April 30, 2009

Zell on CRE at Milken Conference: Ranieri on Housing

Here is a discussion with Sam Zell at this week's Milken Institute Global Conference 2009. Zell weighs in on the credit markets for commercial real estate, among other CRE issues. Is credit frozen or is it just that the lenders are making prudent decisions on which loans can be repaid? Interesting video on rolling debt, over-leveraging, future deleveraging, valuation, capital markets and cap rates.



Zellism: "Bankruptcy courts do not respect loan maturities."

Lewis Ranieri on Housing

Here is another video from the Milken Conference that addresses the housing market. Lewis Ranieri, a mortgage-bond pioneer and former Salomon Brothers vice chairman, says the slump in U.S. home prices is almost over because the drop is expanding the number of potential buyers.

“I’m actually very enthusiastic about housing, and I haven’t said that in five years,” said Ranieri, who spoke on a panel at the Milken Institute Global Conference in Beverly Hills, California. “As housing prices continue to inch down within shouting distance of a bottom, affordability will simply get greater.”

Ranieri makes some excellent points, but I have a concern for the economy and housing. The record low affordability and low interest rates have yet to spur homebuying to any significant extent, although it probably will start loosening the market.

But my concern is that the housing industry will not be able to build profitably competing against the flooded existing housing market, including bank REOs. If housing construction does not resume to a healthy level to spur the economy, can the economy recover? Residential investment fell 38% in Q1 2009 and has fallen for the last 13 consecutive quarters. The lack of residential investment has been a huge drag on the economy for the last couple of years.

Where does it leave the economy if builders are unable to build new homes because the cost of construction is too high to compete with current affordability? High replacement costs will encourage a clean-up of the 12 million existing homes for sale, but the lack of new construction will hurt an economic recovery. This is the pain that is still to come.

Click below to go to the video. Tune to about 11:50 to go straight to the housing comments.



You can peruse a host videos of subjects and speakers from the Milken Conference their website.

April 29, 2009

Fannie & Freddie Remain Mired in Conflicing Directives

One innocuous government press release, so many issues...

In a press release Tuesday the Federal Housing Finance Agency (FHFA) issued a proposal to modify the 2009 housing goals for Fannie Mae and Freddie Mac. Perhaps it was this quota mindset of putting every American into a house that got us into our current credit and housing mess. Nevertheless, these goals are still on the books for Fannie and Freddie, so they have to be dealt with. And there is no way Fannie and Freddie are going to make their "numbers" this year. I have no idea what those numbers are, but get there, they're not.

First of all, FHFA is proposing that the GSEs (Government Sponsored Entities which include Fannie & Freddie) get credit toward their housing goals for loan modifications.

The FHFA is saying that it is tough as hell these days to make a loan that isn't written in red ink. As a result Fannie and Freddie are not buying enough loans to meet their goals. In their own words:

“FHFA has determined that in light of current market conditions, the 2009 housing goal and home purchase subgoal levels previously established in regulation are not feasible unless they are adjusted,” said FHFA Director James B. Lockhart. “Restrictions on the availability of private mortgage insurance for borrowers with lower down payments, a surge in refinancing, particularly by higher income borrowers, the increasingly important role of FHA in the mortgage marketplace and a slowdown in the multifamily market, among other factors, mean fewer goals-qualifying loans in 2009.”
While the GSEs are digging out from astronomical losses on the back of federal policy, they are facing directives to meet diametrically opposed goals.

It's time to rethink the purpose of the GSEs and to rephrase their mission statement to exclude reference to giving loans to people who can't afford them and to acknowledge that not every American should own a home.

As of yesterday, this is still on the books and in their press release as their political position:
"Fannie Mae and Freddie Mac, also known as government-sponsored enterprises (GSEs), were created by Congress to support mortgage lending. Their affordable housing goals require the Enterprises to focus their mortgage financing toward low- and moderate-income families, very low-income families, low-income families in low-income areas, and residents of communities underserved by mortgage credit. Families are considered as having low or moderate incomes if they make no more than the area median income, which varies by community."
Although this is still the mindset of the FHFA, the underwriting requirements and pile-on fees in no way allows room for low-income financing. Typical conundrum. But at least they finally got the concept that "A mortgage without equity is a rental with debt."

Not every house should have a mortgage and not every American should own a home, particularly on the backs of taxpayers. As a taxpayer, I'd rather subsidize rents than individual mortgages.

I rest my case ...

Absence of Residential Investment is Killing the GDP

The Commerce Department let loose the bad news today for Q1 GDP which declined 6.1%. The lack of investment activity, particularly associated with residential construction, is killing the GDP. But first things first ...

"The two-quarter contraction is the worst in more than 60 years. The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace ... The economy has fallen 2.6% over the past 4Qs, the biggest year-over-year decline since 1982." Market Watch

From the Commerce Department:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 6.1 percent in the first quarter of 2009. (Wall Street economists over estimated Q1 decline of -4.6%)

Real personal consumption expenditures increased 2.2 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth.

Real nonresidential fixed investment decreased 37.9 percent in the first quarter

Nonresidential structures decreased 44.2 percent ... Equipment and software decreased 33.8 percent ... Real residential fixed investment decreased 38.0 percent

The huge investment slump was the key story in Q1.

• All investment-related segments of the economy showed significant weakness; we surmise that lot of this weakness is credit crisis related;

• Real exports of goods and services decreased 30%;

• Residential building declined 38% — the deepest drop in the cycle so far.

• Commercial construction fell 44.2% in 1Q –the largest quarterly decline ever recorded (data goes back to the 1940s).

• Capex investment fell 33.8%, the 5th Q decline in a row, and the deepest decline to date. The Big Picture


On lack of residential investment from Calculated Risk: Click graphs to enlarge.

"Residential investment (RI) has been declining for 13 consecutive quarters, and Q1 2009 was the worst quarter (in percentage terms) of the entire bust. Residential investment declined at a 38% annual rate in Q1.


"This is important to follow because residential tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

"Residential investment (red) has been a huge drag on the economy for the last couple of years. The good news is the drag on GDP will probably be getting smaller going forward.

"Even if there is no rebound in residential investment later this year, the drag will be less because there isn't much residential investment left! The bad news is any rebound in residential investment will probably be small because of the huge overhang of existing inventory."

The good news? Ordinary people spent money. Consumption had been falling by 4 percent, but it rose last quarter by 2.2 percent, the best in two years and enough to boost GDP by 1.5 percent. And consumer confidence is up also. Click on personal consumption chart from EconompicData to enlarge.


April 28, 2009

Tracking April Housing Reports

Keep the champagne corked for now.

