Housing Crisis Gets Star Billing in New “Fresno” Documentary
“Let Us Now Praise Famous Men” teamed Fortune magazine writer James Agee and American photographer Walker Evans in a Depression era masterpiece about three poverty-stricken sharecropper families in America’s deep South in 1936.
“Fresno” is the work of documentary film maker Stephen Payne, who’s made a 70-minute piece that places the California city in one of the housing crisis’ ground zeros.
Reports the Fresno Bee.
[Steve Payne says] “My budget covers Fresno. By studying something small and understandable like Fresno, it makes it feel like you can get a handle on this.”
Fresno also fit the bill economically. A recent study by the Brookings Institution ranked Fresno seventh on a list of the largest 100 cities hardest hit by the recession.
Also, Fresno has the 14th-highest rate of home foreclosure in the country.
Payne says he made six trips to Fresno, starting three months ago and ended filming with about 35 hours of footage that he’s boiled down to about 70 minutes.
“I thought I could be done with this thing in two or three visits,” Payne says. “But as I got a little more into it, I realized I needed to spend a little more time on this, or else it wouldn’t do it justice.”
Asked how the finished product manages to weave the various stories together, he said: “It just does.”
“It’s one of those odd little things where if you tried too hard to make it work, it would look fake,” Payne says. “By just cutting between these things it just seems to flow. I liken it to a good cocktail. It’s like a Bloody Mary — on paper it doesn’t look very good. But actually on several Sunday mornings I would climb over my dead granny to get one.”
One of the stars of “Fresno” is Josh Peacock, who was at the center of all the news stories about the pool-raiding skateboarders.
He is currently being followed for another documentary produced by a Hollywood agency that’s behind numerous cable reality shows. Peacock also produced his own pool-skating video called “Cancer Dust,” that was mostly filmed in Fresno and is available at Herb Bauer’s Boardshop, SBI or his own Web site (www.fresnopools.blogspot.com).
The Skateropolis blog has posted this clip of the film’s trailer.
S&P Downgrades Take Wind out of Housing’s Sails
CNBC’s interview with Alpine analyst Stephen Kim typifies Wall Street sentiment about a next leg downward for housing. Standard & Poor’s yesterday raised the bar for expected losses from risky loans underarching mortgage backed securities, signaling anticipation for a new wave of irrecoverable dollars invested in residential real estate bonds.
Failing home loans that lead to a tidal wave of foreclosures depress home prices and cause the feeback loop to repeat in a worsening viscious circle. Despite tiny signs, anecdotal evidence, and great hopes that Spring 2009 marked the end of the worst times for housing, it’s clear the pain shall continue through the end of the current year, reaching into 2010.
Hurry Up and Wait on HASP and HAMP Loan Modifications
The New York Times reports extensively today on the slow progress President Barack Obama’s $75-billion Homeowner Affordability & Stability Plan programs are making to forestall as many as 4 million foreclosures by allowing cash-stressed homeowners to get terms of their loans modified.
120 days into the weeds of the programs, it’s a slow go.
Under the plan, the government offers mortgage companies $1,000 for each loan they agree to modify, then another $1,000 a year for up to three years.
Hanging in the balance is more than the fate of individual homeowners. The administration portrays its mortgage program as a crucial piece of its broader effort to restore vigor to the economy. If the effort fails, foreclosures will continue to surge and home prices will probably keep falling, sowing fresh losses in the financial system and threatening to crimp credit anew for businesses and households.
Yet in the four months since the Treasury Department announced the program, millions of new homeowners have slipped into delinquency and foreclosure. For now, progress is constrained by the limited capacities of mortgage servicing companies, said Michael S. Barr, the assistant Treasury secretary for financial institutions. He offered the first signs of the administration’s impatience with the institutions that control home loans.
CNBC sought comment on assessment of the success or lack thereof of the initiatives from James Lockhart, director of the Federal Housing Finance Agency, whose remarks covered not just the mortgage modification efforts but housing’s outlook itself.
The issue is, it’s a large-scale problem without a one-stop-shop solution. The answer is as granular as each case by case loan modification applicant.
