Article In October 27, 2006 Wall Street Journal

Housing Decline
Sparks Slowdown
In Construction
Store, Mall Demand Drops
As Fewer Homes Are Built;
Weighing Economic Risks

By ALEX FRANGOS

October 27, 2006

The unexpectedly rapid decline of the nation's housing market will mean an overall drop in construction spending next year, with spillover effects in areas such as job growth and real-estate development.

In a closely watched report expected to be released today, McGraw-Hill Construction will forecast the first decline in overall construction spending since 1991. The company says the value of new construction will decline 1% in 2007 to $668 billion, compared with an expected rise of 1% for 2006 and a 12% increase in 2005. McGraw-Hill said the anticipated decline was due mostly to a 5% fall in construction of single-family homes. But the overall drop also reflects a 3% slide in construction of stores and shopping centers, a component closely tied to population growth and home-building trends.

"Single-family housing has fallen more steeply than what we had anticipated and the correction is taking place faster," says Robert Murray, vice president at McGraw-Hill Construction, a unit of McGraw-Hill Cos. The industry "no longer has single-family housing to bolster total construction."

The construction industry accounts for almost a tenth of economic activity, and its contraction could have a ripple effect through the economy as it is a major buyer of finished products and generator of jobs. Local governments' ability to raise revenue through development fees and taxes, especially in fast-growing parts of the country, could suffer as well.

The McGraw-Hill forecast comes on the heels of a report yesterday by the Census Bureau showing that home builders have had to slash prices to sell homes. Although new-home sales for September rose 5.3% to a seasonally adjusted annual rate of 1.075 million, the median price fell to $217,100 from $240,400 a year earlier. That was the lowest price in two years and the biggest year-over-year decline since December 1970.

Meanwhile, at a conference yesterday in Washington, David Seiders, chief economist of the National Association of Home Builders, predicted average prices of single-family homes will drop next year. It is the first time the trade association has predicted a price decline in roughly a decade of providing estimates.

Mr. Seiders blames a confluence of factors for the anticipated declines, including overbuilding, prices that have outpaced incomes, and rising inventories of unsold new and resale homes. The imbalance between supply and demand, as buyers continue to sit on the sidelines waiting for prices to drop, has already had a big impact on builders.

In the second quarter of 2006, the annual rate of single-family starts fell 41.2% to 1.53 million, while "permits are in free fall," Mr. Seiders says.

To be sure, prices still remain higher than several years ago and many consumers maintain hefty amounts of equity in their properties. Moreover, mortgage rates remain near historical lows and prices remain stable in many markets. Yet the latest news has prompted some economists to question whether the construction industry will become a drag on economic growth or whether the worst has already been felt.

Yesterday, former Federal Reserve Chairman Alan Greenspan said he saw "early signs of stabilization" in the housing market. Mr. Greenspan noted in a speech to the Commercial Finance Association that a weekly index of applications for home-purchase mortgages, compiled by the Mortgage Bankers Association, has "flattened" at relatively high levels. The index plunged in the second half of 2005 and early this year, but lately has been steadier. It is currently 18% below the year-ago level.

"We've already had the hard landing," Angelo Mozilo, chief executive officer of Countrywide Financial Corp., the nation's largest home-mortgage lender, said in a conference call this week. Mr. Mozilo said he expects the mortgage market to "tread water" in 2007. "In 2008," he added, "we'll have one hell of a year for people who remain in the industry" as demand rebounds.

U.S. home prices rose an average of 58% in the five years ended Dec. 31, according to an index produced by the Office of Federal Housing Enterprise Oversight. In some cities, prices more than doubled in that period. Over the past year or so, house prices have declined moderately in many areas -- including Massachusetts, the Washington, D.C., area and parts of California, Florida and Arizona -- but they remain far above their levels of a few years back.

Some of the negative effects from the housing slump are likely to linger well into 2007 and perhaps much longer. Some economists think housing prices will continue to drift downward through much of next year. That may damp consumer confidence, and it will diminish consumers' ability to borrow against their homes to finance spending. And foreclosures are expected to rise at least modestly; that could prolong weakness in housing as lenders dump properties on the market.

"We're not out of the woods yet," says Peter Kretzmer, a senior economist at Bank of America in New York.

Mr. Murray at McGraw-Hill Construction concurs. Just weeks ago, he was figuring there would still be growth next year. "We thought the correction [in the housing market] would be, in the words of Fed chairman, 'orderly,' " he says. But recent data have shown it is "not as orderly as what people thought."

But the decline won't be limited to housing. Also expected to see a falloff is the construction of retail centers, whose development has been consistently strong in recent years as consumer spending and housing formation grew.

The link between retail construction and home building is strong. "When there's a new neighborhood, there's a new grocery store and pizza parlor in a small shopping center," says James Haughey, director of Research and Analytics at Reed Construction Data, a Norcross, Ga., publisher of building information and a unit of Reed Elsevier Inc. He doesn't see retail falling off right away, however, as retailers are still catching up to consumer growth. "It will be a delayed impact because the pipeline of shopping centers is so full," Mr. Haughey says.

The continued rapid construction of a wide range of other commercial projects -- hospitals, schools, offices, hotels and factories -- will keep bulldozers and backhoes somewhat busy and the massive construction industry active. That, of course, could be reassuring news for the economy. Spending on commercial construction, including multifamily dwellings, will increase 2.5%. Among the fastest-growing segments are hotels and manufacturing buildings, as well as schools and health-care facilities.

Construction activity has a major impact on the overall economy. Census Bureau estimates of construction spending, which rely on McGraw-Hill's numbers while adding other spending categories, showed $1.2 trillion of spending on construction in the year ended August.

The fallout is being felt at some of the nation's largest home-building companies, which are downsizing staffs. Pulte Homes Inc. of Bloomfield Hills, Mich., said yesterday it has reduced its work force by about 10%, or 1,400 full-time jobs, since Jan. 1. The cuts have been made throughout the company and across the country. "We've taken these measures in response to lower housing demand, which has resulted in a reduction in construction volumes," Pulte spokesman Mark Marymee said.

