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This blog is the voice of the Bay Area's home building community. It is a forum for discussion of housing-related news and issues pertinent to the region's 7.2 million residents. All comments are welcome. Perverse Incentive
Scott Adams, creator of the Dilbert cartoon strip, owner of the Stacey’s restaurants in Dublin and Pleasanton, tells the story, reportedly, of the software company that offered a $10 bonus to its testers for every bug they found, and $10 to its programmers for every bug they fixed. Programmers began purposely planting bugs into code, according to Adams, and telling testers how to find the errors. The programmers would then fix the code and both the programmer and tester would receive bonuses. The bonus was discontinued after one programmer eliminated more than 100 bugs in a single week. Adams’ anecdote comes to mind after reading an editorial in yesterday’s Washington Post concerning pending housing relief legislation on Capitol Hill. The Post actually echoed my concerns – which I expressed in a Blog entry last month – about a provision of the Senate version of the measure that would provide $3.9 billion to state and local governments to buy up foreclosed properties. The proposal “may give lenders a perverse incentive to foreclose,” the Post warned (and correctly so). “Ordinarily,” the editorial elaborated, “the costs and risks of foreclosure, including the risk of getting stuck with unmarketable properties, force banks to avoid foreclosure whenever they can. But that deterrence will be weakened if state and local banks suddenly appear on the scene with almost $4 billion to spend on homes that have been foreclosed upon.” That’s why that provision needs to be stripped from the final version of otherwise welcome housing relief legislation. We don’t want bankers behaving like avaricious software programmers. Darkest Before Dawn
Treasury Secretary Henry Paulson was in New York this morning where he told an audience that, “Until the housing market stabilizes further, we should expect some continued stresses in our financial markets.” As I read Secretary Paulson’s decidedly downbeat remarks, I was reminded of the familiar proverb – It is always darkest before the dawn. I am convinced that is the case with the current housing downturn. It’s kind of dark out there at the moment for the home building community. (Indeed, our friends at the California Building Industry Association released a report today that housing starts were down 43.9 percent in June from a year earlier). Nevertheless, I believe that a rebound is in the offing, and sooner than Secretary Paulson and others expect. That’s because there is a lot of pent up demand for housing. Indeed, 41 percent of current home owners responding to an online survey by Harris Interactive said they plan to purchase another home in the not-too-distant future. Some 47 percent of renters said they planned to buy a home within five years. The reason those prospective home buyers haven’t done so yet is because they’re hoping for home financing to become more favorable. That’s the conclusion of Pat Lashinsky, CEO of Zip Realty. “The biggest thing that is holding down the housing market we see is not a lack of demand for buyers,” he said this past weekend, on the CNN’s Open House. “There are a lot of buyers interested who think that home prices have come to a good place. But the ability to get an appropriate loan with an appropriate monthly payment is without doubt the biggest difficulty they face.” Yet, prospective home buyers are determined, according to the Harris Survey. Nearly 80 percent said they not only are willing to make sacrifices to earn and save the income needed for down payments on a home purchase, but also to compromise on neighborhood features and residential amenities. That reveals just how much housing demand is pent up. Once it is released – and the federal government's estimated $25 billion commitment to mortgage underwriters Fannie Mae and Freddie Mac could very well make that happen – we’re going to see the market recovery we’ve been long awaiting. Fair Weather Friends
Shares of Bank of America rose this morning in early trading on the strength of the Charlotte-based institution’s report that its second quarter profits were better than market analysts estimated. That makes four of the nation’s five largest banks to report better-than-expected second quarter results. The recent performance of B of A and the other major banks is being cheered on Wall Street. But you won’t hear much celebration among home builders, many of whom view the banks as fair weather friends. Indeed, they were only too happy to provide builders generous lines of credit when the good times rolled. But now that the home building industry has fallen on hard times, all too many banks are treating their once-valued builder clients like lepers. The travails of Barratt American, recently reported in The Wall Street Journal, provide a case in point. The San Diego-based builder did business with B of A for some two decades. Nevertheless, at the start of the year, the bank informed Barratt President and CEO Mick Pattinson that it was cancelling the builder’s $125 million line of credit. That created a cash crunch that left Barratt unable to pay its bills, triggering more than 40 lawsuits against the builder (mostly by subcontractors with liens against the company’s assets). Barratt has since laid off almost all of its employees and its future is uncertain at best. Despite B of A’s treatment of Barratt, the bank insists it remains a friend to the home building industry. It actually went so far last month as to sponsor the pre-dinner reception at the California Homebuilding Foundation’s annual Hall of Fame induction ceremonies. While I attended the dinner, I chose not to set foot in the B of A reception. That’s because I prefer to eat and drink with real, rather than fair weather, friends. Green Momentum
