Housing Chronicles to host 119th edition of the Carnival of Real Estate

Next week, The Housing Chronicles Blog will be hosting the 119th edition of the Carnival of Real Estate.

So what's a 'carnival?'

According to the site:

The goal here is to bring together the best real estate bloggers from around the country (and world) to share information about what we’re all passionate about: real estate. This is intended to be a forum for everyone to participate. Like a potluck, everyone brings something and may the best dishes be recognized each week.

The Zillow Blog Team — well, actually one very tuned-in guy on the team — was pondering the existence of Blog Carnivals for everything from “street poetry” to cats, but there was not one for real estate. Obviously, we were amazed by this realization. No Carnival for real estate? This must be fixed! So, we at Zillow thought, “Why not create a Carnival of Real Estate?” And so, we did.

If you've written a blog post you'd like to submit, please do so by Sunday, November 30th and look for the winners sometime on Monday, December 1st.

Update on Nov. 30th:

P.S. I forget to mention that the official deadline for submitting is 3pm Eastern Time, or noon on the West Coast.

Now foreclosures of 'prime' borrowers rising sharply

Due to growing job losses among previously 'safe' industries (such as government), now it seems that foreclosures and defaults to 'prime' borrowers -- i.e., those with decent credit scores, offering down payments and willing to document their incomes -- are rising sharply. So what does this mean for the overall market? From an L.A. Times story:

Although soaring defaults on subprime loans and other dicey mortgages are a well-known cause of the country's financial crisis, delinquencies and foreclosures now are skyrocketing among "prime" borrowers -- people with good credit histories who documented their incomes when applying for their relatively straightforward mortgages.

Nationwide, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of this year, the latest period for which the Mortgage Bankers Assn. has figures, easily topping the previous record of 1.97% set in 1985.

In California, with a jobless rate topping 8% and home prices down more than 40% from their peak and falling, the situation is significantly worse, with 4.15% of prime loans seriously delinquent. That far exceeded peaks of about 2.6% reached in the recessions of the 1980s and 1990s...

By putting more foreclosed homes on the market, the trend is likely to further depress housing prices, intensify the mortgage-related crisis afflicting the financial system and exacerbate the recession most economists believe is already underway...

In California, delinquencies on prime mortgages could increase for years, said Christopher Thornberg, founder of consulting firm Beacon Economics in Los Angeles.

One reason, he said, is that home lenders became so complacent during the housing boom that they did little to qualify borrowers besides having computers check a few facts.

" 'Prime' lost a lot of meaning in the insanity of the last few years," said Thornberg, who was one of the first experts to foresee the housing downturn...

Click here for full story.

Did public builders destroy the market for private ones?

Boyce Thompson, Editorial Director for magazines such as Builder, Big Builder and Multi-Family Developer, has an interesting blog post online asking if the obsession by public builders to chase market share and improve their balance sheets ended up destroying the supply-demand balance of local markets. From his post:

There are many private builders out there who lay the blame for the housing boom, and subsequent bust, at the feet of public builders whom they say built homes and market share at any cost. These same builders, they argue, continued to pump out specs after the end came in an attempt to work off land inventory, at the expense of every other builder in the marketplace.

This argument holds some water. The publics did build up massive land inventory. They wanted to show The Street that they could feed a well-oiled home building machine that was cranking out 20 percent revenue growth, even in the face of mounting public resistance to development. Then, when the end came, they were forced to sell off land to generate cash. And they took impairments on what land they couldn't sell...

Click here for full blog post.

FHA-backed loans: the new sub-prime disaster?

Never underestimate the power of greed. That seems to be the lesson of a story published in Business Week magazine on former sub-prime mortgage players now simply transitioning their business models to loans backed by the FHA -- and by extension, the U.S. taxpayer. From the story (hat tip: Brian McDonald):

Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy...

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout.

Click here for full story -- but sit down first!

