Real Estate Lessons: Timing Vs. Location

Haddow & Company is an Atlanta-based real estate research and consulting firm. In their third quarter report released this week, they make the point that timing is more important than location when it comes to a development’s success, at least long term.

Below is an excerpt from the Haddow Report that cites an example in the Atlanta area - in my stomping grounds – that illustrates perfectly the importance of timing over location. I’ve witnessed this property’s evolution for 30 years (yikes). It has enjoyed only a marginal success weighing heavily on the good faith of the single bar-crawl crowd (of which I was one for many years - long ago) in its eating and drinking establishments.

The latest reincarnation of The Prado, at the hands of Sembler, a well-respected retail developer, left me scratching my head. It’s a tri-level street scene that is hard to walk unless you are a billy goat. Anchored by Target, Publix and Staples, it sounds like a winner. Target and Staples are sitting pretty but are much unto themselves drawing traffic for just a few storefronts on the top level. They are blessed with easy parking access.

Publix however is configured in such a way to be the most inconvenient grocery store in Atlanta to get in and out of. It is also not convenient to any other part of the retail space. I shopped there once and that was enough. It remains virtually empty at any given time.

The lower level is populated by a mixture of new franchise food vendors, three long-time established eateries that have remained in their former habitat, and a new locally popular Taco Mac.

The demographics of the location obviously drew the big boxes but the site plan is painful to experience. One issue with the location is that it would seem a central and ideal position to capture hoards of traffic. In actuality it lies just to the south of the busy Atlanta perimeter highway, I-285, and is separated from the busier north side of I-285 by a limited bridge that is generally considered a nightmare to be avoided at all costs.

So the seemingly central location is in actuality the periphery bordered by a “no cross” psychological barrier. But even given that hurdle, the timing is by far the biggest enemy for the new development. Started when things were at the pinnacle of the boom, it opened at height of the bust.

This example of the Prado has been played out countless times all over the country, but Atlanta seems to have a special penchant for the boom-bust cycle. We do it very well. We gorge at the real estate feast and inevitably fall hard from over indulgence.

Now I give the floor to Haddow to describe the wild swings of the property value saga for the Prado:

The old real estate maxim, Location Location Location, is so familiar even those outside the industry take it as gospel. It’s time to dispel the myth. Location is certainly a key ingredient of any real estate venture, but a great site does not guarantee success.

Timing is far more important, and deserves at least equal recognition in a true accounting of how to profit from investing in real estate.

The point at which investment or development occurs is crucial in establishing cost basis, while disposition timing can greatly influence sale proceeds. The Prado in Sandy Springs offers a great illustration. This mixed‐use development, built in the early 1970s, was acquired by a real estate investor in 1985 for $14.5 million. A sharp downturn in the real estate market led to the property’s foreclosure and subsequent sale for $4.1 million in December, 1992. The Prado was sold for redevelopment in late 2006 at a price of $23.8 million. This enormous value increase was partly due to the property’s location, but the real cause was a dramatic change in economic and market conditions, as well as the flow of capital.

Just consider what has happened to residential land prices during the current downturn. Properties acquired at the housing market’s peak in 2005 and 2006 have nosedived in value. The locations did not change. Values inflated by easy credit and overzealous expectations are now deflated by the banking crisis, oversupply, and economic slump.

…Real estate is a cyclical business, which highlights the importance of timing. Now is a great opportunity to consider investing because the market is at or near a cyclical low. Wise acquisitions will yield terrific results if disposition decisions are properly timed.

The economy, capital markets, and supply‐demand fundamentals all play a part in determining investment returns. Location is definitely important, but it is mostly about timing.

So many lessons learned so many times over.

Shiller Speculates on Housing: Crystal Ball Is Partly Cloudy

This was an unsettling day in just about every arena. There is a lot of confusion out there, according to the blog and news chatter, in interpreting the economic smoke signals.

Consumer confidence report turned south today. Unemployment marches on although the corporate diets are resulting in some good third quarter earnings' reports.

September new home sales were reported today and weighed in far below what was anticipated with a 3.6% decrease over August. The new home sales were particularly puzzling considering the positive influence of the $8,000 tax credit on housing sales.

Case-Shiller Home Price Index showed a 1.3 increase over July although prices are still down significantly from a year ago. Seven months in 2009 have indicated positive gains in house prices and September is the third straight month of increases.

The National Association of Realtors reported a huge 9.4% increase in pending sales for September over August but some argue the data is skewed to the positive by misleading seasonally adjusted methodology. Look beyond the fluff and dust act put out by the National Association of Realtors (read here) on the existing home sales in August. Things are getting better but perhaps not as good as the NAR spins.

According to NAR data less than 10% of September sales were over $500,000. The market in September was driven by REO sales and first-time buyers employing the $8,000 tax credit. Tough times lie ahead for the high-end housing market.

There is a rear fear of "shadow inventory" that may be lurking around the corner. The following chart from the TBP tells the story (click to enlarge image):



Loan applications are down over the last two weeks.

The stock market corrected today with the DOW closing well below 10,000.

Despite all the contradictory signals, there are is still plenty of cause for optimism. Watch the following Bloomberg interview with Robert Shiller, Yale University, of Case-Shiller fame. It is an excellent discussion on the confusing nature of where the housing market goes from here. h/t TBP. Click here or on image for video.


We are quickly entering the twilight zone of real estate - November & December holiday season. Amazing, isn't it?




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Brookings Institute & Goldman Sachs Weigh in on the $8,000 Tax Credit

Goldman Sachs released a report last week on the effects of the $8,000 first-time buyer tax credit on the housing market. Below is a commentary on the report and the WSJ article, Uncle Sam Adds 5% to Prices of Homes, Goldman Says from Calculated Risk.

Note that Goldman Sachs estimates the first-time home buyer tax credit probably cost around $80,000 per additional home sold. The Brookings Institution in a recent paper estimates that the tax credit cost the government about $43,000 for each additional home sale it produces. (I think we're into semantics territory; that is a very big difference. They are obviously using different models. Either way, that is a huge, huge cost.)

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.

But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

In the research note, Phillips discussed how policies have reduced foreclosures, and stimulated demand with both the first-time home buyer tax credit and "abnormally low mortgage rates". Phillips wrote (no link):

"In 2010, we expect some of these supports to fade. Fed and Treasury purchases of mortgage-backed securities will taper off, and the pause in foreclosures created by federal mortgage modification programs may end.

The federal tax credit for first-time homebuyers appears likely to be extended for at least a few months, but probably no longer than through the first half of 2010."

Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.

The report isn't all negative. Goldman believes "the brunt of the price decline is behind us" and the outlook is uncertain: "the cloudy policy outlook adds to our already considerable uncertainty of where house prices will ultimately bottom".

RealCentralVa.com points to a WSJ article that reports on another viewpoint from the Brookings Institute:

Ted Gayer, a scholar at the liberal Brookings Institution, argued in a recent paper that the credit costs the government about $43,000 for each additional home sale it produces. That is because most of the two million or so home buyers expected to claim the credit would have bought a house anyway. Only about 350,000 were additional buyers. Expanding the credit to make all home buyers potentially eligible would swell the government’s cost per additional home sale to more than $250,000, said Mr. Gayer, co-director of economic studies at Brookings.

Case-Shiller Finds Home Prices Improving in August but still in "Less Bad" Territory

The S&P/Case-Shiller Home Price Indices were released this morning for August ’09. While not in positive mode yet, the annual average rate of decline for both the 10-City and 20-City Composites improved over July. The data show seven months of improved readings during 2009. Housing is still in the “less bad” territory but moving in a positive direction. Home prices have returned to the price level in September, 2003. From the press release:

The seasonally adjusted 20-city index in August was down 11.3% from a year earlier. By contrast, last December that index was down 18.5% from a year before. From the peak in the second quarter of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%, both seasonally adjusted. With the relative improvement of the past few months, the peak-to-date figures through August 2009 are -30.2% and -29.3%, respectively.

Below is a summary of the monthly changes city by city using the seasonally adjusted (SA) and non-seasonally adjusted (NSA) data can be found in the table below (click table to enlarge.)



Case-Shiller offered up the following chart illustrating where housing falls when compared to other asset classes. A pretty good showing. Prices have continued to decline since 2007 and are now at the same level as Sept. '03. Sorry I don't have the current returns from the REIT class. Click charts to enlarge.

Goldman Sachs: September 2008 in the Rearview Mirror

September 2008 Redux. There is much more at stake than the bonuses set to be paid over at Goldman Sachs. Follow the bread crumbs...

(Vanity Fair excerpt from Andrew Sorkin's newly released book, Too Big To Fail:

Friday, September 19, 2008 ...

Hoarse and a little haggard, Paulson made his way to the podium in the pressroom of the Treasury Building to formally announce and clarify what he had christened earlier that morning as the Troubled Asset Relief Program, soon known as TARP, a vast series of guarantees and outright purchases of "the illiquid assets that are weighing down our financial institutions and threatening our economy."

John Mack [Chairman, Morgan Stanley] had been watching CNBC on Friday morning when he received a phone call from Lloyd Blankfein [Goldman Sachs CEO]. "What do you think of becoming a bank-holding company?" Blankfein asked Mack.

