Although San Francisco California's strongest economy, home prices still falling

According to a conference on October 21st at the Hyatt Regency in San Francisco (for which MetroIntelligence authored the real estate sections), the region's economy remains the strongest in the state and is not expected to experience a repeat of the tech-related bust earlier in the decade. Although home prices in the City of San Francisco are not expected to decline as other parts of the state, the neighboring counties of San Mateo and Marin are projected to suffer some additional pain through 2009. From a story in the San Francisco Chronicle:

Home prices and taxable sales will fall in the San Francisco metropolitan area while rents rise and unemployment climbs.

But the 1.8 million residents of Marin, San Mateo and San Francisco counties still live in California's strongest economic region and should suffer less from the housing bust than the rest of California, says a forecast being issued Tuesday. "Things will be rough here, but not nearly as rough as the Inland Empire (in Southern California) or in Contra Costa County," said Chris Thornberg with Beacon Economics...

The 113-page report calls the three-county metropolitan area "the strongest economy in the state of California at the moment," but warns that it still will be hurt by the housing collapse that has crippled the global financial system and undermined the world economy.

The forecast tries to predict economic conditions in the three-county zone through the first quarter of 2010 and suggests that:

-- Home prices will fall roughly 25 percent from their peak.

-- Taxable sales will drop by 10 percent across the region.

-- Payrolls will shrink by 2.5 percent over the next two years.

-- Rental rates are likely to continue to rise, particularly in San Francisco, where 60 percent of households are renters...

Economic softness is expected to hit commercial real estate, which had begun to recover from the dot-com bust. But the forecast assumes that the region's prestige and proximity to Silicon Valley will merely slow the growth of rental rates in the metropolitan area - put at 11 percent last year - rather than lead to a collapse.

"Rent growth is expected to fall to just 1 percent over the next year, although over a five-year horizon it should average a more moderate 3.5 percent in the region," according to the forecast.

But individual renters will get no such relief as the region's relative economic strength and desirable lifestyle draws job seekers and shrinks the vacancy rate which, at about 4.3 percent, is among the lowest in the state. "Over the last two years, average asking rents have continued to rise," noted the report, which expects the landlords' market to continue for now.

Click here for full story.

If you missed the conference, you can still download the book and the presentations here:

• San Francisco Economic Forecast Book (PDF - 39M)
• Christopher Thornberg Presentation (PDF)
• Jon Haveman Presentation (PDF)
• Fred Silva Presentation (PDF)
• Event Agenda (PDF)
• Speakers' Bios (PDF)

Commercial property market following residential market trends

From the Wall Street Journal:

The next shoe? After years of plunging residential property valuations, commercial real estate is heading into the danger zone as office vacancies rise, stores close and hotel bookings fall.

This could mean another body blow to already struggling financial institutions. Alan Todd, head of research on commercial-mortgage-backed bonds at J.P. Morgan Securities, projects commercial-property losses of as much as $250 billion over the next 10 years, or about 7% of the $3.4 trillion outstanding debt. That would rival the roughly 9% cumulative loss rate during the real-estate carnage of the early 1990s.

Commercial real-estate values have fallen since the beginning of the credit crunch, by as much as 20%, due to more expensive and less available financing. Financial institutions have already taken more than $15 billion in commercial property-related write-downs this year.

There are bullish points. Unlike the early 1990s, the commercial market hasn't suffered years of overbuilding. Defaults on commercial real-estate debt remain less than 1%, compared with more than 10% at the worst point of that earlier collapse. Rents and vacancy rates have so far remained solid, enabling most properties to pay their debt service...

Click here for full story.

Government about to file charges against subprime lending fraud

While it lasted, working as a mortgage broker was a sure-fire way to make good money without the need for a license or even a high school diploma. Of course what went along with that was a great deal of fraud, and it looks like we're about to hear of various indictments being handed out to the scofflaws. From an AP story via MSNBC.com:

The top federal prosecutor in Los Angeles indicated Thursday that charges are coming soon from a sweeping investigation of banks and subprime lenders for their role in the U.S. mortgage crisis.

"I think we are going to see some fairly dramatic results in the near future," U.S. Attorney Thomas O'Brien told The Associated Press. "Mortgage fraud is an extremely important issue to me and to the people of this district."

A grand jury is investigating at least three mortgage lenders — Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc.

Thirty-four lawyers currently are looking at mortgage fraud and other white-collar crimes, now one of O'Brien's top priorities.