Centex Corp., a large builder based in Dallas, said this week that its salaried work force has been reduced by about 10% since April 1 to around 6,400 employees.

In the Phoenix area, construction accounts for 10% of salaried jobs, "and they are pretty good-paying jobs," says Jay Q. Butler, director of the Arizona Real Estate Center at Arizona State University. He sees the slowdown in the home-building sector being offset somewhat by strength in health care, schools, convention centers and highways. He cautions, however, that local governments that rely heavily on fees garnered from home builders could face fiscal crises. Several municipalities in his area, he says, are considering instituting or augmenting fees on commercial developers to make up for the projected shortfall.

Some developers could benefit from the housing downturn as demand for materials such as gypsum, copper electrical wire and lumber drop. Already this year, prices for those products have fallen. Falling house prices would also bring welcome relief to buyers who have been buffeted by steadily rising price tags.

Certain sectors of the commercial construction industry could continue to grow. Hotel construction spending, for instance, was up 64.4% to $21 billion in August on a seasonally adjusted annual basis, according to the Commerce Department. Though McGraw-Hill predicts no growth in hotel spending, others think the increase is likely to continue in 2007. "The rebound in [hotel] construction is everywhere," says Bjorn Hanson, head of the hospitality-and-leisure practice for PricewaterhouseCoopers LLP.

About 70% to 80% of the hotels, says real-estate consultant Patrick Ford, are popping up near freeway exits with limited meeting spaces and food service. The area around Dulles International Airport in Virginia is adding 22 hotels, most in that mold, according to Mr. Ford, president of Lodging Econometrics in Portsmouth, N.H.

Manufacturing and industrial construction will grow thanks partly to the mushrooming of ethanol plants in the wake of federal legislation mandating increased supplies of the fuel additive. Matt Hartwig, spokesman for the Renewable Fuels Association, an ethanol trade group, says there are more than a "couple hundred" ethanol plants in development, with 46 under construction.

The office-building sector is also expected to grow as it reacts to recent job growth and business expansion. Office-vacancy rates nationally hit 13.5% in the third quarter, the lowest since the third quarter of 2001, says Sam Chandan, chief economist at Reis Inc., a New York-based research firm. And bond issues passed in several states to accommodate growing school-age populations has meant a classroom building boom. Fast-growing states such as Arizona and Nevada are adding dozens of schools a year.

Article In October 26, 2006 Wall Street Journal

Home Prices Seen Dropping Through 2007

By JUNE FLETCHER

October 26, 2006

Average home prices are headed down over the next few quarters, according several leading housing economists, and growth isn't expected to resume until at least 2008.

The predictions were made on Wednesday at the National Association of Home Builders 2006 Fall Construction Forecast Conference, held in Washington. Builders, lenders, product manufacturers and others attend the semiannual conference to learn about economic trends in residential home building.

The forecast comes as other bodies have released dour news about the housing market. Median single-family home prices are already falling. The U.S. Commerce Department reported today that the median price of new homes fell to $217,100 from $240,400 a year earlier, the lowest price in two years and biggest year-over-year drop since December 1970.

That follows a report on Wednesday by the National Association of Realtors that showed the median price of previously owned homes fell 2.2% to $220,000 during the month, a record drop. Meanwhile, the Federal Reserve decided not to change the federal funds rate, the interest rate on overnight loans between banks, from 5.25%, citing the "cooling" housing sector. Although purchase loans are only indirectly affected by this rate, it does have a direct bearing on home equity lines of credit.

At the forecast conference, David Seiders, chief economist of the National Association of Home Builders, predicted that average prices of single-family homes -- up 10.1% in the second quarter from a year earlier -- will stall in the second quarter of 2007, and then drop 1% in the third quarter and 0.5% in the fourth quarter, before recovering slightly in 2008. It is the first time that the trade association has ever predicted a price decline. Mr. Seiders pegged his forecast to quarterly changes he expects will occur in the Office of Federal Housing Enterprise Oversight's Housing Price Index, which has never showed a year-to-year decline in home prices.

Mr. Seiders blamed a confluence of factors for the anticipated decline, including overbuilding, lack of affordability and rising inventories of unsold new and resale homes. The imbalance between supply and demand, as buyers continue to sit on the sidelines waiting for prices to drop, has already had a big impact on builders. In the second quarter of 2006, the annual rate of single-family starts fell 41% to 1.53 million, while "permits are in free-fall," Mr. Seiders said. Although he anticipated a correction at the last semiannual meeting of the forecast conference, "it happened a lot sooner than I expected," he said.

Other economists at the semiannual conference were more pessimistic. David Berson, chief economist at Fannie Mae, said that average home prices could fall 2% to 3% by the middle of next year and not rise until 2009. "Prices have gone out of whack with income growth," he said.

Mark Zandi, chief economist of Moody's Economy.com, expects prices will fall between 2% and 4% by the middle of next year, once sellers finally accept that the boom is over. Still, he doesn't believe that a housing crash is imminent. "Corrections devolve into crashes when bankers dump properties," he said. According to Mr. Zandi, that scenario is less likely to happen today than it was in the '80s and '90s, since most homeowners have a sizable amount of equity in their homes and are unlikely to default on their loans.

Article in October 26, 2006 Wall Street Journal

Home Prices Keep Sliding; Buyers Sit Tight

August and September Declines
Were Largest in at Least 38 Years;
Yanking a Listing in Naples, Fla.

By JAMES R. HAGERTY
October 26, 2006

The air continues to seep out of the U.S. housing market, according to the latest data, and some economists are warning that prices will keep declining through much of 2007.