Mack hadn't really studied the issue and asked, "Would that help us?"

Blankfein said that Goldman had been investigating the possibility and explained to him the benefits.

Well in the long run it would really help us." Mack said. "In the short run, however, I don't know if you can pull it off fast enough to help us."

"You have to hang on, " Blankfein urged him, clearly still anxious about how punishing the markets had become, "because I'm 30 seconds behind you."

On Sunday the Fed decided to grant Goldman and Morgan Stanley bank-holding-company status. This would put both firms under tighter Federal Banking Regulations BUT it would also allow the firms to borrow at the Fed Window and obtain funds at the same low rate as banks.

On Monday the following press release was issued by Goldman Sachs (excerpt):

Monday, September 21, 2008

New York, September 21, 2008 -- The Goldman Sachs Group, Inc. (NYSE: GS) today announced that it will become the fourth largest Bank Holding Company and will be regulated by the Federal Reserve.

In recent weeks, particularly in view of market developments, Goldman Sachs has discussed with the Federal Reserve our intention to be regulated as a Bank Holding Company. We understand that the market views oversight by the Federal Reserve and the ability to source insured bank deposits as providing a greater degree of safety and soundness. We view regulation by the Federal Reserve Board as appropriate and in the best interests of protecting and growing our franchise across our diverse range of businesses.

...While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” said Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs. “We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”

...We intend to grow our deposit base through acquisitions and organically.

From New York Magazine:

It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill.

Even Goldman alumni were struck by the company’s shameless posture in ramping up the leverage again so soon after the government bailouts. “It’s a statement of arrogance,” says one former executive.

Fast forward a year to September 30, 2009 and take a look at this breakdown of Goldman's revenue. Does it look like a bank or a hedge fund? (Double click to see a larger image.)

The following are several excerpts from Mish's Global Economic Trend Analysis that continues the story of Goldman's rise from the ashes:

Rolfe Winkler at Contingent Capital is writing Letting Goldman Roll The Dice.

Is Goldman really such an indispensable financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.

Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.

With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for the $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?

Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.

To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”. But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses.

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit..

And:

According to ABC News in October, 2008, Goldman "spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989" and their "bankers have been the country's top political campaign contributors this year." "They are almost in a class by themselves," said Sheila Krumholz, the executive director for the Center for Responsive Politics. As Michael Moore has been pointing out, Goldman was the number one source of funding for the Obama 2008 presidential campaign. The bailout of AIG -- which resulted in massive federal government monies to Goldman -- was engineered at a meeting between Paulson, Geithner and Goldman CEO Lloyd Blankfein. Last year, Goldman paid top Obama economics adviser Larry Summers $135,000 for a one-day visit to Goldman. Mish

Gary Gensler, Chairman of the Commodity Futures Trading Commission says Derivatives Bill’s Loophole May Exempt Most Firms.

Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.

“It is clearly the weakest of all the proposals I’ve seen to date,” said Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, California, in an interview before the hearing. Whalen, who has testified before Congress on derivatives regulation, is an independent bank analyst. “Frank’s committee seems to be intent on gutting any meaningful reform.”

The draft would ease trading and clearing requirements for derivatives dealers such as Morgan Stanley and Goldman Sachs Group Inc., compared with the administration’s proposal.

And what's really maddening? It's legal.

Pay the guys whatever you want. No complaints here. Just pass some regulation to level the playing field Barney. Can the playing field be leveled for investors? Are we repeating the exact same mistakes that precipitated September of '08?

Many think so.

Q-3 -- No Bottom Under Foreclosures

Nothing good in the foreclosure numbers for Q3 …

RealtyTrac released third quarter figures today for foreclosure filings on 937,840 properties, a 5 percent increase from the previous quarter and an increase of nearly 23 percent from Q3-2008.

One in every 136 U.S. housing units received a foreclosure filing during the quarter — the highest quarterly foreclosure rate since RealtyTrac began issuing its report in the first quarter of 2005.

September numbers were 4 percent less than August but 29 percent higher than September 2008. Despite fewer filings in September month-over-month, it was still the third highest monthly total since the company’s tracking began in 2005.

“REO activity increased from the previous quarter [21%] in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties.”

Nevada foreclosures are still rising at an alarming rate – Q3 was 10 percent above previous quarter and 59 percent over Q3-2008 with one in 23 housing units receiving a foreclosure filing. That is six times the national average.

“Arizona posted the nation’s second highest state foreclosure rate in the third quarter, with one in every 53 housing units receiving a foreclosure filing, and California posted the nation’s third highest state foreclosure rate, also with one in every 53 housing units receiving a foreclosure filing during the quarter.

“Other states with foreclosure rates ranking among the top 10 in the third quarter were Florida, Idaho, Utah, Georgia, Michigan, Colorado and Illinois.

“Six states account for more than 60 percent of nation’s third quarter total.

“California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the nation’s total foreclosure activity in the third quarter, with 579,541 properties receiving foreclosure filings in the six states combined. "

Research Turns Summer Housing Optimism Sour

Summer optimism from several slightly positive market indicators are being dampening by recent mortgage default research by Fitch Ratings, Zillow and Standard & Poor’s. Tomorrow, RealtyTrac reports on September foreclosure filings. But for today this national outlook for housing into 2010 is a bitter pill to swallow - all on a day the Dow hits the 10,000 mark.

Fitch Ratings paints a gloomy picture for any improvement in residential mortgage performance at least in the near-term. Fitch estimates that approximately 60% of the remaining performing borrowers from 2006-2007 originations are underwater, reducing incentive for homeowners to stick around and repay upside down debt. Combine this with other financial difficulties, like unemployment, and the likely hood of default increases substantially.

Despite several recent indicators of very slight home price increases, Fitch projects over the next year a further home price decline of approximately 10% nationally. (At least that is more positive than Meredith Whitney’s prediction of housing price declines.) They predict that the downward price pressure will come from growing foreclosures with the end of foreclosure moratoriums and the release of properties by banks that did not qualify for a loan modification, to their inevitable fate. In the meantime the number of distressed borrowers has continued to grow.

A well-read article in the Wall Street Journal this week follows the same line of research as Fitch, but with special emphasis on foreclosures rising in the top end luxury markets. From the article:

About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com. The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.

Stan Humphries, chief economist for Zillow, says, “Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.”

Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.

Not to promote a bummer pile-on, but Standard & Poor’s agrees. The following from Research Recap:

Standard & Poor’s outlook assumptions for the U.S. residential mortgage market contribute to its view of loss expectations for archetypical prime mortgage pools, which it defines in a prior criteria article, Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans (free download),” published Sept. 10, 2009.

Highlights of the outlook assumptions include:

• Standard & Poor’s loss expectation for the archetypical prime RMBS pool, and the baseline credit enhancement level it associates with a ‘B’ rating for prime RMBS, is 0.50% of the original pool balance (assumptions for prime RMBS are the starting point for analyzing the other RMBS asset categories).
• Standard & Poor’s expects continued weakness in the U.S. residential mortgage market through mid-2010, followed by a period of stabilization and a slow subsequent recovery.
• Standard & Poor’s believes that under this market scenario, the market-value decline assumptions underlying the 0.50% credit enhancement level, which it outlined in its Sept. 10 criteria article, are appropriate.
  

We believe house prices could decline an additional 10% before hitting bottom around midyear 2010, for a total peak-to-trough correction of 35%-40%. However, we base our expected-loss case on a 30% market value decline, so if we were to rate new RMBS today, the expected price decline in our analysis more than covers the potential additional decline.

Standard & Poor's Report: Criteria Structured Finance RMBS: Outlook Assumptions For The U.S. Residential Mortgage Market

Too Big to Fail??

Check out this list of the "too big to fail" and see the campaign contributions and lobbying costs by the top TARP recipients. OK now I understand why they're too big to fail. Government gets sold to the highest bidder.

From The Big Picture:

Want to know why Financial Reform has been dead in the water so far ?

“The banks run the place. I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.”

- Representative Collin C. Peterson (D- Minnesota), NYT

Wasn't Obama going to do something about lobbyists and special interest?

Is This the Time to Buy?

Is now the time to buy into the real estate market? It is probably the safest time to buy. The caveat to that statement is markets like Detroit, Miami, Las Vegas, and Phoenix where the overhang of inventory and/or unemployment form storm clouds for continued downward pressure on prices.

Is the real estate market rebounding? Rebounding is far too optimistic a description. Realistic hopes bet on stabilization.

But if all other stars are aligned buyers should take advantage of a market with historically low interest rates and low prices, two characteristics not often found in the same bed. Credit is continuing to tighten and becoming not only harder to get credit, but lenders are also requiring more cash to close. Prices are showing some hopeful signs of a price bottom. Inventory is slowly working down, especially in new construction. The next generation of new homes will not carry the same value.

So while things are not rosy, it is likely a very favorable time for buyers (and sellers operating under the same market conditions if also buying.)

Here are some thoughts and observations on the real estate market and credit availability, which while serious considerations, should not deter buyers entering the market.

