Among other things, the event in hindsight serves as a bright-line moment that separates a 15-year housing boom from a bust whose duration no expert can confidently predict, and whose ravages are still being felt and dealt with.

Economics aside, Katrina marked first the exodus of investor buyers from residential real estate and, subsequently, the meltdown of mortgage finance’s international house of cards, which seemed to hiccup one moment and contract double-pneumonia the next.

Almost four years later to the month, amid a delicate balance of morale, movement forward, and memory, the wards, parishes, and neighborhoods of the Big Easy may once again serve as a metaphor–but not just a metaphor–for a painfully slow but sure show of irrepressible resiliency–more like obstinacy–that must foreshadow any noteworthy measure of re-stabilization, not to mention recovery.

Click image to access Make It Right Foundation site.

Down in the Lower 9th, the vaunted Make It Right Foundation, backed by a $5 million bump each from Brangelina and Tom Darden of Cherokee Investments as well as contributions from a number of other donors, intrepidly makes progress as it makes headlines. Some 18 homes–of an intended 150–are either done or under construction, with a number of duplexes scheduled to break ground in August. Still, at a cost of $350,000 or more per home, and a selling price at a fraction of that, the Make It Right model, while laudable in its mission, is far too expensive and time-consuming to be scaleable in its execution.

Symbolically, efforts like Brad Pitt’s, and those of Branford Marsalis and Harry Connick Jr.–who’ve teamed up with Habitat for Humanity to create “Musicians’ Village” for musicians who lost their homes to the hurricane–may work to call attention of the world outside New Orleans for the continued need for help.

But they hardly serve as a self-sufficient, organic market-based approach to solving the sorry Jack-O-Lantern look of so many neighborhoods where many homes still sport FEMA search marking system badges, and others are either “scraped” to the slab or a still-standing, termite-ridden, mold hotel awaiting inevitable bull-dozing.

A middle-class, integrated neighborhood called Filmore (in New Orleans’ Gentilly 6th District), up toward Lake Pontchartrain and just east of the huge City Park, may well soon reflect a new stage of the city’s no-quit mentality.

Former JMP Securities investment group director Phil Whitcomb is working with a S.W.A.T. team of real estate development and construction operations folks on a concept that, if it gets buy-in from important neighborhood associations and local influencers, could pump the blood of life into a 52-block area bordered by Bayou St. John to the west, Robert E. Lee Boulevard to the north,the London Avenue Canal to the east, and Filmore Avenue to the south.

Pratt Park would get a Promethean make-over.

The idea–in contrast with the headline-grabbing Make It Right initiative–would be to home-grow a neighborhood transformation. It would be a mash-up of the best advantages of scaled production home building and economic redevelopment at the street-by-street level to create a sustainable extreme community make-over – jobs and affordable, energy-efficient homes where residents adopt a reinvigorated stake in their place.  The neighborhood even has a built-in park, Pratt Park, which would morph into a prized playground and park facility in Whitcomb’s blueprint for Filmore’s renaissance.

The timing? Perhaps within weeks, floor plans that could fly with acceptable local architecture will be developed, even as several public-private partnership dimensions of the plan get traction. Still, it’s not a moment too soon.

With the exception of the higher ground along Gentilly Boulevard (which parallels the Bayou Sauvage Ridge) and the neighborhoods along the Lake that were built upon artificial fill, District 6 experienced some of the worst flooding as a result of Katrina. Many residential structures that were built upon slabs experienced flooding up to their roofs and are uninhabitable for the foreseeable future.

The best term to describe Whitcomb’s plan to build or renovate most of the homes in the neighborhood is “scattered urban.”

It would involve a combination of bidding for New Orleans Redevelopment Authority-owned lots, buying lots from owners who no longer intend to move back to The Big Easy from out of town, and in some cases, acquiring lots from current residents who may want to sell.

On building lots that have already been “scraped” or ones that should be bull-dozed, Whitcomb would work with a development company called Promethean Structures on building homes that would sell in the range of $150,000 to $240,000, a new-home that would comp in an acceptable range that existing homes are selling for in the community.

One of the secret-sauce operational details would be that each of the new homes would go up in 50 days, in part through the use of highly energy efficient and weather resistant structural insulated (polyurethane) panels.

A tighter envelope for air leakage, the ability to withstand high winds, non-combustible, and capable of meeting even the new, higher proposed energy conservation guidelines of the climate act, SIPs would cost about $10,000 more per home.

