Good news/Bad News

LA Times came out with a pretty even-handed article on the latest bit of good news on the economy:

U.S. gross domestic product increased at a brisk 3.3% annual pace in the April-June quarter, according to the Commerce Department. That was the best showing since the third quarter of 2007, beating the government's earlier estimates of a 1.9% growth rate and topping economists' forecasts of 2.7%.

And more good news:

Exports grew at a 13.2% rate in the quarter, more than double the first-quarter rate. Consumer spending rose 1.7%, the biggest increase in nearly a year, as government rebate checks of as much as $600 per person sent shoppers scurrying to malls and big-box retailers.

Here’s the reality check:

However, some economists questioned whether those factors could sustain economic growth through the second half of the year and into 2009.

And this is cause for concern:

The GDP report also showed that businesses cut investments in equipment and software by 3.2%, more than in the first quarter, and investment by home builders fell 15%, although this was an improvement over the first-quarter drop of 25%.

After-tax corporate profits, meanwhile, fell 3.8% in the second quarter after increasing 1.1% in the first three months of the year.

MSNBC’s article is less realistic, though the subtitle does back off from actually calling a bottom.
And the basis for calling the bottom? Home prices are still dropping, just not by as much:

"If you look at the year-over-year numbers they are still going down but not accelerating to the downside quite as much as they had been in a number of cities,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “So we are seeing hints of bottoms.”

(psst. If I were one of the rating agencies that screwed the pooch rating worthless mortgage backed securities as triple A, I would hesitate going out on yet another limb. Then again, they don’t have much credibility to lose. And ‘seeing hints of bottoms’ sounds more like a peeping tom than an economic analyst.)

The recovery in the housing market is being slowed by the availability of credit, now that lenders have substantially tightened up guidelines on approving loans. The supply of mortgage money has also been crimped as the two government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, struggle to cope with mounting losses from foreclosures.

Ending the practice of loaning money to completely unqualified people is not what’s slowing the recovery in the housing market. Whatever impediment is in place keeping home prices wildly out of whack compared to everything else, is what will slow the recovery in the housing market. And that includes bailouts.

The heavy pace of foreclosures has also been a major force pushing home prices lower, as lenders aggressively price their backlogs of repossessed real estate, hoping to unload them before prices fall further. Once the pace of foreclosures begins leveling off, the pressure on prices will ease.

As far as I have seen, the majority of banks have done anything but ‘aggressively price their backlogs of repos’. In fact, relatively few repos are priced to today’s market and even fewer banks can actually move quickly enough to close the deal. However, the ones that do have been rewarded with fast sales.

Let’s hope that trend changes.

The pain in Spain

A couple of days ago, Pigginton's San Diego Housing Blog (one of the best and funniest, btw), compared Spain's housing market to Temecula. I think that does a disservice to Temecula. Granted, Temecula has been hurting for a while, but it adjusted far more quickly than anyone expected, and realistic pricing is one of the key factors that will bring a housing market back to life. There are some smoking deals in Temecula right now if you are willing to navigate the short sale swamp.

The same cannot be said for Spain's housing market, which appears to be toastito, according to UK's Guardian:

Spain had been among the euro zone's hottest real estate markets but house prices fell for the first time in a decade between April and June as chronic overbuilding and 8-year-high mortgage rates added to the impact of the U.S. credit crunch.
"House sales have fallen on a month-on-month basis since the beginning of last year, when the indicator began, and this is just the start," said Merrill Lynch economist Daniel Antonucci.
"We expect data to continue to worsen well in to next year."
Mortgage lending also plummeted 40.6 percent in June after a 40.4 percent drop in May, as the credit crunch squeezed Spanish banks.
Strong economic growth in Spain over the last decade had been supported by surging property and construction markets, though many analysts expect the country to go into recession in the second half of the year as housing demand collapses.
"It's awful, as usual," said Stephane Deo, chief economist at UBS. "The housing market is in freefall and this is just another confirmation that this sector is in deep, deep trouble."

Does this sound familiar?

As Patrick wends his way through Europe, I thought it would be fun to take a look over the next couple of days at a few of the markets he is either visiting or flying over...What is striking is how the bubble economy took hold in so many parts of the world, and with such similar (…even predictable? Nah!) results. This article in the Irish Times provides a succinct overview of how it all happened, and a surprisingly (to me at least) tough stance, Government must let Property Bubble burst:

Ireland's economy has grown in two broad stages in the last 20 years. The first one was a coupling of the country to the very powerful forces of globalisation (eg US multinationals), while the second saw the flourishing of the domestic economy with the tailwind of low interest rates.

Where the first phase saw Ireland grow in confidence, the second, arguably, saw it become complacent, uncompetitive and dazzled by its own unexpected success. This is standard behaviour in economies in the full throes of an economic bubble.

And:

The biggest mistake policymakers and politicians could make at this stage is to try to prop up the asset bubble in the property market.

However, the apparent bewilderment of some politicians in the face of the downturn, and the desire of many of our oligarchs (as expressed in these pages) to see their industries supported by the State, suggests that the short-term crisis and not the long-term future dominates attention spans.

Guest blogger for Housing Chronicles from 8/28-9/14/08

I'll be taking a long-planned vacation from August 28th through September 14th, so in my absence I've asked a friend and colleague, Heidi Gothard, to take over primary blogging duties. Heidi's a big fan of blogs in general, so you may see her referencing other blogs as well as the news stories that I've tended to cover. Since I can't help myself, I'll be bringing my laptop in tow to check in periodically, but probably not for posting.

Here is Heidi's bio:

With over 15 years of experience as an independent real estate research consultant for residential developers, market research firms and investors, Heidi Gothard has worked on many large-scale projects and master plans throughout the southwestern United States. Prior to joining MetroIntelligence, Heidi worked with other regional consulting firms including MetroStudy, The Meyers Group (now Hanley Wood Market Intelligence), MarketPointe Realty Advisors, Real Estate Economics, and Market Profiles as well as directly for builders and developers including Pulte Homes, Western Pacific Housing (now part of D.R. Horton), Playa Vista LLC and The Irvine Company.

As a Marketing Research Manager for the Irvine Company, Heidi led a team of analysts to offer pricing recommendations for existing and future projects on the Irvine Ranch to use in various pro-formas critical for land sale negotiations, oversaw the in-house databases and provided all aspects of housing research (including both new construction and resale data) to the senior management team.

Heidi also brings an extensive background in technology to each consulting assignment, having served as a Client and Industry Relations Manager for Cox Communications to create some of the country's first wired broadband communities -- including high-speed Internet access, digital telephone and digital television -- for the master-planned communities Ladera Ranch and Newport Coast.

Home price declines slowing: what does it mean?

Not surprisingly, the latest S&P/Case-Shiller index shows home prices continuing to decline in the 20 cities it includes for its monthly survey. However, during the last month those price declines starting to slow, which some analysts suggest may point closer to a housing bottom. Still, one month does not make a trend. From an AP story via MSNBC.com:

A widely watched index released Tuesday showed home prices dropping by the sharpest rate ever in the second quarter, but the data for June suggest the severity of the housing slump may be waning.