"While housing is showing some signs of having reached a bottom, we need to recognize that it is a sector still on life support," Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said Tuesday, according to excerpts of his speech. "The market for housing will not become truly robust until market forces replace the prostheses of government support." Wall Street Journal

The long arm of government is currently propping up the real estate market with:

• Artificially low interest rates

• First time homebuyers tax credit (now up for renewal by new legislation)

• Mandate for loan modifications

Free market conditions that continue to press back against federal efforts and stymie the possibility of a robust rebound :

• High unemployment rate

• Tight credit getting tighter

• A decade of stagnant wages

Mortgage rates have returned to below 5% after steadily inching down through the late summer. But those low rates come with fees of around 1% of the loan amount and a 20% down payment.

“Credit standards are tight and set to get tighter in the coming months. Fannie Mae last week said that it will put in place new guidelines in place, effective Dec. 11, that raise the minimum credit score requirement to 620. Total debt-to-income levels generally won’t be able to exceed 45%.” WSJ

Concerns over the threat of inflation prompted Bernanke to announce yesterday that he will raise interest rates but not until there are clearer signs of a long-term recovery. But they will go up.

A bill recently introduced would require home buyers to put down a larger down payment on loans backed by the Federal Housing Administration. It would increase the minimum down payment on FHA from 3.5% to 5% and the bill would also eliminate the ability of buyers to finance closing costs. If passed both would increase cash requirements (on maximum leverage) by about 4 to 4.5% plus any discount points.

Pressure mounts because of the increasing default rate on FHA mortgages. An annual FHA audit is expected to show that projected reserves will fall below 2% of FHA-backed loans outstanding, a level required by Congress. With expectations for the return of Fannie and Freddie to the taxpayer buffet, the FHA could follow suit if reserves continue to fall.

According to the Wall Street Journal, the FHA said last month that it would not need taxpayer money but it could force the FHA to raise its insurance premiums. The agency is also beefing up its risk-management measures and loan quality control. FHA became the default lender of choice for liberal underwriting criteria when subprime lending met its demise.

House Republicans voiced concerns at Thursday’s hearing that the administration and Congress were relying too heavily on the FHA and exposing taxpayers to losses. But unless the Democratic leadership signs onto the bill, it’s unlikely that it would become law...

The debate over FHA lending requirements crystallizes the challenges facing Congress and the administration as it tries to wean the housing market off of federal support. Under questioning from House Republicans, Mr. Bernanke addressed the inherent tension between protecting against taxpayer risk and cutting off mortgage credit to more potential buyers.

“You could make the conditions tougher and tougher. That reduces the risk to the taxpayer, absolutely. And it reduces the number of people who can get mortgages,” he said.

Starwood Capital Steward of Corus Assets

One River Place - Atlanta Georgia

Starwood Capital Group is the big winner in the Corus sweepstakes at a cost of about $.55 on the dollar for the failed bank’s assets, most of which were condo developments. The winning bid was $2.77 billion for the assets with a face value of around $5 billion. The Starwood-led consortium’s bid was 20% higher than the other bidders.

The Wall Street Journal reports that the deal, announced Tuesday evening by the FDIC, hands Starwood and its investor partners the Corus portfolio of 112 construction loans. More than two-thirds of those loans are in default or are in foreclosure. The rest of the borrowers are left with a cloudy picture of the future in a distressed market.

“The FDIC is providing financing and taking a 60% equity stake in the Starwood partnership,” says the Journal, bringing the equity requirement to $554 million. The FDIC also committed to fund up to $1 billion over the next five years for unfunded commitments, construction overruns, and carrying costs. Starwood et al. has to pay back that debt and $1.38 billion in debt issued by the FDIC before they can collect on their investment.

The deal was structured to discourage a wholesale chop and dice of the assets in a quick sell-off to third parties. The FDIC offered up zero percent financing which will facilitate a “hold” with an orderly liquidation game plan. “Manage assets and reduce debt” as a “steward for the capital of the FDIC,” says one member of the investor group.

Most of the Corus assets were located in the largest bubble markets like Las Vegas, South Florida, California and Atlanta, where Starwood can expect no new condo deals for the foreseeable furutre. “In years three, four and five, there won't be any more new condos being built in these markets and you'll be one of the few guys with new inventory," Barry Sternlicht, founder of Starwood, said in an interview with the WSJ.

Corus had some 16 condo loans in South Florida and 10 other major Atlanta condo projects.

"Starwood is positioning itself to emerge as a major force in the world of distressed real estate. It has closed a $2 billion private-equity fund to buy distressed hotel assets and recently took a real-estate investment trust public, raising an additional $950 million that will be investing in distressed commercial real-estate loans and securities." WSJ

Chicago-based Corus was seized by federal regulators last month. The FDIC has estimated that the Corus failure will cost its insurance fund about $1.7 billion.

John Stewart on Last Year's Financial Crisis

This afternoon I caught an interview on CNBC with John Stewart, who wrote an article, published this week in The New Yorker, on the days when "Lehman Brothers went under, the Federal Reserve bailed out A.I.G., and the global financial system nearly collapsed." It sounded really interesting with some tidbits that have never seen the light of day until now. As a preface to the article, here is the CNBC chat with Stewart.

If the video does not load below, click here..

The full article online requires a subscription to The New Yorker (or just go by a copy of this week's issue off the newsstand) but you can access here a few questions and answers from Stewart on his article and how Wall Street has changed since the meltdown. Here are two questions and responses.

TNY: Do you think there’s any evidence that the people and institutions that caused this crisis have learned their lessons? Or do you think we’re running the risk of another one?

Stewart: Some of the people and institutions that caused the crisis are gone. So they’re not really in a position anymore to wreak the kind of havoc that they did before. On the other hand, the regulatory structure that led to these massive amounts of leverage and poorly understood derivative products hasn’t really changed yet. And until you have sophisticated regulators with the power to oversee all these different firms, the risks are going to be there. It may not be mortgage-backed securities—back in the late nineteen-eighties it was junk bonds, and some new financial innovation that seems great at first will soon become a vehicle for massive profits and aggressive risk-taking. And another balloon will get out of control.

....

TNY: So we were close.

Sterwart: Very close. I heard from several people on the staff of Treasury and the Fed that they believed that things were going to collapse if they didn’t have legislation. They hastily drafted TARP legislation, which is why it was only three pages, and the seven hundred billion dollars number was plucked by Paulson out of thin air. It was roughly half the size of the market for mortgage-backed securities, and a number that would impress people. Of course, it got voted down at first, and there were various market convulsions for a few days until it finally passed on October 3rd. In the period from September 20th to October 3rd, they were scared to death that things were going to fall apart, and they didn’t have the capital to stop it.

Can Congress get the job done when it comes to regulation reform? It's not looking so good at the moment, but we'll see.

It's a great read. Nobody knew what was going on at AIG.

California Lawsuits Could Set Scary Precedents

Could this happen only in California?

On September 3rd a federal lawsuit was filed in the District Court for the Central District of California on behalf of buyers who purchased homes from Beazer Homes USA, Centex Homes, D.R. Horton, Lennar, Richmond American Homes, Ryland Homes, Shea Homes, and Standard Pacific Homes at the peak of the building boom.

The complaint was that these builders created neighborhoods where high foreclosure rates caused home values to plummet, wiping out the investments of many homebuyers.

I find this pretty unbelievable. Big Builder Online reports that “all eight lawsuits are seeking to become national class action cases, representing buyers who put 20% or more down on homes in the builders' neighborhoods across the country. The cases ask for compensatory and punitive damages as well as restitution and/or disgorgement of profits.”

Big Builder Online continues:

The allegations are that the eight builders and their mortgage companies violated two portions of California's Unfair Business Practices Act, “as well as fraud, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing.”

The general accusation is that the builders knew or should have known that by selling homes to investors who would not live in them and buyers who had credit issues and put little money down, they would create communities that could lose their value if home prices failed to climb and buyers with little investment walked from their purchases.

The lawsuits claim that the builders had the responsibility to disclose to buyers that they were selling to investors and buyers with poor credit and/or were investing little in their homes.

"What we believe is that, for the people who were qualified to buy these homes and were financed by the builder themselves through their mortgage companies, there is an obligation from the builder to let them know the facts that could materially affect the value of their homes," McCune (plaintiff’s attorney) said.

The lawsuits allege that the builders' practices in recent years of controlling every step of the home buying process, through appraisals and issuing loans through their finance companies, created an environment where there was no "neutral party" who didn't have a stake in the deal. Plus, McCune said, the fact that the mortgage companies knew the details of buyers' finances bolsters the allegations that the builder companies had to know there could be problems with foreclosures and buyers walking in the future.

"They certainly had knowledge that the house of cards had to come down," McCune said...

"Our local governments are in trouble because of the shrinking tax base," said McCune. "Life savings are gone, and these national builders came and built and then left us with this big mess. I know they feel like the market has affected them badly, but it's hard for me to feel sympathetic because they played such a big part in this."

Yeah, and I’d like to sue “Wall Street” as well. This could start a real pile-on.

This will be one to watch.

What Ever Happened to Long-Term Gain?

