How will the future U.S. economy look?

There's an interesting column in the L.A. Times by "Market Beat" writer Tom Petruno, in which he argues that despite the past chatter about a return to a 30's-style Depression or 70's-style "stagflation," there are some important distinctions about today's world economy which means we're even more likely to forge some new ground:

It would be handy for investors if Wall Street could agree on which decade the U.S. economy is about to relive.

But increasingly, no period from the last century seems to fill the bill...

Three months ago, there was plenty of talk about repeating the 1930s -- maybe not quite so horrific, but with many of the same destructive trends: rocketing unemployment, collapsing consumption and widespread asset devaluations.

It's still early in our housing-centered mess, but it's clear that the economy thus far has shown remarkable resilience given the ravaged state of our financial system...

If the '30s aren't the right template, how about the 1970s? Now, as then, commodity prices are surging, led by oil. That has stoked fear of inflation leaping into double digits -- the most enduring painful memory of the '70s other than leisure suits.

This week, two major companies announced price increases that had that ugly '70s feel to them.

Dow Chemical Co. -- which annually sells more than $50 billion worth of chemicals, plastics and other stuff worldwide -- said it would boost prices as much as 20% effective Sunday. Dow cited the "extraordinary rise in energy and related raw material costs."

And Eastman Kodak Co. on Friday said it would raise prices on certain products up to 20% July 1.

Just how many of those increases will stick remains to be seen, however. Because one of the cold realities of a slower economy is that pricing power is harder to come by, unless you've got something that the world just can't do without...

But there's a bigger reason to doubt that a '70s-style inflation spiral could take hold this time around: It takes two to spiral -- meaning, you need rising wages to give consumers the wherewithal to pay higher prices and create the vicious cycle of one feeding the other.

Wage growth? Now? Have you asked for a raise lately?

Unlike in the '70s, when cost-of-living increases for workers were routine, they now are "more the exception than the rule," says Paul Kasriel, an economist at Northern Trust in Chicago.

What's more, labor unions are far less powerful now than they were then, he notes, which limits the effect on wages in general from union-negotiated pay contracts.

Of course, real incomes weren't growing much in the early part of this decade, either. But consumption got a big assist in that period from the housing boom, as people cashed out some or all of their home equity. We know what happened to that trend.

Add to all of the above the downward pressure on wages of many U.S. workers from the effects of globalization (i.e., more competition all around the globe).

So this is good news? My pay isn't going up, and that will eventually help bring down inflation? It is, no doubt, a bitter pill. And at least in the near term, globalization could well make inflation worse.

America's status as a debtor nation means we have, in effect, transferred a huge amount of our wealth to the rest of the world. The slide in the dollar's value, one byproduct of that wealth transfer, means other peoples' purchasing power has risen while ours has fallen.

So even as we cut back on gasoline use, much of the rest of the world is more able to pay up for oil. That will help keep the price elevated until either global demand eases or supplies increase, or both. And higher energy costs will continue to make it difficult for formerly low-cost exporters (such as China) to keep a lid on prices of manufactured goods.

Still, in the long run, globalization should reduce the chances of sustained, '70s-style inflation by favoring innovators worldwide. The best way to keep prices in check is to make sure the best goods and services -- including ours -- can quickly find their way into the marketplace.

The flip side is that, by keeping our doors open to cash-rich foreign investors, we may help keep the value of our assets (including houses) from deflating as much as they otherwise might have, given our own financial struggles of the moment.

So it's not the '70s all over again, nor the '30s. It's a very different world, and we're making it up as we go along.

Homebuilders and brokers should first ask themselves: "Who's Your Company?"

(Note: The following article was first published in the June 2008 edition of Builder & Developer magazine).

In his new book “Who’s Your City?” author Richard Florida -- who brought us the 2002 national best-seller “The Rise of the Creative Class” -- argues that not only is the choice of where to live the most important decision someone can make, but those who match their interests and personalities to specific cities tend to find the best-matched careers, spouses and friends.

Frankly, I think this concept should be marketing catnip for homebuilders, allowing them to leverage these ideas (and roadmap included in the book), arm themselves with increasingly sophisticated demographic data and decide, both for their companies and their buyers, exactly ‘Who’s Your Development?’ In fact, some would argue that only those builders who are able to successfully address these questions throughout their organizations and provide a distinctive yet trusting brand image will both survive and remain strong enough to benefit from the eventual housing rebound.

It’s an important concept at a time when builders are shouldering much of the blame – rightly or wrongly – for the current housing slump. When I recently wrote a guest blog post defending the idea of extending the tax loss carry-back for homebuilders at the L.A. Land blog, the reader responses ran 40-to-1 against the idea, so clearly builders have a steep PR hill to climb. Consequently, I think tomorrow’s building industry will look a bit different than in the past, with a focus on customized solutions to buyers’ life stages, personalities and demographic profiles.

I had the chance to talk with Dr. Florida when reviewing this latest book for the Los Angeles Times, and a major theme he discusses is the changing nature of what people want from a community. In many urban areas, for example, time has steadily been on the rise --even more than money -- as the primary resource for people to live happy and fulfilling lives. Explains Florida, “It’s not about the price of oil, it’s about the time cost of commuting, and meeting people, and leveraging those networks within solid neighborhoods close to employment centers.”

Although “Who’s Your City?” focuses its research at the citywide level, Florida and his team provide specific examples of how different neighborhoods have distinct personalities. For example, a slowly revitalizing Koreatown in Los Angeles might be an ‘urban mosaic’ characterized by ethnic restaurants and relatively cheap rents, whereas Tyson’s Corner, Virgina or California’s Silicon Valley would be two of the country’s best-known ‘edge cities’ in which single-family homes with larger-than-average lots mix with plenty of local employment and shopping opportunities.

But what if you want to identity an area’s personality to a more specific level – say a specific neighborhood that’s defined not just by existing residents, but also those who might be attracted to a future vision? That’s when someone like Jonathan Smoke and two of his companies, BlueSmoke and HousingIntelligence.com, can assist. Smoke, as a former SVP for corporate strategy and innovation at Atlanta-based Beazer Homes (and before that their Chief Information Officer), has tapped these experiences to create a national resource of data and analysis oriented towards the supply side of the building industry.

With the company motto “Don’t Just Guess,” Smoke and his team have partnered with Claritas (a division of Nielsen, the same company which tracks television viewers and website visitors) and Scarborough Research (which tracks shopping patterns, media behaviors and lifestyle decisions) to create proprietary demand models he says are far more accurate than what most builders and consultants currently use. Instead of reviewing what he calls ‘demonstrated demand’ models -- defined as homes already sold and review past performances instead of those of the present or future – his company focuses on current and projected demographics, preferences and lifestyles and translates that information into estimated demand for any variety of product types, price range or geographic areas. The end result? Higher absorption rates and a better return on investment for marketing dollars.

