Tips on buying foreclosures

Given the rising number of home sales of foreclosed homes, it would seem like a good time to jump into the game. But since many of these sales are to professional investors, many of whom work with pooled money and analysts to crunch the numbers, it's easy for neophytes to make mistakes. Fortunately, CNNMoney.com provides some tips to foreclosure beginners:

A home goes into pre-foreclosure when a borrower has fallen behind on his payments, but the house has yet to be auctioned off.

Buyers can find pre-foreclosures by poring over the delinquency notices that lenders file with county courthouses when a borrower misses a payment.

Armed with prospects, buyers should go scouting. If they see homes they like, they should contact the owners to see if they want to sell...

Cold calling and making low-ball offers on people's homes can be difficult: Some owners are emotional, even angry. Many are trying to hold onto their houses and don't appreciate what they consider scavengers sniffing around...

Indeed, some owners are open to doing what's called a short sale, which is when a buyer pays less for a house than the mortgage that is owed on it. Lenders must agree to a short sale, and will then forgive the rest of the debt.

Often, banks are reluctant to do such deals, since it requires them to take a loss. It can take months and a lot of badgering before a deal goes through, and not every buyer is up for that kind of hassle.

But as the housing market deteriorates, lenders are warming up to short sales, according to Foreclosure.com founder Brad Geisen. "It makes a lot more financial sense for them to liquidate early rather than go through the foreclosure process," he said, which can cost lenders about $50,000...

In the next stage of foreclosure, homes in default are auctioned off on the county courthouse steps. These homes can be real bargains, but the process is a crap shoot.

Bidders can't inspect the property, so there's no telling how much work it needs. And there is also no telling what kind of liens there are against the home, due to unpaid taxes and so forth, which can also jack up the cost of these homes. Finally, Buyers need to come with cash, ready to put 10%-20% down on the spot, and able to pony up the rest in a matter of days...

After a lender takes back a house, the property goes back on the market as what's called an REO (real estate owned) property. These are treated like ordinary sales, listed with a broker. Typically, bargains are not as sharp.

Author Steve Dexter advises house hunters to go to the Web sites of all the major lenders and look for REOs in their communities. Alternatively, "Get a young, hungry real estate agent who's screening REOs all the time and put them to work for you," he said. Foreclosures for sale may also be found on the sites of Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500), as well as eBay (EBAY, Fortune 500)...

Another way to buy an REO is through an REO auction. As bank portfolios of these properties have swollen, they've started to unload them en masse. Pam McKissick, chief operating officer of Williams & Williams, an auction company based in Tulsa, said her company buys big portfolios of post-foreclosure properties from lenders and then auctions them to individual buyers.

The proof is in: speculation caused the oil bubble

Ever since oil prices began their steep pricing rise earlier this year, we had pundits dismissing talk about overt speculation in oil futures for the increases. They pointed to static production, rising demand by emerging economies and political instability in countries with large oil exports, but they never really explained why a slow yet steady rise in demand would result in a spike in such a short time. People paid higher prices because they had little choice in the short run, but over time began to make adjustments that led to slowing demand that would eventually impact prices, but certainly not lead to the price drops we've seen in recent weeks.

So why have they fallen so quickly? An article in the UK's Daily Telegraph takes it on:

The market's conviction that oil prices were set on an unstoppable upswing was underpinned by a set of mantras to be chanted daily before breakfast by anyone hoping to make money by following the crowd: insatiable demand from China; indolent Opec sheikhs unwilling to open the supply taps; that nasty Vladimir Putin playing political hardball with Russia's oil and gas resources; those mad Iranian mullahs hell-bent on nuclear conflict; and beyond all these, the looming threat of "peak oil", the inevitable moment when Mother Earth's carbon-fuel gauge starts pointing towards empty.

One way or another, said the fundamentalists, the only destination for oil prices in the medium term was somewhere north of $200 a barrel. And hooray to that, chorused the green lobby, because it may be the only thing that will ever make us wake up to the need to stop cooking the planet with carbon emissions...

