Poll shows Americans almost evenly split on housing bailout

If you read the many housing blogs hosted by angry renters, you'd think that there was overwhelming resentment towards any bailout of people who bought more homes than they could reasonably afford. However, according to a recent poll conducted by CNN/Opinion Research, 49% of respondents actually support some type of special treatment for homeowners in danger of losing their homes vs. 48% against it. From a CNNMoney.com story:

Americans remain split on whether homeowners about to default on their mortgages should receive special treatment to help them keep their houses, according to a new CNN/Opinion Research Poll.

The poll finds 49% of Americans believe such homeowners should receive special treatment, while 48% feel homeowners should not get assistance. Three percent of those polled had no opinion...

Congress also appears split on the issue. On Wednesday, the House began debating Democrat-sponsored legislation that would let the government back loans for homeowners facing foreclosure and would reduce the principal owed on those mortgages. Many Republicans oppose the bill, and President Bush has threatened to veto it.

The proposed legislation would allow the Federal Housing Administration to insure up to $300 billion in new loans over four years.

In order to qualify, lenders would have to cut the debt to no more than 85% of the homes' appraised value. If the FHA-refinanced loans defaulted, the FHA would pay the lender the outstanding principal.

Foreclosed homes double as marijuana farms

According to Luke Mullins at his U.S. News & World Report blog The Home Front, those people concerned about nefarious activities taking place at the growing number of foreclosed homes across the country might have a point. In this case, a man with two homes in foreclosure was using them as a growing operation for his marijuana operation -- since he was arrested, one can only guess that he didn't have a prescription from his doctor for medical use of his crop.




From a story in the San Bernardino Sun:

A bank employee stumbled upon a foreclosed house used to grow marijuana, leading to the seizure of an estimated $4.5 million in drugs in two houses and an arrest Saturday.

Angel Wayhang Kou, 30, of Rancho Cucamonga was booked into jail on suspicion of cultivating marijuana, maintaining a residence for drugs, theft of utilities and conspiracy...

Narcotics officers seized more than 2,000 mature marijuana plants. Evidence there led police to another house used to grow marijuana in the 6200 block of Long Cove in Fontana, where officers found 500 mature plants and 150 harvested buds weighing more than 150 pounds.

Narcotics officers estimated the street value of the marijuana in the two houses at $4.5 million.

The five-bedroom houses sit in upscale neighborhoods and were rigged with state-of-the- art equipment...

Police said Kou stole about $100,000 in electricity from Southern California Edison between the two homes by bypassing electrical boxes.

Decker said Kou owned both homes, but both were in foreclosure.

The pros and cons of a bailout

The Wall Street Journal's David Wessel argues that if the government does anything about rising foreclosures due to unaffordable loans and negative equity, the Barney Frank plan about to be vetoed by the Bush Administration might be an experiment worth pursuing:

The latest flash point in the debate over the nation's bursting housing bubble is this: Since so many American houses are worth less than their mortgages, should the government do more to get lenders to settle for less than the full debt, even if it may cost taxpayers some money?

The White House and Treasury say "No!" House Financial Services Committee Chairman Barney Frank and other House Democrats, with the quiet backing of Federal Reserve Chairman Ben Bernanke, say "Yes!"

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already owe more than the current value of their homes. They are said to be "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won't, and are at risk of losing their homes...

In ordinary times, a lender shouldn't need prodding from the government to do what's in its self-interest. But these aren't ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many. No one in Washington wants to help the "speculators" who bought homes they don't live in or those who lent to them. And there's broad agreement that those who bought more house than they'll ever be able to afford are going to lose out. The debate revolves around the "preventable foreclosures."

Mr. Frank would offer lenders and eligible borrowers a deal: If the lender agrees to cut the debt so the homeowner owes no more than 90% of the house's current value, and the Federal Housing Administration (or an outfit to whom it outsources this) determines the homeowner can afford a new loan, then the lender gets rid of the mortgage and the FHA insures a new mortgage for the remaining balance.

The lender takes a hit, but gets rid of the risk that house prices will keep falling or the borrower will default on a new loan; the government picks up that risk. To create a cushion for the FHA, the lender has to chip in another 5% of the property's current value. The homeowner has to surrender some profits, if any, to the government when the house is sold...

The White House condemns this as a "bailout" and says it won't work. As the Treasury argued in a recent PowerPoint presentation: "Homeowners who can afford their mortgage but walk away because they are underwater are merely speculators." (It's a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.) But if not for the widespread decline in house prices -- "a relatively novel phenomenon," Mr. Bernanke labels it -- and the proliferation of no-money-down mortgages made with the acquiescence of regulators, these homeowners wouldn't be underwater.

