Business Week on "the housing abyss"

Arguing that the measures taken so far to prevent an overly large erosion in housing values have fallen flat, Business Week asks what can be done to avoid falling to the bottom of the 'housing abyss:'

The housing crisis is entering a new and frightening stage. On June 24, Standard & Poor's announced that the S&P/Case-Shiller 20-City Home Price Index had fallen more than 15% in April from a year earlier. Adjusted for inflation, the decline is the biggest since 1940-42, according to data collected by Yale University economist Robert Shiller.

The risk for the financial system and the economy is that the price drop, already horrifying, will start feeding on itself. When home values fall low enough, hard-pressed homeowners become less able or less willing to keep paying their mortgages. That forces lenders to repossess homes and then dump them back on the market at fire-sale prices, which depresses prices further and leads to even more foreclosures...

Efforts by the private sector and government to stop the slide before it gets out of control haven't done the job. Poorly designed mortgage securities rife with conflicts of interest, as well as legal disputes over priority between creditors, are forcing many homes into foreclosure needlessly, accelerating the market decline.

Sure, Congress is expected soon to pass a huge legislative package aimed at preventing needless foreclosures and stimulating first-time home purchases. But many analysts and advocates are already warning that more dramatic measures will ultimately be required. "The depth of pain is not being registered in D.C.," says Mike Shea, executive director of nonprofit advocacy group ACORN Housing in Chicago...

...the housing optimists have systematically misjudged the market. Some became convinced that the huge runup was justified by fundamentals such as population growth, rising incomes, and land scarcity. And because sharp national housing price declines are so rare in U.S. history, analysts assumed that prices would, at worst, flatten out for a few years...

What they forgot was that markets can overshoot on the downside just as easily as on the upside, with both financial and psychological forces feeding the decline...

...the fall in house prices is so precipitous that it is changing homeowner psychology, eroding the long-held taboo against walking away from a home. In hard-hit markets such as Las Vegas and Phoenix, many homeowners are beginning to conclude that their home purchase comes with a "put option"—the right to hand the keys back to the lender if things don't work out. Indeed, risky payment-option ARMs that allow unpaid interest to be added to the principal, 70% of which were issued in California and Florida, are going bad even before they reset upward, as homeowners see trouble ahead and bail. "Commercial real estate borrowers have always looked at things this way. Consumers simply caught on to the game," says Tom Lindmark, a managing director of Phoenix-based Metropolitan Real Estate...

Mass foreclosures accelerate a neighborhood's decline, triggering a spiral of abandonment and decay. A survey of agents this year for Inside Mortgage Finance by Geosegment Systems and Campbell Communications found that about half of foreclosed properties have significant damage, which reduces a property's value by about 25% (e.g., $100,000 on a $400,000 house). Ruined floors and carpets, holes in walls, and missing appliances lead the list...

Who can fix this mess? Certainly not lenders. They're part of the problem. To repair their damaged balance sheets, they're aggressively reducing lending. And they haven't geared up for the wave of defaults...

What more might government do? The Federal Reserve has already intervened heavily, of course. In addition to slashing short-term interest rates, it has extended more than $150 billion in secured loans to banks. Anything more from the Fed would leave it open to charges that it was subsidizing the banks and raising the risk of inflation...

If the housing market continues to weaken, action in Washington could heat up next January, when a new President and Congress take office. The next President, whether Democrat or Republican, will have more flexibility to be bold because he will be starting with a clean slate, although Barack Obama has taken a far more interventionist stance than has John McCain...

But expect strong pushback on that last idea from fiscal conservatives. The Wall Street Journal's editorial page observed on June 21 that the FHA lost $4.6 billion last year, making it a less-than-obvious candidate to guarantee billions in troubled loans.

Envisioning life with oil at $200 per barrel

When I first wrote about the theory of peak oil last fall, I thought it was at least a couple of years away. But now, for a variety of reasons, the potential impact of oil supplies becoming scarcer while demand increases is rolling out not in terms of years, but weeks. What does this mean for a society which (myopically) assumed cheap energy was something to be tapped forever? A story in the L.A. Times takes it on:

Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.

The pain would probably be particularly intense in Southern California, which is known for its long commutes and high cost of living. "Throughout our history, we have grown on the assumption that energy costs would be low," said Michael Woo, a former Los Angeles city councilman and a current member of the city Planning Commission. "Now that those assumptions are shifting, it changes assumptions about housing, cars and how cities grow."

Push prices up fast enough, he said, and "it would be the urban-planning equivalent of an earthquake."...

Consumer spending has held up surprisingly well in the face of skyrocketing pump prices -- bolstered in part, perhaps, by federal tax rebates. But the same day the government reported a 0.8% rise in May consumer spending, a research firm said consumer confidence had plunged to its lowest level since 1980 -- hinting at the catastrophic effect another big gas price surge could have on retailers and customers

"The purchasing power of the American people would be kicked in the teeth so darned hard by $200-a-barrel oil that they won't have the ability to buy much of anything," said S. David Freeman, president of the L.A. Board of Harbor Commissioners and author of the 2007 book "Winning Our Energy Independence." BIGresearch of Worthington, Ohio, said more than half of Californians in a recent survey said they were driving less because of high gas prices. Almost 42% said they had reduced vacation travel and 40% said they were dining out less.... Nationwide, $200 oil and $7 gasoline would force Americans to take 10 million vehicles off the roads over the next four years, Jeff Rubin, chief economist at CIBC World Markets, wrote in a recent report...

As for the state's beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers...

Already Californians' mobility is being curbed. Traffic on the state's freeways fell almost 4% in April compared with a year earlier, and ridership on many subway and bus lines operated by the L.A. County Metropolitan Transportation Authority has risen in recent months. But a huge influx of riders would strain aspects of the system, MTA says, noting that many buses are overcrowded at rush hour now. Quickly adding capacity to meet demand from new riders wouldn't be easy, because new buses cost hundreds of thousands of dollars and take up to two years to deliver...

Dramatically higher transportation costs would usher in an era of virtual mobility, or zero mobility, for many workers. "We're seeing companies go to four-day workweeks, place increased emphasis on working at home, show bigger interest in setting up satellite offices -- anything that gets commute times down and gets people off the road," said analyst Rob Enderle of Enderle Group in San Jose. Videoconferencing, touted as "the next big thing" for years, would finally have its day, thanks to improved technology and a desperation to cut corporate travel budgets.

Telecommuting, or working from home, is easier than ever because of the spread of high-speed Internet access, said Jonathan Spira, chief analyst at Basex Inc., a business research firm in New York. In particular, workers in "knowledge" jobs that can be performed with computers and phones would benefit. But Gilligan of USC noted that lower-income workers tend to be in jobs that don't favor telecommuting, such as retail and food service.

Home swapping gains in popularity

Given the continuing state of the slow housing market, home swapping is starting to gain popularity as a way to trade places with someone else. From an article in the L.A. Times:

For years people have been swapping homes for vacations. Today, the idea of permanent exchanges is gaining support among disillusioned property owners struggling to sell in a glacial real estate market.