Review of "Financial Shock" now online at Inman News

My first writing assignment for Inman News, a book review of the book "Financial Shock" by economist Mark Zandi, co-founder of Moody's Economy.com, is now online. Since the book was published in the summer -- and therefore before the recent stock market swoons and other financial challenges -- I also interviewed Dr. Zandi by phone for his views on the recent events. What I like about Zandi, both over the phone and in his book, is his ability to speak in plain English about complex economic issues. From InmanNews.com:

When Mark Zandi, chief economist and co-founder of Moody's Economy.com, decided to write a book on the implosion of the subprime mortgage industry earlier this year, the global meltdown in the financial markets and impact to the overall economy had yet to surface. Yet because the book is so comprehensive, it still provides an excellent framework from which to understand the root causes of the crisis, from the mistakes made by Alan Greenspan to the rapid rise of irresponsible lenders who rewrote the rules of underwriting based on their own short-term interests...

Click here for full review.

Trying to price your home? Don't trust the various index readings.

For many months I've been having the same argument with economists who are forecasting home price reductions of up to 50% or more in previous bubble areas: that doesn't mean all neighborhoods in a particular region will suffer the same fate. Although that also doesn't mean that they'll escape unscathed, factors such as good schools, access to public transit and freeways and jobs are just as important today as they always were. Call it the 'battle of the indices,' but each methodology has its strengths and weaknesses, and the search is on for a system that is the most accurate. From a Wall Street Journal story:

The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month...

To address these discrepancies, indexes are going increasingly local. Other, less-well-known measures of home prices -- some of them available only to paying customers -- are adjusting to exclude homes sold by banks...

The numbers from home-price indexes are widely watched. The Federal Reserve uses them to measure the value of housing stock. Banks use them to determine whether mortgages are underwater and to estimate the value of homes they will have to sell after foreclosure.

But the indexes may be leading everyone astray. Just as respondents to election surveys are meant to stand in for the broader electorate, the homes being sold need to represent all homes. The problem is, producers of these price measures aren't sure that sale prices reflect the values of houses not on the market...

The Case-Shiller index includes properties that had subprime loans attached.

"That's the stuff that went down most substantially, and that's probably the stuff that went up most substantially," Prof. Case says.

The federal index, though, doesn't include such properties, instead accounting only for properties with financing from mortgage giants Fannie Mae or Freddie Mac. For that reason, many prefer Case-Shiller...

Most of the numbers that get headlines are based on metropolitan areas. Yet the housing-market picture can vary dramatically within the same region. Lynn, Mass., a suburb northeast of Boston, saw prices drop 10% in the second quarter compared with a year earlier, according to Wellesley's Prof. Case. Yet in the same period prices in Cambridge, just west of the city, rose 13%.

Integrated Asset Services, or IAS, sells estimates by neighborhood. "We are a lot more granular" than Case-Shiller and the federal index, Chief Executive David McCarthy said.

Click here for full story.

Builders asking for own $250 billion bailout

With bailout season in full swing, the nation's home builders are now asking for their own bailout -- a $250 billion package called 'Fix Housing First' that would combine more generous (and genuine) tax subsidies and funds to buy down mortgage rates to increase affordability. From a Wall Street Journal story:

The builders' lobby is ramping up its sales pitch for a $250 billion stimulus package called "Fix Housing First," arguing that financial markets won't recover until home prices stop falling. They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner's mortgage rate.

Congress resisted a similar effort to pass a larger tax credit earlier this year, instead creating a $7,500 credit for new-home purchases that had to be paid back over 15 years, effectively extending an interest-free loan.

Builders are promoting the campaign with full-page newspaper advertisements, but face an uphill battle, with critics suggesting the proposal is too expensive and that it too heavily promotes home purchases rather than addressing loan modifications for delinquent homeowners...

The homebuilders' proposal would offer home buyers a tax credit equal to 10% of the home's value, capping it at $22,000, nearly three times the $7,500 credit Congress offered to new buyers earlier this year. Builders say the earlier credit didn't work because it wasn't big enough and had to be repaid...