Despite the restrictions, the plan could allow some homeowners to get a deal they don't deserve; that's the unfortunate byproduct of any rescue. But the Treasury and Fed surrendered the let-the-market-work-it-out high ground when they agreed to risk nearly $30 billion of taxpayer money to shield Bear Stearns, its creditors and counterparties from losses.

This scheme might not work. Mr. Frank has crafted rules aimed at preventing those who can easily afford loans and those who haven't a prayer of paying a new loan from participating, leading the Congressional Budget Office to predict only 500,000 mortgages would be refinanced this way. Some administration experts suspect that's high; they doubt many lenders will play ball. In that event, it won't cost taxpayers much.

So, perhaps it's best considered a prudent experiment for coping with a bad situation that might get worse: Create a mechanism now so the bugs are worked out, in case home prices plunge more than anticipated and push millions more homeowners underwater.

Economic slump impacting more men than women

According to Business Week's Peter Coy, the current economic slowdown is impacting men more than women due to the nature of their jobs. So what does this mean for male breadwinners in the future? From the article:

From last November through this April, American women aged 20 and up gained nearly 300,000 jobs, according to the household survey of the Bureau of Labor Statistics (BLS). At the same time, American men lost nearly 700,000 jobs. You might even say American men are in recession, and American women are not.

What's going on? Simply put, men have the misfortune of being concentrated in the two sectors that are doing the worst: manufacturing and construction. Women are concentrated in sectors that are still growing, such as education and health care.

This situation is hardly good news for women, though. While they're getting more jobs, their pay is stagnant. Also, most share households—and bills—with the men who are losing jobs. And the "female" economy can't stay strong for long if the "male" economy weakens too much...

The share of all men aged 20 and over with jobs has fallen since last November, when private-sector employment peaked, going from 72.9% to 72.2% in April. For women the ratio rose, from 58.1% to 58.3%. The adult male unemployment rate has risen twice as much as the female jobless rate since November. Those figures from the BLS' household survey are echoed in its separate survey of employers.

To see why, go sector by sector. Manufacturing is over 70% male and construction is about 88% male. Meanwhile the growing education and health services sector is 77% female. The government sector, which has remained strong, is 57% female. The securities business, which is filled with high-paying jobs, is likely to be the next sector to get whacked—and more than 60% of its workers are men.

Men are having a harder time than women getting back on track after losing a job. "For a man to move from a $20- or $30-an-hour union job to being a Wal-Mart (WMT) greeter is devastating," says Claudia Goldin, a Harvard University labor historian. Men also shy away from some of the growing fields, such as nursing. Only about 10% of nursing students nationwide are male, notes Harriet R. Feldman, dean of the Pace University School of Nursing. Some retired nurses are actually going back to work because their husbands have lost jobs, says Lois Cooper, vice-president for employee relations and diversity at staffing firm Adecco Group North America in Melville, N.Y...

Over three-quarters of people who earned over $100,000 last year were men, says Queens College political scientist Andrew Hacker. In fact, although the pay gap between men and women has been gradually narrowing, it actually widened a bit over the past year. Median usual weekly earnings for men grew 4.6% from the first quarter of 2007 through the first quarter of 2008, vs. 3.1% for women.

That might be evidence that the jobs women are landing aren't necessarily good ones. Says Eileen Appelbaum, director of Rutgers University's Center for Women & Work: "We had an expansion of jobs for home health aides, retail clerks, child-care workers. They're low-wage, they're dead-end, and they don't have any benefits."...

There's no easy remedy for what ails the male economy. Edward J. O'Boyle, senior research associate at the Mayo Research Institute in West Monroe, La., says part of the solution is reviving manufacturing—a gargantuan task. On construction, he favors financial reforms to even out the booms and busts.

Economists are debating whether the overall economy is in a recession. For men, the evidence is clear.

KBHome declared greenest builder

According to the Calvert Group, an investment management firm, and the Boston College Institute for Responsible Investment, homebuilder KBHome is the builder adhering most closely to green building concepts. Although none of the builders studied are fully green, Centex, Pulte and Lennar were each singled out for specific items. From a BuilderOnline.com story:

KB Home ranks first among the largest public builders in terms of sustainability in the areas of energy, water, timber, and land use, according to a joint report released today by Calvert Group, an investment management firm, and the Boston College Institute for Responsible Investment.

But the report, which looked at builders' policies, programs, and performance in the areas above, also found that none of the firms qualified as fully green. "Of the 13 major home builders, only six had explicit commitments to environmental sustainability, energy efficiency, water conservation, or responsible land management, and no company published a comprehensive sustainability report," it stated.

