Rather than wait for the moribund housing market to rebound, some builders and developers are instead looking to rezone their land for other uses, such as retail, office or industrial uses. So how successful is this strategy? A story on BuilderOnline.com explains:
The single-family housing market has come to a grinding halt, with land now being sold for 10 percent or 20 percent of what it was once worth. Left with the choice of either accepting the lower price or holding the land indefinitely, many developers are drawn by the appeal of converting lots or selling them for some other use, particularly in light of the fact that the commercial and industrial sectors are foundering far less than their residential counterparts...
Unfortunately, no matter what the current or future use of land may be, a sale may never take place. In this economy, any kind of land deal is difficult...
Rezoning your residential property as commercial, office, or industrial use may look enticing-especially with growing government support...
1) Quantify Demand. Commercial and industrial uses may look appealing, but you need tenants.
2) Know the Competition. Even if there's demand in the area, there may be a backlog of supply at other business parks that will doom a transition.
3) Sign Tenants. The best way to ensure you have tenants when you open is to have them when you break ground.
4) Don't Count on the Chains. Just because you have land at good prices, it's not a given that major chains such as Home Depot will be interested.
If you wanted to attend this year's BIS (Building Industry Show) in Long Beach on November 13th and 14th but money's too tight, fear not. The BIA of Southern California is offering a free pass to building industry associates. Click here for details and to register.
According to a presentation this morning in San Bernardino, it looks like it's going to be tough sledding in the Inland Empire for the near future, with home prices continuing to decline and an economy in recession.
Such were the projections of speakers from Beacon Economics, which organized the conference and the University of Redlands, which acted a title sponsor (MetroIntelligence Real Estate Advisors was also a sponsor and authored the real estate sections of the report). From a story in the L.A. Times:
A panel of economists today offered grim predictions for the Inland Empire economy, including a rise in unemployment, a slide in manufacturing and a wave of foreclosures likely to continue for another two years.
Some of the numbers were staggering.
"There has been a 3,500% rise in foreclosures in the Inland Empire since 2005," said Brad Kemp, director of regional research for Beacon Economics, a research and consulting firm. "Most people want to think this housing drop is over, but it's going to continue."
A recovery, he said, is not expected until early 2011, the same year he thinks the housing crash will bottom out after home prices fall 28% to 32% more...
"California has been in a recession for almost a year now," said Christopher Thornberg, one of the founders of Beacon Economics, which produced the forecast. "This is not only a recession but a deep recession, and it's amazing how many people were denying it even when we were in the middle of it."
He said house prices must fall 40% to 50% to become affordable again. And when they do, it will be a long time before values go up.
"Housing markets don't bounce, they splat," he said. "We will be at the bottom for a while. The peak of foreclosures will be around for the next two to three years."
Recessions, he said, are a good thing because they "work the evil out of the system."...
Between 2000 and 2006, 315,000 jobs were created and 815,000 new residents moved in, according to the report. Home prices jumped 214% in Riverside County and 241% in San Bernardino County.
Many homeowners took out adjustable-rate mortgages that were foreclosed when the rates reset at a higher level. Home prices plummeted 35% in Riverside and 37% in San Bernardino Counties over the last year.
"Most of the downturn . . . will be experienced by the end of 2010, when median home prices are expected to be on order of $198,000 and $165,000 in Riverside and San Bernardino Counties respectively," the report said. Click here for full story.
If you missed the presentation, you can find the conference materials here:
Here's a short summary from the publisher on the book:
Since the early 1980s, the United States has experienced a wave of prosperity almost unprecedented in history in terms of wealth creation, new jobs, and improved living standards for all. Under the leadership of Presidents Ronald Reagan and Bill Clinton, Americans changed the incentive structure on taxes, inflation, and regulation, and as a result the economy roared back to life after the anti-growth, high-inflation 1970s.
Now the rest of the world is following the American economic growth model of lower tax rates, more economic freedom, and sound money. Paradoxically, one country is moving away from these growth policies and putting its prosperity at risk -- America.
On the eve of a critical presidential election, Laffer, Moore, and Tanous provide the factual information every American needs in order to understand exactly how we achieved the prosperity many people have come to take for granted, and explain how the policies of Democrats Barack Obama, Hillary Clinton, and Nancy Pelosi can cause America to lose its status as the world's growth and job creation machine.