The government is pursuing a "surgical approach" in its investigations and hopes to streamline its prosecutions by seeking indictments with only three or four counts, instead of spending several years seeking additional charges.

The future of new homes is smaller

Good-bye McMansions in the suburbs -- the new homes of the future are likely be smaller, denser and built closer to jobs (finally!). Some builders have already started downsizing the plans they offer, while others will be slower to adapt because their entire business model (i.e., Toll Bros.) is predicated on luxury, move-up housing. From an AP story via MSNBC:

When the U.S. housing market hit the skids, homebuilders like KB Home that thrived by offering large homes and expensive amenities began to rethink their home designs with an eye toward making smaller, less costly homes.

Three years into the downturn, that trend appears to be intensifying, as many builders scramble to make their wares palatable and affordable to first-time buyers and compete with a trove of preowned homes and deeply discounted foreclosed homes on the market...

The trend in smaller homes is a reversal of more than two decades of expanding floorplans, during which median size single-family went from less than 1,600 square feet to more than 2,200 square feet.

That steady drive by builders to erect increasingly bigger homes peaked during the housing boom. Derided by some as McMansions, these super-sized homes packed with amenities helped drive up home prices even more...

Click here for full story.

Lead bank pushing for liquidation of land developer LandSource

Barclays Bank, the lead lender for land developer LandSource, is calling for an almost-immediate liquidation of its assets. From a BigBuilderOnline story:

Barclays Bank, representing the lead creditors of LandSource, filed a plan in bankruptcy court on Monday Oct. 13 calling for liquidation of the giant land development company by auctioning off all its assets within 120 days of the court's approval and distributing the proceeds among creditors.

The move seems an abrupt about-face for Barclays, which, shortly after LandSource filed for Chapter 11 bankruptcy court protection in June, agreed to provide the California-based company with debtor in possession financing to keep its doors open and employees paid for a year during the reorganization...

Click here for full story.

Office market in Southern California market now softening

The commercial real estate market, which was once thought somewhat immune to the bust of the residential sector, is now starting to feel the pinch from a slowing economy. First it was the retail sector -- which relies on consumer spending -- and now it's starting to impact office rents and vacancy levels in preferred areas of Southern California also once considered more resilient. From an LATimes story:

In a sign that the economic slowdown is affecting Southern California businesses, the rents on office space are down slightly over last year, and vacancy rates are up.

In some parts of the region, office buildings that once housed mortgage lenders and other housing-related businesses stand 20% empty, according to brokerage Cushman & Wakefield. Even in desirable Santa Monica, vacancies have almost doubled as companies have shunned the coastal area's still-pricey digs in favor of cheaper rents elsewhere in the region.

Experts say the decline in rents and the jump in vacancies portend trouble, even in those parts of the region -- such as L.A.'s Westside -- where the market is still relatively stable...

Click here for full story.

New home construction falls to 6-decade low

For those folks who think that home builders are only worsening the problem of unsold homes by continuing to add new inventory, new stats out by the Commerce Department show what we've already seen behind the scenes: starts have fallen to a six-decade low. From an AP story via the LATimes:

Construction of new homes plunged by a bigger-than-expected amount in September as builders slashed production yet again, putting the country on track to build the fewest homes this year in more than six decades.

A barometer of future building also dropped, falling to the weakest level in more than 25 years. Analysts blamed the renewed swoon on the financial crisis which erupted with force this fall, raising new anxieties among potential home buyers and making it harder for builders to get construction loans.

The Commerce Department reported Friday that construction of new homes and apartments dropped by 6.3 percent last month, a much bigger decline than the 1.6 percent decrease that had been expected. It pushed total production to a seasonally adjusted annual rate of 817,000 units. That's the slowest pace since January 1991, when the U.S. was in a recession and going through a similar painful housing correction...

Click here for the full story.

"Dr. Doom" Roubini peers ahead

With an opinion piece published in the Toronto Globe & Mail entitled "Yes, Chicken Little, the sky is really falling," Dr. Noriel Roubini has some advice for a global financial system in crisis, and warns of what might happen if the right solutions are not applied (hat tip: Patrick.net):

The rich world's financial system is headed toward meltdown. Stock markets have been falling most days, money markets and credit markets have shut down as their interest-rate spreads skyrocket, and it is still too early to tell whether the raft of measures adopted by the U.S. and Europe will stem the bleeding on a sustained basis...