Although the number of completed trades isn't being tracked, interest is such that several home-swap websites have sprung up in the last year and now claim close to 40,000 combined swap listings nationwide. Others appear regularly on Craigslist.org...

Though the number of swap listings is still a small fraction of total property listings, website operators are confident they have hit upon a simple way to help ease today's market woes -- matching buyers and sellers.

"It's like a dating service for home sellers," said Greg Holt, chief executive and co-owner of Denver-based Pad4Pad. "We're bringing people together."

From St. Augustine, Fla., Sergei Naumov, creator and owner of GoSwap.org, agrees. "The concept works as simply as: 'I will buy your house if you buy mine.' "

These websites, along with others such as OnlineHouseTrading.com, DomuSwap.com and DaytonaHomeTrader.com, say once potential swappers feel they have the makings of a match and begin negotiating, they are on their own and the process runs much like any other real estate transaction.

Having decided to swap homes, both parties need to agree on the value of their respective properties and secure fresh mortgages. Any difference in value will be paid either in cash or by using funds from the new mortgage...

Pad4Pad's Holt said because both parties have already connected, he has found real estate agents willing to assist for a flat fee of about $700 instead of more costly percentage commissions.

Sites also suggest that people share the same title company to ensure that both deals go through simultaneously and that nobody is left holding mortgages on two properties.

Finding the next President for anxious times

Now that we've whittled down the presumptive nominees to Barack Obama and John McCain, it will be very interesting to see their plans not just for the real estate market, but the overall economy, a real energy policy and what we can expect from their respective administrations.

Friends, family and colleagues get very irritated with me when I tell them I've not yet decided who will get my vote in November (the building industry tends to lean conservative and my friends are a mixed bag), but that's because I simply don't know enough about either man to make an informed choice, so for me the debates will be crucial.

As a 'decline to state' for many years (also known as an Independent), I don't vote party lines and think it's irresponsible and lazy to do so -- what's next, "I like the sound of his name?" (don't joke, that's how some people vote for local judges). For those people who decided months ago who would get their vote -- well before we've seen the two candidates argue the issues -- I would argue that the choice is not one of intellectual honesty, but of emotion. And, according to an op-ed piece by Thomas Friedman in the New York Times, that's exactly what we do NOT need. Amen to that. Let's ask people to THINK this time:

Just a few months ago, the consensus view was that Barack Obama would need to choose a hard-core national-security type as his vice presidential running mate to compensate for his lack of foreign policy experience and that John McCain would need a running mate who was young and sprightly to compensate for his age. Come August, though, I predict both men will be looking for a financial wizard as their running mates to help them steer America out of what could become a serious economic tailspin...

My fellow Americans: We are a country in debt and in decline — not terminal, not irreversible, but in decline. Our political system seems incapable of producing long-range answers to big problems or big opportunities. We are the ones who need a better-functioning democracy — more than the Iraqis and Afghans. We are the ones in need of nation-building. It is our political system that is not working...

We used to try harder and do better. After Sputnik, we came together as a nation and responded with a technology, infrastructure and education surge, notes Robert Hormats, vice chairman of Goldman Sachs International. After the 1973 oil crisis, we came together and made dramatic improvements in energy efficiency. After Social Security became imperiled in the early 1980s, we came together and fixed it for that moment. “But today,” added Hormats, “the political system seems incapable of producing a critical mass to support any kind of serious long-term reform.”..

We need nation-building at home, and we cannot wait another year to get started. Vote for the candidate who you think will do that best. Nothing else matters.

Illinois also suing Countrywide

It looks like Illinois is joining California in suing Countrywide Financial for "the company and its executives defrauded borrowers in the state by selling them costly and defective loans that quickly went into foreclosure." From a New York Times story (reg. required):

The lawsuit, which is expected to be filed on Wednesday in Illinois state court, accused Countrywide and Mr. Mozilo of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like its heavily advertised “no closing costs loan.” Countrywide also created incentives for its employees and brokers to sell questionable loans by paying them more on such sales, the complaint said.

In reviewing one Illinois mortgage broker’s sales of Countrywide loans, the complaint said the “vast majority of the loans had inflated income, almost all without the borrower’s knowledge.”...

The civil lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present...

The lawsuit adds to the considerable legal risks facing Bank of America as it prepares to absorb Countrywide in a takeover announced in January.

New home market still in free-fall

After a small rebound in April, new home sales in the U.S. continued to fall during May. Prices have also continued to fall while the inventory timeline rose slightly to nearly 10.9 months. From a BuilderOnline.com story:

New-home sales declined 2.5 percent in May, after registering their first increase in five months during April, according to the United States Census. Sales of new homes fell on a seasonally adjusted basis to 512,000 units in May, from 525,000 units the previous month.

New-home sales peaked in this cycle on a seasonally adjusted basis in July 2005, at 1.371 million units. The low point so far during the current bust was registered in March, which has been revised several times and is now recorded at 501,000 units, according to the Census.

Wall Street analysts were predicting 515,000 new-home sales for May, according to Forbes.

New-home sale prices also declined in May, with the median sale price declining to $231,000 from $243,500 in April, and average sale prices declining to $311,300 in May from $321,200. Both price indicators have moved up and down over the last few months, with low points for both falling in October.

Inventory of new homes also increased, rising from a 10.7 months' supply in April to a 10.9 months' supply in May. Inventory hit its peak of an 11.4 months' supply in March.

California sues Countrywide

In a clear sign that government is taking the residential lending bust to a new level, California Attorney General (and former Governor) Jerry Brown has sued Countrywide Financial, arguing that the company set out to deliberately relax underwriting guidelines and deceive borrowers with Option ARM and other adjustable rate loans that were in fact financial ticking time bombs. From an L.A. Times story:

Countrywide Financial Corp. and its chief executive, Angelo Mozilo, were sued today by California Atty. Gen. Jerry Brown, who accused them of forcing thousands of Californians into foreclosure by deceptively marketing risky adjustable-rate mortgages to borrowers who didn't understand that their monthly payments would one day "explode."

In a complaint filed in Los Angeles County Superior Court, Brown alleges that Countrywide and its top executives, beginning in 2004, plotted to loosen or ignore lending standards so they could make more sub-prime mortgages and other adjustable-rate loans that were promoted by emphasizing low initial rates.

By deceiving borrowers about the risks of these loans, Countrywide's top executives sought to double the lender's share of the national mortgage market to 30%, mass-producing loans that could be sold off and transformed into complex bonds, the suit said...

The California suit, which also names Countrywide President David Sambol as a defendant, asks the court to order an end to what it calls the misleading and unfair practices, and demands that homeowners victimized by the alleged scheme have their money and property returned. The complaint doesn't specify what procedures might be used to accomplish this restitution.

Case-Shiller: where will prices go next?

Despite the continuing declines in the Case-Shiller index, some economists still think that prices in certain cities have more decreases in store before hitting bottom. From a BuilderOnline.com article:

As Cleveland goes, so goes the nation?

That's one hopeful way of looking at the Case-Schiller Index, which tracks home prices in 20 major cities. The data for April, which were released this morning, show that Cleveland—whose prices had fallen nearly 14 percent from its peak in August 2006—might be stabilizing. "The fear had always been that prices in markets like Cleveland would go too low, but the data suggest that Cleveland has found a bottom and may be bouncing back," observes Dean Baker, economist and cofounder of the Center for Economic and Policy Research.

