The Housing Chronicles Blog, Copyright (c) 2007-2010 Patrick S. Duffy

New column for March 2010 issue of Builder & Developer magazine now online

pduffy@metrointel.com (Patrick Duffy) — Fri, 12 Mar 2010 20:21:00 +0000

My column for the March 2010 issue of Builder & Developer magazine is now online. For this issue, I focused on how builders are downsizing square footage but keeping high-quality materials and focusing on compelling designs demanded by today's buyers. You can read the entire article by clicking here.

An excerpt:

For years we’ve been hearing about gradual changes in the interior preferences of homebuyers, but during the boom years many builders stuck with the tried and true rather than risk their production schedules – and profit margins – on risky changes. Of course with discounted short sales and foreclosures continuing to dominate most local housing markets, new homes not only have to be competitively priced, but offer updated design cues and interior amenities...

Some builders staying alive by working for banks

pduffy@metrointel.com (Patrick Duffy) — Wed, 03 Mar 2010 19:25:00 +0000

As I had written about in January of 2009, in which I suggested that some builders could keep their operations alive by taking on remodeling work and also working for banks to finish up half-finished project, it appears that's just what has happened. From a story in the Wall Street Journal:

Home builders in some of the nation's hardest-hit housing markets are going to work directly for banks, in a little-used arrangement that is helping to ameliorate conditions in some battered local economies.

The builders traditionally got loans from banks to build homes, but that credit has largely dried up. The contract work builders are getting is welcome as many of them struggle to stay afloat...

...builders from California to Florida are starting to contract their services to lenders, many of whom have been left holding unfinished homes after the original builder went belly up. While there are no data on the trend, many builders are taking this work for the first time, particularly in markets like Nevada, Arizona and California, says Stephen Melman, director of economic services for the National Association of Home Builders.

The trend helps preserve relationships between builders and lenders in a strained time for the two. In some of these situations, home builders are working for the same institutions that won't lend money to them. While banks have hired builders before for fees, the trend is more prevalent now as more financial institutions own foreclosed properties, experts said...

The shift also helps the banks. In Atlanta, Beazer Homes USA Inc. in November was selected by Hearthstone Inc., an institutional investor in Los Angeles, to build and market homes on 462 lots over the next two to three years after another builder on the job went out of business. Hearthstone President Mark Porath said the company initially faced selling the lots for a loss after the first builder went bust. Now with Beazer on board, Hearthstone stands to eke out a small profit, he said.

Beazer officials said the deal—its biggest ever with a bank—allows it to expand in a market they feel has growth potential without facing much downside risk. Beazer is being paid "more a fixed than variable" payment for its work, with some "upside" compensation if certain goals are met, said Beazer Chief Financial Officer Allan Merrill...

Current tax credit program hits the skids

pduffy@metrointel.com (Patrick Duffy) — Wed, 03 Mar 2010 19:18:00 +0000

It looks like the $6,500 tax credit for existing homeowners looking to buy another home has been pretty much DOA for a variety of reasons. From an AP story via MSNBC.com:

It sounded like a great idea three months ago: Hand homeowners a $6,500 tax credit to find a new place to live, giving a thrust of energy to the housing market's recovery.

So far, people are staying put.

In November, the federal government extended a tax credit of up to $8,000 for people who hadn't owned a home for three years. This credit had helped boost home sales last summer and fall. Seeking to build on that momentum, the government added a new credit of up to $6,500 for current homeowners, hoping it would transform them into house-hunters this winter and spring...

But real estate agents around the country say the credit is doing little to elevate sales. Reasons vary.

The unemployment rate is still near 10 percent and consumer confidence is falling. Home prices have stabilized in some markets, but are still a third below their 2006 peak. Droves of people who want to sell are stuck because their home is worth less than they paid for it. Harsh winter weather has Americans shoveling driveways instead of preparing their home for buyer visits...

Agents believe the credit's true test will come in the spring, the busiest home-buying season. Concerns about high unemployment could keep buyers on the fence...

Another problem is that homeowners, in many cases, will need to sell their current home to afford a new one and claim the credit on tax returns. That's a major issue for borrowers who owe more than their home is worth. Nearly one-in-three homeowners with a mortgage is currently in that situation, according to Moody's Economy.com.

Also, $6,500 may not mean much to a buyer with enough equity to sell a property and afford another home. The savings will hardly dent down payments or moving costs. Most sellers employ real estate agents who typically receive 6 percent of the sales price...

Economists argue that a tax credit is rarely the sole motivation for a home purchase. Many believe tax credits just accelerate sales that would have happened anyway, leading to a drop off once that demand is exhausted...

To qualify for the $6,500 credit, buyers must have owned and lived in the same home for five consecutive years out of the past eight. They must sign a contract by April 30 and close before June 30. Lawmakers can extend both tax credits, but it's not clear if they will.

The home's purchase price can't exceed $800,000, and it must be used as a main residence. The income limit for single taxpayers is $125,000; for a married couple, it's $225,000.

A rebound for apartment builders?

pduffy@metrointel.com (Patrick Duffy) — Wed, 03 Mar 2010 18:50:00 +0000

After a couple of years in the doldrums, it looks like apartment builders are finally gearing up again for an anticipated leap in demand to occur once the economy rebounds and potential renters now doubling up with roommates (or living with their parents after boomeranging home after college) strike out on their own. From a Wall Street Journal story:

This year, real-estate investment trusts, or REITs, are expected to start close to $1 billion in new multifamily projects, according to real-estate research firm Green Street Advisors. While that still is less than average, it is a significant increase over the $100 million of development starts in 2009.

Analysts caution that the increase in construction doesn't mean there has been an improvement in the business. Apartment vacancy is at a record and unemployment, essential to the sector's health, remains elevated.

But operators are betting that limited new supply, combined with an improving economy, will lead to ideal market conditions nationwide starting in 2011 or 2012...

To be sure, there are risks. Given the multiyear construction window, companies have to start now to be ready in time. If the economy weakens further and recovery is delayed, landlords may be forced to keep rents low or offer free rent to get leases signed...