The delusion that economic contraction in the U.S. and other advanced economies would be short and shallow – a V-shaped, six-month recession – has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession – such as the one experienced by Japan after the collapse of its real-estate and equity bubble – cannot be ruled out...

As we have seen in recent days, it will take a big change in economic policy and very radical, co-ordinated action among all economies to avoid disaster. This includes:

Another rapid round of interest-rate cuts of at least 150 basis points on average globally;
A temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut are distinguished from distressed but solvent institutions that must be partially nationalized and given injections of public capital;
A rapid reduction of insolvent households' debt burden, preceded by a temporary freeze on all foreclosures;
Massive and unlimited provision of liquidity to solvent financial institutions;
Public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
A massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash- strapped local governments;
An agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors' surpluses to avoid disorderly adjustment of such imbalances.

Anything short of these co-ordinated actions may lead to a market crash, a global financial meltdown and worldwide depression. The measures adopted by the U.S. and Europe are a start. Now they must finish the job.

Now you all go out and have a nice day, ya hear?

San Francisco Peninsula economic forecast conference on Tuesday, October 21st

Next Tuesday, October 21st, is the third of four economic conferences produced by Beacon Economics, this time at the San Francisco Hyatt Regency. Space is limited though, so if you want to go be sure to pre-register here or click on the link on the upper right-hand side of this blog.

Special offer for The Housing Chronicle Blog readers: email me at pduffy@metrointel.com for a code you can use when registering to save $50 off of registration (normally $150).

This event will focus on the San Francisco metropolitan region of the Bay Area, including the counties of San Francisco, Marin and San Mateo. MetroIntelligence Real Estate Advisors is again participating in this event as a sponsor, including writing the real estate section for the conference books.

Want to learn more and attend? Read on:

Where do some of California's most renowned and straight-talking economists think local, state, and national economies are headed in 2009?

San Francisco: So far, relatively stable and holding...

• The region has avoided Wall Street style financial-sector layoffs... but can it continue?
• Can SF dodge the housing bullet?
• Are woes in the residential housing market spilling over into the retail and office sectors?.
• How will local government handle revenue shortages?

The State: California hit harder than the nation as a whole...

• Do the harder hits imply a quicker recovery?
• Will the Federal housing bill do anything to stabilize California's residential markets?

California's Budget Blues: Is reform possible? A special discussion with California Forward

• Critical mass: Has the time come to change the state budget process?
• What should be included in a budget reform agenda?

The Nation: Recovery, continued doldrums, or worse yet to come...

• Wall Street wreckage: what does it mean for the broader economy?
• Is the inflation boogie man really about to jump out of the closet?
• Has the Fed avoided a major banking sector collapse?

Featured Speakers
Jon Haveman Principal Beacon Economics	Christopher Thornberg Principal Beacon Economics	Sean Randolph President Bay Area Council Economic Institute

California's Budget Blues: Special Panel on Fiscal Reform

Ted Egan Chief Economist Office of Economic Analysis City and County of San Francisco

Sunne Wright McPeak President and CEO California Emerging Technology Fund

Fred Silva (moderator) Fiscal Affairs Advisor Beacon Economics

Beacon Economics is pleased to announce that it has joined forces with the Bay Area Council Economic Institute (BACEI) in hosting its 2nd annual San Francisco Economic Forecast Conference. Beacon’s track-record of truth-seeking economic analysis and the Bay Area Council’s reputation as the voice for Bay Area business promise a candid, thought-provoking, and revealing discussion. The event is already generating a buzz, and seating is limited. So reserve today!

Attendees also receive Beacon's new 2008 San Francisco Economic Forecast Book. This original, in-depth look at the region’s labor markets, income, real estate markets, demographic trends, and other indicators, is a valuable and enduring resource for anyone facing important economic and financial decisions over the next year.

CAR predicts home prices will decline by 6% in 2009, sales up by 12%

I've not been a big fan of the California Association of Realtors' (CAR) ability to forecast market trends over the past few years, mostly because they've been so off the mark. When the market changed on a dime from boom to bust -- something I'd predicted in early 2006 -- their economist, Leslie Appleton-Young, basically begged for more time to think of some new terms to describe what was happening. Now we know why (from a story in the Riverside Press-Enterprise, which covers part of the Inland Empire):

Association President William E. Brown said a misunderstanding of the depth of the nation's credit crisis led the association to mistakenly predict a year ago that the median price of a resale home in California would drop only 4 percent in 2008. In its latest forecast, the association assumes that the current economic recession will last through the second quarter of 2009 and then the economy will begin a "turnaround."