The National Association of Realtors yesterday reported the biggest drop in home prices since the trade group began compiling price data in 1968. Specifically, the association said the median price for home sales completed in September was $220,000, down 2.2% from a year earlier. That matched a revised 2.2% decline in August. In addition to being the largest price drops in at least 38 years, the back-to-back declines are the first time median home prices have fallen since 1995.

Other data gathered by The Wall Street Journal show large inventories of unsold homes and declining price trends in most major metropolitan areas.

Housing is still contracting," says Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. "We haven't yet found the bottom." Mr. Miller doesn't expect house prices to resume their usual rising trend until 2008.

The latest report is likely to encourage many potential buyers to hold off in the hope of further price declines. "There's no rush," says Robert Cook, a procurement manager living in Whitehall, Pa., who is looking to buy a larger home for his family in Pennsylvania's Lehigh Valley.

Rather than slash their prices, some sellers are taking homes off the market until they see stronger demand. Audrey Heckaman, a pharmaceutical sales representative in Cleveland, bought a new condo in a golfing community in Naples, Fla., in 2004 for $221,000. Early this year, she put it on the market for $429,000. But she found that too many other units in the same development were on the market. After cutting her price to $384,000, she yanked the home from the market in June and found renters for part of the year. In the long run, she figures, demand from retiring baby boomers will drive prices back up.

For those who want to buy now, sellers are dangling lots of incentives. A developer in Dadeland, Fla., near Miami, is offering $5,000 of furniture as an inducement for buyers of new condominiums, says Ronald A. Shuffield, president of the brokerage firm Esslinger-Wooten-Maxwell Inc. Other developers offer to pay some of the fees and other costs usually borne by home purchasers.

Some people who are forced to sell quickly are suffering huge losses. At an auction in Naples last weekend, the highest bid for a three-bedroom lakefront house was $440,000, including commissions and auction fees. The house had sold in July 2005 for $690,000.

Despite the recent drop-off, house prices remain far above the levels of five years ago, and they continue to rise in some areas, including Seattle, Houston and Raleigh, N.C. But they are falling sharply in other places. In Massachusetts, the median price for single-family homes in September was down 8.3% from a year before, according to Warren Group Inc., a publisher and data collector in Boston. In Phoenix, the median price dropped 4.8% in September, the local Realtors association reported.

In some areas, prices are only just beginning to fall back toward realistic levels, says Thomas Lawler, a housing economist in Vienna, Va. He believes that prices could fall more than 10% from their peak levels in markets such as Sacramento, Calif.; San Diego; Las Vegas; Reno, Nev.; Phoenix and parts of northern Virginia and Florida.

Nationwide, sales of previously occupied homes in September were at a seasonally adjusted annual rate of 6.2 million, down 1.9% from August and 14% from a year earlier, the Realtors group reported.

In a mildly positive sign for home sellers, the number of homes listed for sale at the end of September declined 2.4% from a month earlier to 3.75 million. But that was smaller than the usual decline in September, when the resumption of school and the approach of the holidays typically begin to reduce the number of for-sale signs. Over the past decade, inventories of home sales have declined an average of 3.6% in September from the previous month.

Inventories in September were up about 35% from a year earlier. A surge in inventories, fueled partly by investors rushing for the exits, began chilling the housing market in mid-2005 after a five-year boom that more than doubled prices in many areas.

Despite the spreading weakness in house prices, few experts expect anything approaching a collapse. The economy continues to expand, though at a slower rate, and a recent drop in interest rates helps make mortgage costs more affordable.

To gauge residential real-estate prospects for 27 major metro areas, The Wall Street Journal gathered data on inventories of homes for sale at the end of the second quarter from a variety of local sources; pricing trends based on surveys of real-estate agents by Daniel Oppenheim, an analyst at Banc of America Securities in New York, a unit of Bank of America Corp.; and data on late mortgage payments and job-creation prospects from Moody's Economy.com, a research firm in West Chester, Pa. Employment trends tend to drive demand for housing.

Metropolitan areas with large increases in homes on the market and weak job-growth projections include Detroit, New York and Los Angeles. Inventories have more than doubled from a year earlier in the Miami, Orlando, Tampa and Phoenix metro areas, but strong job and population growth should help to soak up excess supply in the next few years.

Even within metro areas, price trends vary considerably depending on neighborhoods and types of housing. In northern New Jersey, for instance, prices for homes below about $400,000 may start rising again slightly by next spring if interest rates remain around current levels, says Jeffrey Otteau, president of Otteau Valuation Group Inc., an appraisal and research firm in East Brunswick, N.J. At that price level, "there's virtually zero construction," he says. But he says there is such a glut of luxury housing in the area that prices of such homes won't recover before 2008.

Tom Doyle, an agent at Naples Realty Services who compiles market data on his Web site (www.naplesinsider.com), estimates that prices for typical homes in the area are down 15% to 20% from their peak a year ago. Inventory has doubled during that time, but many of the homes on the market are priced so high that they have "only a lottery's chance of selling," he says. Looking ahead to this winter's selling season, Mr. Doyle says he expects prices to be flat to lower because of the large supply of homes for sale.

Seattle has been one of the strongest markets in recent months but is showing signs of losing some steam as inventories of unsold homes rise. In 17 counties of western and central Washington State covered by the Northwest Multiple Listing Service, the median price in September was up 9.4% from a year earlier, the first single-digit increase in two years.

Mike Skahen, owner of real-estate brokerage Lake & Co. in Seattle, says inventory is still lean in good neighborhoods near the area's biggest employers. But the overall market is slowing to a more normal pace as "buyers are feeling they can be more selective."

Houston's market is benefiting from job growth at energy and technology companies and draws newcomers because of its low home prices. The median price in the second quarter was $152,700, compared with a national median of $227,500, according to the National Association of Realtors.