The housing and economic numbers do not reflect an anecdotal sense of encouragement that things are starting to look up. The thumbs-down overwhelmingly took the April reports but the data are lagging real-time.

Data reporting in April:



Two Thumbs-Up



Six Thumbs-Down






S&P Case-Shiller Home Price Index


A deceleration in the rate of decline in home prices is better news but still it's a thumbs-down from Case-Shiller. At the end of February average home prices were at similar levels to where they were in Q3 of 2003. From the peak in mid 2006, the 10-City Composite is down 31.6% and the 20-City Composite is down 30.7%.


Existing Home Sales and Inventory Slightly Down

March existing home sales slightly down, prices slightly up, and inventory very slightly down - that is for month-over-month data. Yearly comparisons were not so kind.

Existing home sales in March fell 3.0 percent month-over-month and fell 7.1 percent from March 2008. Despite the power of record level affordability and record low interest rates, homebuyers remained on the sidelines with the exception of first-time homebuyers spurred by the $8,000 tax incentive. The NAR attributed 50 percent of March existing home sales to first-time homebuyers. And REOs and short sales made up 50 percent of existing home sales in March.

Although prices rose from February to March, the national median existing home price for all housing types was $175,200, down 12.4 percent from March 2008. The price increase from February to March was 4.2 percent, which is much higher than the typical 1.8 percent seasonal increase between those two months. Distressed properties, which accounted for just over half of all transactions in March, typically are selling for 20 percent less than traditional homes.

Inventory was down slightly for the end of March falling 1.6 percent to 3.74 million existing homes, or a 9.8-month supply compared with a 9.7-month supply in February.


New Home Sales Slightly Down

New Home Sales in March were basically flat from February, down only 2,000 units. But year-over-year sales were 30.6 percent below the March 2008 estimate of 513,000.

The not-seasonally adjusted March sales of 34,000 represents the lowest number of new home sales since the Census Bureau has been keeping score in 1963. The previous low was 36,000 in 1982 when interest rates were over three times higher than current rates.

The good news is that new home inventories are decreasing. At the current sales rate this represents a decrease to a 10.7 month supply, well below the record high of 12.5 month supply in January. But the record low number of sales just emphasizes the weakness of the market. New homes compete for buyers with existing home inventory (3.74M at the end of March) which is 12 times higher than new home inventories. With sales of existing homes running to 50 percent distressed sales including foreclosed homes, it is a race for price slashing to compete. Price is the driving force in this market.


Foreclosure Activity

If you think nobody cares if you 're alive, try missing a couple of house payments.

Obviously a thumbs-down. Pent up defaults from the foreclosure moratoria contribute to the higher than expected numbers. One in every 159 U.S. housing units received a foreclosure filing during the quarter.

  • U.S. Foreclosure Activity Up 24 Percent From Q1 2008
  • March Activity Up 17 Percent From February
  • Up 46 Percent From March 2008
The March and Q1 2009 totals were the highest monthly and quarterly totals since RealtyTrac began issuing its report in January 2005 "despite a decrease in bank repossessions (REOs), which were down 13 percent from the fourth quarter of 2008 and 3 percent from February totals."

The housing market will not find firm footing for a recovery until the rate of foreclosures show a strong declining trend. Government and private banking programs should help stem the tide but the economy will have to show signs of life before foreclosures will decline significantly.


Interest Rates & Affordability

Record low interest rates are nothing but great news. Thumbs-up all the way although the low rates are yet to significantly stimulate home sales. Refinancing of existing loans accounts for the vast majority of current loan applications. While refi’s are very helpful to the economy, the Fed embarked on interest rate cuts to spur demand for home purchases.

Home prices in most of the U.S. have fallen back into line with what the typical household can afford to pay in most of the U.S., according to a new study cited by the Wall Street Journal. The quarterly report – by economists at IHS Global Insight, a research firm, and PNC Financial Services Group Inc., a banking concern based in Pittsburgh – looks at price trends in 330 metropolitan areas across the country. For the fourth quarter of 2008, covered by the new report, home prices are dubbed “fairly” valued in 202 of the 330 markets studied.


Housing Starts, Permits and Construction Activity

For builders these days, construction activity usually means little to no profit. Survival is the name of the game.

Building permits for March were 9.0 percent below the revised February rate of 564,000 and is 45.0 percent below the March 2008 estimate of 932,000.

Housing starts were 10.8 percent below the revised February estimate of 572,000 and is 48.4 percent below the March 2008 rate of 988,000.


Unemployment


Unemployment rose to 8.5% nationally in April. The following is a graph from the Bureau of Labor Statistics:




Consumer Confidence Up Beyond Expectations

The U.S. consumer confidence index jumped to 39.2 in April from 26.9 in March. The 12.3 point gain in the index was the fourth largest ever in the 32-year history of the survey. The big improvement in the numbers came in the expectations index, which surged to 49.5 in April from 30.2 in March, the biggest increase since the fall of Baghdad in the spring of 2003.

Sources: US Department of Commerce, Census Bureau, Department of Labor, National Association of Realtors, Mortgage Bankers Association, RealtyTrac, Calculated Risk, The Big Picture, Wall Street Journal, Rollins Financial, New York Times, Matrix, MarketWatch, Big Builder.

February Case-Shiller Report Sees a Deceleration in Declining Home Prices


The S&P/Case-Shiller Home Price Index is held as the gold standard for tracking housing price trends for many economists and financial analysts. And their assessment as of the end of February is that the rate of home price declines is slowing - maybe.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's.

“All 20 metro areas recorded a monthly decline in February, but 16 of the 20 metro areas saw an improvement in their monthly returns compared to January. Nine of the 20 metro areas showed improvement in their annual returns compared to their returns in January.

Furthermore, this is the first month since October 2007 where the 10- and 20-City Composites did not post a record annual decline. We will certainly need a few more months of data before we can determine if home prices are finally turning around."
At the end of February average home prices were at similar levels to where they were in Q3 of 2003. From the peak in mid 2006, the 10-City Composite is down 31.6% and the 20-City Composite is down 30.7%.


Although prices are not falling as hard, all 20 metro areas reported negative monthly and annual rates of change in average home prices in February. With expectations for larger foreclosure volume in the near term, we are unlikely to see rising home prices any time soon.

From opposite poles of the index, from peak-thru-February 2009, "Dallas has suffered the least, down 11.1% from its peak in June 2007; while Phoenix is down 50.8% from its peak in June of 2006. The rates of decline from the respective peak of each market are evidence of how much each market has given back from the gains earned in the past 10-15 years. All of the 20 metro areas are in double digit declines from their peaks, with ten of the MSA’s posting declines of greater than 30% and seven of those -- Detroit, Las Vegas, Los Angeles, Miami, Phoenix, San Francisco and San Diego -- in excess of 40%."

