Interview with Robert Shiller now online at BlogTalkRadio

My interview with Robert Shiller, author of the new book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism" is now online at BlogTalkRadio. You can also listen to the interview by clicking on the widget on the right hand margin of this blog.

This interview will be accompanying my upcoming review of the book for the syndicated news service Inman News.

Is homeownership a good thing or not?

Lately we've been hearing from various economists on the value of homeownership in a society, arguing that due to the latest economic meltdown created from the housing bust that many people should remain renters forever. And that's a valid argument. But should that argument be extended to predict the end of the single-family home forever?

From my own experience, renters aren't as involved in community affairs as owners (in fact without the advantage of automatic sprinklers, grass and other greenery would die because many don't seem to even want to water the lawn), and for all of these arguments that 'if you put the same amount that you'd pay for a mortgage into an interest-bearing account' the chances of that happening across the board are so small it's almost laughable. For many people, buying and paying off a home over time is a time-tested strategy to build some wealth -- regardless of swings in the market over a 30-year period.

But don't take it from me. Listen to what Joel Kotkin has to say at Forbes.com:

Increasingly, conventional wisdom places the fundamental blame for the worldwide downturn on people's desire--particularly in places like the U.K., the U.S. and Spain--to own their own home. Acceptance of the long-term serfdom of renting, the logic increasingly goes, could help restore order and the rightful balance of nature.

Once considered sacrosanct by conservatives and social democrats alike, homeownership is increasingly seen as a form of economic derangement. The critics of the small owner include economists like Paul Krugman and Ed Glaeser, who identify the over-hot pursuit of homes as one critical cause for the recession. Others suggest it would be perhaps nobler to put money into something more consequential, like stocks.

Homeowners also get spanked by leading new urbanists, like Brookings scholar and urban real estate developer Chris Leinberger. He lays blame for the downturn not on unscrupulous financiers but squarely on aspiring suburban home buyers. "Sprawl," he intones, "is the root cause of the financial crisis."

(Note: For years, Leinberger led a well-known consulting company with multiple offices which specialized in master-planned communities, and for which I also consulted in the mid 1990s. One has to wonder how many such communities were built because of the supporting documentation his company created. Perhaps he simply had a change of heart and now realizes that sprawl wasn't the way to go, but I've never seen or heard anyone tie this rather obvious disconnect together).

If only we built more high-density, transit-oriented housing--which, incidentally, is not exactly thriving--the crisis could be happily resolved, he believes. This approach is echoed by big-city theoreticians like Richard Florida, who believes that both homeownership and the single-family house "has outlived its usefulness." In his "creative age," we won't have much room for either single-family homes or owners. Instead, we will be leasing our ever-more-tiny cribs--just like yuppies with their BMWs--as we wander from job to job.

(Note: Of course Florida lives in Canada, where there's no tax advantages to buying a home, so Candians have to bank on building equity by paying down a mortgage or hoping the value goes up. But it's still possible that the 'creative class' of whom he speaks won't want to be homeowners even with tax advantages).

Yet the recent real estate debacles should not obscure the tremendous positives associated with homeownership. Widespread and diffuse ownership of property has been a critical element in successful republics, from early Rome and the Dutch Republic to the foundation of the United States...

In virtually every country, this was largely a suburban phenomenon. People bought houses where land was cheaper, stores and schools newer. Here, too, people could transcend the often confining social limits of the old neighborhood. It was also, as the novelist Ralph G. Martin, noted "a paradise for children."

Through all this, the chattering class never lost its contempt for homeowners and their suburban refuges. Old gentry long disliked the idea of dispersed ownership of property--even if many got rich selling their own estates to developers. Aesthetes disliked the seemingly banal housing tracts "rising hideously," as Robert Caro put it, from the urban periphery...

Yet, despite the disdain, the dream of homeownership survived. Many boomers, who in their 1960s radical phase denounced suburban tracts as sterile and racist, meekly ended up buying homes there. So, increasingly, did middle-class minorities, whose rates of homeownership rose faster after 1994 than that of whites.