But, thanks to both builder and home buyer tax credits that could be obtained, the actual cost to home buyers would come down to about a $5,000 premium for a 2,000 sq. ft. home, says Whitcomb. “After the purchase, the electric bill’s going to run about 60% of what it would be for a house of that size,” says Whitcomb. So the cost of ownership winds up coming down over the years.

Whitcomb’s construction concept dives in not just on a box level, but the street and the neighborhood level as well. To start, he’s eyeing a retail site and an elementary school for redevelopment or land reuse to support the revitalization of the community.  There are also several multi-family units near the new Greater Gentilly Technical High School under construction on Paris Avenue that need to be rehabilitated.  Additional ideas will come forward through collaboration with the local homeowner associations.

Whitcomb won his production builder stripes in the Centex Homes academy in six years as vp of corporate development, and before that, in various management positions at Electronic Data Systems and as a corporate attorney specializing in real estate. Of critical importance to Whitcomb is that all the key management talent, community outreach, and labor supervision be homegrown New Orleans. 

Whitcomb

“In various of my incarnations, I had occasion to spend time in New Orleans, and I love this city. But it’s more like a European city in the way business is conducted,” says Whitcomb. ”You work with people here, and you don’t tell them what to do; not if you want to get things done.

“We’re doing this to help, but we are a for-profit organization and want our concept to be scaleable and expandable to other areas of New Orleans and Gulf Coast communities,” says Whitcomb. “Hopefully, we can replicate the revitalization that took place in southern Dade County after Hurricane Andrew–-also called St. Andrew by some locals.”

To jumpstart the dream–known as the Tern Bay Country Club Resort–developers set up a local quasi-government that Florida statutes allow to create special purpose districts. This entity, called a Community Development District, has the financial and operational clout to move a project from being mere dream on paper to reality, where real people buy the 1,810 or so homes, and live the American Dream–owning a home in one of Florida’s brand new communities.

To do that, the CDD gets power to collect tax payments from the property owner or property owners—first, the developer, and then, progressively, the home buyers. Other states have an equivalent; California has its Mellow-Roos Community Facilities Districts that act the same way. Texas has them too.

The kicker is this: just like a shark has to move constantly and eat often, a new CDD has to be propelled forward by demand for new homes to live. When growth stops, the youngest of these things die of asphyxiation.

With the tax payments assured of coming in from property owners, developers and, one believed, a seemingly endless flow of new homeowners, CDDs also have the power to issue bond debt on those present and future payments. In 2005, Tern Bay’s CDD issued $58 million in bond debt to fund infrastructure like roads, water supply, sewers, amenities, and to “put down the lots.” The principal contractor to buy the lots and build was Lennar Homes. In addition to the almost $60 million in bond debt, Ocean Bank also fronted $61 million for the project as the first mortgage holder.

Fast-forward two years, to 2007. More than $33 million in development costs later, Lennar cuts loose from the project. Developer Priority Developers walks as well, apparently forgetting to tell the golf course lawn mower service to stop cutting the grass. The CDD starts missing its payment obligations on operations and management, and the project tailspins into default. Said golf course lawn mower service, Hawkins Environmental, Inc., winds up at an advertised foreclosure sale on June 29, 2007, and walks away with title to the entire tract for $100.

Wait a minute. Weren’t we just tallying total debt—bond and bank mortgage–on Tern Bay at more than $120 million? Yes. What happens, then, when a lawn mowing company picks up title to 1,750 acres for $100? Well, now he owes bond holders a lot of money, is what. Clearly, it’s a mess.

“Prior to May 2008, we had exactly one default in all the years we’ve been doing this, and now we’ve got 90-plus that are in various stages of distress,” says Ed Bulleit, a managing director at Prager, Sealy & Co., which has underwritten the lion’s share of CDD bond issuances since their 1990s creation. “When CDDs were set up in the 1990s, they represented a small component of the capital stack available to the developer. Like everything else, they overgrew during the 2004 to 2007 period because of the intense demand for instruments for liquidity.”

For more than a year, Tern Bay has been slogging through foreclosure proceedings, and the legal complexities are too numerous to go into. Now, multiply the Tern Bay case by say 120 or 130 times, with upwards of $2 billion in bond debt at risk, collateralizing land that may be worthless or at least far less than the face-value of the bonds outstanding.