Moreover, instead of attempting to cram these households into the existing limited array of ‘entry-level’ to ‘luxury’ consumer segments relied on for decades, Smoke has developed an expanded and more detailed set of eight categories that focus more on personality traits than just incomes alone. As a result, he says his segments are more adaptable to markets that can change over time for a variety of reasons, and are especially useful to assist those developments failing to meet their projected pro forma models.

Explains Smoke, “It’s important for the best use of dirt, for designing product, for marketing and promotional purposes, and be able to adjust as market conditions change due to a new competitor or any host of externalities.”

But are most of today’s builders even set up to implement such changes quickly? According to development management consultant Philip Simmons, the answer is no, as many builders and developers today simply don’t know how to strategically adjust their operations to a rapidly changing market. Simmons, a veteran of the building industry who most recently ran the Urban division for John Laing Homes after stints with Archstone, Avalon Bay Communities and Watt Industries, argues that the skills needed for a housing boom are completely different when it eventually busts.

“When times were good you had five people for three jobs, whereas in times like this you need two people to cover five jobs,” he explains. Consequently, the past focus on a narrow skill set simply isn’t relevant when it’s equally important to understand the dynamics of all company departments and divisions. Says Simmons, “It’s a different world and what used to work isn’t working.” So when the inevitable finger-pointing starts, the consequences for a development team can be a lack of trust leading to conflicts among team members, a loss of commitment, the avoiding of accountability and, ultimately, failed projects.

For Scott Laurie, named President and COO of California infill specialist Olson Homes in 2007, his years as both a Division President and at the corporate office for a volume builder like KBHome came in handy when he was tapped to reorganize the Seal Beach-based Olson. “The easy thing to do is reduce headcount to nothing, but that’s the short-term thinking,” he says.

In his case, instead of cutting headcount alone, he looked at both salary levels and job functions in order to envision how to keep core talent around for a market rebound. Within nine months of taking the reins, he had reduced staffing by over 40 percent, mostly by eliminating middle layers of management and dramatically consolidating divisions. Since sales people and construction superintendents now report directly to senior level VPs, the benefits are twofold: restoring accountability while reducing costs.

On the marketing side, he’s revamped the company’s outdated website – which has spiked the percentage of sales leads from the website to 35 percent today from the low single digits a year ago -- and created a new corporate brochure focusing on Olson’s unique strength among the state’s production builders, namely expertise with walkable, transit-oriented (and therefore greener) living which promotes a balanced lifestyle just as much as its floor plan designs.

By salting this new brochure with pithy quotes ranging from the philosopher Cicero to classic author Henry David Thoreau, it manages to convey the important daily benefits of in-town living that doesn’t mean sacrificing style or safety. The company’s motto – “In Town. In Style. In Reach” – extends to all of its product lines from mixed-use condominium developments to small-lot single-family detached homes. Olson is also serious about market research, and is one of the few builders which requires their consultants to use pre-set report templates in order to provide a detailed, objective comparison of proposed developments with a particular focus on demographics, schools, crime rates and proximity to retail services.

It’s hard to argue with success: over the last 20 years the builder has entered into partnerships with 80 different cities and counties throughout California, making them a preferred partner for local redevelopment agencies. Home buyers have also responded, with Olson’s recent per-project absorption rate of more than one net sale per week exponentially greater than the market average.

According to Laurie, this success is no accident. “To be successful you have to be patient to get deals done. Olson has both patience and great people. The focus is to maintain relationships.” Concludes Philip Simmons, “Whenever there’s a problem it’s always about management. Sometimes it’s just about filling in some gaps that should be the mortar in between the bricks.”

This pro-people attitude certainly makes sense, as you can’t hope to define “Who’s Your Development” until you’ve first answered “Who’s Your Company?”

Banks costing themselves (and shareholders) more money by delaying short sales

According to an article at CNNMoney.com, lenders which delay responding to short sale requests are costing themselves much more as homes needlessly go into foreclosure:

Banks say they want to help troubled homeowners, but they are delaying deals that could save everyone - including the lenders themselves - a lot of time and money.

Lenders are taking much longer than necessary to approve short sales, according to Duane LeGate, of House Buyers Network, a short sale specialist...

Ideally in a short sale, everyone wins. Borrowers avoid the ugly foreclosure process that destroys their credit, while lenders recoup more of their costs than they would by spending the time and money it takes to kick an owner out and resell the property.

Lenders typically lose about 19% of a mortgage's value in a short sale, according to Clayton Holdings, a Conn.-based, provider of loan analytics, while they lose an average of 40% on loans that go into foreclosure.

Coldwell Banker CEO Jim Gillespie agrees that short sales are taking too long to complete. And he speaks from firsthand experience; a short-sale offer he made on a house in Marin County, Calif. in late fall didn't win approval until April...

The difficulty in getting short sales approved stems from the same hurdles facing all the other foreclosure prevention efforts. The fact that the majority of mortgages are pooled and securitized makes it hard to get approval to change the terms of the mortgages.

"It has to do with who owns the loan," said LeGate. "If a mortgage is stuck in a pool somewhere, when something goes wrong, no one knows who the actual owner of the note is."

Additionally, the volume of troubled borrowers makes it hard for lenders to keep up. The housing crisis has put an enormous burden on mortgage servicers, the companies that manage loans for securities investors.

At many servicers, said LeGate, "There's no one really skilled at loss mitigation, and these guys have more work than they were prepared to do."

And with foreclosure filings breaking new records each month, there's no sign that this problem will ease any time soon.

Translation: we still need actual some leadership on this issue.

Not a surprise: report finds mortgage brokers charge more than direct lenders

I have to admit that I'm not a big fan of mortgage brokers: although they claim to work with numerous lenders to get you the best deal, most smart people with decent credit and a willingness to document their income and assets (imagine that crazy idea!) could find good deals on their own.

So how do I know this? Because when I was too busy to do so for myself, I've used mortgage brokers twice in the last few years, and now I know that (a) I paid needless fees and points (I shouldn't have paid any points at all); and (b) I'm paying higher rates on the notes (generally just 1/4 point, but that can add up over a long period of time). The lowest-rate mortgage I ever got was through a direct lender - 5.50%, no points, 30-year fixed (I'm also not a fan of adjustable rate mortgages, having lived through that mistake in the 1990s).

And don't even get me started on the junk fees like $50 FedEx packages and "document preparation fees," as if it takes an act of Congress to key in a few numbers into a template (which, by the way, often contained numerous mistakes).

So it comes as no surprise to me to see this article in the Wall Street Journal citing a recent study by the Dept. of Housing and Urban Development (HUD) that concludes borrowers pay a lot more to get a loan from a broker than through a direct lender:

The home-mortgage industry takes advantage of consumers' confusion to charge some people much higher fees than others, according to a study prepared for the Department of Housing and Urban Development.