Baker presented his latest take on housing market conditions during a teleconference this morning, and on the whole his prognosis is not good. The Case-Schiller Index in April, at 169.85, is down 15.2 percent from the same month in 2007. Adjusted for inflation, the decline is closer to 20 percent, Baker estimates, which means that over the previous 12 months, the housing market lost $4 trillion in value.

While some cities, such as Seattle, Dallas, and Denver, have enjoyed modest price increases, other major metros have seen home prices spiral downward. The composite annualized index during the first quarter for the cities Case-Schiller tracks declined by 22.1 percent, a falloff that Baker observes hasn't been as steep since the Depression era in the 1930s. "Bubble cities," which experienced huge price run-ups earlier this decade, have even seen an acceleration in their price erosions, says Baker: Annualized rates during the first quarter were off 35.6 percent in Phoenix, 33.7 percent in Los Angeles, 35.6 percent in San Francisco, 36.8 percent in Las Vegas, 31.5 percent in Miami, and 29.3 percent in Tampa, Fla...

Baker is considered to be among the more pessimistic of housing economists, but his outlook now sounds practically mainstream: This morning, Global Insight’s housing analyst Patrick Newport told MarketWatch that he also believes the Case-Schiller Index might need to fall another 20 percent to 30 percent, and that prices would need to go down another 10 percent, before the housing market stabilizes. Both Baker and Newport agree that the overabundance of unsold homes on the market is one of the primary reasons why home prices keep declining. Baker, though, points to two other factors: interest rates and unemployment, which have both been creeping up. Baker expects interest rates to hit 7 percent by the end of this year.

He also notes that declines in home prices are being exacerbated by the sheer volume of foreclosures that are dragging down prices in all markets. Baker worries that foreclosures will put more stress on Fannie Mae and Freddie Mac, which are now guaranteeing about 80 percent of the mortgages being issued.

Housing rescue bill finally moves forward

The Senate has finally agreed to end debate on the housing bill winding its way through Congress and put it up for a vote, meaning that a final aid bill could be passed by mid summer. From a New York Times story (registration required):

A bill aimed at helping hundreds of thousands of homeowners in danger of foreclosure cleared an important test vote in the Senate on Tuesday, raising the prospects for final passage of an aid bill by mid-summer...

Housing legislation still has other obstacles to overcome, notably a veto threat from the White House. Differences between the Senate and the House, which approved a somewhat different housing-rescue bill by 266 to 154 last month, will have to be ironed out. And the senators will have to work out differences among themselves on various amendments to their version.

But the overwhelming vote in the Senate was nevertheless a good omen for those hoping to see passage of an assistance bill, as were reports on Capitol Hill that intensive negotiations are under way between Senate and House architects of housing legislation. There have also been reports that lawmakers are willing to excise or tweak sections most objectionable to President Bush...

The bill would create an affordable housing fund, financed by Fannie Mae and Freddie Mac, the government-sponsored financial institutions that purchase mortgages from lenders. In the first year after final approval of the legislation, the fund would provide about $500 million for the foreclosure-rescue campaign.

Under both the House and Senate plans, lenders could limit their losses from potential foreclosures by agreeing to reduce the principal balances of loans at risk of default. Borrowers, many with expensive adjustable-rate loans, could then apply to refinance with a more stable, 30-year, fixed-rate mortgage insured by the government through the Federal Housing Administration.

Just before the House approved its rescue plan last month, President Bush threatened to veto it, saying it would put taxpayers’ money at risk and “reward speculators and lenders.” And the margin by which the House approved its measure, while substantial, did not reach the two-thirds that would be necessary to override a veto.

CNN: We were Warned about Risky Oil Supplies

CNN Presents aired an hour-long documentary over the weekend entitled "We Were Warned: Tomorrow's Oil Crisis," looking at the causes behind the recent oil shocks and what we can expect looking forward. Of course the impact on housing will be tremendous, and those builders which can't come up with creative solutions (i.e., partnering with companies such as the FlexCar car-sharing service) or alter their business plans for this new reality will likely perish. From the CNN website, a description of the show:

What if a hurricane wiped out Houston, Texas, and terrorists attacked oil production in Saudi Arabia? "CNN Presents" looks at a hypothetical scenario about the vulnerability of the world's oil supply, the world's remaining sources of oil and explores the potential of alternative fuels.

It looks like the days of singles buying SUVs only so they can 'see over the traffic' was not only ridiculously mis-guided, but is also history.

Not to be outdone, Fox News was also running its own special report over the weekend on energy entitled America's Future: Do We Have Enough Energy?

The truth about walking away from a mortgage

For those who think walking away from a mortgage is the easiest route to start over again, a Time magazine article has some important details:

Nearly 9% of all U.S. mortgages--or 4.8 million loans--are past due or in some stage of foreclosure. So when a company claims to offer distressed homeowners both relief from their mortgages and revenge against the bankers who saddled them with too much debt ("Give the lenders back their own headaches"), there are plenty of people eager to hear more...

Walking away is a popular phrase these days among real estate pros and ex--mortgage brokers looking to capitalize on slumping home prices and rising delinquencies. It sounds so liberating, but what does it mean? That foreclosure can be a good thing?...

The whole idea of walking away is troubling to consumer advocates, who worry that these firms are whitewashing the fact that foreclosure is a traumatic experience--both financially and emotionally--that takes years to recover from...

What is real--and what is very much downplayed by these outfits--is how completely a foreclosure wrecks your finances. Near term, you might get slammed with a massive tax bill, since forgiven debt can be subject to income tax. Long term, car loans and--you guessed it--home loans will be much harder to come by. How's that for walking away? "This is the American Dream ended in disaster," says Odette Williamson, a foreclosure lawyer at the National Consumer Law Center.

News Summary for Sunday 6/22/08

Commercial developers seeing return of recourse loans (Wall Street Journal)

Rates improving for some home loans (Wall Street Journal)

FHA wants to phase out seller-funded down payment charities (Washington Post)

Website pushes real estate analytics to new level (Inman News)

MLSs and brokers adding consumer-friendly tools to websites (Inman News)

Bush and Congress may finally negotiate housing deal (CNNMoney)

States increasingly tackling rising foreclosures (CNNMoney)

San Francisco launches solar roof program (BuilderOnline)

Diary of a homebuilder exiting a market (BuilderOnline)

Gas prices increasingly impacting homebuying decisions (USA T0day)

Florida condo project tries out 'clothing optional' pool to sell homes

According to a story at TampaBayOnline.com (hat tip to the Drudge Report), the owner of an apartment-to-condo conversion project in Florida has come up with the ultimate incentive: a clothing-optional pool. After all, why ask for paid closings costs, free upgrades or interest rate buy-downs when you can get to know your new neighbors really, really well? From the story:

Swimmers will have the option of wearing nothing at all at the Arbors at Branch Creek, a complex of 390 homes that landed on the idea to help move units in a down market.

One pool is being set aside for nude swimmers, sunbathers and hot tubbers, said Christine Pirkle, director of sales with the Web site for the project's developers.