On a regional basis, however, builders looked a little better. The report specifically cited Centex for its marketing of Energy Star-rated homes in California and Nevada, Pulte for its energy efficiency efforts in the West, and Lennar for its use of solar technology in California.

Overall, the report ranked builders in the following order:
1. KB Home
2. D.R. Horton and Pulte
4. Centex
5. Lennar
6. Ryland
7. Beazer
8. Meritage
9. Toll Bros.
10. K. Hovnanian
11. MDC Holdings and Standard Pacific
12. NVR

For more information, visit www.calvert.com/Pdf/7776.pdf.

"Bulletproof" markets also getting hit by a slower market

It seems that even cities once considered somewhat immune to the housing bust -- such as Seattle, Portland and Charlotte, NC -- are now succumbing to national pressures. From a CNNMoney.com story:

Some of the last, best housing markets - the ones that continued to climb even as the rest of the country cratered - have turned south lately.

Seattle, Portland Ore., Charlotte, NC, and Salt Lake City all posted home price gains during 2007, even as more than half of the 150 markets tracked by the National Association of Realtors registered declines. Now they've joined the losers.

"What the numbers are saying is that the trend is broadening out," said Michael Larson, a real estate analyst with Weiss Research. "[The downturn started with] the markets that had flown the highest. When the speculative bubble popped, those got hit first. These [bulletproof] markets are now getting hit for traditional economic reasons."...

Unlike bubble markets such as San Francisco and Miami, these areas actually remained affordable for most residents despite years of price appreciation.

For example, the median home price in Seattle, the most expensive of the four, was $370,000 in February. And about a quarter of all homes sold there during the last three months of 2007 were affordable to families earning the area's median household income of nearly $76,000, according to the Housing Opportunity Index from Wells Fargo (WFC, Fortune 500) and the National Association of Home Builders.

In Portland 28.8% of homes sold were affordable in the last quarter of last year; in Salt Lake City the figure was 35.4% and in Charlotte it was 62.9%. Compare that with Miami, where only 13% of homes sold were affordable for most people, or San Francisco where only 7.9% of homes fell into that category.

Each of these bulletproof markets has whethered the housing crisis better than most cities, and will likely recover more quickly than others thanks to their own unique characteristics.

All of them avoided the speculative runup that fueled so many bubble cities, but their local economies are perhaps the biggest factor in keeping them afloat. In Seattle, software and aerospace jobs have kept things humming, while high-tech and telecom have done the same for Portland, and banking and tech companies have boosted Charlotte....

And they all have geography on their side as well. Charlotte, which is home to the headquarters of Bank of America (BAC, Fortune 500) and Wachovia (WB, Fortune 500), has also seen an influx of retirees from the north who moved to Florida and then left the Sunshine State after property taxes and insurance soared in the wake of severe hurricanes. The trend is dubbed the 'halfback' phenomenon since the retirees are moving halfway back to where they started.

Similarly, Californians escaping the crush and the high cost of living there invaded the Pacific Northwest, according to Lennox Scott, CEO of John L. Scott Real Estate, one of the largest brokers in the area.

That migration changed Seattle, making it a destination city...

Portland has experienced a similar phenomenon on a smaller scale; it consistently finishes high on surveys of most livable cities.

Both towns have also pursued policies of managed growth, limiting the land that can be developed, which has also helped housing prices hold up. "We don't have the ability to expand supply easily," said Scott, "especially in the affordable price ranges."

Salt Lake City has fewer such restrictions, but steep growth in its population, which is up about 14% since the 2000 census, has kept housing demand high.

Now the credit crunch that has made getting a mortgage harder for everyone is hitting even the strongest markets.

"What's driving housing activity everywhere today is national forces," said Patrick Newport, a real estate economist with Global Insight, a consulting group. Indeed, U.S. foreclosures spiked 112% in the first three months of 2008.

But the fundamental local conditions that have helped keep these relatively strong should help them bounce back sooner than most.

Is the housing crisis nearly over?

Despite the regularity of bad news about the housing market, two writers in the Wall Street Journal argue that we may in fact be hitting a bottom for the housing slump. First, from Brett Arends:

Is it time, at long last, to head down to Florida to start looking at homes?

Maybe.

And the nearby chart shows one reason why.

It comes from Wellesley College Prof. Karl E. Case, one of the leading experts on the housing market in the country. And it suggests we may be at, or near, the bottom of the housing crash.

Of course, even if he's wrong we won't know for sure for many months.

But new housing starts have at last slumped below the seemingly magical one million mark. That happened in March. Every time that has happened in the last 50 years, it proved to be the bottom of a recession...

There is no guarantee this market will be the same but the similarities with the past are striking. Each boom peaked at around the same level of 2.5 million starts as well...

