California drought may put limits on development

The drought in California may soon begin to impact future development in the state, requiring developers to prove they have access to a 20-year supply of water. While some developers have made changes such as drought-tolerant landscaping or even buying future water from farmers, look for this to become an important issue in the years ahead. From a New York Times story:

As California faces one of its worst droughts in two decades, building projects are being curtailed for the first time under state law by the inability of developers to find long-term water supplies... California officials suggested that the actions were only the beginning, and they worry about the impact on a state that has grown into an economic powerhouse over the last several decades.

The state law was enacted in 2001, but until statewide water shortages, it had not been invoked to hold up projects.

While previous droughts and supply problems have led to severe water cutbacks and rationing, water officials said the outright refusal to sign off on projects over water scarcity had until now been virtually unheard of on a statewide scale.

“Businesses are telling us that they can’t get things done because of water,” Gov. Arnold Schwarzenegger, a Republican, said in a telephone interview.

On Wednesday, Mr. Schwarzenegger declared an official statewide drought, the first such designation since 1991. As the governor was making his drought announcement, the Eastern Municipal Water District in Riverside County — one of the fastest-growing counties in the state in recent years — gave a provisional nod to nine projects that it had held up for months because of water concerns. The approval came with the caveat that the water district could revisit its decision, and only after adjustments had been made to the plans to reduce water demand...

Also in Riverside County, a superior court judge recently stopped a 1,500-home development project, citing, among others things, a failure to provide substantial evidence of adequate water supply.

In San Luis Obispo County, north of Los Angeles, the City of Pismo Beach was recently denied the right to annex unincorporated land to build a large multipurpose project because, “the city didn’t have enough water to adequately serve the development,” said Paul Hood, the executive officer of the commission that approves the annexations and incorporations of cities.

In agriculturally rich Kern County, north of Los Angeles, at least three developers scrapped plans recently to apply for permits, realizing water was going to be an issue. An official from the county’s planning department said the developers were the first ever in the county to be stymied by water concerns. Large-scale housing developments in Santa Barbara and San Luis Obispo Counties have met a similar fate, officials in those counties said.

Throughout the state, other projects have been suspended or are being revised to accommodate water shortages, and water authorities and cities have increasingly begun to consider holding off on “will-serve” letters — promises to developers to provide water — for new projects.

“The water in our state is not sufficient to add more demand,” said Lester Snow, the director of the California Department of Water Resources. “And that now means that some large development can’t go forward. If we don’t make changes with water, we are going to have a major economic problem in this state.”...

An eight-year drought in the Colorado River basin has greatly impinged on water supply to Southern California. Of the roughly 1.25 million acre-feet of water that the region normally imports from that river toward the 4.5 million acre-feet it uses each year, 500,000 has been lost to drought, said Jeff Kightlinger, the general manager of the Metropolitan Water District of Southern California.

Even more significant, a judge in federal district court last year issued a curtailment in pumping from the California Delta — where the Sacramento and San Joaquin Rivers meet and provide water to roughly 25 million Californians — to protect a species of endangered smelt that were becoming trapped in the pumps. Those reductions, from December to June, cut back the state’s water reserves this winter by about one third, according to a consortium of state water boards.

The smelt problem was a powerful indicator of the environmental fallout from the delta’s water system, which was constructed over 50 years ago for a far smaller population....

The 2001 state water law, which took effect in 2002, requires developers to prove that new projects have a plan for providing at least 20 years’ worth of water before local water authorities can sign off on them. With the recent problems, more and more local governments are unable to simply approve projects...

As the denied building permits indicate, the lack of sufficient water sources could become a serious threat to economic development in California, where the population in 2020 is projected to reach roughly 45 million people, economists say, from its current 38 million. In the end, as water becomes increasingly scarce, its price will have to rise, bringing with it a host of economic consequences, the economists said...

The water authority for Southern California recently issued a rate increase of 14.3 percent, when including surcharges, which was the highest rate increase in the last 15 years. In Northern California, rates in Marin County increased recently by nearly 10 percent, in part to pay an 11 percent increase in the cost of water bought from neighboring Sonoma County.

Interest groups that oppose development have found that raising water issues is among the many bats in their bags available to beat back projects they find distasteful.

“Certainly from Newhall Ranch’s standpoint, water was a key point that our opponents were focused on,” said Marlee Lauffer, a spokeswoman for Newhall Ranch, a large-scale residential development in the works is Santa Clarita, north of Los Angeles. The City of Los Angeles, among others, has opposed the development.

To get around the problem, Newhall Ranch’s planners decided to forgo water supplied through the state and turn instead to supplies from an extensive water reclamation plant as well as water bought privately. Other developers, like Mr. Jenkins, have changed their landscaping plans to reduce water needs and planned for low-flow plumbing to placate water boards.