The Standard & Poor’s/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.

The monthly indices also clocked in record declines. The 20-city index fell by 15.9 percent in June compared with a year ago, the largest drop since its inception in 2000. The 10-city index plunged 17 percent, its biggest decline in its 21-year history...

However, the rate of single-family home price declines slowed from May to June, a possible silver lining, the index creators said...

Fourteen cities in the monthly index showed improvement from May to June; nine recorded positive returns.

The index’s glimmer of hope follows another surprisingly positive housing headline on Monday. Existing home sales rose in July, surpassing expectations, as buyers snatched up cheap distressed properties in the hardest hit housing markets.

Book review of "Houseonomics" online at LATimes.com

Still playing that 'woulda, shoulda, coulda' game about not selling off any real estate assets during the boom? Fear not, as the book "Housenomics" takes an entirely different approach on how to value real estate, and you can find my review of the book for the Los Angeles Times online here:

With home prices continuing to fall -- and expected by many experts to decline further before finding a bottom -- it's very easy to play that "woulda, shoulda, coulda" game and envision how life might have been different had you sold that home back in 2005 and run off with the profit to Tahiti.

But in their new book "Houseonomics: Why Owning a Home Is Still a Great Investment," authors Gary N. Smith and Margaret H. Smith would argue against that type of thinking entirely, because it ignores what they call the "home dividend."

In fact, they contend that for most people in most places, now is a good time to own a home. In some areas of the country -- such as Indianapolis, Atlanta and New Orleans -- homes can even provide double-digit after-tax returns...

Notes from Real Estate Connect SF

Each year in San Francisco since 1996 (and now also in New York City), a dedicated group of technologists, real estate pros and other industry leaders gather to discuss the most pressing issues impacting the business of real estate. Founded by Inman News Founder & Publisher Bradley Inman, the Real Estate Connect conference has steadily grown in both attendance and prominence, with Internet companies such as Yahoo!, Google, Zillow and Trulia now among its top exhibitors.

It’s also the place where a network such as HGTV can promote their new website, called FrontDoor.com, and provides a unique opportunity for a company like Realogy – which owns the Century 21, Coldwell Banker and ERA brands – for a splashy announcement of its latest brokerage namesake, Better Homes & Gardens. Even Craig Newmark, founder of the eponymous Craigslist.com, was there to share his thoughts on his site (12 billion page views per month, most of which originate in the U.S.) and his site’s great success (listening to the constant input from users).

The big theme at this year’s conference was the future of the ‘nomadic consumer.’ Given the convergence of emerging trends such as smart phones taking on complex tasks once relegated to personal computers, faster and improved wireless networks, and information being stored on a vast computing ‘cloud’ rather than on individual hard drives, the day when consumers, suppliers and subcontractors will increasingly drive around to new home communities and require instantaneous information will soon be here, with the spoils being accorded to those who prepare the best.

Part of that preparation will be reconfiguring existing websites for an Internet that will be just as video-centric as television. Gradually, words and pictures will be replaced by instructive video to a generation that was not only weaned on it, but has adopted it as an art form for sites such as YouTube. Still, it will be the search for a new home itself that will require new and better tools for a buyer pool now just beginning to see the importance (and prudence) of becoming a fully informed consumer.

I’d expect to see more companies jumping out of the shadows -- such as Zillow, Trulia and Redfin -- that force established players such as Realtor.com, Homescape or NewHomeSource to change their game plans not just once in awhile, but continuously in order to remain relevant. At the same time, some of these new entrants continue to hit some bumps along the road as they learn that technological expertise alone is a poor substitute for years in the real estate trenches. Addressing these issues will become even more important as the real estate listings business becomes a global enterprise.

The housing industry is also a natural fit for social networks and blogging, since these often-unedited forums allow potential customers to make a human connection with a real person instead of a generic company website with the requisite disclosures in a 5-point font. Rather than listings remaining prisoners of the 900-plus separate MLS systems throughout the country, an individual with a page on ActiveRain (a popular social network for real estate) or their own blog can now include specific listings, foreclosures or even analytical tools so buyers don’t feel the need to surf to other sites to be informed. Although some currently popular blogs cheering on the housing bust may end up with short lives when the market revives, those dedicated to objectivity and intellectual honesty will continue to battle traditional newspapers and magazines for online attention.

One side benefit of the current housing downturn will be changes for the rebound that not only benefit the consumer, but strengthen an industry that has been damaged by the short-term interests of certain mortgage brokers, real estate agents and, yes, also some homebuilders. Imagine how much easier business will be with a simpler and more transparent mortgage system in which products are fully explained to buyers. Envision a time when those who dispense advice on one of life’s most important purchases – a new home – are more closely regulated and disciplined.

The resulting thinning of the real estate herd, many of whom only jumped in after seeing it as a get-rich-quick scheme, will eventually leave the real estate industry with a higher quality of sales executives and managers who can re-think the process of home sales in a world in which neither buyer nor seller has an information advantage. For the building industry veterans who recognize and embrace these new market realities, success will likely come sooner rather than later.

How to shop for mortgages anonymously

Tired of having to input your entire life to get competitive bids on mortgages? Some new websites are finally opening this service up to anyone without having to submit personal data. From a Washington Post article:

Even though mortgage lenders have raised the bar on what it takes to qualify for a home loan, shopping for a loan online has gotten easier, if not necessarily less confusing...

Zillow.com and Mortgage Marvel.com have embraced this concept in the past year, though that's where their similarities end.

Mortgage Marvel bills itself as the mortgage-shopping version of travel sites Orbitz or Expedia.

The site, which launched in the spring, is operated by Mortgagebot, a Milwaukee-based provider of online loan-origination technology for banks and other lenders.

Like the online travel sites, Mortgage Marvel lets users enter details on the kind of mortgage loan they need and the site rounds up real-time rate and lender fee quotes from hundreds of lenders.

Want to call someone on their BS? Try Zillow.

In the early 1990s -- well before the days of Zillow -- I remember being at a house party overlooking San Diego Bay and someone remarking how much the house probably cost. I was so curious to find out the details, the next business day I ordered a report from a title company to find out now only what the buyer paid, but also the lot size, square footage and room count. Although I didn't go around blabbing the details, I always felt a bit guilty nosing around, so the appearance of Zillow.com on the scene has brought me great relief!

A regular visitor to Housing Chronicles sent me a link to this video today now making the rounds on the Internet, which envisions how fun it would be to call the BSers one invariably meets in life with large pillows at the point of the offense. The point? When someone you meet at a party tells you how much their house cost, you can look it up -- without having to call a title company! The video is below:

An inconvenient national debt

Sure, Al Gore might have had penguins and polar bears to show for his documentary on global warming, "An Inconvenient Truth," but poor former Comptroller General David Walker only has people to protect. In his new film "IOUSA," Walker and the Concord Coalition's Robert Bixby go on a 'fiscal wake-up tour' to explain to U.S. citizens of the perils of ignoring a mounting federal debt -- which now exceeds $9.6 trillion and rises at a rate of $1.85 billion per day (and that's before adding in future entitlements for Medicare and Social Security, which brings it up close to $53 trillion, but who's counting?). Scared yet? You should be! From a Wall Street Journal article:

In the movie, which is co-written by "Empire of Debt" co-author Addison Wiggin and directed by "Wordplay" filmmaker Patrick Creadon, Messrs. Walker and Bixby argue that unless the government alters its policies and spending habits, the U.S. will be in for a serious financial meltdown.