The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders...

Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates.

For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.

Borrowers who paid "discount points" to lower their interest rates typically didn't benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose "no-cost" loans -- in which all fees are built into the interest rate -- typically paid the lowest effective fees.

Here's the defense from the mortgage brokers association:

Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on "stale" seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.

Lessons from "Building Better Market Research - Housing 2.0: Orange County"

I was going to write up a summary of some key points we made at yesterday's presentation in Irvine, but Jonathan Smoke did it so well on his blog at Housing Intelligence that I'm just going to point you over there with some highlights (he has more details including graphs at his blog):

I flew into Orange County the day after S&P released the March Case-Shiller price indices, which showed that existing home prices were down year-over-year 21.7% in Los Angeles.

The housing picture is ugly in the OC. Looking at Median Home Prices, if you had purchased a median priced home at the peak of the market, you’d be down almost $100,000 as of March. The median home price is currently in the low $600’s...

New home production has tanked. Single family permits were only a third of their prior peak in 2002, and the decline is not abating so far into 2008.

Prices are down, sales are down, production is down. Is there any hope for the future?

Sure there is...

We know that demand has not lived up to expectations because we can compare our proprietary estimate of demand to the actual last 12 months of sales. Our demand numbers represent what demand should be in normal market conditions.

We factor household formation by consumer segment, ownership rates by segment, trends in ownership, and structural replacements. We can’t account for negative psychology—there’s simply no reliable historic data with enough granularity to line it up with the rest of our data.

At all but the $450,000-500,000 price range, demand has not lived up to expectations. And that’s one more reason for hope. The demand is there. Households are still forming. The economic fundamentals are strong. Ownership has actually started to increase again because affordability is improving.

Click on image for larger view

I’ve heard many “housing experts” describe the housing boom in these bubble markets as simply moving forward demand that would have materialized in future years. So, we’re now three years past the peak. The demand analysis may be showing us that we’ve worked through the borrowed demand and are now pushing demand into future periods.

The future when things start moving again will be when home prices have stabilized, credit is more available, and consumers are more confident. When that happens, we’ll see a surge in sales and likely new home production to work through the pent-up demand.

So to my new friends in the OC, hang in there. Follow some of the advice you heard from the conference. Focus on knowing your customers. Invest in changes to improve products and processes. Get as lean as possible to survive, and then come back with a vengeance!

How long will this take? The home price indices are not sending encouraging signals, but they are 30-60 days old and may be overly influenced by sales of foreclosed homes.

At least on the listings side of things, it would appear that the conditions are stabilizing...

The average days on market for listings have also declined and have been under 100 days for three months now. Yes, I know that’s still ugly, but it’s not getting worse.

Finally, inventories of single family homes have fallen back to the levels of a year ago.

If the demand is there, and I believe it is, these are encouraging signals. And remember, there are communities selling well now.

Hyphen Solutions/Professional Builder presentation now online

For those of you who missed the presentation on May 29th by myself and Jonathan Smoke with Housing Intelligence & BlueSmoke, LLC entitled "Building Better Market Research -Housing 2.0: Orange County," you can now find it online here. In addition, Hyphen Solutions will be emailing out the same .pdf version to all builders who RSVPd to attend the event.

Special offer from Dwell magazine for Housing Chronicles readers

I got an email from a PR agent for the upcoming "Dwell on Design" conference in Los Angeles from June 5-8, inviting me and readers of this blog to accept free exhibition passes and discounts for the conference and parties. Here's the email:

My name is Paul Vaughn, and I'm helping Dwell Magazine to promote their third annual Dwell on Design Event. (>www.dwellondesign.com)

I would like to offer you and your readers free Exhibition tickets and $50 off coupons for the Conference, as well as a free 1 month digital issue to Dwell Magazine.

The Dwell on Design Event runs June 5-8 at the LA Convention Center, and includes an Exhibition of 200 exhibitors, a Speakers Conference of 50 speakers, and full size Sustainable Pre-Fab Neighborhood built on site, as well as 16 Home Tours of private green residences and evening parties at the Dwell Ford Brady (www.fordbrady.com) and the Museum of Contemporary Art (www.MoCA.org).

Codes and Links:

• Registration Link http://www.dwell.com/peopleplaces/conferences/17691009.html
• Free Ticket To the Dwell on Design Exhibition: BDODEC
• Discounted Conference Ticket ($50 Off): GRP22SP
• Digital Issue of Dwell Magazine: http://www.zinio.com/delivery?issn=1530-5309&of=PHoneissue
• Electonic Press Kit http://www.guerillapr.com/dwellondesign/exhibitors.html

We're also having a landscape design competition, as well as a live design rendering competition, at MoCA on Fri June 6th. The details will be on http://dwell.uber.com/moca in a couple of days.

Additionally, we can provide you and your staff with free six month digital Dwell subscriptions: http://www.zinio.com/delivery?issn=1530-5309&of=PHfree

Is telecommuting the answer to rising gas prices?

David Lazarus, the "Consumer Confidential" reporter for the L.A. Times, has written an article about the potential benefits of telecommuting for employees. I think he's onto something -- with today's technologies it's time that employers moved away from this ancient belief that "face time" -- seeing someone in person at the office -- equates to productivity. When I started working for a San Diego-based firm in 2000, I started working mostly from home, saving the driving mostly for important face-to-face meetings with clients, colleagues, direct reports and supervisors.

Today, eight years later and often from a home office, I work longer and with greater productivity, in part because I save up to two hours per day otherwise lost to commuting, finding something for lunch or being distracted in a myriad of ways. With emails replacing faxes and conference calls replacing many meetings previously done in person, the only thing keeping me rooted in Los Angeles are things I must do in person, such as attending industry events, giving speeches, meeting with clients for the first time or conducting field work.

Unfortunately, most people (and employers) still don't understand the huge advantages of telecommuting even on a part-time basis, and why is that? Because they either didn't bother to ask, didn't listen to the answer or just don't want to adapt. But as gas prices continue to rise, they may no longer have a choice, and this could also have a huge impact on future land use patterns. From the article:

The Energy Department reported Tuesday that the nationwide average for self-serve regular gas hit $3.937 on Monday, up 14.6 cents from the week before. In California, the average climbed 14.7 cents to $4.099. Diesel is even higher, topping $5 a gallon statewide.

But the more painful that things become at the pump, the more our political and business leaders will finally realize that they need to take steps, and soon, to wean us from our self-defeating oil jones.

I'm not just talking about promoting conservation and offering incentives for people to buy hybrids and stuff like that. I'm talking about some radical thinking that could finally ease the epic commutes that are wasting so much time and fuel...