Healthy Borrowers Come Down with Defaultitis
“Strategic” home mortgage defaults, leading to foreclosures, are on the rise.
The term describes people who can afford to keep making their mortgage payments, but who think it’s stupid to do so. 25% of loan defaults now take place among people who decide that it’s dumber to keep paying and get swept underwater as home prices deflate than to stop paying and face the music for jingle mail.
The Wall Street Journal reports on the phenomenon:
Strategic default is most likely when home values have fallen by more than 15%, according to the study by authors of the Financial Trust Index, a joint project of the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management. (Read the paper here by authors Northwestern’s Paola Sapienza, Chicago’s Luigi Zingales and Luigi Guiso of the European University Institute.)
The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default — even if they could pay the mortgage — when the equity shortfall hits 50% of the house’s value, they found.
An assumption of policy makers behind the big foreclosure mitigation programs–Homeowner Affordability and Stability Plan and Home Affordable Modification Program, etc.–is that moral ballast trumps falling home prices and negative equity when it comes to those who are capable of meeting their home loan obligations.
True dat, but only to a point. About a 10% decline in home prices, sampled in the Boston, Mass. market in the early 1990s, might appear to be the tolerance level for people who’re apt to stay in their homes and keep paying the piper even if they’re underwater now and for the foreseeable future.
“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”
Among the other findings:
People under 35 years and over 65 said were less likely to say it was morally wrong to default, compared to middle-aged respondents. People with a higher education and African-Americans are less likely to think it’s morally wrong to default, while respondents with higher incomes were more likely to think it’s morally wrong. Republicans and Democrats showed little difference in moral views of strategic default, while independents were less likely to say defaulting is immoral. People who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral, the authors found.
Interesting light shed on our American Dream of homeownership.
Home Builders’ Manifesto Destiny: Change or Bid Goodbye
One way to phrase the situation for those in the business and operations of new residential construction (and, in the mean time stop paying attention to meaningless, volatile, and highly flawed monthly national data on where housing is in its economic cycle):
Change the skill-set from capacity to ability.
That’s the way FMI Corp. principal Clark Ellis described the challenge for home building companies. It sounds so simple.
Home building companies, until around Spring 2007, had four key stakeholders: home buyers, financial investors, suppliers and local decision-makers, and staff. No longer. A fifth critical stakeholder has emerged out of the profound dislocation that came along with deleveraging household, business, and government economies: Broad public perception and Congress.
Going back to Clark Ellis’ phrase to describe the structural challenge of every home builder to migrate from being a Capacity organization to an Ability organization, the addition of this fifth critical stakeholder makes the challenge that much harder.
Look at the nation’s car business. It grew into empires based on capacity. It has become rubble because it has not found ability. For two deathwish decades Detroit pitted its gearhead engineers against its blustery marketeers. They one-upped and undermined one another into oblivion.
When Capacity was the goal, home builders rose to it with gusto. Now that Ability is the goal, it means having to blow up a lot of the way things worked before. Financial realities forced some of that, but downsizing and other cost actions only get organizations part the way there.
For practical purposes, value engineering, as most people use the term in new-home construction operations, is a misnomer. It’s really a cost strip-out process, as opposed to engineering process and product for optimized value.
So taking out product costs, and getting leaner in overheads and operational expenses, and cutting production time, and renegotiating loan terms and land deals, and eliminating waste are necessary actions. Those steps are strides toward Ability, but they don’t get you there.
What will get you across the chasm from Capacity to Ability is not just cost engineering, but making the new-home a purchase experience like no other. Ability means giving a home buyer prospect something that sets your home apart from a design, community experience, value, and quality standpoint. To become an Ability organization, it’s not enough to be efficient, althought that is a must. You’ve got to be different as well as efficient.
Clearly, save a few anomalous markets, new-home builders are either going to have to compete with distressed home sales for months and months to come or they’re going to go away. Home prices continue to come farther down to earth in relation to household incomes and rent comparisons, and interest rates hover at historically manageable levels.
The three question marks for Josephine Homebuyer are these: Can I get a loan? Will I keep my income at its current level? and Will the price of the house stay stable enough that I won’t be underwater on the loan in a year?