According to Mr. Walker:

"...our concern, quite frankly, is that too much attention has been placed on short-term economic concerns and not nearly enough on a number of large and growing structural problems that will have serious adverse consequences if they're not addressed...

f you look at this year's deficit, as a percentage of the economy, it's not that disturbing. The problem is that we're heading in a wrong direction. When the baby boom generation starts retiring, that will bring a tsunami of [government] spending that we are not prepared for. We are in a $53 trillion hole. And that hole gets deeper $2-3 trillion a year automatically, even if you have a balanced budget. Honestly, since the budget controls expired on December 2002, I think Washington has been totally out of control. They've wanted guns, butter, tax cuts and entitlement expansions...

We're going to have to re-impose tough budget controls -- tougher than the ones we had in the '90s -- because we're in worse shape. Secondly, we're going to have to reform Social Security, Medicare, and the entire health-care system. Thirdly, we're going to have to engage in comprehensive tax reform. And lastly, we're going to have to look at the base of the federal government, because it's grown very much out of shape.

I think there is also a cultural problem here. I think the federal government is doing an extremely poor job of managing its finances, and unfortunately, too many Americans have been following this bad example, spending more money than they make, and mortgaging their future. And there has to be a behavioral change. One of our biggest concerns is also the savings deficit. Generally, Americans are very prolific at spending and not very good at saving, and that's caused us to increasingly rely on foreign lenders to finance our deficits. That's not in our [best] long-term economic or geopolitical interests...

Neither one of the presidential candidates has addressed fiscal responsibility and intergenerational equity. We are hopeful that as a result of the film and a number of other efforts, that these issues will be a higher priority in the election campaign. There has been some talk of a commission proposal, and taxes and health care, but it's been piecemeal...

It's fine for them to talk about what needs to be done in the short term, but not to the exclusion of what needs to be done to address the real disease. Leadership is all about helping people look broader and longer. For me, we haven't learned the lessons from the past. And the most recent lesson is that the factors that resulted in the current mortgage-based subprime crisis exist with regard to the federal government's finances. And we're not addressing them. The type of economic disruption we can get is much, much, much greater than what we're currently facing. It's time that we had some leadership to start addressing it...

In the case of "The Inconvenient Truth," you had the penguins and the polar bears to help visualize the consequences. In ours, we're talking about human beings. Hopefully, people care about them, too."

Shadow rental market now impacting apartment rents

Although large apartment buildings in most U.S. markets have managed to remain profitable during the housing slump, the oft-discussed 'shadow' rental market (i.e., single-family homes rented out to pay the mortgage) is now having an impact, but not as much as the impact from a slowing economy. One reason cited? People doubling up with roommates or moving back with family. From a Wall Street Journal article:

For the past year, apartment buildings have been one of the few bright spots in the real-estate industry as people forced out of the home-buying market by foreclosures or the credit crunch have turned to renting.

But now the specter of job losses is beginning to spread the gloom into that sector as well. As would-be renters are doubling up in apartments or moving in with friends and families, rents and occupancy rates are beginning to fall in many cities...

Job losses bode poorly for apartment-company stocks, which have outperformed their real-estate rivals so far this year. The Dow Jones Residential REIT subindex is up 14% year-to-date, while the overall Dow Jones Equity REIT index, which includes hotels, retail, self-storage and office properties, is down 1.8%...

Investors have been buoyed by the 1.5 million rental households that have entered the market in the past year, including buyers locked out of the for-sale housing market and those who defaulted on their mortgages. The one downside of the housing crisis for apartment owners has been the "shadow market," made up of unsold homes that owners have put on the rental market.

But that competition isn't nearly as big a problem as job-loss trends. "A lot of folks think it's the shadow market that's softening rents. It's really a jobs issue," says Richard Campo, chief executive of Camden Property Trust....

The biggest impact from job losses could be seen in cities such as Charlotte, N.C., and Atlanta, which haven't seen large shadow markets develop. "That group in the middle is starting to show signs of slowing," says Haendel St. Juste, an analyst at Green Street Advisors Inc. "When you look at the markets that are starting to slow, it's spreading beyond the markets that were burdened by housing."...

For investors, concerns about falling rents and rising vacancy has resulted in a decline in prices for apartment buildings. The "capitalization rate," which measures the relationship between the price and cash flow of properties, dropped one-quarter of one percent from the second quarter of 2007 to second quarter of this year...

The availability of credit from government-sponsored Fannie Mae and Freddie Mac has buoyed values and fueled new deals. Turbulence at the mortgage titans, which together with Ginnie Mae hold 35% of the mortgage debt on multifamily housing, riled apartment owners last month as investors worried about the fate of Fannie and Freddie. But those worries dissipated as the housing bill signed into law last month made the government's implied guarantee of Fannie and Freddie's $5.2 trillion in mortgage securities more explicit.

Housing fundamentals actually improving

Although I doubt you'll ever see this story cited by bloggers completely enamored of bad news, a story in The Economist concludes that certain housing fundamentals are actually improving. Say WHAT?!

THE American housing market has deteriorated so sharply in the past two years that it is easy to fall prey to profound pessimism. Recent weeks have brought yet more bad news. To protect their thin capital, Fannie Mae and Freddie Mac, the big mortgage agencies, said they would limit the volume of new mortgages that they buy...

Amid the despondency, however, supply and demand are moving towards balance. Sales of new homes, which had plunged nearly 60% from their average level of 2005, have been stable since March. Sales of existing homes stopped falling last autumn...

By the standards of previous cycles, residential construction should be nearing the bottom. Karl Case, a housing expert at Wellesley College and one of the creators of the S&P/Case-Shiller home-price indices, notes that in three previous housing cycles, residential investment peaked at about 5.5% of GDP and hit bottom at around 3.5%. In the latest cycle it peaked at 5.5% in 2006 and by the second quarter had fallen to 3.1% of GDP, below the troughs of 1975, 1982 and 1991. He does not expect much rebound. But like hitting yourself with a hammer, house building need only stop falling for the economy to feel better...

Finally, since home prices have dropped about 18% from their mid-2006 peak (based on the S&P/Case-Shiller composite of 20 cities) and incomes have steadily grown, homes are returning to more typical levels of affordability in some regions. Mr Case estimates that in Los Angeles, the ratio of home prices to annual income per person doubled from 2001-06 to 16, and has since fallen to 11. In Boston, it rose from nine to 12, and has since fallen back to nine.

There are numerous caveats, however. First, the scale of the housing boom means history is a flawed guide to how big a retrenchment is in store...