Landlords also are excited about demand. The 20-to-34 age group, prime renting age, is expected to increase by five million in the next decade, according to Hessam Nadji, managing director of Marcus & Millichap, a real-state-investment brokerage firm. People who moved home or who bunked with roommates during the downturn also might ink leases as the economy improves.

Moreover, construction costs "have fallen rapidly in the last two years," said Tom Toomey, chief executive of apartment owner UDR Inc. A unit that would have cost $300,000 to build two years ago could now be built for as little as $220,000, Mr. Toomey said...

The case for principal reductions

pduffy@metrointel.com (Patrick Duffy) — Fri, 26 Feb 2010 01:14:00 +0000

These days, it's hard to find a more emotionally charged issue than the idea of a principal reduction for underwater borrowers. The problem is that arguments such as "Not fair!" "No taxpayer-funded bailouts" and "You made your bed -- now lie in it!" do nothing to address the larger, macroeconomic issue of foreclosures or short sales that might be unnecessary if lenders wrote down the principal to current market value.

What's to be gained by forcing people to refuse jobs in other locations because they can't sell their (underwater) homes -- especially when a lender will still have to write down the principal owed with a short sale or a foreclosure? It just seems nonsensical to me to do so if the borrower has the financial means to continue making payments on a reduced mortgage.

But rather than listen to me, listen to real estate columnist and "Real Estate Professor" George W. Mantor, who provides an excellent overview of the subject and the benefits of principal reductions. From the article:

...as continuing price declines push more and more homeowners deeper and deeper underwater, we are going to see a second wave of defaults. And, this one is not only going to swamp the market, it’s going to take the future with it when it recedes.

The employment numbers don’t mean anything. They don’t count failed business owners and other self-employed, and there are a lot of them, who are not entitled to unemployment insurance. There are those who have simply given up looking for work or those who have “graduated” and have maxed out their benefits.

Without substantial job creation, more homeowners will lose their grasp on their finances as unemployment insurance, savings, and retirement accounts are depleted.

Then there is the thorny issue of deferred interest loans made between 2005 and 2007, the peak of the market, that will adjust upwards in the months to come. Property values in some cases have fallen by as much as half, making the possibility of a refinance remote and increasing the likelihood that the borrower will exercise a strategic default...

The only way to avoid more and deeper pain across all sectors of the economy is principal reduction to market value. What is a short sale but a principal reduction for the new owner? How does that solve anything while getting us to the same place?

Obviously, the banks will resist and not just so they can collect on the default swaps. Principal reduction would require bringing the borrower and the true holder of the note, the investor, to the same table. The last thing the banks want is for borrowers and investors to come face to face.

The investors would realize that half of their money was skimmed off the top and that the value of the security is only a fraction of what they were led to believe.

As investors, they understand the difference between a 75% loss of value and a 100% wipe-out. Sooner or later, these assets have to be corrected on someone’s balance sheet. Not only would they more readily agree to mark to market rather than lose everything, but in most cases, these are the only people who could legally agree to a permanent loan modification or a short sale.

The upside for them is that the revenue stream is restored. Once the pools are in default, they get nothing, even though there may be performing loans within the pool.

Foreclosing and reselling in most markets is done at a price that represents the true market…what a willing buyer will pay tempered by what a willing lender will appraise the collateral for, often, some tentacle of the foreclosing lender. In this scenario, the financial intermediary also gets any proceeds from the foreclosure, not the investor.

These are extraordinary times and they call for extraordinary approaches. Here are 10 reasons why reducing loan balances and restoring lost equity is the best approach now.

1. What we are doing to address the problem isn’t working.

It isn’t going to work and, in fact, the longer we pretend that there will be significant loan modifications, the worse things are going to get.

2. Everyone who is upside down should get relief.

By “re-equifying” those households, we free up consumer spending, stimulate lending, and start putting people back to work—everyone wins.

3. It will cost less.

By keeping people in their homes, we reduce the costs of social services that are breaking the budgets in every community.

4. We were all gamed by the system.

Some worse than others. Here is just one little trick that even the smartest know-it-all usually wouldn’t catch in their loan documents. It is in the disclosure of Yield Spread Premiums. Most of us are used to seeing four percent written as either 4% or .4. But financial intermediaries express it this way, .04. The way we might express four tenths of a percent. On a $500,000 loan, it’s the difference between $2,000 and $20,000.

5. It will happen anyway.

The equity is gone; the loss is real. Foreclosure is the most expensive, least desirable way to bring the property back to its true market value

6. We all win if we do and we all lose if we don’t.

I’m sure that a handful of people who haven’t felt some real pain may be taking some perverse pleasure in watching their neighbors pack up and leave, but when you hear the stories of some of the homeowners who have stayed in vacant neighborhoods, the actual cost to those who remain is probably greater.

7. Borrowers and investors both gain.

Securitized loans put the investor and the borrower in same boat. Both were defrauded by the financial intermediaries and neither has received any remedy for their losses.

Trillions for financial intermediaries and nothing for the parties that were scammed. Instead of giving the money to the financial intermediaries that perpetrated this Ponzi scheme, it should have gone to the investors who were willing to accept the reduction in value of the pool. Instead, we give the money to the financial intermediaries who conceal the values of the assets. It’s a game.

8. We can afford to do it; we cannot afford not to.

Since the start of the meltdown, the Fed has amassed a whopping $9 trillion in loans to foreigners, but they will not say and, apparently there is no record of, where the money went. That’s $30,000 for every man, woman and child in America. That’s our money and right now, we need it.

At the moment, Congress is pushing for an audit of the fed, something that hasn’t been done in over ninety years. You would think everyone who is working for the taxpayer would want the taxpayer to know where their money is going, but this is shaping up to be one heck of a fight.

9. Some players in the mortgage arena are starting to get it.

Wilbur Ross owns American Home Mortgage Servicing, Inc. the third largest mortgage servicer in the country and he recently became one of the leading advocates for principal reduction. His reason, loans with significant principle reduction that give the owner equity in the property stay current.