In North Carolina, Charlotte, Raleigh and some other areas have been strong lately as moderate weather and relatively low housing costs attract employers and retirees. Pat Riley, president of Allen Tate Realtors in Charlotte, has noticed increasing numbers of people moving to North Carolina from Florida to flee congestion and high housing and insurance costs. One hitch: Some people moving to Charlotte are having trouble selling their homes elsewhere and so are delaying purchases.

The median price of new and previously occupied homes sold in the eight-county Charlotte region was $182,000 in the third quarter, up 6% from a year earlier, according to Market Opportunity Research Enterprises, a research firm in Rocky Mount, N.C. But the Charlotte market may be starting to cool a bit. The Charlotte Regional Realtors Association reported that home sales in September slipped 2% from a year earlier, while the average price edged down 0.2%.

The California Association of Realtors last week forecast that the median home price in the state will slip 2% to $550,000 in 2007, after rising 7% in 2006 and 16% in 2005. That would mark the first California-wide decline since 1996. California's last house-price slump lasted from 1992 through 1996.

Leslie Appleton-Young, the California Realtors' chief economist, says she doesn't expect the current downturn to be as severe as the one in the 1990s because she thinks the job market will be healthier this time. Many people don't need to sell and will withdraw their homes from the market until demand recovers, she says. Still, she adds, some investors who bought near the top and took on too much debt "are going to get into trouble."

Article In October 22, 2006 Wall Street Journal

FORECLOSURE Q&A: A fortune in foreclosures?

Investors are rushing to take advantage of the sharp rise in seized properties, but many aren't aware of the risks

BY GRETA GUEST
FREE PRESS BUSINESS WRITER

October 22, 2006

The rapid pace of Michigan foreclosures in recent months has more buyers looking at the real estate market as a good investment, agents who specialize in foreclosures say.

Many investors do make good money in the foreclosure market, but it can be tricky for novice real estate investors, said Marshall Mandell, associate broker for RE/MAX in Farmington Hills.

"If you can buy and hold real estate for a number of years, I would say it is a good time to buy now. For a short-term goal, it is riskier," Mandell said.

Michigan ranked third nationwide for foreclosures in September, behind Colorado and Nevada, according to RealtyTrac, an Irvine, Calif.-based online foreclosure Web site.

Michigan reported 7,846 properties entering foreclosure in September, a 14% increase from August and almost triple the rate of September 2005. That works out to one foreclosure filing for every 538 households.

And metro Detroit ranked second nationally among metropolitan areas, with one foreclosure filing in September for every 197 households, or a total of 4,190 properties entering some stage of foreclosure. The Greeley, Colo., area had the highest default rate.

Foreclosure filings are up 39% nationwide this year and already have exceeded the total reported for 2005. RealtyTrac predicts that if the current pace continues, foreclosures will exceed 1.2 million by the end of the year.

Tricia Raymond, an agent for RE/MAX in Bloomfield Hills, says she thinks it will take time for the southeast Michigan economy to perk up again. She said the high foreclosure rate is tied to layoffs and people who took on second mortgages during the refinancing boom before interest rates started going up again.

"When people get tired of the stock market, they try real estate," Raymond said. "Detroit can come back, but we have to have some jobs to come back to. It is going to be rough in the next two years here."

Right now, properties -- including foreclosures -- stay on the market an average of eight months before they sell, she said.

"We are at or near a lull in our market," said Dave Kashat, associate broker with Keller Williams Realty in Livonia. "You can never say when the bottom is. Every real estate market goes through its boom-and-bust cycle."

Three foreclosure specialists -- Marshall Mandell, Tricia Raymond and Dave Kashat -- appeared on a panel last week at a meeting of the Real Estate Investors Association of Oakland. Here are some of their answers to questions that arose.

QUESTION: When negotiating a price, do banks take into consideration that the Michigan market is very slow right now?

Kashat: I've noticed the banks are starting to get more aggressive with their prices.

Raymond: They know when they really need to dump these properties.

Mandell: You have to consider that their holding costs are very low. They can hold these properties for a very long time.

Q: Where does the average person find listings of foreclosed properties for sale?

Raymond: There is no one place that lists everything. It is private enterprise. You have to go company to company, foreclosure site to foreclosure site. Real estate agents can usually find out more about the properties.

Q: Is it better to try to bid on a property at auction or after it is in the bank's possession?

Mandell: The property may be worth $190,000 and the opening bid is $190,000, so the only one to take the property back is the bank. There is no spread for the typical investor.

Typically, you will not have been able to preview the property prior to the sheriff's auction. After the listing period, you can view the property. Some of them are in terrible condition. They may have mold or built-in structural damage that is not apparent from the exterior. Sometimes they are heavily vandalized, but you won't know until you see it. More and more they are stealing the copper, aluminum siding, furnaces, water heaters ... they are selling these things for scrap.

Kashat: Some investors will buy the property sight-unseen and plan on doing total rehabs, but that is not the type of risk the average person should be taking on. They should wait and do a full assessment of the property.

Q: How do you get your offer accepted by the bank?

Raymond: The bank is not emotional about what it is selling. It has a price just like anything else in a store. It will typically be within 10% of their list price.

Mandell: If you really want the house, then don't play games with your offer. There is a lot of fallacy around the banks. People think the banks have to get these properties off the books and they are willing to take a loss. Banks are banks. They are in the money business. There are whole departments set up to make sure they don't lose money on these properties.

Kashat: There are a lot of things you take into consideration. The bank usually lowers the price. Offering 50% is probably not going to get you anywhere.

Q: What does it take to make money on foreclosed property?

Raymond: You've got to cherry-pick your deals. In a buyer's market all the basics apply. An investor has to think about who the end buyer is going to be.

Mandell: Buying right and knowing what to fix and when to fix it ... and having a good crew who can do that for you.

Q: What are some of the bigger risks in buying foreclosed property?

Kashat: One of the biggest risks is not having the right person advise you -- and just being aware of what you are agreeing to. Some banks pass along their closing costs to you.