American drivers spent 4.2 billion hours stuck in traffic in 2005, according to a recent report from the Texas Transportation Institute. That's about 38 hours per driver, or nearly an entire workweek.

The institute estimates that all this congestion resulted in 2.9 billion gallons of wasted fuel, or about 26 gallons per driver. Factor in lost productivity, and you have an economic hit to the nation of more than $78 billion.

Not surprisingly, the Los Angeles metro area took the booby prize for worst commute, with drivers languishing an average of 72 hours a year in traffic jams -- whole days of your life that you'll never get back.

Similarly soul-crushing commutes can be found in the San Francisco Bay Area, Atlanta, Washington and Dallas.

One answer, of course, is public transportation. But that seems to be one of those things that most of us support in the abstract but don't make use of on a regular (or even semi-regular) basis...

With the economy on the skids and state and local officials struggling to balance their budgets, I'm not holding my breath that we'll see a vast, multibillion-dollar expansion of public transportation.

Nor do I think that Detroit will make more than a token effort at developing more fuel-efficient technologies that would significantly improve mileage. Big automakers will have to be dragged screaming and kicking into the future.

The only realistic answer I see to runaway fuel costs is to get us off the road more quickly. And that means cutting our commutes.

Let's take advantage of what we have (a rapidly growing broadband data network) rather than waiting for what we don't (a world-class, totally convenient public transportation system and cars that get 75 miles per gallon)...

First, we need to accept that a lot of work no longer has to be done at work. Thanks to the Internet, BlackBerrys and other info-tech advances, many people can be just as productive at home as they can at the office, and sometimes even more so.

I'm not saying that we should all go off-leash. But I am saying that employers could trust workers enough to experiment with one remote day a week -- work-at-home Wednesday, for instance...

Meanwhile, local governments could give businesses tax breaks or credits to establish branch offices. Sure, you'd still have to get to the head office from time to time. But why should someone who lives on the Westside or in the Valley have to commute to downtown L.A. every day?

Let's say that any company with more than 1,000 employees would be eligible for a tax incentive if it opened branch offices that reduced people's commutes to 10 miles or less.

Additional tax breaks could be offered for setting up videoconferencing facilities to eliminate the need for you-are-there meetings.

Why was there an April bounce in home sales?

Just when you're getting ready to (perhaps) celebrate the April bounce in new home sales activity, a story at MarketWatch.com comes along to spoil the fun, calling the signs of rising resale inventories "ominous" (hat tip to Patrick.net):

The inventory of unsold homes on the market jumped 10.5% in April to 4.55 million units. At the current sales pace, that represents an 11.2-month supply of houses -- nearly double what the real estate industry considers to be a health level.

Of course, April is the biggest time of the year for putting houses on the market. That's because of the school-year cycle; families with kids in school who need to move in the June-August summer recess have to get their homes on the market then in order to sell, buy and close on both transactions before the fall term begins.

But even by seasonal standards the number of houses put on the market last month was high. And here is why that is particularly ominous:

• Many of those potential sales are likely forced. Strapped homeowners who are struggling to keep up with mortgage payments may feel compelled to sell and get what they can for their house before the financial burden overwhelms them.
• Many of those houses are foreclosures. With foreclosure proceedings nearly double what they were a year ago, banks are being handed the keys to record number of properties. Their aim is to get rid of them, regardless of market conditions.
• Many of these moves are not discretionary. Let's face it: The job market is not the most stable right now. Folks who face layoffs or are "asked" to transfer may have little choice but to put their home on the market.
• Many of these properties are failed investments. The speculators who bought -- mostly condos -- in the boom times in anticipation of quick profit have been caught with their windows down. They may have been tempted to hold for a rebound, but like stock traders they will also cut and run with no bottom in sight.

Some of the folks who put their houses on the market in April may end up pulling them off the market in subsequent months, once they see how choppy the water really is. But for most, it's now sink or swim.

Justice Dept. ruling opens access to home sale listings

In a considerable defeat to NAR and local Realtor boards fighting to keep control over home sale listings, the Justice Dept. has enacted a settlement which, assuming court approval, will provide these same listings to a variety of alternative (and most online) sources. From a USA Today story:

The Justice Department gave a boost Tuesday to online real estate brokers — and potentially their clients — by forcing new industry policies that give Internet-based agents access to home listings they were previously denied.

The tentative settlement, which still requires court approval, could save consumers thousands of dollars when buying a home.

Online real estate agents often charge discounted commission fees and let buyers review listings at their own pace.

For years, however, Internet-based brokers have complained that the National Association of Realtors wanted to let real estate agents exclude some of their listings from their online competitors, many of whom offer discounted prices. More than 800 multiple listing services nationwide are affiliated with the Realtors group.

In a September 2005 lawsuit, government lawyers said such policies discriminated against online brokers. The settlement, filed in U.S. District Court in Chicago, opens the MLS databases to online and traditional residential property agents...

In a report last year, the Justice Department and Federal Trade Commission found limits on discount brokers' access to Web listings of properties for sale prevented consumers from getting the cost savings and other benefits online competition has brought other industries.

The report found that more consumers use the Web when house hunting than rely on "For Sale" yard signs.

Even so, online brokers who were locked out of the MLS databases were unable to compete with real estate agents, government attorneys said. In at least one case, in Emporia, Kan., an Internet-based agent was forced out of business after the local MLS denied his access to any property listings in the local market.

Glenn Kelman, chief executive of Redfin, an online real estate brokerage based in Seattle that operates in 20 large metropolitan areas, said the settlement came as a relief for executives at the company, which bills itself as a lower-cost alternative to traditional real estate agents.

However, Kelman said he was concerned about a piece of the settlement that lets sellers' agents block Internet users from making comments on listings. Such comments, common on retail websites such as Amazon.com, are "just part of how today's consumers make decisions," Kelman said.

That part of the deal, however is a "a small price to pay to get an agreement and to get this behind us," said Patrick Lashinsky, chief executive of Emeryville, Calif.-based online broker ZipRealty Inc.

Tuesday's settlement will not take effect until late summer at the earliest, or 60 days after it wins court approval. It would be in place for 10 years.

It neither imposes a fine on the National Association of Realtors, nor does it force the group to acknowledge any liability.

Builder Standard Pacific nabs $530 milliion investment

Irvine-based builder Standard Pacific Homes has reached an agreement with the private equity firm MatlinPatterson Global Advisers LLC in which MatlinPatterson will invest more than $530 million. From a MarketWatch.com story:

The deal calls for MatlinPatterson to buy about $382 million of a new series of senior convertible preferred stock representing 125 million shares at a conversion price of $3.05. The price is a 37% premium over Standard Pacific stock based on May 23 closing prices.