Incidentally, contrarians will also love Tuesday's gloomy first quarter news from leading homebuilding D.R. Horton and from federally sponsored home loan giant Fannie Mae. Both announced massive losses following write-downs. Fannie is holding a $4 billion cash call and both slashed their dividends. You often see these kinds of capitulations at a market bottom, though of course you can see them on the way down as well...

Prices may still fall further. Yet if you are tempted to keep waiting for homes to get a lot cheaper, there are several reasons to think that might not happen.

First, there are too many other bargain hunters out there.

Second, the falling dollar has made these homes even cheaper to foreign buyers. There are plenty of people in Europe for whom Florida is now a bargain.

Third, interest rates are low right now. I hesitate to give my fellow Americans any extra incentive to borrow yet more money, but you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won't last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.

Finally, in an age of weak currencies and rising inflation, "real" or "hard" assets are in demand. That should include land, bricks and mortar.

Next, from an opinion piece by hedge fund manager Cyril Moulle-Berteaux:

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability...

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

But what about the 30% decline in prices that many economists say is still forthcoming? Nonsense, says Moulle-Berteaux:

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading...

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Fed Chair Bernanke makes his case for gov't intervention

Federal Reserve Chair Ben Bernanke outlined some of his reasons for government intervention in the housing bust in a speech at Columbia Business School, arguing that steep price declines and foreclosures carry a high risk of imperiling the overall economy. From a CNNMoney.com story:

Foreclosure filings of all kinds - delinquency notices, auctions sale notices and bank repossessions - were up 112% during the first three months of 2008 compared with the same period a year ago. Community advocates and policy makers are worried that the problem will worsen as the interest rates on as many as 1.8 million mortgages reset this year.

"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy," concluded Bernanke. "Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."

In explaining the forces behind the problem, Bernanke cited the "increasing role" of declines in home values. He unveiled a series of "heat maps" that showed delinquency rates, job losses and home price changes.

Unemployment statistics, according to Bernanke, do not explain the increased delinquencies of many areas, including California, Florida and parts of Colorado, where foreclosure filings have increased even when unemployment generally have fallen...

The wave of foreclosures sweeping the nation are driven in part by a nearly unprecedented decline in home prices and require a concerted government and private-sector response, Ben Bernanke, chairman of the Federal Reserve, said Monday...

Bernanke pointed to the use of so-called piggy-back loans in helping drive foreclosures. These loans, which required low down payments or none at all, were used with increasing frequency during the bubble years to enable borrowers to purchase homes in high-priced states.

Because of price drops, many of the borrowers are now "upside-down," meaning they owe more than their homes are worth. Many of the owners had counted on the idea that their home values would continue to soar, increasing their home equity, which they could then tap to pay their bills. Now, they can't afford to pay off their mortgages and they have no assets to rely on.

In the past, said Bernanke, lenders and companies that service loans were "used to dealing with mortgage delinquencies related to life events such as unemployment or illness. . . . A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue."

In some cases, such as when the value of a home has fallen below the mortgage balance, a writedown of principal may be the best solution, according to Bernanke, although, he added, to be effective they must be targeted to cases facing the highest risks of foreclosure...

Bernanke outlined the steps that the Federal Reserve was taking to try to minimize the impact and scope of the foreclosure crisis.

The response includes working with community groups trying to acquire and restore vacant properties; encouraging lenders and mortgage servicers to work with at-risk borrowers; and developing new lending standards to prevent some of the abusive lending practices of the past from continuing.

The Fed, according to Bernanke, has worked closely with the Hope Now alliance - an industry foreclosure-relief effort spurred on by the Bush administration - to support help for troubled borrowers, develop protocols to standardize loss-mitigation approaches and improve reporting standards.

Bernanke also threw his support behind the expanded use of the Federal Housing Administration (FHA) and government-sponsored enterprises such as Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) to address problems in mortgage markets.

Opening up the lending markets has already helped thousands of at-risk borrowers to refinance into lower cost loans and save their homes, Bernanke said.

Vacancies disproportionately impacting newer homes

It looks like homes built after 2000 are disproportionately impacted by rising vacancies, yielding rates of over 10% versus 2.9% for all homes vacant but available for rent. From a New York Times story (hat tip to Patrick.net):

The Census Bureau reported that 2.9 percent of homes intended for owner occupancy were vacant at the end of the first quarter. That figure had begun to rise even during the housing boom, a little-noticed byproduct of the aggressive construction of homes encouraged by easy credit. Before 2006, that figure had never exceeded 2 percent.