The plans calls for water conservation and quality improvement programs, as well as a resource management plan for the delta. Among its most controversial components is $3.5 billion earmarked for new water storage, something that environmentalists have vehemently opposed, in part because they find dams and storage facilities environmentally unsound and not cost effective.

The critics also point out that the state’s agriculture industry, which uses far more water than urban areas, is being asked to contribute little to conservation under the governor’s plans. As more building projects are derailed by water requirements, the pressure on farmers to share more of their water is expected to grow.

Study shows higher gas prices helped bust the housing market

For several years I've been including the question of higher gas prices when studying new development in outlying areas, arguing that infill projects will hold up better in a downturn if they're located closer to employment centers and/or offer access to convenient public transit. A recent study by the group CEO for Cities and profiled on BuilderOnline.com has confirmed this, which I think will prove to be a huge trend for the homebuilding industry moving forward:

In a new study released by CEO for Cities, gas price increases in the last five years are cited as a factor in declining home values and loan defaults in distant suburbs and metropolitan areas with weak central cities.

The study, called “Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs,” measured the change in housing prices between the fourth quarter of 2006 and the fourth quarter of 2007, as well as foreclosures and delinquencies, in 20 major markets.

Five markets -- Los Angeles, Chicago, Tampa, Pittsburgh, and Portland, Ore. – were examined in detail. In all five markets, neighborhoods within three miles of the central business district held their home values better than neighborhoods that were 10 miles further out.

CEOs for Cities is a Chicago-based network of corporate, academic, civic, and philanthropic leaders focused on urban strategies for addressing societal issues...

The study also found a “very strong correlation between how strong central cities are and overall economic success,” Cortright says. Core vitality ratings use an index of the concentration of education levels of residents of close-in neighborhoods; a rating of 100 percent on the core vitality index means that the educational level of adults living in neighborhoods within five miles of the center of the central business distract was the same as the education level of the entire metropolitan area, according to the study. New York, Chicago, Seattle, and Portland, markets with strong central cities, were least affected by the housing downturn, with the lowest rate of price decline and delinquency, he says.

From a development perspective, Cortright says the study suggests that it will be much harder to turn a profit on projects in the distant suburbs, and conversely, there will be “much more consumer interest in those closer-in projects.”

Price declines and rising foreclosures now capturing prime borrowers

It looks like we're entering a phase of this housing cycle in which even the more conservative 'prime' borrowers -- those whom are able to document their assets and income and maintain higher credit scores -- are feeling the pain of declining home prices and even at an increasing risk of foreclosure. From a story in the Wall Street Journal:

Mortgage delinquencies and foreclosures continued to surpass record levels in the first quarter, as the prolonged decline in home prices and shifting economic conditions trapped a growing number of prime borrowers.

Delinquencies and foreclosures increased at the fastest pace for borrowers with prime adjustable-rate mortgages, according to the Mortgage Bankers Association, though borrowers with subprime ARMs still account for the largest share of troubled loans. The number of new prime ARM foreclosures increased by 29,000 to 117,000 in the first quarter, while the number of new subprime ARM foreclosures increased by 20,000 to 195,000. This is the first time prime foreclosures have grown faster than subprime foreclosures, the MBA said...

The increase in delinquencies has been highest in states where there has been a lot of overbuilding, said Jay Brinkmann, the MBA's vice president for research and economics. New subdivisions in those states have seen the biggest price drops, he said, as builders have cut prices to reduce inventories. That has made it more difficult for borrowers in the same or nearby subdivisions to sell or refinance if they get into trouble. About 10% of the homes built after 2000 are now vacant, according to the Census Bureau, compared with roughly 2% of homes built earlier...

Still, the rise in past-due loans was widespread, with delinquencies up year over year in every state except Louisiana. Thirty-nine percent of subprime ARMs and more than 10% of prime adjustables are at least one payment past due. Option ARMs, which carry a low introductory rate but can lead to a rising loan balance, account for much of the rise in delinquent prime ARMs, Mr. Brinkmann said.

The data provide little evidence things will improve soon. Mark Zandi, chief economist at Moody's Economy.com, notes credit-bureau data from April show delinquencies have become "measurably worse" in the second quarter. "The problem now is negative equity combined with a weakening job market," he said, rather than resetting adjustable-rate mortgages.

Falling home prices have exacerbated the problems in the mortgage market by making it more difficult for borrowers who run into trouble to refinance or sell their homes. "The only alternative for them is foreclosure," says Paul Willen, a senior economist with the Federal Reserve Bank of Boston. "That accounts for a lot of what we are seeing."...

Falling home prices are also making it more difficult for borrowers to tap their equity to pay bills. At LSS Financial Counseling Service, based in Duluth, Minn., the average borrower seeking foreclosure counseling had nearly $17,000 in credit-card debt, compared with about $13,000 two years ago.