Now the psychological tide seems to be turning. On the supply side, Saudi Arabia, the dominant member of Opec, is now signalling greater willingness to open the oil taps. When the princes of the desert made a rather smaller gesture of willingness in that direction in June, the market took no notice and prices marched on. But in the new mood, any hint of an increase in Saudi supply is a reason to mark down prices.

As for the Russians and the Iranians, the pundits have remembered that even the most externally truculent or internally turbulent of energy-exporting nations can feed its people at home only by selling its natural resources abroad, so must ultimately stay on good terms with its customers.

And meanwhile, five years of rising oil prices have provoked a wave of investment in new drilling and refinery capacity - including the opening up of inaccessible oil sources that no one wanted to tackle when prices were low. Whether it is deep under the Arctic ice-cap or soaked into the tar-sands of northern Alberta, there turns out to be quite a lot more oil waiting to be exploited before we really approach the peak-oil apocalypse. More than that, high oil prices have encouraged rapid development of such alternative energy sources as wind and solar power, and more efficient engine and heating technologies.

On the demand side, a shuddering deceleration in economic activity across the industrialised world is starting to take pressure away. Many economists think the downturn will be deep and painful, and Opec (whose predictions are naturally at the low end of the range) thinks demand for its output could be lower in the early part of the next decade than it was in 2006...

There is a long-running argument as to just what proportion of any commodity price movement can be traced to speculative activity by hedge funds and others, and what proportion to physical demand. But when the oil price swings up or down by $5 or more in a single day, you may be sure that the fluctuation is not being caused by a sheikh on one end of the line arguing with the manager of your local petrol station on the other: it is the financial parasites in between who are moving the market.

L.A. Times "Money Talk" columnist smacks renter

Liz Pulliam Weston, who writes the "Money Talk" column for the L.A. Times, gave a renter some straight talk regarding how much money to spend on rent. Although her response might seem harsh, I think she has a point regarding renters who refuse to take on roommates and so are more likely to incur debt and not be ready for financial emergencies; in fact, of the friends I have with the worst finances, they're renters who insist on living alone even if it negatively impacts their savings rates, debt levels and credit ratings.

First, the question:

I have read in your columns and elsewhere that people shouldn't spend more than 30% of their gross incomes on housing.

But sky-high rent has become a sad reality for many people living in large cities. Even in the smaller city where I live, a one-bedroom apartment costs upward of $800 a month, not including utilities. The 30% rule is no longer true for many of us. I know my rent eats 45% of my monthly income, and I was lucky enough to find a half-decent place.

Followed by her response:

If you spend more than 30% of your gross on housing, you're likely to have trouble making ends meet. You may not be able to save adequately for emergencies and retirement. You're more likely to go into debt.

Only on television can young people with entry-paying jobs live in fabulous apartments in great neighborhoods. In reality, smart twentysomethings do what's required to keep housing costs down, including living in cheaper neighborhoods and sharing space with roommates. They get over their adolescent fantasies of what city living would be like and deal with the reality of making their budgets balance.

SLAM!! In other words, "grow up." Makes me think about the time I got a roommate who secretly moved in two birds, a cat and a dog when I was out of town (before I evicted him), but at least he helped pay the rent!

Public builders report more losses, announce action plans

Fights with analysts! Poison pills! New promotions to sell homes! Yup, it's reporting season for the public builders, with an interesting wrap-up at builderonline.com:

In a move that could become common among home building companies desperate to preserve tax write-offs for their operating losses, Hovnanian Enterprises has installed a poison pill provision that would dilute the company's stock in the event that an outside entity purchased 4.9 percent or more of the company's outstanding stock...

If the U.S. government's $7,500 tax credit is intended to lure would-be first-time home buyers off the proverbial fence, Pulte Homes has a plan that will all but yank them off of it. Beginning tomorrow, Aug. 5, the company is rolling out a new sales campaign that will allow first-time buyers to double their tax benefit...

Emotions ran high today during D.R. Horton's fiscal third quarter conference call, as CEO Don Tomnitz spoke passionately to analysts about his company's performance, his feelings on the recently passed housing legislation, and management's stubborn commitment to spec building.

