaw in Los Angeles' new DNA.

A big reason Angelenos drive everywhere is that they can park everywhere, generally free. Businesses must provide parking spaces according to a strict schedule. This raises the cost of doing business and hugely lowers the cost of driving. Free parking is, as Donald Shoup of UCLA put it in a recent book, “a fertility drug for cars”.

Consider the roughly 29,000 people who live in Los Angeles' historic downtown. In the past few years a mixture of childless professionals and students have moved into new lofts. They have access to southern California's best public-transport network, and are the sort of people you would expect to take advantage of it. Yet last year a consortium of local property owners revealed that just 11% normally did so, while another 17% generally walked. Almost everybody else drove.

The politicians and planners are gambling that, by arranging Angelenos in a more conventional pattern, they can change their behaviour. Perhaps it will work. But if they are wrong, an already crowded city will simply gum up.

And when it does, you might have Mr. Yaroslavsky to blame. But why should he care? Those who live in the suburbs and outside of either his district or the city limits can't vote him out -- and that, in a nutshell, is why transportation and land planning in Southern California is such a mess.

Centex unloads 8,500 lots for 17 cents on the dollar

It looks like someone has actually stepped up to catch that 'falling knife' of real estate values we've been hearing about for a couple of years. In a deal announced late Monday by Centex Homes, they're selling 8,500 lots -- many of which are located in hard-hit states such as California and Nevada -- to a joint venture of three capital management firms focused on real estate in order to purge themselves of 10% of their lot holdings and to raise some much-needed capital. From Forbes.com coverage:

Centex Homes, a subsidiary of Centex (nyse: ctx - news - people ), announced late Monday that it will decrease its total lot holding by 10% to reduce its land supply and raise capital. Dallas, Tex.-based Centex will sell 8,500 lots to a joint venture called Corona Land Company which is led by RSF Partners and includes Farallon Capital Management and Greenfield Partners...

Centex said the book value of the properties sold was approximately $528 million, with no more exact figure available. The original cost basis of the land was an estimated $935 million, said Paul Puryear, an analyst from Raymond James. Selling that land for $161 million translates to deep discounting, Puryear said, where Centex got 17 cents on the dollar for its original purchase. That’s not particularly good news for the residential construction and mortgage financing company. But it meets the firm’s near-term goals of freeing up capital and unloading lots and real estate with long lead times...

It’s also a “first step towards rationalization of the marketplace,” Puryear said, adding there are buyers to “catch the falling knife” willing to put money down.

Bernanke finally admits the obvious: a recession

Fed Chairman Ben Bernanke has finally dipped his toes into the waters of reality, admitting that real gross domestic product "could even contract slightly." He also discussed revealed his thoughts on managing inflation versus propping up the sicker parts of the economy, including rescuing Bear Stearns from an almost-certain wipe-out. From an L.A. Times story:

Federal Reserve Chairman Ben S. Bernanke warned this morning that threats to the economy are far from over, with unemployment on the rise, prices for food and fuel growing, and real incomes on the wane...

The Fed chairman said he considered inflation to be a secondary threat to the economy, citing a leveling off of commodities prices in the futures markets, especially for oil. And he said that he expects the economy to be on the rebound by the end of the year....

Bernanke also defended the Fed's decision last month to underwrite the buyout of troubled Wall Street brokerage Bear Stearns by JPMorgan Chase -- a decision that led the central bank for the first time in more than 70 years to make loans to non-banks.

"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence," Bernanke explained. "Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."

So what about homeowners on trouble? That one was handled by committee chairman Chuck Schumer:

"The administration was all for government action in the case of Bear Stearns, but what about government action to help homeowners?" Schumer asked in opening remarks. "Yes, Bear Stearns was in trouble, but millions of homeowners are also in trouble. Yes, Bear Stearns needed government intervention, but what about government intervention for homeowners?"

MetroIntelligence announces alliance with Beacon Economics

We're pleased to announce a new strategic alliance with Beacon Economics, which is a research and consulting firm specializing in analyses of real estate markets, local economic development, and public and private policy issues.

Beacon Economics organizes economic forecast conferences and advises city governments, financial institutes, real estate firms, and businesses

So why is this such a great fit?

Because whereas Beacon provides an excellent '30,000-foot' overview of real estate markets, the strength of MetroIntelligence is at the 5,000-, 500- and 50-foot levels such as submarkets, neighborhoods and specific projects.

Beacon brings some distingushed academic credentials to the mix: founding partners Jon Haveman and Chris Thornberg, both well-known PhD economists, bring experience from the Public Policy Institute of California and the UCLA Anderson Forecast to the table and are quoted almost daily by both regional and national press.

Combined, MetroIntelligence and Beacon can address any of your real estate consulting needs with a level of experience few can match. We've also got some more exciting alliances in the discussion phase, so please check back to this blog for updates.

If you're in need of an immediate consulting proposal, please contact us directly at 888-82-DEVELOP or email us a pduffy@metrointel.com. We can consult on any land use at any location in the U.S. and beyond.

Do home auctions always reveal the true market price?

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

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

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

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

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

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

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

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

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

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

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