Mandell: Sometimes the foreclosures are more damaged than an owner-occupied home because they have been vacated and sometimes squatters have been through them.

Article In October 22, 2006 Detroit Free Press

Owners fret over property values
Poll: 44% in state concerned

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

October 22, 2006

Nearly half of Michigan homeowners are worried about the price they'd get for their house if they had to sell, according to a recent Detroit Free Press-Local 4 Michigan Poll.

Mark Hand, 45, a builder and remodeler from Grand Rapids, said he has builder friends who can't sell new houses they have built. Other friends trying to sell their own homes are also having a tough time.

"I'm not planning on selling my home, but if I were I'd be very worried," Hand said Thursday. "For people who need to move or sell, I'm glad I'm not in their shoes, I'll put it that way."

In the poll, 44% of Michiganders said they worried a lot or at least a little about their home values. Fifty-four percent said they weren't worried and 2% were not sure. The poll of 670 Michigan homeowners was conducted Oct. 8-11. It has a margin of error of plus or minus 3.9 percentage points.

There's good reason for concern. Sales of existing single-family houses were down 14.35% in Michigan through September of this year, compared to the same period last year, according to the Michigan Association of Realtors. That drop makes 2006 the worst year since at least the 1980s.

Prices are down 1.6% statewide so far this year, but in some markets, such as northern Oakland and Macomb counties, sale prices on existing houses have dropped closer to 10%, the association said.

Clearly Michigan's reliance on the ailing domestic auto industry has created a special worry for state residents. But Michiganders are hardly alone in their distress. Home sales are off nationwide.

The national sales decline is close to 13% so far this year. The inventory of homes for sale nationally has soared from about 2.3 million in 2003 to nearly 4 million today.

David Lereah, chief economist for the National Association of Realtors, blames the declines on inflated housing prices. In a recent analysis, Lereah wrote that housing prices simply got too high, cutting into affordability.

"Sellers need to abandon unreasonable expectations about the value of their homes," he wrote. "But there should be few worries for consumers. Most homeowners today have enjoyed substantial equity gains on their properties during the real estate boom years. Cutting prices by 5 or 10% will not wipe out their home equity gains."

Barbara House, 47, said many people in her northwest Detroit neighborhood are struggling just to afford their mortgage payments.

"People cannot keep their homes because they are losing their jobs, their way of life," she said Thursday. "I know of two people, friends of mine, that got jobs and had the 401(k) plan, the whole works, and went and bought a beautiful brand new home. And within six months time, they had lost their car and eventually they lost their home.

"Until something is done about the economy, people are going to keep losing their cars; they're going to keep losing their homes."

Article In October 19, 2006 Wall Street Journal

U.S. Home Prices May Fall
But Risks Will Be Limited

By BRIAN BLACKSTONE
October 19, 2006

U.S. housing prices may decline "a little" within the next year, but any such drop is likely to be mild and inconsistent with a bursting housing bubble, according to a paper written by a Federal Reserve economist.

Based on an analysis of housing futures and options and derivatives of housing-related company shares, "market participants expect home prices to decelerate sharply or actually decline a little within the next year," wrote J. Benson Durham, an economist with the Fed's monetary affairs division. However, the anticipated drop in prices "is mild compared to some estimates of the purported overvaluation of the housing market," he added. The paper, dated September, was posted on the Fed's Web site Thursday.

Mr. Durham cautioned that deep and liquid markets needed to signal future home-price trends don't fully exist and that housing futures and options have only been trading on the Chicago Mercantile Exchange since May 22. Still, implied volatility on CME housing options are greater than the historical average, "which suggests that investors see more risks to home prices going forward," he wrote. That higher uncertainty, however, is "generally inconsistent with the perception of a "bubble,'" he added.

Mr. Durham also examined options on shares of certain homebuilders to gauge whether investors see upside or downside risks to home prices. Those options "are only marginally negatively skewed at the present time," he wrote. "This suggests that market participants do not, in fact, view the risks to home prices or, perhaps more accurately, to the broader housing sector as especially tilted to the downside," Mr. Durham concluded.

The paper's conclusions seem in line with the thinking of Fed officials that the sector will slow substantially through the rest of 2006 and into 2007 but is unlikely to derail the economic expansion.

In the minutes of the Sept. 20 Federal Open Market Committee meeting, the Fed said housing "seemed to be cooling considerably" but that the overall economy should strengthen next year "as the housing correction abated." Officials also continue to remark that higher inflation poses a greater risk than a slower economy.

Housing data had declined markedly in recent months, raising fears of a housing-induced slowdown severe enough that it would eventually require Fed rate cuts. But there have been tentative signs of stabilization of late. The National Association of Home Builders index rose in October, albeit by only one point, but nevertheless breaking a string of eight straight declines. And housing starts unexpectedly rose in September, breaking a string of three straight declines.

Article in October 19, 2006 Wall Street Journal

More Home Loans Go Sour

Though New Data Show Rising Delinquencies,
Lenders Continue to Loosen Mortgage Standards

By RUTH SIMON
October 19, 2006

Mortgage lenders are making it easier to get loans even as the housing market cools -- and as the number of borrowers struggling to make their payments continues to rise, new studies show.

In the latest sign that a cooling housing market and weaker credit standards are beginning to take their toll on borrowers and lenders, the number of past-due mortgages continued to rise in the three months ended Sept. 30, according to data from Equifax Inc. and Moody's Economy.com Inc.

The increase is particularly notable because bad loans normally climb when the economy weakens and job losses rise, leaving more borrowers unable to make their monthly payments. By contrast, the latest increase appears to be more closely tied to looser lending standards, borrowers tapping their equity and slowing home-price growth.

"We're seeing rises in delinquencies and loan losses that are unrelated to what's going on in the job market," says Mark Zandi, chief economist of Moody's Economy.com. "It's very unusual."

