Banks to The Donald: Ha! Ha! Ha!
Kick start the banks into lending money again, and the real estate business would be just fine.
The Donald in all his loose canon glory speaks for about eight minutes on how real estate developers would be glad to get back in the game were it not for the banks, as well as about government financial and economic policy, and of course, about gaming.
Trump may not be the most edifying interview, but he’s a master spinner and always amusing.
Here he is on CNBC’s Sqawk Box, talking to one of the show’s hosts Joe Kernen.
Make Over Mondays
Know the feeling? A month ends, and you check it off. It’s another month you don’t have to stare down from the front end. We don’t imagine there’s a home builder out there who doesn’t relish the thought of seeing the tail lights of 2009.
So, what happens these Mondays, the day that not so long ago in people’s memory was the day you practically needed an armored car to pull up and take all the deposit money from the weekend past to the bank?
These months, Mondays should be about all the little things because the big things are beyond our control. This limbo we’ve all gotten to know so well, like a form of progressing malnutrition, is about the stubborn distance that lies between a bid and an “ask.” There are four money buckets: The money you’ve got; the money you’ve got coming in; the money you owe; and the money you need. The amount that one or more of those is out of balance is probably the extent to which you’re watching Bloomberg news in the mornings, as opposed to ESPN.
You can control the weeds in the flower beds of the sales models. You can control the number and the quality of the smile-and-dial phone calls you and your sales associates make to make your quotas. You can control the energy-level of affirmation for every sales success one of your team nets. You can control the follow through and care every one of your customers gets so that they’re your No. 1 branding strategy. You can keep dialing your bank or bankers, and let them know where you are with your business. You can keep showing up at the country club, because those local club deals are still one of the No. 1 ways capital will find its way back into real estate. You can go out into your market and find a land seller or developer who just might be willing to make you an offer you can’t refuse on a piece of dirt that would move even in today’s horrid environment.
You can buy up some REOs, taking them off the market, and using your subs and your staff, you can make them available for rent or rent-to-own. You can dial back your costs far enough to zero out all but the essentials and offer your services as fee builders.
These are some of what people mean when they talk about “all the tricks” in the book. It’s the book for down cycles. One of its rules is you mark off weeks and months as you survive them, and put those days behind you. You then start a new week or a new month like a baseball player who starts each game “0-for-the-game.”
Everyone’s at that same starting point, and while an 80-year stalemate between big and ask has got things gummed up from a macroeconomic standpoint, this is the first April of the rest of your life, and it’s time to get things rolling.
After all the trillions and all the programs and all the efforts to lure in the private sector, the only sure way to counter toxic assets is with assets that aren’t toxic. And one of the only ways to get to assets that aren’t toxic is to help house buyers get past their fear of risk. They need assurance that what they’re puchasing will be the property they’re committed to making their home.
Home Building’s Plot Thickens
Theory, circa 2006: Efficiently scaled home builders had enough elasticity in their systems to push their home prices down — and out ahead of — below the competing market. That would keep them in the business of sustainingtheir management, marketing, and home building infrastructures in well-oiled condition, turning inventory in a methodical manner, and generating cashflow on a virtuous time-released schedule.
Nice theory.
Circa Spring 2009, a third successive “Spring Selling Season” has turned into a third successive Hand Wringing Season. Even the best-scaled, balance sheet scrubbed public home builders are looking at every dollar in their cash till and gut-checking themselves as to whether that dollar has 2009’s name on it, or maybe 2010’s. Is that dollar “dry powder,” for opportunistic muscling for market dominance once the constipated land-transaction market finally gets moving again?
Or, just as likely, will that dollar need to try to attract other capital, get in the lengthening line of debt term renegotiation with nameless, faceless, and sometimes clueless lenders and bondholders who are beyond sweating over whether their risks have come to roost.
With KB Home’s bellwether earnings call a couple of weeks ago, the Los Angeles-based home builder’s CEO Jeff Mezger offered a ray of hope amid the brutal realism that prevails as to the difficult leg ahead. Eventually, one will finally stop saying, “It’s going to get worse before it gets better,” because despite the complex of negative feedback loops whirring us into more pain, it will finally be the worst it can get.
Second up in the bellwether home builder earnings call parade was Lennar CEO Stuart Miller. Recalling Stuart’s prognosis at this time of year since 2006, each time it was for continued deterioration in the market, with no signs of an end to the worsening. Now, at least, Mr. Miller, while not sanguine, is indicating that the bump-along-the-bottom period may be approaching.