So what kind of turnaround? Read on:

The association predicts that in 2009 the median home price in California will decline 6 percent to $358,000 from a projected median of $381,000 this year. Sales of existing single-family homes in 2009 are projected to increase 12.5 percent to 445,000 from 395,600 in 2008. That would build on a 12-percent surge in home sales this year, which has been fueled by steeply discounted foreclosed properties.

So how realistic is this forecast? From what I've been reading, it's pretty optimistic in terms of pricing increases, although the sales projection seems reasonable due to lower prices:

However, Patrick Duffy, principal for MetroIntelligence Real Estate Advisors in Los Angeles, said the association's prediction of a 6 percent further decline in the state's home prices next year seems "optimistic" and what he would expect from an organization whose members have an interest in promoting home buying. Duffy said other economic forecasts predict California home prices to fall next year by 10 percent to 15 percent.

This opinion was based on what I've read and heard from economists I respect, some of whom are also quoted in the story:

Michael Carney, director of the Real Estate Research Council of Southern California, said he expects price declines next year in Riverside and San Bernardino counties will be greater than the 10 percent he is predicting for the state as a whole because of this region's large glut of bank-owned houses and job losses.

And then of course there's our own West Coast version of "Dr. Doom" Roubini named Chris Thornberg, and here's what he had to say about the forecast in the San Francisco Chronicle:

Sales will likely climb by about the amount the group predicts, thanks to the bargains presented by increasing foreclosure sales, but its price forecast is too rosy, said Chris Thornberg, founder of Los Angeles research firm Beacon Economics.

"The decline of 6 percent sounds like something of a pipe dream," he said. "The shear amount of momentum there is ... just phenomenal, and I find it hard to believe it's going to basically bottom out that quickly."

Thornberg believes prices will fall by at least 10 percent, and possibly as much as 15 percent.

When will prices hit bottom?

Although it's certainly true that home prices have fallen much more quickly than pundits had anticipated, that doesn't mean they've yet hit bottom. So when will they do so? It largely depends on the market, the severity of over-building and affordability ratios. From a New York Times story:

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.

In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.

Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers...

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.

In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody’s Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country. Economy.com’s calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif...

To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.

Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)...

Click here for full story.

Partial nationalization of banking system likely to mean fewer competitors

Armed with a $250 billion blank check to invest in U.S. banks, the federal government is poised to play financial God in a way that's not been done before. So will its impact help pick winners from losers or prop up weaker banks that would otherwise fail? From an LA Times story:

By flooding the U.S. banking system with hundreds of billions of dollars in cheap capital, the government could find itself funding the most dramatic change in the nation's financial landscape since the deregulation drive of the 1980s.

That's because the Treasury secretary and bank regulators will decide which banks get an infusion of government money, and which will be denied. Many of the nation's 8,400 banks -- especially the smaller and weaker among them -- may be allowed to fail or be swallowed by bigger rivals, industry analysts say...

The program is also likely to hasten the evolution of the country's financial system from a conglomeration of community banks into a network of bigger, interconnected institutions, said Timothy J. Yeager, a former economist for the Federal Reserve Bank of St. Louis and a finance professor at the University of Arkansas.

But not everyone agrees. Gerard S. Cassidy, managing director of bank equity research at RBC Capital Markets, said he believed the program would help some weaker banks stay in business, because they will be eligible for the same favorable terms the big banks will get for government capital...

Click here for full story.

San Francisco South Bay economic conference tomorrow, October 16th

Tomorrow is the second of four economic conferences in San Jose produced by the unusually objective Beacon Economics (meaning no spin at these events!). Space is limited though, so if you want to go be sure to pre-register here or click on the link on the upper right-hand side of this blog.

This event will focus on the South Bay region of the San Francisco East Bay (i.e., Silicon Valley). MetroIntelligence Real Estate Advisors is participating in this event as a sponsor, including writing the real estate section for the conference books.

Want to learn more and attend? Read on:

Where do some of California's most renowned and straight-talking economists think local, state, and national economies are headed in 2009?

The South Bay: Technology is booming, but can it offset housing and consumer blues...

• Will coastal areas dodge the housing bullet?
• Are woes in the residential housing market spilling over into the retail and office sectors?.
• How will local government handle revenue shortages?

The State: California hit harder than the nation as a whole...

• Do the harder hits imply a quicker recovery?
• Will the Federal housing bill do anything to stabilize California's residential markets?