In an interview with HousingWire he said, “The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way.”

This was demonstrated in a study by investment firm Ellington Management which showed that every month, 8% of homeowners whose mortgages were 160% of the value of the home became delinquent while only one percent of those with loans that were 60% of value become delinquent.

10. It would jump start the economy.

Uncertainty isn’t good for the economy. Not knowing how far values will fall, not knowing when job losses will abate, and seeing no light at the end of the tunnel are paralyzing. Not just to consumers, but also to small business owners who are the hiring engines we need to pull us out of this recession. They need to know that consumers can and will spend before they start rehiring.

By restoring the lost equity in homes, we immediately stabilize real estate prices by establishing a “floor” and the true market value of property.

By stopping foreclosures, communities start to see their tax basis improve. They can start to rehire laid off workers such as teachers and emergency responders.

As distasteful as this may be to some people, it’s time to admit that there are no other solutions. The value is gone, never was really there, a few people got rich, a lot of people got poor, and now we have to fix it.

Has the time for mass-produced fuel cells finally arrived?

pduffy@metrointel.com (Patrick Duffy) — Thu, 25 Feb 2010 19:34:00 +0000

Back around the year 2000, I wrote an article for a local building industry group magazine about fuel cells and the impact on housing, cars and overall economy. But due to ongoing issues with using hydrogen to power these cells, over the last decade the industry has struggled to gain traction. Now, however, a Silicon Valley start-up called Bloom Energy has invented a relatively simple fuel cell that can run on not just hydrogen, but a host of other renewable energy sources.

Firstly, 60 Minutes aired a segment about Bloom Energy (I sure hope they give their PR people a nice raise!) on Sunday night:

Watch CBS News Videos Online

Next, a story in the L.A. Times covers the company and its technology:

After nine years of research shrouded in secrecy, a Silicon Valley tech firm Wednesday took the wraps off a fuel cell that it says can generate energy by combining air and a wide range of fuels without going through the process of combustion.

The firm, Bloom Energy, said the solid oxide fuel cell -- resembling a Polaroid snapshot both in dimension and thickness -- could be a game-changer in the clean technology industry because it can be powered by either fossil fuel or renewable sources in an electro-chemical process that is both cleaner and more reliable than current options.

In the company's plans, thousands of fuel cells would be crammed into a box about the size of a refrigerator called the Bloom Energy Server, each capable of producing 100 kilowatts of electricity, or enough to power 100 average-size homes or a small office building, Bloom said...

Still, given the high cost ($700,000+), it will be awhile until prices come down far enough to power individual homes. However, power companies could install a unit at a substation to power a specific neighborhood rather than build expensive power plants in remote locations that can be expensive to transmit (just look at your power bill).

Last year, EBay Inc. set up a 500-kilowatt system powered by biogas outside its San Jose headquarters, taking 15% of the campus' energy needs off the electrical utility grid. The fuel cells, which EBay dubbed "skinny batteries," were officially introduced at the company's site Wednesday with Gov. Arnold Schwarzenegger and former U.S. Secretary of State Colin Powell on hand.

Bloom Chief Executive K.R. Sridhar, a former NASA scientist, described the technology behind the fuel cell in a statement as potentially having "the same kind of impact on energy that the mobile phone had on communications."

Fuel cell technology has been in development for decades, with hydrogen as the usual fuel source. But Bloom's flat ceramic squares are more versatile, the company said.

Is it time for principal reductions?

pduffy@metrointel.com (Patrick Duffy) — Wed, 24 Feb 2010 18:00:00 +0000

Amidst the news that approximately 25% of homeowners with mortgages are now underwater (meaning they owe more than their mortgage balance), will we start seeing more cries for lenders to offer principal reductions to (a) make these existing mortgages more affordable; and (b) provide an incentive to keep borrowers in their homes? Given the high recidivism rate among borrowers with loan modifications -- which is often like putting a Band-Aid on an amputated limb and then praying it holds -- perhaps it's time to look at other options. From a CNNMoney.com story:

Nearly 25% of all mortgage borrowers were underwater, meaning they owe more on their loans than their homes are worth.

First American CoreLogic, the research firm that monitors housing equity, reported Tuesday that 11.3 million homeowners -- or 24% of all homes with mortgages -- were underwater as of the end of 2009. That's up from 23% and 10.7 million borrowers three month earlier...

For many homeowners, being underwater, also know as negative equity, has few consequences. If they're not planning to sell and can afford their monthly bills, they can wait out the downturn.

For others, however, plunging underwater can spell disaster. If they become unemployed or have a financial emergency, they have no equity to tap. Or, if they need to downsize or sell their home to relocate for a job, they can't...

Traditionally, being underwater was one of two main factors in determining a borrower's likelihood of foreclosure. The other is having sufficient income to pay bills. But, there's an increasingly important exception: strategic default. As equity gets more and more negative, some homeowners are choosing to quit paying and give the keys to the bank.

As long as negative equity remains a big problem, it will be difficult to stem the tide of foreclosures that continue to plague many local real estate markets around the nation.

New home sales fall to all-time low

pduffy@metrointel.com (Patrick Duffy) — Wed, 24 Feb 2010 16:00:00 +0000

One of the biggest concerns regarding efforts by the federal government to boost homebuying activity was that by borrowing demand from the future, when those training wheels were removed we could see a double-dip. So is that what's happening with the new home market? From a CNNMoney.com story:

Sales of new homes plunged to a record low in January, government figures showed Wednesday, as the weak economy and a glut of foreclosed homes continue to weigh on the market.

The seasonally adjusted annual rate of new home sales plummeted 11.2% to 309,000 last month, compared with a revised rate of 348,000 in December, the Census Bureau said. That's a decline 6.1% from January 2009...

The drop surprised many industry analysts. A consensus of economists surveyed by Briefing.com had expected January sales to rise to an annual rate of 354,000.

"Some people were expecting a surge in demand because of the tax credit," said Patrick Newport, an economist at IHS Global Insight. "But that surge isn't materializing."