LandSource taps former building CEOs for BK re-org

LandSource, the now-bankrupt land developer with large holdings in and around the Santa Clarita Valley, has tapped Larry Webb (former CEO of John Laing Homes) and Timothy Hogan (former CEO of Warmington Homes) to help restructure it out of bankruptcy. From a BigBuilderOnline.com story:

The former CEOs of John Laing Homes and Warmington Homes are on deck to manage the assets of LandSource Communities through bankruptcy reorganization.

The California-based land developer has asked a bankruptcy court judge to appoint Timothy P. Hogan, formerly of Warmington, and H. Lawrence (Larry) Webb, once with John Laing, as co-chief restructuring officers...

The judge will hear the request on Aug. 19. His approval would make formal what has actually already started. HoganWebb LLC has been working since July 1, defining what services they would provide as restructuring officers.

Under the proposed agreement, they would perform a financial review, help develop restructuring plans and other alternatives to maximize the value of the business, work as the main contact for financial and operational issues, as well as a variety of other tasks. For that first phase, the pair will be paid $120,000 a month.

If the company fails to develop a reorganization plan by certain deadlines, the contract will kick into phase two and Webb and Hogan will become the sole members of the executive committee. For that they would be paid $170,000 a month.

HoganWebb would be paid a $1 million bonus if the bankruptcy court confirms a reorganization plan on or before June 7, 2009.

Hogan and Webb were selected after an extensive search because they are considered neutral, with no significant ties to either the debtor or creditors.

Nice work if you can get it!

Union for construction workers going after homebuilders

L.A. Land blogger Annette Haddad has a post regarding a picket of KBHome's headquarters in Westwood today by the Laborer's International Union of North America. So why where they picketing? Because they're angry that the jobs lost by their 500,000 members are largely the result of homebuilders pushing unaffordable loans during the height of the housing boom, leading to its resulting bust:

The union, whose members were among the first hit by the recessionary effects of the housing downturn, protested builders' practices outside KB Home's Westwood headquarters today. On hand were several homeowners living in a KB development in Buckeye, Ariz., who said they are underwater -- owing more on their mortgages than their homes are currently worth -- and are facing foreclosure as their monthly payments ratchet higher and prices slide.

The LIUNA has produced a report in conjunction with a new group called The Alliance for Homebuyer Justice -- which you can find here in .pdf format -- which uses homeowners in Arizona as an example of predatory lending between 2004 and 2006, with loans expected to rest through 2001 and unleashing yet another wave of defaults and foreclosures.

So what does LIUNA want? Under the "What Needs to be Done" section of the report:

HUD should completely repeal the 1983 amendments to RESPA that allowed builders and other businesses to make referrals to affiliated businesses (I also wrote about this for my freelance article on builder incentives for the L.A. Times last month);

Bank of America, which acquired Countrywide, should discontinue the lending relationships that Countrywide had with the builders' mortgage operations;

Congress should pass the Emergency Home Ownership and Mortgage Equity Protection Act, allowing bankruptcy judges to modify harmful mortgages (such as by reducing the principal to the actual value of the home or changing an ARM to a fixed rate);

Rather than merely paying lip service to preventing foreclosures, as Countrywide did, Bank of America must start actually doing it (i.e., loan modifications).

Of course LIUNA also has its own agenda, to which it openly admits at the end of the report, including the right to organize unions, being paid a living wage, better training for workers, open access for homebuyers to affordable mortgages from independent sources and home prices that are targeted to what the community can afford.

The plight of 'rebound renters'

For those considering joining the 'jingle mail' crowd and thinking that they'll simply move out and find a rental home elsewhere, a story in The Washington Post reminds readers of the pitfalls of renting:

Foreclosures have doubled over the last year, which means a lot of former homeowners are becoming renters again for the first time in a long time. And there are new lessons to learn: You're not quite the master of your own domain, because you lease the property instead of owning it. You have to live by the landlord's or building's rules and regulations. And you have to remember to change your insurance coverage.