Ouch! KBHome sues investor McFarlane Partners

According to an AP story, homebuilder KBHome has sued real estate investment firm McFarlane Partners over suspended payments at several Southern California area condominium projects. And to think the building industry used to be somewhat friendly to one another (at least in the press):

Homebuilder KB Home sued real estate investment firm MacFarlane Partners LLC for failing to contribute some $52 million toward the development of three condominium complexes, according to court papers obtained Thursday. MacFarlane and KB Home had agreed to share the construction bill for the complexes in Anaheim, Irvine and the San Fernando Valley, but the investment firm ceased payments in late 2007, leaving the homebuilder to cover the shortfalls, according to the Superior Court lawsuit filed last week.

The lawsuit, which claims MacFarlane and its affiliates failed to honor contractual and fiduciary obligations, lists compensatory damages totaling more than $100 million.

San Francisco-based MacFarlane spokesman Doug Holm did not immediately return a call seeking comment.

KB spokeswoman Lindsay Stephenson said the Los Angeles-based company is working on a strategy to complete the projects, which are in various stages of construction, without MacFarlane as a partner.

Banks about to face the real estate music

According to a story in the Wall Street Journal, the second phase of financial pain from the real estate bust is about to begin: whereas phase one was focused on the 'demand' side (i.e., homebuyers & mortgages), phase two will be centered on the 'supply' side (i.e., banks forced to mark their real estate collateral to current pricing). As Ivy Zelman concludes, "...this period of procrastination is nearly over."

Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.

Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses...

The surprisingly gloomy outlook is at odds with the sentiment of investors, who appear to have moved on from worrying about the health of the financial system to obsessing about gasoline prices and consumer spending. The Dow Jones Industrial Average rose 213.97 points, or 1.7%, on Thursday on the back of surprisingly strong retail-sales data.

The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending.

Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of their real-estate debt. IndyMac Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540 million in loans made to finance land purchases and housing construction projects. Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar...

The sales are a response to a growing problem: Home builders are falling behind on loan payments, and the value of the land and housing developments that serve as loan collateral is plummeting. Over the next five years, U.S. banks could "charge off" as bad debt between 10% and 26% of their loans tied to residential construction and land assets, which would amount to about $65 billion to $165 billion, according to a report sent to clients Thursday by housing research firm Zelman & Associates. That compares with charge-offs of about 10% of construction-related bank assets, totaling $31.6 billion, when adjusted for inflation, during the last housing downturn in the late 1980s and early 1990s. In 2007 and the first quarter of this year, banks wrote down just 0.7% of such assets, according to Zelman...

The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hit hard by the housing crisis. Banks in Arizona have 36% of their total loans tied to construction and development. In Georgia that number is 34%, and in North Carolina it's 28%. Zelman said construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975.

IndyMac is trying to sell debt backed by a grab bag of assets, including partially built subdivisions, condo buildings and large parcels of raw land covered in sagebrush in parts of California, where the housing crisis is acute, according to people familiar with the offering.

Selling real-estate loans could help larger lenders like IndyMac shore up their balance sheets. But such sales, by setting a market value for distressed real-estate loans, could trigger problems at smaller banks with real-estate exposure, which might have a difficult time absorbing such losses...

Real-estate lenders had been hoping for a decent spring sales season for new homes, which would have helped builders stay current on their loans. But the selling season has been a bust. The rate of foreclosures on homeowners hit a record, as did the rate at which they fell behind on their mortgage payments. In the first quarter, 6.35% of mortgages were at least 30 days delinquent, not including those already in foreclosure, a rise of 1.51 percentage points from the year-earlier period.

"We've seen a real change in the market," says Ricardo Chance, a managing director at KPMG Corporate Finance LLC, who is helping troubled builders restructure their businesses. "Finally the banks are capitulating and saying, 'Let's mark to market and flush this all out.' The market is going to get worse. We don't want to hold on to this stuff."

KBHome returning to its roots

There's a very interesting (and lengthy) story in the current issue of Fortune magazine (and available at CNNMoney.com) about homebuilder KBHome and how it, like other builders, rode the wave of the housing bubble by building increasingly pricey homes. In the process, however, it moved away from its core product, namely entry-level and first-time-move-up homes that were affordable enough to often compete with the rental housing stock. There are also a lot of swipes at former CEO Bruce Karatz, so it'll be interesting to hear what former KB alum have to say about this article:

During the bubble, KB Home (KBH, Fortune 500), like many other big builders, blew up its old-line business by going ritzy and building expensive houses. Now KB is among the first homebuilders to recognize the error of its ways, and it is returning to its roots as a purveyor of low-cost, smaller homes. In some cases KB is even using the same façades from the go-go years and then shrinking the house that lurks behind them to be half as deep - and about half as expensive. "If I had to write a headline for housing, it would be back to basics," says Broad. "The right thing to do is just what KB is doing: build starter homes that compete with rentals."