To be sure, the financial crisis has led to a sharp drop in levels of homeownership, as occurred in the last big recession of the early 1990s. In the future, some suggest that aging boomers will force the home market to collapse even more due both to the current mortgage meltdown and changing demographics.

Yet there are limits to how far homeownership will drop. Urban boosters, apartment-builders and greens--all advocates of expanding the renter class--tend to ignore several key facts. For one thing, the vast majority of boomers are holding onto their mostly suburban homes far longer than ever suspected. Many will remain there until forced into assisted living, nursing homes or the cemetery.

Then we have the X generation, who, if anything, has favored large homes and exurbs in large numbers. In addition, behind them lie the large cohorts of millenials, who according to surveys conducted by generational chroniclers Morley Winograd and Mike Hais, prioritize the ownership idea even more than their boomer parents do.

No doubt, the weak economy will slow this generation's push into the home market. However, by the next decade, as this generation enters the late 20s and early 30s, they will find their economic footing and be ready to enter the market for houses in a big way...

Home price declines flattening, but not evenly

Although the S&P/Case-Shiller national index is showing a flattening in the pace of price declines for the third month in a row, for various price ranges and different cities, the pain continues or is expected in the future. I'll be interviewing Dr. Shiller tomorrow at 12 noon (Pacific time) for my Housing Chronicles show on BlogTalkRadio.com, and I'm sure I'll be asking his opinion on these differences. From an L.A. Times story:

Home prices in 20 metropolitan areas were down 18% in April compared to the same month the previous year, according to the S&P/Case-Shiller home price index.

In the Los Angeles area, which includes Orange County, April home prices fell 21% from the previous year.

Los Angeles County and Orange County prices in April were down 42% from their 2006 peak, the index shows. The 20-city index was down 33% from its 2006 peak.

The Case-Shiller index had posted record year-over-year declines from October 2007 to January of this year. April's index was the third straight month in which the pace of price declines slowed slightly...

While Los Angeles area price declines have slowed, Charlotte, Chicago, Cleveland, New York, Portland and Seattle posted record year-over-year declines in April.

The worst year-over-year declines in April were in Phoenix (35%), Las Vegas (32%) and San Francisco (28%).

Los Angeles area price declines have varied substantially by price segments. The lowest-priced third of homes sold in April is down 54% in price from its peak, according to Case-Shiller; the middle third was down 42%; and the most-expensive third of homes sold was down 31%.

The lowest-priced homes in the Los Angeles area had more room to fall - they had also shown the largest price increases during the real estate bubble, with prices in that segment inflated by subprime lending...

Nontheless, because the mid-level and upper-price tiers depend largely on buyers moving equity from the entry-level tier, it's only a matter of time before we see price declines even out, and that process is already starting in certain markets.

Interview tomorrow with Robert Shiller, co-author of "Animal Spirits"

On Wed., July 1st at noon (Pacific time, 3pm Eastern time) I managed to snag an interview with Robert Shiller, Princeton University professor, co-founder of the S&P/Case-Shiller index and co-author of the new book "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism" for my Housing Chronicles show on BlogTalkRadio.com.

You can either listen to the first 15 minutes streamed live or listen to the podcast afterwards (I'll post a link). I'll be citing this interview for my upcoming review of the book for Inman News.

Time to throw out the old rule books

“If You Don’t Create Change, Change Will Create You” – Anonymous

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one.

In today’s world, new rules are constantly being written by the brash and the creative, whether it’s Google’s transformation of the advertising world or the huge success of the CBS franchise “CSI.” For example, not only did CSI creator Anthony Zuiker have zero experience writing for television, he also didn’t realize that including flashbacks and quick cuts were both against long-standing industry convention.

Not knowing any better – because he never read the old, stale rulebook – he included both, thus giving the original series a pace and look that quickly sent it to the top of the ratings game and launched two spin-offs, one of which is the most-watched show in the world. So is that just dumb luck or a sea change that will cut across all industries?