This is a must-read from the Washington Post:

Wall Street's Mania for Short-Term Results Hurts Economy
By Steven Pearlstein

It's been a year since the onset of a financial crisis that wiped out $15 trillion of wealth from the balance sheet of American households, and more than two years since serious cracks in the financial system became apparent. Yet while the system has been stabilized and the worst of the crisis has passed, little has been done to keep another meltdown from happening.

Even the modest regulatory reform effort launched with much fanfare back in the spring is now bogged down by bureaucratic infighting and special interest lobbying. And back on Wall Street, the wise guys are up to their old tricks, suckering investors into a stock and commodity rally, posting huge profits on their trading desks and passing out Ferrari-sized bonuses. The Wall Street Journal reports they've even cranked up the old structured-finance machine, buying up claims to life insurance proceeds and packaging them into securities.

All of which makes it particularly disappointing that so little attention was paid this week to a report by a panel convened by the Aspen Institute on the "short-termism" that has now become hard-wired into the culture of Wall Street and corporate America.

This wasn't just any blue-ribbon committee. Its members include billionaire investors Lester Crown and Warren Buffett; mutual fund pioneer John Bogle; Richard Trumka, the soon-to-be new president of the AFL-CIO; present and former corporate chief executives Jim Rogers of Duke Energy, Lou Gerstner of IBM and Henry Schacht of Cummins; retired Wall Street hands John Whitehead of Goldman Sachs, Pete Peterson of the Blackstone Group and Felix Rohatyn of Lazard Freres; Marty Lipton, Ira Millstein and John Olson, the deans of the corporate bar; and respected academics such as Bill George of Harvard and Lynn Stout of UCLA....

Read the entire article here.

Read the report referenced above from the Aspen Institute: Overcoming Short-termism. It begins like this:

We believe a healthy society requires healthy and responsible companies that effectively pursue long-term goals. Yet in recent years, boards, managers, shareholders with varying agendas, and regulators, all, to one degree or another, have allowed short-term considerations to overwhelm the desirable long-term growth and sustainable profit objectives of the corporation. We believe that short-term objectives have eroded faith in corporations continuing to be the foundation of the American free enterprise system, which has been, in turn, the foundation of our economy. Restoring that faith critically requires restoring a long-term focus for boards, managers, and most particularly, shareholders—if not voluntarily, then by appropriate regulation...

A nice companion piece on the subject of needed regulation based on Goldman Sachs is The Great American Bubble Machine published by Rolling Stone in July. But I'll warn you, it's a little scary, even if you only take the top 25 percent as the truth (that's for those who think Rolling Stone is still run by a bunch of pot smoking old hippies. Ahhh, those were the days.) In striking contrast it begins like this:

The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates.

Money Market Guarantee Ends 9/19

For what it's worth ... from ZeroHedge Blog:

The Treasury's Money Market Fund guarantee program, which was among the first to be instituted in the wake of Lehman's collapse, after the Reserve Primary Fund broke the buck (for a great description of what really happened, go here) is set to expire on September 19, after an extension had been granted on March 31 to postpone the initial April 30 expiration.

As a reminder, and as all money on the sidelines proponents will remind anxious bears, there is about $3.5 trillion in cash that is currently insured by the US Treasury. And speaking of the whole sideline money theory, which has been disproven over and over by those who don't actually have an agenda to push this stock or that on CNBC, here is another perspective on the issue courtesy of today's Rosenberg notes:

"The reality is that the mountain of money is no higher or lower than it was when the market was plumbing the depths through 2008 — money market mutual funds back then were $3.5 trillion and guess what? Today they are $3.5 trillion. Go figure."

Prof. Warren's Take on Geithner's Testimony to Oversight Committee

The following video from CNBC with Professor Elizabeth Warren is well worth the time and is a good recap of Treasury Secretary Timothy Geithner's testimony before a Congressional Oversight Panel reviewing the government's financial rescue efforts. Warren, a Harvard Law Professor, is the Panel chair.

The need for regulatory reform was very high on the "must do" list, least we end up at the threshold of another crises. With the Fed's track record of being asleep at the wheel, regulatory reform with greater transparency, accountability and risk control sounds like a minimum requirement for change.

If the video does not appear below, click here.

Foreclosure Pipeline Remains Full

It’s a real stretch to garner any good news from RealtyTrac’s August 2009 U.S. Foreclosure Market Report™ released today. Foreclosures remain steady at record levels.

The report reflects that there were 358,471 foreclosure filings — default notices, scheduled auctions and bank repossessions — for August which is a decrease of less than 1 percent from July but a nearly 18 percent increase year-over-year. Same old weary story with only slight variations.

“The August report demonstrates that there is still an ample supply of properties filling the foreclosure pipeline even while the outflow of bank-owned REO properties onto the resale market is being more carefully regulated,” said James J. Saccacio, chief executive officer of RealtyTrac. “After hitting a high for the year in July, REOs dropped 13 percent in August, but we also saw a record high number of properties either entering default or being scheduled for a public foreclosure auction for the first time.”

Nevada, Florida, California post top state foreclosure rates. Six states account for more than 60 percent of national total. Top 10 states with highest foreclosure rates are Nevada, Florida, California, Arizona, Michigan, Idaho, Utah, Colorado, Georgia and Illinois.

It is somewhat discouraging to note the expectations for future foreclosures that are sure pile on ...

Treasury (read yesterday's press release) expecting more foreclosures to come from borrowers not qualified for loan modifications and the unidentified underwater borrowers (h/t Calculated Risk):

Over 570,000 trial modifications have been offered under the program. Over 360,000 trial modifications are underway.
...
[W]e recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included. Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures, as President Obama noted when he launched the program in February.

Some of these foreclosures will result from borrowers who, as investors, do not qualify for the program. Others will occur because borrowers do not respond to our outreach. Still others will be the product of borrowers who bought homes well beyond what they could afford and so would be unable to make the monthly payment even on a modified loan.

Expect continued downward price pressure . Same song, different page.

From Bloomberg: Wealthy Families Succumb to Bankruptcy as Real Estate Crashes ...

Wealthy individuals' Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.

More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Chicago bankruptcy attorney Joseph Baldi.

... Wealthier people filing for bankruptcy typically have large homes, two car payments and children in private schools, said Leslie Linfield, executive director of the Institute for Financial Literacy in Portland, Maine ...

“There are a lot of people with real estate, and they can’t afford it,” said Baldi ... “They can’t make the payments, and they can’t sell the house.”

Hoping not to appear like piling on ... also noted from Calculated Risk on the danger of resetting interest only loans. We also know the high number of ARMs that will be resetting over the next few years.

From David Streitfeld at the NY Times: The House Trap

An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

There are a several fascinating anecdotes in the article, including a professor who teaches real estate finance. Here is one:

“I understand I took a risk,” said [Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004] “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.

Click here to see individual state foreclosure data for August.

The Best of Times ... The Worst of Times

“It was the best of times, it was the worst of times …” Charles Dickens

“At the height of the Italian Renaissance, people believed they were living in an age of decline and even that the end of the world was imminent. Similarly, in the first decade of the 21st century, we believe we are living in a catastrophic time, a time of crisis – but if you compare life for the majority of people in the developed world with any other place or time, this looks like colossal self-pity.” Jonathan Jones, Guardian

There are big winners and losers loitering or littering the financial highways:

It was the best of times …

Some of the nation's largest banks could, in fact, emerge from the crisis stronger than they entered it. While they have suffered huge losses on complex financial products, and are still facing mounting loan defaults, they were stabilized with tens of billions of dollars of taxpayer money. In the second quarter, the seven largest commercial banks earned more than $14 billion, even as thousands of smaller banks were in the red.

Big lenders are currently enjoying an advantage in their "cost of funds" -- the raw material of a bank, which is in the business of borrowing cheaply and lending at a higher rate. The handful of banks with more than $10 billion in assets were paying 1.18% to borrow money in the second quarter, the FDIC said in data issued Thursday. By contrast, banks with $100 million and $1 billion in assets were paying 1.97%, a big difference in a business where tenths of a percentage point translates into millions of dollars in profits. Wall Street Journal

It was the worst of times …

For those not to big to fail, times seem particularly tough: The reality of excessive debt and falling asset prices have rendered the best efforts of the Fed impotent.

Burdened by costs associated with rising levels of troubled loans and falling asset values, FDIC-insured commercial banks and savings institutions reported an aggregate net loss of $3.7 billion in the second quarter of 2009. Increased expenses for bad loans were chiefly responsible for the industry’s loss. Insured institutions added $66.9 billion in loan-loss provisions to their reserves during the quarter, an increase of $16.5 billion (32.8 percent) compared to the second quarter of 2008. Quarterly earnings were also adversely affected by writedowns of asset-backed commercial paper, and by higher assessments for deposit insurance.

