Article in October 26, 2006 Wall Street Journal

Decline in New-Home Prices
May Reflect Regional Factors

October 26, 2006

U.S. new-home sales jumped1 unexpectedly in September by 5.3%, but prices were lower. The average price of a new home decreased to $293,200 in September, from $314,000 in August and $299,600 in September 2005, according to Commerce. The median price fell 9.7% last month, to $217,100 from $240,400 a year earlier, representing the sharpest drop since December 1970. The August 2006 median sales price was $239,300. Meanwhile, new-home inventories receded in September. Economists comment on the drop in price and what it means for the future of the market.

* * *
The newspaper headlines will blare that new-home prices fell by 9.7% year over year, the largest drop since 1970. Admittedly, this is a shocking headline, but do not make too much of it. First, as we have noted many times, the mix changes every month so that these price numbers do not pertain to a comparable mix of homes over time. If people are scaling back their desires, if the regional mix changes, etc., then the numbers get skewed. Moreover, the new-home side of the equation should be the most volatile, because the inventories of new homes all have to get sold quickly (whereas homeowners can simply take their existing homes off the market for a while when market conditions ease). It is easy to imagine a world in which new-home prices fall by 5% or 10% and the average of all home prices are steady or even somewhat higher. We will wait for the Ofheo figures to get a better read on overall home prices. In any case, the faster new-home prices fall, the quicker those inventories are going to get sold and the faster we can get past this housing correction. --Stephen Stanley, RBS Greenwich Capital

The median new home price fell by 1.7% [in the third quarter] across the nation. However, the median sales price rose in each of the major geographic regions (Northeast +19.3%, Midwest +4.0%, South +0.7%, West +1.6%), which suggests that some of the home price decline is due to a shift in the regional pattern of sales toward lower-priced regions. --Bear Stearns Economics

* * *
The really startling number in this report is the 9.7% plunge in median prices compared to a year ago. No doubt a good part of this drop reflects an increase in the number of smaller homes in the sample, which is not adjusted to take account of changes in the mix of homes sold from month-to-month. Still, mean prices also slumped, to -2.1% from +6.4% in August, so we think there probably has been a serious drop in prices per square foot. --Ian Shepherson, High Frequency Economics

* * *
While month-to-month changes in median sales prices can be driven by changes in the regional mix of sales (prices in the Northeast and West are much higher than in the Midwest and South), the underlying trend here is one of lower prices after the sharp gains seen for many years. It should not be surprising to see prices weaker for new homes than for existing homes, as most owners of an existing home are not forced to sell, and many just pull their homes off the market rather than aggressively lower the selling price. Builders, though, do not have this option, and prices of new homes therefore are more reflective of softer demand than are those for existing homes. --Joshua Shapiro, MFR, Inc.

* * *
[The price decline] exaggerates the extent of the weakening price picture. Because sales in the more expensive Northeast fell sharply while sales in the South rose, the mix of homes sold shifted toward those priced at under $200,000, while sales of pricier homes fell as did the relatively small subset of homes prices at under $150,000. Nonetheless, the stronger sales helped builders pare inventories by about 1.9% but the stock of unsold homes remains at an uncomfortably high level that would still require 6.4 months to liquidate at the current selling rate. Summing Up: New home sales rose a "surprising" 5.3% in September BECAUSE builders were more aggressive in cutting prices. --Nomura Economics Research

* * *
The demand for new housing is well pass its peak and is now on a retreating trend despite this month's bounce. Moreover, inventories of unsold new homes remain very high, revealing moderate overbuilding. Finally, home-price momentum has slowed significantly as home builders are using big discounts to motivate new home buyers. Consequently, housing's contribution to economic growth will be a large negative in the third quarter and a somewhat smaller negative in the fourth quarter. --Steven Wood, Insight Economics

Article in October 26, 2006 Wall Street Journal

New-Home Sales Jumped 5.3%
Last Month as Prices Plunged

By JEFF BATER and BENTON IVES-HALPERIN

October 26, 2006

WASHINGTON -- The median price of a new home plunged in September from a year earlier by the largest amount in more than 35 years. But in a sign that the housing market could be nearing bottom, the pace of sales rebounded for a second month.