In the economic, financial, and credit environment that we’re in now, a total cost of homeownership analysis could be an increasingly strong argument for people to buy new. More efficient, more repair-free, easier to maintain homes in more sustainable communities may prove to offset the apparent price advantage of buying a foreclosure.
Ability needs to happen holistically. You can’t have it in sales without achieving it in land strategy, operational processes, finance, product development, purchasing and sourcing.
Getting to expanded Capacity was levering up the model and accelerating its output. Getting to Ability is changing the model.
It’s putting a name and a face and an identity on your home buyer. According to yesterday’s new home sales data, there’s only about 32,000 of them a month (unadjusted) to go around for everybody. That’s not nothing, but it certainly calls for Ability vs. Capacity to meet their need.
If you do that though, you’ll be taking care of those other four stake holders, the financial partners, suppliers and municipal decision-makers, employees, and John Q. Public and his elected U.S. representatives.
Existing Home Sales Miss Street by a Nose
Looks like those who bet the “under” on exsiting home sales win.
Per the NAR May 2009 release (with guidance from Calculated Risk’s post):
- Existing home sales (SAAR) for May 2009 4.77 million, a 2.4% sequential increase
- Not seasonally adjusted, sales are 3.6% off May 2008 NAS levels
- Median price for an existing home fell 16.8% year-on-year to $173,000
- NAR says about one-third of sales were foreclosure sales or short sales
- Inventory of existing homes for sale decreased to 3.8 million, which for May is unusual
- Months’ supply of existing home inventory decresed to 9.6 months (normal is about 6 months)
Here’s a key observation from Calculated Risk on the NAR report today.
It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!
Here’s the good-news, bad-news headline and report in the Wall Street Journal.
- Home Resales Up From Previous Month, as Prices Fall
Existing-home sales rose a second month in a row during May, but prices again fell sharply, threatening a delay to a housing sector recovery.
The Big Picture’s Barry Ritholz wants to set everybody straight on the proper headline.
In a note from Citi’s housing analyst Josh Levin, he focuses on an issue that has arisen in earlier posts by Big Builder editor Sarah Yaussi.
NAR Cites Appraisals as Growing Problem – In its press release the NAR notes that in the past month stories of appraisal problems have been “snowballing from across the country” with many contracts falling through at the last moment. We assume that such problems stem from the Home Valuation Code of Conduct, which went into effect 5/1. To the extent that this problem is in fact wide spread, we would expect that it may: (1) depress EHS going forward and (2) could cause the historical relationship between pending home sales and EHS to decouple.
Read to the end of Barry Ritholz’s post for the verbal hide-tanning of NAR economist Lawrence Yun. Barry may have been busy hawking his book lately, but this is the vitriol of Ritholz with which we’ve come to know and love.
Here’s a 6-minute CNBC video on existing home sales analysis from real estate correspondent Diana Olick and IHS Global Insight’s Patrick Newport.
Tomorrow, we get new home sales data. UBS is forecasting a 3.9% month-to-month increase over April 2009’s level, from 360,000 units to 370,000. A faint pulse, but a pulse nonetheless.
Harvard Joint Center for Housing Studies Notes Duress
This release today from the Harvard University Joint Center for Housing Studies.
(New York) The worst housing downturn in generations continues to grind on, finds a study released today by the Joint Center for Housing Studies of Harvard University. Despite some stabilization in homebuilding and home sales in the spring, real home prices continued to fall and foreclosures mount in most areas in the first quarter of the 2009. With mortgage interest rates heading higher in June and the economy still contracting, a sustained recovery for housing still faces an uphill climb. “Although there are some signs of improvement or at least steadiness in new construction and sales,” says Nicolas P. Retsinas, Director of the Joint Center, “housing starts stand near 60+ year lows and any life in home sales is coming from distressed foreclosure sales, temporary first-time buyer tax credits, and low interest rates that moved higher in recent weeks.”