It was interesting reading the various news analyses of yesterday’s vote by the California Building Standards Commissions to adopt statewide green building standards. “The new green building language, which was heavily influenced by the construction industry, fell far short of the stringent rules that environmental advocates had sought,” the Los Angeles Times informed its readers. The Times added that Governor Schwarzenegger’s staffers “headed off what threatened to be an embarrassing full-throated condemnation by meeting with environmentalists Wednesday and agreeing to last-minute revisions of the draft.” That’s quite a contrast with the overwhelmingly favorable response with which the Executive Board of the Association of Bay Area Governments greeted a proposal yesterday to endorse Build it Green’s GreenPoint Rated as Bay Area’s preferred verification system for new home projects. The Board, which includes county supervisors and city council members from throughout the Bay Area, unanimously approved the proposal after hearing from Cheryl O’Connor, Chairwoman of the Home Builders Association of Northern California, Brian Gitt, Executive Director and CEO of Build it Green, and yours truly. The ABAG Exec Board, most of whose members share common cause with Bay Area environmental organizations, are supportive of GreenPoint Rated, are delighted that the HBANC has partnered with Build it Green, because they know that Gitt’s organization truly is independent. Unlike the state Building Standards Commission, Build it Green does not labor under suspicions in the environmental community that it is unduly influenced by developers. And there’s another reason ABAG went its own route on green building last night, rather than defer to the state Building Standards Commission: The state standards won’t have the force of law until the end of 2010 or the start of 2011. That’s a two year head start for residential green building here in the Bay Area -- under the GreenPoint Rated system -- while much of the rest of state waits on the Building Commission standards to take effect.
First Fruit
The green building movement here in the Bay Area will take a giant step forward today when Oakland City Council President Ignacio de la Fuente introduces legislation establishing a citywide green standard for residential construction. The Council President’s proposed ordinance, backed by the Home Builders Association of Northern California, designates GreenPoint Rated, developed by Berkeley-based Build it Green, as the verification system for all new homes built in Oakland. If, as expected, Mr. de la Fuente’s measure is approved by his Council colleagues, Oakland’s future housing stock will be among the nation’s greenest. Indeed, between now and 2014, Oakland needs nearly 15,000 new housing units to be built to meet the city’s growth in population and employment. Building those homes to the GreenPoint Rated standard set forth in the de la Fuente measure will reduce the carbon footprint of that new construction by the tonnage equivalent to removing 12,000 automobiles from the road. Oakland has suddenly leapt to the front of the region’s green building movement, side by side with San Francisco and ahead of San Jose. Given all the troubling news that has come out of Oakland in recent weeks and months, this is news the city’s residents can celebrate. The Affordability Fallacy
The latest statewide report on new homes sales and pricing was released yesterday. Co-produced by our friends at the California Building Industry Association and Hanley Wood Market Intelligence, it shows that median new home prices were down this past May as much 40 percent in some local housing markets compared to May 2007. Logic suggests that the precipitous decline in housing prices throughout the Golden State has made housing more attainable for those who were priced out of the homeownership, but Rachel Drew, a research analyst for Harvard University’s Joint Center for Housing Studies says that is not the case. “In spite of the downturn in the housing market,” she told the Associated Press this week, “affordability continues to be the No. 1 housing challenge.” Drew’s sentiments were echoed by Barbara Lipman, research director of the Center for Housing Policy in Washington, D.C. “In many metropolitan areas, certainly in California,” she told AP, “you can earn 120 percent of the median (income) and still not be able to find anything affordable or that’s in a reasonable commute distance. There just isn’t a sufficient supply of housing for moderate income people.” Local governments here in the Bay Area hold fast to the fallacy that housing would be more affordable if only home builders built more lower-priced homes. So nearly half of cities impose so-called inclusionary housing mandates on home builders, requiring that that a certain percentage of their homes be offered at below market rates. But as AP points out, “what makes a home affordable or not can vary quite a bit depending on the cost of financing, the size of the downpayment and other costs of living.” Indeed, let’s say we have two families, both earning $100,000 a year, and both seeking to purchase a $500,000 home. The first family obtains financing that results in a $2,000 a month mortgage. The second obtains less favorable financing that obligates then to pay $3,000 a month. The first family finds homeownership affordable. The second doesn’t. So affordable housing has far less to do with home prices, a variable over which home builders have some control, than the cost of home financing – the variable over which lending institutions have control. That’s why falling home prices in California, in the Bay Area, have hardly made the dream of homeownership any more attainable for those priced out of the market. Bush on Housing