During the quarter, the number of institutions on the FDIC’s “Problem List” increased from 305 to 416, and the combined assets of “problem” institutions rose from $220.0 billion to $299.8 billion. This is the largest number of “problem” institutions since June 30, 1994, and the largest amount of assets on the list since December 31, 1993. FDIC Quarterly Banking Profile

And the biggest of big banks, Bank of America, Wells Fargo, and J.P.Morgan appear to be doing well thanks to bailouts and low costs of funds. Because those banks are regarded as "well capitalized" they pay a smaller insurance rate to the FDIC. "Regarded" is the key word. They can continue to be regarded as "well capitalized" but commercial real estate loans, credit card defaults, and pay option ARMs problems are the 800 pound gorillas in the room. Mish's Global Economic Trend Analysis

The multiple 800 pound gorillas that continue to hang around are becoming pretty darn tiresome. My purpose in these excerpts is to point up the overhanging uncertainty that continues to plague recovery.

Weekend At Bernie's Redux

The analogy to the hilarious 1989 movie, Weekend at Bernie's was obviously too much to resist. Does that sound caddy, or downright mean? It probably won't draw much criticism ... since we're talking about Bernie Madoff and his ex-beach house that is ready to hit the market.

Take a look at this Bloomberg video concerning Madoff's beach shack (estimated at $7-$10 million) and New York's Montauck's housing market in an interview with Johnathan Miller of Matrix fame. Click here to see video if it does not appear below.



The video is a presentation of the property by a gun-wielding U.S. Marshall cum real estate salesman. If you've seen the movie Weekend at Bernie's, you'll appreciate the similarity of settings, sans brilliant sunny weather.

The Loss of Mortgage-Interest Tax Deductions: Much To Do About Nothing?

In a column this week in the Washington Post, Ken Harney sets out the sinister plans of the Congressional Budget Office to disallow mortgage-interest tax deductions for a large segment of homeowners. Just when you need it the most.

Tax deductions for mortgage interest have been a mainstay benefit of homeownership that many of us have taken for granted - until now. As with many of the new rules coming out of Washington, the world as we know it is being set upon its ear.
Washington has some pretty big bills to pay these days and the Congressional Budget Office is in a cash-raising mode. How many millions in a trillion? Enter the taxpayer. Previously political “no-go zones”, like mortgage interest, may be invaded by Congress as it is forced to pay for their drunken sailor spending.

But we have to back up a moment. Is this a real cash-raising measure or is it just politics as usual? Is Congress going to come in on their white horse and save the mortgage-interest deduction for their constituents? It seems much to do about nothing. Remember the Alternative Minimum Tax that has already caught so many taxpayers who are the targets of the CBO’s dis-allowance of interest deduction? It seems as if the CBO is targeting the same group that they have already screwed with the AMT.

I’ll explain in a minute, but first here is the report on the CBO's proposal from the Washington Post:

Earlier this month, the nonpartisan Congressional Budget Office delivered its latest revenue-raising options for Senate and House consideration as they write this fall's tax and budget legislation.

Tucked away in the report are several incendiary plans that could -- if adopted -- cost homeowners billions of dollars. Though not formal legislative proposals, the CBO's options represent a handy fiscal menu from which legislators can pick and choose to reduce the deficit -- now at unprecedented levels -- or pay for new programs.

Tops on the CBO's hit list for housing: Slash deductions for homeowner mortgage interest from the current $1.1 million limit to $500,000, phased in with $100,000 annual reductions starting in 2013 and extending to 2019. Under current law, taxpayers can write off mortgage interest on their principal-home debt up to $1 million, and on home-equity debt up to $100,000.

Under the CBO's option, that maximum mortgage-debt amount would shrink annually until it hits $500,000. Over 10 years, this change alone would boost federal tax collections by an estimated $41 billion.How is this ominous sounding suggestion by the CBO much to do about nothing? Many reading this are already uncomfortably familiar with the Alternative Minimum Tax. To oversimplify a complicated matter, it is highly likely that anyone with a $500,000+ mortgage is already in the ATM tax box, rendering the mortgage-interest tax deduction a mute point.

Our Congressmen win either way this goes – and they still get their money. They win if they show their constituents and contributors they have fought to end the AMT. In that case the above proposal kicks in and snares the tax dollar. Or Congress wins by spouting their fight to prevent legislation that would disallow mortgage-interest tax deduction on the new CBO proposal. Either way, rest assured the affluent are going to pay. It’s a shell game. Nothing much changes. But it's a good PR play.

FYI: According to the CBO “Canada, Britain and Australia all have roughly similar homeownership rates as the United States, but none provides mortgage-interest tax deductions.”

Here is a very broad-brush explanation of AMT from Fairmark.com:

The AMT provides an alternative set of rules for calculating your income tax. In theory these rules determine minimum amount of tax that someone with your income should be required to pay. If you're already paying at least that much because of the "regular" income tax, you don't have to pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax. Then you compare this tax with your regular tax. If the regular tax is higher, you don't owe any AMT. But if the regular tax is lower, the difference between the two taxes is the amount of AMT you have to pay.

Example 1: Your regular income tax is $47,000. When you calculate your tax using the AMT rules, you come up with $39,000. That's lower than the regular tax, so you don't pay any AMT.

Example 2: Your regular income tax is $47,000. When you calculate your tax using the AMT rules, you come up with $58,000. You have to pay $11,000 of AMT on top of the $47,000 of regular income tax.

Other housing-related items on the CBO's revenue-raising target list:

• Get rid of all write-offs for state and local taxes, including property taxes. That would pump $343 billion into federal coffers from 2010 to 2014, and $862 billion by 2019.

• Clamp a 15 percent cap on the value of all itemized deductions -- not just mortgage interest and property taxes but also charitable contributions, medical expenses and casualty losses. The revenue windfall: $1.3 trillion over 10 years.

• Revert to the capital gains approach that prevailed before 1987. Rather than taxing most gains at 15 percent as the current code does, the CBO plan would exclude 45 percent of gains from taxation and tax the remaining 55 percent at an individual's regular tax rate. New money raised: $48 billion over the next decade.

You can read the entire CBO Budget Options (all 248 pages) by clicking here. Advance to page 173 to get to the heart of the matter.

Get your checkbook out.

Banner Year for FHA Yields Increased Risk

It looks like fiscal 2009 will be FHA’s busiest year on record with one in four mortgages made over the last year being insured by the Federal Housing Administration. That’s a 50 percent increase with a count of 2.52 million loans.

Eighty percent of the FHA mortgages made for home purchases were to first-time buyers with low down-payments starting at 3.5 percent.

With the absence of subprime lenders, the FHA's market share grew from about 3 percent in 2006 to 23 percent this year. Also driving the numbers is the increased loan limits. The loan limit for FHA increased at the beginning of the year from $362,790 to $729,750 in some high-cost areas such as New York and Washington D.C.

But as FHA insures more loans, it is also assuming more risk. Defaults and foreclosures are up over last year. Mortgages 90 days or more delinquent are up 5.57 percent over last year.

With unemployment continuing to rise, the risk of default is very real although the borrowers are more solid than those receiving subprime loans in past years. Borrowers with FHA-insured loans now have average credit scores of about 690, compared with about 630 two years ago.

FHA also has tightened lending standards, requiring a 10% down payment for those with credit scores below 500.

Source: USA Today

9.5 Ft. Wide NY Townhouse for $2.75M

Can you imagine a townhouse that is just nine and a half feet wide? And the interior only clears just over eight feet and it runs 42 feet deep. Definitely Pullman-style; it would fit quite nicely in Amsterdam.

The 990 square-foot skinny dwelling is located in the West Village area of New York City and is expected to sell near the list price of $2.75 million, or $2,777 a square foot.

To say that it is one of a kind is an understatement. The New York Daily News reports just how unique.

Built in 1873, the diminutive house is squeezed between 75 and 77 Bedford St. and has been home to a who's-who list of luminaries, including anthropologist Margaret Mead and Pulitzer Prize-winning poet Edna St. Vincent Millay.

Author Ann McGovern lived there briefly and the red-brick house inspired her to co-write the novel "Mr. Skinner's Skinny House."

Corcoran's [listing company] Web site claims that actors Cary Grant and John Barrymore also once called the thin house home.

Click here to read the entire article.

New Home Sales Continues to Rise

The news today from the Census Bureau on new home sales for July was up 9.6 percent from the revised June sales. July sales however were 13.4 percent less than the same period in 2008.

The really good news is the drop in the inventory level, which at the end of July was 271,000 homes. This represents, based on the current sales pace, a supply of 7.5 months, down from 12.4 month supply at the end of May. The inventory supply is approaching acceptable territory.

The median sales price of new houses sold in July 2009 was $210,100, down from $231,600 in June. The average sales price was $269,200 for July, down from $290,600 in June.

The new home sales numbers are based on contracts signed, not closings, so a push at the near end of the tax break for first time homebuyers probably had some effect on the numbers.

CNBC reported that there was an increase in July of 33 percent for houses yet to be built and a decrease of 6 percent in the number of sales of spec inventory. This is probably because builders are focusing on new builds because their margins are better and the product smaller and less expensive, better meeting current market demands.

Calculated Risk predicted that there would be two housing bottoms, one for sales and one for prices. That is being born out in a bottom for the number of sales, which now has several months’ backing. Except for the Case-Shiller Home Price Index, most real estate data shows a slowing, but still decreasing values.

The lack of activity in the $250+ price range is mainly due to the lack of move-up buyers to start the sales chain. Unemployment and foreclosures bear heavily on all market segment and drives the average prices south.