The twist to the Circa 2006 theory above is that while the big home building companies are secularly a shadow of their former selves, they’re practically the only engine left in the barely pulsing new-home economy. They’ve morphed into quarter-sized versions of their 2006 heft, they’ve said to hell with methodical liquidation of inventory, and chewed off connections to immense land holdings like they’re coyote ugly one-night stands; they’ve scrapped and scrambled for sales; they’ve stormed Capitol Hill with bids to knock reason into the unreasoning, irrational political complex; they’ve excavated their balance sheets of huge wells of expense; and they’ve piled up cash reserves in hopes of being around for an Resolution Trust-like land reset goldrush.
Still, each percentage point of unemployment–coming as they do torturously on ladder-steps of months and quarters, and half-years–represents a new spread of distance between now and a recovery horizon.
We’re out on a limb, of course, but we believe we’re in the middle of the last non-starter spring selling season of the current cycle. Another tough eight month stretch and the rare rays of light that have sparked up the gloom will start adding up.
Meanwhile, we continue to be amazed at the fortitude, or maybe its just stubborn resolve of those who’ve stayed in the game with every trick in the Book of Housing Cycles. You must be in it more than for the money; it must be part of the DNA. Former U.S. Secretary of Housing and Urban Development Henry Cisneros, calls you “housers,” which is not a pretty word.
But what it means–he describes a young mother coming home to one of your homes with a newborn who’ll one day be going off to college–is why you continue to fight to be here.
That’s Fact, Circa 2009.
HUD Taps Carol Galante for Key Multifamily Role
From MULTIFAMILY EXECUTIVE, by Chris Wood: The Department of Housing and Urban Development was a morale morass, and still needs attention internally it probably won’t get until its chief Shaun Donovan chalks up some wins on the foreclosure front… So, we’re talking 12 months minimum.
Click image for access to Multifamily Executive Q&A with Galante.
Every bit of new blood in the department sends a critical message, and clearly, with the hire of BRIDGE Housing Corporation president Carol Galante, Donovan’s playing from strength and resolve to change what has chronically ailed the organization for almost a decade.
Multifamily Executive, which last fall named Galante its executive of the year, assigned senior editor Chris Wood to chat at the end of last week with the new appointee, for her perspective on overseeing $58 billion in development and preservation of privately-owned rental housing as well as a key role in sustainable residential development initiatives.
A Q&A with Galante reveals she intends to serve as an important counterpoint voice to Donovan as priority focus remains on single-family–foreclosures and duress–issues.
There is definitely a role for multifamily, and I think this administration gets that. The administration understands that rejuvenating and refinancing our nation’s multifamily housing stock is critical. Equally important is keeping that housing stock healthy. Greening it, and building more of it in the right places is important as well as economic stimulus.
Read more of Chris Wood’s interview here.
Foreclosure Fluency the USA Today Way
35 U.S. counties are responsible for one out of two–or 1.5 million–foreclosure actions in 2008, per a USA Today analysis of RealtyTrak data. Great Flash infographic maps show the velocity of the foreclosure tsunami as it engulfed Rust Belt cities and bubble-market centers in the Southwest and Calilfornia in the two years from 2006 to 2008.
“This crisis was triggered by foreclosures, and a lot of those were in a very small number of areas,” says William Lucy, a University of Virginia professor who has studied the link between lenders and faltering home loans. Banks spread the risk and “it became like a car with no reverse gear. Once it starts to go over the cliff, it’s gone.”
In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.
Banks are at the nexus of the problem because their fully compromised investment in real estate has both a home mortgage and a commercial acquisition, construction and development dimension to the startling erosion of their capital base.
The weakening and ultimate failure of many banks burns housing on the non-for-sale side even though many of the multifamily for-rent companies interacting with lenders have maintained surer footing with their construction and development loans to date.
Multifamily Executive magazine senior editor Christopher Wood maps out two indirect but nasty impacts a pulverized lending and credit environment has on multifamily housing players in his article, “Bank Failures Expected to Continue: Multifamily is likely to suffer more indirect damage as financial stabilization efforts arrive too late to save lenders with high residential mortgage exposure.”
One indirect ramification is that–despite the fact that much of multifamily’s financing need is met from government sponsored entity and Wall Street funding–any curtailment in local bank funding pipelines through as a shrunken pool of capital to draw from. The other consequential effect of bank failures on multifamily is job loss, which whacks every part of every economy.