Some 2.33% of mortgages were delinquent at the end of the third quarter, the highest level since 2003, according to Equifax and Moody's Economy.com. Among the areas that saw the biggest jump in the delinquency rate since the end of last year were Stockton and Merced, Calif., and Las Vegas-Paradise, Nev. Delinquency rates were highest in McAllen-Edinburg-Mission, Texas; Brownsville-Harlingen, Texas; and Detroit-Livonia-Dearborn, Mich.

A separate report released yesterday by the federal Office of the Comptroller of the Currency found that lenders continued to ease credit standards over the past year.

To be sure, mortgage delinquencies have been at low levels in recent years, and the recent uptick only brings them closer to historical averages. The seasonally adjusted mortgage-delinquency rate reached its most-recent peak of 2.53% in the first quarter of 2002, according to Equifax and Moody's Economy.com.

The latest news comes amid increasing concerns that lenders have been loosening their standards in an effort to boost loan volume as refinancings and home purchases wane. In a speech to the American Bankers Association this week, Comptroller of the Currency John Dugan noted that bank regulators have seen a "significant easing" of mortgage lending standards this year, even though banks normally tighten standards when the housing market cools. "We don't want to see the lending decisions bankers make today result in excessive foreclosures -- and reduced affordable housing credit -- tomorrow," he said.

The Comptroller's report found that competitive pressures are driving many banks to further loosen their credit standards. More than one-third of the lenders relaxed their standards for home-equity loans in the 12 months ended this March, according to bank examiners, while less than 5% tightened their standards.

Over the same period, 26% eased their mortgage-lending standards, most often by increasing the use of nontraditional mortgage products. These include loans that allow borrowers to pay interest and no principal in the early years or make a minimum payment that can lead to a rising loan balance. Yesterday, regulators released a booklet designed to help consumers understand these exotic mortgage products.

"We have reason to believe that the amount of easing we saw back in March is continuing," says Kathryn Dick, deputy comptroller for credit and market risk at the OCC. Federal bank regulators have been stepping up their scrutiny of residential mortgage lending by large banks, she says, with a particular focus on banks that lend heavily in cooling housing markets.

There are signs that some lenders are beginning to pull back. Last week, New Century Financial Corp. said it would begin tightening lending guidelines for adjustable-rate mortgages sold to "at-risk" borrowers. The company also said it would offer the option of refinancing into a low-fee 30-year or 40-year fixed-rate mortgage to certain borrowers with adjustable-rate or interest-only loans held by the company.

Agencies that counsel homeowners with mortgage problems say that many borrowers are running into problems because of the terms of their loans, not their personal circumstances. "It's mostly people with adjustables" who are having trouble paying their loans, says Pam Canada, executive director of the NeighborWorks HomeOwnership Center in Sacramento, Calif.

David M. Crosby, a Las Vegas bankruptcy attorney, says he has seen a "surge" in borrowers with mortgage problems. "Most of it is [tied to] the end of the housing boom, but I do see a good percentage of clients who got caught by a change in their mortgage rates." In addition, some clients "bought a number of speculative homes," he says. "The market turned on them, and now they are in a real financial mess."


Some homeowners are calling it quits. "A surprising number of people are walking away from their homes rather than trying to save them," says Mr. Crosby, either because the rate on their loan has jumped or because they owe more than the home is worth.

While the number of bad loans remains manageable, higher loan losses could force lenders to cut back on credit, making it more difficult for some borrowers to get a loan. A spike in foreclosures could also help push home prices downward in some markets if lenders were forced to sell significant numbers of homes at a loss.

Absent a recession and job losses, the rise in delinquencies is unlikely to have an impact on the national economy, says Doug Duncan, chief economist of the Mortgage Bankers Association. But an increase in bad loans could hurt some local housing markets, "especially if you see home price declines," he says.

An analysis by Moody's Economy.com found that a weak economy -- as measured by payroll growth -- was the driving factor in less than one-quarter of the metro areas with large increases in delinquencies. Instead, the rise in bad loans was more closely correlated with "mortgage equity withdrawal," a measure of how much cash homeowners have pulled out by refinancing, taking out home-equity loans or selling their homes and pocketing some of the profits, the study found.

Other factors included slowing home-price growth and a high proportion of loans given to borrowers with scuffed credit. The study was based on an analysis of credit records and included late payments on mortgages and home-equity loans and lines of credit.

Article in October 12, 2006 Wall Street Journal

Finally, the Contractor Will Take Your Calls

Housing Slump Frees Up
Builders and Lowers Cost
Of Materials for Remodeling

By SARA SCHAEFER MUÑOZ
October 12, 2006

For homeowners who have been putting off remodeling projects, now may be the time to call the contractor.

While the current housing slump isn't cheering investors, it is making remodeling a kitchen or bathroom or adding an addition easier and cheaper. During the booming real-estate market of the past several years, people wanting to remodel often found themselves waiting months for contractors to take on lower-ticket jobs -- if the contractors would take them on at all. Now, sluggish home-building demand is pushing down the cost of construction materials (prices for lumber are near their lowest level in a decade) and spurring contractors to take on smaller projects -- and sometimes cut fees.

Custom and speculative builders are also starting to take on renovation jobs, picking up work they may have passed over just a year ago. In Tucson, Ariz., Richard Fink, co-owner of Becklin Construction LLC, a custom home builder, used to do a few remodeling jobs as favors to former clients; now remodeling has grown to half his business. Samm Jernigan, a high-end custom home builder in Wilmington, N.C., said earlier this year he started "aggressively pursuing" remodeling projects for the first time, and John Diament, a home builder outside of Philadelphia, says two months ago he started asking architects to send big remodeling jobs his way.

"It's good news for the consumer if you've got a lot more people seeking projects," says Gopal Ahluwalia, staff vice president of research for the National Association of Home Builders.