One idea with broader support -- but with a potentially bigger price tag -- is an interest-rate buy-down that would allow existing homeowners to refinance to lower rates. Chris Mayer, senior vice dean of Columbia Business School, has suggested that the government push interest rates down to 5.25% for homeowners who prove that they can afford to live in their new homes and can document their income.

Upside-down builders holding on for dear life

Boyce Thompson, Editorial Director for Builder magazine, has a great story now posted online at the BuilderOnline.com web site. Entitled "Upside Down," it tells the story of how banks have been working with private builders when the value of their holdings fall below the loan amounts they've extended.

For the current issue of Builder & Developer magazine, I wrote about builders taking on the banks and who insist they're not being treated fairly. According to Boyce's story, however, the larger economic fall-out may have pushed lenders as far as they can go, which will likely mean far fewer builders when the dust finally settles.

In concert with the economists who head up Beacon Economics, MetroIntelligence has increasingly been working with banks, developers and builders to re-evaluate their land holdings and operations against forecasts of regional economic conditions, and we've been finding many of the same issues with our clients. From the story:

Three years into the worst housing downturn since the Great Depression, three dozen major builders have declared bankruptcy. Yet for every builder that has gone under, hundreds more are on life support, hanging on only because their lenders choose to look the other way...

Nearly everyone in the industry knows someone who remains in business, struggling mightily to generate enough cash to pay off debt and fund operations, only out of the good graces of a lender. From a financial perspective, these companies are upside down, without the assets to pay off their debts. As we move into the winter months, with builders and lenders both starved for cash, the pace of builder liquidations and bankruptcies is likely to markedly increase...

The banks, of course, would like an immediate repayment in full of loans they’ve made. But most builders don’t have the money, or the inclination, to do this, especially if they have gone to outside equity for funds, and those equity sources are looking for a 20 percent to 25 percent return.

“That leaves the banks with only three choices,” says one builder who has been negotiating with his banks for more than a year. “They can foreclose and pursue any guarantees, which is likely to put the builder out of business. They can continue funding the build-out of the neighborhood with the hope of maybe getting full repayment or minimizing their losses. Or they can accept a discounted repayment of the debt.”

Click here for full story.

Is private equity the answer to the lending squeeze?

With banks hoarding cash and other lending sources trying to remain afloat, some experts have suggested that private equity is the next likely source for development projects, as they've been tapped in the past. For now, however, much of that money remains on the sidelines as investors wait for a bottom that so far remains elusive. From a HousingZone.com story:

Reports have been surfacing that massive amounts of private equity funds are being pulled together to take advantage of the opportunity that the free fall of home and land values is providing. At the time this article was prepared, sources interviewed indicated that the majority of funds out there are sitting on the sidelines...

When these funds do come around, builders — as much as they want and need the cash to move forward with their developments — will want to be cautious. Private equity investors are not the same animal as the local community bank.

“There are different cultures. Builders are entrepreneurial. Financing people are bottom line. It's not like the good ol' days where things were done on trust...Finance people operate deal-by-deal. It's more black and white. Private equity firms are looking for a return, and there's a gap between what home builders have been used to and what these types of lenders are asking..."

Click here for full story.

What happens if the big 3 automakers collapse?

Over the past year, the building industry has been pretty vocal about the impact to the economy if home builders are allowed to go bust without any government intervention. With the domestic auto industry on the ropes, they're making a similar argument:

How to fix a building industry in turmoil

Last Thursday and Friday I attended the annual Building Industry Show (BIS) in Long Beach, CA. To be sure, this year's event was a somber affair, with a smaller exhibit space, fewer education classes (that were often sparsely filled), and a high ratio of exhibit staff to visitors. In other words, what could be expected from an industry in recession.

But I also saw some of the same faces that are industry fixtures -- people who manage to squeak through the bad times to excel in the good.

I also ran into some former colleagues from Hanley Wood Market Intelligence, and we discussed some of our former and current competitors who remain busy only because they're willing to manipulate data and arrive at pricing & absorption recommendations requested by the client.