I think that even more potent forms of creative destruction are about to envelope the building industry, and it won’t just be about building more in-fill product or scaling down home sizes and prices to meet today’s demand. These changes are going to alter everything from supply chain management to the way in which homes are marketed and sold, and those veterans who keep themselves otherwise occupied while waiting for someone to call and ask for their outdated skill set may be in for a long wait.

While there will certainly be some demand for the impressive homes of the past, we’re also quickly seeing a return to designs that meet needs more than wants. This is especially important for the groups of people mostly left behind during the last building boom such as families, seniors, the disabled and the homeless who can only afford to live in housing made possible by tax credits, low-interest bond financing and various other government programs.

For example, in upscale Thousand Oaks in California’s Ventura County, our staff is currently drafting a report in support of an affordable housing project that will help to house a variety of low-income families, homeless persons and the mentally disabled, many of whom now are mere numbers on a wait list that’s close to 600 families.

And who’s hoping to build this 60-unit project? A local non-profit that has managed over the last 30 years – mostly under the radar – to build, rehabilitate and fill 400 units and provide housing for 1,000 adults and 200 children. It’s that type of story (along with appropriate private and public incentives to make it happen) this industry really needs to start telling more of around a campfire – assuming, of course, that the old rulebooks are helping to provide the kindling.

Why California can't be governed

Ever wonder why we Californians seem to have so much trouble governing our finances? Well, it wasn't always this way, and, as a 7th generation California native, I can personally attest to a huge variety of changes, instituted in large part by a populace that moved from *other* areas to then impose their own will on the rest of us (such as freebies for everyone but no way to pay for it).

Being lucky enough to be born when I was, I enjoyed a solid public education, a safe neighborhood, friends and neighbors who shared similar values, an enviable infrastructure and a state-supported university system that was among the best of the world.

When it changed, it just wasn't due to Prop. 13, although that was the start of it. I remember joining my family to protest the proposition (my first foray into politics), and when a cigar smoke-smelling Howard Jarvis waddled by and told my brothers and I, "Why don't you go home and learn to read?" I'm sure he didn't realize that home schooling would become the savior for many of today's families.

The L.A. Times has an opinion piece on what ails California, and it's a quite instructive. From the article:

After Proposition 13 passed, then-Gov. Jerry Brown and the Democrat-dominated Legislature realigned -- "tangled" would be more accurate -- the relationship between state and local governments by effectively shifting control of remaining property tax revenue to Sacramento. In a crisis atmosphere, they radically transformed California's political landscape, taking power and responsibility for health, welfare, schools and other local services away from city councils, boards of supervisors and school boards, thereby establishing today's chaotic maze of overlapping jurisdiction, which defies efforts at accountability...

Proposition 13 also ushered in an era of ballot-box budgeting, as fiscal initiatives became a favored special-interest tool to take control of public fund expenditures. A series of post-13 initiatives -- including measures creating the lottery, financing public schools by mathematical formula and earmarking revenues for special programs, from mental health to medical care -- established an exquisitely complex state budget calculus that has hamstrung the rational operations of government...

The once-a-decade process of redrawing political maps based on the census has created an increasingly partisan Capitol atmosphere. Reapportionment has become essentially an incumbent protection effort, as lawmakers craft districts that are either safely Democratic or safely Republican. In this way, the crucial contests are party primaries, not the general elections. Because primaries draw the most partisan voters, the most conservative Republicans and the most liberal Democrats tend to win the nominations that guarantee election in November. The dynamic locks in ideological polarization in Sacramento, where lawmakers have little motivation to compromise...

Despite the claims of backers, the 1990 term-limits initiative did not get rid of career politicians -- it simply changed the arc of their careers. Instead of spending decades in the same Assembly or Senate district seat, legislators position themselves for the next office -- or job as a lobbyist -- as soon as they arrive in Sacramento...