The indices have a base value of 100 in January 2000; thus, for example, a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the subject market. Below is a chart from the Case-Shiller report that breaks down each MSA. Click on the chart and scroll down to see a larger image.



The following is an interesting excerpt from a post on Calculated Risk regarding the Case-Shiller Index. During a speech at Seattle Pacific University yesterday, a Calculated Risk reader (Erik) asked Professor Shiller the following:

Q: Why does the FHFA (OFHEO) index show house price gains for the last two months, whereas the Case-Shiller is showing prices are still falling.

A (Erik's notes): He thought about it for a bit, and said "I haven't studied it yet", I think it is because the "OFHEO index doesn't capture foreclosures as much our index." They tend to use conventional mortgages more and conventional mortgages seem to hold out longer and as a result "there may be an upward bias to their numbers." He then paused and said, the OFHEO numbers are a bit fishy (he looked perplexed) to me because they seem to have broken the smooth trend (he gestured with his hand the trend and finished with an upward movement) and I can't quite figure out where they came from, but I suspect it is from them capturing too few foreclosures or us capturing too many (laughs) even OFHEO has said they don't know why or can't explain their own numbers from the last two months.
Seems like a clumsy answer from the guru himself. The FHFA's numbers are based only on mortgages guaranteed by Fannie Mae or Freddie Mac and therefor only account for conforming loan data. The Case-Shiller includes a more thorough product range including FHA and jumbo loan transactions. Here are the FHFA's results for February:

"U.S. home prices rose 0.7 percent on a seasonally-adjusted basis from January to February, according to the Federal Housing Finance Agency’s monthly House Price Index. January’s previously reported 1.7 percent increase was revised to a 1.0 percent increase. For the 12 months ending in February, U.S. prices fell 6.5 percent. The U.S. index is 9.5 percent below its April 2007 peak."

April 27, 2009

Las Vegas Meets Orlando in a Spanish Desert ... Maybe

Call me a skeptic, a cynic – whatever. I just can’t get my arms around plans for a new proposed project in Spain that will be the European version of Las Vegas meets Orlando, and the largest entertainment and leisure complex in Europe. All this in the midst of a global recession in a country ravaged by an enormous housing bust and unemployment topping 17.5%, the highest in Europe.

The grand title for the project is Gan Scala and the plan proposes building 32 casino-hotels, 18 theme parks and a racecourse in the Spanish countryside in the Aragon region near the town of Ontinena. Did I mention the 70,000 hotel rooms, 65,000 workers and an expected 15 million visitors a year? The mammoth undertaking is being tackled by International Leisure Development (ILD), a British concern.

All this in the midst of a staunch Catholic community overseen by the thirteenth century Church of Saint Mary that sits on a hill in the centre of Ontinena. The tiny beacon for moral guidance will likely be overshadowed by all the new glitz and glamour and money.

According to the BBC, “one survey found that more than 80% of the people who live in the region favour the scheme that would see more than 30 casino hotels, a convention centre, theme parks, golf courses, a racecourse and a dog track, constructed on an area of countryside the size of 1,500 football pitches.” That is 11 square miles.

The local support is not surprising. Ontinena is about two hours drive from Barcelona and has a population of 600. A century ago the population was 2,000 and now the area is populated by houses in ruin. The city is bordered by the Monegros Desert and farmland that is cultivated in grains.

The ILD Team:

Jaime Riera, an ILD spokesperson, says “the owners of the land are willing to sell and that finding the estimated $20bn (£14bn) to fund the scheme, even in the economic crisis, is no problem. We have never had problems regarding financing. I am so confident because you can have the land, you can have the institutional support and you can have the money, but in this case I think we have everything to make the cocktail wonderful."

I’m still not convinced. Is credit in their world free-flowing? Not from what I’ve heard. And there is no mention anywhere about infrastructure issues which has to be an enormous stumbling block to just get the project started.

The socialist regional, autonomous government of Aragon supports the project and is backing a law to approve the project, which is expected to be passed by the end of June with the support of the opposition conservatives. The government says the law would enforce all the necessary legal guarantees and environmental controls on the scheme.

The isolated region of Ontinena could indeed use some local stimulus.

Opposition to the Gran Scala scheme is coming from a collection of NIMBY organizations who say environmental impact studies have been insufficient. Amazingly enough, there is a link to the opposition on the project's website (in Spanish).

Although the project sits alongside the Monegros Desert, a region that suffers chronic drought, ILD swears the casino city will be a model for sustainable development and claims there is plenty of water.

Yeah, plenty of water in the desert, just like Dubai.

An hour away from Ontinena, in the middle of another parched Spanish plain, lies the city of Zaragoza. Last year, Zaragoza hosted the World Water Expo that was all about conserving water resources and promoting sustainable development. It is unlikely a casino city like Gran Scala is what they had in mind as a model.

The project’s website says, “Most of the 600 people in sleepy Ontiñena, however, seem delighted.” I’m sure. “ Big city lawyers have arrived, exchanging contracts for plots of land at up to 30 times market value.”

Mayor Angel Torres, says of Onitena , “All you can do there is sow cereal crops and pray for rain. Now the people see a future for their children and grandchildren.”

I’m filing this project under “What are they thinking,” right along with these other fantasy developments:

The Most Expensive Apartments in the World - $100M - An Exercise In Over-The-Top

The World's First Factory-Built High-Rise: "Stack-a-Skyscraper"

Dubai, the Dark Side: The Scariest Rich Place on the Planet

Over The Top Eco-Iconic Architecture

Go ahead guys, prove me wrong!

See the Gran Scala vision in this video:

April 26, 2009

Worthy Nods

Here are this week's Worthy Nods from the news and from around the blogs ...

The New York Times: Mortgages - A New Web Site Helps Borrowers -
FICO which developed the most widely used scores for assessing credit risk, unveiled a Web site this month — MortgageReliefOnline.com — to help homeowners with at risk mortgages. The new site walks borrowers through a questionnaire about their income, mortgage debt and home value, and asks for contact information. FICO takes that information and pairs it with data regularly received from the credit bureaus about the borrower’s credit and spending history, among other things. The company’s technology then helps determine whether the borrower qualifies for a loan modification. If so, an owner can get further assistance, free of charge, through Money Management International, a nonprofit credit-counseling organization based in Houston.