Houses can be rented out, of course, even if they had been intended to be lived in by the owner, but the rental market also has high vacancies now. Over all, 10.1 percent of homes intended for rental are vacant. That rate is a little below the record level hit in 2004, but it is still higher than it ever was before the construction boom of this decade.

The figures include both single-family homes and apartments. In rentals, the vacancy rates are almost equal for homes and apartments. But in the owner market, the vacancies are much more concentrated in condominiums. In buildings with five to nine units — like many garden apartment buildings — the condominium vacancy rate is an unprecedented 15.2 percent. That is up from 12.2 percent at the end of 2007. Before 2006, that rate had never been as high as 10 percent.

Even worse news for those who bought new homes or apartments in recent years is that the vacancy rates in those properties are far higher than they are in older buildings. For homes and condominiums built after March 2000, the vacancy rate for homes intended for owner occupancy is 10.2 percent, up from 8.8 percent at the end of 2007.

For rental units, the figures are even greater. There, 25.2 percent — or one of every four — of housing units built since the spring of 2000 are vacant.

Vacancy rates vary by market, of course. At the end of 2007, areas with the highest vacancy rates in housing intended for owner occupancy fell into two categories: Rust Belt areas like Detroit, Cleveland and Akron, Ohio, and former boom areas like Orlando and Tampa in Florida, and Las Vegas. Although home prices have fallen sharply in parts of California, only the Sacramento area shows high vacancy levels...

Residential construction’s share of the economy fell to 3.8 percent in the first quarter, down from a peak of 6.3 percent in the first quarter of 2006, when home prices were nearing their highs. But that figure is not far below the average figure for the 1990s, 4.1 percent, and well above the low of 3.3 percent, reached in the first quarter of 1991 after the last major housing market setback.

Private builders increasingly under duress

Recently I've been hearing increasing reports of subs and suppliers not getting paid by homebuilders. In the case of Barratt, it's been due to cash flow problems resulting from its longtime lender, Bank of America, declining to provide new financing. From a BuilderOnline.com article:

This week, Barratt American expects to have short-term loans in place, secured through the sale of “unencumbered assets,” to shore up a cash-flow problem caused by a significant decline in its business. That decline recently led Barratt’s primary lender, Bank of America, to cut off the Carlsbad, Calif.-based builder after a 28-year relationship.

“I call it ‘constructive default,’ ” says Mick Pattinson, Barratt’s president and co-owner, who spoke with BUILDER on Friday. “We’re not in default, but the bank wouldn’t renew our two loans.” He explains that his company had a $125 million credit facility with Bank of America, of which $100 million were available when the bank informed Barratt seven months ago that it would not go forward with its lending. Barratt drew another $30 million of that facility, although at higher interest rates, until Pattinson balked at the expense and found himself without a line of credit to tap...

“We’ve been stymied without cash,” Pattinson tells BUILDER. His company’s inability to pay its bills has triggered more than 40 lawsuits filed mostly by subcontractors with liens against the company’s assets that guarantee payment for labor and materials.

Pattinson confirmed he has been in London seeking private equity money, where “we’ve been getting a good reception.” (Pattinson is British and Barratt was once based there.) He is confident that he’ll find new financing from overseas sources, and can settle disputes with vendors or contractors. “They understand how we got here, and we’ve had relationships with some of them for 10, 15 years.” The bigger problem for his company, and builders in general, is that domestic capital has dried up. “Right now, you couldn’t get cash from a bank to build a house if your life depended on it,” he laments.

What irks Pattinson is how Bank of America rewarded his company’s decades-long loyalty by throwing Barratt under a bus the minute business went soft. “When times were good, we had banks lining up in our lobby for our business, but we told them we were with Bank of America. Now, when times are bad, we get screwed. The banks are a disgrace.”

Do we need a new & improved New Deal?

Princeton Professor Alan Blinder argues in the New York Times that the best lessons to be taken away from the latest boom-and-bust cycle is a need for some kind & gentle regulation that provides just enough guidance so the greedy don't get carried away by future misadventures:

An inordinate share of the dodgiest mortgages granted in recent years originated outside the banking system. They were marketed aggressively, sometimes unscrupulously, by mortgage brokers who were effectively unregulated; we have now lived to regret that arrangement. The need for a federal mortgage regulator — including a suitability standard for mortgage brokers — is painfully obvious.

Next, we should resist calls to scrap the “originate to distribute” model, wherein banks originate mortgages, which are then packaged into mortgage pools and turned into mortgage-backed securities that are sold to investors around the world. This seemingly convoluted model has given the United States the world’s broadest, deepest, most liquid mortgage markets. And that, in turn, has meant lower mortgage interest rates and more homeownership. These are gains worth preserving.