The End of Prosperity is essential reading for all Americans who value our nation's free enterprise system and high standard of living, and want to know how to protect their own investments in the coming storm.
Sounds a bit hysterical, but realize he IS selling a book.
Laffer, who is famous for "The Laffer Curve," which posited that, in certain situations, a decrease in tax rates could result in an increase in tax revenues, has written an op-ed piece in The Wall Street Journal in support of his book (hat tip: L.A. Land):
Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book "Fooled by Randomness."...
No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple...
The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.
But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it...
Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the "retirement test" for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.
The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.
These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.
The most recent Case-Shiller numbers for August 2008 are out, and they're continuing to show sharp pricing declines from last year. But what's interesting to me is that the price declines -- at least so far -- have been far sharper for homes priced under $380,000 (-39%) than for those priced in the top third, or over $573,000 (-19% decline).
So can these higher-priced homes continue to hold their values, or are they destined to fall further to match the sharper decline in cheaper homes -- which have historically provided the required equity to move up to pricier homes? Given the economic fundamentals at work, I think it's just a matter of time before we see sharper declines at the higher end. From an L.A. Times story:
The Standard & Poor's /Case-Shiller index of home prices in 20 metropolitan areas was down 16.6% in August from the same month a year ago. Los Angeles and Orange County home prices were down 26.7% in August compared with August 2007...
Close behind in their August annual price drops were Miami (28.1%), San Francisco (27.3%) and San Diego (25.8%).
The smallest August yearly declines were in Dallas (2.7%) and Charlotte (2.8%).
In the Los Angeles area, lower-priced homes showed greater price declines than the high end of the market. The lowest-priced third of homes, those under $380,000, declined 39% in value in August compared with August 2007, according to the index. Prices of the top third of homes, those priced above $573,000, fell 19% in August compared with a year ago.
Lower-priced Los Angeles area homes dropped 42% from their fall 2006 peak price. The highest-priced third of Los Angeles area homes were down 21% from their peak in the summer of 2006.
Overall, Los Angeles area home prices were down 31% from their fall 2006 peak and matched spring 2004 prices.
I just heard from a real estate reporter (and friend) at the L.A. Times that her job has been eliminated along with 74 others, including the former editor of the real estate section, with whom I had worked and had one of the best working relationships in my career(s), writing or otherwise. Click here for the coverage of the layoffs from the Times.
Although I know that it's a tough time for traditional newspapers, this is very sad news for Southern California because it leaves the Times -- the largest daily on the West Coast the #4 in the nation in terms of circulation -- with very little local or regional coverage of real estate.
While some would argue that blogs can take up the slack, I would in turn tell them that they really know nothing at all about blogging. Blogs are about citing other news stories and writing short articles, and not providing the sort of in-depth coverage that a large newspaper can do. And if everyone's blogging, then who writes the longer articles to cite? Oh, I know -- osmosis!
Regardless of whatever political arguments readers might have had with the Times (many found it too left-leaning in recent years), I don't think that extended to the real estate coverage. Given the terrible advice doled out by real estate agents, the CAR and other from the supply side of the real estate industry during the boom years, the dearth of an important source of objective information is truly a terrible thing irrespective of the economics cited for its demise.
One can only hope that some type of appropriate replacement -- such as a website or blog that provides high-quality, feature-length stories -- will eventually arrive on the web.
Despite the wide prognostications by economists on further sales declines of new homes, the Commerce Dept. showed an increase in sales activity during September 2008 as prices continued to fall back to 2004 levels. Still, because the sample size for this particular report is fairly small -- and audits less than 5% of permit reporting places throughout the U.S. -- we could see revisions to the data next month. From a New York Times story:
Sales of new homes recorded an unexpected increase in September as median home prices dropped to the lowest level in four years.
The Commerce Department reported Monday that sales of new single-family homes rose 2.7 percent last month to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from the August level.
The median price of a new home sold in September declined 9.1 percent from a year ago to $218,400, the lowest price level since September 2004, a period when home prices were rising rapidly as the country experienced a five-year housing boom.