And, on the Lansner on Real Estate blog, he cites at National Multi Housing Council study that concludes most foreclosure 'refugees' are not looking for apartments managed by large companies, but individual homes owned by individuals. And why is that? Some reasons:

Experts have several theories about why there hasn’t been a flood of foreclosure refugees into apartments:

• Foreclosures may involve investment properties
• Some are renting houses rather than apartments
• Those with credit problems are applying for units that don’t screen applicants
• They could be moving in with family...

“Given that foreclosures take time and that additional pressure will be put on financially burdened homeowners as adjustable-rate mortgages continue to reset in 2008 and 2009, it is reasonable to expect the number of applicants with foreclosures to continue to increase, perhaps dramatically, from current levels,” said the report.

Homeowners clueless or in denial about values?

According to a story in the Wall Street Journal, a Zillow.com poll shows that 62% of homeowners across the U.S. think the value of their homes actually rose over the last year. So are homeowners in denial or just clueless? Well, considering that high school drop-out rates are reaching worrisome levels and people claim they never understood the loan documents they were signing, I'm going to have to vote for clueless, and thus ripe victims for scammers of all types:

In its second-quarter survey, released Wednesday, Zillow said that 62% of the 1,361 homeowners who responded said they believe the value of their home increased over the previous year.

But according to Zillow, that high level of optimism is out of sync with reality. Zillow's data show that 77% of U.S. homes depreciated in value over the past year, while only 19% appreciated.

The survey also found that homeowners plan to invest in their homes over the next six months. About 56% of all respondents said they would be spending money on improvements. Of those, about 17% said they would be spending money on major improvements, while 49% said they would be investing in minor improvements.

When asked about government efforts to bail out homeowners facing foreclosure, 48% of those surveyed said they oppose such efforts, even though 90% reported that foreclosures have occurred in their local market and 80% anticipate that the rate of foreclosures over the next six months will remain steady.

Economists debate depth of downturn

A v-shaped recession? U-shaped? How bad will it be? Will it turn into a depression? At this point, a depression is unlikely, at least according to a group of economists contacted for a story in the New York Times (via Patrick.net):

Even if the economy continues to deteriorate, economists generally agree that the United States is not heading for another Great Depression. Not only are the conditions far less dire, eight economists said in interviews, but the government is playing a heightened role in trying to cushion the impact of the housing downturn, losses at financial institutions and rising unemployment.

“The government is larger now and it acts as an anchor,” said Richard Parker, senior fellow at the Shorenstein Center at Harvard. “During the Great Depression, the government had neither the means nor the capability to serve as a backstop.”

But the economists — who range from academics to policy researchers, liberals to conservatives — disagreed about just how bad this economic slowdown, led by the worst housing slump since the Depression, could be...

Most of the economists who were interviewed blamed Alan Greenspan, the chairman of the Federal Reserve from 1987 to 2006, for his unwillingness to clamp down on either the technology stock bubble or the run-up in housing prices.

“The Fed isn’t the whole story, but it’s a big part of it,” said Gerald P. O’Driscoll Jr., who was vice president of the Federal Reserve Bank of Dallas from 1982 to 1994 and is now a senior fellow at the Cato Institute, a libertarian research organization in Washington. “It allowed these absolutely insane bubbles to happen. The lesson is, you can’t let these bubbles continue unabated with no policy making.”

But the economists said others were to blame, too: investors, banks and rating agencies, as well as the current chairman of the Federal Reserve, Ben S. Bernanke, and the Clinton and Bush administrations...

The economy’s woes might have been preventable, the economists all agreed, if the actors involved had made more realistic assumptions about the future. And about the laws of gravity.

“People are way too willing to extrapolate from history,” said Jan Hatzius, chief domestic economist at Goldman Sachs. “If it’s 2005, you can’t look at a 40-year run of data and say, ‘It must be a law of nature that housing prices never fall.’ ”...

All the economists agreed that regulators should have been looking more closely at Fannie and Freddie.

“Everybody turned a blind eye,” Mr. O’Driscoll of the Cato Institute said. “The Fed deliberately and consciously refused to regulate the mortgage industry like it was supposed to have done. I’m not a big fan of government regulation, but sometimes the government can do something to help — and in those cases, it has to.”

Ah, the power of 20/20 hindsight.