In round figures, estimates of 100 to 150 are number of CDDs set up in Florida during the go-go years 2003 to 2007 that are either already in distress or are likely headed for default and foreclosure. All told, there are just under 400 Florida CDDs, with about $8 billion in bond debt outstanding.

The highest casualty rate is for CDDs that cropped up as scores of new dots up and down both coasts of Florida’s map during the great real estate surge. Billions of dollars in bond money has been spent on vast tracts with roads, sewer and water, parks, golf courses, etc., with tens of thousands of finished lots ready to go, and going no where. The means for bond holders to get their money back has evaporated as paths of growth morphed into trails to real estate paralysis–and as values of everything have plummeted–the land itself is worth a fraction of the money spent on horizontal development.

Tern Bay is viewed by many Florida real estate pros as the poster child of CDDs gone bad. Since reality has scrunched everyone’s rose-colored eyeglasses to a thousand pieces, the dream is now seen for what it was—a pipedream—and what it is—a nightmare. Other CDDs that have hit the wall in Florida include Cordoba Ranch in Hillsborough County, Southern Hills in Hernando, Grand Hampton in Hillsborough, River Hill in Lee County, Bridgewater in Polk County.

Ironically, though. Some of the hugeness of the CDD problem in Florida may be the precise measure of its solution, as the massive de-leveraging of the economy and resetting of asset values grinds its way toward a solution. Take the toxicity out of the asset and you’ve got an asset of some value or other. That’s where the big question is: Is an asset that was worth a dollar in 2006 worth a dime today? Or 40 cents? Or 85 cents?

• The markets haven’t decided on the new value base
• Large bondholders are weighing their options—owning land or cashing out for pennies
• Bank lenders are likely to be wiped out since their debt is junior to bondholders
• Cash vulture investors are circling, awaiting blood
• Mitigation of off-site expenditures need resolving

Mayday Mayday

Mayday comes from the French “m’aidez,” and is globally understood as code for “We’re in big, big trouble here, so help now!” That’s precisely what May Day has come to mean in the world of Florida’s CDDs. Like so many of real estate’s pretty good ideas-gone-terribly-wrong, CDDs’ immediate past has been caught up in a billion-dollar vortex where easy money instantly swung to rack and ruin.

As it turns out, a CDD’s interest and principal payments on bonds come due twice a year, May 1 and November 1, with May 1 being the more important. When things go right, CDD’s collect assessments as property taxes and make payments vs. “A Bonds” from homeowners’ property taxes over an extended period, and “B Bonds” from assessments to developers and builders who are phasing through their plan, usually within seven years.

Last year, things started not to go right, and this year they went wrong. Around May 1 of this year, 80-plus CDDs defaulted on payments they needed to make to fulfill obligations to bondholders who invested upfront dollars so that developers and builders could put in infrastructure.

CDD distress has its phases. When money stops coming in via the tax assessments to businesses and homeowners, the district may no longer be able to pay operations and management fees first. That’s a no-no that trips covenants. Depending on how bad things get quickly, a CDD may not be able to make its interest and principal payment on May 1. They tap their emergency reserve fund so that bondholders get paid, but then they’re technically in default.

The CDD, working in the fiduciary interest of the bondholders as senior to all other debt—including first mortgage bank debt—can decide to proceed toward foreclosure.

What’s likely in at least some of the cases is that the CDD will go from being a paper asset to a real estate asset. Bondholders will need to decide whether to take a little cash and run far away from the instrument, or to take the land just like a bank takes land back as real estate owned, and possibly hold it until volume comes back to normal and it may regain a value.

“There’s no single solution for all of these districts. It depends where they are; how far along in development they are, what the disposition of the bondholder to wait or not is, many, many factors that make each one different when you approach restructuring,” says William Rizzetta, president of Rizzetta & Co., which performs financial and operational management more than 100 CDDs, and is the largest company of its kind.

Still, their future as a sensible financial building block for planned residential development is in question. Who gets burned and how much will no doubt reset risk and reward levels around their use.

Part of the ironic so what for home builders is this: If they could get their hands on at least some of the finished lots soon, for as little as they’d have to pay for them, they could build and sell highly affordable homes and generate cash to live through another quarter. Estimates of as many of 80,000 to 90,000 finished lots are tied up in CDDs whose future remains uncertain.

So, in a sense, while the resolution of CDDs heading to foreclosure can take more than 12 months, there’s actually a shortage of lots in Florida, a shortage of lots that can pencil to sell into today’s market.

