How the U.S. government cooks the economic books

There's a great column in the 5/23/08 issue The Week magazine on how the U.S. government plays with economic data to make the economy seem stronger than it is. That's why you can find your own household budget straining to meet higher energy and food prices but then read official government reports that seem to ignore reality. I have a saying I tell clients: "You can't fix what you don't admit." Too bad the government doesn't know that one. From the article (subscription required):

The federal government’s economic numbers simply cannot be trusted, said Kevin Phillips in Harper’s. To see how the numbers have been “corrupted,” check out the three most closely watched economic measures—the Consumer Price Index, which tallies inflation at the retail level; the Gross Domestic Product, which tracks the economy’s overall growth; and the monthly unemployment figure.

All three sets of data give a falsely cheerful picture of the economy, not because of “any concerted or cynical schemes,” but because policymakers of both parties have found it expedient to distort the numbers.

By low-balling the inflation number, for example, the government can hold down interest rates and control the cost of pension and disability payments, which are indexed to inflation. A low inflation rate, in turn, makes the nation’s gross domestic output look more robust. That’s because when inflation is low, quarterly increases in the dollar value of the nation’s goods and services are attributed largely to greater output rather than higher prices. And by undercounting the unemployed, the government can downplay the severity of economic downturns. The inflation statistics most dramatically show the disconnect between the official numbers and reality, said Dean Calbreath in The San Diego Union-Tribune. Government spokesmen like to cite the so-called core inflation rate, which smoothes out fluctuations in food and energy costs. But “many economists say the core rate does not show how inflation is affecting the typical consumer.”

For instance, the official statistics give “nearly as much weight to high-ticket items such as cars and electronics,” which people buy infrequently, as they give to everyday purchases such as food and gasoline. The core rate also doesn’t capture how the prices of food and energy, among other items, have risen far more rapidly than incomes.

As a result, people are spending an ever-greater share of their wages to buy an ever-smaller amount of food or gasoline. Another oddity of the inflation calculation is what’s called the “hedonic adjustment,” said Bill Fleckenstein in MSN’s Moneycentral.com. In effect, the government says that some product improvements, such as cameras in mobile phones, amount to price reductions. In other words, a $300 phone with a camera is “cheaper” than a $300 phone without one. Such trumped-up price deflators make the government’s inflation calculation a “cheat.” The inflation numbers are dubious, but it’s the unemployment figures that deserve “the Pulitzer Prize for Fiction,” said Alan Abelson in Barron’s. The government reported this month that payrolls shrank by only 20,000 jobs in April, and that the unemployment rate dropped to 5 percent from 5.1 percent.

But the job losses would have been closer to 287,000, if not for the so-called birth/death adjustment that supposedly measures jobs added or lost by businesses that either started up or closed their doors in the past month. Using the adjustment, government economists surmised that the financial services industry added 8,000 jobs last month; construction added 45,000. Those are quite some feats, considering that banks and brokerage houses are laying off people left and right, and “construction is not exactly booming.” Say this for the government’s numbers, though: They might not be accurate, but they’re “carefully designed to leave you with a comfy feeling in these rather trying times.”

Luxury home prices in SoCal now also falling

According to a story in the L.A. Times, prices of luxury homes are also starting to feel the impact of a slower market. Although owners of pricier homes can withstand pricing declines longer than entry-level buyers with resetting mortgages, eventually the rich need to sell too and must lower prices in order to make a sale:

The rich may indeed be like the rest of us. Prices of their homes are now falling too.

Gated mansions and hillside estates have held their own through most of the real estate slump, but data released Monday showed big drops in the region's most exclusive neighborhoods...

Expensive markets often resist declines for several reasons. Sellers in high-priced areas often have a large amount of equity in their homes or own them outright. That makes them more able to sit on their houses and ride out a market downturn than people desperate to unload a house with a mortgage they can't handle.

But with the passage of time, sellers who want to move but have been waiting for a market turnaround grow weary of waiting, Berkeley professor Davidoff said.

"It's like being in a teakettle. People eventually want to get out," he said...

But some affluent buyers say high prices, not tough credit standards, are keeping them from purchasing a home. It's simple, they say: Just as in the under- $500,000 market, buyers will come forward in expensive neighborhoods when prices fall.