Since Proposition 13, state government has become increasingly dependent on volatile sources of revenue -- the sales, corporation and progressive personal income taxes -- that generate annual shifts in tax collections corresponding closely to the business cycle. When economic times are good, as during the dot-com and housing bubbles, money pours in and there's little political incentive -- in fact, term limits create a perverse disincentive -- for long-term financial planning. When revenues contract, the Capitol has rarely made real spending reductions, preferring to wait for the next boom...

California is one of only three states requiring a two-thirds legislative vote to pass a budget, one of 16 requiring a two-thirds vote to raise taxes -- and the only state to require both. The budget requirement has been in the Constitution since the New Deal; the tax restriction began with Proposition 13. In the polarized atmosphere of Sacramento, the two-thirds rules effectively hand a veto to the minority party. Under these conditions, stalemate and deadlock on key fiscal issues have become the political norm...

In the next few weeks, a blue-ribbon commission is set to recommend sweeping changes in the tax system to stabilize revenue collections. Voters last fall approved Proposition 11, which takes away the Legislature's power to draw its own districts in favor of an independent commission. Next year, as they elect a new governor, Californians also will vote on a system of "open primary" elections aimed at aiding moderates, and they also will probably decide on one or more initiatives to dump the two-thirds budget vote requirement.

California Forward, a bipartisan good government group financed by major foundations, is crafting proposals to conform government systems and processes to modern management methods. And the business-oriented Bay Area Council is pushing initiatives for a state constitutional convention, the first since 1879, to wipe the slate clean and build a new, rational structure for state government.

New home sales down by 1/3 from last year

As builders continue to compete -- generally unsuccessfully -- against heavily discounted foreclosures and are unable to obtain financing for new homes, sales of newly built units fell by 33% between May of 2008 and 2009. But is a bottom about to be reached? First, from an L.A. Times story:

The seasonally adjusted annual rate of new-home sales was down 0.6% from April and fell 32.8% from May 2008, amid a glut in housing. New-home sales in the West, however, were up 1.3% over April's adjusted annual rate...

The median sale price for a new home in May was $221,600, down 3.4% from a year earlier.

But in the battered Inland Empire, the pace of decline is showing marked signs of slowing. Yesterday I spoke with Lou Hirsh of the Riverside Press-Enteprise:

Inland new home sales in April were down 20 percent from April 2008. That is lower than the 28 percent year-to-date decline compared with the first four months of 2008, and the 41 percent decline seen for the period of May 2008 to April 2009.

"That tells me that we're getting closer to the bottom," said Patrick Duffy, a principal and analyst with MetroIntelligence Real Estate Advisors in Los Angeles.

Duffy said the cancellation rate on new Inland homes in April was 7.8 percent in April, versus 22 percent a year ago. Declines in inventory absorption rates and median asking prices are also less severe than at the same point of 2008...

National experts said that without bigger price cuts, builders may keep losing market share as the jobless rate and foreclosures climb, aggravating the drop in resale prices.

"Further increases in mortgage rates would be a huge concern amid rising unemployment and falling incomes," Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pa., said before the Commerce Department report...

Next book review: "Animal Spirits"

For my next book review for Inman News, I selected the book "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism" by economists George Akerlof and Robert Shiller.

The reason I chose it was because few markets are more prone to human psychology than residential real estate, so I was hopeful that the book would provide some tools to real estate agents to educate potential buyers when deciding to enter into a deal.

I'm also trying -- so far unsuccessfully -- to grab 15 minutes of Dr. Shiller's time for a brief, 15-minute interview for my HousingChronicles show on BlogTalkRadio (and also to help with my review). Since I've interviewed the authors of nearly every book I've reviewed for Inman News and the L.A. Times -- including other noted economists such as Richard Florida and Mark Zandi, who regularly testifies in front of Congress -- I was thinking Dr. Shiller would be willing to do the same.

However, since the PR rep for his publisher is having zero luck scheduling this interview, if any readers of this blog have any sway with Dr. Shiller, you'd have my gratitude to intervene. While the lack of an interview certainly won't stop me from writing the review, I'd find it much easier to tie it directly to the Inman News audience with a few specific questions. After all, this isn't the type of book to which your average real estate agent would gravitate, so I had to talk my editor into letting me review it in the first place.