Also, MatlinPatterson will exchange roughly $128.5 million of the company's debt for warrants to acquire preferred stock representing 89.4 million shares of common stock at an exercise price of $4.10 a share, according to a press release.

"This capital infusion will strengthen our balance sheet, enhance our financial flexibility and provide funding for future growth opportunities," said Jeffrey Peterson, Standard Pacific chief executive, in a statement. Peterson took over as CEO and chairman in March after the previous chief, Steve Scarborough, retired.

Standard Pacific shares were up about 64% at last check to $3.65...

Standard Pacific has been one of the hardest-hit residential builders during the housing bust. Earlier this month, it reported a wider quarterly loss and booked more impairment charges. Management said the home builder was exploring alternative financial and strategic options, including a potential sale of the company...

Morningstar Inc. analyst Eric Landry in a May 13 research note wrote Standard Pacific was being squeezed by too much land, debt and joint ventures.

"As a result, Standard Pacific now finds itself in an extreme liquidity crisis, as plunging prices in the company's markets have robbed it of the profitability needed to stay compliant, even with amended indenture covenants," he said.

"Consequently, we expect management to seek alternatives that will likely turn out very badly for existing shareholders," Landry added. "Most likely possibilities include dilutive share offerings, or some sort of a distressed sale."

Slight uptick in new home sales for April

The Commerce Department stats for new home sales during April have been released, and are showing a slight uptick in activity - 3.3% -- although they're still down by 42% from April of 2007 (see previous post about the latest numbers from the Case-Shiller index). From a New York Times story:

A government report released Tuesday showed that sales of new single-family homes rose 3.3 percent in April but were down 42 percent from a year ago...

sales of newly constructed single-family homes rose 3.3 percent in April to a 526,000 annual rate but they were down 42 percent from a year ago, which was the largest year-over-year drop in nearly 27 years, government data on Tuesday showed.

The Commerce Department estimate showed the first increase in new home sales since October, but the increase came after a big downward revision to the previous month.

Economists polled by Reuters were expecting new home sales to slip to a rate of 520,000. The department revised down its March estimate to a rate of 509,000 from 526,000, or a 11.0 percent decrease from a first-reported 8.5 percent decline.

The inventory of homes available for sale in April fell 2.4 percent to 456,000, which was the 12th straight monthly decline. The April sales pace put the supply of homes available for sale at 10.6 month’s worth.

As always, expect revisions to this government data next month, as the Commerce Department polls less than 5% of permit-issuing places nationally and then calls builders to see if the homes they've built have sold.

Case-Shiller index shows steep pricing decline

The S&P/Case-Shiller index for March 2008 is out, and shows a 14% pricing decline for the 20-city index during the first quarter of 2008 versus 2007. From an L.A. Times story:

U.S. home prices continued to fall at a record pace through March, according to a major indicator released today. The Standard & Poor's/Case-Shiller U.S. national home price index fell 14.1% in the first three months of 2008 compared with the same period a year earlier. The decline was the largest in 20 years for the index, which covers all U.S. Census divisions... The index showed an even sharper drop in Los Angeles and Orange County, where March prices fell 21.7% from a year earlier. Las Vegas showed the biggest year-over-year drop in March (down 25.9%), followed by Miami (24.6%) and Phoenix (23%). Charlotte, N.C., was the only city among the 20 to record a March price increase, 0.8%... More bleak housing news came today from the U.S. Commerce Department, which reported that April home sales were down 42% from the same month a year earlier. The traditional March-to-April bounce in home sales was also much smaller than in previous years. April sales were up 3.3% from March this year. In 2007, sales rose 10% from March to April.

News from the Fitch Ratings Housing Conference

According to analysts speaking at the recent Fitch Housing Conference, a combination of excess supply, poor consumer psychology and an economic recession are likely to prolong the housing slump. From a BuilderOnline.com article:

Those waiting for the home building industry to right itself and start down the primrose path are going to have to wait a while longer, the analysts at Fitch Ratings in New York, said Wednesday afternoon during Fitch's 2008 Annual Housing Conference...

"This downturn was not precipitated by a recession, but our economist thinks the U.S. is now in a modest recession, that will roughly extend through the June quarter," said Robert Curran, managing director, corporate finance, home builders and building materials companies for Fitch Ratings. "Issues of affordability, excess supply, and poor buyer psychology still dominate."

A modest recession, declining home prices, tighter mortgage standards—even for conventional loans, poor buyer psychology, and near-record levels of new and existing homes for-sale further boosted by foreclosures and people walking away from their homes defines the current environment for housing, Curran said, noting that the housing contraction will last through 2008, at least.

"If mortgage rates should rise, or credit terms tighten further, then our housing forecast could turn even more pessimistic," Curran said. "And if the economy, perhaps now in a modest downturn, slides into a sharp recession, then the downturn would not only deepen, but extend further into 2009."

Fitch forecasts new-home sales to fall 15 percent further in 2008 to a level of 658,000. Fitch analysts also project total housing starts to fall 22 percent to 1.06 million, and single-family new-home starts to drop 25 percent during 2008...

In the first quarter of 2008, average home builder revenues declined 22 percent, and new orders fell 38.5 percent. The good news is Curran sees a bottom in new-home sales approaching.

"Late this year, new-home sales are likely to bottom on a seasonally adjusted basis and flatten out on a year-over-year basis, with housing starts troughing three to six months later," Curran said. "Home builder revenues are projected to fall about 30 percent in 2008, while profits drop 50 percent for those builders that do make profits."...

The single most pressing problem for housing today is excess supply, Curran and other Fitch analysts said. New-home units for-sale, on a month's supply basis, reached 11 months in March (seasonally adjusted) well above the five and a half to six months' supply that Fitch believes represents a rough equilibrium of supply and demand. In the existing market, there is a 9.9 months' supply, Curran said.

The Census' numbers understate the problem, Curran and other analysts said.

"There has been an increase in the shadow supply of vacant for-rent single-family homes and reversion of condominiums to the rental pool," said Steven Marks, managing director, Fitch's REIT Group. "On the demand side, the single-family housing slowdown turned many good renters into poor homeowners, many of whom have become renters again."

The near-record level in single-family rental vacancy rates reflects the difficulties being encountered by investors who are waiting to put their single-family homes back on the market, but are struggling to find renters for them.

Curran said it is difficult to forecast the number of single-faily rental units that will become for-sale units, or when their owners will try to sell them.

"But they will have an impact on the market," Curran said.

For now, Fitch's analysts see more former homeowners becoming renters, said Adam Fox, senior director of Fitch's Commercial Mortgage Backed Securities Group...

Legislation being pushed by Congress to try and stem the wave of foreclosures, to keep people in their homes, is unlikely to be a big help, Curran said

"Net-net, I don't see the government as a savior here for housing, it may make the situation a little less onerous for housing," he said.