It's one thing to be aggressive and then add multiple caveats as disclaimers. It's quite another to offer recommendations on the financial feasibility of a multi-million dollar development that have no basis in reality.

Just so I'm clear on this practice: it is called fraud. Like Enron did when cooking the books, only worse because it's impacted an entire industry.

This practice of always blessing a client's project, no matter how unhinged from market fundamentals, was a direct contributor to the size of the housing boom and the degree of the bust.

I'm going to be talking a lot more about this unfortunate history in the months ahead, because I don't think the building industry can either recover or regain the trust of Congress or the home buying public until they're confident that a repeat of this same self-indulgent practice is eliminated.

That's also why I've been working a lot closer with Beacon Economics -- no one would ever accuse them of rolling over to spin bad news into gold for a client. The data is the data. Period. And that's also why they're gradually catching the eye of an industry that is sick and tired of being lied to. I'd say that's called capitulation. And it's a good thing.

I think Supreme Court Justice Louis Brandeis put it best when he opined, "Sunshine is the best antiseptic," and fewer places will that be more true in 2009 than upon Wall Street executives, bank officers and certain developers.

So if you're a builder, investor or a lender with a project that's gone bust, I urge you to hire some decent forensic accountants and a legal team who can help you piece together the history of whatever due diligence was done for a construction loan by the development team.

Was the feasibility analysis done in-house or was an outside and theoretically 'objective' company contracted? If a separate consultant was hired, what is the reputation of that company?

Have other projects on which a company consulted gone bust because the market changed or because their recommendations had no basis in reality even based on the boom-enriched valuations of the day?

Even better, hire a consultant with a reputation for objectivity to conduct a peer review analysis of previous market studies and determine whether the data available at the time of the analysis supported the final recommendations.

Only then can you learn from such mistakes and prevent future ones from taking place.

Builders asking some cities and HOAs to reconsider age restrictions

During the boom years, cities loved age-restricted communities (usually 55+) because seniors don't demand public school services, they trend to drive less, they ask less of their government and, best of all, calls to police departments for raucous parties tend to be rare when they end by 8pm.

Now, however, the very benefit that allowed these communities to sell at paces far beyond what was typical for an area -- the age restriction -- is starting to act as a anchor. Consequently, some builders are asking both municipalities and HOAs to rescind these age restrictions in order to spike sales. From a BuilderOnline.com story:

When the housing market was booming, age-restricted communities made business sense for builders, too. Most of the buyers owned their homes outright and had seen the value of those properties skyrocket. They could sell quickly and pay cash for their new homes.

Now, those buyers are stuck, unable to sell their current homes--or unwilling to do so at current home prices. As a result, builders who won government approvals based on restrictions that said at least one occupant of each unit would be at 55 years old now have projects that are dead in the water.

Some builders are trying to get relief from the restrictions so they can jump-start sales. Kalian Companies, a Red Bank, N.J.-based builder/developer, spent nearly a year working on revising the plans for Carriage Park at Bound Brook, a 144-unit condominium project in the town of Bound Brook. “When we bought it, we didn’t even think about not going age-restricted,” says company president Mazin Patrick Kalian. “Every project in New Jersey was getting approved age-restricted because the schools in New Jersey were so backed up.”

Click here for full story.

Homeowners still engaging in "Homeallucination"

According to a recent AP story, many homeowners throughout the country are still engaging in what economist Chris Thornberg of Beacon Economics has dubbed "homeallucination." It means that although home values around your neighborhood have fallen, somehow you think yours is different. Special. Somehow immune to declines. In other words, what your therapist might gently call "denial." From the story:

Despite dismal housing headlines and reports showing falling prices nationwide, owners in some once-hot areas still believe their home is gaining value or at least holding its own. And by hanging onto too-high expectations, sellers are unwittingly keeping the market from finding a bottom...