But the model needs some nips and tucks. A far less radical, though still regulatory, approach would require both originating banks and securitizers to retain some fractional ownership of each mortgage pool. Keeping some “skin in the game” should accomplish two things: make the banks and securitizers more attentive to the creditworthiness of the underlying mortgages, and reduce the tendency to play “hot potato” with mortgage-backed securities.

And while we’re on the subject of M.B.S., we must end the regulatory fiction that off-balance-sheet entities like conduits and S.I.V.’s are unrelated to their parent banks. (S.I.V. stands for structured investment vehicle, if you must know, but please don’t ask me the difference between it and a conduit.) Since last summer, we have seen one financial giant after another brought to its knees by losses that originated off balance sheet...

Because securities firms are now under the Fed’s protective umbrella, they must start operating as safely and soundly as banks. That means both closer supervision and less leverage...We should all take a deep breath here, because sharply reducing the leverage of securities firms, to bring it close to that of banks, will be a major change in the financial landscape. It will, for example, substantially reduce the profitability of investment houses and, therefore, reduce their scale. But that’s the price you pay for access to a publicly financed safety net...

Next come ratings agencies, whose recent performance has drawn criticism. The good news is that they are making good-faith efforts at change. They are improving their analytics, and guarding against conflicts of interest by hiring ombudsmen and submitting to independent third-party reviews...My Princeton colleague Dilip Abreu suggests paying ratings agencies with some of the securities they rate, which they would then have to hold for a while. Robert Pozen, head of MFS Investment Management, wants independent investors in the conduits to hire the agencies instead. Another idea would have a public body, like the S.E.C., hire the agencies, paying the bills with fees levied on issuers. If you have a better idea, write your legislators...

Everyone knows we live in a world of giant multinational financial institutions, huge cross-border flows of capital and increasingly globalized markets. Such an environment demands ever closer international cooperation and coordination among the world’s major financial regulators. But today’s level of international cooperation is wholly inadequate to the need. Perhaps the current worldwide financial crisis will finally persuade the world’s financial regulators that lip service is not enough...

...let’s be clear about the purposes of all these New Financial Deal reforms. They would not banish speculative bubbles from the planet. After all, there have been bubbles for as long as there have been speculative markets. But with each bursting bubble, new flaws in the system are exposed.

Peering behind the U.S. economic curtain

Despite the seemingly good news that the U.S. has avoided a technical recession, there's actually a bit more to it than that. From a story by BusinessWeek's Peter Coy:

...the cut in the federal funds rate they announced on Apr. 30—a quarter-point, to 2%— probably won't be enough. Senior U.S. economist Paul Ashworth of London-based Capital Economics predicts the Fed will be forced to cut the funds rate to 1% by summer's end. The U.S. economy remains in dire need of aid, and the financial system, while no longer in flames as it seemed to be a couple months ago, is still smoldering. At the same time, inflation, aside from food and energy, is more a theoretical threat than a real one. Core prices rose just 2% from the first quarter of 2007 through the first quarter of 2008, going by the Fed's own favorite measure of inflation (the personal consumption expenditure deflator, excluding food and energy)...

In fact, though, the U.S. economy is weaker than is apparent from the 0.6% annual rate of growth in gross domestic product, which was reported before the Fed's statement. Much of the growth came from an accumulation of inventories—goods that were put on the shelf rather than sold. Final sales to domestic purchasers, which excludes inventory accumulation, actually fell 0.4%. It was the first such decline since 1991.

Indeed, the U.S. may well be in a recession despite the positive GDP report. First-quarter growth could be revised downward as more data come in. Even if the GDP news doesn't get worse, the business-cycle arbiters of the National Bureau of Economic Research could declare the current mess to be a recession in hindsight based on weakness in income, industrial production, and employment...

...many sectors of the economy are doing fine. By stimulating exports, the weak dollar is giving a lift to farmers, miners, and manufacturers. Procter & Gamble and General Motors both reported strong overseas earnings on Apr. 30. The health-care sector is cruising along as well...

Other sectors, though, are desperately weak, in particular financial services and housing. Residential construction fell at an annual rate of 26.7% in the first quarter, the worst in 27 years. The number of vacant single-family homes and condos rose to nearly 2.3 million in the first quarter, a record. Consumer confidence is in the pits, hurting retailers.

And despite the efforts of Bernanke & Co., there's still plenty of stress in the financial system. Banks are charging one another a big premium over the fed funds rate for loans, reflected in the elevated London interbank offered rate. One reason: They're hoarding cash to guard against incurring more loan losses or being forced to take assets back onto their balance sheets...