Congress extended a popular tax credit last year that allows first-time buyers to deduct up to $8,000 from their income taxes and some repeat buyers to get a $6,500 break. Buyers now have until April to apply for the credit, which helped boost new home sales from depressed levels last year.

New home sales fell in all U.S. regions except the Mid-west, where sales edged up 2.1%. The Northeast was the hardest-hit last month, with sales plunging more than 35%...

At the current sales rate, it would take 9.1 months to sell through that inventory. That's up from December, when there were 8.1 months of inventory on the market. Prior to December, inventory levels had been steadily declining since May 2009.

Adam York, an economist at Wells Fargo, said the inventory of new homes for sale appears to be leveling off near 235,000 units.

"This is well below the level that persisted for most of the 1990s," he said, "suggesting builders have moved most of their excess inventory and will be in a better position when sales do eventually recover."...

Some economists expect new home sales to improve as the number of foreclosed properties on the market decreases and buyers take advantage of the tax credit.

"The supply of foreclosed homes has tightened," said Celia Chen, a senior director at Moody's Economy.com. "I think by early spring, home sales will pick up because buyers will want to take advantage of the tax credit."

IHS Global Insight's Newport said he also expects sales to pop this spring. However, he may reduce his full year forecast for new home sales in light of Wednesday's report.

"Builders are putting up homes," he said. "But what these numbers are telling us is that those homes aren't selling."

New home interiors adapting to a changing market

pduffy@metrointel.com (Patrick Duffy) — Fri, 19 Feb 2010 23:02:00 +0000

For years we’ve been hearing about gradual changes in the interior preferences of homebuyers, but during the boom years many builders stuck with the tried and true rather than risk their production schedules – and profit margins – on risky changes. Of course with discounted short sales and foreclosures continuing to dominate most local housing markets, new homes not only have to be competitively priced, but offer updated design cues and interior amenities.

Perhaps the biggest change today is that, on average, new homes are getting smaller after nearly doubling during the previous generation. According to a 2009 survey by the NAHB, 58% of potential buyers reported a preference for smaller homes with high-quality materials, and between 2007 and 2009 the desired square footage shrank from 2426 to 2292 square feet.

Although many production builders are getting ahead of this trend by ditching the status-seeking sweeping staircases, grand foyers and attention-getting fireplaces, Marianne Cusato, designer of the famous “Katrina Cottages” of 300 to 1800 square feet now available at Lowe’s, has introduced a “New Economy Home” for a larger audience.

At a reasonable 1676 square feet, Cusato’s design offers a flexible downstairs suite that can morph from a family room or office into a rental unit or a downstairs master bedroom in conjunction with an owner’s needs (and even, as she suggests, allow a divorced couple to share the house if finances are tight). What’s missing from her plans, of course, are features which might look nice but add little to a home’s utility value, such as long hallways, giant master suites, media rooms and that now-dated scion of the early 2000s – the Roman tub.

One key demographic group with design as a primary component of a home buying decision is Generation Y. While a large portion of this group may currently be doubled up with roommates in apartments or have temporarily boomeranged to live back with their parents, when the economy rebounds they’ll want their first taste of freedom in both stylish rentals and for-sale homes.

Importantly, for this cohort less is more, meaning clean lines and contemporary styling accented with bold colors against neutral backgrounds. Since both the Generation X and Y value social opportunities, builders can do a lot by properly merchandising small spaces for casual entertaining with the use of game tables and flat screen TVs.

Although the kitchen still remains the activity hub for most parties, the best designs create interactive flow with an adjacent family room by substituting breakfast bars for walls. And with outdoor spaces such as patios, yard and balconies increasingly becoming part of the overall entertaining experience, they should not only interact well with traditional interior rooms but also be easy to furnish.

For Gen Y, Gen X and Baby Boomers combined, they’re also increasingly demanding home offices or dedicated workspaces in lofts and alcoves, yet desire homes which require little maintenance and offer flexibility for a multi-tasking lifestyle.

And, while numerous surveys have demonstrated that buyers don’t want to pay more for green features, they still want to see them at least offered as an option (and one way to show a builder’s green credibility is to always offer appliances with an Energy Star label).

In the end, today’s more sophisticated buyers seem to be bringing a list of opposites to the sales table: homes that are both social hubs and sanctuaries, homes that are green but don’t cost any more, and homes that are well-designed but exclude pricey upgrades and options they can’t recoup when they re-sell. But for those builders who step up to that plate and are willing to swing, future riches may indeed await.

Banks finally seeing short sales as cheaper than foreclosures

pduffy@metrointel.com (Patrick Duffy) — Thu, 18 Feb 2010 02:59:00 +0000

For a few months now I've been hearing rumblings that many of the non-foreclosure sales out there are actually short sales since lenders have, after needlessly losing more money than necessary to the (old-fashioned) foreclosure process, realized that short sales are faster, easier and prevent angry borrowers from trashing the place when they leave.

So what took them so long? Well, I can only speak from personal experience, but my very first job out of college was for a mortgage company that was associated with a (now-defunct) S&L, and rocket scientists they weren't. From an L.A. Times story:

In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn't worth what the owner paid for it after more than two years of falling real estate values.

Such deals are appealing to struggling homeowners because they escape weighty house debts -- but they don't get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.

Lenders, which can withhold approval of a short sale if they don't like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure...

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

Late last year, the Obama administration added incentives to get short sales done if a borrower is unable to qualify for a modified mortgage as part of the government's $75-billion effort to help troubled homeowners. Starting in April, the government will pay incentives to lenders and borrowers when a sale is completed.

Many economists view short sales as a way to address a problem that mortgage relief hasn't fixed: properties that are "under water," carrying more debt than the home is worth....

Short sales remain difficult. Uncertainty over home prices makes properties hard to value, lenders are understaffed and multiple loans on a home can trip up negotiations among creditors...

One factor motivating banks to go along with short sales is that foreclosures typically cost more. Foreclosed properties often sit vacant, susceptible to damage from neglect or vandals. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale...