Here’s an excerpt from Wood’s analysis.
Matthew McManus: Click for access to bio. Note: No relation to Housingcrisis blog author.
“Notwithstanding those five- to 10-unit properties where a lot of local banks might have taken on deals, the vast majority of multifamily over the past 10 years has been financed through the agencies or through Wall Street,” says Matt McManus, chairman of NAI BlueStone Real Estate Capital, a Philadelphia-based commercial real estate investment banking and advisory firm that secures debt, mezzanine, equity, and sponsor equity financing for investors, operators, owners, and developers
“I don’t think that there is enough exposure to banks that the number of banks that are failing are going to really have any impact to the multifamily industry,” McManus continues. “But indirectly, whatever bank goes under, there are a few less dollars that can be loaned out to job-creating vehicles.”
Regional unemployment figures catalyzed by bank failure are certain to hit multifamily operators already struggling with tough property fundamentals. “The broader impact is being felt very clearly in higher vacancy rates and falling rents,” says report author Anderson. “But the other 800-pound gorilla is what happens with commercial [and multifamily] real estate. So far, multifamily delinquencies and defaults have not been that bad, but they have spiked significantly upward. By our calculations, there is $210 million in multifamily mortgages coming due between now and 2011. Quite a bit of that will face some difficulty in getting funded, despite the activity of the GSEs.”
Indeed, McManus reports a wide disparity between Freddie Mac re-financing terms and what is readily available in the market for a Class A stabilized apartment property in Philadelphia. “We can’t find a bank that is within 80 percent of Freddie Mac’s proceeds,” McManus says. “That’s how conservative banks are being today. They underwrite to shorter amortizations, higher debt service ratios, and sometimes artificially high constants to make a 60 percent LTV-type loan versus a 75 percent or 80 percent LTV.”
Not Pretty Pictures of the Housing Crisis
This article in the New York Times draws several conclusions. Unfortunately for readers of the story, the conclusions conflict, and negate insight.
- The headline revelation is that spring selling season has officially been cancelled
So this March-to-June season, when most homes are bought and sold, will be bad, perhaps the worst since the market began to spiral down in 2006.
Across the nation, 19 million houses and apartments — nearly one out of every seven — are vacant, the highest percentage since the 1960s. But only about six million of those homes are for sale or for rent. That means millions more could still flood onto the market, depressing prices further.
- The story swings over to touch on President Obama’s housing policy initiatives, and the fact that they’ll play out in an environment so inimical that the housing plans will get eaten for lunch.
On Wednesday, the Obama administration announced details of a plan that will pay banks to lower monthly payments for troubled borrowers, hoping to avert millions of foreclosures and keep more homes occupied. Despite that effort, most analysts expect the outlook to worsen.
- Next, the story asserts that even though it has cancelled the spring selling season due to consumer and commercial credit disruptions, homes are selling up a storm in markets where prices have corrected.
In inland areas of California, for instance, sales are surging now that prices have fallen sharply. But most of the sellers are not individuals but rather banks that foreclosed on homeowners who could not or would not pay their mortgages.
- We’re supposed to glean intelligence from reporting that some markets’ delcine lagged that of the bellwether bubble markets’ fall. The interpretation and analysis is not of the local job dynamics and broader business dislocations that account for the way San Francisco and New York markets have taken a recent beating, but simply that they took longer to succumb.
New York is not alone. Real estate sales have also slumped in cities like San Francisco and Seattle, which previously seemed impervious. California’s recent experience might offer one roadmap of how the housing slump will play out in other places. But the process will be painful and slow.
- One wonders which question Zelman & Associates CEO Ivy Zelman actually answered when she responded with her quote, “You are really looking at a very, very ugly outlook.”
If home sales are surging where house prices have corrected, and home sales have stalled where prices have not corrected, what is that saying?
Does it suggest that sellers of new and existing might take control of their own destiny in this dynamic? If foreclosure prices can move buyers off the sidelines, and if the second-tier foreclosure flip from investor to home purchaser can get buyers to move, why is the conclusion that there will be no spring selling season?
The conclusion could be that home builders and developers are going to have to short-sell a lot of their inventory and deal with a lot of red ink for the market to clear.
The limbo housing is in is largely self-induced, and will have to self-resolve.