Some believe that with banks and other lenders dumping huge numbers of foreclosed homes, prices could fall well below equilibrium. That is debatable. A recent paper by Charles Calomiris of Columbia University and Stanley Longhofer and William Miles, both of Wichita State University, argues that foreclosure sales will impact prices less than commonly thought. They examined state-level data from 1981 to 2007 and found that even large increases in foreclosures have only a small marginal impact on prices, perhaps because they occur late in the cycle when the supply of newly built homes is shrinking....

Most serious is the prospect of a further squeeze on credit...Even if Fannie and Freddie’s capital constraints do not stop them guaranteeing mortgages, they have tightened their underwriting terms. Banks, which lack capital themselves, are passing these tighter terms on to customers. Mortgage rates have risen by half a percentage point since early June...

This has left both optimists and pessimists pinning hopes for a rebound on the federal government. Last month’s housing-rescue law offers up to $7,500 to first-time homebuyers, a feature that the NAHB has been heavily promoting. The law also made the government’s implicit backing of Fannie and Freddie explicit, if necessary by injecting capital into them.

Death of the suburbs? Not in the Inland Empire

With the long-term trend towards higher energy prices, a major theme lately has been the death of the suburbs in favor of urban areas. In fact, on a global scale, cities are expected to continue increasing their percentage of overall population.

According to an article in The Economist, however, that doesn't necessarily mean the death of all suburbs, especially if they're located in Southern California's Inland Empire, or the IE. While the IE has seen housing prices plummet more than in neighboring Los Angeles or Orange counties, so far that's been due more to rising foreclosures and the use of sub-prime and Alt-A mortgages during the housing boom than higher fuel prices. And, according to the story, the IE has a few more tricks up its sleeve to benefit from the eventual rebound:

The Inland Empire is America’s warehouse: goods, mostly from China, are sorted and assembled there before being distributed across the country. Until recently increasing trade could be counted on to prop up the economy. Traffic through the ports of Long Beach and Los Angeles, America’s two biggest by container volume, levelled off only briefly during the early 1990s recession and continued to grow in 2001. Now it is declining. In June imports through the two ports were 15% and 12% below last year’s level. Moreno Valley’s office-vacancy rate is already the highest in the region...

The Inland Empire’s housing market did not collapse because people chose not to live in sprawling suburbs. They clearly did, hence the huge growth there. The problem was that buyers could not really afford the houses that were being built. Now they can...House-builders are at last creating smaller homes, and a few buyers are returning. Now the task is to ensure that neighbourhoods are not snapped up by slumlords...

Places like Moreno Valley retain two enormous advantages over traditional cities. They have lots of cheap, available land and a pool of workers keen to avoid the ever-lengthening commute to Los Angeles and Orange County. When it comes to attracting businesses, these two factors outweigh high petrol prices. The city of Ontario, which contains the Inland Empire’s main airport, already has more than two jobs for each home. Greg Devereaux, the city’s manager, reckons it will eventually have more than three.

SoCal home sales jump on reduced prices

The sharp reduction in housing prices over the past year seems to have finally impacted both the psychology and the willingness of buyers to re-enter the marketplace. Although one month does not make a trend, it's the first piece of good news we've seen here in Southern California for awhile. From an L.A. Times story:

Southern California home sales rose last month for the first time in nearly three years, although prices continued their downward spiral, data released today showed...

The ongoing decline in prices appears to be spurring sales. The number of homes sold picked up in July for the first year-over-year expansion since October 2005. All counties, save Los Angeles County, posted at least a 10% increase from July 2007. The biggest gainer was the region's foreclosure nucleus -- Riverside County -- where sales jumped 48.6%.

Los Angeles County was the weak link for home sales. The region's biggest county posted an all-time July low of 6,592 sales, down 3.2% from a year ago. The median price, meanwhile, dropped 27% to $400,000.

Overall, 20,329 homes in the six-county region closed escrow last month, a 13.8% rise from a year ago...

There's no question that it's the purchase of the foreclosures that are driving local sales. Foreclosure resales in July composed 43.6% of all transactions, DataQuick reported.

The question now is, whether rising demand can counter the ongoing price descent.

July's numbers show that, although still slow, the pace of Southern California home sales may have found a floor. Each calendar month from September 2007 through June was an all-time sales low, but last month's sales number, while still below the 20-year average, wasn't the worst showing for a July.

Have the housing bust & credit crunch been overstated?

We keep hearing that a major impact of the 'reverse wealth effect' of declining home prices is a pullback on consumer spending. However, according to Dick Green, President of Briefing.com, that conclusion just isn't supported by the facts. From his article (hat tip: Brian McDonald):

The defining characteristic of this business and financial cycle has been a massive correction in the housing industry. That has had direct implications for that economic sector and financial stocks. The implications for the rest of the economy and other stocks, however, have been exaggerated.

Briefing.com first addressed the implications of the housing implosion in a Sept. 25, 2006 Big Picture article titled "Housing: Correction or Crisis?" In that, we noted Fed studies that suggested an annual 10% decline in home prices would reduce GDP each year by about 0.25% due to the wealth impact on consumer spending. That is hardly dramatic, and is about in-line with what has occurred.

It is hard to separate the negative impact on consumer spending of the wealth impact from lower home prices, but it is not hard to show that consumer spending has not declined even in the face of the massive housing correction...

There has not been a single quarter of a decline in consumer spending.

Spending growth has slowed the past year, as payrolls have stagnated, and as higher gas prices have sapped consumer spending power, but the nonstop talk that a recession will develop because of a pullback in consumer spending has simply been WRONG...

Another feared implication of the housing crash has been that a credit crunch will result from the earnings and balance sheet problems at financial firms.

Here the problem is partly compounded by imprecise language.

There is a credit crisis on Wall Street. There is a lack of liquidity in the secondary market for mortgage-backed assets and many related securities.

That is not the same, however as a credit crunch.

A credit crunch is defined as a contraction in availability of credit as reflected in declining levels of loans. This has not happened.

The simple fact is that the level of outstanding commercial and industrial loans (C&I loans) was up steady last year and has risen every month this year....

There is no doubt that lending standards have tightened. The quarterly Fed report makes that clear. But, it is illogical to assume that just because a majority of banks respond to a questionnaire by stating that they have tightened standards, that a credit crunch has developed.

Banks are tightening standards from what had been extremely loose standards. And, they may be tightening standards for mortgage loans but not as much for C&I loans. Regardless of the surveys, the hard data show lending is continuing.

(It is sometimes noted that commercial paper, another form of credit for companies, has declined over the past year. That is true, but the decline has been in financial company commercial paper. This is not at all surprising. Nonfinancial commercial paper has not declined and remains a means of obtaining capital for companies outside the financial sector.)

The bottom line is that it is WRONG to say that there is a credit crunch. Nonfinancial companies have access to the credit they need to grow and manage their businesses.

The housing crash has created an understandably negative tone which has adversely affected consumer and investment sentiment.

On top of this, the spike in energy prices and the (mathematically modest) declines in payrolls have created an environment conducive to shrill journalistic claims of recession or worse.