Barron's: Loans, Liars and Geniuses -
When will the credit markets thaw? It's anybody's guess. It is nearly impossible to tell with any precision whether they are beginning to thaw as a result of the Treasury and the Fed's pumping tons of greenback emissions into the financial troposphere.

New York Times: Credit Markets Still Tight, Geithner Says - Tell us something we didn't know. Geithner acknowledged that the federal programs had not cured all problems in lending.“To date, frankly, the evidence is mixed” that the federal assistance has eased the lending markets, Mr. Geithner said as he testified before the Congressional Oversight Panel, which monitors the government’s $700 billion financial bailout.

Washington Post: House Revives, Toughens '07 Mortgage Bill - A House bill that targets abusive mortgage lending has been resurrected in tougher form after stalling in the previous Congress, and lawmakers began working on it last week at an all-day House Financial Services Committee hearing. The current proposal contains many provisions that will be hotly contested by the mortgage industry, like requiring the originating lender maintain a five percent interest in the mortgages until the loans are paid off.

Main Street: Banking 101: Bank Stress Tests and You - A clear explanation of the Bank Stress Tests.

Wall Street Journal: Mind the Cap Rate - A benchmark used to value commercial real estate assets is the capitalization, or cap, rate. Cap rates reflect expected returns on property excluding debt and determines property values on the basis of rental income. Cap rates fluctuate depending on the economy and supply and demand for commercial property. During the last real-estate collapse in the early 1990s, cap rates increased to an average of more than 9%. But at the market's peak in 2007, investors were willing to accept cap rates as low as 4% on prime property, partly on the assumption that rents would keep rising. As banks conduct their stress tests, one big question is what cap rate they are using to value the properties that back their commercial-property portfolios. Analysts believe many banks also are using a 7.5% cap rate. But they warn that figure likely is too low given that this downturn is anything but median...

New York Times: Tracking Loans Through a Firm That Holds Millions - Although the average person has never heard of it, MERS — short for Mortgage Electronic Registration Systems — holds 60 million mortgages on American homes. Created by lenders seeking to save millions on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. It played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.

Barron's: Housing's Refrain: Not Getting Worse - Recently there has been an explosion of delinquent loans that have run far ahead of what lenders have foreclosed upon. Once the overdue loans turn into foreclosures, the next wave will hit the market. Until they're sold, foreclosed homes "rot away" while lenders are stuck with the cost of holding onto them.

Washington Post: Mortgage-Rate Patterns Sway Amid Changing Landscape - Historically, adjustable rate loans carried a lower starting interest rate than 30-year fixed rate loans. But the landscape has changed. The mortgage market collapsed. Investors lost their appetite for adjustable loans, which have been closely tied to soaring foreclosure rates. And the Federal Reserve adopted policies aimed at driving mortgage rates down. "The shame of it is that fewer people can qualify for these super low rates," said a financial planner in McLean. People who lack equity in their homes, cash for a down payment, or stellar credit do not qualify for the best deals.

Slate: Mitt Romney Sets the New Republican Trend - Downsizing - The Romneys began the year with four McMansions—in Massachusetts, Utah, California, and New Hampshire. Now they're making do with two.

New York Times: Auctions for Troubled Property Loans Jump to the Web - It is not a game for novices or for anyone lacking courage. But for investors with the right expertise and a serious appetite for risk, the credit crisis is shaping up as a once-in-a-lifetime chance to buy troubled real estate assets on the cheap.

Washington Post: Backlog of Foreclosed Homes Weighing on Price - A logjam of foreclosed homes, which is expected to grow significantly in the next few months, is dashing hopes of a quick housing rebound as prices continue to tumble lower. Some analysts cling to hope for early signs that sales could begin to stabilize later this year, but there is growing concern that an excessive inventory of foreclosed homes could flood the market and suppress prices well into 2010.

Business Insider:
The Housing Crisis Hits Hollywood and not even Nic Cage is Safe - Celebrities are just like us: they can’t sell their overpriced houses, either. Cage is the poster child. He listed his 11,817-square-foot spread in Bel Air for $35 million in September 2007. It now sits unsold, all nine bathrooms worth of it, for $18.7 million.

New York Times: Things to Remember the Boom By - Every boom time is remembered for its symbols of overindulgence. What will be symbols of the easy money and chest-pumping confidence that fueled the first decade of this century? Maybe the Hummer, secret bank accounts, corporate jet, ...

April 25, 2009

Mortgage Payment Insurance Protection - Sales Tool Du Jour for 2009

The Federal Housing Finance Agency reported last week that the main reason for current mortgage defaults is loss of income and unemployment. Although no data is available to verify, it is likely that fear of job loss or decrease in income is also the main reason homebuyers are sitting on the sidelines. The housing industry is turning to the insurance industry to remove the fear of unemployment from the home buying process.

Like some car manufacturers, builders, brokerages and lenders are offering insurance programs to cover monthly debt payments in the event of job loss to lure buyers to the closing table. National unemployment is expected to reach 10 percent later this year, but that still leaves 90 percent of the working population employed. Those are pretty good odds for the insurer. I’d take that to Vegas.

A once obscure, not-for-profit company located in Washington D. C., The Rainy Day Foundation, is suddenly doing a booming business in the “mortgage payment protection” business. And apparently it is big business.

The Washington Post reports that “According to its chief executive, Rick Del Sontro, Rainy Day is offering free job-loss protection coverage and home buyer financial counseling through approximately 100 builders and lenders across the country, plus two large real estate brokerages.”

Did you say F-R-E-E? Well, it’s free to the homebuyer. And it is quite a sales tool. The Post cites Rainy Day’s client list as including some very big players: “Long & Foster Real Estate is the largest independent brokerage in the country, according to industry estimates. Builder Lennar is active in 17 states including California, Florida, Arizona, the Carolinas, Illinois, and the metropolitan Washington area. Keller Williams, whose South Florida affiliate began offering coverage earlier this month, is the third-largest real estate franchise firm in the United States.”

Here's how the Rainy Day plan works: People buying homes through a participating builder, lender or real estate agency can qualify for up to six months of mortgage payments -- capped at $1,800 per month in some versions and $2,500 in others -- if they lose their job during the two years following their closing. There is no direct cost to the buyer. The insurance coverage is underwritten by Virginia Surety.
Money is not however distributed like an ATM. The grants are not offered to people who have been financially reckless nor is divorce grounds for assistance.

The Rainy Day program is called "HELP" which stands for Homeowner Education and Loan Protection. Their website explains the premise: “The program provides three main components to; keep homeowners from becoming delinquent, make homeowners current if they are delinquent and to create long-term financial stability. Buyers can also receive pre-purchase financial education and periodic post-closing check-ins by Rainy Day counselors. Purchasers may also be eligible to receive ‘emergency fund’ grants from Rainy Day if they encounter short-term financial drains such as unexpected medical bills.”