“It’s been a difficult time for American families. We must ensure we can continue providing credit during this time of stress.” So said President Bush this morning at a White House press conference. The President’s remarks, as the Associated Press reports, came against the backdrop of “the toughest real estate market in decades, falling home prices and financing that's harder to come by this morning.” Mr. Bush urged Congress to move quickly to pass legislation implementing the Administration plan to strengthen Fannie Mae and Freddie Mac, which underwrite roughly half the nation’s mortgages. The President took on those who suggest the plan amounts to an unwarranted “bailout” for the two mortgage giants – like the Contra Costa Times, which ran a banner headline on its front page today, editorializing “Bailout could bleed taxpayers.” “I don’t think it’s a bailout,” Bush said this morning. “The shareholders still own the company.” Indeed, a bailout is what occurred in the S&L crisis, when the government actually took ownership of more than $100 billion in private assets before selling them off. What the Administration is doing, by shoring up Fannie and Freddie, is taking necessary measures to prevent the housing downturn from transmogrifying into a macroeconomic crisis of S&L-like proportions. The only disappointment I have in the Administration’s approach to the housing crisis is that it doesn’t go far enough. I’d like to see President Bush get behind the pending housing relief legislation on Capitol Hill, particularly the provision offering a temporary tax credit to new home buyers. This supply side tax measure, combined with expanded lending capacity for Fannie Mae and Freddie Mac, would do much to stimulate homes sales (as a similar home buyer tax credit did back in the 1970s), thereby hastening the much-hoped-for housing recovery. Booyah to Treasury
I like Jim Cramer’s shtick on Mad Money, his CNBC show. Between the chair throwing, the sound effects and the shouts of “Booyah,” the former hedge-fund manager and best-selling author drops a lot knowledge on the show. Indeed, for the past week or so, Cramer has been urging the federal government to step up and support floundering Fannie Mae and Freddie Mac, which own or guarantee roughly half the mortgages in the country. “We may actually need a bailout of the two largest entities that help our housing market,” Cramer said last week. He suggests that the government “should write a $100 billion” check. They “wrote a $500 billion check to Iraq,” he continued. “This seems closer to home to me.” The Bush Administration apparently agreed. For, yesterday, Treasury Secretary Henry Paulson announced a rescue plan for Fannie and Freddie, in which the federal government will inject billions into the two institutions through investments and loans. The plan calls for Treasury to substantially increase its line of credit to Fannie and Freddie, while temporarily authorizing Sec. Paulson’s department to purchase equity in the two mortgage giants. Meanwhile, the Federal Reserve is opening its emergency discount window to Fannie and Freddie. There are some who take issue with Cramer, who believe that Fannie and Freddie should be left to the tender mercies of the financial markets, who believe that the two mortgage giants should be allowed to fail. But that’s a recipe, argues Cramer, for the financial markets “being brought down by housing.” That is why it behooved the Treasury and the Fed to rescue Fannie and Freddie. “Give them $100 billion and we’re fine,” says Cramer. To which my response is – Booyah.
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San Jose NIMBYs
Where’s San Liccardo when you need him? The San Jose City Council member, who sanctimoniously lectures home builders about their obligation to provide below-market rate housing (at their own expense), is strangely silent when affordable home projects are opposed by local NIMBYs. The latest example is San Jose’s Rose Garden neighborhood, where the restless natives are doing any and everything they can to prevent ROEM from building 32 townhouses, half of which are subsidized by the city and will be sold at below-market rates to needful families. The San Jose Mercury News reports that, since ROEM’s project was approved four years ago, the Rose Garden NIMBYs have “complained to ROEM and to city officials about everything from noisy early morning delivery trucks to workers chopping down shade trees.” Just last week, the Merc reports, neighborhood activists called the cops on ROEM, accusing the builder of using an illegally connected fire hose to power-wash and strip paint from two houses. The NIMBYs claimed that ROEM was endangering their health by blasting lead-based paint into the air while stripping the houses. “The have no regard for the neighbors,” said resident Chet Lockwood, whom the Merc describes as chief opponent of ROEM’s affordable housing project. “Their attitude,” said Chet, “is ‘Screw the neighborhood.’” Please. All ROEM was trying to do was spruce up the area surrounding its 32-unit project in anticipation of showing four model homes. The Rose Garden NIMBYs are acting like ROEM has transformed their once-tranquil neighborhood into some sort of latter day Love Canal. At least Joe Horwedel, San Jose’s director of planning came to ROEM’s defense. “It’s frustrating,” he told the Merc, “to spend these kinds of resources on what we think is a good project in a good neighborhood. Every little thing that comes up is thought to be an emergency.” We’re still waiting for Councilman Liccardo, the supposed affordable housing champion, to man up and take on San Jose’s NIMBYs. Lawyer Gets His
