Chapter Adverse for Massachusetts Affordable Project
From HOUSINGFINANCE.COM, By Bendix Anderson: Bankruptcy protection is not the exclusive province of single-family detatched housing players, nor is it only striking down the once high-and-mighty profit-making organizations who populated home building.
The housing crisis, for what it is, is a leveler. Into its vortex is swept private and public, for-profit and not-for-profit, greed-fueled and virtue-inspired players alike.
If a local economy’s unhinged, it matters little that a condo project is pro-forma-ed for affordability vs. market rate. It will have too few takers nevertheless.
Affordable Housing Finance senior associate editor Bendix Anderson reports on one such case in Gloucester, Mass., where the wheels fell off an affordable project practically from the get-go.
The filing comes as no surprise to housing watchers. CAHO struggled for years to sell condominiums at its mixed-income Pond View Village property here, which started selling in August 2006, just as the condominium market began its collapse. See related article.
“The condo market softened, and we took our licks,” says Joe Flatley, executive director of Boston-based Massachusetts Housing Investment Corp. (MHIC), a major investor in Pond View.
CAHO planned to use the proceeds from the sale of 81 planned condos to help pay for millions of dollars of work the nonprofit did to prepare the long-vacant, historic LePage Glue factory for redevelopment, including 43 affordable rental apartments that are finished and fully occupied. Pond View was CAHO’s first development, though the local nonprofit was formed with help from Wellspring House, a respected Boston-based nonprofit affordable housing developer.
Housing’s crisis is not about the captains of home building who took pages out of Wall Street investment houses’ lessons in reckless avarice. It’s also about people who worked for decades to line up capital, entitlements, and community support to expand the housing stock for those with less wherewithal, and what’s happening to them as the economic corrects for its sins of profligacy.
Blogmania
They’re a pipeline for instant karma and on-demand insight. We think of them sort of as channeling the post-breakup Beatles. In the 1980s, you knew that Wall Street would supply the incisive, black-humor joke for just about any moment U.S. or world history could concoct. Today, that’s all happening on these guys’ blogs.
They’re Calculated Risk, The Big Picture, Mish’s Global Economic Trend Analysis, and The Mess that Greenspan Made.
It’s like, not everything they do lives up to their legend, but you still want to hear it all.
Consider their respective takes on, say, January. It seals their personae in our minds.
Calculated Risk is most like John–succinct, cynical, self-conscious, mirthful, prolific, prophetic.
Barry Ritholz’s The Big Picture reminds one of Paul–coyer-than-thou, emotive, rocking, self-referential.
George comes through in Mish–Virtuosic discipline, pseudo-mystical, whiny, didactic, earnest.
That leaves Ringo for Tim Iacono–Percussively repetitive, occasionally inspired, ironic but not skeptical, cheery.
Part of the best thing about them, like the Beatles, is their fan-clubs, the regular commentors. They’re like you and us–only maybe a little smarter, meaner, and more prepared to butt in line to have their say. Enjoy.
Co-inky Dink?
Wethinks, judging from the volume and quality of the catch in our overnight Akismet spam filters that Super Bowl weekend and Viagra sales must oddly connect.
Thoughts?
Seriously, though, the weekend after the Super Bowl traditionally launches what until 2006 was known as “Spring Selling Season” for home builders.
We know that many large builders, via their relationships with lenders or with their captive mortage divisions, are offering 4% or so 30-year-fixed mortgage packages to buyers. We also know that said home builders are fire-saling in certain communities to match price with foreclosure sales in those submarkets.
They’re saying that they’re 50-50 in spec vs. pre-order selling, which has to mean that there are buyers at the ready when the price and value line up right.
If people can buy a new home at a 2002 price, with 4% terms, could there be a Spring Selling Season after all? Maybe, in 2010.
First, people might need to stop worrying about whether they have a job or not.
Tax Carry Back Extension Carries the House
Here’s how Wachovia Securities analyst Carl Reichardt, Jr. toplines the potential impact of a net operating loss tax carry back extension from the currently allowed two years to five.
We believe for some builders an increased carryback period could result in meaningful improvements in liquidity, especially HOV, and to a lesser extent LEN. However, if the carryback extends it may keep weaker builders alive, providing them with additional liquidity, thereby extending the period of intense hyper-competition among homebuilding firms that we expect will keep growth rates, margins and returns compressed secularly relative to past periods for the industry. Near-term liquidity is not an issue for the majority of public homebuilders in our view, given that 2008 was a year of substantial asset liquidation and/or build-through by most. The primary problem for effectively every builder is a negatively-balanced demand/supply relationship for their product, and extending the carryback does nothing to alleviate this.