Simon Lee, a commercial real estate investor who has been shopping for a house in Bel-Air, Pacific Palisades and Brentwood, said he believes prices in those areas are still inflated in today's market.

"I think it needs a major adjustment, 25% or 30%," he said.

Lee said he was among a small group of bargain hunters scouring these Westside neighborhoods for homes priced under $2 million.

"I see the same people every week at the open houses," he said.

How did CalPERS so misjudge land investments?

There's a story in the L.A. Times about how CalPERS -- the California Public Employees' Retirement System -- misjudged the California land market by investing $1 billion in a land partnership that controlled 15,000 lots along Interstate 5 in the Santa Clarita Valley.

So what happened? First, from the Times story:

CalPERS, the nation's biggest public pension fund, and its partners acquired a controlling interest in 15,000 acres of undeveloped land in the Santa Clarita Valley early last year, before the meltdown in the housing market. The land, once owned by Newhall Land and Farming Co., was appraised at $2.6 billion at the time of the CalPERS investment but has dropped considerably in value since then.

Caught in a credit crunch, CalPERS and its partners in LandSource Communities Development are in talks with a loan syndicate headed by Barclays Capital Inc. to restructure $1.24 billion in debt. LandSource received a notice of default on April 22 after missing a payment of an undisclosed amount, and a Standard & Poor's online newsletter, citing anonymous sources, predicted that LandSource would file for bankruptcy this month.

CalPERS' LandSource investment is likely to pay off in the long run as continued growth in the Southern California economy increases pressure to build north of the San Fernando Valley...

CalPERS' potential problems with developing Newhall Ranch could reach beyond current difficulties with tight credit and an economic slowdown, said Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. Because of escalating gasoline prices and longer commute times, Newhall Ranch might be too far from central Los Angeles to function as a traditional bedroom community, Gabriel said.

"Residential development in the future is going to look different than in the past. We're in a new energy price environment," he said. "The emphasis is going to be on reducing commutes and carbon emissions."

The article makes some good points at the end, namely that we're now in a different environment for development planning than we were even a year ago.

Two years ago I spoke with a Wall Street fund also looking to invest in Santa Clarita Valley land, and at that time the conventional wisdom was that the area -- with a lot of local employers -- could probably ride out a downturn better than outlying areas such as the Antelope Valley or the Inland Empire. What no one counted on was the credit crunch and its aftermath, which has resulted in sharply lower land prices due to the lack of financing for both development and the home mortgages builders require in order to develop and sell homes.

Why no one saw this coming will be a great case study for the future, but to imply that CalPERS didn't due its due diligence with the best information available at the time simply isn't true. Not only will this change how communities are developed and financed, but will also undoubtedly impact the nature and scope of feasibility studies.

Habitat for Humanity takes advantage of foreclosures

According to an AP story, the rising tide of foreclosures has lowered prices enough for the non-profit builder Habitat for Humanity to take advantage:

The foreclosure crisis that has forced thousands of families from their homes has given something good to the nation's best-known housing charity: Cheap properties for sale in communities around the country.

Some Habitat for Humanity chapters have seized buying opportunities in neighborhoods affected by the mortgage meltdown, snapping up scores of empty lots and unoccupied homes - some for as little as half price...

In the Minneapolis area and elsewhere, the charity that offers affordable housing to low-income families is buying foreclosed homes and using volunteers to renovate them. If that's not practical, the houses are torn down to make way for new dwellings. In some cities, Habitat is even buying parts of subdivisions that developers couldn't afford to finish.

Habitat officials don't see themselves as capitalizing on the misfortune of others. They say putting families into affordable Habitat homes is much better than allowing properties to remain vacant or letting slumlords grab them...

An official with Americus, Ga.-based Habitat for Humanity International said the extent to which local affiliates take advantage of foreclosures depends on how much money they have.

In Fort Worth, for instance, the local chapter is negotiating to buy part of a 160-lot subdivision that a developer left unfinished. Yager said the plan is to purchase 50 of the remaining 100 vacant lots and put single-family homes on them.

Yager declined to say how much he expects to save because his group is still negotiating. But he said the Fort Worth market for such lots has dropped around 30 percent to 40 percent since the height of the real estate boom.

In nearby Dallas, another Habitat affiliate has picked up about 150 lots at a roughly 50 percent discount as developers dump inexpensive lots in the city's southern neighborhoods to focus on more profitable areas to the north.