Meanwhile, prices of framing lumber have fallen dramatically, says Shawn Church, the editor of Random Lengths, an industry newsletter based in Eugene, Ore. The composite price per thousand board feet of framing lumber was $274 this week, compared with $375 a year earlier, according to data from Random Lengths. Ken Simonson, the chief economist for the Associated General Contractors of America, a trade group in Arlington, Va., says he expects to see a roughly 10% drop in prices of gypsum and construction plastics when government price data are released later this month. Economists say the lower material costs could save homeowners an estimated 5% to 10% on additions.

The falloff is largely because of slowing new-home construction, which for several years had driven up the cost of materials. Housing starts dropped 6% in August from a month earlier to a seasonally adjusted annual rate of 1.665 million units, according to the Commerce Department. That was the slowest rate of starts since April 2003.

Growth in spending on remodeling has also slowed recently, a result of rising interest rates and homeowners who have postponed selling, along with presale renovations. According to the most recent data from Harvard University's Joint Center for Housing Studies, spending on home remodeling rose just 2.8% in the 12-month period ending in June, compared with the frenzied 20% increase in 2004. Still, spending on home remodeling, maintenance and repairs totaled $215 billion in 2005, up from $199 billion in 2004, according to the most recent annual data from the Census Bureau.

The new environment means that homeowners are more likely to find contractors willing to take on projects quickly. "Rather than saying 'call me next spring,' they'll be more likely to say 'I'll be over this week to the talk about the project,' " says Kermit Baker, a senior research fellow at the Harvard Joint Center.

That is what Kurt and Susan Askin found this summer when they sought a bid for remodeling a bathroom in their northern Virginia home. About three years earlier, the couple redid their kitchen and had to wait a couple of months to get started. But when they decided to go ahead with the bathroom project this summer, they called the same contractor and the project was under way in two weeks.

"I was certainly pleasantly surprised," says Ms. Askin, a retired accountant.

Their contractor, Don Sever, the owner of Sever Construction, in Oakton, Va., says he sees interest in remodeling starting to ease. He has trimmed prices by about 5% to attract more business. "People are much more cautious about spending that home-equity money," he says.

Economists caution that people should only invest in their home if they are planning to stay awhile and enjoy it. With home prices starting to fall, owners may not see the same, hefty return on their investment that renovations have brought in the past several years.

"It's a riskier proposition to fix it up for a buyer," says Mr. Simonson of the Associated General Contractors of America.

There are also risks in hiring a new-home builder who doesn't have remodeling experience, building experts say. On the surface, the required skills may seem the same, but staffers that work on new homes tend to have specific skills, such as roofing or framing, and managers may not be versed in the challenges and costs associated with reconfiguring an existing kitchen. Remodelers, they say, are better-suited to coordinate all the details of project, from putting up wallboard to installing faucets.

Longtime remodelers also warn that new-home builders may not be accustomed to interacting frequently with clients. While builders may be used to working on their own in an empty house, remodelers must be in a home for weeks at a time while their clients are living there.

"It takes a different kind of person," says Mr. Sever, the Oakton, Va., remodeler. "You need to put up tarps, clean up and not set tools on a customer's dresser."

Scott Sevon is a custom builder and remodeler in the Chicago area who has recently taken on more remodeling projects. He says he has made his staff aware that remodeling "is a lot more time and hand-holding and lot of good communication skills." As one way to demonstrate their responsiveness, he gave all of his staff Blackberry e-mail devices so clients can get in touch at any time.

Despite possible drawbacks, some clients say hiring custom builders for remodeling projects is a plus. When Bruce Ash wanted to do a large-scale renovation at his Tucson home, he wasn't sure if a traditional remodeler would have the attention to detail required to mimic the Arts and Crafts style he and his wife envisioned. They wanted mahogany wainscoting in a specific pattern and custom-made doors that were modeled on an old house in Wisconsin. He found Mr. Fink of Becklin Construction to take on the $700,000 project. It was one of Mr. Fink's first major remodeling projects.

"Guys who are used to commissioning million-dollar houses are going to be attuned to a whole different level of detail," says Mr. Ash, a real-estate manager. "Normally, the market has been such that we could never get custom builders to remodel homes, but now, they are interested."

Article in Octiber 3, 2006 Detroit News

Home Values Lag Ownership Costs

Trend is squeezing homeowners in cities across U.S., including Detroit, Livonia, according to census.

Gordon Trowbridge and Christine MacDonald / The Detroit News

Metro Detroit home values are barely keeping pace with the cost of owning a home, according to Census Bureau data released today.

And of 20 cities across the nation where the survey found ownership costs outpaced the growth in home values, two of them -- Livonia and Detroit -- are in southeast Michigan.

Experts say the trend threatens to squeeze families whose home investment may no longer be growing as fast as the expenses of maintaining it. And it highlights the fact that while much of the nation enjoyed a boom in home values in the first half of the decade, Michigan was left behind.

No city demonstrates the trend better than Livonia: Between 2000 and 2005, real estate values there increased about 29 percent, according to the data released today. Over the same period, the monthly cost of home ownership -- mortgage and tax payments, insurance, condo fees where applicable and utilities -- rose 35 percent. It's as if Livonia homeowners have been investing in a mutual fund with fees so high that they erase all the fund's earnings.

"I am afraid. It's a bummer. I don't even want to know," said Kim Naccashian, 44, of Livonia. She fears the value of the home she and her husband bought in 1992 is fast eroding -- a fear fed by what she sees in her job as a real estate appraiser.

While the rise in costs for Metro Detroit communities was at or about national averages, the growth in home values lagged the rest of the country: Monthly homeowner costs in Metro Detroit were up about 28 percent from 2000 to 2005, more than the national increase of 19 percent. But home values were up only 28 percent in Metro Detroit, compared with 50 percent for the nation.

"Appraising two foreclosures a week does nothing for my financial outlook," Naccashian said.

"You've got people in $500,000, $600,000 homes going into foreclosure."