The fear of more losses is justified. Contango Capital Advisors CEO George Feiger predicts that losses will soon spread beyond residential mortgages to commercial real-estate loans and then on to weaker parts of the corporate sector, such as companies that have undergone leveraged buyouts. And Feiger notes that banks suffering losses will be forced to cut back on new lending.

That's why the Fed may need to cut more. By reducing the federal funds rate, it can lower banks' borrowing costs so their profit margin on lending goes up. Retained profits will give them the capital base they need to lend more, juicing economic growth.

Inflation hawks worry that rate cuts will cause inflation to become entrenched. But the slow increase in the core rate of inflation over the past year shows that soaring food and energy prices have yet to spill over into the rest of the economy. In the case of energy, there's one obvious reason: Spending on gasoline depresses the economy by taking money out of consumers' wallets and sending it abroad. The same goes for imported food.

Another reason inflation continues to remain under control is that, contrary to appearances, the Fed has not pumped up the money supply to combat economic weakness. It has offset its new kinds of lending to commercial and investment banks by simultaneously draining money from the banking system. The core money supply, known as M1, grew just 0.2% in the year through March. And even at 2%, the fed funds rate is not highly stimulative, given that it's no lower than the year-over-year core inflation rate.

The Fed has quelled the panic that prevailed in the financial markets until recently. But it still has to nurse an economy weighed down by massive bad debts. That is likely to require a period of easier money. Don't put away those fire hoses quite yet.

How Google spurs innovation

Yes, I know Google has little to do with homebuilding (other than advertising options), but there's an interesting interview with its CEO, Eric Schmidt in the latest issue of Business Week magazine. If you ever want to insult builders, call them "lemmings," but there is a certain truth that many homebuilders copy each other's designs, marketing plans and merchandising strategies when something works -- and why not? If strategies like model homes, full-color brochures and interactive websites help to sell homes, why not copy the leaders who institute them first?

So how can a company with a more staid culture hope to innovate? At Google, the fact that they allow employees to dedicate 20% of their time to new ideas is the commitment they need to keep ahead of their rivals. As a big fan of many Google products -- including this blog, their advertising programs, the new GrandCentral phone service and their famous search technology (Google is in fact my home page) -- they're clearly doing something that works:

Many companies, says Chief Executive Eric Schmidt, can skirt downturns entirely by coming up with innovations that change the game in their industries—or create new ones. (When asked if Google's strategy would change as the economy heads into a likely recession, he replied: "What recession?")...

The story of innovation has not changed. It has always been a small team of people who have a new idea, typically not understood by people around them and their executives. [This is] a systematic way of making sure a middle manager does not eliminate that innovation. If you're the employee and I'm the manager, and I sit down and say, "Our product's late, and you screwed up, and you gotta work on this really hard," you can legally say to me, "I will give you everything I've got, 80% of [my time]."

It means the managers can't screw around with the employees beyond some limit. I believe that this innovation escape-valve model is applicable to essentially every business that has technology as a component...

We make an explicit decision to favor the end-user. [We] do not say, "Newspapers should be happy. Advertisers should be happy. Telcos should be happy. Competitors should be happy." Those are fine if we can do it. But it's all about end-users...

The No. 1 thing we do require is: You can do whatever you want as long as you track it. We have very sophisticated measurement systems at every stage of launch. We have what is called trusted testers. Then beta test, which is forever. We do these 1% launches where we float something out and measure that. We can dice and slice in any way you can possibly fathom.

What's more important than the absolute number is the relative growth rate. High growth solves virtually all problems. If the growth rate is low, or negative, you've got a serious problem...

You have to have a set of necessary conditions for innovation to occur. To start with, you have to listen to people...

Innovation comes from places that you don't expect.

The flaws of home price indices

One of the ironies of journalism is that those who work in an industry -- and generally know it the best -- are typically prohibited from writing for mainstream newspapers or websites due to actual or perceived conflicts of interest. So when a source such as S&P/Case-Shiller or the NAR releases its numbers tracking the market, those figures are generally reported as fact with little regard to their accuracy.

Thankfully, a recent article at MarketWatch argues that some of these widely reported numbers may be skewed due to methodologies that aren't taking into account some of today's market anomalies:

Top officials with the National Association of Realtors and Standard & Poor's, which issues the S&P/Case-Shiller Home Price Index, agreed this week their monthly reports are giving imprecise readings of price changes at all levels -- national, state and regional -- due to rare market conditions that are skewing survey results.

The NAR reported last week that U.S median home prices fell 7.7% in March from a year ago. The decline resulted largely from a market anomaly -- a steep decline in costlier home sales due to tighter lending standards and high jumbo-mortgage rates, coupled with a foreclosure-driven spike in cheaper homes...