The Countrywide VIP List: Senators, Regulators, Celebrities & CEOs

It seems Angelo Mozilo never met a person of influence he didn't want to make into a "Friend of Angelo's," who would qualify for rate reductions and elimination self-admitted 'garbage fees' in exchange for real and perceived favors in the past and in the future. So how can I get a refund for the fees I paid when I got a loan through Countrywide?? According to a cover story in Portfolio magazine (sort of a competitor to Fortune), perhaps running for the Senate would be a good start, and if this story doesn't get you angry, then apparently nothing will:

Through a program that provided loans on favorable terms to V.I.P. borrowers, the nation’s largest mortgage lender curried favor with politicians, government officials, and business partners who were in a position to influence policy, profits, or public opinion. While some may not have been fully aware of the special terms, many took the bait...

The vigor with which Countrywide chased V.I.P.’s was matched only by the aggressiveness with which it marketed loans to risky borrowers. In the past year, Countrywide morphed into the Chernobyl of the mortgage meltdown, with the F.B.I. investigating its lending practices, its stock plummeting, and Bank of America buying the company at a fire-sale price. Much as the high­fliers of the internet bubble crashed overnight, the company that symbolized the housing market’s boom has quickly come to define its collapse. In June, Condé Nast Portfolio disclosed the names of five V.I.P.-loan recipients: Senators Christopher Dodd and Kent Conrad, former cabinet members Alphonso Jackson and Donna Shalala, and former United Nations Ambassador Richard Holbrooke. The Wall Street Journal reported that James Johnson and Franklin Raines, both former C.E.O.’s of government-sponsored mortgage buyer Fannie Mae, received favorable rates.

But many other V.I.P. borrowers haven’t been named until now, including former Countrywide director Henry Cisneros, who served as secretary of Housing and Urban Development in the Clinton administration; former White House staffer Paul Begala, now a commentator on CNN; and Postmaster General John Potter.

Countrywide also offered special discounts to Congressional staffers involved in housing issues. Current or prospective business partners who received special treatment include former C.E.O.’s William Esrey of Sprint, which teamed up with Countrywide to provide property information to homebuyers on their cell phones, and Bruce Karatz of KB Home, a leading homebuilder that refers customers to Countrywide for mortgages.

The biggest subset of V.I.P.’s included Mozilo’s network of friends, business associates, and people he wanted to ingratiate himself and his company with; they were known in company emails and memos by the initials F.O.A.—Friends of Angelo...

Read the full story in its entirety -- it's quite illuminating.

2007 mortgages even worse than those made in 2006

In a sign that the housing bust still has a long ways to go before the excesses are wrung out of the system, an analysis prepared by the FDIC for the Wall Street Journal reports that delinquencies are even worse for loans made in 2007 versus those in 2006. From a WSJ story:

Mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated.

An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30...

Until these bad loans are fully digested, "foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter," said Mark Zandi, chief economist of Moody's Economy.com. One piece of good news, he said, is that loans originated in the fourth quarter of 2007 and early 2008 appear to be performing better.

Economists and industry officials say several factors may account for the dismal performance of the class of 2007. Home prices were falling sharply in much of the country by 2007, meaning many borrowers who took out loans in that year for nearly the full price of the home now owe more than the home is worth. These borrowers are particularly vulnerable to a weakening economy, and have difficulty selling or refinancing if they lose their job.

Questionable business practices may have played a role, too. Some of the 2007 loans "were knowingly originated as really bad loans," says Chris Mayer, a professor of real estate at Columbia University's business school. Mortgage originators who profited handsomely from the housing boom "realized the game was completely over" and pushed mortgages out the door, says Mr. Mayer...

Some 65% of subprime loans originated in 2007 will end up in default compared with about 45% of those originated in 2006, according to estimates by UBS AG, which looked at loans packaged into securities...

The share of borrowers with prime jumbo loans who took out a "piggyback" second mortgage -- which allowed borrowers to finance more than 80% of their home's value without private mortgage insurance -- climbed to a record 33% in 2007, according to the UBS analysis. In other words, many people buying expensive homes were putting little of their own money down.