The Habitat affiliate in Phoenix had struggled in recent years to find affordable land. But it is closing in on a deal to complete a 20-home development abandoned by a company that went bankrupt. Habitat expects to buy 14 unfinished lots for around half price.

In Milwaukee, the city is buying condo units in one large complex - many of them in foreclosure - and then selling them to Habitat for about $5,000. Habitat volunteers renovate them, and the group sells them to clients for $25,000.

Legislation working its way through Congress might help Habitat and nonprofit housing agencies take even greater advantage of bargains. One bill would send $15 billion to the hardest-hit states for the purchase and improvement of foreclosed property. States could then make those properties available to nonprofits such as Habitat. However, the Bush administration has threatened a veto.

The long-term damage of foreclosures

Perhaps the most important thing I've learned reading comments on housing blogs is how many people (especially the knee-jerk "No Bailout!" crowd) don't really understand macroeconomics. I can certainly see why -- when I was in college I used to joke, "I'm an econ. major but that doesn't mean I'm boring!" because the array of numbers, tables and graphs in beginning economics classes was enough to put most people to sleep (something I've discussed with economics professors I know, but they're very committed to the teaching of theory first).

Where economics gets interesting is in the application of its theories, and few places test the combination of psychology and money more than in the housing market, which is actually a giant puzzle of various trade-offs. That's why it's interesting that Dr. Robert Shiller -- co-founder of the S&P/Case-Shiller housing price index and a Princeton professor -- opined in the New York Times over the weekend that the rising foreclosures in this country, coupled with the often hypocritical tsk-tsks of the less tolerant, could very well have a long-term impact on the psychology of the American consumer. Frankly, I'm just happy that an economist has emerged from his ivory tower long enough to see things from a perspective that isn't simply an objective discussion of numbers alone. From his article:

ACROSS the United States, there were 243,353 foreclosure filings in April alone, nearly three times the total in the same month just two years ago, according to RealtyTrac, a company that follows the numbers. The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.

It’s easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. After all, we live in a capitalist economy that thrives on the sanctity of contracts. The founders of our nation put the contract clause into the Constitution to make it clear that people need to live up to the documents they sign...

This stern view may, in fact, be winning the battle of public opinion. On May 9, the House approved legislation aimed at helping some of the people facing foreclosure, but the president has said he would veto it...

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

But instead of having sympathy for these homeowners, many people blame them for their predicaments. That isn’t surprising. It’s an example of a general tendency that was documented by social psychologists decades ago.

In his 1980 book, “The Belief in a Just World: A Fundamental Delusion,” Melvin Lerner, a social psychologist, argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who appear to be suffering are in fact responsible for their own situations. He provided empirical evidence, derived from experiments, that after an initial pang of sympathy, people tend to develop negative views toward others who are suffering. That negative tendency seems to be at work today.

Second, it is important to consider the psychological trauma of foreclosure. No one is likely to starve or sleep on the streets as an immediate result of a foreclosure, and the authorities no longer dump a family’s furniture on the sidewalk when it happens. Nonetheless, there is deep trauma.

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

But we are now seeing the president’s Ownership Society plan operate in reverse. Already, the homeownership rate has fallen — from 69.1 percent in the first quarter of 2005 to 67.8 percent in the first quarter of 2008. That’s almost back to the 67.5 percent level where it stood when Mr. Bush took office in 2001. And it is likely to fall further.

The pain of this reverse movement could leave a psychological scar that will be with all of us for the rest of our lives.

A 'dead cat' bounce on Wall Street?

Is Wall Street being too optimistic about the Fed's actions to keep the financial markets from unraveling extending to the overall economy and the housing market? According to economist Ken Rosen, there's still another 'leg down' for housing prices due to high foreclosures, tight consumer credit, job losses that will also result in higher delinquencies for credit cards and HELOCs. From a MarketWatch.com video:

Partisan rancor behind a housing rescue bill

Wonder why it seems to be taking so long for Congress to agree on a housing rescue bill that most can live with? Not surprisingly, the fact that it's an election year has made the politics even more complicated. From a CNNMoney.com story:

The momentum behind congressional efforts to let the government offer more aid to struggling homeowners has hit stiff resistance...

The wild-card: it's an election year. Republicans who hail from states with big subprime problems could be on the hot seat with constituents if the housing picture doesn't improve and Congress lets the bill die.