California's Budget Blues: Is reform possible? A special discussion with California Forward

• Critical mass: Has the time come to change the state budget process?
• What should be included in a budget reform agenda?

The Nation: Recovery, continued doldrums, or worse yet to come...

• Wall Street wreckage: what does it mean for the broader economy?
• Is the inflation boogie man really about to jump out of the closet?
• Has the Fed avoided a major banking sector collapse?
  

Featured Speakers
Jon Haveman Founding Principal Beacon Economics	Christopher Thornberg Founding Principal Beacon Economics	Sean Randolph President Bay Area Council Economic Institute
California's Budget Blues: Special Panel on Fiscal Reform Lawrence Stone County Assessor County of Santa Clara Chuck Reed Mayor City of San Jose Fred Silva (moderator) Fiscal Affairs Advisor Beacon Economics Beacon Economics is pleased to announce that it has joined forces with the Bay Area Council Economic Institute (BACEI) in hosting its 2nd annual South Bay Economic Forecast Conference. Beacon’s track-record of truth-seeking economic analysis and the Bay Area Council’s reputation as the voice for Bay Area business promise a candid, thought-provoking, and revealing discussion. The event is already generating a buzz, and seating is limited. So reserve today! Attendees also receive Beacon's new 2008 South Bay Economic Forecast Book. This original, in-depth look at the region’s labor markets, income, real estate markets, demographic trends, and other indicators, is a valuable and enduring resource for anyone facing important economic and financial decisions over the next year.

Click here to register.

Bush Admin. announces partial nationalization of banking system

Ah, I love the smell of socialism in the morning, it smells like -- Europe. But is that necessarily a bad thing in order to save the banking system? From an L.A. Times story:

Bush administration officials today unveiled a dramatic partial nationalization of the U.S. financial system, a series of "unprecedented and aggressive steps" to pour at least $250 billion into the banking system and expand federal insurance protection in the largest government intervention since the 1930s...

The strategy closely resembles the path taken by Britain and the European Union, a route credited with reviving faltering stock markets there. The Dow Jones industrial average shot up more than 300 points shortly after it opened this morning, though the large gains later eased. Markets across Europe were soaring, as they did earlier in Asia.

Administration officials released the details of the massive government intervention, whose broad outlines began emerging Monday. They said the programs are intended to be temporary, lasting from one to five years with built-in expiration dates.

The centerpiece is a $250-billion infusion of cash into the banking system. Roughly half will go to nine large U.S. banks and financial institutions that agreed to participate after meetings with Paulson on Monday. Among them are Citigroup, Wells Fargo and Bank of America. The other half of the money will be made available to medium and smaller banks in the coming days.

In exchange for the cash, the federal government will get preferred, nonvoting shares in the banks, with a fixed dividend of 5% for five years, increasing to 9% after that. The goal is to provide money to banks at a fairly low cost for five years to get credit flowing though the financial system...

Click here for full story.

New report says San Francisco East Bay housing won't rebound until 2014

According to Beacon Economics' latest report on the San Francisco East Bay, this region's housing market isn't expected to rebound soon. They're predicting that won't happen until 2014. From a story at the Contra Costa Times:

The East Bay economy may have to endure two more years of tough conditions before it fully rebounds, a disquieting new report predicts.

Even worse, a recovery for California's housing market will lag even that distant timeline, economists Jon Haveman and Christopher Thornberg, partners with Beacon Economics, told a Bay Area Council Economic Institute meeting in downtown Oakland this week.

"The housing market will not resume growing until 2012," Haveman said in an interview after his presentation. "Then it will just sit there for a few more years. We won't see any significant appreciation in the housing market in the East Bay and California for five years."

It will be the non-housing parts of the East Bay economy that will help the region extricate itself from a significant downturn.

But more pain looms ahead of the East Bay before that rebound occurs, according to the economists.

"The years 2007 and 2008 have been difficult years for the East Bay," Thornberg and Haveman wrote in their report that was presented Wednesday night. "Our forecast is that 2009 and 2010 will be equally difficult, with an earnest recovery beginning in 2011..."

Click here to read the entire story.

If you weren't able to attend this conference in person, you can still view the conference materials online (MetroIntelligence Real Estate Advisors was responsible for the real estate sections of the conference books as part of an ongoing partnership with Beacon):

Entire Conference Book

Chris Thornberg Presentation (U.S. & state overview)

Jon Haveman Presentation (regional overview)

Fred Silva Presentation (state fiscal affairs)

Speakers' biographies