The surprising increase in September sales still left them 33.1 percent below the level of a year ago as the country is battered by the worst housing slump in decades.
Zandi, who is also widely quoted as an economic expert in the national press as well as a consultant to the McCain campaign, has been better known as Chief Economist and co-founder of Moody's Economy.com, so he's in a particularly good position to write the book, which provides a comprehensive overview of the sub-prime crisis, the related fall-out and, more importantly, some policy prescriptions for how to avoid similar mistakes in the future.
However, since his book was printed in July it missed out on some of the recent events, so I thought it was important to interview Dr. Zandi for any updates. Some money quotes:
On whether or not a government bailout is a wise move:
"It's guarding against the downside risks, which are quite considerable...If we don't down this path quickly, then the policy choices will get overwhelmed by the magnitude of the problem."
On what's next for the homebuilding industry:
"I would expect it to go through a very significant rationalization, and expect to see more failures, although the big, publicly traded builders are still in business and I don't think that's going to change."
On what else needs to be done to fix the housing market:
"Another write-down plan should be implemented and keep on trying to forestall foreclosures...It's a reasonable way to go to write down the first mortgage to the point that it becomes affordable and guarantee the part that's written down to the lender."
On the current economy:
"I think we've been in a recession for a year and will be through next summer -- about the worst we've experienced since the end of WWII, although perhaps not as bad as the 1982 downturn. I would expect unemployment rates to peak at 8% by early 2010."
I'd imagine that some apartment investors with long-term bets on the rental market are feeling somewhat vindicated by the news that, at least according to data tracker RealFacts (an alliance partner to MetroIntelligence and Beacon Economics), rents and occupancy levels continued to hold up during the third quarter of 2008. From an AP story via the L.A. Times:
Apartment rents, as well as apartment occupancy, across the country were virtually unchanged in the third quarter of 2008, according to RealFacts, a San Francisco-based apartment data research firm.
And while more than a million homes have been lost to foreclosure in the last two years and with banks readying for another 1.5 million repossessions, apartment buildings have remained solvent. To date, there have been virtually no foreclosures on large apartment buildings, according to RealFacts...
In the San Francisco Bay area, with one of the highest housing prices in the country, average rents for the third quarter were $1,637, or 1.2 percent higher than the $1,618 they cost per month in the second quarter.
In the Riverside-San Bernardino area of southern California, which has one of the highest foreclosure rates in the country, rents were $1,157 in the third quarter, slightly down from $1,162 in the second.
And in the Las Vegas area, also hit hard by foreclosures, rents were $887 in the third quarter and $886 in the second...
The data collected by RealFacts comes from more than 3 million apartments in complexes of 100 units or greater.
Next Wednesday, October 29th, is the fourth and final annual conference for 2008 produced by Beacon Economics, this time at the following location:
National Orange Show Events Center Valencia Ballroom 689 South "E" Street, San Bernardino, California
Space is limited though, so if you want to go be sure to pre-register here or click on the link on the upper right-hand side of this blog.
Special offer for The Housing Chronicle Blog readers: email me at pduffy@metrointel.com for a code you can use when registering to save $50 off of registration (normally $150).
This event will focus on the Inland Empire. MetroIntelligence Real Estate Advisors is again participating in this event as a sponsor, including writing the real estate section for the conference books.
Want to learn more and attend? Read on:
Where do some of California's most renowned and straight-talking economists think local, state, and national economies are headed in 2009?
The Inland Empire: Ground zero in California's housing bust and recording massive numbers of foreclosures...
Will the region suffer a long-run downturn or will demographic forces stimulate a quick recovery?
Any sign of a bottom? When will builders see new demand?
Are woes in the residential housing market spilling over into the retail and office sectors?.
How will local government handle revenue shortages?
The State: California hit harder than the nation as a whole...
Do the harder hits imply a quicker recovery?
Will the Federal housing bill do anything to stabilize California's residential markets?
The Nation: Recovery, continued doldrums, or worse yet to come...
Wall Street wreckage: what does it mean for the broader economy?
Is the inflation boogie man really about to jump out of the closet?
Has the Fed avoided a major banking sector collapse?