The populace will be part of that resolution because the populace became part of the bubble. There’s a tax penalty for becoming part of the bubble and we’re going to learn how big the penalty is for what we began to take for granted when times boomed.
Meanwhile, April 2009 may be a low point for those who are trying to work through what they hold in assets to gain cash enough to work through more tomorrow. But it’s not because the NY Times has drawn attention to this issue. It’s because structural issues–prices, credit, job trends, household spending, household formations, etc.–have locked into a negative feedback loop or a “downward spiral” and this is part of a storyline that housing veterans have seen before.
They don’t call it “very, very ugly.” They call it a tough but inevitable part of doing business in new residential real estate.
Have a look at the Times’ ”very, very, ugly” infographic.
Click on image for larger NY Times version of the information.
This is a technical analysis. We don’t believe real estate markets obey technical analyses. We believe uncertainty clouds the bottom, but that price-correction will be the only solid floor for housing.
California Housing Crisis Takes a Star Turn
The Los Angeles Times reports today: As projects grind to a halt, home sites turn to wasteland (HT Calculated Risk). A key source of insight into the story is HousingCrisis.com sister company Hanley Wood Market Intelligence.
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.
Other States Wonder, Is California Dreamin?
California, home to world entertainment capital Hollywood, has just attracted a new audience. As California begins to roll out a spending plan that allocates $100 million in new-home buyer tax credits so as to give new-home sales a cardiac jolt, other states’ legislators want front-row center seats to see how the plot develops.
Georgia lawmakers are considering a form of tax credit for home buyers, in addition to other stimulative programs to assist a new-home building economy that has seized up, according to Big Builder senior editor Lynn Norusis in an article called: “California Tax Credit Breeds Optimism.”
Whether The Golden State’s plan is a success–generating new-home reduction in inventory, jobs, and municipal revenues–or not won’t be known for months as a complex process of applying for the state’s new home purchase credit plays out.
California’s credit allows any primary-resident buyer of a new home–resales are not eligible–an amount equal to the lesser of 5% of the home purchase price or $10,000, with a total budget package of $100,000,000 enough available for approximately 10,000 to 12,000 new home sales. The credit begins March 1 and will last a year, or until the state appropriate runs out.
The program comes on top of a nationally available $8,000 home buyer tax credit that’s included in the stimulus package Congress and the President enacted into law on Feb. 17th.
Clearly, other states whose economies have relied on new residential construction to fuel revenue growth over the first part of the decade will be interested spectators. Some states, however, like Nevada, don’t have a state income tax via which to extend such a benefit.
“We’ll Shrink” is a Step, Not a Strategy
From BIG BUILDER, By Teresa Burney: Standard Pacific Homes, a builder of quality communities characterized by architectural fluency and a strong sense of place over the years, has two major strikes against it.
One is its geography, and the other is its geography. Not a typo.
The home builder’s roots and concentration for most of its three-decade history was Southern California, with some creep-age into Nevada and Arizona as it followed populations’ migration from overpriced Los Angeles and Orange County eastward.
More recently, StanPac bragged that its California concentration was a thing of the past, thanks to its growth and quantum leap expansion to the far east regions of the nation, i.e. the East Coast. Unfortunately most of that growth was in Florida, where StanPac entered the land dance with a wad of cash and gusto from 2003-to-2006, overpaying for land and companies with impunity. Its product worked and its operations translated pretty well. The company, except for the acquisitions it took on during those years, was not an insider in the laws of local real estate that would have provided sanity guidelines on how much to pay for which tracts, but none of that seemed to matter. Everything bought sold at a profit, what ever the price tag.
Until reality struck.
So strike one is that its greatest competence in real estate and product knowledge is in California–the epicenter of new-home Armageddon; and strike two is that the company laid out way too much money to carry its act across country, where it knows way less about the ins and outs of the local dirt it paid a king’s ransom to procure.
Standard Pacific to some extent is like a West Coast analogue to K. Hovnanian Homes, another company that stepped on the gas in acquisitions and growth during 2002-2006, when the cost to grow was unsustainably high. Now, these two companies, and a few more like them, are prisoners to increasingly costly debt and restrictive balance sheet management, vs. looking sharply at where they could capitalize on opportunities that crop up here and there that would result in achievable business gains now.
What’s more, Standard Pacific is a somewhat shaky balance sheet in search of a reason for being, as a harsh, impassive market decides which of the going-concern home builders today should be around to offer their capacity tomorrow.