Bill Lerach is serving a two-year prison sentence. Home builders can take some solace in that. Once the most feared trial lawyer in America, Lerach is indirectly responsible for the proliferation of construction-defect lawsuits during the 1990s. The omnipresent threat of such litigation compelled builders to abandon condominium development in much of California for the better part of a decade. Lerach, a La Jolla resident who ran the San Diego office of the New York-based law firm Milberg Weiss, did not target home builders, per se. But he did provide the blueprint that other trial lawyers would use to shakedown builders. Lerach’s specialty was class-action securities litigation. According to a federal indictment handed down earlier this year, he made his firm roughly a quarter-billion dollars in fees over two decades by filing securities fraud suits against numerous well-known corporation on behalf of plaintiffs whom Lerach hand-picked and whom Lerach paid illegal kickbacks. Construction defect lawyers may not have brazenly broken the law, like Lerach, but they certainly employed many of his questionable practices. They targeted deep-pocket home builders for class action lawsuits. They hand picked home owners to be plaintiffs promising them easy money. They coached the supposedly aggrieved home owners to allege that their homes were beset with all manner of construction defects. And they extracted multi-million dollar payouts from any number of home builders, not because those builders sold poorly constructed, defective homes, but because the builders made the economically prudent decision to settle with the avaricious trial lawyers rather than commit the time and money to fight it out before a judge and jury. Like convicted felon Lerach, construction defect lawyers claimed that their primary motivation was seeing justice done on behalf of their client-plaintiffs. But such claims rang just as hollow in construction defect litigation as it did in Lerach’s class action securities litigation. For after trial lawyers collect their whopping fees in construction defect lawsuits, there is little settlement money left for plaintiffs to repair the alleged defects in their homes . Get it Done
The National Association of Realtors released its monthly housing report today. It lowered its 2008 forecast for sales of existing homes to 5.31 million from an earlier projection of 5.39 million. It also lowered its outlook for new home sales to 525,000 from 529,000. Against that backdrop, lawmakers have returned to the Nation’s Capitol – following their Fourth of July recess – where long-delayed housing relief legislation awaits their approval. The House has previously approved its version of the legislation. And the Senate yesterday approved its version by a veto-proof 76 to 10 margin. CNNMoney reports that a final version of the bill is on track in both the Upper and Lower Chambers of Congress “possibly by week’s end.” Yet, it also warns that “the election-year package still faces a tricky path.” Indeed, the White House looks askance at certain provisions of the bill, particularly the $3.9 billion that would go to local governments to buy and fix up foreclosed properties. Republicans see it as a bail out for imprudent lenders. My fear is that it would create a moral hazard for local governments, which almost certainly would like have stocks of private homes under their control. There is also the matter conforming limits on the mortgages the Federal Housing Administration can insure and Freddie Mac and Fannie Mae can buy. The Senate bill sets the limit at $625,000, roughly three times national median home price. The House version sets the limit at $725,000, which is fairer to residents of high-priced housing markets like the San Francisco Bay Area. The two prime movers of housing relief legislation, Sen. Christopher Dodd, the Connecticut Democrat, and Rep. Barney Frank, the Massachusetts Democrat, are confident they can reconcile the differences between the Senate and House versions, while also addressing the reservations of President Bush and Republican lawmakers. That’s encouraging. Because every day that Congress fails to act, the economic repercussions of the housing downturn only get worse. Bad Brew
I just finished a profile of Starbucks CEO Howard Schultz in Portfolio magazine. It was timely reading inasmuch as the most successful coffee chain on the planet announced last week that it actually is shuttering 600 of its stores, turning out 12,000 of its baristas. As Portfolio sees it, last week’s announcement was a “sudden, shocking end to the long and gilded age of Starbucks, which in the past year and a half has seen earnings drop, the number of customers diminish, the stock lose more than half its value.” Schultz, who grew Starbucks from five coffeehouses in Seattle 37 years ago to the seemingly ubiquitous chain it is today, rejects notions that his company’s travails are attributable to lower-priced competition (like McDonalds or Dunkin Donuts), or that the coffee drinking public no longer finds the Starbucks brand as appealing it once did. What it mostly comes down to, he told Portfolio, is the housing market. That’s right. Schultz travels extensively, he related, visiting such regions as Southern California and South Florida where Starbucks stores have been especially hard hit. “You drive around and see home after home that is empty,” he said. “Our stores are in the backyards of those communities.” This is the true to life lesson that neither President Bush, nor Treasury Secretary Henry Paulson, nor Federal Reserve Chairman Ben Bernanke, nor Senate Republicans seem to get: That while the housing downturn has hurt home builders directly, it also has hurt many, many other businesses indirectly. Like Starbucks. Home of the Brave
O! thus be it ever, when freemen shall stand Between their loved home and the war's desolation! Blest with victory and peace, may the heav'n rescued land Praise the Power that hath made and preserved us a nation. Then conquer we must, when our cause it is just, And this be our motto: 'In God is our trust.' And the star-spangled banner in triumph shall wave O'er the land of the free and the home of the brave!