Unexpected saviors helping to prop up homebuilders

According a Reuters article, a unique blend of hedge funds, private investors and larger public builders are jumping in to buy land at distressed prices and invest in troubled builders in search of a big payoff when the market rebounds:

The precipitous slide in home values and a glut of unsold properties are pushing U.S. home builders to the brink of insolvency, but a posse of unexpected saviors could help keep the companies out of bankruptcy court until home buyers return.

Hedge funds, private investors and even larger cash-flush home builders are eyeing valuable swathes of land held by troubled companies, according to bankruptcy attorneys and restructuring specialists. As long as private firms have the cash to keep a struggling home builder running, they think they can profit when the real estate market picks up again...

Troubled home builder Standard Pacific Corp (SPF.N: Quote, Profile, Research), which builds homes in Florida, California and other major metropolitan areas, may be catching the eye of hedge funds. Hedge fund Tiger Global Management LLC has taken a 3.55 million share stake in the company, making it the fifth-largest institutional shareholder, according to Reuters. The firm declined to confirm the data or comment further.

Hedge funds are finding they can offer operating cash or long-term equity financing to distressed companies...

Still, it is risky for investors to bet on home builders or related companies. Declines in U.S. home prices accelerated in the first quarter, falling a record 1.7 percent from the end of 2007, according the national house price index of the Office of Federal Housing Enterprise Oversight (OFHEO), which covers home purchases.

As home values fall, builders are slashing plans for new developments and allowing land to lay fallow, cutting off their revenue stream.

Debt for companies, including Standard Pacific, is trading at distressed levels and banks are increasingly unwilling to lend to many home builders as the housing market weakens.

A Chapter 11 bankruptcy could protect some companies from creditors, while they restructure, but with analysts saying the housing market is unlikely to regain strength soon, liquidation may be their only option...

But the desperate and expedient measures required by bankruptcy and liquidation can cause much more pain for a company and its stakeholders. With a cash infusion from hedge funds or private equity, the company may be able to wait out the housing slump and its investors can reap the rewards, restructuring experts say.

"A property tax base that moves with you"

My latest feature article for the real estate section of the Los Angeles Times on Propositions 60, 90 and 110 was published yesterday. Somewhat to my surprise for such a California-specific story, it's also been reprinted (at least on the websites) for other Tribune Co. papers including the Chicago Tribune, Baltimore Sun, Newsday and The Morning Call.

I want to thank those who made this story possible. Firstly, it would have not been possible without an email pitch to me from Realtors Barry and Serene Sulpor, who also put me in contact with John and Rose Osten, the couple featured in the piece. John was a great interview subject and gave me lots of financial details from which to work and tell his story of how these tax-saving measures worked for him.

Thanks again to others to whom I spoke for the article, including agents Lana Fears and Carey Ann Parker, Riverside County Assessor Larry Ward and Board of Equalization member Michelle Steel. Without their participation, there would have been no story to tell.

It's very hard to get people to talk on the record for newspaper articles, so if/when a reporter ever calls you for insight or a quote, please participate!

OFEHO tracks steep decline in home prices for 1Q 2008

According to the Office of Federal Housing Enterprise Oversight (OFHEO), home prices fell faster during the first quarter of 2008 than they've fallen in the 17 years the group has been tracking the market. From a USA Today story:

The government says U.S. home prices posted a first-quarter decline bigger than any in the 17-year history of the data.

The Office of Federal Housing Enterprise Oversight (OFHEO) says home prices fell 3.1% in the first quarter compared with a year ago.

The index also fell 1.7% from fourth quarter 2007 to the first quarrter of 2008, largest quarterly price drop on record.

The report says prices fell in the first quarter in 43 states. Eight states had quarterly price declines of more than 3% and two — California and Nevada —saw prices decline more than 8%...

States with the greatest price appreciation between first quarter 2007 and first quarter 2008 were: Wyoming (6.3%), Utah (5.6%), Montana (4.9%), Texas (4.7%), and Alabama (4.5%).

States with the sharpest depreciation for the same period were: California (-10.6%), Nevada (-10.3%), Florida (-8.1%), Arizona (-5.5%), and Michigan (-3.1%).

The government index is calculated by tracking mortgage loans of $417,000 or less that are bought or backed by the government-sponsored mortgage-finance companies Fannie Mae and Freddie Mac. Legislation enacted in February temporarily raised the limit to as much as $729,750 in high-cost areas.

The government index focuses on less expensive properties and includes fewer houses bought with risky home loans that have gone sour over the past year.

Another reading that includes such properties and focuses on major U.S. cities, the Standard & Poor's/Case-Shiller has shown larger declines.

So how are these other indices different? Here's a quick primer:

Among the differences in the home price indexes:

• The Standard & Poor's/Case-Shiller nationwide housing index focuses on major metropolitan areas and includes expensive properties as well as cheaper ones. The S&P/Case-Shiller indexes use only purchase prices gathering information from county assessor and recorder offices.
• The OFHEO Home Price Index, more national in its scope, excludes higher-priced homes and ones financed by riskier mortgages, and it includes refinance appraisals. The OFHEO index is calculated solely using home loans of $417,000 or less that are bought or backed by government-sponsored mortgage companies Fannie Mae and Freddie Mac. That excludes properties bought with some of the riskier varieties of home loans that have gone sour this year.
• The National Association of Realtors uses a median price of a home sold. Many economists consider the OFHEO and Case-Shiller indexes to be better measurements of the housing market than the Realtors' report, because both indexes examine price changes for the same properties over time instead of calculating a median price for houses sold during a particular month or quarter.

Source: AP, OFHEO

Want to see the entire list by state? Click here.

Why the bump in jumbo loan amounts hasn't worked

When the conforming loan limits were raised to accommodate more jumbo loans, it was thought that it would spark home sales activity in higher-priced areas, but that hasn't quite done the trick. A CNNMoney.com story examines why:

When the housing crisis hit last summer, it became very hard for borrowers to land the jumbo loans they needed to buy homes in high-priced areas, like California and New York.

So as part of the Economic Stimulus Act, Congress tried to get funds for jumbo loans flowing again by temporarily raising the dollar limits for mortgages that Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) can buy. The two government-sponsored entities (GSE) had previously only been permitted to buy so-called conforming loans of up to $417,000, and then resell them on the secondary market.

The new limits raised that conforming loan cap to as much as $729,750 in some high-priced metro areas through December 31, in order to make home loans more readily available to help stabilize falling markets.

But the move hasn't juiced the market, and so the House Financial Services Committee is holding a hearing Thursday to examine why that is...

Despite the increased caps, these new 'conforming jumbo loans' - for anything between $417,000 and $729,750 - are still more expensive than the conforming loans below $417,000.