Lenders and builders pay $550 or more to Rainy Day for each participant in the program. The money funds the premiums for the basic insurance coverage as well as the emergency fund.

Although insurance coverage for mortgage payments in the event of job loss is not new, with the now quarter-century high unemployment rates, the demand for coverage has gone through the roof. It is becoming the sales tool du jour for 2009. Insurance cost starting at $550 for each participant for insurance coverage with up to $15,000 (six months times $2,500 maximum) of mortgage debt is a very attractive proposition in today’s market.

Like any insurance plan there are exclusions and the Post points out a few for the Rainy Day coverage: “There are key exclusions and coverage limits. For instance, the Rainy Day program doesn't kick in for two months after closing. Self-employed persons, independent contractors and active military members are not eligible. There's a 30-day waiting period after you lose your job before the first insurance payment is made.”

All in all, it sounds like a must-have in today’s selling environment for builders, Realtors and lenders. What more could it possibly take to get buyers moving?

April 24, 2009

New Home Sales Numbers for March a Mixed Bag


The Census Bureau reports that New Home Sales in March were basically flat from February, down only 2,000 units. The March seasonally adjusted annual rate (SAAR) of sales was 356,000, only 0.6 percent below the upwardly revised February rate of 358,000. But year-over-year sales were 30.6 percent below the March 2008 estimate of 513,000.

The median sales price of new houses sold in March 2009 was $201,400; the average sales price was $258,000.

The really good news is that the SAAR estimate of new homes for sale at the end of March was 311,000. At the current sales rate this represents a decrease to a 10.7 month supply, well below the record high of 12.5 month supply in January. The decrease in the inventory level is encouraging as new homes hopefully move to a healthy supply level of six to eight months, coinciding with replacement cycles.

The not-seasonally adjusted March sales of 34,000 represents the lowest number of new home sales since the Census Bureau has been keeping score in 1963. The previous low was 36,000 in 1982 when interest rates were over three times higher than current rates.

The report includes “new one-family houses” and does not include most condos. Areas that have concentrations of new condo inventory will have substantially higher new residential inventory levels. Most experts consider new condo and single-family builders are not competing over the same buyer. The validity of the new home sales numbers lies more in the year-over-year comparisons.

The good news is that inventory is decreasing but the record low number of sales just emphasizes the weakness of the market. New homes compete for buyers with existing home inventory (3.74M at the end of March) which is 12 times higher than new home inventories. With sales of existing homes running to 50 percent distressed sales including foreclosed homes, it is a race for price slashing to compete. Price is the driving force in this market.

Builders are bleeding less only because of overhead cuts, tax credits and reductions of inventory. If you consider average home value decreases of around 20 percent, local markets not considered, it is hardly likely that builders are making a profit off anything they’re selling. And probably won’t for some time to come. Mix that up with frozen credit for homebuilders and it is just a battle to survive.

April 23, 2009

The Foreclosure Beat Goes On for Q1

Tired of foreclosure numbers? One of these days it will be a non-story. Oh happy day. But not today, Thursday, April 23.

Here’s the latest foreclosure figures for Q1, fresh off the RealtyTrac presses. In their U.S. Foreclosure Market Report™ for Q1 2009, foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 803,489 properties. Pent up defaults from the foreclosure moratoria contribute to the higher than expected numbers. One in every 159 U.S. housing units received a foreclosure filing during the quarter.

  • U.S. Foreclosure Activity Up 24 Percent From Q1 2008
  • March Activity Up 17 Percent From February
  • Up 46 Percent From March 2008
The March and Q1 2009 totals were the highest monthly and quarterly totals since RealtyTrac began issuing its report in January 2005 "despite a decrease in bank repossessions (REOs), which were down 13 percent from the fourth quarter of 2008 and 3 percent from February totals."

“In the month of March we saw a record level of foreclosure activity — the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record. Since much of this activity was in new foreclosure actions, it suggests that many lenders and servicers were holding off on executing foreclosures due to industry moratoria and legislative delays,” said James J. Saccacio, chief executive officer of RealtyTrac. “It’s also likely that the drop in REO activity can be attributed to these processing delays, rather than to any of the foreclosure prevention programs currently in place. It’s very likely that we’ll see the number of REOs increase again now that most of the moratoria have been lifted.

“On a positive note, it appears that demand is up in some of the harder-hit areas, particularly on bank-owned REO properties that first time homebuyers and investors see as bargains,” Saccacio continued. “But it’s unlikely that this increased demand will be enough to offset the growing number of foreclosures in the pipeline, accelerated by rising unemployment rates.”
It is pretty staggering that five states account for nearly 60 percent of the nation's foreclosure activity in Q1. The hard-hit states of California, Florida, Arizona, Nevada and Illinois had 479,516 properties receiving foreclosure filings combined. And California alone accounted for nearly 29 percent of the nation’s total.

No way we can consider a bottom until the foreclosure numbers begin to stabilize. Unemployment and not subprime is the current driving factor.

Click here to see details from the press release and the state-by-state foreclosure data.

Only Slight Movement in March Existing Homes Sales Data

I'll take a few slight bumps to a train wreck anytime. March existing home sales slightly down, prices slightly up, and inventory very slightly down - that is for month-over-month data. Yearly comparisons were not so kind.

The National Association of Realtors reported today that existing home sales in March fell 3.0 percent month-over-month and fell 7.1 percent from March 2008. Despite the power of record level affordability and record low interest rates, homebuyers remained on the sidelines with the exception of first-time homebuyers spurred by the $8,000 tax incentive. The NAR attributed 50 percent of March existing home sales to first-time homebuyers. And REOs and short sales made up 50 percent of existing home sales in March.

Although prices rose from February to March, the national median existing home price2 for all housing types was $175,200, down 12.4 percent from March 2008. The price increase from February to March was 4.2 percent, which is much higher than the typical 1.8 percent seasonal increase between those two months. Distressed properties, which accounted for just over half of all transactions in March, typically are selling for 20 percent less than traditional homes.
Inventory was down slightly for the end of March falling 1.6 percent to 3.74 million existing homes, or a 9.8-month supply compared with a 9.7-month supply in February.

This chart from Calculated Risk shows non-seasonally adjusted monthly existing home sales for 2005 through 2009. Click chart to enlarge.


Tomorrow the Census Bureau reports on New Home Sales.