Yet, the fact remains that housing is the only major sector of the economy that has contracted. Consumer spending, business investment, exports, and government spending have each increased EVERY SINGLE QUARTER in the GDP data over the past year.

The overall economic situation is of a major contraction in the housing sector that has not had significant ripple effects for other sectors of the economy, and shows no sign of doing so in the future.

This disconnect from the reality of the limited implications of the housing crash and the fears associated with it creates investment opportunities. Longer-term, nonfinancial companies now present many good reward/risk scenarios. Stocks such as 3M, GE, IBM, and others reflect good values with good dividend yields.

This is not to say that the market is a screaming "buy," but it is still our opinion that it would be wrong to panic on the fears that have been so prevalent through 2008, and that good, nonfinancial companies will deliver long-term value.

Builder speaks out against fickle banks and impact fees

Mick Pattinson, president of the homebuilding company Barratt American, has recently been very vocal about banks which have declined to renew revolving credit facilities (thus potentially putting more builders out of business) as well as cities which became overly reliant on impact fees for new development during the boom, thus driving home prices even higher. Mick was one of the first builders I met when entering the building industry as a consultant, and Barratt is known for building very solid, high-quality homes (and no, they're not a client). As other builders keep mum on these issues, it's ironic that it takes a Brit to speak his mind. From a BuilderOnline.com story:

Exposing the duplicity of lenders and municipalities in the downfall of home builders is the latest crusade for one Southern California-based builder that is fighting desperately to keep his own company afloat.

Barratt American, formerly one of the 200 largest home builders in the country, is for the moment “essentially out of the game” as far as production building goes, says its president, Mick Pattinson. He spoke with BUILDER by phone from London, where he’s been attempting to raise new financing after Bank of America told his company last spring that it would no longer fund Barratt’s $125 million credit facility...

But Pattinson isn’t twiddling his thumbs waiting for the housing market to rebound. He’s focusing more of his energies on calling attention to what he says have been two negative forces that crippled the housing industry: banks abandoning distressed builders, and municipalities squeezing builders for higher impact fees, which in his market can exceed $100,000 per house.

Pattinson doesn’t hide his disdain for Bank of America, or for much of the lending community, either, which he insists pulled the financing rug out from under builders at their greatest time of need. “Builders are mad as hell, but they’ve been reluctant to put out their dirty linen about how they’ve been screwed over.”

So to force banks to “explain themselves” to lawmakers and the public, Barratt is working with the Homebuilders Coalition for Responsible Bank Behavior, a newly formed group that he says now involves 43 builders. Most are located in California, but the Coalition also includes builders from Oregon and Washington D.C. The group is developing a Web site, and plans to lobby in California and nationally. (It is close to hiring a public relations person.) Pattinson isn’t sure how much dust the Coalition can kick up, but he claims it’s already gained some traction with officials in Sacramento, California’s capitol.

Lawmakers there are also weighing builders’ complaints about how municipalities have used residential development as their own piggy banks by imposing impact fees that, during the boom years, “got to the point where the housing industry wasn’t working anymore,” says Pattinson. He’s been railing for years against impact fees, which makes him the perfect choice to chair a fee reform task force that the California Building Industry Association recently formed.

Pattinson is buoyed that several California towns have passed fee payment deferral statutes. And if towns start going bankrupt because the housing downturn is depriving them of fees to which they’ve grown accustomed, Pattinson expects more municipalities will be forced to consider weaning themselves from this revenue stream.

Prime borrowers the next to default?

First the sub-prime mortgages defaulted. Then the Alt-A, in which otherwise credit-worthy borrowers didn't want to document their income (since it's fairly easy to document full-time income, either these buyers were going for loans that otherwise wouldn't be approved, were self-employed or had other income that wasn't listed on a W-2 form). Now it seems that prime borrowers are also starting to default in numbers that are raising red flags in the mortgage industry. From a CNNMoney.com story:

Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance...

Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income.

Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport...

More foreclosures will add to an already massive oversupply of homes on the market. Inventories are up to about 11 month's worth of sales at the current rate.

Indeed, about 2.8% of all homes for sale were vacant as of June 30, according to Census Bureau statistics. That's up about 50% from three years ago, and near historic highs...

The failure of prime mortgages will also make it more difficult for new borrowers to find affordable loans - and that will slow sales even more. Lending standards have been tightening for months, but if prime loans start to look risky, lenders will be even more conservative about who gets a mortgage.

Consequently, prudent bottom-fishers looking to pounce when the time is right should definitely be taking steps to maximize credit scores (even if it means paying off an old debt with which you don't agree) and saving up a down payment of 10-20%.

FBI probing builder incentives

Concerned that some incentive programs masked the true price paid by home buyers when pitching lenders to write mortgage loans, the FBI has began its own investigation. From a Wall Street Journal article:

When home sales began to slow at the start of the downturn, home builders offered buyers incentives -- instead of reducing prices -- to stimulate demand. The incentives included cars, tuition and credit-card payments, and even cash. Now, federal investigators are questioning whether some of those incentives misled lenders and caused them to write mortgages that were artificially inflated, contributing to today's home-price crash... Housing analysts say incentive schemes prolonged the housing boom in hot markets like Las Vegas and, consequently, have made the downturn all the more severe.

The FBI wouldn't name individuals or companies under scrutiny, but confirmed that it is looking at cases where the disclosures of incentives "haven't made it all the way to the ultimate lender," says William Stern, financial crimes supervisor for the FBI in Palm Beach County, Fla., and the bureau's former national mortgage-fraud coordinator.

Interviews with real-estate agents, home buyers and former employees at home builders describe an industry where competitive pressures fueled unusually creative giveaways in a last-ditch attempt to prevent price cuts. Home builders hate to cut prices, not only because it reduces profit, but also because their customers who paid full price complain...

There aren't any strict limits on incentives, but they could run afoul of federal regulations if they cause the mortgage to increase by more than the cost of the incentive. "It's a phantom incentive to mask it in an excessive loan," says Brian Sullivan, a Department of Housing and Urban Development spokesman.

Stronger due diligence by banks might have caught some of these problems. Banks, however, say they relied on professional appraisal companies to insure property pricing. Mortgage-fraud experts say appraisers sometimes cooperated with builders because it was the only way to get business. Appraisers say that determining the value of new homes is more difficult because comparable sales figures are provided by builders.

In some cases, developers gave outsized commissions to real-estate agents who then gave that money back to the buyer. The average commission on a home sale nationally was 5.2% last year, up from 5% in 2005, according to a survey by Real Trends, an industry newsletter.

At the height of the real-estate boom, commissions in Las Vegas regularly reached double digits, real-estate agents say. Kurt DeWinter, a Henderson, Nev., agent, received a $70,000 commission on a $550,000 home from Beazer Homes USA Inc. two years ago. He says he gave half of that to the buyer.

McCain vs. Obama: whose economic plan is better?

I can't wait for the presidential debates to begin in earnest, because I'm eager to hear specifics from both candidates on numerous issues, including the economy.