KB's recovery plan is not just a tale of two houses. It is a tale of two CEOs. During the bubble Bruce Karatz, a flamboyant marketer, believed that the public's hunger for McMansions would keep the good times rolling for years to come. It was his successor, Jeff Mezger, a hammer-and-studs operator, who recognized that the world had gone mad and steered KB back to first-time buyers. That strategy shift may prove to be a primer on how the housing market rejuvenates itself after a boom and a bust...

In hindsight, the reason for the current malaise is simple: too few buyers. By 2007 more and more people were frozen out of the market - especially the entry-level buyers, who now account for as much as 30% of new-home sales. They're the twentysomething young professionals who rent until they get married or the first child arrives, and then reach for the American dream of homeownership. From 2005 to 2006 some first-timers rushed to purchase homes they couldn't afford with the help of exotic loans. But another big group of young consumers steered clear and are finally looking to buy. Now that prices of new houses have fallen as much as 30% in areas including the Inland Empire and the outskirts of Phoenix, they are returning- prompting a turning point in the housing cycle. Call it the New Affordability...

Today seven in ten KB customers are getting financing from the FHA. The current rates are below 6%, more than 100 basis points under those on jumbo mortgages not backed by the FHA or Fannie Mae or Freddie Mac. (Fannie and Freddie lend less readily to people with past credit problems and hence aren't as crucial to the entry-level market as FHA financing.) Congress has raised the FHA limit to $729,750 in high-cost areas like Los Angeles through the end of 2008. But even if the limits aren't extended, virtually all the houses KB sells are priced for an FHA loan...

Bargain-hunters are drawn to these small houses, which look just like the behemoths built in 2005 and 2006. In Beaumont, a community of tract homes 70 miles east of Los Angeles, the Seneca Springs community is dotted with 4,000-square-foot, seven-bedroom Mediterranean homes that KB built at the peak. But right next to them the company is erecting new houses with exactly the same 50-foot façades- and a big difference you don't notice from the street: They're about half as deep and roughly 2,000 square feet. Those homes preserve the community's curb appeal by keeping the façades looking similar and sumptuous...

During the bubble KB lost its way. Building big, pricey homes wasn't a mistake- that's what the public wanted. The real problem was that management misread the future: It bought the illusion that the frenzy would last, and gorged on overpriced land. Management's grandiose thinking also pushed KB into splashy new businesses far from its traditions...

Market forces were partly to blame for KB's detour in 2005 and 2006. Builders could sell all the $400,000 homes they wanted, and the margins on those McMansions were a lot fatter than on small houses, chiefly because they could build them on virtually the same small lots as the old-fashioned starter houses. Still, some of the blame for KB's losing its way belongs to the CEO who succeeded Broad, his protégé Bruce Karatz...

In November 2006, KB also promoted its longtime COO, Jeff Mezger, to CEO. In contrast to the flashy Karatz, Mezger is a brick-and-mortar operator...It was Mezger who shifted KB's focus back to the customer who built the franchise, the first-time homebuyer. His coup was making the turn to affordability before such competitors as Centex (CTX, Fortune 500) and Ryland Homes (RYL). "By late 2005 we could see credit was tightening and investors were no longer buying," says Mezger. So he pitched his strategy toward producing the old KB product. "We needed to build houses priced for the median incomes of our communities," says Mezger. "We got away from that in 2004 to 2006." He also strove to build big financial reserves to provide KB with the staying power to weather the stricken market, for several years if needed. Hence, KB sold off huge landholdings and thousands of homes at a loss...

KB is booking those losses because it's been selling homes and lots at well below the amount it spent to build or buy them. But it put out that cash years ago. Now Mezger is building fewer homes and acquiring less land than in the past. So despite the accounting losses, KB is taking in far more cash than it's putting out. As a result, it has increased its cash hoard from $700 million to $1.3 billion and has reduced debt by almost $1 billion, or 33%, in the past 18 months...

Today both land and construction costs are falling rapidly. In California's Inland Empire, the price per finished lot has collapsed, plunging from $150,000 at the peak to about $50,000. Labor costs, the single biggest expense after land, are also dropping as construction trades look for work. In Florida, construction costs for a 2,000-square-foot home have dropped to $80,000, vs. $100,000 at the peak, a 20% reduction. The result is that the average sales price there has fallen from $275,000 to $215,000. In the inland areas of Southern California it has dropped from $350,000 to $260,000. Additionally, KB is cutting costs by assembling homes from prefabricated 12- and 16-foot panels that are hoisted into place with cranes. That wasn't possible when buyers coveted fancier houses with custom elements.

'Shadow' rental market now accounts for 50% of vacancies?

A few months ago, I wrote about the future 'shadow' rental market in my column for Builder & Developer magazine and the impact it would have on the traditional apartment market -- namely higher vacancies and a squeeze on rental rates that would see a return of lease incentives.