For months after the conforming jumbos were introduced, interest rates for them ranged between a point and a point and a half higher than on regular conforming loans. That made jumbo loan borrowing much more expensive; for a $600,000 mortgage, a borrower paid an extra $400 to $600 a month.

In the past, the spread between jumbo and conforming loans was much smaller, a quarter point or so...

The problem: The investors who buy mortgages on the secondary market still consider these new conforming jumbo loans riskier than the original conforming loans, and put a higher risk premium on them...

That reluctance comes despite the fact that buyers who use jumbo mortgages tend to be better credit risks and often put more money down, McDonald said.

Part of the problem is simply that fear is contagious...

ndeed, Fannie and Freddie don't actually package conforming jumbos for sale to investors in the same way they treat sub-$417,000 conforming loans. They are not what's called "TBA-eligible." These are "to-be-announced" transactions where the purchase price is settled at some future date.

The Securities Industry and Financial Markets Association decided back in February to exclude jumbo conforming loans from TBA-eligible pools. But the TBA market is well established and understood by investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA).

"Buyers of securities feel very secure about this market," he said. "They're accustomed to the pricing and they know how the securities perform."

The exclusion of conforming jumbos from that market makes them a somewhat unknown security. "No one is sure what their performance will be, so no one is sure how to price them," said Keith Gumbinger, of HSH Associated, a publisher of mortgage market information.

The Mortgage Bankers Association (MBA) argued that the new conforming jumbos should be issued as TBA products, but there was resistance to this. Fannie and Freddie were hesitant to introduce any new element that might harm the conforming loan market...

Jumbo borrowers are more likely to pay off their loans early, which cuts off the revenue stream of their interest payments for investors, while those with $100,000 mortgages tend to keep making the same monthly payment year after year.

If jumbos were packaged with these in the same mortgage-backed securities, investors would require higher interest rates to purchase them. Borrowers of conforming loans would have to pony up the increased interest, in effect subsidizing more affluent, jumbo loan borrowers.

There are other risk factors that makes investors wary. Jumbos are, by definition, less diverse geographically; they're only available in about 70 metro areas - many of the most challenging markets in the nation...

In early May, Fannie made a change in the way these loans are handled; instead of packaging them for sale on the open market, they are keeping them in their portfolios. Fannie can set the price itself and is doing so as if the loans were TBA-eligible.

As a result, the pipeline for the loans has opened up during the last couple of weeks.

Weekly mortgage application statistics from the MBA reveal the change. In March, 2007, 12.1% of all mortgage loans requests were for jumbos. A year later, only 4.4% were. During the past couple of weeks, jumbos have accounted for 5.8% of all applications.

According to Freddie Mac Vice President Patricia Cook, interest rates for conforming jumbos are now a full point below regular jumbos and only two-tenths of a percentage point higher than conforming loans.

Gumbinger confirms that spreads between conforming and jumbo conforming have narrowed down to below half a point, good news for home buyers in high-priced areas.

Silver lining of falling prices: greater affordability

Thanks to falling prices, U.S. affordability levels for median home prices have bounced back to 54% -- 10 percentage points above the 44% level noted in the first quarter of 2007. Still, because buyers expect prices to keep falling, they remain largely stuck on the sidelines hoping for better deals to come. But in many areas, affordability levels are approaching and exceeding 90%. From a CNNMoney.com story:

With prices crashing around the nation, home price affordability has improved dramatically in many U.S. cities.

As a result, 53.8% of all new and existing homes sold nationwide during the first three months of 2008 were affordable to families earning the median household income of $61,500, according to the latest Housing Opportunity Index released Tuesday by Wells Fargo and the National Association of Home Builders (NAHB).

That's up from 44% during the first three months of 2007 with home prices the most affordable they've been since the three month period that ended June 30, 2004...

Home prices dropped about 8% compared with a year ago, according to NAHB, but that doesn't mean that buyers are flocking back to the market.

"This measure can only take you so far in implications for the market," said Dave Seiders, NAHB's chief economist. "There're several factors that the index does not capture."

These include buyer expectations. Many are reluctant to act in falling markets. That sentiment can contribute to market overshoot, according to Seiders, in which prices fall lower than would be their logical bottom.

Richard DeKaser, who, as chief economist for national City Corp., runs his own affordability studies, pointed out that three main factors influence housing market trends: demographics, like more families moving into an area attracted by jobs; sentiment, the perception that the housing market is a good investment at any point in time; and affordability.

"While affordability is an important factor that will contribute to recovery of housing markets eventually," he said, "improved affordability is unlikely to lift markets out on its own."...

The index also fails to capture the tightening of lending standards, which has been quite dramatic during the past 12 months. The index presupposes constant lending standards.

But today, lenders are requiring much higher down payments, better financial documentation and higher credit scores than they did during the boom, cutting back on the number of potential buyers.

California has been particularly hard hit by a liquidity squeeze in jumbo loan markets. These mortgages of greater than the $417,000 cap limit that Freddie Mac and Fannie Mae imposed (now temporarily raised to $729,250) are especially important to high-priced markets.

"Jumbo markets had essentially shut down, " said Seiders, "and many California markets depend on jumbo loans." These are getting a little easier to find but they still cost a full 1 to 1.5 percentage points higher than other loans.

That has helped make Los Angeles, the least affordable metro area in the United States, more affordable than last year. But still, despite much lower home prices, to a median $412,000 from $525,000, only a little more than 10% of homes sold during the first quarter of 2008 were priced low enough so that households earning the median income of $59,800 in the area could buy.

That, however, is a change from a year ago when only 3% of Los Angeles area homes sold were affordable to the average Joe...

Although home affordability improved to its best level since mid-2004, Seiders is not predicting a market turnaround anytime soon.

According to him, with job growth slowing, negative consumer sentiment and tight mortgage lending standards, it could be a while before real estate markets start climbing again.

He's predicting that housing starts won't turn upward until early 2009, that home sales will be flat through mid-2009 and that home prices will fall another 10% or so beginning to recover in late '09.

Prices in certain areas still holding up

Although you'd never hear this from many housing bust bloggers, there are certain areas in which prices are holding up -- namely urban cores which offer proximity to employment, shopping, transportation and entertainment options. A recent story in the Wall Street Journal discusses some of these areas in more detail:

Downtown: It's been among the safest places to hide from the housing downturn.

Much has been made of the way the nation's real-estate bust is affecting some American cities far more than others. But even within a single metro area, changes in housing prices can show wild variations.

And in big cities, prices in the central cores often fare the best. Far-flung suburbs -- where home building exploded in recent years -- have more typically gotten hammered. In between is a patchwork of established suburbs and city neighborhoods peripheral to downtown that can be all over the map in terms of price declines -- or even increases...