Housing demand has withered under the weight of crushing job losses, house price deflation, and tighter credit standards, the report concludes. First-time homebuyers are struggling to meet today’s stricter underwriting guidelines, household growth is well below long-term trends, and immigration has slowed; as a result, the share of homes for sale and vacancies stand at near record levels despite sharp decreases in housing production. “The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery,” remarks Eric S. Belsky, Executive Director of the Joint Center. “For now, markets remain under considerable stress.”
The housing downturn hit low-income minorities especially hard. With unemployment rates sharply higher among minorities, minority households are more likely than others to spend more than half of their incomes on housing. Also, higher shares of minorities live in neighborhoods with elevated foreclosure rates and where house prices fell the most.
Meanwhile, the number and share of households spending more than half their incomes on housing continues to remain at elevated levels. Before the economy began to shed jobs in 2008 and 2009, the number of households with such severe cost burdens, in 2007, stood at 18 million, up from 14 million, in 2001. Although renters are more cost burdened than homeowners, the most rapid growth in households with housing burdens, during the decade, occurred among owners.
Even though present housing challenges are legion—including still soaring foreclosures, millions of homeowners stuck in homes worth less than the amount they owe on their mortgage, and falling rental property values—the State of the Nation’s Housing report concludes that the demographic moorings of future demand remain strong. The largest generation in American history will be reaching young adulthood in record numbers over the next decade. As a result, even under a set of household projections that assume annual immigration falls some 40 percent below the average of the first half of this decade to just half of U.S. Census Bureau immigration projections, household growth from 2010-2020 should still rival the solid performance in the 1995-2005 period. Even if immigration slows considerably, minorities will still account for about three-quarters of household growth.
“With the echo baby boom driving demand for starter homes and apartments and the baby boom powering demand for homes suited to older Americans,” explains Mohsen Mostafavi, Dean of the Harvard University Graduate School of Design, “the design professions will be called upon to deploy new technologies and designs to meet the aesthetic tastes and functional needs of a new, more diverse younger generation on the one hand and a generation in need of home modifications to help them age more safely and healthfully in place on the other.”
Looking beyond the current turmoil, the report underscores the potential to reduce domestic energy consumption by making the existing housing stock more energy efficient and creating dynamic mixed-use communities. Bringing the efficiency of the existing housing stock up to that of homes built since 2000 could save as much as 20 percent of residential energy consumption and more compact urban development could cut vehicle miles traveled substantially. Getting there will be a challenge, cautions the report, because local regulations often discourage compact and mixed use developments. Further incentives may be necessary to get property owners to invest in meaningful energy upgrades.
Fix Housing Later
Unemployment is the chicken. Foreclosures are the egg. Swap their positions all you like. They’re each a self-fulfilling prophecy of the other, a negative feedback loop.
Housing leaders and housing-centric economists want to believe housing always leads the economy. Fix housing, they say, and you’re on your way to fixing the broader economy, because housing is an engine with a multiplier effect. Residential investment dollars–including construction costs for all kinds of housing–redouble and stream into many other markets and cause good things to happen in local, regional, and national economies.
This time though, a consensus is building that housing will not lead the way out of the downturn. Housing is not broken. Creation of demand is. Look at the latest unemployment data. Now, look at how foreclosures are working, i.e. 54% of new foreclosures are prime fixed and adjustable rate mortgages from among the lowest risk borrowers, per this analysis by Calculated Risk.
How about this for an argument? Housing, not only will not lead an economic recovery, it should not. Business Week economist Mike Mandel makes a case that a housing snapback would drain needed investment from other industry and service sectors that would put a more solid structure–including healthcare, education, and manufacturing–under the economy.
Here’s a few-minute video from Mandel on his Fix Housing Later theory.
Clearly, a more normalized level of demand for housing–existing, new, for-sale, and for-rent–would shape itself around less cyclical job growth in non-housing industry arenas. Businesses that got burnt badly as they met hyperbolic, investor-driven demand. In a real sense, housing’s 15 year run before 2006 used up a couple of the wild cards that would have jump started the economy, and pulled forward buyers into homeownership that it would be nice to have in the demand pool right now.