I recently lived through this 'shadow' market with a small income property I have in Long Beach, CA, which has been in my family since 1980. Located within two miles of both CSULB (30,000 students) and the beach, the occasional vacancy would never take more than a couple of weeks to fill. But when a couple of failed conversion projects hit the market, they suddenly unloaded scores of recently upgraded apartment units -- including granite countertops and new appliances -- onto the marketplace. Suddenly that two-week vacancy turned into over two months, and to fill it I had to forget about any price hike from the previous lease.

Similar stories are now hitting other markets throughout the country -- generally where the housing market was the frothiest. From an MSNBC story:

Renters may be the biggest winners in the current housing slump, especially in places like Florida, Las Vegas and Southern California, that have thousands of vacant for-sale and foreclosed homes and condos on the market.

Apartment vacancies are edging up in many areas of the country as frustrated sellers instead try to rent out their homes and condos in once red-hot housing markets. And that is making it harder for landlords to raise rents. In the toughest markets, apartment owners are even offering lease incentives to snag renters.

This "shadow market" of investor-owned homes and condos accounts for almost half of the rental stock, and attracts displaced homeowners more often than your typical apartment renter...

After staying relatively flat last year, apartment vacancies bumped up in the first quarter from the end of last year, the research showed. The vacancy rate is expected to rise by a half-percent this year to 6.1 percent as the market absorbs about 3.3 million more rental home and condo units...

The national trend, however, belies what's happening in the country's most beleaguered housing markets. Areas that experienced explosive condo development and conversions of apartments into condos for sale are finding those units unloaded onto the rental market because developers can't sell them.Sharp increases in vacancy rates plague most Florida markets where condo development was rampant. In Jacksonville, for example, rental vacancies spiked to more than 10 percent in the first quarter, up from 5.8 percent in the prior year. Orlando and Ft. Lauderdale had the next biggest gains in vacancies..

In San Diego, single-family homes being placed on the rental market are hurting luxury apartment communities, said Rick Snyder, president of the California Apartment Association.

The new supply is preventing some landlords from increasing rents, and other are even being forced to offer freebies like one free month with a one-year lease or upgraded unit fixtures...

But there could be some unseen risks behind these bargain shadow rentals. Renters who got homes or condos on the cheap may find a sheriff knocking at the door with an eviction notice if their landlord fails to pay the mortgage...

Meanwhile, renters in some of the costliest cities aren't getting any relief, to their dismay. Rents in pricey San Francisco surged 11.5 percent last year, while New York rents shot up 9 percent and rents in San Jose, Calif., climbed 8.7 percent, Marcus & Millichap said.

Las Vegas developer blogs back with "Frothing Developer"

Ever since I started Housing Chronicles last November, I've been urging homebuilders to start their own blogs as a way to communicate with their colleagues, suppliers and clients. It seems Las Vegas Developer Alex Edelstein, CEO of Gemstone Development, has taken that a step further in order to counter the constant barrage of bad news from the media.

Entitled "Frothing Developer," the blog seeks to counteract regular media reports about the Vegas market as well as homebuilding in general. From a BuilderOnline.com story:

Alex Edelstein is fed up and he's not going to take it anymore.

As the CEO of Las Vegas-Based Gemstone Development, Edelstein believes the media has it all wrong when it comes to the local economy and real estate market. So he has created a new blog called Frothing Developer to right the media's wrongs.

"If you read and believe all of the negative stories in the traditional media and vulture blogs, it's easy to get a skewed perspective on what's really happening in the economy and the housing markets today--particularly in the local Las Vegas market," said Edelstein in a prepared statement. "We'll go hand-to-hand with anyone who knocks Las Vegas' prospects without an understanding of our market and the real facts. We kept waiting for the media to pick up the positive news here and finally decided we needed to just get the word out ourselves."...

The Frothing Developer blog, which is available on an eponymous web site, has posted roughly 40 stories during its first two weeks ranging from deconstructions of media reports on home prices and inventory to pieces on CNBC's Jim Cramer's relatively bullish outlook on housing.

Gemstone is among the largest condo developers in Las Vegas. Its $230-million Manhattan Condominiums project was the first new mid-rise condominium to be built in Las Vegas since 2002. It sold out its initial 700 units and finished construction on its last building this year. Gemstone's newest development, ManhattanWest, is a mixed-use community with some 600 residences and 200,000 square feet of shops, restaurants, offices, and an all-suite hotel 20 acres in Southwest Las Vegas.