Standard Pacific, like a fair number of other builders, makes good houses and has a modicum of good practices, and prides itself on its enlightened business culture, but it’s not really the very best at anything–at least not in the minds of people who should want to buy their homes. The population-driven economy is voting with its feet, saying, “we don’t need your inventory because we have too much of that. What else you got?”
That question falls in a big way now to the fellow who’s the third chief executive within a 14-month period. Big Builder/Builder senior editor Teresa Burney spoke at length Tuesday night with StanPac’s new CEO Ken Campbell in the wake of a management shakeup that slashed management cost base a pretty penny. Campbell’s first focus, of course, is cost and he’s unabashedly brutal in his look at the company’s operational and cost structure. A lot needed to go–fat, muscle, bone… all of it.
Campbell, a turnaround maven, showed unusual candor. “When I come in, you know a company’s at its bottom,” he told Burney. It’s the nightmare most operators only dream of when it comes to their lenders or private equity partners deciding to come in and manage the place.
"When I show up, it means the company's at its 'bottom.'"--Ken Campbell, CEO Standard Pacific
“If you want people to change the way they think, you can’t leave the same people in the same jobs and expect a different way of thinking. You have to change it enough so it doesn’t look familiar,” he said. “If you leave the same people in the same place, you are going to get the same outcome. With the train going this slowly, the risk (of making dramatic changes) is not that great, and the risk of continuing to do the same thing is obvious…A little chaos is a good thing.”
And Campbell says he’s been creating chaos since he took over the position in December 2008. “The cost cutting began in earnest the day after I got here.”
Standard Pacific, which occupied two buildings at its Irvine, Calif.-based headquarters, moved out of the fancier one that had been the executive offices and combined operations into the smaller, less well-appointed building. “So now it’s a crowded busy space.”
And the slashing of positions has been ongoing as the market has continued to deteriorate faster than expected.
“We had this plan back in December that had been developed with the help of an outside consultant, but by the time they rolled it out, it was already outdated,” he said. “I came in, and we immediately did an adjustment in that…We needed more significant cuts with lower revenue assumptions…It’s been a moving target.”
Size matters, Ken. Now, what about figuring out whether Standard Pacific really needs to be in the game or not and how it can do that? Don’t worry, you’re not alone. Standard Pacific is one of 100 current or kaput companies that alone built and sold more new homes in 2006 than the entire population of builders large and small will sell in the nation in 2009.
That would suggest transformation–of the radical kind–might be an idea whose time has come.
Cali $10K Home Buyer Tax Credit Raises Questions
Reporter Jim Wasserman of the Sacramento Bee had a couple of days to try to demystify details of a provision just passed into law in the California budget. He’s run into some stumbling blocks on information.
Hours after a new state budget produced a $10,000 tax credit for buyers of new, unoccupied houses in California, home builders began gearing up marketing campaigns around the surprise tax break hoping to spur new traffic to their models this weekend.
“We’re definitely getting the word out there as quickly as possible, and big as possible,” said Ian Cornell, a Sacramento spokesman for New Jersey-based K. Hovnanian Homes.
Builders and buyers alike also are trying to figure out exactly how the credit will work when it begins March 1. On Friday, as Gov. Arnold Schwarzenegger signed a state budget that eliminates a $40 billion deficit, it was still unclear whether the buyer or builder will process the request, what kind of paperwork it entails and what stage of the sales process a March 1 start applies to.
“It’s a little foggy right now,” acknowledged Mark Rowson, president of Costa Mesa-based Warmington Residential’s Northern California division. The firm has a development in Galt and is scouting Sacramento for new projects.
Whatever the initial uncertainty, builders say they’re thrilled. Unlike an $8,000 first-time homebuyer tax credit also approved by the federal government, the California version offers breaks for both first-time and move-up buyers. It also sets no limits on income, meaning even the most expensive homes qualify.
“It’s generated interest very quickly,” said Rowson.
The $10,000 tax credit surfaced late Sunday as part of Democrats’ state budget negotiations to win the vote of Rep. Roy Ashburn, R-Bakersfield. It gives anyone who buys a new house between March 1, 2009, and March 1, 2010, up to $3,333 off their taxes for each of the first three years after buying.
It’s generating excitement, but the devil’s in the details, and apparently one of them is a $100 million limit on the total credits to be awarded to home buyers for the program, as noted earlier by Calculated Risk.