The full Senate is not expected to address the housing issue before early June.

Dodd's bill would let the Federal Housing Administration back mortgages of at-risk borrowers if lenders voluntarily write them down to an affordable level, a proposal similar to one passed by the House last week.

Republicans have said the plan amounts to a bailout that would put taxpayer dollars at risk and help lenders and borrowers who took imprudent risks.

Democrats counter by saying that the cost of the FHA plan - the House's version is estimated at $1.7 billion - is not a big price to pay considering that the Federal Reserve is backing JPMorgan Chase's purchase of Bear Stearns with $29 billion to curb systemic risk on Wall Street. They also contend that the point of the FHA proposal is not just to help individual homeowners but to prevent a rash of foreclosures in financially hurting communities, where home values and property taxes are already taking a hit.

And presumptive Republican presidential nominee John McCain has proposed an FHA rescue plan that is similar in parts to Dodd's proposal...

Another sticking point in the negotiations over Dodd's bill is a measure that would provide for stricter oversight of the two biggest players in the mortgage market - Fannie Mae and Freddie Mac. The two government-sponsored enterprises guarantee the purchase and sale of home mortgages in the secondary market. Both have experienced accounting scandals in the past and both saw steep first-quarter losses.

Key Republicans, such as the Banking Committee's ranking member, Richard Shelby, R-Ala., have been campaigning for more stringent safeguards than Dodd's bill provides. In particular, Shelby wants the agencies to hold a bigger financial cushion in reserve to protect them during housing market downturns and to allow their regulator more latitude in changing those capital requirements as the regulator sees fit...

Lawmakers are under pressure to act quickly. They have little more than 5 legislative weeks left before they break for the July 4 recess. After that, political analysts say, the focus will shift solely to the elections and most legislative business will grind to a halt.

FannieMae lowers down payments to 3-5%

After instituting higher down payments for borrowers in areas of declining home prices, FannieMae has reversed itself, and now plans to require just 3% to 5% in order to help loosen the tight mortgage market. From a CNNMoney.com article:

Fannie Mae is doing away with higher minimum down-payment requirements for borrowers in parts of the country where home prices are dropping.

The government-sponsored mortgage finance company said Friday it will require minimum down payments of between 3% and 5% for all loans that it guarantees. That replaces a December policy that required a higher minimum if the loan was for a home in a zip code with declining real estate prices.

Washington-based Fannie (FNM, Fortune 500) says the move is part of its effort to help resuscitate the flagging mortgage market...

Richard Gaylord, president of the National Association of Realtors, said in an April letter to Fannie Mae, that because the health of a housing market can differ widely -- even in the same zip code -- in a particular neighborhood can differ widely, neighborhoods with healthy housing markets are often stigmatized...

A Freddie Mac spokesman said the McLean, Va.-based company earlier this month adjusted its policies to make 5 percent down payments available in declining markets. Rather than defining those markets by zip code, Freddie Mac allows appraisers to make that determination, he said.

The announcement comes as lawmakers near a bipartisan agreement on a housing bill that could bring stricter regulation for the two companies. Senators are considering tapping a fund drawn from Fannie and Freddie's profits to pay for a new foreclosure-prevention program.

Congress created Fannie and Freddie to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. Together they hold or guarantee about $5.1 trillion in home-mortgage debt.

Non-residential construction the next to fall?

Although it was mostly the housing industry which got hammered in 2007, this year non-residential construction sectors including offices, retail, hotels and industrial uses may also decline. From a CNNMoney.com story:

Demand for new homes collapsed last year. Next up could be a similar drop in the rest of the construction market -- and that could be the latest drag on an already sputtering U.S. economy

Nonresidential construction, which includes office buildings and retail centers, hotels and institutions such as schools, hospitals or government buildings, remained strong through much of 2007.

But a combination of the economic slowdown and tighter credit appears to be putting the brakes on nonresidential projects. Even if work continues on those projects already underway, there are signs that the pipeline of new construction is about to dry up...

A slowdown in the entire construction market would be bad news for the economy. Investment in nonresidential buildings added an average of $250 billion to the economy every year since 1990. A downturn is also expected to lead to the loss of many well-paying jobs in the months ahead.

Economists say a fall-off in nonresidential construction in the face of an economic slowdown shouldn't be a surprise.