According to Amazon.com, here's a description of the book:

The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today.

Keynesianism, Reaganomics and Thatcherism? I can't wait!

Can't wait for the interview? Buy the book at Amazon.com (now only $9.99), or click on the widget below:

Next up on the To Do list: The Crumbling of America

In between the turmoil in Iran, the impending Gosselin divorce, a stock market that can't decide which way it wants to go and an attack on celebrity blogger Perez Hilton, it's hard to think of one more problem to be solved, but this one is important.

The History Channel is currently running a two-hour special entitled "The Crumbling of America," and what it shows is quite sobering. Even to bring up the country's crumbling infrastructure back to where it should be will cost -- you guessed it -- trillions! And who's to blame for this long-delayed maintenance?

Ultimately, we are -- because we think all taxes are bad and insist on electing politicians who are afraid to tell us inconvenient truths. And, as one expert on the show opines, people are going to die before we wake up to the consequences of our collective disinterest in what once made the United States what it was: an infrastructure that created the best efficiencies the world has ever known. Sadly, he's probably right. From the History Channel Web site:

America's infrastructure is collapsing. Tens of thousands of bridges are structurally deficient or functionally obsolete. A third of the nation's highways are in poor or mediocre shape. Massively leaking water and sewage systems are creating health hazards and contaminating rivers and streams. Weakened and under-maintained levees and dams tower over communities and schools. And the power grid is increasingly maxed out, disrupting millions of lives and putting entire cities in the dark. The Crumbling of America explores these problems using expert interviews, on location shooting and computer generated animation to illustrate the kinds of infrastructure disasters that could be just around the bend.

Beacon Economics launches national employment database

MetroIntelligence partner Beacon Economics has just launched the first national database of its kind on key employment statistics. Here's how Beacon describes it:

This month we are pleased to introduce the newly expanded California and U.S. Employment Report from Beacon Economics. Our datasite now covers key employment statistics in all 50 states. For each state, breakdowns are available by major regions and industries. See instantly how retail trade employment is doing in Colorado... find out which region of New York has the largest number of jobs... see how Florida's unemployment rate has changed over the past 6 months, year, or 3 years. Explore the detailed data available and gain new perspective on the nation's employment landscape.

I think this a great and easy-to-use service (and best of all: it's free!).

Check it out by clicking here.

So what do the folks at Beacon think about California?

Last month, Beacon Economics wrote in this employment report that the decline in California's unemployment rate in April was likely a statistical blip. This month's numbers confirm that suspicion.

• Unemployment Hits Record High: On a seasonally adjusted basis, the state's unemployment rate hit 11.5% in May - the highest on record since these statistics have been reliably tracked. The number of people classified as unemployed in the state shot up to 2,138,000 from 2,065,477 in April.

• State Employment Falls Back to '03 Levels: Total nonfarm employment in California dropped another 68.9 thousand in May. This 0.5% decline pushes employment in California back down to 2003 levels.

• No Turnaround This Year: Despite the fact that we have seen positive indicators in other sectors of the economy, including equity markets and home sales, employment is typically a lagging indicator. We do not expect employment in California to show any turnaround this year

A telling tale for wannabe landlords

I keep hearing stories of bored entrepreneurs buying up blocks of homes at a time in order to "hire a management company and rent them out!" Oh, if it were only so easy. Unfortunately, not all management companies are created the same. Last year I had to fire one for a variety of reasons including incompetence, unprofessional behavior and hiring shoddy subcontractors (in fact, I was thinking of pitching such a cautionary tale to the L.A. Times, but once I hired a new company I just wanted to be past the experience). But at least my property is local!

Newsweek writer Daniel McGinn, however, author of the book "House Lust," jumped on that out-of-state bandwagon a few years ago, buying up a duplex thousands of miles from his home in New York, and he's written a story on how that experience made him 'the accidental slumlord.'