April 22, 2009

A Convincing Argument for Hope


The morning news was filled with reports on the death of David Kellerman, CFO of Freddie Mac. This morning I came across this article entitled "Brave New Worlds" written by Joshua Cooper Ramo, the author of "The Age of the Unthinkable." And so it seemed appropriate to share Ramo's words on evolving in the time of uncertainty and insanity. He makes a good argument to hold on for a brave new world. Here are some excerpts from his article published in Departures Magazine...



"To begin with, it's worth noting that all the insanity around us notwithstanding, there will be a moment when this age will start to make sense. That brave new world will look very different than it does now. And - though this may be the hardest thing to imagine, what with the economy in shambles and creeping anxiety about ideas we hold dear - in some ways it will look better. But it is also true that there is no book of answers we can take off the shelf, peruse quickly as if looking up a forgotten recipe, and then snap shut with a nod and the acknowledgment, Now, I understand this age. No, in an era in which the improbably has somehow become the inevitable - when the world's most solid-looking financial system tumbles into chaos in less than a year, when countries we thought pleasant turn dangerous, when our own lives seem constantly assailed by fresh risks - the old rules are frankly of very little use. Optimism and an innovative spirit matter a great deal now. Yet there will be many dark days ahead when it will be hard to get too far from that old and unnerving aphorism of Mao Zedong's: A revolution isn't a dinner party...

"It's as if we've moved from playing an already complex game of chess to some sort of endlessly changing puzzle (think ten-dimensional Sudoku). Answers that our experts insist are the best choices, answers that make sense one day - attack terrorists or bail out banks - not only fail, but appear to backfire...

"While we may be living in an age of unthinkable disruption, we're not condemned to be mere victims. Each of us can play in this game of mixing and matching ideas. Individuals have never had more power. And this means we are in a sort of race, because though it is true that 90 percent of nongovernmental organizations were created in the last ten years, it is also true that 90 percent of suicide bombings occurred in that same span. What lies ahead of us now is this sprint between forces of good and forces of bad. It is a race we are all part of, like it or not. The new global risks, from financial panic to computer viruses, hit everyone evenly. There's no hiding. But if the world's current instability is written out in your latest bank statement, it is also spelled out in the ambition of your kids to make new and faster Internet sites, of your friends to lend a hand to one another, and maybe even in your own instinct that we've arrived at a moment when you can pursue work that combines your passion for the world with something that has been aching in your soul. This urge to shape and create explains why what often seem like our greatest moments of peril sometimes turn into historic moments of reinvention. Think of how some setback in your own life simply laid a foundation for still greater success.

"Mao was right. Revolution isn't a dinner party. It is the chance for something better. It is the chance to cook up something out of our dreams, to develop new recipes that fit appetites that somehow are different than they were a year ago, to be decent on a scale we might not have imagined possible. And it's this that makes this an age of unthinkable possibility, a moment when we can ceaselessly surprise ourselves for the better. We're not being served anymore at the table of history. We're cooking for ourselves and enjoying, again, the full and dangerous and unnerving pleasure of creation."

February House Price Index Shows Slight Increase

Caveat needed for FHFA report.

U.S. MONTHLY HOUSE PRICE INDEX ESTIMATES 0.7 PERCENT PRICE INCREASE FROM JANUARY TO FEBRUARY


"U.S. home prices rose 0.7 percent on a seasonally-adjusted basis from January to February, according to the Federal Housing Finance Agency’s monthly House Price Index. January’s previously reported 1.7 percent increase was revised to a 1.0 percent increase. For the 12 months ending in February, U.S. prices fell 6.5 percent. The U.S. index is 9.5 percent below its April 2007 peak."

Before you get too euphoric about this sliver of good news, the House Price Index increase for February, month-over-month, is calculated using only purchase prices of homes backing conforming loans held by or guaranteed by Fannie Mae and Freddie Mac. The HPI does not take into account lower priced homes and higher priced homes that would be under jumbo loans. Also does not factor cash transactions. Although we'll take good news wherever it can be found, this is only a portion of the total picture. Also month-to-month numbers do not a trend make. Year-over-year HPI is more meaningful which shows a decrease.

Also the surge up in default notices is extremely concerning. More REO properties will further drive prices downward.

Click here to see supporting FHFA graphs.

April 21, 2009

FHFA's Report Card on Foreclosure Prevention

The Federal Housing Finance Agency, regulators of Fannie Mae and Freddie Mac, released a report this morning with new data detailing actions taken to prevent foreclosures under the umbrella of “Making Home Affordable” including:

  • Reasons for default,
  • Loans in bankruptcy and
  • Types of modifications.

Foreclosure action was suspended by Fannie Mae and Freddie Mac in late November and quietly recommenced on March 31, 2009. In their news release the FHFA said that foreclosures decreased by 77 percent from the prior three-month average of 16,342 to 3,711 in December, and 79 percent to 3,391 in January .

During the same three month moratorium, loans that were 60+ and 90+ days delinquent increased. The biggest jump in delinquencies for the period was for prime loans:

All loans 60+ days delinquent increased by 47 percent in December and January (from 834,831 as of November 30 to 1,229,051 as of January 31.)

Prime loans 60+ days delinquent increased by 69.6 percent while nonprime loans increased by 23 percent.

The report, based on data from the Enterprises’ 30.6 million residential mortgages, shows that during or at the end of January:

  • The top five identified reasons for default were curtailment of income (34.1 percent), excessive obligations (19.8 percent), unemployment (8.1 percent), illness of the principal mortgagor or a family member (6.5 percent) or marital difficulties (3.5 percent). This is a new metric introduced this month.
  • In January 8,953 loan modifications were completed compared to 8,688 in December and the prior 3-month average of 7,926. This represents a 3 percent increase in loan modifications by Fannie Mae and Freddie Mac from December 2008 to January 2009. Of the modifications completed, 65.2 percent required an interest rate reduction and term extension, 19.5 percent a term extension only, and 5.3 percent an interest rate reduction only. Modification types were broken out in greater detail this month.
  • Loans in bankruptcy proceedings represented 0.16 percent of all loans serviced. This is a new metric introduced this month.
  • Loans 90+ days delinquent (including those in bankruptcy and foreclosure) as a percent of all loans, increased from 1.67 percent as of October 31 to 2.14 percent as of December 31 and 2.45 percent of January 31.
  • Loans for which the foreclosure process was started as a percent of loans 60+ days delinquent declined from 6.38 percent in December to 6.12 percent in January. During 2008, foreclosure starts as a percent of 60+ days delinquent loans ranged from a low of 5.25 percent in November to a high of 9.22 percent in February 2008 and averaged 7.33 percent.
  • Loans for which a foreclosure or third party sale was completed as a percent of loans 60+ days delinquent decreased from 2.43 percent for October, 1.79 percent for November, 0.40 percent for December and 0.28 percent for January.