Then there's the problem of second mortgages, which have proved to be a thorny impediment to the housing recovery. The loans were widespread during the boom years as people tapped rising equity or financed a down payment.

Of the 1.2 million U.S. properties in foreclosure, about 34%, or 403,670, have a second loan, according to RealtyTrac. In California, with 280,023 properties in foreclosure, about 46%, or 128,800, have a second loan.

A muddled outlook for homebuilders in 2010

pduffy@metrointel.com (Patrick Duffy) — Tue, 16 Feb 2010 20:51:00 +0000

In contrast to the overall market, stocks of some homebuilding companies have continued to rally this year on the assumption that the strongest ones will take market share and emerge victorious when the market eventually rebounds. But since it's largely been government largesse propping up the housing market in the form of tax credits and low interest rates, once those training wheels are removed there is a real concern of a double dip. And of course there's also the matter of another wave of foreclosures, which are generally priced far below new homes. From a story in BusinessWeek:

While new home orders have increased in recent months and the pace of housing starts is expected to accelerate, the reality is that the housing market continues to be heavily reliant on government stimulus initiatives affecting everything from mortgage rates, sales of homes to first-time home buyers, and the pace of bank foreclosures... Macquarie Equities Research analyst Kenneth Zener says he expects distressed home sales to be kept near the 2009 pace—1.8 million—over the next three years, because of efforts by the government and banks. But he believes government programs, such as the Federal Home Affordable Modification Program (HAMP), have only delayed and not solved issues around negative equity, which require some principal forgiveness... While the economic recovery holds out hope for homebuilders, the wild card will be the rate of foreclosures. And that's likely to become more volatile as the government withdraws its massive liquidity on signs that the economy is finding its footing again.

February 2010 column for Builder & Developer magazine now online

pduffy@metrointel.com (Patrick Duffy) — Thu, 11 Feb 2010 23:44:00 +0000

My most recent column for Builder & Developer magazine is now online. For this particular column -- and in keeping with the magazine's theme highlighting exteriors -- I discussed the importance of architecture and quality exteriors in order to builders to compete against existing homes (and especially foreclosures).

An excerpt:

With steeply discounted foreclosures taking a huge bite out of the potential demand for new homes over the past couple of years, the nation’s home builders initially reacted with a combination of incentives and price cuts to stay competitive. Yet as the recession has worn on, the building industry has managed to find another trump card up its sleeve that will stay with us even as the economy rebounds: compelling architecture. Ranging from the practical and sustainable to the purely aesthetic, new home design is here to stay as a primary means for builders to stay competitive.

At the most recent Gold Nugget Awards in San Francisco, the one common element among the award-winning projects was not only offering attractive exteriors and an efficient use of space, but also incorporating designs into the scale and look of the surrounding area...

You can read that column here.

Why that bomb in the commercial markets keeps on ticking...

pduffy@metrointel.com (Patrick Duffy) — Tue, 09 Feb 2010 23:38:00 +0000

For months now we keep hearing about this impending train wreck in the commercial real estate market. According to a story at CNN.com, however, banks have already recognized about 50% of their potential losses, meaning this is a train wreck that's already in motion -- albeit quietly. From the story:

Banks have already recognized about $50 billion in losses, or about 60% of the estimated cumulative losses, according to real estate research firm Foresight Analytics.

And despite a steep drop in the price of apartments, office buildings and industrial properties nationwide over the past year, there have been recent indicators to suggest that the market may have finally hit bottom.

After 13 months of consecutive declines, overall commercial property values climbed 1%, according to the most recent monthly reading by Moody's/REAL Commercial Property Price Index...

Unfortunately, the consensus is that neither prices nor occupancy rates will improve anytime soon.

Estimates published last November by the Urban Land Institute and PricewaterhouseCoopers suggest that commercial real estate vacancies will continue to increase in 2010, while prices could tumble further during the year. Prices could fall as low as half their peak levels from 2007.

If that happens, that would only darken borrowers' hopes that banks will refinance their outstanding loans. And some $1.4 trillion is commercial real estate debt is expected to come due over the next three years.

Matt Anderson, partner at Foresight Analytics, said that can mean only one thing for banks: more losses...

Strategic defaulters beware: banks coming after those with deficiency judgments

pduffy@metrointel.com (Patrick Duffy) — Fri, 05 Feb 2010 00:51:00 +0000

Well this is interesting. Although we've been hearing over the last couple of years that lenders are too swamped with defaults to consider pursuing borrowers who can't re-pay the mortgages, that is now changing. In those states in which loans are recourse -- meaning they can come after you personally even after the mortgage lien has been released -- borrowers who walk away or complete a short sale are finding out that banks aren't happy until the entire amount borrowed has been paid.

And for those who think walking away through a strategic default is about the same as using a coupon in a store? Banks are combing through payment histories to make sure that if you walk away that it's because you can't pay any of your bills and not just your mortgage.

Of course in recourse states such as California, lenders can only take back the property used as collateral for the loan. But if you've refinanced or placed other debt on that property, watch out! From a CNN.com story:

Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth...

Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them...

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are "non-recourse" and don't allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims...

Releasing title does not necessarily end the debt. It's complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale..

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."

New realities for Baby Boomers

pduffy@metrointel.com (Patrick Duffy) — Thu, 04 Feb 2010 18:21:00 +0000

Question: what happens when you're a Baby Boomer, your home equity evaporates and the value of your retirement savings plunges?

Answer: You work longer!

Such are the findings from a survey conducted by pollster Harris Interactive retirement community builder Del Webb/Pulte. From a BigBuilderOnline.com story:

The study, which polled Boomers in two specific age groups--those turning 50 this year, and those turning 64--found that the average anticipated retirement age has been extended by about four years. Whereas a majority of 50-year-olds polled in 1996 said they planned to retire at 63, those turning 50 today said they expect to retire around age 67.