Four years ago, at the height of the boom, I visited Pocatello to write a story for NEWSWEEK about how out-of-state investors had begun buying cheap rental properties there, drawn by ultralow sales prices and a solid rental market. (At the time, the average Pocatello home sold for just $98,000.)

A year later, while writing a book about the housing boom, I decided to dive in myself. In late 2006, after seeing only e-mailed photos, an appraisal and an inspection report, I paid $62,750 for a two-unit rental property in Pocatello, which is 2,450 miles from my Massachusetts home. I didn't expect to get rich; my main motivation was to have a good story for the book.

By that measure, the deal was a success; when House Lust came out in 2008, the chapter in which I described my early misadventures as a property magnate (an early tenant went to jail; my first property manager made off with $1,300) helped fuel reviews and interviews. But now, long after the buzz over the book has died down, I'm stuck with a house in Idaho—and friends who call me a long-distance slumlord...

Click here for the full story.

A decidedly somber affair at this year's PCBC

Each year in June or July, tens of thousands of builders, suppliers and subcontractors converge on San Francisco's Moscone Center for the Pacific Coast Builders' Conference, but this year the total is down to just about 14,000 attendees (I also decided against attending this year due to a convergence of work deadlines). From the San Francisco Chronicle:

"California's home building industry is in the worst shape ever," said Horace Hogan, chairman of the California Building Industry Association, the trade group that puts on PCBC, and president of Brehm Communities, a Carlsbad (San Diego County) home builder, speaking at a news conference.

"Every builder I know has laid off most of their staff, and contractors and suppliers we've done business with for years have folded up shop." The show reflected that contraction. At the peak of the housing boom in 2006, it drew 35,000 attendees. Last year there were about 19,000. This year only 14,000 people came to Moscone. Even with a smaller exhibit floor, the aisles were noticeably underpopulated...

Hogan had a variety of grim statistics to tick off. Although the 65,000 housing starts in California in 2008 were the lowest ever recorded, "As bad as last year was, right now 2009 looks like it might even be worse," he said, citing projections of only 40,000 housing units this year. That sluggish pace means the loss of more than 360,000 jobs and $50 billion from the state's economy, he said.

California's $10,000 tax credit for people who buy a new home is something the builders would dearly like to see extended. They say not only does it help their industry, but it generates state and local taxes, creates jobs and stimulates the economy.

Sam Chandan, president and chief economist of New York's Real Estate Econometrics, had more downbeat news at a session on the economic outlook, predicting a huge wave of defaults in commercial mortgages.

"About $300 billion in commercial mortgages will come due between now and the end of 2009, and the same in 2010," he said. "We lack the capacity to refinance them. This will lead to a significant increase in defaults and delinquency rates for commercial mortgages..."

During the last downturn of the early 1990s in California, people could choose to find a job in another industry or move temporarily to Las Vegas or Phoenix to find work in the local building industry. But now with the entire economy in recession, there are few good substitutes.

And as for those commenters you always see online (probably sitting alone in their underwear) who quack, "Greedy builders! Had it coming! Get what they deserve!" please give it a rest, it's just not helpful, nor is it original. You could say the same thing about bloated governments, badly managed car companies, irresponsible bankers or media companies which haven't reacted quickly enough to the creative destruction fomented by technology. Like it or not, we're now in this together, and quacking out the same tired lines of schadenfreude is just boring.

About that California economy...

Wonder just when the California economy is expected to revive itself? According to economists at Chapman University, although the recession may technically lift by the second half of the year, we won't feel better about things until 2010. First, from an L.A. Times story:

The Chapman forecasters expect nonfarm payroll employment in California to continue falling into next year before beginning to rebound in the fourth quarter of 2010. California will lose an estimated 437,000 jobs in 2009 and an additional 56,000 jobs next year, they said...

Job losses have spilled across all sectors as layoffs in the construction industry led to cutbacks at law firms, accounting firms and most other sectors, excluding health and education. Even as the economy turns around, cautious companies will probably be slow to begin hiring again, which will lead to a sluggish recovery in the state...