Here in Atlanta, the local data collector and numbers' cruncher for new construction is expecting a positive year-over-year increase in closings for single-family for July ... IF SINGLE-FAMILY ATTACHED IS EXCLUDED. Yes, we're anxious for some good news.

Unexpected Good News From June Case-Shiller Home Price Index

It's after 5:00, at least on the east coast, and I'm as ready as anybody else for some good news. The source of relief? The usual bad news bears at Case-Shiller actually had a pretty good June National 20-City Home Price Index report today, at least month-over-month. That's good enough for me. I'm heading for the champagne bottle.

The index rose 1.4% month-over-month, the 2nd month in a row of M-O-M gains.

Even though there remains a year-over-year home price decline of 14.9 percent, it's a substantially better comparison than the record decline of 19.1 percent in Q1 Y-O-Y.

Need more to dust off the good bottle of champagne? Sales of new and existing homes rose for three consecutive months through June. Housing starts were up in June, and an index of builder sentiment rose in July, though both remained at low levels.

Take a look at this beautiful graph from Calculated Risk showing the 20- city price comparison for the last three years:


But just to keep the bubbles under control, here is a comment from a Wall Street Journal article on today's housing news:

The latest readings don't necessarily herald a full-blown recovery for the housing market or broader economy. Consumer confidence remains near record lows. The U.S. unemployment rate, at 9.5% in June, is expected to hit double digits before year end, making swift growth and an expanding labor force unlikely anytime soon.

I have to stop now. Not only do I need to chill the champagne (wasn't expecting the Case-Shiller good news) but I also have to turn off the TV where Cramer is in an absolute rant about his call of a June 30 housing market bottom. Idiot.

"After hell, purgatory isn’t so bad.”

Insanity Invades the Stock Market - Fannie Mae Stock Run-Up Defies Logic

Thank you Washington Post for doing a piece today on the puzzling phenomena of Fannie Mae and Freddie Mac shares trading up almost 50 percent yesterday. I am not an expert on the stock market, far from it. But I don’t trust a market where a company is losing money so fast the Hoover dam couldn’t withhold the red ink and yet their stocks are being bought like it was water in the desert.

In addition home builder stocks and airline stocks were hot trades. Massive losses. Such an upside down market is not for me. Something is wrong.

On Monday, Fannie Mae jumped 41.7 percent, to $1.70 per share, with nearly 824 million shares bought or sold during regular trading hours. Freddie Mac rose 18.5 percent, to $2.05 per share, with almost 384 million shares trading hands. Activity in the two companies' stocks accounted for nearly a fifth of trading on the New York Stock Exchange on Monday, when 6.3 billion shares were bought and sold.

Now for a spot of perspective, Fannie and Freddie owe the government nearly $100 billion, “must pay massive dividends each year to the U.S. Treasury” and are looking at a future which, at least in my lifetime, doesn’t have a chance to turn a profit.

There was no news involving either company that could have explained the moves.

The government took a nearly 80 percent stake in each company, but left the stock outstanding. The shares of each settled below $1, and the New York Stock Exchange warned the firms that they'd be removed from the exchange if their stock did not rise above that threshold.

Still, most analysts say that because the companies owe the government far more than they are able to generate in profits, the real value of the shares is zero. Analysts said much of the trading volume has come from retail investors and day traders.

"This is a bullish market mode, and people are scouring big-time stocks that are trading at very low levels," he said.

The trading in Fannie Mae and Freddie Mac was reminiscent of unusual shifts in the stocks of other companies that have received government bailouts. American International Group jumped 63 percent on one day this month despite the fact that it is being sold in pieces to pay back the government. Shares of the old General Motors continue to be heavily traded since the automaker's bankruptcy filing in June, even though the stock represents the debt and old factories left after GM's restructuring and not the reorganized company, which has yet to issue new stock.Washington Post

Insanity. But what do I know. I thought you needed profits to make money. I guess AIG proved that wrong.

Bank Holding Companies Ranked by Commercial Real Estate Loans

In a new analysis, Moody’s explains why commercial real estate loans held by banks could be riskier than both mortgage securities backed by CRE or CRE loans made by life insurance companies. It’s all in the timing.

Commercial mortgage backed securities and life insurance CRE loans usually carry a 10-year term. CRE loans made by banks are generally only for five years. Most of the bank CRE loans would have been made during the peak bubble years and are likely to come due before a recovery in the commercial real estate markets. Therein lies the angst about an anticipated tsunami.

With few opportunities available for refinancing the mature loans, the future looks bleak. Take a look at bank exposure in the rankings below or click here for the list of 150 Bank Holding Companies Ranked by Commercial Real Estate Loans.

ResearchRecap provided the following excerpts from Moody’s report. Alternatively, you can purchase the entire analysis for $550 by clicking here.

Given where we are in the economic cycle, it is important to point out that there is a marked difference in performance by loan vintage and term. For example, CMBS loans are typically ten year loans, and the current lower delinquency rates encompass performance of those loans originated as early as 2000. These early vintage loans have seasoned and benefit from cash flow and value appreciation over the years.

Thus, CMBS loans originated earlier in the cycle are likely to help offset higher delinquencies from more recent vintage originations. A similar situation exists for life insurance companies as they hold loans with longer maturities. Bank loans tend to have maturities of five years or less. As a result, bank loan portfolios exhibit greater concentration in years representing the peak of the real estate cycle. They lack seasoned loans on their books to offset the higher delinquency rates expected from this time period.

Bank loans have an additional burden over CMBS at refinance due to their shorter remaining term. The economic downturn is just beginning to have a negative impact on real estate loan performance. As a lagging sector, real estate delinquencies are expected to rise over the next two years. For a bank loan with less than five years remaining, the potential to refinance in a more robust economic period is lower than for a comparable CMBS or life insurance company loan, with more than five years remaining.

A higher level of refinance risk for bank loans should contribute to higher delinquency rates over time.

Click on listing for a larger view of the partial list of bank rankings by commercial real estate:

Ripping the NAR

Ripping the National Association of Realtors should be a national sport. But where's the sport? It's just so EASY to tear down their smokin' mirror rhetoric; it's like shooting fish in a barrel.

Barry Ritholtz of the The Big Picture, and the author of Bailout Nation, did a number on the NAR in a post today about the spin put on the July Existing Home Sales report. As you know the data showed a 7.2 percent increase month-over-month. True enough. but Lawrence Yun, the NAR chief economist, presented this as a resounding, thrilling moment in the annals of real estate history. The news was far better than a stick in the eye, but the panacea for the market, it isn't.

Although I think Ritholtz goes a bit too far , he makes many, many excellent points in analyzing the data. Here's an excerpt, but take the time to read the entire piece.

The latest housing consensus as sung in three part harmony amongst the media and green shoots crowd. Their song goes something like this:

1) The worst of the housing trouble is now behind us;
2) Only recently, Housing was “Getting worse more slowly;”
3) That has transitioned to “Housing is getting better.”

I don’t believe it. IMO, all 3 are misleading or outright wrong. This post explains why...

A close look at the data reveals this to be a false premise. If you only read the NAR spin, its easy to fall into their web of happy talk. (We’ve said it so many times, it still bears repeating: The National Association of Realtors are a highly misleading news source. Look past what they say to the actual numbers if you seek economic truth).

In the past, I have gone so far as to imply the Realtors group are spinmeisters. This month, I will be more blunt: Their actual data has become untrustworthy, their spokesmen lie for a living, and their “news releases” is little more than misleading junk.

Investors who rely on the NAR version of the news do so at their own great financial peril.

With that intro, lets dig intot he actual data to show why the real estate trade group happy talk is misleading bunk. IF YOU ARE INTERESTED IN HOUSING, then you need to thoroughly fisk the NAR data, put it into context, and strip the lipstick off the pig...

Read the comments as well.

I just received an invoice for my membership into the NAR. The sad news is I'll pay it sans the large contribution for the NAR Political Action Committee.

7% Surge in Existing Home Sales a Mixed Bag

Same old story – good news…bad news. How I long for the days when any real estate news was good by default.

The National Association of Realtors released today the existing home sales numbers for July. The good news is that existing home sales rose for the fourth straight month in a row, something that hasn’t happened in two years.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.2 percent to a seasonally adjusted annual rate1 of 5.24 million units in July from a level of 4.89 million in June, and are 5.0 percent above the 4.99 million-unit pace in July 2008. The last time sales rose for four consecutive months was in June 2004, and the last time sales were higher than a year earlier was November 2005.

The bad news is the growth in sales was only on the very low end spurred by the federal tax credit for first time homebuyers and falling prices on distressed sales. See the following breakdown (birddogged by CNBC) that demonstrates the extreme pressure on housing above $250,000.

Total housing inventory remained basically unchanged at a 9.4 month supply (4.09 million existing homes) as more houses were brought to market offset by the gain in sales. Raw inventory totals are 10.6 percent lower than a year ago when the number of unsold homes was at a record.