"Developers are a little nervous about getting enough rent, getting enough tenants so they're pulling back," said Jim Haughey, chief economist for Reed Construction Data.

What's more, Haughey said construction on some public infrastructure projects, such as highways and sewers, are being put on hold or slowed down as local governments struggle with declining tax revenue and tight budgets...

Industry tracker McGraw-Hill Construction reported that nonresidential construction starts had remained strong through February, then plunged 23% in March, the most recent month for which a reading is available.

Hotel starts tumbled 67% after the start of large hotel projects in Las Vegas and Atlantic City in February, while office construction was down 28% and store construction was off 18%...

Another troubling sign is that the Architecture Billings Index, a widely respected leading indicator of commercial construction from the American Institute of Architects, has been in a free-fall for several months. It hit a record low in March and has fallen more than 20% in the past three months.

"On the commercial side, best I can tell the problems are in all of it - offices, retail, hotels," said Kermit Baker, chief economist for the American Institute of Architects. "I think we will see a prolonged decline"

Baker said he's hopeful that the downturn will be limited since office vacancy rates are relatively low. But he said high prices for many basic materials, such as steel and copper will keep some projects on hold. A weak dollar and strong global demand for those products is keeping the prices high...

Inflation is also making the market seem healthier than it is. Haughey said higher material costs are masking the slump in nonresidential building because construction is measured by the dollars spent on projects. In other words, fewer structures are getting built but it's costing more to do so.

David Seiders, chief economist of the National Association of Home Builders, said problems in the residential mortgage market seem to have spread to the nonresidential construction sector as well even though there hasn't been a corresponding problem with rising defaults on those types of loans. He points out that the Federal Reserve's latest loan officer survey showed that tightening of credit in commercial real estate.

The survey found more than two out of three loan officers said their lending standards in the sector have tightened "somewhat" and another 10% have tightened them considerably.

"The degree of credit tightening going on there is very noticeable right now," said Seiders. "It's frozen up along with the private mortgage-backed security market."

The impact of rising gas prices on suburbia

The Developments blog at the Wall Street Journal has an interesting post on the long-term impact of rising gas prices on suburban development -- a subject this blog has discussed on numerous occasions and well before the recent run-up in prices at the pump (hat tip to Patrick.net):

Rising gasoline prices have affected much of American life –- from the cars we drive to the vacations we take. A new study, however, indicates that increasing gas prices may have the strongest impact closer to home — the houses we choose to live in.

In a report entitled “Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs,” released this month by CEOs for Cities, economist Joe Cortright contends that while predatory lending and subprime mortgages had a hand in today’s housing crisis, higher gas prices played a major role –- and will have a much longer-lasting impact on U.S. consumers’ home-buying preferences...

Higher gas prices negatively impact housing prices by sapping home buyers’ budgets and leaving less to spend on housing, and by making consumers less apt to bid more for homes in less centrally located suburbs, he explains.

The study notes that while initiatives by states and the federal government to ease the housing market’s woes will have some positive effect on the real-estate market in the months ahead, higher fuel costs will permanently impact the suburban landscape as more home buyers choose to reside in closer-in locations that offer shorter commutes and mass transit.

He point out that in metropolitan areas like Chicago, Los Angeles, Pittsburgh, Portland and Tampa, home prices have fallen more in farther-flung ZIP codes than in close-in neighborhoods. For instance, in Chicago, while housing prices have remained stable in close-in neighborhoods within three miles of the city’s central business district over the past 12 months, home prices have fallen 4% in “distant” neighborhoods 13 miles from the central business district. And in Los Angeles, while home prices have dropped 6% in close-in neighborhoods, they have decreased 10% in distant neighborhoods, according to the report.

Meanwhile, an article in Sunday’s Arizona Daily Star newspaper looked at the effect gas prices may have on suburbs in Tucson, Ariz. While some individuals quoted in the article expressed a desire to move closer in to the city to cut down on gasoline costs, other said they prefer to remain in the outskirts despite fuel costs because they perceive the suburbs to be more family friendly and safer than residing in the city.

The future of green homebuilding

Although 'green building' has been noted a lot the last couple of years, it wasn't until recently that homebuilders have instituted a national set of standards to bring various local groups together. On a local level -- such as in Atlanta, GA -- green building techniques have helped to spike sales while offering homebuyers greater efficiency in a time of scarce energy resources.