The Southern California median home price last month was $249,000, down 51% from May 2007, according to figures released Wednesday by MDA DataQuick of San Diego. It's the fifth straight month that median prices have hovered around $250,000, though May did show a slight increase in prices for the region.

Chapman forecasters expect home prices to strengthen in 2010 as banks become more willing to lend to prospective buyers and fewer new homes come on the market. Home prices will rise 0.8% in the state next year after falling 35% in the state in 2008, the economists say...

A few days earlier, the UCLA Anderson Forecast released its own projections on the local and regional economy, and pretty much rained all over Chapman's parade, citing increasing unemployment and an economy that won't bounce back until at least late 2011. Also from an L.A. Times story:

Despite some healing in the national economy, California still faces significant difficulty, in part because of the state's budget woes, economic forecasters at UCLA say.

Unemployment in the state will reach 12.1% by the end of this year and will not return to single digits until late in 2011, economists predicted in the quarterly UCLA Anderson Forecast, which was set to be released today...

Construction jobs, which fell 12% in 2008, are expected to drop more than 15% this year as demand continues to fall for both residential and commercial development. Already, activity has dropped so dramatically in the state that developers are now under-building for the size of California's population, sowing the seeds of another housing bubble, the report said...

Bill Watkins, executive director of California Lutheran University's Center for Economic Research and Forecasting, agreed with the Anderson group that California faces a rougher road than the rest of the nation.

"California's economy is quite a bit weaker than the U.S. economy, and we don't expect to see a recovery any time soon," he said. The state will not come out of recession until the second half of 2011, he predicted...

So who's right and who's wrong? Well, UCLA insisted there was no recession until it was so painfully obvious they had no choice to reverse themselves (and without ever admitting any fault), and Chapman was so off on their projections for Orange County that the local BIA group decided to give another economic forecasting group a try for awhile. I guess we'll have to wait until 2011 to see!

Lending for builders to remain tight until at least 2010

It's interesting these days to listen to economists or pundits who read through reams of data and declare, "There's plenty of credit -- just not at the price you want!" and then actually sit down with those who are trying to get deals done, and it's a very different story.

Yesterday some colleagues and I had lunch with a wealthy private investor (who claims to have access to $1.5 billion cash and another $500 million in other sources), and for people like him, the lack of credit -- which he doesn't need -- is providing him with some great opportunities, although he also remains on the sidelines because the spread between what sellers want and what buyers are offering is in the 25% range. For now, and likely through 2010, most buyers of land and many commercial properties will be families and groups of friends with money to invest, because credit is expected to remain tight for at least another 12 months. From a BuilderOnline.com story:

Builders immediately saw banks tighten up credit last fall, when the financial crisis began, and the government’s billion-dollar bailout to the banking industry seems to have had little effect. Builders can’t get money to buy land. They can’t get loans to develop lots. They can’t convince banks to joint-venture with them on partially finished developments, even when the bank already owns the land and would have minimal risk...

Unfortunately for builders, the current tight credit situation is likely to continue into 2010, according to experts interviewed by BUILDER in recent weeks. The reasons are myriad: a struggling economy, capital pressures, consumer credit problems, banking consolidation, and regulatory and accounting uncertainties, and of course, falling home prices...

Unfortunately for builders seeking capital, real estate loans represent a major factor in those losses.
Last year, banks reported net charge-off rates of 0.99% for all loans and 0.73% for real estate loans for the first quarter. This year, those figures doubled, to a net charge-off of 1.94% for all loans and 1.44% for real estate loans.

A similar trend occurred in noncurrent loans, which are at least 90 days past due. Overall, banks said 3.77% of all loans were noncurrent in the first quarter of this year, compared to 1.72% one year ago. A prime offender? Real estate, where the percentage of noncurrent loans jumped from 2.21% in 2008’s first quarter to 4.89% for 2009’s first quarter. Within that category, construction and development lending is the most troubled, with nearly 11% of such loans more than 90 days past due.