Looks like there’s a bit more cash for the accountants to go after based on taxes paid on profits back to as far as mid-2003. Is it a lifeline or a distraction?
Ultimately, foreclosures are and will be the chronic pain-point for new home builders. Whether or not a claim is made on a rebate now or later, those who survive will be the ones who can crack the code of selling against a foreclosure. It’s either the value proposition or the price, or both.
REIT or Wrong, They’re Minding Their Balance Sheet
From MULTIFAMILY EXECUTIVE, by Les Shaver: Households are doing it. City governments are doing it. Lenders are doing it. So, why wouldn’t it make sense for residential REITs to get on the bandwagon of spiffing up their balance sheets, even if the longterm fundamentals remain strong for the rental market? Well, of course, they are doing just that. Multifamily Executive senior editor Les Shaver reports on a number of key players who’ve shed debt and pushed maturities to later in a prospective recovery cycle.
Here’s the rationale:
Says Taylor Schimkat, senior associate for Green Street Advisors, a Newport Beach, Calif.-based REIT consulting and research firm: “If the REITs have the capacity, it makes sense for them to retire their near-term, unsecured bonds early [and where possible at a discount to par] and push out their maturities.”
Looking to pare debt-related expense is not the only way REITS are trying to get ahead of a tidal wave of job and commercial real estate deterioration sweeping into the multifamily landscape.
Shaver also reports on a number of companies who need to write-down assets based on underwhelming demand vs. pro forma-ed properties. Here’s his take on strategic and tactical moves by AIMCO and Camden ahead of a spate of Q4 earnings calls among REITs in the next couple of weeks.
Still, there is no shortage of bulls still at large in the residentail REIT arena. Have a look at commentary from Investment U, picked up at SeekingAlpha this morning.
Stimulus Envy — Matchups We’d Like to See
Folks, on the eve of Super Bowl XLIII in Tampa this Sunday, don’t miss a marquee night of titanic import and raw fury, a clash for the ages.
The Main Event: My Stimulus v. Your Stimulus
Billy Mays, A Pitch in Time, Photo by ACJetter
Light Heavyweight: Billy Mays v. Nouriel Roubini
Middleweight: Liquidity Trap v. A Banana
Lightweight: John Thain v Joe the Plumber
Featherweight: Jerry Howard, NAHB v Doug Bibby, NMHC
Bantamweight: Calculated Risk v The Big Picture
At Housingcrisis.com, we live by a few commandments, one of which came to one of our staffers as she was stuck on a tarmac for several hours, listening to the pilot tell passengers repeatedly every 20 minutes: “We’re next for take-off.” The commandment in one word: “Don’t trust.”
Liquidity trap, nothing. It’s all about putting “risk” on the balance sheet–household, corporate, or government–right there where it belongs instead of in some hidden accounting tactic. “Don’t trust.” Who are you going to outrun, the bear or your buddy?
High Laing-xiety
From BUILDER, by John Caulfield: The story here increasingly reminds us of the famous Charlie Partanna line from Prizzi’s Honor, which is not exactly for family-oriented information channels like this one. The line goes roughly like this: “Marxie Heller so f-in’ smart, how come he’s so f-in’ dead?”
Jack Nicholson priceless.
Now here’s the low-down on John Laing Homes, as super-reported by Builder senior editor John Caulfield. The cut-to-the-chase nut paragraph:
This communications vacuum inevitably invites questions about John Laing Homes’ operations and its financial standing wth Emaar, one of the biggest developers in the Middle East. Indeed, at least two sources contacted for this story, who profess knowledge about Laing’s situation, said that what precipitated the review process was Emaar’s decision to cut off the builder from new working capital. (One source said that Emaar, which paid $1.05 billion to acquired John Laing Homes, has since pumped at least $600 million more into the company.) Sources also contend that Laing stopped paying its trades and suppliers in December.
HousingCrisis.com has weighed in recently on the goings-on at Laing, since some big money interests expressed curiousity as to weather Emaar might be looking to unload the whole kit-and-kaboodle for a song after shelling out a billion for it in 2006.
The number of variations on the same plotline goes on and on. But Laing’s tale is wrenching. It went from being what longtime former CEO Larry Webb described as a “pretty good builder” to perhaps the richest single private to private M&A deal there’ll ever be. The drama stars an international cast of young bright lights with Oxford degrees and business track records with soaring trajectories.