Link to Letter and FHFA Federal Property Managers Report No. 5 (includes monthly Foreclosure Prevention Report). (Identical letters sent to Chairmen Dodd and Frank and Ranking Members Shelby and Bachus.)

April 20, 2009

Dubai, the Dark Side: The Scariest Rich Place on the Planet

In Greek mythology it was Icarus, son of Daedalus, who equipped with wings made of feathers and attached with string and wax, attempted to escape the Minotaur’s labyrinth with his father. His father warned him not to fly too near the sun for the heat would melt the wax. Icarus, ever the adolescent, was drunken with the thrill of flying and transcending the feeling of a mere mortal, of course flew too close to the sun. The wax melted, his feathered wings feel off, and well you can guess the rest of the tragic tale.

The city of Dubai could be the incarnation of that same self-destructive adolescent drunk with confidence and the misguided belief that he could do what other mortals could not. Dubai also showed a blatant disregard for every law of nature. But the tale of the golden city in the desert is much more sinister and dark than that of Icarus, despite the bright shiny skyscrapers and Mercedes.

Dubai went too far too fast, their fault being the overwhelming desire for riches beyond measure, so when the boom busted on their shores the implosion was so fast, so drastic, it sucked the air from across the desert and shattered the illusion of the glass towers.

Now that the tide has receded in Dubai, the dead bodies can be seen by the world. Without the cover of riches, the ugly side of an ancient culture glares in the desert sun. Johann Hari writes a fascinating, in-depth article on the dark side of Dubai for The Independent, a British newspaper.


It delves into a Dubai seldom seen during the boom years, populated with slave laborers, the once wealthy living out of their Mercedes and Land Rovers and prisons populated with white-collar debt-laden expats, all under the benevolent eyes of an ambitious dictator with a beautiful smile.

The world was astonished by the audacity of Dubai’s verve. Their “build it and they will come” confidence did indeed entice the world to come build it for them. And they came from every corner of the world, to collect their piece of the astonishing wealth. Can a Mecca be carved out of the desert? Dubai was Las Vegas on steroids, all an illusion.


Many of the titans of western business were partners in the real estate boom of Dubai. This may well prove to be the worst commercial real estate disaster in the world. The word “unsustainable” cannot begin to describe the Dubai economy. The over-the-top skyscrapers that were being erected, each trying to outdo the last, were an architectural landscape of superlatives, “The Largest”, “The Tallest”, “The Greenest”. The irony now is not lost on the “greening of Dubai.” Developers were creating towers touting their self-sustaining, low carbon footprint structures at the same time they were building in an environment that is likely to become an ecological nightmare. The scenario could make a most excellent science fiction disaster movie.

Another interesting aspect to Dubai’s future is an underlying threat to the closely guarded moderate Islam ideology that may come from the fervent Muslim leaders of the other Emirates members who came to the aid of bankrupt Dubai with their version of the bail-out checks. Their more conservative reins over the city could once again change the landscape of religious toleration now enjoyed by foreigners. Party’s over?

The unbelievable seedy and sinister story of a dark Dubai is heightened by the equally unbelievable height of excess that catapulted a poor Arab village into a modern day Babylonia in three short decades. Hari’s expose is truly an extraordinary journey that I encourage you to read at leisure. It is way better than fiction.

I hope I’ve convinced you to read Hari’s entire extraordinary piece. If not I’ll tempt you with what are only a few excerpts, although it seems quite a bit of the story, it is just the tip of the proverbial iceberg in the desert…

The wide, smiling face of Sheikh Mohammed – the absolute ruler of Dubai – beams down on his creation. This man has sold Dubai to the world as the city of One Thousand and One Arabian Lights, a Shangri-La in the Middle East insulated from the dust-storms blasting across the region.

… B
ut something has flickered in Sheikh Mohammed's smile. The ubiquitous cranes have paused on the skyline, as if stuck in time. There are countless buildings half-finished, seemingly abandoned. In the swankiest new constructions – like the vast Atlantis hotel, a giant pink castle built in 1,000 days for $1.5bn on its own artificial island – where rainwater is leaking from the ceilings and the tiles are falling off the roof. This Neverland was built on the Never-Never – and now the cracks are beginning to show. … Once the manic burst of building has stopped and the whirlwind has slowed, the secrets of Dubai are slowly seeping out. This is a city built from nothing in just a few wild decades on credit and ecocide, suppression and slavery. Dubai is a living metal metaphor for the neo-liberal globalised world that may be crashing – at last – into history.

I. An Adult Disneyland

Karen Andrews can't speak. Every time she starts to tell her story, she puts her head down and crumples. She is slim and angular and has the faded radiance of the once-rich, even though her clothes are as creased as her forehead. I find her in the car park of one of Dubai's finest international hotels, where she is living, in her Range Rover. She has been sleeping here for months, thanks to the kindness of the Bangladeshi car park attendants who don't have the heart to move her on.

This is not where she thought her Dubai dream would end.
Her story comes out in stutters, over four hours. At times, her old voice – witty and warm – breaks through. Karen came here from Canada when her husband was offered a job in the senior division of a famous multinational. "When he said Dubai, I said – if you want me to wear black and quit booze, baby, you've got the wrong girl. But he asked me to give it a chance. And I loved him." All her worries melted when she touched down in Dubai in 2005.

"It was an adult Disneyland, where Sheikh Mohammed is the mouse," she says. "Life was fantastic. You had these amazing big apartments, you had a whole army of your own staff, you pay no taxes at all. It seemed like everyone was a CEO. We were partying the whole time."
Her husband, Daniel, bought two properties. "We were drunk on Dubai," she says. But for the first time in his life, he was beginning to mismanage their finances. "We're not talking huge sums, but he was getting confused. It was so unlike Daniel, I was surprised. We got into a little bit of debt." After a year, she found out why: Daniel was diagnosed with a brain tumour…

Read on…there is a "rest of the story."

… "The thing you have to understand about Dubai is – nothing is what it seems," Karen says at last. "Nothing. This isn't a city, it's a con-job. They lure you in telling you it's one thing – a modern kind of place – but beneath the surface it's a medieval dictatorship."

III. Hidden in plain view

There are three different Dubais, all swirling around each other. There are the expats, like Karen; there are the Emiratis, headed by Sheikh Mohammed; and then there is the foreign underclass who built the city, and are trapped here. They are hidden in plain view. You see them everywhere, in dirt-caked blue uniforms, being shouted at by their superiors, like a chain gang – but you are trained not to look. It is like a mantra: the Sheikh built the city. The Sheikh built the city.