It will be several months before the nudity rules are put in place, Pirkle said. Landscaping is needed to keep out prying eyes, for one thing, plus condo owners must approve. But there are few owners among all the developers hold a number of units...

Eden came up with a new strategy, "to set us apart from the thousands of other condos out there," she said. "We have two fabulous swimming pools here. We are taking one of them, building cabanas and lush landscapes and completely privatizing it and it will be clothing optional."...

Some residents of the complex were unaware of the plans.

"I think that's something they should probably … let us know," said Justin Gralnick.

Resident Leslie Hill agreed.

"Every morning this is where the school bus picks up 10 or 15 kids," she said. "They are going to have a European style, clothing optional pool. No, that's not appropriate for the family lifestyle that lives here."

Hill will be moving.

Disneyland rolls out "Innoventions" house of the future

Disneyland launched the first iteration of their Innoventions house at Tomorrowland earlier this week. So will people actually use these technologies in their own homes? Hard to say. From an L.A. Times article:

Big Spender has given you an inside peek into the lifestyles of the rich and famous: a Rolls-Royce rental for $7,500 a day; truffle cheese for $65 a pound; and a pearl necklace for Fido for $2,325. This week, though, we visit 360 Tomorrowland Way, a 5,000-square-foot home inside Disneyland. The Innoventions Dream Home, which opens late this month, is stocked with the latest technology -- stuff that, in some cases, even that black American Express card can't buy.

Mirror, Mirror on the wall, who's the fairest of them all? You are, of course. And you look fabulous in that black dress; no, wait, the red one! At the Dream Home, the preprogrammed Magic Mirror is loaded with every piece of clothing and accessory in your closet. Just stand in front of the mirror, click on the clothes and see how you look. Price? Keep dreaming; it's still being developed...

Next, from BuilderOnline.com:

It wasn't so long ago that your standard "graphical user interface" was quarantined to a computer monitor and relegated to whichever part of the house your hard drive occupied. But in the Innoventions Dream Home, which debuts this week at Disneyland in Anaheim, Calif., user interfaces have officially migrated beyond the confines of the black box and keyboard, taking the form of interactive tabletop displays, wall-mounted touch screens, and virtual bulletin boards in just about every room of the house.

Built by Taylor Morrison, the concept home features digital home automation, streaming media, and gobs of other techno-fabulous goodies, courtesy of Microsoft, HP, and technology integrator LifeWare. Think digital photo albums, appliances that "talk" to each other, magic mirrors, and wireless everything. The house even has rooms that "recognize" individual family members and morph their surroundings (changing, for example, temperature, lighting, artwork on the walls, and music on the sound system) according to the taste of whomever is occupying the room.

So what are the chances people will actually start asking for these innovations in the homes they buy? I guess we won't know, at least not for now.

Large spike in California unemployment

Unemployment rates in California hit 6.8% during the month of May -- the 5th worst in the country and certainly a huge spike of 1.5 percentage points from just a year ago. From an L.A. Times story:

California's unemployment rate jumped in May to 6.8%, its highest level in almost five years, reflecting the continued loss of construction and finance jobs in the wake of the real estate collapse. The state Employment Development Department reported today that joblessness rose six-tenths of a percentage point from last month and a dramatic 1.5 percentage points higher than a year earlier... California's May unemployment rate was the fifth highest in the nation, behind Michigan, Rhode Island, Alaska and Mississippi, according to the U.S. Bureau of Labor Statistics... The report said California posted a net loss of 10,900 jobs in May from the month before, mostly in construction... The employment scene, though mostly grim, is not all bad. Congress is expected to extend unemployment benefits to nine months from six, and the president is likely to sign the measure into law by July 4, said Andrew Stettner, deputy director of the National Employment Law Project, a research and advocacy group for lower-wage workers. And some industries gained jobs statewide since April, adding a net 9,000 jobs, including in education and health services, natural resources and mining and information.

Dipping your toes into buying foreclosures

Looking to profit from other people's pain by investing in foreclosures? It's the American Way, right? Well, not so fast, at least according to a story in the L.A. Times:

With 700,000 bank-owned homes on the market, and another one million in some state of foreclosure, according to RealtyTrac, an Irvine, Calif., provider of foreclosure listings, you might be tempted to add a distressed property to your portfolio.

Beware. Buying a home in foreclosure is not for the meek. Those with an appetite for risk, however, will find the tumultuous market stocked with plenty of investment opportunities...

Whether you're looking to flip a home, buy into a neighborhood you couldn't otherwise afford or planning to rent the home, you, like these big companies, must have heaps of cash on hand.

There are properties that can be turned within a few months, but the overall market is still slow. Even if you have a renter lined up or have enough money for a 10% to 20% down payment, you should be ready to weather a depressed market for another two or three years.

Go to the county assessor's office and study recent sales for price-per-square foot and time spent on market to determine what sort of price you can expect at resale. Be conservative. If you are renting, calculate a capitalization rate, and subtract 10% or more of the annual yield for maintenance and depreciation. Make sure that your endeavor is still profitable if you incur two to three years of carrying costs and depreciation.

It's also crucial to remember that bad loans that plagued speculators and unprepared borrowers don't simply disappear when distressed owners sell their properties. Unless the property goes through foreclosure auction and becomes bank-owned, outstanding liens and fees are simply transferred to the new owner. If you plan to buy out of pre-foreclosure, make sure the property has a clean title; otherwise you'll just be trading places with the distressed homeowner...

However you do the math, the most important thing to keep in mind is that the investment has to be worthwhile--even if you can't sell the home at your desired price for two or three years and the current housing market deteriorates a further 10% to 20%.

Laing Luxury adds custom builder to its porfolio

Despite the fallout on the production homebuilding business, many custom builders are still well in the black -- so much so that John Laing Homes has expanded into custom homebuilding through its Luxury division. From a BigBuilderOnline.com article:

The new business, called Custom Residences, falls within the realm of the company's Laing Luxury division and has a footprint limited to the coastal areas of California in Orange County and northern San Diego County...

The launch, while a move to generate revenue during the slow market, also reflects a push from parent company Emaar Properties to diversify the luxury brand...

People often approached the semi-custom luxury division, requesting a custom home. But the high-velocity times of old prevented the division from pursuing it; semi-custom buyers were too plentiful and production schedules too taxed to add a custom building component to the business...

Because there's overlap between the custom and semi-custom businesses--the two share design, building, and trade partners--the company gains access to additional revenue streams without adding operational costs while buyers get a turn-key custom home experience.

And these days, corporate has a tight focus on streamlining the company. Recently, executive management restructured some of its divisions, consolidating divisions in California and Colorado. According to company sources, operations in the Central Valley, Sacramento, and the San Francisco Bay Area have been combined under the Northern California division mantle while four divisions--Inland Empire, Los Angeles-Ventura, Orange County, and San Diego--have been consolidated into a single Southern California division.