At this point I can't promise to punch the hanging chad for either candidate come November, and why is that? Perhaps because neither of their economic plans add up, something which BusinessWeek has outlined in detail:

...how much faith should voters put in the Arizona Republican's proposals? Or for that matter in Senator Barack Obama's bold plans to spend hundreds of billions on national health care, infrastructure, education, and energy? Put another way, how likely is it that the plans now being spelled out on the campaign trail will actually come to pass? In two words, not very.

Politics, the weak economy, and the reality of the ballooning federal budget will all limit the next President's room for maneuver. McCain's low-tax strategy could well be chewed up in a Congress that is likely to be even more Democratic than it is today. Obama's lofty plans could be undone by the hefty costs of his health-care plan and other programs. Even some Democrats may not stomach the huge expense and vast complexity of Obama's proposals.

In every election there is a big gap between what the candidates promise and what they can actually deliver...

The 2009 economy will offer tough conditions for a President set on bold new policies. The next Administration will face anemic growth, sluggish employment, a housing downturn expected to continue at least through much of next year, and continued tight credit markets as the shakeout works its way through the financial sector.

And in part because of last spring's $168 billion stimulus, the federal deficit will rise to nearly $500 billion next year, almost three times fiscal 2007 levels. There's a growing sense in Washington, particularly among Democrats, that another round of stimulus or further moves to bail out the housing or financial markets could be needed. Such spending could add tens if not hundreds of billions to the deficit. In the face of that tab, the question will be whether McCain or Obama can find the money to fund many of their tax cuts and spending proposals...

Come January, the next President will have to take a much clearer stand as to where his priorities truly lie. The problem for voters is that it is impossible now to tell which of many competing goals Obama or McCain will back when the time comes to move from campaigning to governing. In either case, Americans will likely get much less than what's being offered in the heat of the campaign.

In other words, it's time to start voting armed with knowledge about the reality of a candidate's positions instead of the gut check that's led to ruinous results in the past.

25% of home sellers suffering losses

For those home sellers who have to sell for any variety of reasons -- rising payments, job loss, job transfer, divorce or death -- up to one-quarter are selling at a loss according to Zillow.com. What does this mean for a housing rebound? Likely pushed off even further. From a CNNMoney.com story:

In the 12 months that ended June 30, nearly 25% of all homes sold nationwide fetched less than sellers originally paid, according to real estate Web site Zillow.com.

While the nation's double-digit decline in home prices has been well documented, the new report underscores the economic force of those price declines. Homeowners are walking away with much less in their pocket when they sell. And that affects more than the real estate market...

In Merced, Calif., 63% of homes sold during the past 12 months brought in less than what the owner paid. Prices there have fallen 40% over the past 12 months and 56% from their 2006 peak.

About 63% of sellers in Stockton, Calif., lost money during the same period, 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix...

Many sellers are so underwater that their only solution is a short sale. Elsa Bell, a claims adjuster, bought her Riverside, Calif., house in 2006 for $330,000, using a no-down-payment loan. In April she put the house on the market for $275,000, but it hasn't sold...

The good news is that she should get out of the deal fairly clean. Since she has little invested, she has little to lose. The bad news is that a short sale may mean a hit to her credit score.

Nationwide, nearly a third of all homeowners who bought since 2003 owe more on their homes than the homes are worth. And those that, like Bell, put little or none of their own money into the home purchases, are more likely to try to sell short or simply abandon their homes...

A plethora of sellers taking losses can have a chilling effect on people's lives, says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

People don't want to sell at a loss, so they put off their plans, whether it's a move for a better job opportunity elsewhere or trading up to a larger home.

"That will delay the [market correction]," said Baker. "It takes time for people to recognize that [these losses] are real."

A quick turnaround is not likely. More than $200 billion in adjustable rate mortgages are scheduled to reset during the second half of 2008, according to the National Association of Realtors, and loans of all types defaulting at high rates. There is also about 11 months of inventory at the current rate of sales.

Private builders facing rougher seas ahead

The combination of down payment charities disappearing in October, rising foreclosures pushing prices down and the ongoing credit crunch is expected to disproportionately impact private homebuilders in the coming months, potentially leading many into bankruptcy. From a BuilderOnline.com story:

The disappearance of seller-financed down payments, coupled with mounting foreclosures and a serious drain on available capital, pose a triple threat that could push considerably more private builders over the edge into bankruptcy by the end of this year.

That's the bleak assessment of current market conditions that Tom Eggleston, the president and CEO of C.P. Morgan Communities, shared with other builders and investors during a conference call that JPMorgan hosted yesterday.

Much of the call was devoted to the elimination of seller-funded down-payment assistance (DPA) in the recently passed federal housing bill, effective Oct. 1. More than 55 percent of C.P. Morgan's buyers need that assistance to purchase a house, Eggleston estimated. Michael Rehaut, JPMorgan's housing analyst, projected that its elimination could reduce the total number of new-home buyers by 17 percent.

Possibly more problematic for builders will be the deadline Congress imposes on when homes purchased with DPA mortgages need to close. Eggleston speculated that this deadline could be as early as Nov. 1, which means that a buyer of virtually any home currently under construction would not be able to accept down-payment help from a seller or third party. The earlier the deadline, the greater the possibility that more purchase agreements will get canceled.

Eggleston didn't see many viable options to DPA mortgages. Financing offered through a program by the Veterans Administration and the U.S. Department of Agriculture is "limited" and "quite stringent," he said. State and county programs often aren't all that well capitalized. Eggleston did note, though, that the housing bill offers a $7,500 credit to first-time home buyers who might be able to get an advance on that credit from tax-planning agencies such as H&R Block. (Rehaut pointed out, however, that the advance might not be available until the first quarter of next year, at the earliest. And how many buyers actually apply for that credit—which is in the form of a 15-year loan—remains to be seen.)...

Eggleston thinks that foreclosures could represent two-fifths of closings in many markets and might increase to half by the middle of next year. He also thinks no more than one-fifth of distressed homeowners will avoid foreclosure as a result of the housing legislation.

He's more concerned, though, about accelerated demands by lenders for collateral reappraisals, which has led to a significant reduction in the value of assets that back the loans builders use to run their businesses. Eggleston expects lender demands to continue through the next year, which in his estimation will only put more companies on the brink of insolvency. Before the conference call, Eggleston was on record stating his belief that 80 percent of all private builders would be in workout with their banks by year's end.

Steps to ensure your builder isn't going bust

Syndicated writer Lew Sichelman's latest article is on the steps buyers can take to ensure they're not buying homes from a builder about to end up in BK. While some blog commentators have claimed that some builders deserve to go bankrupt due to past bets that went bad, that opinion doesn't really consider the impact on buyers with customer service issues:

It's always wise for would-be home buyers to make sure that the builders they choose are on solid footing. But at a time when many companies are teetering on the brink of financial ruin, it's necessary to be as picky about the builder as the floor plans and options he offers.