The S&P/Case-Shiller index, which Tuesday posted a 12.7% decline for February, is skewed for two reasons of its own -- it tracks just 20 major markets, many among the hardest hit, and its "repeat sales" survey by design pulls in individual homes both bought and sold in the last few years. Many of those are now being dumped by distressed homeowners and investors who bought at peak market prices and face higher mortgage-rate adjustments...

As reported Tuesday, the S&P/Case-Shiller Home Price Index's12.7% decline in February was the largest drop since its creation in 2001. Despite that index's limited seven-year history, the Associated Press reported that home prices "plunged by a record" percentage and "at their fastest rate ever."

The glaring discrepancy in this case is that 17 of the 20 metro areas posted record annual declines, and yet 78% of the 330 metropolitan regions that NAR tracks reported price increases in the latest period -- and that despite the acknowledged downward bias in current price readings.

S&P Index Committee Chairman David Blitzer acknowledged his organization's overall and metro-market readings paint an incomplete picture. For that reason, he said, the report now charts price changes in 17 of the markets at three specific levels - low-, mid- and high-priced homes -- to provide a clearer assessment.

In the high-priced San Francisco area in February, for example, homes priced below $512,000 fell 32% in value from a year ago, while homes priced from $512,000 to $750,000 fell 21% in value and those over $750,000 fell 6%...

If homeowners want to determine their property's value, it's never been more critical to take the measure of recent sales by home-price level in their town or city neighborhood.

"Just like saying the average nationwide temperature today is 57 degrees doesn't tell you anything, the same is true for real estate prices," Yun said. "The only way to tell what your own home is really worth is to look at local-market conditions, do Internet research and utilize professionals (such as licensed appraisers) to help determine the value of your home."

Jonathan Smoke at HousingIntelligence.com also blogged about this same thing today, with some other good points made:

To make proper conclusions about nearly anything housing related, you must be able to understand the neighborhood level context, and by neighborhood I mean at least as granular as the zip code, but ideally more lower like census tract or block group or actual subdivision. And at that granular level you need to know:
• What has sold and for what price?
• Who lives there and who is moving there?
• What can you learn about the type of customers and what they are buying?
• What’s the current inventory?
• What are the relevant trends?

So to do this, we must go beyond admitting that just home price data are flawed—almost all existing housing information resources are flawed...

We need granular home sales and home price data. By granular I mean down to the neighborhood.

We need to be able to slice and dice home sales and home prices by existing vs. new, size of home, features of home, and type of home.

We need to track home builders and their market share, price per square foot and more.

We need to track permits and existing inventory.

We need to track real consumer-driven demand, not the demand most people settle for (what sold last year)...

Right now I am raising investment capital so I can properly license all necessary data and complete the development to make this a reality. We know how to do it, so it’s only a matter of time.

If you are interested in investing or simply want to put your name on an interest list for access to this kind of housing intelligence, please contact us and let us know of your interest. And stay tuned, as we will make progress quickly.

Builder's brands not relevant in today's market?

According to an article posted at BuilderOnline.com, today's buyers not only don't care about a builder's brand, they don't even want to hear about it, which should tell you something about the uphill PR hill builders will need to climb in the next few years. What they DO want is a sales agent who appears to be a good listener:

Sales consultants advising home building CEOs about their salesforces have a buzzworthy catch phrase, “You were born with two ears and one mouth, and you should use them in that proportion.”

Harsh? Maybe. But to sell in today’s housing market, salespeople need to start conversations with clients, learn about them, build relationships, and by doing all of that, sell the right house to the right buyer, home building sales consultants say.

Customers don’t want to feel hustled, says Jon Fogg, former vice president of sales for Centex Corp. and now a partner at consulting firm The Berke Group in Atlanta.

“Customers have told us they are offended by this process and would like [salespeople] to spend time learning about them and their problems, not dump a bunch of features and benefits on them,” Fogg says.

Potential buyers also don’t want to hear about the builder’s brand, says Berke Group founder and CEO Martin Freedland.

“They don’t give a damn; it’s the nicest way I can say it,” Freedland says...

Selling homes with a system that worked wonders during the boom years, by greeting prospective clients, qualifying them, and constantly trying to close during initial conversations is now a doomed strategy, Freedland says...

Builder salespeople must get their heads around not trying to force transactions. Sales operations and strategies must be ­customer-based and geared toward selling to customers’ wants and needs, versus selling the builder to the customer. Salespeople have to earn the right to sell a customer a home, Freedland says...

Salespeople weren’t the only ones disinterested in improving sales skills during the boom. Builders did not feel the need to spend a lot of money or time on sales training. Now they must invest in training their salesforce to become better listeners...