Even worse from the banks’ perspective, the bulk (61%) of the industry’s current $7.7 trillion in loans outstanding is in real estate loans, including $567 billion in construction and development lending...

Many banks, already weighed down by significant numbers of real estate owned (REO) properties, are wary of adding any additional land investments to their books, even in relatively low-risk joint ventures where the bank supplies the REO land and builders simply construct the homes.

Just like builders and homeowners, falling land values have eroded the value of banks’ land assets, forcing them to raise capital to protect against potential losses. In this declining market, they must also boost their reserves enough to satisfy bank examiners, who expressed worries about commercial real estate lending exposure at banks as early as 2006...

Accounting rules add another wrinkle. For accounting and financial risk reasons, regulators may not approve of a bank’s continued involvement in a real estate project and want the lender to realize any gains or losses as soon as possible. As a result, banks are doing everything they can to exit land deals quickly because if the project drags on (which is certainly likely in today’s weak market and struggling economy), bankers may need to account for that dirt differently due to its “troubled status,”...

Lack of resources may be another issue, particularly at smaller banks. At the same time as builders are begging and pleading for funding, lending institutions are dealing with a host of other challenges requiring time and resources—new credit card laws, personal and corporate bankruptcies, foreclosures, and mortgage modifications. They simply may not have the people, time, or expertise to carefully evaluate a builder’s proposal, no matter how promising.

The future of homebuilding is -- spiritual?

Pollster John Zogby has some interesting advice for builders attending the Pacific Coast Builders' Conference in San Francisco this week: move away from marketing quantity in favor of quality of life. That's because there's a sea change among the American consumer that's expected to continue well beyond this recessionary cycle. From a BuilderOnline story:

Pollster John Zogby, speaking at this week's PCBC in San Francisco, argued that for a growing percentage of the population the American dream is defined by spiritual rather than materialist goals. His polls show that 46% of the American public defines the American dream by quality of life rather than quantity of possessions. Builders, he said, won't be able to "function properly" unless they get to know these buyers intimately, whether through market research or living among them...

Zogby outlined four pools of people who share this spiritual connection. A sizable portion of the population, he said, is now working for less. They have de-emphasized what they own or where they live to define themselves. "They are the new American consumer," he said, adding that these are smart consumers who will shop for bargains but save money to buy something nice they really want. It's a mistake to try to reach this group by marketing fantasy; reality is what appeals to them.

A second cohort of 9 to 10 million Americans has done very well in life, but it is now making a conscious decision to stop materialist behavior. They may decide not to do a 4,000 square foot addition because they aren't fully utilizing the 5,000 square foot home they already have. They don't want the hassle of owning even more. "There's a real movement toward simplification," Zogby said.

Aging baby boomers, 78 million strong, are a third source of secular spiritualism. Many who believe they changed the world when they were 19 are now looking for a second act as they turn 60. Zogby suggested that this generation, instead of looking forward to retirement, is searching for "encore living," a way to spend the remaining years of their life giving back to society through volunteer work and other endeavors.

The fourth group of spiritualists is inclined toward personal sacrifice. "One of the great untold stories of the last 25 years is the revolution in recycling," said Zogby, who did some of the early survey work with local governments that revealed a latent desire to recycle. "Americans are looking for the next wave of sacrifice," he said, suggesting that it will be in the area of sustainability. "We are citizens of the planet Earth."

Besides appealing to buyers looking for spiritual fulfillment, Zogby recommended that builders pay close attention to the behavior of Generation Y, which are 18- to 30-year-olds.

These are America's first global citizens, he said, citing polls that show 56% have a passport and travel abroad, and one fourth say they expect to live and work in a foreign country within their lifetime. This group communicates through social networks with friends from foreign countries. They follow international sports. They may marry people from foreign countries. They are a mobile group that wants to cluster in urban areas. They will have an average of four jobs before they turn 30.

"They may not want to live in the same place forever," said Zogby, arguing that this demographic will create new forms of shared homeownership to accommodate their mobile lifestyle.