There already have been 35 "major" implosions and 27 "tiny" ones among the building community, according to the Home Builder Implode-o-Meter. And the website has 15 builders on its "ailing" watch list, including some of the biggest names in the business.

The website's roll call of fallen firms is somewhat subjective because the companies on it may not have shut down operations altogether. Some have filed for bankruptcy protection, while others may still be running but have gone through some sort of adverse change.

Whatever the case, when a builder becomes crippled, his buyers usually go down with him. Current customers often lose their deposit money or end up with a partially completed house. Recent buyers who have already moved in could be left with no one to come back to fix the numerous items that invariably require attention.

For the entire list of suggestions, click here.

Economists differ on how to value housing

One of the main reasons that I think economists can't seem to agree on how to value the appropriate price for housing is because they tend to take a 30,000-foot view, sort of what you might see when flying over an area. Then, taking out their magic pencils, they wave it over the area and proclaim that prices must fall by a certain amount in order to revert to a long-term relationship between prices and median incomes, or prices versus potential rents, or prices versus changes in interest rates.

Of course real estate agents will tell you that since real estate is local that the 30,000-foot view is inherently flawed, thus giving us one more reason that no one can seem to agree on a home's value -- other than comps, of course, which of course only tell you what a home in the same area recently sold for and may or may not have anything to do with your house.

So what's a home buyer or home seller to do? Fortunately, a story in the New York Times (hat tip: Patrick.net) lays out the various metrics economists use to value real estate markets and the pros and cons of each:

The New York Times asked economists across the country to share the data they use to figure out how much houses in regional markets are overvalued, a calculation that approximates where the bottom may be. Models built on these variables show that while some markets — such as California — are on a road to recovery, others — such as south Florida — have a way to go.

These signs cannot possibly tell the whole story, especially since they point more toward where prices should be valued than where they will be. But these measures are nonetheless helpful to anyone buying, selling or borrowing against their home sweet home...

One way to envision the bottom would be to look back at where prices were five or 10 years ago, before the current price run-up. There are some better ways, though.

Noting that home prices have outpaced inflation in the past, one can calculate how much houses appreciated annually in the decades before the bubble, and then figure out how far out of line prices are now. Edward E. Leamer, director of the U.C.L.A. Anderson Forecast, has crunched these numbers for various regional markets.

In Ocean City, N.J., for example, inflation-adjusted house prices rose about 1.6 percent a year from 1988 through 2002. Compared with what this rate would predict, the city’s houses in the first quarter of this year were overvalued by 51 percent. Over the previous year, they had fallen 0.6 percent; at this pace, Ocean City house prices will be at the right level in about 13 years. The model foretells eternal decline for some cities. It predicts that Kingston, N.Y., will not return to “normal” for almost four centuries.

So that's not very helpful, is it?

Many experts look to price-to-rent ratios to estimate where house prices should be in a region. Because renting is a direct alternative to buying, and because rents tend to be less volatile than prices, rents are often considered to be a good shorthand for figuring out the intrinsic value of a home.

In the past decade, the price-to-rent ratio in many markets has exploded, indicating that people have been paying much more for their homes than the property is actually worth. From 1994 to 2002, for example, Phoenix had an average ratio of 11, according to data from Moody’s Economy.com. After peaking in the last quarter of 2002 at 22.5, it cooled to about 17.3 in the first quarter of this year.

This measure is popular but problematic because some economists say many of the homes that people rent (apartments in multifamily buildings) may not be comparable to the types of homes that people buy (single-family houses).

This is why looking at the local market is key -- that way you'd have a much better chance of finding a comparable property for rent. Any economist who would compare the cost of renting an apartment with the cost of owning a single-family home to argue for lower home prices should give back his PhD.

Another ratio that housing economists watch is the ratio of home prices to per-capita income. This is telling because it shows whether Americans can actually afford the houses in their area.

Looking at previous peaks and troughs in the income ratio can provide an idea of where the housing market will bottom in a particular city. In Boston, for example, the housing market peaked in the late 1980s around 11, and then hovered around 7.5 when it bottomed in the late 1990s, according to Mr. Case. This time around, it peaked at over 12, and in the first quarter of this year, it was just over 10...

Some economists argue that the price to per-capita income ratio is misleading, because the price used in that model does not take into account the full cost for buyers. This full cost should include not just the price of the house but mortgage rates as well.

“As long as anyone can remember, as long as we have data, mortgage rates have been about 1.6 percent above the 10-year Treasury rate,” said Christopher J. Mayer, an economist and senior vice dean at Columbia Business School. “Today, it’s more like 2.5 percent above the 10-year Treasury. That’s a gigantic difference, literally reducing the amount of house someone could afford by 20 percent.”

He has put together, in a model that has not yet been published, a rough calculation of where house prices should be if mortgage markets were functioning the way they had been in the last few decades.

This model shows that big-bubble cities like Miami and Phoenix were still overvalued in the range of 13 percent in May. It also found that San Francisco and Boston homes were corrected to the right level, and that homes were actually undervalued in New York by 5 percent.

Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals.

Yet another ratio worth watching is the relationship of housing inventory to sales. This measures the imbalance between supply and demand, which is the economist’s holy grail of market behavior.

A recent International Monetary Fund paper argued this measure was the strongest determinant of housing prices in the short run. Booming areas were often overbuilt and have the most inventory to clear out before prices can recover. Inventory-to-sales ratio declines across California, for example, have given hope that the state is nearing recovery...

The wrench in all these models is that this is the first national housing bust since anybody started keeping track of many of these useful data points. It is hard to predict how the national trends will affect state and city housing markets, which are otherwise very local organisms...

...some experts argued that it was silly to try to build a mathematical model for the market’s overvaluation. Too much is unknown, they say, to make any predictions.

August column for Builder & Developer magazine online

My latest column for Builder & Developer magazine is now available online. This month's edition reviews the long-term impact of higher gas prices on suburban development, based partly on comparisons of annual increases in fuel prices vs. population growth in the Southwest Riverside County part of California, a long-time bedroom community for commuters working in San Diego County, Orange County and elsewhere in the Inland Empire.

Tips on buying foreclosures

Given the rising number of home sales of foreclosed homes, it would seem like a good time to jump into the game. But since many of these sales are to professional investors, many of whom work with pooled money and analysts to crunch the numbers, it's easy for neophytes to make mistakes. Fortunately, CNNMoney.com provides some tips to foreclosure beginners:

A home goes into pre-foreclosure when a borrower has fallen behind on his payments, but the house has yet to be auctioned off.

Buyers can find pre-foreclosures by poring over the delinquency notices that lenders file with county courthouses when a borrower misses a payment.

Armed with prospects, buyers should go scouting. If they see homes they like, they should contact the owners to see if they want to sell...

Cold calling and making low-ball offers on people's homes can be difficult: Some owners are emotional, even angry. Many are trying to hold onto their houses and don't appreciate what they consider scavengers sniffing around...

Indeed, some owners are open to doing what's called a short sale, which is when a buyer pays less for a house than the mortgage that is owed on it. Lenders must agree to a short sale, and will then forgive the rest of the debt.