The numbers are from the 2005 American Community Survey, a random-sample survey that is designed to replace a part of the once-a-decade census. The survey includes data on all geographic areas of more than 65,000 people; data released earlier this year covered population and economic characteristics.

Several factors have pushed ownership costs higher, experts said: For some families, higher interest rates mean bigger mortgage payments, and higher energy costs may be pushing utility bills up.

But economist Christopher Cagan said the real problem for Michigan families is the sluggish growth in home values.

"Costs are rising at a fairly modest rate, but the value growth just has not been there," said Cagan, director of research and analytics for First American Real Estate Solutions, a California mortgage company. The auto industry's struggles have kept Michigan from enjoying the same big jumps in home values that have benefited much of the country.

Elsewhere in the country, some economists worry that exotic mortgages -- interest-only loans or adjustable-rate mortgages -- will hammer homeowners who have bought more home than they can afford.

In other Metro Detroit communities -- Dearborn, Southfield and Canton Township -- home-value increases have barely outpaced monthly costs.

Renters in some communities are being squeezed too, according to the data. The increase in monthly rents in Dearborn and Detroit (both up 39 percent since 2005) are in the top 10 percent of the 500 communities included in the Census Bureau data -- far higher than those cities' rankings in home-value increases.

Among other findings:

Michigan remains among the leaders in homeownership rate. About 75 percent of the state's homes were owner-occupied in 2005, a slight increase from 2000. Only Minnesota and West Virginia had higher homeownership rates.

Livonia ranked second among the nearly 500 communities listed in homeownership rate, at 89 percent. Rochester Hills (79 percent) and Shelby Township (78 percent) also were in the nation's top 20.

Article in October 3, 2006 Detroit Free Press

CENSUS 2006: Habits, real estate set Michigan apart

Home values Loans put owners in a dangerous situation

BY MARISOL BELLO and JOHN WISELY
FREE PRESS STAFF WRITERS

October 3, 2006

Census data released for publication today show that while growth in median home values in Michigan lag that in the rest of the nation, homeowners here have kept pace with the national trend toward getting second mortgages and home-equity loans, taking advantage of low interest rates and using their stake in their homes for ready cash.

But that may prove a dangerous strategy at a time when the state's economy continues to falter and job losses have reached record highs. The pressure of additional payments could help fuel a skyrocketing number of home foreclosures and loan defaults.

Economists say such an availability of cash has actually propped up the Michigan economy in recent years by giving residents the means to continue spending. But long-term, it's draining wealth from homeowners.

"There's a widespread trend for people to tap into their equity nationally," said Dana Johnson, chief economist for Comerica. "Obviously, here there's less equity to tap as elsewhere. ... It puts borrowers in a more precarious position."

The census data show that 556,000 Michigan homes -- representing 19% of all the owner-occupied homes in the state -- have some kind of second loan on them.

The data also show that the median value of owner-occupied homes in Michigan has increased 19% in the last five years, when adjusted for inflation -- well below the national average of 32%.

In metro Detroit, 24% of the homes in Oakland County have a second loan on them, while the median property value has increased 16% in the last five years. In Macomb County, 21% of homes have a second loan on them, while the median value has gone up 11%. In Wayne County, 17% of homes have second loans, and the median value has increased 25%.

The information comes from the yearly American Community Survey, which the Census Bureau plans to use to replace the decennial census. The 2005 survey includes municipalities with a population of 65,000 people or more, which in Michigan, included 21 cities and 28 counties.

How the money's being spent

Talking to homeowners, it becomes clear that not all of these loans are being used for traditional purposes, such as home repair. Some are using the loans to pay for everything from college tuition to grocery and utility bills.

The loans typically charge far less interest than credit cards, so using one to pay off the other can help cut costs. And many people have taken out second mortgages to avoid paying expensive mortgage insurance.

During their daughter's first year at Grand Valley State University in 2001, Larry and Diane Janes took out a $7,500 home-equity loan on their Livonia home. Now, with two kids in college, the Janes are up to $40,000 in home-equity loans.

"Unfortunately, we weren't eligible for any other type of assistance," Larry Janes said Friday. "A home-equity loan is tax deductible and has lower interest rates. It was something we started tapping small and use as needed."

Of the 21 Michigan cities and townships included in the census estimates, Rochester Hills (29%), Canton (28%) and Waterford (27%) had the highest percentages of homeowners carrying a second loan.

Between 2000 and 2005, census figures suggest Michiganders increasingly turned to second loans, though they are not an exact comparison. The 2000 data did not include multifamily units, such as condominiums, which are counted in the 2005 estimates.

But comparisons can be made. For instance, in Dearborn, with its predominance of single-family homes, 17% of homes had a second loan, compared with 12% in 2000. But median home values in Dearborn increased only 9% during that time when adjusted for inflation, from $146,571 to $160,200, according to census estimates.

In Rochester Hills, also made up predominantly of residential homes, the number was up from 21% five years ago. Meanwhile, median home values increased 12% during that span, from $243,831 to $272,300.

The slow growth shown by the census numbers is underscored by recent figures that found that home values in metro Detroit dropped by 8% during the second quarter this year, compared with the same period last year. The National Association of Realtors found that metro Detroit's drop was the second highest of 151 metropolitan areas nationwide.

And that puts more homeowners at risk of defaulting on their loans or losing their homes in foreclosures.

In the first eight months of last year, lenders filed for foreclosure on 21,076 homes, according to RealtyTrac, an online market for foreclosed properties. During the same period this year, the number of filings shot up to 50,863.

Meanwhile, 6.7% of mortgages in Michigan were past due by the second quarter of this year, according to a delinquency survey conducted by the Mortgage Bankers Association of America. Only hurricane-ravaged Mississippi and Louisiana had higher delinquency rates.

"The question is, how far down that well do you want to go and how many times can you tap it before it runs dry?" said Diane Swonk, a Livonia native and chief economist at Mesirow Financial in Chicago.