For today's buyers, all this means that shopping for housing bargains is increasingly complicated. The best deals may be where prices have slid the most, but such areas could easily fall a good bit more before hitting bottom. Meanwhile, you'll get few bargains if you buy a home in San Francisco or Manhattan or downtown Boston. Of course, if the housing crisis broadens, the central core areas also could see price drops...

L.A. is an anomaly. No real urban core exists. The area is just a sprawling string of suburbs that run together.

And most of that sprawl is bathed in red ink. Median prices in communities throughout Riverside and San Bernardino counties -- the distant, inland suburbs that are at the epicenter of the region's subprime and foreclosure crises -- are down, often sharply.

Lower-priced homes in tony Palm Springs have lost about 24%, though more-expensive homes are up slightly. Less-affluent cities such as Ontario, Chino and Rancho Cucamonga are all down between 15% and 31%. Los Angeles County, Orange County to the south and Ventura County to the north are suffering equally.

The only notable area of strength: high-end real estate. L.A.'s Westside, home to affluent neighborhoods such as Brentwood and Westwood, "tends to be more insulated because this is where people with money want to be," says Madison Offenhauser, regional director in Los Angeles for Keller Williams Realty.

Median prices in Brentwood are up 16%. The Hollywood Hills, up 26% to a median price of more than $2.1 million. Rancho Palos Verdes and the Palos Verdes peninsula, up 17%. Parts of Newport Beach, one of Orange County's poshest addresses, are up as much as 67% to $2.75 million. The coastal village of Laguna Beach is up 6%.

Lee Ann Canaday, owner of the Canaday Group, a Laguna Beach real-estate firm, says "almost every deal I've done this year" in Laguna and Newport Beach has had multiple offers.

"Poison Ivy" Zelman on false hope for homebuilding stocks

Former stock analyst-turned-consultant Ivy Zelman, nicknamed "Poison Ivy" due to her storied history of analyses which hammered building stocks, is now writing for BuilderOnline.com. In her latest post, she argues that the rise in homebuilding stocks since the beginning of the year is based on false hope:

If stock prices represent a reliableindicator of fundamental trends, one would be led to believe that the outlook for home builders is quite rosy. Since the start of the year, major public home builder stocks have appreciated nearly 40 percent on average, versus the broader market which is down 7 percent. I have heard many reasons for the market’s optimism, most notable of which is the theory that a government bailout of foreclosed homeowners, higher loan limits on government-sponsored mortgages, a tax credit for buyers of new and foreclosed homes, and a four-year tax-loss look back for builders will stabilize the housing market and ultimately lead to an earlier-than-expected recovery.

Despite the apparent optimism, I continue to believe that the fundamental outlook for the industry remains extremely challenging, and more pain is on the horizon. I expect the glut of home inventory, weak absorption rates, turmoil in the mortgage markets, and a deteriorating job environment to pressure pricing downward.

Given this dynamic, I expect new-home prices to continue to decline approximately 10 percent to 15 percent through 2009. I expect existing-home prices to fall even further, declining through 2010 or 2011, as existing-home prices have been stickier than new-home prices on the way down. These price declines should further pressure land values, which I estimate are already down approximately 40 percent from peak levels for finished lots and down as much as 80 percent in some former investor hotbed markets. Raw lot prices have plummeted even further, with an average decline of 60 percent from their peak. In many markets throughout California, Arizona, and Florida, finished lots are now worth less than the cost of development.

While many industry participants believed that Lennar’s bulk land sale in November 2007 at 40 percent of book value was artificially low in order to generate tax refunds, subsequent deals by M/I Homes (at roughly 30 percent to 35 percent of original purchase price) and Centex (approximately 15 percent to 20 percent of purchase price) demonstrate the recent free-fall in land prices. I expect builders to take additional impairments over the coming quarters as land values deflate further...

Although the banks have finally awakened to their woes and become aggressive in re-margining assets or, worse, foreclosing on properties, I believe we are only in the early stages of this capitulation. Banks have begun talking to investors about selling bulk loan packages, but the bid-ask spreads are still way too wide. Therefore, no significant transactions have taken place yet. The magnitude of downside in home and land values will likely be contingent on the regulators and how much pressure they apply to the banks in the coming months.

Builders might want to plan for fewer retirees than expected

For years, homebuilders and others across the U.S. have been planning for the wave of 78 million baby boomers to retire. However, a Business Week article argues that some of these past estimates have been too optimistic, as a combination of falling housing prices, a bear market in stocks and a gradual reduction in defined benefit pension plans will force many boomers to continue work well into their retirement years:

Companies from cruise lines to retirement communities and financial consultants have been planning for this mass retirement. They hope to profit grandly by selling goods and services to tens of millions of relatively young boomers with bulging nest eggs and decades of free time ahead.

But demography is not destiny—and it may not even make for a good business plan. It looks like fewer of those 78 million will be either rich enough or young enough at retirement to meet the expectations of businesses catering to boomers released from the workforce. This shortfall, and how it may dash such hopes, is the focus of a new study co-authored by Kevin P. Coyne of Atlanta's Coyne Partnership. In coming decades, "the size and growth rate of the U.S. retirement market will be much smaller than is widely believed," he says...

It's the long-term perspective, however, that sets Coyne's analysis apart. He sees permanent shifts taking hold. And the implication is that some portion of the billions companies are spending on services aimed at retirees could be misspent. Experts are bound to disagree on the scale of this investment, but in light of Coyne's report, creators of such services may need to rethink some of their assumptions.

For financial and social reasons, the propensity to delay retirement is increasing, Coyne says. The total number of retirees over the next two decades will grow by less than 3% per year, on par with the overall population, and could fall to as low as 1%, he says. By 2017 this will lead to some 5 million to 10 million fewer retirees than some marketers have been counting on.

Certainly, a shift is under way. In the first four months of 2008, about 30% of 65- to 69-year-olds were either employed or looking for work, up sharply from 24% in the last business-cycle peak in 2000, according to the Bureau of Labor Statistics. Look one rank down, at 60- to 64-year-olds, and 54% are in the labor force, up from 47%.

Social forces are also keeping workers on the job, says Joyce Manchester, an analyst at the Congressional Budget Office. With divorce rates up, more boomers are depending on one income. Many have children just entering college. And a greater number of women now hold white-collar jobs, which are less physically taxing and so easier to stick with than jobs women held in the past. What's more, boomers make up the first generation to fund retirement partly from finite pools of savings instead of wholly from guaranteed-for-life pensions. Says AARP's director of financial security, Jean Setzfand, "That makes them fundamentally more cautious."

Will President Bush sign the housing bill?

A key Senate panel has OK'd legislation to help the ailing housing market. MarketWatch reporter Rob Schroeder talks to John Wordock about where the measure goes from here and whether President Bush is now likely to sign it (audio clip).