Richmond American (MDC Holdings) claims to be positioned well for recovery

Building as Richmond American Homes, MDC Holdings reported at the J.P. Morgan third annual Basics and Industrials Conference in New York that it's positioned itself well for an eventual rebound in the housing market:

M.D.C. builds homes as Richmond American and also runs a mortgage finance company (HomeAmerican) and a company to supply escrow services, title insurance, and homeowners insurance (American Home). Reece, who is scheduled to step down at the end of June after 18 years with the company, told analysts and investors at the J.P. Morgan third annual Basics and Industrials Conference in New York that M.D.C. has maintained a strong cash position and a relatively short land position through the current downturn, while aggressively cutting general expenses by shrinking its employee head count from more than 4,000 to around 1,800...

Keeping a handle on land commitments is a primary focus of that effort, said Reece. From a high of 300 active communities, said Reece, M.D.C is now down to just 260 active communities in 13 states and has kept its land investments lean, helping to rein in the kind of impairment charges that have plagued many builders in the current downturn.

"We consider land as a raw material in our home building process," explained Reece. "So we like to buy it like a raw material. We buy it just in time, as much as we can." The cautious approach to land acquisition is a key reason for the strong condition of the company's balance sheet presently, said Reece: "We try to keep our land supply very low. We have a rule of keeping our land at about a two-year supply-not only broadly speaking as a company, but when we look at individual divisions or even individual communities. We like to, from the first closing to the last, be in and out in two years or less."

The company has bought very little land since 2005, he reported, and all land purchases-even individual lot take-downs-go through a rigorous process of management review. The roughly 10,000 lots the company currently owns, he said, are mostly fully developed and don't represent a future expense for developing before building can happen...

On the operating side, Reece emphasized several strategies, including a sales effort focused around the company's innovative "Home Gallery," which allows potential buyers to customize units to their personal preferences and a push for a high-quality "customer experience," in which community manager bonuses are tied to third-party rating surveys of customer satisfaction. In addition, said Reece, the company is working to "un-bundle" labor and materials costs in order to gain more control over home construction costs.

And with land and inventory issues under firm control, Reece argued, Richmond American is well poised to concentrate on those production values, without the distraction of overcoming balance-sheet difficulties.

Ryland Group's CEO says foreclosures don't compete with new homes

In remarks at this week's J.P. Morgan third annual Basics and Industrials Conference in New York, The Ryland Group's Chad Dreier was focusing on being positive, including reasons why foreclosures won't be as high as once thought and why they generally don't compete with new home sales. From a BuilderOnline.com story:

While the mortgage and banking industries, government agencies, and consumers grow anxious over mounting delinquencies and foreclosures, the new-home building market could remain fairly well insulated from any significant aftershock..

Dreier acknowledged that the foreclosure issue was "another headwind on home building." Foreclosed homes are adding to record levels of existing-home inventory and are exerting some downward pressure on home prices. However, Dreier suggested that the issue might be overblown for new-home builders for several reasons.

First, mortgage rates have remained cooperative. Many adjustable-rate mortgages have recently reset at historically attractive rates, preventing many homeowners from experiencing unmanageable spikes in monthly payments. Because the reset rates are more affordable than many feared, a number of foreclosures have been prevented.

"They're bad, but I don't think they are as deep as people thought they would be," Dreier said, noting that he had recently heard from experts that foreclosures could top out at around two million rather than a previously projected three million.

Second, Dreier said he hardly considered foreclosures direct competition for new-home sales.

"I actually don't think people who are looking at new homes are looking at foreclosures," he said.

While foreclosed homes can be had at bargain-basement prices, a lack of maintenance and care often deters new-home shoppers. Moreover, these shoppers generally see value in a new home that they can't find in an existing home, and they're willing to spend more money to have it, according to Dreier.

Dreier said Ryland had a low foreclosure rate. "We don't have a lot of foreclosures. Our average is below the FHA average, which I think is 1.2%," he said...

Dreier said Atlanta; Austin, Texas; Charlotte, N.C.; Chicago; Orlando, Fla.; Phoenix; and Washington, D.C., yielded disappointing results. Stagnant growth in Cincinnati for the past five years has pushed management to decide to exit the market. Dallas also remained challenging for the company. "There's way too much inventory, and margins are mediocre on a good day--and it's not a good day," Dreier noted.

But the biggest trouble spot was Fort Myers, Fla. "It's in shambles, and I don't think it'll come back for a long time," Dreier said, pointing out that the market had as much as 45 years of inventory.

But the good news was that cancellations appeared to have stabilized in 1Q2008 to around 27%, and backlog was up sequentially 20% from 4Q2007.

This was thanks in part to good performance in some surprising markets. Dreier said Baltimore was shaping up to be the company's most profitable market in 2008. Indianapolis also was one of Ryland's best markets. "We've got more sales than last year," Dreier said. "We've got a great management team there."

Charleston, S.C., has proved to be a strong market for the company. And Dreier called San Antonio, Texas, a "fantastic market," more stable than some of the other Texas markets because of a large military presence. The company also improved in Houston, where units and profits were up over last year. "It's the best out of all the Texas markets," Dreier added.