But what is retirement? The research also suggests that today's definition does not necessarily exclude professional pursuits. In the latest survey, 41% of 50-year-olds and 18% of 64-year-olds who are still working said they don't anticipate ever retiring. Boredom, self-satisfaction, and enjoyment were among the reasons cited for staying employed, but the No. 1 factor was financial stability.

Sobering as it may be, more Boomers are economically unstable now compared to a decade and a half ago. In 1996, roughly 11% of 50-year-olds reported they had not even begun saving for retirement; today that number is double. The study also found that nearly 40% of older Boomers who have already technically "retired" are continuing to work on some level...

Click here for entire story.

New home architecture as a competitive edge

pduffy@metrointel.com (Patrick Duffy) — Fri, 29 Jan 2010 22:29:00 +0000

For example, Barry Berkus’ Yarnolani Court won Project of the Year for what is in fact a small, five-unit infill project in Santa Barbara not just due to its LEED Platinum certification and its unique way of combining interior and exterior spaces, but also due to its attention to detail. While remaining true to the city’s Spanish architectural traditions, Yarnolani Court offers a slimmed-down scale to accommodate less than 2,000 square feet of living space while still paying attention to details such as cantilevered wooden alcoves, wrought iron railings and arched windows and doors.

In areas throughout the Sun Belt, smaller interior square footages can be balanced by a more artistic approach to bringing in the outside. That’s how a project such as Shapell’s Grand Award for its Belmaison in San Jose can be recognized for its use of double courtyards that allow natural light and passive ventilation to maximize the impact of what nature has to offer on a very narrow lot.

For a high-density urban development, paying attention to the scale of the surrounding neighborhood is critical. In the case of Grand Award-winner The Renaissance by Signature Properties in the City of Concord (a suburb of the Bay Area), connections to the immediate area – including transit stops – are enabled by a scale friendly to pedestrians and enhanced by exterior articulations that underscore the high quality of materials used. The result is a project that won’t seem trendy five years from now and has become an integral part in the city’s revitalization plans.

Even for an infill project in an existing suburban area, sensitivity to local history and architectural norms is critical. When SummerHill Homes built Lane Woods in Menlo Park -- once known as a weekend getaway for residents of San Francisco and San Jose – the builder preserved 96 existing trees, oriented lots around a central park, and offered up traditional wood siding, large porches and balconies. Suddenly a project with just 32 homes could lay claim to its own version of an ‘old growth’ neighborhood while still providing the environmental and technological benefits of new construction.

As builders – and their buyers – continue to embrace the advantages of green building, even small changes can make a difference. For example, porous pavers can assist water run-off during storms while re-charging underground aquifers, roof-integrated solar panels can help reduce power bills while minimizing the aesthetic impact to the exterior look, and specially treated paint applied to just about any surface can act as an insulator capable of cutting energy use by 20% to 40%.

On a national scale, the days of the ever-present stucco home may even be numbered. According to a recent survey conducted by Harris Interactive, 59% of homeowners with a preference for siding would choose brick, followed distantly by vinyl with 37%, stucco with 19%, fiber cement/composite with 14% and ‘other,’ with 11%. It looks like more sophisticated and traditional exteriors – those which win awards -- are here to stay.

BofA breaks logjam, signs up for piggyback loan modification program

pduffy@metrointel.com (Patrick Duffy) — Wed, 27 Jan 2010 18:44:00 +0000

Here's hoping that lenders are just as much as lemmings as other businesses and join Bank of America in signing up for modifying 'piggy-back' loans as part of President Obama's $75 billion foreclosure prevention program. This is a big step in preventing foreclosures, as these lenders have traditionally been stuck in second place behind first mortgages and didn't want to take huge losses on short sales. From BuilderOnline.com:

Mortgage companies are finally starting to sign up for a long-delayed piece of the Obama administration's $75 billion foreclosure-prevention program.

The administration had been offering lenders who made so-called "piggyback" mortgages - second loans that allowed consumers to make a little or no down payment - incentives to lower payments or eliminate the loans entirely.

But no one signed up until Tuesday when Bank of America became the first to do so.

During the housing boom, lenders readily gave such second loans. While home prices soared, such mortgages were even extended to borrowers with poor credit and people who didn't provide proof of their incomes or assets.

Those loans are now an obstacle to alleviating the housing crisis. That's because piggyback lenders - fearing they won't be repaid - can veto a borrower's efforts to modify their primary mortgage..

If more lenders follow Bank of America it could clear the way for more mortgage companies to cut borrowers' principal balances on their primary loans. But administration officials appear wary of subsidizing such reductions with taxpayer money.

That could spark a backlash from critics who claim it's unfair to people who are still paying their mortgages on time and a bailout for banks that made reckless loans.

With foreclosures still at record-high levels, The Obama administration's program to aid homeowners has been a disappointment. Only about 66,500 borrowers, or 7 percent of those who signed up, had completed the program as of December.

The Treasury Department plans later this week to announce a streamlined process designed to get more borrowers to complete the loan modification program. The program reduces mortgage rates to as low as 2 percent for five years.

But many experts say more dramatic changes are needed.

"Unless you modify principal, there is absolutely no hope of restructuring mortgages on a mass scale to keep people in their homes," Daniel Alpert, managing director of the New York investment bank Westwood Capital LLC said earlier this month. "Eventually their hand will be forced."

U.S. new home sales fall by 7.6% in December

pduffy@metrointel.com (Patrick Duffy) — Wed, 27 Jan 2010 18:36:00 +0000

Not surprisingly, new home sales fell by 7.6% during December 2009 to a seasonally adjusted rate of 342,000. The entire fourth quarter of the year is generally a very slow time for home sales of all types, which were likely boosted for the existing home market by tax credits. From the L.A. Times:

The seasonally adjusted annual sales rate for single-family homes in the U.S. was 342,000, down from a revised November rate of 370,000 and 8.6% below the December 2008 estimate of 374,000.

The median sales price of new houses sold in December 2009 was $221,300. The median is the point at which half the homes sold for more and half for less.

The seasonally adjusted estimate of new houses for sale at the end of December was 231,000, a supply of 8.1 months at the current sales clip.