Featured Speakers
Jon Haveman Founding Principal Beacon Economics
Christopher Thornberg Founding Principal Beacon Economics
Stuart Dorsey President University of Redlands
Johannes Moenius Associate Professor University of Redlands
California's Budget Blues: Special Panel on Fiscal Reform
Jim Brulte (invited) Former California State Senator State of California
Daniel Mitchell Professor and Ho-Su Wu Chair in Management UCLA
Fred Silva (moderator) Fiscal Affairs Advisor Beacon Economics
Beacon Economics is pleased to announce that it has joined forces with the Inland Empire's University of Redlands in hosting its 2nd annual Inland Empire Economic Forecast Conference. Beacon’s track-record of truth-seeking economic analysis and the University of Redland's reputation academic rigor promise a candid, thought-provoking, and practical discussion. The event is already generating a buzz, and seating is limited. So reserve today!
Attendees also receive Beacon's new 2008 Inland Empire Economic Forecast Book. This original, in-depth look at the region’s labor markets, income, real estate markets, demographic trends, and other indicators, is a valuable and enduring resource for anyone facing important economic and financial decisions over the next year.
Due to a combination of rising foreclosures and criticisms that the recent bailout packages did little to address homeowners at risk of default, the Bush Admin. is proposing more help on the way. From a New York Times story:
With foreclosures mounting, Bush administration officials said Thursday that they were preparing to step up efforts to help struggling homeowners.
A senior policy maker told a Senate committee that the administration was working on a plan under which the government would offer to shoulder some of the losses on loans that are modified.The insurance program could cost tens of billions of dollars, according to a person briefed on discussions about the plan, and would be run by the Treasury Department under the $700 billion financial rescue bill Congress passed earlier this month...
Details of the plan are expected in the next week or two. Ms. Bair told senators that policy makers were contemplating creating standardized loan modification practices that would be used by mortgage servicing firms, which handle billing and collection on behalf of investors and banks. Loans modified under those principles would qualify for a partial federal guarantee.
In other words, if homeowners defaulted on their loan again, part of the loss would be borne by the government. It was unclear whether investors or homeowners would have to pay premiums for that protection.
Following months of rhetorical obfuscations reminiscent of his past Federal Reserve meeting minutes that mostly served to deflect mounting criticisms of his now-infamous laissez-faire philosophy, Alan Greenspan finally issued a mea culpa and admitted that he might have been wrong about the housing bubble, although you had to listen closely to catch it. From an L.A. Times story:
Former Federal Reserve Chairman Alan Greenspan told Congress today he was in "shocked disbelief" at the breakdown of credit markets that has triggered "a once-in-a-century credit tsunami" inflicting great damage on the U.S. economy.
"This crisis ... has turned out to be much broader than anything I could have imagined," Greenspan told the House Oversight and Government Reform Committee in his first congressional appearance since financial markets began melting down last month. "Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment."
Greenspan, who stepped down as Fed chairman on Jan. 31, 2006, after nearly 20 years in the position, reiterated comments he made early this year about his surprise that financial markets had allowed the credit crisis to develop. And under questioning he admitted that the crisis showed flaws in his strong free-market ideology .
Although the home building industry tends to be somewhat fiscally conservative -- especially in the executive ranks -- this year it's become much more complex, with some builders actually admitting to voting for -- drum roll, please -- a Democrat (The Housing Chronicles Blog is remaining apolitical in this particular race.) From a BuilderOnline story:
Builders tend to be a fairly reliably Republican crowd, but the factors influencing the 2008 election seem to have pushed them into new political territory, based on interviews BUILDER did this week with a dozen builders around the country...
Not surprisingly, builders cited the state of the housing market and global economy as a significant factor in their voting plans for president. But many also expressed frustration at the lack of real solutions to the housing crisis being offered by either Republican John McCain or Democrat Barack Obama...
Several builders said that extremism was not what they wanted in their next president. "I will support whichever candidate is less likely to be swayed by the extreme factions in their party. I'm equally leery of ultra-left Democrats and ultra-right Republicans, and I don't want anyone in the White House who will put social issues ahead of stewardship of the economy," said McGuiness, who said he plans to vote for Obama. "McCain seems to be courting the extreme elements in his own party more so than Obama is in his; McCain, once in, may very well return to being as independent-minded as he once was, but we have to accept the possibility of [Sarah] Palin ending up president, and I think she is part of the extreme element I don't want in charge."