In early July, Rizzetta was to host a meeting among the larger CDD bondholders –Goldman Sachs Asset Management, Oppenheimer Funds, Van Kampen Investments, Vanguard, Nuveen, and Alliance Bernstein Investments. “We want to make sure the lines of communication are open and that we’re hearing face to face what the concerns are and where there might be opportunities to work through some restructuring of the bond debt in some cases,” says Rizzetta.

For the bondholders’ part, CDDs were never the sexiest play, although they became kind of flashy during the run up. But while the expectations were never that high, they certainly weren’t supposed to be such big losers. So, the dilemma over whether to hit eject or become landowners will come to the fore as more and more of the districts fail to perform.

Actually, when the numbers are accurately tallied, San Diego residential real estate had a pretty good April, up 20% from the same month in 2008, and a moderately good May, up 6.5%.

That’s not 63% better than April 2008, which is what the California Association of Realtors originally reported. And a 6.5% lift in May is no where near the 89% mega quantum leap the association crowed about a month ago.

If it’s their job to count the stuff right, why can’t they do their job? You’d think they were trying to pull one over on people. Fortunately, real estate economist Tom Lawler caught the, ahem, error of CAR’s ways.

The Wall Street Journal reports:

The California Association of Realtors expects to make sharp downward revisions in its recent monthly reports of soaring home sales in the San Diego area, Robert Kleinhenz, deputy chief economist of the trade group, said in an interview. Those revisions will mean modest downward revisions in statewide sales, he added.

The revisions are likely to be announced in late July, when
the Realtor group reports home sales for June.  The problem resulted from a glitch in data from a multiple-listing service in San Diego, Mr. Kleinhenz said. He said a change in computer systems used there resulted in incorrect data being sent to the Realtor association over the past year or so.

Thomas Lawler, an independent economist in Leesburg, Va., who tracks home sales nationwide, raised questions about the San Diego data in a report last week. Mr. Lawler noted that the numbers reported by the Realtors vastly exceeded those from MDA DataQuick, a research firm in La Jolla, Calif., and other sources.

Nothing like needing to sharply, downwardly revise published data to cultivate trust in an already wary market.

Click on image for access to LA Times article.

It’s a scene not uncommon throughout California, as residential construction grinds to a halt under the dual weight of the credit crunch and the housing crisis: a rusty chain the only barrier between the community and a half-built structure in Hollywood; a bare dirt lot in Pasadena; old stoves amid the trash at the site in Oakland.

“I hear hacking and see scary bonfires in the middle of the night,” said Don Johnson, a retired Coast Guard employee who lives near the defunct Oak Knoll Naval Medical Center in Oakland.

Nearly 250 residential developments with a combined total of 9,389 houses and condominiums have been halted in California, according to research firm Hanley Wood Market Intelligence. The units, worth close to $3.5 billion, were in various stages of development.

Now, many are in bankruptcy or have been foreclosed by lenders. Developers have halted sales on an additional 370 new-home developments — about 30,000 units worth $11.9 billion.

“It’s a sad state of affairs,” said Greg Doyle, regional director of Hanley Wood.

The ramifications of the paralysis–similar to the cost of health problems that are ignored–are that the costs of inertia redouble in direct opposition to the upside multipliers of new residential construction.

Here’s an observation on the issue from a more operational perspective, from Patrick Duffy, who writes the HousingChronicles blog.

One primary reason I’ve been banging the drum that there just wasn’t enough proper due diligence done on new home projects during the boom (or what was done could be considered fraudulent due to the manipulating of data leading to patently false conclusions) was the impact on these half-finished projects to surrounding neighborhoods.

Whether in Hollywood, Oakland or out the suburbs of the Inland Empire, everyone suffers for the actions of relatively few people. And while many projects were ceased simply because of a lack of funding, some should never have been built in the first place due to lack of demand at the price points required to buy the land.

Then, there’s what to make of the data. Calculated Risk always helps with the so-what perspective.

This suggests a further decline in existing home sales for the March report (January was the most recent report). Note: there still might be a slight increase in existing home sales in February based on the December Pending Home Sales report.
Note: Existing home sales are reported at the close of escrow, pending home sales are reported when contracts are signed. The Pending Home Sales index leads existing home sales by about 45 days, so the January report suggests existing home sales will decrease from February to March.