Builder WCI files for bankrtupcy

Although the homebuilder WCI Communities doesn't build in California (they're more heavily concentrated in the northeast, mid-Atlantic and the southeast, including Florida), the bankruptcy by one of the country's largest public builders puts a public face on a largely hidden issue -- builders on the ropes in wait of a rebound. From an AP story via the LA Times:

Carl Icahn's WCI Communities became the latest casualty of the housing market crisis Monday, filing for Chapter 11 bankruptcy protection after the home builder failed to get additional financing in the face of massive losses.

Icahn, chairman of WCI's board, said the filing was necessary because the Bonita Springs, Fla.-based developer's entire $1.8 billion debt may soon be in default. Icahn said this was confirmed when some holders of $125 million convertible notes insisted on being paid in cash in full on Tuesday.

WCI also fired Chief Executive Jerry L. Starkey and replaced him on an interim basis with David L. Fry...

WCI Communities builds tower residences and traditional homes in upscale communities in the mid-Atlantic and Northeast, but most of its business is in Florida, where the housing market has struggled mightily. The developer had been trying to stay afloat in the face of weak demand, flagging prices, canceled orders and growing inventory.

How do you know when the time is right to buy a home?

L.A. Times reporter Peter Hong has written a story on how to gauge whether or not it's the right time to jump back into the housing market. Although there have been stories elsewhere on the web about this subject, what I like about this article is that he discusses how to value homes like a stock -- in other words, the dividend that one can get from renting it out or the savings from not choosing buying over renting. This is a crucial calculation that everyone should make when buying a home, and he also interviews Drs. Gary and Margaret Smith, authors of the book "Houseonomics," which I'm reviewing for the Times:

Southern California median home sale prices are down about 30% from their peak. That's about as far as they fell in the 1990s real estate downturn, and enough of a decline to have many asking: Is it time to buy?...

More than half of the adults in the Los Angeles metropolitan area own their homes. But because of the price run-up that began in the late 1990s, fewer than 11% of adults in the L.A. area earn enough to buy a median-priced home of $412,000, according to a National Assn. of Home Builders index.

As recently as 2001, when the median was lower, that figure was about 38%.

Los Angeles economist Christopher Thornberg believes that home prices will stabilize when homes are affordable to about 25% of the adult population. For that to happen in Southern California, home prices would have to come down 20% to 35% from their current levels, Thornberg said...

Home prices are also relatively high compared with rents. The ratio of home prices to annual rents in the Los Angeles area was 20 as of March 31, meaning the median home sale price was 20 times a year's rent for a comparable property, according to Moody's Economy.com.

The 15-year average ratio in Los Angeles is 16.4.

It's true that rent checks don't generate returns. But renters can take the money they would have spent on a down payment and invest it in stocks, mutual funds or other investments (20% down on the median-priced Los Angeles home would be about $82,000) and are spared the costs of home maintenance and repairs...

Margaret Smith, a Claremont financial planner and former university economist, takes it a step further, saying that a home is almost always a smart investment, even if values do temporarily decline.

Smith and her husband, Gary Smith, a Pomona College economist, say buying is practically a sure bet when you would pay less for a monthly mortgage and other home costs than what it would cost to rent the home.

They call that monthly savings the "home dividend" and say it will offset a short-term decline in a home's value. The monthly rent savings not only is money in your pocket but also can be invested elsewhere.

Even if your mortgage payment and expenses start out higher than comparable rent, the payment becomes relatively cheaper as rents increase -- provided it is a fixed-rate loan. "You can certainly turn a negative into a positive over time," Margaret Smith said.

In addition, mortgage interest and property taxes can be deducted from income taxes, potentially shaving thousands off annual home costs.

By Smith's formula, the home dividend for someone who buys a $355,000 home (the Southern California median) would be nearly $1,000 after one year compared with renting a home for $2,000 a month.

That is, the buyer -- even with the added expenses of homeownership -- would spend less on his or her housing costs than rent because of mortgage interest deductions.

"Stop fixating on short-term price moves; think about long-term rent savings," Gary Smith said.

If someone delays buying a house that would produce rent savings to hold out for a better price, the delay would mean losing those savings -- and the loss could be compounded if prices went up instead.