The pick of Palin as vice president also dismayed John Gavenas. An independent voter, he serves as vice president of land planning and development at Avatar Properties in Florida, and like the other builders interviewed for this story, stresses that his political opinions are his own and do not reflect the views of his company or colleagues. "The possibility of Palin leading this country is an unthinkable option, and McCain's choice of her as his vice president seriously undermines his credibility. Less than two years' experience as governor of the least populous state in the union; 700,000 people; and zero foreign policy experience (got her passport last year?); not to mention a lackluster education and a far-right religious agenda," Gavenas told BUILDER via e-mail. "How could this be a serious choice for any other than the rock-bottom base of the Republican Party?"
I'm very pleased to report that traffic to The Housing Chronicles Blog has continued to increase, especially over the last month. At the same time, our syndication deal with BlogBurst since February of 2008 has helped us to recently reach the 8 million headline view, mostly on the Reuters website.
Top 10 Publishers (All History) for Housing Chronicles
Total Views
Reuters
7,709,403
FoxNews
152,420
Chicago Sun Times
120,050
Livestrong
17,053
Computer Shopper
11,476
IBS
5,203
Wall Street Journal
5,017
Palm Beach Post
715
usatoday.com
263
CT Green Scene
209
BlogBurst has also announced the beta testing of a "new & improved!" syndication service that will expand the publishers carrying blog content, of which this blog is currently participating.
Thanks to all the readers who continue to visit this blog, we do appreciate it!
According to a conference on October 21st at the Hyatt Regency in San Francisco (for which MetroIntelligence authored the real estate sections), the region's economy remains the strongest in the state and is not expected to experience a repeat of the tech-related bust earlier in the decade. Although home prices in the City of San Francisco are not expected to decline as other parts of the state, the neighboring counties of San Mateo and Marin are projected to suffer some additional pain through 2009. From a story in the San Francisco Chronicle:
Home prices and taxable sales will fall in the San Francisco metropolitan area while rents rise and unemployment climbs.
But the 1.8 million residents of Marin, San Mateo and San Francisco counties still live in California's strongest economic region and should suffer less from the housing bust than the rest of California, says a forecast being issued Tuesday. "Things will be rough here, but not nearly as rough as the Inland Empire (in Southern California) or in Contra Costa County," said Chris Thornberg with Beacon Economics...
The 113-page report calls the three-county metropolitan area "the strongest economy in the state of California at the moment," but warns that it still will be hurt by the housing collapse that has crippled the global financial system and undermined the world economy.
The forecast tries to predict economic conditions in the three-county zone through the first quarter of 2010 and suggests that:
-- Home prices will fall roughly 25 percent from their peak.
-- Taxable sales will drop by 10 percent across the region.
-- Payrolls will shrink by 2.5 percent over the next two years.
-- Rental rates are likely to continue to rise, particularly in San Francisco, where 60 percent of households are renters...
Economic softness is expected to hit commercial real estate, which had begun to recover from the dot-com bust. But the forecast assumes that the region's prestige and proximity to Silicon Valley will merely slow the growth of rental rates in the metropolitan area - put at 11 percent last year - rather than lead to a collapse.
"Rent growth is expected to fall to just 1 percent over the next year, although over a five-year horizon it should average a more moderate 3.5 percent in the region," according to the forecast.
But individual renters will get no such relief as the region's relative economic strength and desirable lifestyle draws job seekers and shrinks the vacancy rate which, at about 4.3 percent, is among the lowest in the state. "Over the last two years, average asking rents have continued to rise," noted the report, which expects the landlords' market to continue for now.
Principal at MetroIntelligence Real Estate and Economic Advisors.
Consultant to Wall Street institutions, home builders, commercial developers, lenders, investors and municipalities throughout the U.S.
Cited in multiple newspapers including New York Times, Wall Street Journal, L.A. Times, S.F. Chronicle, Boston Globe, Chicago Tribune, Orange County Register, San Diego Union and many others.
Public speaker for building industry associations, trade shows, company presentations and radio/TV interviews.
Visit www.metrointel.com for complete bio.