Finally, ignore the “affordability index”. That really just tells us that interest rates are low – something we already know.

Still, “something we already know” may be overly dismissive.
What we’ll begin to see is a relationship between revert-to-mean home pricing and the psychological conviction among home buyers that they won’t lose money by buying. That’s the inflection point where private sector bid and ask behavior will trump government policy.

A key factor in the negative feedback loop is absolute vacancies, the number of home units capable of housing people but aren’t. This factor erodes motivation to act on the part of consumers, and stands as the distance between the recovery of demand and the eerily silent inertia that reigns o’er the housing economy.

If there’s no fear that one will miss an opportunity of a lifetime by not buying now, then there’s little trigger to jump in off the sidelines.

CNBC has pulled together a U.S. Census-based ranking of the 10-metropolitan areas with the most homeowner vacancies, and cobbled a slideshow to highlight the markets.

Have a look-see.

Total U.S. Jobs per USA Today

A forecast for job growth in 2010 is the good news. Today’s reality is different, though. Data on claims for unemployment insurance came in this morning, and it’s not good news.  The pros in financial analytics call what follows chart porn.

As quick as the data can come in, Calculated Risk has got the fever chart to map it. What he’s got here will likely do some explaining for Wall Street volatility today. As grim and uncertain as the present is, the immediate outlook, particularly as regards jobs, looks tougher yet.

Here’s the key take-away from CR:

Click on graph for access to orginal CR post.

The first graph shows weekly claims and continued claims since 1971.

The four week moving average is at 607,500, the highest since 1982.

Continued claims are now at 4.81 million – another new record – above the previous all time peak of 4.71 million in 1982.

Zandi Man

Moody’s Economy.com chief economist Mark Zandi presumes “strong actions by policymakers” are at hand, and will play a role in a market bottom before the end of 2009. Why does he presume that? It could be that many of the “strong actions” favored at this moment by policymakers have the Zandi Man’s fingerprints on them. Not that that’s a bad thing. It’s just that it may color somewhat his forecast of a swing to the positive for housing markets.

Not before the national peak to trough home price average plummets by 36%, though.

Zandi and his team, as noted in an analysis by Builderonline.com senior online editor Alison Rice, look market-by-market for inflection points and timing. Here’s the link to the Builder story.

Moody’s Economy.com researchers project that Santa Cruz/Watsonville, Calif., will hit bottom in 2009’s third quarter, when its home prices will have fallen 44.3% from the area’s 2005 peak. Other markets are trending downward. Homeowners in Miami/Miami Beach/Kendall, Fla., will have to wait more than two years—to 2011’s second quarter, when home prices will have plummeted 66.4% from their 2007 highs—for their home prices to stop eroding.

The reason, as builders know too well, is the foreclosure crisis. “Normally, defaults and foreclosures have little impact on prices,” the authors say. “However, the volume of foreclosures is so large that they are an important driver of falling house prices.”

The ongoing efforts of elected and appointed officials should help. “Another cause for optimism is that policymakers, though largely unsuccessful at stemming the correction, have been spurred to respond more aggressively because the malaise has spread into a painful recession whose reach extends far beyond housing,” Zandi and his colleagues write. “Stronger policy measures are coming that will help place a floor under the housing downturn. These measures will help housing directly, by lowering mortgage interest rates and forestalling foreclosures, and indirectly, through job-generating fiscal stimulus spending that will bolster demand.”

See Housingcrisis.com’s earlier post on Dr. Zandi’s favored status as economist of Congressional choice these days.

He’s started contributing weekly for the Wall Street Journal’s “Developments” blog. Clearly, he’s starting off on an informed sources, provocative note. The kicker in his maiden contribution:

However, before jumping on any deals consumers should research the financial strength of potential home builders to ensure there’s someone around to address warranty issues. It’s about balancing some of the best deals on new homes we’ll see for a while — in which many builders are basically selling at or below cost — against your own comfort level that a builder may go out of business sometime after the sale closes.

At Housingcrisis, we feel that trust and confidence are at the core of the meltdown, and will be at the core of the recovery. Thing is, we can’t predict what will cause trust and confidence to swing back toward positive after the extreme yaw toward paralysis and dread.

Clearly, though, it’s an advantage to have knowledgeable veterans on the ground who’ll be the first ones to sense a sustainable turn in market trends. That’s Duffy, who also blogs at www.housingchronicles.com.