Sales were also going well in Denver, where Dreier said the division was short on land. And he remained optimistic about Las Vegas. "I'm a big fan of the Vegas market. We're doing better this year than last year," he said. "We're pretty happy with Vegas."

Robert Toll speaketh again

You do have to hand it to Toll Bros. CEO Robert Toll: he does like to speak his mind. Perhaps it's because he's not a hired hand to lead just another public company, but helped build the company from the ground up and so has seen his share of peaks and troughs. In his latest remarks -- made a day after reporting a less-than-expected loss for the second quarter -- Mr. Toll insists we're in a housing 'depression' that could last another couple of years:

The chief executive of Toll Brothers Inc., the nation's largest luxury-home builder, said Wednesday the housing industry is in a "depression" and any recovery could be two or three years away.

In candid remarks at the JPMorgan Basics & Industrials Conference a day after reporting a second-quarter loss, Robert Toll said he's not ready to call a bottom yet since the housing market could still get worse.

"Can the market go down another 10 or 20 percent? Sure," said Toll, whose Horsham-based company will sit on cash unless a bargain land deal comes along.

He said the current housing crisis is the worst he's seen since the mid-1970s, but back then the decline was relatively short-lived. The current downturn started in late 2005...

Buyers' lack of confidence that home prices will stop sliding is what's keeping them out of the market, rather than lack of access to credit, he said.

He said the underpinnings for a healthy housing market are still in place: low interest rates, a low jobless rate, increases in population and accumulation of wealth. Moreover, home prices have fallen to levels seen around 2002 and 2003, making them more attractive to buyers.

When the market recovers, home prices will march right back up, Toll said.

In the meantime, builders face another headwind as the cost of materials rises -- and there aren't a lot that can still be cut.

"Labor has gone along with us and squeezed themselves to the bone," Toll said.

As for materials, he added, "there's a whole bunch of them that's oil based ... I see costs going up from here. So we're caught in a squeeze. Certainly, our clients aren't going to pay more money because our costs our going up."

Investors returning to Foreclosure Central: Stockton, CA

A few months ago (and recently re-run), 60 Minutes aired a story on the housing market with a particular focus on the basket case that was Stockton, California, which had become sort of a ground central for rising foreclosures. Certainly one benefit of the crashing prices in Stockton, however, has been the interest by investors, who can increasingly buy properties that are cash-flow neutral or positive if rented out. From an MSNBC.com story:

In some areas of California, so many foreclosed homes are available to buy on the cheap that real estate agents are discouraging prospective sellers from even putting their houses on the market.

Perhaps the most extreme example of this is Stockton, about 85 miles east of San Francisco, where roughly three of every four homes for sale are in or on the path to foreclosure...

Worse for people trying to sell their homes, lenders in possession of houses and condominiums may keep their fire-sale in full swing for months to come to attract investors to a market near the top of U.S. surveys of areas hit by foreclosures...

More listings would add pressure on local home prices. But they may only hold prices down rather than drag them lower because investors are slowly coming to Stockton in search of bargains, and in some cases they are in bidding wars, albeit at comparatively low prices.

"We heard yesterday there were 36 offers on one house," said Terry Hull Sr., a veteran Stockton property manager and owner of property management company W.T. Hull Co Inc.

Hull said he, too, may soon put offers on local properties because they have become so cheap: "We're going to buy about 50 houses because we know it's an opportunity you rarely see."...

Distressed borrowers who manage to sell their houses are in many cases able to rent equivalent properties for about half the cost of their monthly mortgage payments. "I don't know of anybody who has been foreclosed who is moving into an apartment," said Paul Jacobson, an associate at W.T. Hull Co.

Investors have taken notice that rental demand in Stockton is on the upswing while home prices have fallen, providing an opportunity to turn foreclosures into profits, said Cesar Dias, a Stockton real estate agent who arranges bus tours of foreclosed properties...

Dias said one foreclosed home he showed last month sold for $80,000, or $11,000 above its asking price, after 12 days on the market. The two-bedroom, one-bathroom house may rent for up to $1,000 a month and generate a monthly profit of up to $400.

Investors likewise pounced on a three-bedroom, three-bathroom home in a gated subdivision that Dias just showed. It has at least three offers at its $220,000 asking price, he said. "People are cherry-picking and finding the right ones," Dias said. "They see prices are at a bottom."

"Do I see the tide turning? Yes," Dias added.

Foreign buyers to the rescue?

Apparently a combination of favorable tax laws, a weak dollar and falling prices are encouraging foreign investment in residential real estate throughout the U.S. From an MSNBC.com article:

South Koreans are benefiting from new, more liberal foreign investment laws back home, but the country isn’t the only new market on agents’ radars, especially not for luxury projects. Jason Press, executive vice president of marketing at New York-based condo marketing company Shvo, has traveled to Seoul, Paris and elsewhere to peddle the company's high-end offerings.