"Buying a house is risky, but waiting is risky too," Gary Smith said.

Housing Chronicles cited in latest Carnival of Real Estate

Thank you to Justin Smith of SearchingSolutions.com for naming The Housing Chronicles blog as third-place winner in this week's Carnival of Real Estate #102.

This blog post discusses the impacts of higher gas prices on future real estate development and how homebuyers are increasingly making their decisions based on both actual and future fuel prices.

Planning for higher gas prices

For several years now, the ‘peak oil’ theory has posited that global oil production will soon peak and then begin a slow but steady decline, thereby forcing economies dependent on cheap energy to quickly adapt or face cataclysmic ruin. Although we’ve not yet hit that oil supply plateau, the global rise in energy demand is currently having similar impacts, especially on far-flung suburbs with few public transit options and which act as bedroom communities for job centers elsewhere. In other words, like the recent 5.4 temblor in Southern California, this should be viewed as a wake-up call for ‘The Big One,” in this case real estate assumptions that may no longer work.

According to a study by the group CEO for Cities in May 2008 entitled “Driven to the Brink,” the final casual factor popping the housing bubble wasn’t the sudden lack of creative loans or buyer demand, but a sharp spike in gas prices beginning in 2004. Arguing that gas prices were lower in inflation-adjusted terms than they’d been in 1990, the constant rise to over $4 per gallon today has impacted both household budgets and impacted housing prices on the suburban fringe. Consequently, prices for homes located in and around urban cores – and which offer close proximity to various transit options, jobs, shopping, recreation and entertainment amenities – have performed better during the recent housing slump than those areas requiring a commute, and in some cases have even gained at the expense of the exurbs.

Given that urban sprawl throughout the U.S. has arguably been the direct result of the perception of low energy prices far into the future, changing that calculus will likely exert a significant impact on both the economic decisions and the psychology of the home buying public. And, as with many things in business, sometimes perception is more important than reality.

Says Brad Kemp, Director of Regional Research for Beacon Economics in Los Angeles, “It’s 100 percent reasonable that people consider gas prices when choosing where to live,” adding that it’s not so much the actual cost of higher commuting costs as it is the perception that the trade-off to drive further in search of cheaper housing may longer be as valid as it’s been in the past.

To prove his point, Kemp and his team compared population growth in the Southwest portion of California’s Riverside County against fuel oil prices since 1993. Whereas low fuel prices had helped to enable the region’s growth throughout the 1990s, whenever where was a pricing spike – such as in 2000, 2003 or 2004, population growth soon slowed. Following a sharp population rise in 2006 – perhaps coinciding with a last-ditch effort by homebuyers to grab low teaser rate loans while they could – growth fell sharply in both 2007 and into 2008 as fuel prices eclipsed $3 and then $4 per gallon. And this certainly isn’t a phenomenon specific to former boom areas located in California, Nevada, Arizona or Florida – it was also been demonstrated by the CEO for Cities report in Chicago, Pittsburgh and Portland.

Still, there could be many benefits from a planning process which focuses more on redeveloping existing areas and encouraging politicians to sell the benefits of greater density. For an industry rapidly embracing green building and sustainability, a trend away from commuting long distances could reduce overall energy use, stimulate local economies, help reduce the chronic trade deficit and, since transportation-oriented uses are reportedly responsible for more than one-third of greenhouse gases, reduce the emissions which contribute to global warming.

Moreover, given the lobbying clout of homebuilders with Congress as well as at the local level, they could also play a pivotal role in ongoing policy changes resulting from higher energy prices. With the rise of emerging economics around the world, it’s unlikely fuel prices will ever return to the commodity prices of the 1990s, and governments need to plan accordingly. Part of that planning will require addressing the need for higher density in appropriate areas and the political backbone to resist the short-sighted and often destructive actions by neighborhood NIMBYs. Local governments will also have to band together more proactively to jumpstart mass transit options in urban cores and make it easier for growing families to live in mixed-use, convenient areas.

Like or not, 2008 will certainly be seen as a watershed moment for the building industry, and one in which the economics of far-flung, low-density developments must face a new reality.