For the year, an estimated 374,000 new homes were sold in 2009, a decline of 22.9% from the 2008 figure of 485,000.

Mortgage defaults drop 24% in California

pduffy@metrointel.com (Patrick Duffy) — Wed, 27 Jan 2010 18:14:00 +0000

Could the worst be over for California's housing market? During the last quarter of 2009, mortgage defaults in the state -- which is a precursor to foreclosure proceedings -- fell by 24%. From an L.A. Times story:

The number of homes entering the first stage of foreclosure, or receiving notices of default, declined 24.3% during the fourth quarter from the prior three months, according to county data collected by MDA DataQuick, a San Diego research firm. The decline in the default number is significant because any new wave of foreclosures will first be detected by that measure, according to the firm...

At the same time, big banks are feeling intense pressure in Washington to work with troubled borrowers through the Obama administration's Making Home Affordable program. Much of that relief has been temporary. Through December, banks had lowered mortgage payments for 172,288 California borrowers, but only 7.8% of those modifications were permanent, according to government data.

Many experts consider that record a failure and fear that if the government doesn't improve its performance, those loans eventually will go into foreclosure and put pressure anew on the state's housing market...

Those figures indicate that the Obama administration's efforts to help troubled homeowners have allowed some borrowers to stay out of default but kept many in a kind of late stage of delinquency limbo, said Celia Chen, senior director of Moody's Economy.com. If the majority of borrowers who have received temporary loan modifications under Obama's program are unable to get permanent changes to their mortgages, another wave of foreclosures could follow, she said.

754,000 new housing starts by 4Q 2010?

pduffy@metrointel.com (Patrick Duffy) — Wed, 20 Jan 2010 18:12:00 +0000

At the 2010 International Builders Show this week in Las Vegas, the NAHB's chief economist David Crowe is predicting a rise in home starts for the spring, a dip mid-year (as tax credits expire) and then another rise by the end of 2010. From BigBuilderOnline.com:

The pace of housing starts will speed up this spring, slow and perhaps reverse course at mid-year, and then re-accelerate next winter and into 2011, the National Association of Home Builders' chief economist forecast today.

David Crowe said the number of combined single and multifamily housing starts will rise from an annual rate of 565,000 in 2009's first quarter to 677,000 this quarter. He forecast starts would climb to 688,000 in the second quarter of 2010, slip to 669,000 in the third quarter, and then rebound to 754,000 in the final three months of 2010.

Starts will keep escalating robustly in 2011, he predicted, climbing from an annual rate of 870,000 in the first quarter of that year to 1.22 million in October through December 2011...

Click here for entire story.

SoCal housing market improves in December

pduffy@metrointel.com (Patrick Duffy) — Wed, 20 Jan 2010 18:00:00 +0000

Owing to a combination of low interest rates and a tax credit that was extended until April, housing sales in Southern California showed additional strength in December. But is this the sign of a genuine rebound based on market fundamentals or a temporary blip riding on the training wheels of federal stimulus? From an L.A. Times story:

Rock-bottom interest rates and stronger sales in higher-priced neighborhoods helped Southern California's housing market post robust gains in the typically sleepy month of December, new data show, and experts say the momentum is continuing -- ushering in an early start to the spring home-buying season.

The median price paid for a Southland home rose 4% to $289,000 last month from December 2008, the first time the closely watched figure has posted a year-over-year gain since the region's real estate market took a nose dive 2 1/2 years ago, according to data released Tuesday by MDA DataQuick, a San Diego real estate research firm.

Rebounding home prices could help the Southern California economy recover from its slump, as a stronger housing market could lead to hiring on construction sites and in real estate sales, title and escrow offices, said Esmael Adibi, director of Chapman University's A. Gary Anderson Center for Economic Research.

"The worst is behind us for sure," he said. "For the economy, the implication is, at least on the residential side, we don't expect more layoffs, and you might actually see some pickup in employment."...

One thing driving sales is the April 30 expiration of tax credits for home buyers. First-time home buyers can get up to $8,000 in credit on their federal income taxes, and current homeowners can qualify for up to $6,500.

Low mortgage rates are also a factor. Thirty-year fixed-rate loans were below 5% through most of December and haven't risen much.

The role of the federal government in the housing market remains key. Some experts worry that once certain policies and programs wind down -- among them low interest rates, tax incentives for buyers and an increased accessibility of mortgages backed by the Federal Housing Administration -- the housing market could falter.

Christopher Thornberg, principal of Beacon Economics, predicts home prices will drop once those policies and programs expire.

"The bounce in the housing market is due to government policy, not due to fundamentals," he said. "None of these programs fix the underlying problem. They only delay the solution -- they only delay the healing process."...

Richard Green, director of the USC Lusk Center for Real Estate, said buyers have sensed more security in Southern California's real estate market in recent months and have begun to get off the fence.

"We are getting a little bit of what we had six or seven years ago, where people are worried if they don't get in now they are going to miss out on an opportunity," Green said. "In a decent neighborhood, in the half-a-million-dollar range, we are back to lots of offers."

Housing Chronicles blog launches new logo

pduffy@metrointel.com (Patrick Duffy) — Sun, 17 Jan 2010 20:46:00 +0000

A couple of weeks ago, I was approached by a logo design company called Logo Design Consultant for The Housing Chronicles Blog. Although I had been approached in the past from overseas companies, in between language barriers and poor design work, I just never managed to pull the trigger.

This company, however, based on Virgina, relies on a team of over 20 designers who managed to convert their original idea into a final design in just one or two iterations, and in just a few days I had a new logo! Whaddya think?

If you're on a budget and looking for a new logo for your company, blog or Web site, try out Logo Design Consultant.

Introducing HousingStorm.com

pduffy@metrointel.com (Patrick Duffy) — Fri, 08 Jan 2010 00:28:00 +0000

Some of you may have noticed a new feed from HousingStorm.com, which replaced the old one from L.A. Land once that blog of the L.A. Times was absorbed into Money & Co. In addition to offering the most recent 5 posts from HousingStorm, I'll also be contributing to their site, started by Danville real estate agent (and technology wiz) Greg Fielding.