My most recent article for Builder & Developer magazine discusses these trends in more detail:

It was in early 1977 when a newly elected President Jimmy Carter donned a cardigan sweater on national television, urged Americans to do the same and then asked them to turn down their thermostats to conserve energy. But who could guess that he was on the forefront of a movement towards resource sustainability that would take another 30 years to coalesce? Not only has green building and conservation emerged as the most important trend in homebuilding, but according to some experts will help drive the U.S. economy once the current recession eventually rebounds...

...according to the NAHB 2007-2008 Consumer Preference Survey as analyzed by Jonathan Smoke at HousingIntelligence.com, nearly 90% of respondents are concerned about the impact their homes have on the environment. Yet because only 16% are willing to pay extra to address that concern, homebuilders would be wise to first target those consumer segments actually willing to spend a premium. Fortunately, Smoke thinks three of his defined consumer groups fit into this category, including “Feature and Location,” “Elite” and “Active Adult Elite” buyers, who share in common a desire for quality, prestige and community. To further increase the odds of success, he suggests builders focus on top-rated green items including Energy Star-rated windows, energy-certified appliances and generous insulation while getting rid of now-dated design features such as two-story foyers which are expensive to heat and cool...

For those harried sales agents already under pressure to explain the specifics of a home plan and neighborhood, when it comes to explaining green building – or green mortgages, which allow buyers to qualify for higher loan amounts when they’re buying energy-certified homes -- it’s best to let simple displays in the model homes and colorful collateral in the sales office do the talking.

With some clever design elements, that collateral could easily double as a benefits list for comparison shopping – and pity the poor builder who thinks green building is just another fad, because they’re now in the minority. In a 2007 survey conducted by Professional Builder, 70% of homebuilders agreed that this is a trend that’s here to stay, and of those respondents, 83% considered it extremely important to their marketing strategy which has had a positive impact on sales.

MetroIntelligence adds management consulting to its roster of services

I'm very pleased to announce that MetroIntelligence Real Estate Advisors has added Simmons Group Consulting to our growing roster of services for the real estate industry, in this case development management consulting. Established in 1992, The Simmons Group mission is to increase client productivity and profitability by offering cost-effective senior development management services best applied through a trusted outsourced relationship.

Founder Phil Simmons certainly knows what he's talking about -- most recently, he launched the Urban Division as Division President for John Laing Homes -- the second-largest private builder in the U.S. -- and before that was Development Officer for Archstone-Smith, AvalonBay Communities, and Watt Industries. David Gaulton, who also serves as President of the highly regarded firm of Pacific Development Services, heads up The Simmons Group's construction management operations.

I first met Phil when he was a panelist for a session I moderated at a Big Builder conference in Las Vegas, and afterwards interviewed him for an article I wrote for California Builder magazine on product development strategy. We were so impressed at MetroIntelligence with Phil's honesty, development acumen and insight that it seemed a natural fit to add development management consulting to our increasing roster of services, and look forward to working with Simmons Consulting Group on a variety of projects, both now and as the market rebounds.

Homebuilders still see recovery a long way off

According to the regular NAHB/Wells Fargo poll, U.S. homebuilders are finding a market continuing to deteriorate and not expected to rebound anytime soon. From a CNNMoney.com story:

Homebuilders' confidence fell once again in May and their view of the state of the battered market hit a record low.

The National Association of Home Builders/Wells Fargo monthly index fell to its second lowest reading on record, ahead of only last December's reading.

Builders were asked for their view of the current market, the amount of the buyers looking at homes and expectations for six months from now.

Only 6% of the builders surveyed believe the current market is good while 69% view it as poor. Builders also reported a lower level of people looking to buy new homes.

And 51% of the builders said they now expect conditions to remain poor six months from now, up from 47% who were expecting a poor outlook in the previous reading...

The report comes a day ahead of the government's latest report on housing starts and building permits. Economists surveyed by Briefing.com forecast that starts fell to an annual rate of 940,000 April, which would mark a 17-year low. Permits, also viewed as a reading on builder's confidence in the market, are forecast to slip to 912,000, which would also be a 17-year low.

Earlier this week, luxury homebuilder Toll Brothers (TOL, Fortune 500) reported sharp drops in both revenue and new orders when it released preliminary results, saying that even many buyers who put down a deposit aren't taking the next step of signing a contract due to lack of confidence in the market.