Often, banks are reluctant to do such deals, since it requires them to take a loss. It can take months and a lot of badgering before a deal goes through, and not every buyer is up for that kind of hassle.

But as the housing market deteriorates, lenders are warming up to short sales, according to Foreclosure.com founder Brad Geisen. "It makes a lot more financial sense for them to liquidate early rather than go through the foreclosure process," he said, which can cost lenders about $50,000...

In the next stage of foreclosure, homes in default are auctioned off on the county courthouse steps. These homes can be real bargains, but the process is a crap shoot.

Bidders can't inspect the property, so there's no telling how much work it needs. And there is also no telling what kind of liens there are against the home, due to unpaid taxes and so forth, which can also jack up the cost of these homes. Finally, Buyers need to come with cash, ready to put 10%-20% down on the spot, and able to pony up the rest in a matter of days...

After a lender takes back a house, the property goes back on the market as what's called an REO (real estate owned) property. These are treated like ordinary sales, listed with a broker. Typically, bargains are not as sharp.

Author Steve Dexter advises house hunters to go to the Web sites of all the major lenders and look for REOs in their communities. Alternatively, "Get a young, hungry real estate agent who's screening REOs all the time and put them to work for you," he said. Foreclosures for sale may also be found on the sites of Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500), as well as eBay (EBAY, Fortune 500)...

Another way to buy an REO is through an REO auction. As bank portfolios of these properties have swollen, they've started to unload them en masse. Pam McKissick, chief operating officer of Williams & Williams, an auction company based in Tulsa, said her company buys big portfolios of post-foreclosure properties from lenders and then auctions them to individual buyers.

The proof is in: speculation caused the oil bubble

Ever since oil prices began their steep pricing rise earlier this year, we had pundits dismissing talk about overt speculation in oil futures for the increases. They pointed to static production, rising demand by emerging economies and political instability in countries with large oil exports, but they never really explained why a slow yet steady rise in demand would result in a spike in such a short time. People paid higher prices because they had little choice in the short run, but over time began to make adjustments that led to slowing demand that would eventually impact prices, but certainly not lead to the price drops we've seen in recent weeks.

So why have they fallen so quickly? An article in the UK's Daily Telegraph takes it on:

The market's conviction that oil prices were set on an unstoppable upswing was underpinned by a set of mantras to be chanted daily before breakfast by anyone hoping to make money by following the crowd: insatiable demand from China; indolent Opec sheikhs unwilling to open the supply taps; that nasty Vladimir Putin playing political hardball with Russia's oil and gas resources; those mad Iranian mullahs hell-bent on nuclear conflict; and beyond all these, the looming threat of "peak oil", the inevitable moment when Mother Earth's carbon-fuel gauge starts pointing towards empty.

One way or another, said the fundamentalists, the only destination for oil prices in the medium term was somewhere north of $200 a barrel. And hooray to that, chorused the green lobby, because it may be the only thing that will ever make us wake up to the need to stop cooking the planet with carbon emissions...

Now the psychological tide seems to be turning. On the supply side, Saudi Arabia, the dominant member of Opec, is now signalling greater willingness to open the oil taps. When the princes of the desert made a rather smaller gesture of willingness in that direction in June, the market took no notice and prices marched on. But in the new mood, any hint of an increase in Saudi supply is a reason to mark down prices.

As for the Russians and the Iranians, the pundits have remembered that even the most externally truculent or internally turbulent of energy-exporting nations can feed its people at home only by selling its natural resources abroad, so must ultimately stay on good terms with its customers.

And meanwhile, five years of rising oil prices have provoked a wave of investment in new drilling and refinery capacity - including the opening up of inaccessible oil sources that no one wanted to tackle when prices were low. Whether it is deep under the Arctic ice-cap or soaked into the tar-sands of northern Alberta, there turns out to be quite a lot more oil waiting to be exploited before we really approach the peak-oil apocalypse. More than that, high oil prices have encouraged rapid development of such alternative energy sources as wind and solar power, and more efficient engine and heating technologies.

On the demand side, a shuddering deceleration in economic activity across the industrialised world is starting to take pressure away. Many economists think the downturn will be deep and painful, and Opec (whose predictions are naturally at the low end of the range) thinks demand for its output could be lower in the early part of the next decade than it was in 2006...

There is a long-running argument as to just what proportion of any commodity price movement can be traced to speculative activity by hedge funds and others, and what proportion to physical demand. But when the oil price swings up or down by $5 or more in a single day, you may be sure that the fluctuation is not being caused by a sheikh on one end of the line arguing with the manager of your local petrol station on the other: it is the financial parasites in between who are moving the market.

L.A. Times "Money Talk" columnist smacks renter

Liz Pulliam Weston, who writes the "Money Talk" column for the L.A. Times, gave a renter some straight talk regarding how much money to spend on rent. Although her response might seem harsh, I think she has a point regarding renters who refuse to take on roommates and so are more likely to incur debt and not be ready for financial emergencies; in fact, of the friends I have with the worst finances, they're renters who insist on living alone even if it negatively impacts their savings rates, debt levels and credit ratings.

First, the question:

I have read in your columns and elsewhere that people shouldn't spend more than 30% of their gross incomes on housing.

But sky-high rent has become a sad reality for many people living in large cities. Even in the smaller city where I live, a one-bedroom apartment costs upward of $800 a month, not including utilities. The 30% rule is no longer true for many of us. I know my rent eats 45% of my monthly income, and I was lucky enough to find a half-decent place.

Followed by her response:

If you spend more than 30% of your gross on housing, you're likely to have trouble making ends meet. You may not be able to save adequately for emergencies and retirement. You're more likely to go into debt.

Only on television can young people with entry-paying jobs live in fabulous apartments in great neighborhoods. In reality, smart twentysomethings do what's required to keep housing costs down, including living in cheaper neighborhoods and sharing space with roommates. They get over their adolescent fantasies of what city living would be like and deal with the reality of making their budgets balance.

SLAM!! In other words, "grow up." Makes me think about the time I got a roommate who secretly moved in two birds, a cat and a dog when I was out of town (before I evicted him), but at least he helped pay the rent!

Public builders report more losses, announce action plans

Fights with analysts! Poison pills! New promotions to sell homes! Yup, it's reporting season for the public builders, with an interesting wrap-up at builderonline.com:

In a move that could become common among home building companies desperate to preserve tax write-offs for their operating losses, Hovnanian Enterprises has installed a poison pill provision that would dilute the company's stock in the event that an outside entity purchased 4.9 percent or more of the company's outstanding stock...

If the U.S. government's $7,500 tax credit is intended to lure would-be first-time home buyers off the proverbial fence, Pulte Homes has a plan that will all but yank them off of it. Beginning tomorrow, Aug. 5, the company is rolling out a new sales campaign that will allow first-time buyers to double their tax benefit...

Emotions ran high today during D.R. Horton's fiscal third quarter conference call, as CEO Don Tomnitz spoke passionately to analysts about his company's performance, his feelings on the recently passed housing legislation, and management's stubborn commitment to spec building.