On the East Coast, Hamptons Luxury Homes is also sailing through the current downturn based on some strategic shifts instituted in 2007. From a press release I received:

Hamptons Luxury Homes, Inc. (OTCBB:HLXH), a construction services company that builds and renovates multi-million dollar estate homes in the Hamptons area of Long Island, New York, reported another quarter of revenue growth and profitability, marking the fifth consecutive profitable quarter for the company during a period when many within the industry have encountered difficult times...

Frank Dalene, Vice President and Chief Financial Officer of Hamptons Luxury Homes, said: “We continue to see our results reflect the success of initiatives that we put in place last year to grow our business. The increase in our contract and service revenues for this quarter was due to an increase in construction activity for the period as a direct result of our increased sales and marketing efforts...

Hamptons Luxury Homes, Inc. (www.hlxhomes.com) is a regional construction services company that builds and maintains custom homes, luxury vacation homes and ultra-luxury estate homes throughout the eastern end of Long Island, New York, with its principal offices located in Bridgehampton, New York. The Company’s wholly owned subsidiary, Telemark Inc. is a nationally recognized and award winning ultra-luxury homebuilder. The Company maintains an industry leading reputation for construction of luxury vacation homes from foundation to completion, with values ranging up to $60 million.

How we got here -- and how we get out

Philip Simmons, previously a Division President for the Urban division of John Laing Homes and now a management consultant for homebuilders and developers, has penned an excellent overview of the how the building industry got into its current mess and, more importantly, how to get out. And no, I'm not just saying that because he quoted me. From an article at Builder & Developer magazine:

This is the first time in decades that we are paying such a steep price for management that does not have the depth of experience to manage through a major market adjustment...

After more than a decade of soaring profits and over-staffed offices, industry managers are for the first time being forced to get back to basics, limit their resources and make painful and difficult decisions.

In addition to being forced to take a long hard look at the adequacy of their staff capability and organizational structure, individual managers also need to simultaneously juggle an increased number of operational functions within the organization. It is a trial-by-fire for those executives and managers who have never before been through this type of cycle...

The markets no longer forgive feasibility oversights, erroneous entitlement assumptions, costly design defects, schedule delays, or sloppy sales and marketing programs...

Companies can no longer afford to tolerate team members who fail to fully engage with the program. In order to thrive a company must first survive, and only a fully committed, competent, focused and disciplined team will prevail against the challenges we face.

Lawsuit challenges real estate auctions

A lawsuit against companies which auction homes has been filed in California Superior Court according to Inman News, arguing that the "sold" price is really only an offer to the existing owner and that the companies force buyers to use their in-house settlement services. From the story:

A lawsuit filed in California Superior Court challenges real estate auction practices, charging that some auction companies engage in deceptive advertising and violate provisions of federal law related to real estate closing services.

Many modern real estate auctions are nothing more than a bait-and-switch scheme to lure hopeful buyers to submit offers that can later be accepted or rejected by the lenders/sellers, despite the general public's perception that once the auctioneer declares, 'Sold,' the property is in fact sold," the lawsuit charges...

Filed June 12 on behalf of three individuals who attended a real estate auction event in Southern California -- including one individual who is a RE/MAX real estate broker -- the lawsuit also charges that auction companies "direct and require the use of their settlement service providers and shift the cost of sales, including commissions, from the lenders/sellers to the consumers" in auction event signing rooms.

"The lenders'/sellers' representatives are not found in the signing room to sign the contracts; rather they are just there (to) sell loans and other settlement services," the lawsuit alleges.

Several auction companies, lenders Countrywide Home Loans Inc. and GMAC Mortgage LLC, and title and escrow companies are named as defendants in the lawsuit, which seeks class-action status...

In a reserve auction, which is common for real estate auctions, properties may ultimately not be sold to the winning bidder if a reserve price -- which is typically concealed during the auction process -- is not reached.

Real estate auction companies typically state in materials presented to attendees that sales are subject to lender approval, which means that winning bidders may not ultimately get the property at the price of the winning bid -- a lender may ask for a higher amount in order to complete the sale.

The lawsuit charges that auction companies use "fine print and covert documents at the auction event that state, 'subject to lender confirmation,' instead of truthfully saying, 'no sale is final today because the lender/sellers are not onsite at the live auction.' "

And the lawsuit charges that the fees collected by auction companies are in some cases unlawful under California real estate laws.

According to the complaint, the auction companies and other companies named in the lawsuit allegedly violated provisions of the Real Estate Settlement Procedures Act related to prohibited payment exchanges related to loan transactions and settlement services and "requiring the use of certain settlement service providers including ... title insurance companies."...

The lawsuit seeks to permanently enjoin the parties named in the lawsuit from using the auction-marketing methods and to be enjoined from violating unfair competition laws. Also, the lawsuit seeks to restore "all funds acquired by means of any act or practice declared by this court to be unlawful or fraudulent or constitute unfair competition ... or untrue or misleading advertising," among other relief.

My column in June edition of Builder & Developer magazine now online

My latest column for Builder & Developer magazine entitled "Know Thy Buyer or Perish" is now online at the magazine's website.

It focuses on how builders should not only determine who their buyers are for their communities, but should also define for their entire companies the values which set them apart from their competitors and communicate that message throughout the organization.

UCLA Anderson Forecast still says no recession

Claiming that he's still holding onto a "shaky view," Ed Leamer, Director of the UCLA Anderson Forecast says California and the U.S. will still avoid a technical recession (two consecutive quarters of negative growth) but that it still won't be an enjoyable time. From an L.A. Times story:

Under pressure from falling home values, high oil prices and rising unemployment, the economy in California and the nation will perform anemically in the coming months -- but there still won't be an actual recession, UCLA forecasters say.

"I am holding on to what is now a shaky view: no recession this year," said economist Edward Leamer, director of the quarterly UCLA Anderson Forecast, which is being released today.

The predictions, however, call for somewhat more pain in the months ahead than previously forecast, with little improvement this year or next.

Not good, but not a recession, which is commonly defined as two consecutive quarters of negative growth in gross domestic product...

The drag on the economy from the buckling housing industry may become the most severe since the Great Depression, the report said. There will be little or no growth in gross domestic product this quarter, and GDP will probably slip into negative territory in future months before finishing next year with a tepid average improvement of 1.2%.

A key factor in favor of the economy, the forecast says, is that so far the pounding of the housing market has not badly damaged the job market.

In the 1990s, Southern California home values fell after many workers -- particularly in the aerospace and defense industries -- lost their jobs and couldn't keep up mortgage payments. Foreclosures peaked in 1997, when employment already had recovered, because many homeowners had struggled for months to hang on.

"This time, what happens in housing stays in housing," Leamer said, as many employers worried about the economy hold off on new hires but decline to cut staff.

Many homeowners are choosing to sell their houses at a loss and move -- not because they lost their jobs, he said, but because they owe their lenders more money than their houses are worth.

Bailing out makes financial sense to them. "The lenders have provided an option to walk away if things go bad -- you might as well exercise that option," Leamer said.

Distress sales will continue to wreak havoc on home valuations for the rest of the year, the forecasters said...

"The unprecedented speed of the price adjustment means that instead of several years of slow bleeding [like the 1990s] we have compressed the necessary adjustment into two years of intense housing pain," wrote UCLA economist Ryan Ratcliff. "Mom always said it's better just to rip the Band-Aid off."...