An update on the "Is Standard Pacific for Sale?" Post

I blogged earlier this week about a story in the L.A. Times theorizing that builder Standard Pacific might be for sale. Last night at a networking event, I got an update: there was a conference call on the company's most recent earnings, and as part of that call, management discussed that a sale was one of many possibilities available to the company, but that there were no plans to do so. The Times article made it seem like they were moving in that direction, but my source said it was stated simply because public companies are obligated to divulge all possibilities to their shareholders.

Delinquent HOA fees another consequence of the housing bust

Chalk up another reason that a disorderly reduction in home prices and sales isn't the best thing for the housing market, as many angry renters (and bloggers) would believe. There's a story in the Wall Street Journal about what happens to condo (and master-planned) communities running deficits because of delinquent HOA fees (I saw a similar story last weekend on CNN which featured an existing resident running around the community with weed killer to help protect her investment):

Here's another consequence of the troubled housing market: Some homeowners associations are running low on cash...a growing number of homeowner and condominium associations across the country are raising their fees or putting the brakes on clubhouse improvements, new landscaping and other shared neighborhood amenities. The kitty is so low for some that essential services, such as building maintenance, electricity, trash removal and repairs have been cut.

As community residents lose their homes to foreclosure and new home building has slowed considerably, many of the roughly 300,000 neighborhood associations in the U.S. are grappling with shrunken budgets. One estimate puts the delinquency rate on dues at less than 5% in many markets -- higher than normal, though still not enough to threaten basic services, says John Carona, president of Associa, a Dallas-based company that represents 7,000 community associations in 26 states. Normally, the delinquency rate is about 2%, he says.

Elsewhere, the rate is much higher. At Spanos Park East in Stockton, Calif., owners of about 25% of the development's 1,500 single-family homes have been delinquent in paying their quarterly dues, according to Adrianne Bretao, a manager at M&C Associations Management Services, which helps to manage the community association. As a result, the association has put off expanding a patio area in the clubhouse and swimming pool this year, says Denise Laven, the association's president...

Rules on fees and services are outlined in association bylaws, and some states have laws that cover governance of the associations. So individual homeowners often have little power to fight increases in dues and cuts in services -- as long as the board is following the rules. They also have little recourse against delinquent neighbors other than filing lawsuits, which can be costly and time-consuming.

That's why housing experts advise homeowners to read the bylaws thoroughly, asking what services are guaranteed and whether annual fees are capped. Still, since bylaws were drafted when the community was first built, few outline contingencies in the event of a wave of foreclosures...

housing experts say a growing number of banks aren't paying association dues on properties on which they have foreclosed and now own.

Colin Hendrick, president of the Carlisle on the Ocean Condominium Units Association Inc. in Surfside, Fla., has filed six lawsuits since December against banks that failed to pay dues on foreclosed units.

One of those banks, Minneapolis-based U.S. Bancorp, says it isn't responsible for the assessment fees, saying that they are merely the trustees of the property and that the service agent is responsible for the payments. But Florida lawyers say that since the bank is the ultimate owner, it should have to pay.

So far, no overdue fees have been recovered as a result of the lawsuits. With 20 of the development's 115 luxury condominium units in foreclosure and an additional 35 units either behind on their fees or not paying them at all, the association says, it had no choice but to jack up fees 10% to $470 a month...

The tough economy is hurting associations even in areas where the housing market has been relatively stable. Rob Rosenberg, president of Massingham & Associates Management Inc. in Hayward, Calif., says 90% of the 350 home associations managed by his company in the Bay area of California are seeing a rise in the number of residents who pay their dues late or not at all. Some of the associations are toughening their payment policies by sending out more reminder letters, and many will have to start cutting amenities or services after another six months if they don't start collecting more fees, Mr. Rosenberg says.

Craig Koss, president of Kramer-Triad Management Group LLC in Ann Arbor, Mich., says he advised his 300 local homeowner associations to cushion their budgets with additional dollars in anticipation of the heavy foreclosures last year, but only about 25% of the associations did so. He says fiscally responsible associations will keep reserve funds, but in most states, there is not a state agency to oversee the associations to ensure that reserve funds are set up. "A lot of people won't plan until they have to," he says. "They won't have a rainy day fund until it's pouring."