Workers? What workers? … Every evening, the hundreds of thousands of young men who build Dubai are bussed fro m their sites to a vast concrete wasteland an hour out of town, where they are quarantined away. Until a few years ago they were shuttled back and forth on cattle trucks, but the expats complained this was unsightly, so now they are shunted on small metal buses that function like greenhouses in the desert heat. They sweat like sponges being slowly wrung out. … A British man who used to work on construction projects told me:

"There's a huge number of suicides in the camps and on the construction sites, but they're not reported. They're described as 'accidents'." Even then, their families aren't free: they simply inherit the debts. A Human Rights Watch study found there is a "cover-up of the true extent" of deaths from heat exhaustion, overwork and suicide, but the Indian consulate registered 971 deaths of their nationals in 2005 alone. After this figure was leaked, the consulates were told to stop counting.


V. The Dunkin' Donuts Dissidents

… Why is the state so keen to defend this system of slavery? He offers a prosaic explanation. "Most companies are owned by the government, so they oppose human rights laws because it will reduce their profit margins. It's in their interests that the workers are slaves."

… And today? Sheikh Mohammed turned Dubai into Creditopolis, a city built entirely on debt. Dubai owes 107 percent of its entire GDP. It would be bust already, if the neighbouring oil-soaked state of Abu Dhabi hadn't pulled out its chequebook. Mohammed says this will constrict freedom even further. "Now Abu Dhabi calls the tunes – and they are much more conservative and restrictive than even Dubai. Freedom here will diminish every day."

Already, new media laws have been drafted forbidding the press to report on anything that could "damage" Dubai or "its economy". Is this why the newspapers are giving away glossy supplements talking about "encouraging economic indicators"?


… Everybody here waves Islamism as the threat somewhere over the horizon, sure to swell if their advice is not followed. Today, every imam is appointed by the government, and every sermon is tightly controlled to keep it moderate. But Mohammed says anxiously: "We don't have Islamism here now, but I think that if you control people and give them no way to express anger, it could rise. People who are told to shut up all the time can just explode."

VI. Dubai Pride

There is one group in Dubai for whom the rhetoric of sudden freedom and liberation rings true – but it is the very group the government wanted to liberate least: gays.

… Beneath a famous international hotel, I clamber down into possibly the only gay club on the Saudi Arabian peninsula. I find a United Nations of tank-tops and bulging biceps, dancing to Kylie, dropping ecstasy, and partying like it's Soho. "Dubai is the best place in the Muslim world for gays!" a 25-year old Emirati with spiked hair says, his arms wrapped around his 31-year old "husband".

"We are alive. We can meet. That is more than most Arab gays."
It is illegal to be gay in Dubai, and punishable by 10 years in prison. But the locations of the latest unofficial gay clubs circulate online, and men flock there, seemingly unafraid of the police.

VII. The Lifestyle

... With the exception of her, one theme unites every expat I speak to: their joy at having staff to do the work that would clog their lives up Back Home. Everyone, it seems, has a maid. The maids used to be predominantly Filipino, but with the recession, Filipinos have been judged to be too expensive, so a nice Ethiopian servant girl is the latest fashionable accessory.

… It is an open secret that once you hire a maid, you have absolute power over her. You take her passport – everyone does; you decide when to pay her, and when – if ever – she can take a break; and you decide who she talks to. She speaks no Arabic. She cannot escape.

IX. Taking on the Desert

Dubai is not just a city living beyond its financial means; it is living beyond its ecological means. The very earth is trying to repel Dubai, to dry it up and blow it away. The new Tiger Woods Gold Course needs four million gallons of water to be pumped on to its grounds every day, or it would simply shrivel and disappear on the winds.


… Dr Mohammed Raouf, the environmental director of the Gulf Research Centre, sounds sombre as he sits in his Dubai office and warns: "This is a desert area, and we are trying to defy its environment. It is very unwise. If you take on the desert, you will lose." Sheikh Maktoum built his showcase city in a place with no useable water. None. There is no surface water, very little acquifer, and among the lowest rainfall in the world. So Dubai drinks the sea.

The Emirates' water is stripped of salt in vast desalination plants around the Gulf – making it the most expensive water on earth. It costs more than petrol to produce, and belches vast amounts of carbon dioxide into the atmosphere as it goes. It's the main reason why a resident of Dubai has the biggest average carbon footprint of any human being – more than double that of an American.


… If a recession turns into depression, Dr Raouf believes Dubai could run out of water. "At the moment, we have financial reserves that cover bringing so much water to the middle of the desert. But if we had lower revenues – if, say, the world shifts to a source of energy other than oil..." he shakes his head. "We will have a very big problem. Water is the main source of life. It would be a catastrophe. Dubai only has enough water to last us a week. There's almost no storage. We don't know what will happen if our supplies falter. It would be hard to survive."

… The water quality got worse and worse. The guests started to spot raw sewage, condoms, and used sanitary towels floating in the sea. So the hotel ordered its own water analyses from a professional company. "They told us it was full of fecal matter and bacteria 'too numerous to count'. I had to start telling guests not to go in the water, and since they'd come on a beach holiday, as you can imagine, they were pretty pissed off." She began to make angry posts on the expat discussion forums – and people began to figure out what was happening.

Dubai had expanded so fast its sewage treatment facilities couldn't keep up. The sewage disposal trucks had to queue for three or four days at the treatment plants – so instead, they were simply drilling open the manholes and dumping the untreated sewage down them, so it flowed straight to the sea.


X. Fake Plastic Trees


… I ask the Filipino girl behind the counter if she likes it here. "It's OK," she says cautiously. Really? I say. I can't stand it. She sighs with relief and says: "This is the most terrible place! I hate it! I was here for months before I realised – everything in Dubai is fake. Everything you see. The trees are fake, the workers' contracts are fake, the islands are fake, the smiles are fake – even the water is fake!"

But she is trapped, she says. She got into debt to come here, and she is stuck for three years: an old story now. "I think Dubai is like an oasis. It is an illusion, not real. You think you have seen water in the distance, but you get close and you only get a mouthful of sand."
As she says this, another customer enters. She forces her face into the broad, empty Dubai smile and says: "And how may I help you tonight, sir?"


The moral of the story? Don't fly too close to the sun and don't mess with the laws of nature.

Click here for photos from The Independent.

The Independent - Entire article - The Dark Side of Dubai

HAT TIP: The Deadly Beast