Only thing is, there’s probably a very strong correlation between Ivy League degrees and personal and corporate wealth destruction these days. On the surface, the smarter the deader. And the strongest plotline in residential real estate seems to be “the faster one got big, the harder one has fallen” as the vortex of home price deflation, consumer confidence, and credit plays out.
For one of America’s better privately held home builders, it’s high-Laing-xiety time.
Stuck in the Lobby
Yes, its 647 pages are full of pork. Yes, it sadly reflects a cynical patchwork quilt of local re-election campaign tactics, and failing attempts to attach a “bi” to partisan political machinations. Yes, it probably puts too much into spending, and not enough into tax breaks–especially for businesses that could be rewarded to keep people on payrolls. Yes, it’s a “stimulus” package full of programs whose stimulative effect is uncertain, or even laughable. Per the Wall Street Journal account:
Also tucked inside is $335 million for programs that help prevent sexually transmitted diseases, and $50 million for the National Endowment for the Arts. The Senate version includes $70 million for a supercomputer at the National Oceanic and Atmospheric Administration and $75 million for smoking-cessation programs.
Talk to its critics, whose ideologies cover the political gamut, and you’ll hear that it panders, it squanders, it smolders, and it smothers.
We don’t know whether anyone else thinks that the following thought is unfortunate. Our collective IQs, survival instincts, and passions need so to focus on the merits or lack-thereof of a quick-dry $900 billion clean-up plan for an oil spill that Wall Street, Capitol Hill, and Main Street together dumped on our economic shores with “wink-wink, you’re rich” Ponzi-like policies, behaviors, and dead-wrong reckoning.
And yes, what about housing? Think of yourselves as part of an ever-expanding universe of worthy and unworthy petitioners bidding for the billions. Your best hope to get a pass to the front of the line was the term “underlying cause of economic recession.” Housing, the argument goes, started it all. Housing, the argument continues, can and will start the snap-back, turning an L-shaped term of suffering into a V.
What gives then? What happened to the Fix Housing First last-ditch lobbying effort, and that oh, so compelling assertion that everything will continue to behave very badly in the economy if home buyers don’t get a kick with a credit and easier mortgage rate terms? The Senate mark-up of the Stimulus adds about $80 billion in cost, not the $80 billion the Fix Housing First Coalition was hoping for.
The update from the Coalition’s executive director Kenneth Gear today is that, “Senators in committee weren’t accepting amendments,” and that the strategy now will be to line up sponsors of amendments to the mark-up during the Senate debate, which is expected to lead to a vote in the next week or so.
Oddly, even high-profile economists who take issue with parts or all of the Obama plan don’t mention fixing housing via stimulative home buyer tax credit and mortgage buy-down as a lynchpin to recovery. The New York Times talked with seven economists and got 150 or more comments, none of which says, “You’re missing the root cause, and you must stimulate home buying to fix the economy.”
Fact is, home builders are going to have to do it themselves. Prices got too high. They lost their comfort zone with household incomes and monthly rent comparisons. They’re correcting. Overcorrecting. When new home prices re-couple with reality, they’ll sell. The bail-out will be a combination of self-determined pain on the part of builders and developers who paid too much for four years of land, and self-determination on the part of home buyers with down payments and sustainable mortage-paying ability.
One reason for this. The Fix Housing First lobbying effort may help, but it’s not succeeding.
Still, look at today’s numbers on new homes sold. Ok, yes, it’s down to an annualized 900 homes a day vs. nearly 6,000 a day in 2005. It’s not all depressing though. The absolute inventory count of new homes started is down to 357,000 [a 9% improvement]. Home builders are working through their new-home inventory, and finding ways, by hook or by crook, to put cash in their coffers.
Our conclusion: the resources of those who have banded together to support a lobbying coalition to fruitlessly lobby Congress for inclusion in the current stimulus bill would be better served creating innovative sales tactics, mortage-buy downs, and marketing messages on a company-by-company basis.
We could be wrong. Maybe, Fix Housing First will find a sponsor, supporters, and navigate its way into a Trillion Dollar New Deal package. Unlikely.
Have a look at one view of the current situation from a comment in Calculated Risk’s commentary on Record Low New Home Sales in December.
anonymous writes:
If you listen closely, you can hear the sound of a whirring fan. That’s the economy shutting down. Somebody hit CTRL-ALT-DEL in Sept./Oct. and we’re in the process of a hard reboot. The screen is going dark, the L.E.D.’s are blinking red and we’re heading for a global reset.When the system comes back up, don’t press any keys for awhile or everything will really be messed up.