“We recently launched a new office in Dubai, and that’s spurred interest from that region in New York City,” Press says. “We’re associated with luxury international brands, and these are magnets to international buyers.”

Declining prices and a weak dollar have made U.S. property more appealing to overseas buyers, while a weak U.S. economy has forced real estate agents to look farther afield for buyers.

Last year one-third of American agents worked with at least one international buyer, according to the National Association of Realtors. The top five countries supplying international customers were Mexico, Britain, Canada, India and China.

In Dallas, where a $400 million downtown revitalization effort is sprucing up downtown and creating a new arts district, developers of the forthcoming 120-unit Museum Tower luxury condo building are pitching Mexico’s elite. Units in the new tower start at $1 million...

Canadians, meanwhile, are taking advantage of the exchange rate, which gives their dollar — the “loonie” — the kind of leverage it hasn’t seen in years. Five years ago, the Canadian dollar was worth about 70 cents in U.S. currency; now it's worth about $1.01.

Mark Dziedzic, president of property marketer Arizona for Canadians, moved to the Phoenix area three years ago from Canada and now markets property in Phoenix, Scottsdale and Sedona to Canadians.

Outside the Kihei Akahi condo complex on the Hawaiian island of Maui, three flags fly: American, Hawaiian and Canadian. Randy Antonio, an agent with Keller Williams in Maui, says that’s because so many Canadians have bought into the complex, where condos sell in the $500,000 range.

Canadians have been interested in Hawaii since the 1970s, Antonio says, but in recent years the favorable exchange rate has finally made it more affordable for many to buy. Since last year many of his open houses have seen 90 percent Canadian attendance.

Dean Jones, president of Seattle condo marketing agency Realogics, has partnered with Oh, the Urban Condominiums agent, to pitch Seattle-area property to Canadians. Oh got 22 reservations from Canadians during the pre-sale phase of a 39-story condo tower in downtown Seattle after a trip in December.

Jones said some builders are even offering “currency hedges” to Canadians so they can lock in their final purchase at current exchange rates. Dziedzic says some builders in Arizona are using the same strategy.

“Canadians have an opportunity they’ve never seen before,” Dziedzic says.

Agents, of course, have the opportunity too — and as showrooms pop up in Dubai and Seoul, and road shows hit Monterrey and Paris, Americans can expect to see their urban real estate go increasingly global.

Housing Chronicles post cited in latest "Carnival of Real Estate"

Thanks to Jay Thompson, who runs "The Phoenix Real Estate Guy" blog for hosting the 93rd Carnival of Real Estate and citing the Housing Chronicles post, "Homebuilders and brokers should first ask themselves, Who's Your Company?" among the week's winners.

Foreclosures still rising even though lenders are (finally) getting serious about cutting prices

As the tide of foreclosed properties continue to rise, lenders are finally realizing that they need to cut prices -- fast and low -- to move inventory to a skittish public and a tight credit market. But have they waited too long to do so? From a Wall Street Journal article:

The number of foreclosed homes owned by lenders continues to rise despite signs that they are increasingly willing to slash prices to sell those properties.

Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks. The April total works out to about one in seven previously occupied homes available for sale nationwide.

A surge in defaults has increased the inventory of bank-owned homes, known in the trade as REO, for "real estate owned." By cutting prices, lenders have managed to increase sales of such homes sharply in recent months in some cities hit hard by foreclosures, including Las Vegas, Detroit and Sacramento, Calif., local real-estate brokers say.

With home prices falling, "holding the assets means further losses," said Mark Fleming, chief economist for First American CoreLogic. Some lenders now are cutting prices as often as every 20 days on homes that aren't selling, said David McCarthy, chief executive officer of Integrated Asset Services LLC, a Denver-based company that helps banks value and sell REO homes.

But lenders haven't yet managed to catch up with the inflow of foreclosed homes. Mark Zandi, chief economist at Moody's Economy.com, forecasts that the inventory of REO homes won't peak before the end of 2009...

The REO glut is weighing on house prices in many areas, as banks tend to cut prices faster than other sellers. A new set of local home-price indexes, to be introduced this week by Integrated Asset Services, shows that the median price of homes sold in Riverside County, Calif., in April was down about 29% from a year earlier. The median price fell about 13% in Clark County, Nev., and 12% in Arizona's Maricopa and Pima counties. Median-price comparisons can be skewed by shifts in the proportions of high- and lower-priced homes sold from one year to the next but provide a broad indication of market trends.

To avoid or at least delay losses, many lenders are trying to avert foreclosures by easing loan terms or giving struggling borrowers more time to catch up. Hope Now, an alliance of mortgage companies and investors, said last week that mortgage companies completed loan workouts for 183,000 households in April, up from 160,000 in March.