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Nero Politics
“By the time the Senate returns from its July 4 recess,” the New York Times editorialized yesterday, “some 55,000 more homes will have entered foreclosure.” That’s why it was so unconscionable for lawmakers to leave Washington without first passing desperately-needed housing relief legislation – which includes a foreclosure prevention provision. The legislation was expected to pass, but was undone at the last minute by Sen. John Ensign, the Nevada Republican. Sen. Ensign insisted that the legislation be amended to include a multibillion dollar package of tax breaks for renewable energy. The Nevada lawmaker’s proposed amendment appears well-intended, but it really was a subterfuge. It has nothing to do with housing relief. And there’s no specification how those tax breaks would be paid for. Sen. Ensign’s real purpose fro proposing the amendment was to stall the housing relief bill, if not kill it all together. Sen. Ensign and his fellow Senate Republicans are apparently oblivious to the mood of the American people. Indeed, in a recent Gallup Poll, a majority of Americans said they were now worse off financially than they were a year ago. “That’s the first time,” according to the Times, “in the 32-year history of the question that more than half the population reported losing ground.” The party of Ensign is playing Nero politics – fiddling while the housing market remains mired in its worst slump since the Great Depression, while the home building industry struggles to survive the downturn, and while millions of Americans are in jeopardy of losing their homes. It’s enough to make this long-time Republican reconsider his party allegiance. Buy, Sell or Wait
I had a swell time yesterday evening at a forum hosted by the Commonwealth Club of California, titled “Buy, Sell or Wait, Part II: Real Estate in the Bay Area 2008.” It was a follow-up to a panel discussion in which I participated about a year and a half ago. I was hoping that Carol Lloyd – who writes the twice-weekly Surreal Estate column in the San Francisco Chronicle – would be the moderator again this year. But, unfortunately, instead of an authentic journalist, we had some real estate blogger who kept alluding to property P/E ratios (yawn). Anyway, much of the forum was given over to discussion of whether or not it was wise to “invest” in home ownership. That was right in the wheelhouse of one of my fellow panelists, a putative financial planner, who suggested that the audience would be better off putting its money in stocks, bonds and other financial instruments rather than a home. His was the usual rhetoric I’ve heard from “financial planners” and “wealth managers.” Of course they want to steer people away from home ownership. Because those planners and managers want to get their paws on the cash people would otherwise spend on a home. The most disingenuous statement the financial planner made is that many, if not most people are better off renting than owning a home; that home ownership might make sense “emotionally,” but not as a hard-headed investment. So I asked him point blank: “Do you own a home?” “Ugh, yes,” he replied, sheepishly. Game. Set. Match. Good Times Coming
The best panel discussion at our Pacific Coast Builders Conference (PCBC) last week was hosted by our friend John Burns, the market researcher, and featuring Richard Dugas, President and CEO of Pulte Homes and Bert Selva, President and CEO of Shea Homes. “The day is coming,” said Burns, setting the tone for the discussion, “when we’ll be making a lot of money. And I think it’s coming soon.” John’s decidedly upbeat forecast was echoed by both CEOs. “We’re going to make a lot of money again,” said Dugas. “Every day we battle it out is one day closer to recovery,” said Selva. Skeptics might suggest that Mssrs. Burns and Dugas and Selva are simply whistling pass the proverbial graveyard. But, as Burns pointed out, several encouraging trends undergird the positive prognosis for the housing market. For one thing, he notes, there are tremendous bargains to be had on land deals, an indicator that the bottom of the market cycle has been reached. Moreover, listings of existing homes have declined in most major markets – even with the rash of foreclosures – which is shrinking the overall inventory of available homes. Those two welcome trends, said Burns, along with other pieces of positive housing news, explain the growing optimism in his proprietary builder survey. Of course, most housing market analysts are not prepared as yet to declare the housing downturn over. But as I’ve mentioned in previous Blog postings, it is usually six months after the fact before the pointy-heads recognize a market shift. I am persuaded by various indicators that the housing market is at or near bottom. And that, by this time next year, the resilient home building industry will be on the rebound. |
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