A recent Coldwell Banker report showed that more than three-quarters of its real estate agents surveyed said most sellers have unrealistic initial listing prices for their homes.

Likewise, an unscientific study released last week by real-estate Web site Zillow.com found that half of homeowners polled think their home's price has increased or stayed the same in the past year.

"We expected people to get a little more in touch with reality especially over the summer, because you couldn't turn on the TV or read the newspapers without seeing that home prices are falling," said Amy Bohutinsky, a spokeswoman for Zillow.com. "It was very surprising to see this kind of disconnect."...

Click here for full story.

CalPers realizes huge land investment losses

The pension fund for California public employees, commonly known as CalPers, made some huge bets on land investments in multiple states and was a primary source of funding for land developers. But as values for residential land has cratered, it looks like the fund will lose more than 100% of its investment as well as a steady exodus of top executives. From a Wall Street Journal story:

The nation's largest public pension fund, known as Calpers, is paying dearly for its ill-fated decision to become one of the most aggressive real-estate investors among public pensions.

Amid the rapid decline in the housing market, the value of Calpers's investments in land and housing projects across the country had fallen 35%, to about $6 billion, as of June 30, according to recent performance results released Wednesday by the California Public Employees' Retirement System.

The losses are likely to be larger now because the values were based on appraisals completed at the end of March. Since then, land values have cratered nationwide, as evidenced by the bankruptcy-protection filing of one high-profile Calpers undertaking, the LandSource land venture in California. An investment vehicle funded by Calpers sank $970 million in that venture, which holds 15,000 acres outside Los Angeles.

For the quarter ended June 30, Calpers says it expects a loss even greater than 100% for its once high-yielding land and housing investments, thanks to its use of borrowed money on deals. The losses also dragged into negative territory the quarterly returns on its overall $22 billion real-estate portfolio, typically one of the pension fund's most profitable...

Calpers has been operating with interim officials in its two highest positions, as former Chief Executive Fred Buenrostro and former Chief Investment Officer Russell Read left midyear. Including them, seven of Calpers's 50 senior officials have left or intend to leave by year-end.

Click here for full story.

What if you don't qualify for the new loan modification plan?

Just because many critics contend that the new & streamlined loan modification program announced yesterday will leave many other homeowners out in the cold, that doesn't mean they're out of luck completely. First, who does qualify for a loan work-out based on the new rules? From the Wall Street Journal:

Under the FHA plan, lenders will modify interest rates or forgive a portion of the principal, to bring the ratio of mortgage payments, including homeowners' association dues, to 38% of income. Among the requirements for borrowers:

• Must have a loan on a primary residence that was made before Jan. 1, 2008.
• Must contact loan servicers and cooperate on supplying need information.
• Must be at least 90 days behind on payments.
• Must not have filed for bankruptcy protection.
• Must certify that a hardship, such as job loss or illness, has affected their ability to repay, and that they did not purposely default to get a loan modification.

But what if you don't qualify -- say you can no longer afford the mortgage on a vacation home? From a WSJ.com story:

Here are some suggestions:

• Contact a reputable credit counseling agency to see what your options are besides foreclosure. The Department of Housing and Urban Development links to free or low-cost counselors. The non-profit National Foundation for Credit Counseling has an online tool for locating members nearest your home.
• Call your loan servicer to see who owns your loan; then call the lender to try to work out a deal. FHFA says that borrowers who don't meet the requirements for the new streamlined process can still be considered for loan modifications customized to their personal circumstances.
• Sell a family car, take a second job, ask relatives for help or do whatever else you can to raise enough cash to pay the mortgage until the housing market improves. If zoning laws allow it, think about renting out rooms or a finished basement.
• Consider a short sale, where a lender agrees to take less than the balance of the loan. You avoid foreclosure, though you may have to pay taxes on the shortfall. While short sales have become common in places where home prices have fallen precipitously, bear in mind that you must find a patient buyer, since many lenders are overwhelmed by short sales and are slow to respond to offers.

Click here to read full story.