So, even as new residential construction business executives begin to populate their sound bites these days with flashes of wishful thinking, practically the only silver lining in today’s new one-family home sales data is that builders knocked 12 days of inventory off the books, reducing the ready supply of new homes nationally by 13,000 to 297,000.
In some markets, like Phoenix, home builder and developer sentiment has shifted from “you-have-to-fake-it-to-make-it” to that of genuine excitement. “They’ve turned the lights back on” in the land acquisition conference rooms, according to an executive with ties to investor and home builder land transactions.
What’s selling will have to continue to compete with foreclosures, super affordable to migrate renters across into homeownership. No contingencies. No funny business on the mortgage–it’s either FHA qualified, or at least 20% down. Delinquencies and defaults will pile up among prime and Alt-A borrowers for months and months to come, thanks to an unemployment rate expected to grow into the double digits before it starts to ease back by the end of 2010.
Get stocks to start parking in a promise of future growth, and a real economy GDP to inch back from its deep 6 to something around 0 this year, and by golly, consumer sentiment will start a real recovery.
Meanwhile, another year of trying to figure out how to do things with less people than you really need. What we all need though is an economy that can sustainably grow again, not one heated back up by housing. Fix Demand First, housing later.
Who’s Your Goliath?
My dad is and always was a fan of underdogs.
Before sports went berzerkly corporate, and all the New York team owners felt that it was their Manifest Destiny to use zillions of dollars to wrest championship rings from their wearers in other towns and bring them to the Big Apple, my father parked his loyalties solidly behind the longshots like the pre-Dave Debusschere Knicks against the Bill Russell-led Celtics, and the 1964 football Giants with a creaky Y.A. Tittle at the helm, and a new baseball team called the Mets.
So I got it from him.
Click for more info on Malcolm Gladwell
Which is why Malcolm Gladwell’s piece in the May 11, 2009 issue of The New Yorker was a must read. As is Gladwell’s typical article approach, blending historical research with a latter day examplar of a noteworthy phenomenon, it’s a scholarly deconstruction of a twist of fate, “How David Beats Goliath.”
For two reasons, the story should interest those of us whose fortunes or loss of them tie to the new residential construction market.
The first is that the central theme of the story relates to the plight of many organizations who make a living or not in the world of housing. They are David. Foremost, Goliath–the Philistine warrier whose defeat is almost inconceivable–is a real estate market and general economy withering in their effect on combatants large and small.
Gladwell’s yarn–backed by political science data on the number of wars won by undermanned, less powerful armies through history–tells how an underdog gets the upper hand. First thing they have to do is recognize they’re weaker and choose an unconventional strategy.
“When underdogs choose not to play by Goliath’s rules, they win.”
Think Lawrence of Arabia; think Rick Pitino, or if you’re my dad, think Digger Phelps’ Fordham University [no name] Rams against a U Mass team led by Julius “Dr. J.” Erving. The unconventional approach often involves surprise and speed, causing confusion in the ranks of a more potent foe.
Surprise and speed, for home builders, translates into cash. Let everyone else remain paralyzed in a market debatably still deteriorating [or as the Caculated Risk blog asserts, "correcting"], and girding for further waves of foreclosure hell. Don’t play by the rules of the game that you have to price a new home to market. What’s the equivalent for home builders of a full-court press? Is it an Open Series or any number of the other companies’ new, more affordable floorplans that break previously ironclad rules about replacement costs? How do you change your company’s culture so that it can adapt and change its structure?
The other reason to read the article might just be to come to a new understanding of who Goliath really is. Certainly, at the moment, the barbaric, dreaded enemy in most of our minds is a marketplace of still halting consumer confidence, corporate fear of investment, and massive government overcompensation for the ills of free enterprise.
Interestingly, though, a subplot of the article focuses on another kind of David. In this case, it’s Vivek Ranadive, a Silicon Valley software developer who revolutionized data analysis by moving from “batch” collection to real time collection.
What has led and will likely lead many a real estate and residential construction company down the road to ruin is the absence of reliable data to say what is actually going on in the market. There are too many lagging indicators and undependable metrics that allow analysts to assert “the fundamentals are strong” and the “subprime damage can be contained.”