So what is HousingStorm all about? In essence, community plus honesty. But I'll let Greg tell you himself:

I wanted to share with you some thoughts about the variety of topics and opinions expressed on HousingStorm.com, and how we can embrace that variety to create a powerful and educational community atmosphere.

One of the great things about HousingStorm.com is that, not only do you have the ability to share your thoughts in your blog, you have the ability to directly engage the public and other members in healthy debate and discussion.

This is a community where ALL opinions are welcome…meaning, it is a virtual guarantee that another member or contributor will write content or express an opinion that you disagree with.

For example, someone might say that home prices are going down when you think they are going up. Someone might give mortgage advice that you think is irresponsible. Someone else could give remodeling, investing, or home-selling advice that is just flat-out wrong.

The beauty of this community is that you have the ability to respond and share your position. Then, someone else could respond to your thoughts and agree or disagree with you…and so on.

Through this process of healthy debate and discussion, the consumer gets an education and you get a chance to show your mettle.

This concept of having local professionals and members, directly engaging consumers and each other about today's critical real estate issues, is unique to HousingStorm.com. As the community continues to grow, this engagement will give you a dynamic way to share your expertise with the public.

In the current economic climate, not all topics will be fun to discuss. Some debates will get heated. It is in these circumstances that the best of us can get involved and make a positive impact. The public desperately needs your perspective and expertise.

We have the amazing opportunities to engage a public in need of answers and set new standards for what it means to be an engaged, informed, and professional.

Let's make a difference!

Please visit HousingStorm.com regularly, and you can also find the feeds from their most recent postings here on The Housing Chronicles.

Apartment vacancies hit 30-year high

pduffy@metrointel.com (Patrick Duffy) — Fri, 08 Jan 2010 00:06:00 +0000

Renters' market, anyone? While that already happened here in Southern California a couple of years ago, now it's swept across the country like a flu-like virus to include almost all metro areas. According to REIS, the 8% national rate is the highest they've seen since first starting to track the market. In response, landlords are lowering credit standards, cutting rents and offering incentives ranging from Starbucks cards to weeks or a month of free rent.

From a Wall Street Journal story:

The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.

Rents fell 3% last year, according to Reis, led by declines in San Jose, Calif., Seattle, San Francisco and other cities that had brisk growth until the recession...

Landlords now must entice tenants to renew leases. "We'll shampoo their carpets. We'll paint accent walls. We'll add Starbucks cards," said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate investment trust that owns 63,000 units. He said the first half of 2010 should be "pretty ugly," but was optimistic the sector would pick up later in the year...

Landlords were also hit last year by competition from a wave of new supply that hit the market. The 120,000 units that came onto the market last year, including some busted condo projects that had to be converted to rentals, represented the most new construction since 2003, according to Reis...

Click here for entire article (subscription may be required).

Outlook for 2010 and beyond

pduffy@metrointel.com (Patrick Duffy) — Tue, 22 Dec 2009 01:43:00 +0000

Given the depth of the Great Recession’s impact on the housing industry, most insiders are hoping for that long-awaited economic rebound which will finally provide some solid flooring to our decimated industry. And some may get their wish, although the recovery will be uneven, slow and prone to a variety of unknown risks which accompany any forecast.

Since most of the economic growth noted in the third quarter of 2009 was due to fiscal stimuli such as the homebuyer tax credit and Cash for Clunkers programs, it still remains to be seen if the economy can rebound without any government training wheels.

In their latest economic forecasts, our partners at Beacon Economics are calling for growth in U.S. GDP of about 2% in 2010, fueled mostly by increased business investments related to higher savings rates, and a closing trade gap. Yet as tax cuts from the Bush years begin to expire in late 2010 and early 2011, if there is not a double-dip recession, 2011 could see a slow growth rate close to 0%. Thankfully, it seems that unemployment levels may have peaked at around 10% and will gradually decline to 5.5% by 2013.

One wild card which remains is that of ‘shadow inventory’: with 1.7 million homes scheduled for potential sale due to defaults and foreclosures at the end of September 2009 – up by 55% over the past year – any housing recovery will remain in limbo until the supply of discounted foreclosures is largely exhausted.

Still, there is a significant silver lining to declining prices, which is that of sharply rising national affordability levels, which have recently been averaging close to or over 70%. Since cheaper home prices and falling rents mean greater mobility, candidates for jobs will find it much easier to relocate than would have been possible during the height of the boom years.

For those builders working in the commercial sectors, most of that pain is yet to come, especially since changes in the Financial Accounting Standards Board (FASB) rules give banks more leeway to ignore short-term declines in asset values, commonly referred to as “extend and pretend.”

In practical terms, what that means is that banks will avoid taking back commercial properties until the one-two punch of rising vacancy rates and falling rents forces property owners into default on current loans. For cash-rich investors with the fortitude to wait and conduct appropriate due diligence, however, 2010 could bring some of the best opportunities in years.

Another wild card is that of the huge surplus of cash – about $1 trillion – sloshing around in the reserve accounts of the nation’s banks and originally employed to avoid financial Armageddon. Assuming the Federal Reserve can stomach higher interest rates and a stronger economy can mop up this extra liquidity, inflation can be held in check, but it will require a careful balancing act in a highly politicized time in which there are no good guides to follow.

Finally, there are always a series of economic risks which could upset most forecast scenarios, which include a lack of private sector buyers of mortgage-backed securities after the federal government steps back from the market, a weakening dollar leading to a trade war, a rising federal debt, higher tax rates, a bear market for Treasury bonds, persistent high unemployment, geopolitical conflict and a foreign government defaulting on its debt. In other words, the usual suspects.

But fear not. When the impacts from the Great Recession are over, the U.S. will emerge stronger, healthier and with a more stable economy yielding realistic asset prices. Consumers will save more, leading to more balanced trade and a return to steady growth of about 3% per year. And ultimately, the nation’s quality of life will remain one of the best in the world.

Happy (early) 2010!