Risk’s Assessment
Calculated Risk’s approach to starting conversation on economics topics is to deadpan what he says and let pictures deliver the drama.
He’s got a zinger to wrap his day’s observations, this one thanks to data he’s looking at from Kermit Baker and the American Institute of Architects.
CR’s kicker comes as he superimposes AIA’s Architecture Billings Index with non-residential construction spending trends data from the U.S. Census Bureau. Here’s what his chart looks like:
CR's analysis of architect billings vs. non-residential construction spending. Click chart to go to CR's post.
How’s this for deadpan?
The ABI typically leads construction spending by about 9 to 12 months according to AIA chief economist Kermit Baker. This graph also suggests the collapse will be very sharp, and although there isn’t enough data to know if this is predictive of the percentage decline in spending, it does suggest a possible year-over-year decline of perhaps 30% in non-residential construction spending.
In November, private non-residential construction spending was at $428.2 billion annual rate. A 30% decline would be to an annual rate of $300 billion or so. Ouch.
D.R. Horton Priced to Move, and Move They Did
This “Chatter” in from Hanley Wood Market Intelligence’s Las Vegas regional manager Shane Whitmore.
D.R. Horton's Vegas Stakes -- Click on Map for Expanded Interactive Version
Management is still working on all of the final numbers but one thing is for sure …D.R. Horton’s “Short Sale” was a huge success! Many communities reported that their traffic was off the charts and that they had a hard time keeping up. This was a move in the right direction, sales agents were thrilled with the amount of people that came to visit their projects over the weekend (during the past several months many had been lucky to get 4-6 people a week, most will go days with nobody). They are hoping to have some final numbers in the upcoming days but it looks like they sold close to 155 homes in just two days! D.R. Horton reduced their base prices on all of their homes that had started construction to match foreclosure and short sale home pricing throughout the valley. All in all, the sales agents are very excited with the outcome of the sale and their attitudes are now a bit more positive!
For a more sober take on what the fuss is all about in D.R. Horton land, check what J.P. Morgan executive vice president/senior equity analyst Michael Rehaut has to say on the whys and wherefores of the price push:
Pricing continues to soften, with some aggressive price reductions seen leading off the selling season . . . . Overall, we believe prices have continued to slide in recent months; while one builder quoted a 5% decline in the market over the last three months, we believe this is somewhat sanguine, and based on our general observations of trends, estimate the drop to be closer to 10%. Moreover, in front of the Spring selling season, which began approximately mid-January, we note that some builders have implemented aggressive price reductions and discounts, similar to tactics seen during parts of last year’s selling season and throughout the year in general. Specifically, American West dropped its base prices at the beginning of the year by $30K, or roughly 11% on average, in order to price at or below the market, as it has recently shifted its strategy from holding price and margins in 2008, which resulted in 1% market share for the year, to generating cash flow. This has driven some incremental sales in the last couple weeks. Moreover, we point to a D.R. Horton “Short Sale” across its 16 communities this past weekend, promising “record low pricing.” While we believe this is consistent with DHI’s cash flow generation strategy, we nonetheless view the sale as evidence of the challenging dynamics still facing the market. As a result, we believe these actions will trigger other builders to follow suit and lower price, reinforcing the negative trends already in place.
. . . likely driven by foreclosure activity remaining a large portion of the resale and overall market . . . Specifically, we note that builders today largely price to compete with the resale market, which, de facto, is essentially the foreclosure market, in our view. Specifically, the resale market had roughly 3,000 sales in Dec and inventory in the low-20K range, versus minimal numbers for the new home market. However, one builder noted that foreclosures represent 60% of the resale market, and KBH noted that almost all of its potential customers also look at foreclosures. As a result, given that still more foreclosures currently enter the market than exit, and the one builder pointed to approximately 70% of homes in Vegas being “underwater” (i.e., the home value is worth less than the mortgage), we believe foreclosures will pressure prices downward.
Still, inventory turned, is less inventory to turn, which is what home builders need to do whether or not it’s the roughest selling environment in a lifetime.
The question is this: If home builders can engineer their own private-enterprise version of terms they’re asking for in the Fix Housing First initiative, such as price reductions [tantamount to the tax credit they're asking for] and home builder sponsored mortgage rate buy-downs, why bother asking Congress for tax payers’ money to accomplish the same goal?