Baby boomers planning to stay in current homes

In contrast to multiple studies which assumed that boomers would want to retire in large numbers to active adult communities across the country, a recent survey by AARP concludes that one-third of respondents plan to age in place rather than downsize to an apartment or move to a seniors-only community. From a BuilderOnline.com story:

The formerly vibrant new-home buyer market of empty-nesters has decided instead to feather their current nests. According to a survey released today by AARP (formerly American Association of Retired Persons), nearly one-third of middle-aged and older Americans say they are making changes to their current homes so that they can live in those homes for longer rather than buy a new house or downsize to an apartment.

"Contrary to general thought, AARP's survey indicates that Americans who are 45-plus are not looking to downsize or leave their current homes as they prepare for or enter retirement," said Elinor Ginzler, AARP senior vice president for livable communities. "They are literally fixing to stay, improving their homes in order to stay there longer and largely overlooking the drop in home values. Call it cocooning or nesting, boomers and their parents are digging in and staying put.”

While psychology is certainly a factor in such decisions (90 percent of Americans aged 60 years and older want to stay in their own homes as long as they can, according to AARP), so is the wobbly economy, which is forcing many to curtail spending on extras. Nearly half (47 percent) of those surveyed said they had postponed travel plans because of the slowing economy; more than 60 percent said they were eating out less and devoting fewer dollars to entertainment...

For more detail on "The Economic Slowdow's Impact on Middle-Aged and Other Americans," visit http://www.aarp.org/research/economy/trends/economy_survey.html.

Cities stepping in to stop foreclosures

Having grown impatient with the federal government's solutions to the rising levels of foreclosures, some cities are stepping into halt foreclosure proceedings and help their residents keep the homes. From an AP story via MSNBC.com:

Philadelphia is just the latest in a growing number of cities — including Los Angeles, Baltimore, and Trenton, N.J. — that are taking matters into their own hands to help stop the nation’s housing crisis within their borders.

With more than a half-million foreclosed homes on the market, and over 3 million borrowers behind on their mortgages, more cities are aggressively reaching out to residents and filing lawsuits against lenders.

While politicians debate in Washington, many cities are on the front lines of the foreclosure crisis: fielding calls from desperate homeowners, and fighting vagrancy and crime around vacated properties.

“We can’t wait on the federal government,” said Douglas Palmer, mayor of Trenton, N.J., and the president of the U.S. Conference of Mayors. “We’re taking action.”

Cities are under the gun to act: A report released by the U.S. Conference of Mayors last November projected economic losses of $166 billion this year for 361 metropolitan areas. These stem from lost tax revenue and jobs as well as slower consumer spending that come with home equity declines, and don’t even include the financial toll of increased crime, fires and building code violations.

To try to recoup part of that money, some cities are suing lenders. But it’s not easy to go after federally regulated companies.

In January, Cleveland took the public nuisance route and sued 21 major investment banks and lenders, charging that their subprime lending practices devastated neighborhoods and hurt property values and city tax collections. Baltimore sued Wells Fargo & Co., alleging a pattern of predatory lending practices in its poorest neighborhoods. Minneapolis and Buffalo, N.Y. are engaged in similar litigation.

“Why would these mortgage lenders continue to enter deals with these people who they knew could not afford their loans?” said Robert Triozzi, Cleveland’s director of law. “To suggest (these financial institutions) didn’t know the consequences just defies logic.”

He blamed Wall Street greed and said the players relied on a scheme that could only work if home prices continued to rise.

“We’re going to hold them accountable for actions they have done here,” said Triozzi, who is seeking hundreds of millions of dollars in damages.

Wells Fargo said the lawsuit has no merit...

This week in Jacksonville, Fla., — where the foreclosure rate is three times the national average — officials are launching a campaign to promote the city’s interest-free loans. Distressed homeowners can get up to $5,000, which will be forgiven if they stay in their homes for at least five years, said Dayatra Coles, manager of housing services.

Louisville, Ky., also is giving out up to $5,000 in loans. The loans will be forgiven if the homeowner stays put for a decade. The city has teamed up with the United Way to offer access to housing help in addition to the charity’s social services...

Los Angeles, meanwhile, is adding foreclosure counselors in neighborhood centers for jobs and city services. The city also is tapping neighborhood councils to fight blight. L.A. is watching other cities’ plans to buy up foreclosed properties and possibly use them for affordable housing, but in an area where homes can easily cost over $500,000, the cost of such a plan is a huge obstacle, said Gil Duran, spokesman for Mayor Antonio Villaraigosa.

Cities don’t have the financial or regulatory strength to stem the crisis, and need firmer backing from the federal government, said John Taylor, president of the National Community Reinvestment Coalition in Washington.

The federal government has taken several steps to prop up the housing market, but critics say Bush administration-backed efforts to help borrowers avoid foreclosure are falling short.

The government has expanded the authority of the Federal Housing Administration to allow more borrowers to refinance their loans, and to help home buyers purchase a foreclosed property.

In May, House lawmakers passed a bill to send $15 billion to states to buy and fix up foreclosed property. Proponents say the measure, opposed by President Bush, will prevent blight in neighborhoods plagued by abandoned homes. Lawmakers are also considering housing tax credit of up to $7,500 for first-time home-buyers.

Still, calls are growing for more government intervention, in the form of a plan for the government to guarantee as much as $300 billion in new loans to help borrowers refinance into cheaper, fixed-rate mortgages.

Some employers helping workers avoid foreclosure

Apparently stepping into the void left by the Darwinian nature of foreclosures and their aftermath, some employers are assisting workers to avoid foreclosure or find rental properties after they're evicted. From a Wall Street Journal story:

In the wake of the mortgage crisis, a small but growing number of workers are getting help avoiding or coping with foreclosure from an unlikely source: their employers. So far, a handful of companies -- from small manufacturers to large companies like home-financing behemoth Fannie Mae -- are offering assistance, such as interest-free loans, grants and support in securing rental properties. They're also beefing up their employee-assistance programs, or EAPs, and adding more educational seminars on personal finance.

A January survey of 329 human-resource professionals showed that in 2007, 20% of employers said they received more requests from workers for pay advances than the year before, reports from the Society of Human Resource Management. Thirty-nine percent of respondents also saw an uptick in withdrawals from retirement savings -- widely seen as an indicator of financial woes.

Productivity tends to wane when workers are suffering from financial or other pressures, says Laura Wallace, manager of work/life programs at SAS Institute Inc., a business-intelligence software company. Providing help "just makes really good business sense," she says. "If you're worried about losing your home, your creativity is going to go out the window."

Baptist Health executives say it became clear that many of its 12,000 employees were struggling with mortgage problems late last year, when requests for loans from its Sunshine Fund surged. Launched in 1986, the program, funded by employee and matching company funds, was designed as a way for workers to help their fellow colleagues through emergency financial hardships -- and it was in danger of drying up for the first time. "If we grant all these requests, we'll run out of money," Brian Keeley, Baptist Health's chief executive, says he recalls thinking.

The chain's hospitals are located throughout South Florida -- where foreclosure rates are among the highest in the nation, according to foreclosure-tracking firm RealtyTrac Inc.