Orders for durable goods, such as cars and computers, surged 7.8% in September over the previous month, the largest gain since June 2000. Virtually all the strength came from a giant increase in commercial aircraft orders; outside of transportation, orders inched up 0.1%.

Thursday's data suggested that the economy is still growing, albeit at a moderate pace. That is the scenario sought by the U.S. Federal Reserve, which on Wednesday decided to hold short-term interest rates steady for a third straight month.

"Looking forward, there has been a significant improvement in the overall investment climate in the past month and a half -- inflation uncertainty has declined, long-term interest rates have moved down and the Fed has kept interest rates on an even keel," Brian Bethune, an economist at Global Insight, wrote in a research note.

Indeed, the Commerce Department's measures of shipments and orders of "core" capital goods, or those excluding aircraft and defense, suggest business investment is picking up and that the economy may regain some momentum in the fourth quarter after a tepid third quarter.

Shipments of core capital goods plunged 2.1% in September and increased at a slower annualized rate in the third quarter than they did in the second. But orders jumped 1.1% in September and rose at a faster annualized rate in the third quarter than they did the previous quarter. High corporate profits are enabling businesses to make capital investments on equipment and facilities that can lead to future growth.

The Commerce Department Thursday said the median price for a new home sold in September fell 9.7% to $217,100 from a year earlier. That was the sharpest year-to-year drop since December 1970.

At the same time, though, new-home sales rose a second straight month in September, jumping 5.3% to a seasonally adjusted annual rate of 1.075 million homes. It marked the second consecutive increase in sales following three months of declines.

In another hopeful sign, inventories of unsold homes and new homes decreased. According to Commerce data, there were an estimated 557,000 homes for sale at the end of September, representing a 6.4 months' supply at the current sales rate. That represents a 1.9% decline in inventories over August, the sharpest decline since December 2000.

The declines in housing prices underscored the severity of the correction in the once-booming market, which had seen sales of both new and existing homes soar to record levels for five consecutive years, propelled by the lowest mortgage rates in more than four decades. This year, rising mortgage rates have helped cool sales.

A 7.8% surge in durable goods orders last month, to a seasonally adjusted $226.70 billion, meanwhile, was largely due to a jump in transportation orders -- specifically commercial aircraft -- which rose 27.6% in September over the previous month. Durable goods orders fell the two previous months.

A.G. Edwards & Sons economist Gary Thayer said the 0.1% increase in durable goods excluding transportation orders is "more representative of the manufacturing economy right now -- still soft, consistent with moderate economic growth."

In other economic news, the Labor Department Thursday said the number of new applicants for unemployment insurance benefits rose last week, suggesting labor markets remain relatively healthy. Initial jobless claims rose 8,000 to a seasonally adjusted level of 308,000 in the week ended Oct. 21.

"These data still portray a relatively tight labor market, tighter than indicated by the recent growth in payroll employment," Steven Wood, chief economist at Insight Economics, said in a research note.

Article in October 26, 2006 Wall Street Journal

Decline in New-Home Prices
May Reflect Regional Factors

October 26, 2006

U.S. new-home sales jumped unexpectedly in September by 5.3%, but prices were lower. The average price of a new home decreased to $293,200 in September, from $314,000 in August and $299,600 in September 2005, according to Commerce. The median price fell 9.7% last month, to $217,100 from $240,400 a year earlier, representing the sharpest drop since December 1970. The August 2006 median sales price was $239,300. Meanwhile, new-home inventories receded in September. Economists comment on the drop in price and what it means for the future of the market.