Regional breakdown:

• Northeast sales rose 13.4 percent month-over-month and are 3.3 percent higher than July 2008. The median price was $236,700, down 15.0 percent from a year ago.
• Existing-home sales in the Midwest jumped 10.9 percent in July and are 8.0 percent above a year ago. The median price in the Midwest was $157,200, which is 5.9 percent less than July 2008.
• In the South, existing-home sales rose 7.1 percent in July and are 5.4 percent higher than July 2008. The median price in the South was $164,500, down 7.1 percent from a year ago.
• Sales in the West slipped 1.7 percent in July, but are 1.8 percent above a year ago. The median price in the West was $202,300, which is 28.0 percent below July 2008

We'll only find a bottom when foreclosures abate and prices stop falling.

MBA: Foreclosures to Peak by End of 2010

Indicators for months have pointed to prime loans as the next shoe to drop in the foreclosure free fall. The Mortgage Bankers Association is confirming the bad news in prime fixed-rate mortgages in their Q2 2009 Delinquency Survey.

Based on MBA records dating back to 1972, the delinquency rate breaks the record high set last quarter.

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

And from a statement on foreclosures by Jay Brinkmann, MBA's Chief Economist:

“While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans. The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts. A year ago they accounted for one in five....”

While prime fixed-rate loans showed the biggest increase in delinquencies, they are only a small percentage compared to subprime delinquencies. Prime fixed-rates make up 65.5 percent of all US loans outstanding, but only 32.4% of all new foreclosures. But with so much of the mortgage market made up of prime fixed rate loans, the increase is a disturbing trend.

Ominous rumblings resound in the report. Of the top twenty states with the biggest increases in Foreclosure Starts Rate, ten states are newcomers to the high rankings. In other words, the default net is expanding into heretofore lesser effected markets. The new big losers? Washington, Maryland, North Carolina, New York, Idaho and Hawaii.

MBA’s Brinkmann does not expect delinquencies to peak until mid-2010 and foreclosures to peak at the end of 2010.

The good news, if it can be called such, is that half of all negative equity (and therefore delinquency potential) in the U.S. is concentrated in three states - Florida, Arizona and Nevada.

Increasing foreclosures and unemployment prevents any realistic expectation of a housing bottom. Beware also of the second wave of subprime ARM loans that will be resetting to unsustainable rates over the next few years.

How many shoes can one market drop?

How Big is Social Media?

If you are still trying to get your arms around Social Media, you might want to take a look at this video - and try a little harder.

The video will at least give you the breadth of the subject in a fast paced statement that goes something like this ... "If you don't get this, you're missing out."

Case in point, on Saturday this video had 1,700 hits. By Wednesday afternoon there had been 122,388 hits.

Welcome to the World of Socialnomics...



If the video does not appear above, click here.

Thanks LB!

Where in the Hell is Matt?

Totally off subject today ...

I don't have any idea who Matt is, but I'll tell you he can't dance worth a damn and is fabulous anyway.

Matt says, "14 months in the making, 42 countries, and a cast of thousands. Thanks to everyone who danced with me."




Click here if video doesn't appear.

Insider Survey - Real Estate Agents Respond to Housing Market

Inside Mortgage Finance sponsored an informal nationwide survey of 1,556 real-estate agents in June. The anecdotal responses, while not surprising, are still interesting.

• The low end of the market - driven by foreclosures, first-time buyers, and investors - cranking. Prices are low, but velocity is high.
• The high end of the market is dead. Sellers are still in price denial, existing homeowners aren't trading up, and there are fewer foreclosures and forced sales at the high end - at least for now.
• For those who already own houses, "affordability" is not a particularly meaningful measure of housing-market health.
  

Here are some more highlights:

• The market for home purchases (listings) can be divided into segments of 26% for damaged REO (bank-owned properties, not move-in condition), 23% for move-in ready REO, 14% for short sales, and 36% for non-distressed properties.
• Forty-three percent of homebuyers are first-time homebuyers, 29% are current homeowners, and another 29% are investors.
• First-time homebuyers account for the majority of move-in ready REO sales while investors account for the majority of damaged REO sales.
• Real estate agents expect appraisal issues to be the No. 1 reason for cancellations of signed Purchase and Sales agreements over the coming summer months.
• Only 31% of non-REO home sale listings are unforced or optional; other major reasons for listings include financial stress (including short sales), long distance relocation, and divorce or estate sales.
• Homeowners are choosing to not list homes primarily because of “falling prices”, followed by “competition with distressed properties”.
• For first-time homebuyers, “Government incentives to buy (tax credits, mortgage deduction)” is the No.1 motivation to buy.
• For current homeowners buying homes, “Retirement relocation” and “job relocation” are the No.1 and No. 2 motivations to buy, respectively.
• “Sale of residence” is the No. 1 impediment to current homeowners seeking to buy another home.
• “Downpayment for mortgage” is the No. 1 impediment to first-time homebuyers seeking to buy a home, followed by “Slow answers on short sale offers.”
• On average, mortgage servicers take 9.5 weeks to provide a “yes” or “no” response to an offer to buy a short sale property.
• According to real estate agent respondents, “Mandated one-week response time on short sales offers” is the No. 1 rated action that the government could take to increase home sales and stabilize prices.
• According to real estate agent respondents, “Provide consistent one-week ‘yes’ or ‘no’ response to offers” is the No. 1 rated action that the mortgage servicers could take to increase short sales.
• According to real estate agent respondents, “Provide consistent one-week ‘yes’ or ‘no’ response to offers” is the No. 2 rated action that the asset managers could take to sell REO properties with lower overall losses; the No. 1 rated action is “Turn on utilities for inspections.”

Click here to see the report in its entirety.

New Record Set for July Foreclosures - Yet Again

U.S. Foreclosure Activity Up 32 Percent from July 2008

RealtyTrac® today released its July 2009 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 360,149 U.S. properties during the month, an increase of nearly 7 percent from the previous month and an increase of 32 percent from July 2008. The report also shows that one in every 355 U.S. housing units received a foreclosure filing in July.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

...the deep reservoir of distressed loans kept spilling over any and all attempts to dam up foreclosures...


Four states account for more than half of total foreclosure activity ...
The top four state foreclosure activity totals in July were reported by California, with 108,104 properties receiving a foreclosure filing; Florida, with 56,486 properties receiving a foreclosure filing; Arizona, with 19,694 properties receiving a foreclosure filing; and Nevada, with 19,535 properties receiving a foreclosure filing. Together these four states accounted for nearly 57 percent of the nation’s total foreclosure activity.

• For the 31st consecutive month Nevada documented the nation’s highest state foreclosure rate, with one in every 56 housing units receiving a foreclosure filing in July — more than six times the national average. Nevada’s foreclosure rate rose despite a new law requiring lenders to offer mediation to homeowners facing foreclosure at the front end of the foreclosure process.
• Initial defaults (NOD) in California spiked 15 percent from the previous month, and the state registered the nation’s second highest state foreclosure rate for the third month in a row. One in every 123 California housing units received a foreclosure filing in July, nearly three times the national average.
• One in every 135 Arizona housing units received a foreclosure filing in July, the nation’s third highest state foreclosure rate and more than 2.5 times the national average.
• Other states with foreclosure rates ranking among the nation’s 10 highest were Florida, Utah, Idaho, Georgia, Illinois, Colorado and Oregon.
  

Click here for state foreclosure data.

Hitting Bottom? Analysis of Rents and the Price of Housing in 100 Metropolitan Areas

“All real estate is local” is borne out by a new study by the Center for Economic and Policy Research and the National Low Income Housing Coalition. The report addresses two housing issues across 100 U.S. markets: the home price-to-rent relationship in certain housing markets, and the likelihood that homeowners in today’s market will gain equity in the next five years.

With home prices falling (according to the Federal Housing Finance Agency’s House Price Index, prices have declined in 79 of the 100 metropolitan areas studied), homeownership is becoming more affordable as compared to rents in most housing markets. But how long will it take for new buyers to regain equity territory?

The report estimates that homes purchased today in 21 markets won’t have positive home equity by 2013.

Click on the map to enlarge:

Considering the income producing economic model, a home’s sale price is derived from the rents it can generate, home prices in the United States have moved more in line with rental prices.
Beginning in 1995, however, this seemingly stable relationship between home prices, rents, and inflation radically diverged from the historical trend. Home prices shot up while rents continued to move in line with inflation. Where the ratio of median sales price to median annual rent had hovered close to 15 to 1 in recent decades (i.e. it took $150,000 to buy a house that would rent for roughly $10,000 per year) at the peak of the bubble in 2007, it went above 25 to 1 in many inflated markets.

This analysis indicates that in a growing number of metropolitan housing markets, the costs of homeownership are falling back into their historical relationship with rents. As this occurs, it seems likely that housing values have or will soon reach bottom and stabilize. This analysis also illustrates, however, that in order to expect this market stabilization to occur and to be able to achieve increases in affordability (a potential upside from a declining real estate market), the broader economy must also recover. In essence, we should be wary of a false bottom to the housing market and with this in mind, not wait to see if a reversal in home prices is sufficient to pull up the rest of the economy.