Faced with a growing number of desperate employees, the nonprofit established a new fund dedicated to helping workers who face foreclosure. The fund now has $280,000 -- employees contributed $10,000 of that -- and has helped more than 100 employees with mortgage-assistance loans averaging between $3,000 and $5,000 in the first five months of 2008. Employees have two years to pay back the interest-free loans...

In February, Fannie Mae set up a confidential email "hotline" for its employees with mortgage woes, says Joy Cianci, vice president of grant, program and volunteer initiatives. Since Fannie Mae is in the mortgage business -- it buys mortgages from banks and other lenders and packages them as investment securities -- the company can help qualifying employees quickly pursue a mortgage restructuring.

For workers who must sell their homes, Fannie Mae in March began identifying low-cost rental properties near its Washington, D.C., headquarters. And since these workers could have trouble securing a lease because of credit problems, the company also works with landlords to ensure they'll be paid through a monthly payroll-deduction plan. Employees who can't afford a security deposit for a rental property may be eligible to receive a financial-hardship grant...

Most U.S. employers -- about 87% -- allow workers to make hardship withdrawals from their defined-contribution retirement plans, according to the Profit Sharing/401k Council of America, a national association. But many of those that don't are now starting to consider offering the option, says Stacey Carter, vice president at Segal Co., a New York benefits and human-resources consulting firm. Helping workers avoid foreclosure is the primary reason, she adds.

Indeed, more workers have in recent months been making hardship withdrawals, which don't have to be paid back but are subject to taxes and penalties. In the first quarter of 2008, Fidelity Investments in Boston saw a 16% increase from the same period in 2007 in 401(k) hardship withdrawals. Still, this represents just a small fraction of Fidelity's 13 million plan participants, according to a spokeswoman for the financial-services provider.

Other employers, ranging from universities and technology firms to service providers say they're also grappling with how to help employees save their homes, but say they've yet to find a way to help...

Still, some employers say the mortgage problems workers face aren't a workplace matter. "If you got over your head in a mortgage because you were too uninformed to understand or you stretched too far, an employer doesn't have an obligation to fix your mess," says Jay Whitehead, president of Crossing Media LLC, a business-magazine publisher in Edison, N.J. The company has 20 employees and Mr. Whitehead says he recently rejected one person's request for help with a mortgage. "It's an equity and fairness issue," he says.

Good thing Mr. Whitehead never makes mistakes!

Short sales not that easy

For those who think that short sales are easy -- when banks accept less than the full amount owed on a mortgage to avoid foreclosure -- L.A. Times writer Diane Wedner offers up some cautions, including great patience with the banks for a response:

RESIDENTIAL short sales sound like a picnic: Owners need to sell their homes for less than they owe, lenders forgive the difference and buyers grab a good deal.

If only. This is one picnic that requires a long wait for dessert. The only "short" thing about short sales, buyers and sellers say, is one's patience.

"The waiting is torture," said Mark Shandrow, a Keller Williams Realty agent in Long Beach who specializes in such transactions. "The banks are overwhelmed with short-sale requests, and some make sellers wait five months for an answer." That answer, in many cases, he added, is "no."

Yet despite the obstacles to successful short sales -- lenders holding the first and second mortgages don't agree on the terms, buyers often ditch the deal midstream or banks nix the agreement just before escrow closes -- they're on the rise. Countrywide Financial Corp. of Calabasas, the largest U.S. home lender, reports a nearly 60% increase in those transactions nationwide in April, the latest month for which statistics are available, from the same period a year earlier...

The reason for the rise, experts say, is that as more financially strapped homeowners fall behind on their mortgage payments -- and see their homes' values plummet to less than what they owe -- they're turning to short sales as an alternative to foreclosure. Banks, once loath to take on short sales because, among other reasons, they were understaffed for the application onslaught, are tackling them now mainly because they're more cost-effective than foreclosures.

"Banks aren't happy about short sales," said Sherri Frost, a senior loan officer with Sherman Oaks-based Metrocities Mortgage, "but they have few options."

Unlike a foreclosure, in which the lender takes ownership of a property after a borrower misses several payments, a short sale is a transaction in which the owners, not the bank, sell the home; they receive no proceeds from the sale. In a foreclosure, the defaulting owner may receive sales proceeds once the lender has been paid, if the amount exceeds that of the outstanding loan.

If a short-sale borrower owes $500,000 on a home, the bank may accept a payoff amount of $450,000, the amount a buyer has offered to pay. The sellers need not be in default -- meaning they stopped making mortgage payments -- in order for a lender to consider a short sale, but they must be able to show a real hardship to receive the debt forgiveness, which may have tax consequences...

It sounds straightforward, but the short-sale road is a long one. Once sellers have an offer, they must assemble a package to present to the bank, including a "hardship letter" explaining why they had to put the house up for sale -- loss of employment, a spousal death, a divorce, a disability or a mortgage resetting, for example -- and asking the bank to accept a short sale, according to a Countrywide spokeswoman.

The sellers also must provide income verification, their most recent bank and income-tax statements, the listing history of the house and other documentation. Then comes the wait. And frequent follow-up calls to the bank to make sure the file isn't buried...

Sometimes, while awaiting a bank's decision, interest rates go up and buyers no longer qualify for a previously approved loan because their lock-in rates expired. Worse yet, a seller may get an initial approval from the bank, but in the eleventh hour the bank adds a contingency that skewers the deal, or pulls the plug without explanation, agents say...

Lenders will not accept short-sale offers that are far below market value. To the contrary, many banks "net about 90% of the current market value" on many of these sales, agent Shandrow said. Also, the homes usually are sold as is, which sometimes can mean a missing kitchen sink, ripped-out bathroom fixtures and stained carpets.

Marty Rodriguez, a Century 21 agent in Glendora, says she won't take a short-sale offer to the bank unless it's reasonable. "The negotiator doesn't want to look at 12 offers," Rodriguez said. "He wants the best, highest and the most qualified ones."

Buyers looking for bargains should wait until short-sale and foreclosure prices are down about 35% from the peak market in their search area, said James Joseph, owner of Century 21 Ambassador in Brea and Whittier.

"Short sales and foreclosures are the nails in the floor of the market," Joseph said. "That's where the bargains are."

Housing woes now impacting community banks

Local community banks have long been an important source of financing for various homebuilders from those building custom homes to subdivisions. And, although these banks shied away from the sub-prime mortgages that have been decimating large, national banks, the housing slowdown is increasingly impacting community banks as builders short on cash are defaulting on construction loans. From the L.A. Times:

Home-mortgage specialists may have been the first lenders to suffer for their roles in financing the housing bubble. But, as foreclosures rise and home prices fall, many smaller banks and thrifts that backed residential developers and home builders are watching black ink turn red and are spending uncomfortable amounts of time with regulators. The financial institutions also are enduring jabs from critics who say they tossed lending standards out the window...

Residential construction loans, which generate big fees, were especially profitable for smaller banks -- until housing collapsed in places like the Inland Empire, where prices are down more than 30% from their highs, and the Central Valley, where some former boom markets are off more than 40%. Raw land on which Ontario-based Empire Land installed roads, sewers and utilities, expecting to then sell it to builders, has declined even more.