So, in a sense, Goliath is not only an outside force in the marketplace, but an enemy within. Data that is as local as the Census tract you’re competiting in and as instructive as a clock with the correct time is something most real estate players haven’t gotten around to developing or developing a belief in.
Some times, rules that need breaking are ones we’ve made up for ourselves.
Until a megalomaniac named George Steinbrenner came along, my father’s one exception to pulling for the underdog was his love of the New York Yankees. He knew lifetime and year-to-date averages and ERAs of most of the Yankees from about 1935 through The Mick and Whitey Ford.
But even when they were dominant, the Yanks had kind of an underdog’s salt of the earth sense about them. After all, one of the best of them said this. “The future ain’t what it used to be.” Bet you’ll never guess who.
Bottom Fishy
Are you the glass-is-half-full type, or a life-stinks-then-you-die kind?
A whiff of less-bad news here and there has bred with it a subtle change of expectations on the part of some economists, if not the eventualities themselves.
Clearly, though, economists are best at using two words to begin talking about even their strongest convicitons. Those two words? “It depends.”
Here’s a roll-up of economists’ opinions from the Orange Country Register’s “Lansner on Real Estate” that limbs out the Silver Liners from the Doom and Gloomers as to when that most-coveted of pieces of bottom might be in view.
Optimists
Fed Chair Bernanke:
- The worst of the recession has passed: “We continue to expect economic activity to bottom out, then to turn up later this year.”
Mark Zandi, chief economist, Moody’s Ecomomy.com:
- U.S. home prices will reach bottom by the end of 2009.
- “Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight.”
- U.S. home prices will fall another 11 percent on average before stabilizing.
- The Case- Shiller home price index will fall 36 percent from its 2006 peak to the bottom this year.
UCLA Anderson Forecast:
- Housing market to stabilize in late 2009, and “when it does, the contraction in residential construction will, finally, after more than three years, cease to be a drag on the California economy.”
- “As the housing market has completed most of its required adjustment prior to the downturn in general economic activity, it will not be as much of a drag on the recovery as experienced in previous recessions.”
- Orange County: Home prices stabilizing in 2009 and starting to rise in 2010. But appreciation rates remain in the single digits and prices will still be at 2004 levels in 2013.
- “This could well be the worst post-WWII downturn yet.”
- “If there is any good news in the picture it is that the correction in the housing market is almost complete.”
- “We are due for significant increases in unemployment through the 2nd quarter of 2010.”
- “Continued job loss in California is going to lead to more foreclosures and more uncertainty about the ultimate bottom in housing prices.”
California Association of Realtors:
- Recessionary conditions through the first half of 2009, “before we begin to see a turnaround in the second half of next year.”
- Prices down 28.4%. That’s revised from an earlier projection that prices would drop just 6% this year.
- Sales up 25%. CAR forecasts that 550,000 homes will sell in 2009, pretty good considering that the state was down to 347,000 sales a year in 2007. That’s revised from an earlier projection of 445,000 home sales.
Pessimists
Michael Carney, director, Real Estate Research Council of Southern California, Cal Poly Pomona:
- “I don’t see home prices leveling off in 2010. … The real reason we’re not going to see a recovery: The financing is not coming back for at least 5 years.”
Richard Green, director, USC Lusk Center for Real Estate:
- “I’d say we’re at bottom if it weren’t for the fact that the jobs picture is so dim.” … (Thinks market will turn around in 2010.)
Stan Humphries, VP of data and analytics, Zillow:
- “I’m doubtful that we’ll see the bottom until 2010, and thereafter it’s increasingly clear that we’re likely to have a long bottom before we see meaningful recovery in home values.”
Construction Industry Research Board:
- 2009 is expected to be the worst year on record for new residential building permits.
- Just 63,400 units will be produced in 2009, down 3% from the 2008 record-low of 65,380 units.
- 2008 construction was 20% lower than the lowest point during either the 1980s or 1990s housing downturns.
- The low in the early ’90s recession was 84,656 units in ’93. The worst year during the early ’80s recession was 85,656 in 1982.