Since prices appear to be bottoming out, the most sustainable housing market recovery will come from making certain the floor under prices does not falter. This is done most directly by stimulating demand for housing through increasing employment and incomes. This will lead to the creation of new households and the reformation of independent households to absorb excess housing, be it for rental or ownership. At this point in the downturn, trying to stimulate the economy by incentivizing existing home purchases through homebuyers’ tax credits is at best putting the cart before the horse and at worst rearranging the deck chairs on the Titanic, to use the clichés.

In many communities, existing homeowners will continue to be underwater, owing more on their home than it is worth, for some time to come. Negative equity and high loan-to-value ratios in general are logically and empirically the best predictor of foreclosures we have. While in some instances this may be corrected by existing refinancing efforts, given the lack of success thus far, the size of the problem, and the potential for stagnation or even further decline in the economy, coupled with the fact that many markets clearly remain inflated, policies should be enacted that emphasize the avoidance of displacement as well as foreclosure.

What is the conclusion of the report?

When foreclosure cannot be avoided, homeowners should be given an option to remain in their homes as tenants at a fair market rent, for a substantial period of time (e.g. five to ten years) to preserve community continuity and stability, as well as minimize the disruption to the market caused by vacant and abandoned buildings. The Right to Rent would provide homeowners facing foreclosures in hard-hit areas an important degree of housing security and stability in the neighborhoods as a whole.

Policy makers must also find ways to transition households with few options in the private market into permanent affordable rental housing, including additional housing vouchers. Not only will new affordable rental options be necessary to ease the burden of households caught in foreclosure and the recession, but even if housing markets stabilize and the economy broadly improves, rising property prices and rents will be part of any such recovery. In this regard, the bottom of the crash is likely a good time to lock in affordable prices and establish long-term affordability to address the long-term affordable housing crisis that has only been exacerbated by the most recent boom and bust cycle.With state and local coffers empty, the National Housing Trust Fund should be funded to enable the purchase and preservation of affordable housing for those who will continue to need this assistance even after a recovery such as the elderly, the disabled, and low wage workers. This is also the sort of investment that will provide jobs and absorb excess housing, further accelerating the recovery.

Click here to see the report in its entirety with comparisons of the 100 housing markets.

Tip: WSJ

Home Builders - Will Work for Food (when working for money doesn't pan out)

Contracts up for new home sales but revenue for home builders is down. Seeking a bottom to falling prices ...

Toll Brothers Inc. said Wednesday fiscal third-quarter home-building revenue fell 42% as the housing market continued to sag.

In a prepared statement, the builder of luxury homes said home-building revenue for the three months ended July 31 fell to $461.3 million* from $796.7 million a year earlier.

Net signed contracts rose to 837 units from 812 units. In dollar terms however, net signed contracts fell to $447.7 million from $469.9 million.

"The increase in net contracts was generated despite our having approximately 22% fewer selling communities during FY 2009's third quarter than during FY 2008's third quarter: On a per community basis, our net contracts were up approximately 32%.

"Many markets feel better than they did six months ago. The consumer interest we saw in April and May leveled off a bit from mid-June through mid-July, but has regained momentum more recently. As the supply of unsold housing inventory shrinks nationwide and, if consumer confidence continues to improve, we should see stronger demand: It has already positively impacted our pricing power as we are reducing incentives in many markets."

Robert Toll, Chairman and CEO of Toll Brothers, puts a smiley face on the market in the company’s statement: “Although our industry continues to face significant challenges, we are encouraged by the increase in the number of net contracts signed this quarter."

The company had said in June that cancellations appeared to be leveling off, adding that the improving stock market and increased availability of mortgages for larger homes gave the company reason to be cautiously optimistic about the future.

The company's backlog at the end of the third quarter was about 1,626 units, down 37% from a year earlier. In dollar terms it fell 47% to $930.7 million.

*The company also said it estimates pretax write-downs related to operating communities, land and land options, and joint ventures in the third quarter to be between $90 million and $160 million. Included in the impairments are significant write-downs on certain land parcels targeted for disposition, it said.

Update 2:43 P.M. - CNBC is full of news of surging home builder stocks on the wings of Toll Brothers' increase in orders. Traders. Call me crazy but where is the profit potential if revenues fell 42 percent year-over-year with a 3 percent increase in contracts. BTW, the adjusted closed price in August '08 was $24.88. It is now trading at $23.41. Yesterday the adjusted closed price was $20.48. Nothing to do with profits.

Trend to "Jewel Box" Houses - Smaller and Smarter

Martha Stewart/KB Homes "Jewel Box"

Will the recession finally put to rest what Smart Growth advocates have failed to squash? That is, of course, the McMansion.

With the economy in full retreat and jumbo loans in hiding, downsizing is the call of the day. But sooner or later, this too shall pass. Since when have Americans shown a willingness to live frugally in times of prosperity? When a strong economy returns, and it will, homeowners may begin to once again seek more of everything. Larger houses, more privacy, more comfort, more luxury.

Call me a cynic if you must, but plenty of money in the pocket has a way of altering even the best of fiscally conservative principals.

But for now, the bigger-the-better houses are suffering from fewer buyers. Is it because nobody wants them, or nobody can afford them? Or is it that they are just out of vogue at the moment? Along with Hummers and mega yachts.

In the meantime, “jewel box houses” are the new buzz - a trend that doesn’t bear price-per-square-foot comparisons. The National Association of Home Builders published in their August Building News, the following "jewe box" trends from the Orlando Sentinel.

The current recession, the downturn in the housing market and the emphasis on energy-efficiency all are playing into the “jewel box house” trend in which small homes are designed with top-quality materials, upscale detailing and custom built-ins.

Tailored to the owners’ way of life, smaller houses suit a variety of demographic groups — including newlyweds, young professionals, empty-nesters and retirees.

Huge houses with hotel-scale foyers, formal dining and living rooms and vast master suites with spa-style bathrooms are out of sync with the informal way Americans live today, says architect Sarah Susanka, author of “The Not So Big House.”

In most houses, the kitchen is the heart, the place where family and friends gather. Americans take quick showers, they don’t luxuriate in soaking tubs. Not surprisingly, the home-furnishings industry is attuned to the downsizing trend, says Jackie Hirschhaut, vice president of marketing at the American Home Furnishings Alliance.

Increasingly, manufacturers are making furniture that is smaller and more multipurpose: love seats instead of sofas, expandable dining tables, home-office armoires with fold-down work stations and compact corner units for big-screen TVs.

Banks Turning to Receivers for Defaulting Properties

With banks amassing more foreclosed properties, both residential and commercial, many are turning toward receivers to cushion the pain of management through liquidation. By moving distressed properties to the custodial hands of receivers, banks can bypass foreclosure and avoid taking title to these collateralized assets by court direction.

With foreclosed properties, banks are thrown into the real estate management business, a direct antithesis to their business model of loaning money. While holding defaulted properties before liquidation, banks are liable for everything associated with the property including code violations, taxes, and liability. That explains why one bank in Victorville, CA chose to bulldoze unsold homes. Receivership is a way to offset that liability.



Without a hands-on manager, abandoned properties can be stripped of anything valuable one day and become a meth lab the next.

Many banks are asking courts to appoint receivers for developments especially in the bubble hotspots like California, Arizona, and Florida. Business is booming for receivers. The Wall Street Journal reports that California Receivers Forum, a trade association, has seen its membership increase to 550 today from 300 in 2007.

But receivers are expensive. “Spokesmen for Citigroup Inc. and GMAC LLC said they don't use receiverships often because of the expense,” reports the WSJ. “But Wells Fargo & Co. and Bank of America Corp. are giving lots of new work to receivers, according to industry participants. Wells Fargo declined to make anyone available for comment, but a Bank of America spokeswoman said the bank uses receivership because it is efficient and avoids disputes among multiple creditors.”

Last week I posted a piece on the liquidation of properties under the WL Homes’ Chapter 7 bankruptcy. The Wall Street Journal reports further on the receivership process for those properties at the behest of creditor, Bank of America.

The bankruptcy of WL Homes LLC exemplifies the trend. The company, parent of John Laing Homes, was one of the West Coast's biggest home builders during the real-estate boom. But after its Dubai-based owner, Emaar Properties PJSC, cut off funding, it filed for Chapter 11 bankruptcy-court protection in February, then Chapter 7 liquidation in June.

After the bankruptcy, Bank of America found itself with collateral comprising 31 separate assets in 19 locations across California, Arizona and Colorado from one $130 million loan. The properties ranged from raw land to partially completed developments to half-filled condominium buildings, meaning the bank would have to deal with everything from hiring contractors to wrangling with upset and cash-strapped homeowners' associations if it foreclosed.

And by taking the title on the building, Bank of America could be liable for any construction defects for a decade in California or for any injuries on unsecured construction sites.

Rather than deal with the litany of issues, Bank of America turned to Taylor B. Grant, a veteran real-estate receiver based in Newport Beach, Calif.

Since his June 10 appointment, Mr. Grant has visited the properties and hired asset managers, and is deciding how to dispose of the holdings.

He also will begin deciding whether he can get a better value from hiring contractors to finish partially completed homes or from tearing them down and selling vacant lots. After that, he will be able to sell the properties and distribute proceeds proportionally among creditors.