"In the Inland Empire, we're hearing land is going for 20 or 30 cents on the dollar" of its appraised value when the loans were made, said RBC Capital Markets analyst Joe Morford.

According to data tracker Foresight Analytics of Oakland, 15.8% of single-family home construction loans were at least 30 days delinquent in Riverside and San Bernardino counties last quarter, up from just 1.7% a year earlier. The delinquency rate was 14.7% in Los Angeles County, 14.9% in Orange County and 15.4% in Ventura County. It was 30.4% in Merced County, near Sacramento...

Regulators are now aggressively requiring banks to write down the value of questionable loans and to raise more capital to make up for those write-offs. That creates a pinch for banks, one that is apparent in their regulatory filings.

Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."

Other Inland Empire-based construction loan specialists also are feeling the pain.

Corona-based Vineyard National Bancorp, with $2.3 billion in assets, lost $70 million in its last two quarters, and its stock is down 82% from a year ago. It has blamed inland housing loans, though it also specializes in another tricky business, financing builders of expensive custom homes in West L.A., the South Bay and coastal Orange County. Its executives declined to be interviewed...

Home builder troubles haunted even City National Corp. of Beverly Hills, the Southland's largest commercial bank with more than $15 billion in assets. City National avoided the riskier segments of home-mortgage lending and suffered none of the losses on mortgages and bonds backed by home loans that have plagued larger competitors.

But City National's clients have always included home builders, and the bank paid the price as losses on builder loans contributed to a 22% drop in first-quarter earnings. That was despite the fact that such loans made up only 5% of the company's $11.8-billion loan portfolio, and few of them were made in the Inland Empire or Central Valley, CEO Russell Goldsmith said.

Gas prices forcing people out of suburbs

Although this trend of people moving back to urban areas has been happening for several years, it will likely be rushed by rising gas prices, which means that suburban areas without decent public transportation options will likely take a bigger hit. First, from a CNNMoney.com story:

It may seem a bit drastic, but more and more people are taking what is perhaps the ultimate step in cutting gas prices: They're moving...

Factors like distance from work, access to public transportation, and proximity to shopping are gaining ground on square footage and whether or not the home has a yard and pushing people into more densely packed areas.

"The high cost of gas is cited as a driving factor in increased interest in urban living," said Jim Gillespie, chief executive of Coldwell Banker, a national realty franchise. "Over the past several years we've seen a boom in downtown living all over the country."

It seems like the people actually making the move so far seem to be renters as opposed to owners, as not renewing a lease is obviously much easier than selling a home.

While their wallets may be happy, whether the quality of life is improving for the people who move is debatable.

"I went from a beautiful home with a big back yard to an itty-bitty studio apartment," said Erinn Thomas, who moved from a suburb of Reno, NV, to the downtown area to save on gas. "But it's what I had to do to eat."...

Next, from an L.A. Times article:

Rising gas prices may be the latest ailment afflicting the housing market, as figures released Monday showed Southern California home prices plunging 27% in May from a year ago and falling even more precipitously in distant suburbs.

Outlying areas like the Antelope Valley and the Inland Empire have long appealed to people who were willing to accept a burdensome commute for the chance to own a better house. But buyers are increasingly factoring gasoline costs into their purchase decisions, said Dan Griffith, a Rancho Cucamonga-based real estate agent...

Price drops were especially steep in far-flung suburbs. The median price fell 38% in Lancaster and 42% in Palmdale, compared with 23% in Los Angeles County overall.

San Bernardino County saw prices drop by 31%, but it was worse in the remote town of Victorville, where values declined 43%.

Christopher Leinberger of the Brookings Institution, a Washington think tank, says home values in these so-called exurbs may continue to languish long after urban markets begin to recover, thanks to higher gas costs.

"Under the old model we have lived with for the past 50 years, you could drive away from major employment concentrations until you could qualify for a house because cheap energy costs made it possible," Leinberger said. "Now as energy prices go up, the housing prices out there on the fringe take a major hit.".

Builders change tax-break stance

The Nat'l Association of Homebuilders (NAHB) has re-opened its donation coffers after shutting it down in February when it felt builders were being ignored by Congress. Now that the tax carry-back plan seems DOA -- and never made into the House version of a home sales stimulus plan -- the group is focusing on special tax credits to buyers to stimulate the market. From a Wall Street Journal story:

The National Association of Home Builders is playing nice with Congress again.

The trade group, representing thousands of home builders, has switched its lobbying tactics and its political action committee has resumed doling out political donations, after halting them in February to protest what the group said was policy makers' failure to help the housing industry and overall economy.

The association had been pressing for a tax break that would have allowed builders to apply losses to taxes paid four years ago, instead of the current two-year carry-back. But the group has backed off that effort and is focusing now on a proposed tax credit for home buyers to stimulate demand...

The trade group's shift on the tax break comes after the Senate came under fire for including it in its housing-relief plan. Critics said lawmakers were favoring builders over strapped homeowners. The House version of the plan doesn't include a carry-back provision...

Meantime, the home builders' political action committee, BUILD-PAC, is giving out political donations again. Ed Brady, chairman of BUILD-PAC, said the group lifted the ban last month because, "we felt like people were paying attention to us again."

During the current election cycle, the group has given about $977,000, with 45% going to Democrats and 55% to Republicans, according to the Center for Responsive Politics.

How the housing bust was merely the symptom of a culture of debt

A few years ago, a friend with whom I grew up was talking about how most people we knew were in the same financial boat: middle class. Sure, some lived better than others, but we didn't hear much about the rich about the poor like we do today, and I've often chatted with my parents about the values they taught me and how they've changed over the years.

In his latest opinion piece for the New York Times, David Brooks puts in words what we were discussing: that the cultural change which should worry us is not related to Hollywood movies or rap music, but the simple seduction of debt, with the banks and credit card issuers being the drug dealers who made it happen:

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

Sixty-two scholars have signed on to a report by the Institute for American Values and other think tanks called, “For a New Thrift: Confronting the Debt Culture,” examining the results of all this. This may be damning with faint praise, but it’s one of the most important think-tank reports you’ll read this year.

The deterioration of financial mores has meant two things. First, it’s meant an explosion of debt that inhibits social mobility and ruins lives. Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion. By last year, it was up to $937 billion, the report said.

Second, the transformation has led to a stark financial polarization. On the one hand, there is what the report calls the investor class. It has tax-deferred savings plans, as well as an army of financial advisers. On the other hand, there is the lottery class, people with little access to 401(k)’s or financial planning but plenty of access to payday lenders, credit cards and lottery agents...

The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don’t have to work to build for the future. They can strike it rich for nothing.

Payday lenders have also played a role. They seductively offer fast cash — at absurd interest rates — to 15 million people every month.

Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they’ve found that they can make money off the young and vulnerable. Fifty-six percent of students in their final year of college carry four or more credit cards.

Congress and the White House have played a role. The nation’s leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It’s only now become respectable to do so.

Wall Street has played a role. Bill Gates built a socially useful product to make his fortune. But what message do the compensation packages that hedge fund managers get send across the country?..

Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.