* * *
The newspaper headlines will blare that new-home prices fell by 9.7% year over year, the largest drop since 1970. Admittedly, this is a shocking headline, but do not make too much of it. First, as we have noted many times, the mix changes every month so that these price numbers do not pertain to a comparable mix of homes over time. If people are scaling back their desires, if the regional mix changes, etc., then the numbers get skewed. Moreover, the new-home side of the equation should be the most volatile, because the inventories of new homes all have to get sold quickly (whereas homeowners can simply take their existing homes off the market for a while when market conditions ease). It is easy to imagine a world in which new-home prices fall by 5% or 10% and the average of all home prices are steady or even somewhat higher. We will wait for the Ofheo figures to get a better read on overall home prices. In any case, the faster new-home prices fall, the quicker those inventories are going to get sold and the faster we can get past this housing correction. --Stephen Stanley, RBS Greenwich Capital

The median new home price fell by 1.7% [in the third quarter] across the nation. However, the median sales price rose in each of the major geographic regions (Northeast +19.3%, Midwest +4.0%, South +0.7%, West +1.6%), which suggests that some of the home price decline is due to a shift in the regional pattern of sales toward lower-priced regions. --Bear Stearns Economics

* * *
The really startling number in this report is the 9.7% plunge in median prices compared to a year ago. No doubt a good part of this drop reflects an increase in the number of smaller homes in the sample, which is not adjusted to take account of changes in the mix of homes sold from month-to-month. Still, mean prices also slumped, to -2.1% from +6.4% in August, so we think there probably has been a serious drop in prices per square foot. --Ian Shepherson, High Frequency Economics

* * *
While month-to-month changes in median sales prices can be driven by changes in the regional mix of sales (prices in the Northeast and West are much higher than in the Midwest and South), the underlying trend here is one of lower prices after the sharp gains seen for many years. It should not be surprising to see prices weaker for new homes than for existing homes, as most owners of an existing home are not forced to sell, and many just pull their homes off the market rather than aggressively lower the selling price. Builders, though, do not have this option, and prices of new homes therefore are more reflective of softer demand than are those for existing homes. --Joshua Shapiro, MFR, Inc.

* * *
[The price decline] exaggerates the extent of the weakening price picture. Because sales in the more expensive Northeast fell sharply while sales in the South rose, the mix of homes sold shifted toward those priced at under $200,000, while sales of pricier homes fell as did the relatively small subset of homes prices at under $150,000. Nonetheless, the stronger sales helped builders pare inventories by about 1.9% but the stock of unsold homes remains at an uncomfortably high level that would still require 6.4 months to liquidate at the current selling rate. Summing Up: New home sales rose a "surprising" 5.3% in September BECAUSE builders were more aggressive in cutting prices. --Nomura Economics Research

* * *
The demand for new housing is well pass its peak and is now on a retreating trend despite this month's bounce. Moreover, inventories of unsold new homes remain very high, revealing moderate overbuilding. Finally, home-price momentum has slowed significantly as home builders are using big discounts to motivate new home buyers. Consequently, housing's contribution to economic growth will be a large negative in the third quarter and a somewhat smaller negative in the fourth quarter. --Steven Wood, Insight Economics

Article In October 22, 2006 Detroit Free Press

Incentives prop up home prices
Creative deals might distort market

BY VINNEE TONG
ASSOCIATED PRESS

October 22, 2006

Buyers latched onto mortgages with all kinds of exotic teaser rates to be able to afford the soaring home prices that sellers were demanding during the boom years.

Now that the situation is reversed, buyers are demanding cash payments and other incentives that may be artificially propping up sales prices -- suggesting the market downturn could be even more pronounced than has been reported.

Gonzalo Sotelo, a licensed real estate agent in Salinas, Calif., said that three times in the past few months, buyers' agents approached him about securing cash back at closing without informing the lender.

In the most expensive proposition, an agent from the nearby San Francisco Bay area proposed having a home with a $539,000 asking price reappraised and sold at $600,000, with Sotelo's client paying back $60,000 in cash to the buyer. Sotelo of Prudential California Realty said he turned down the deal and hasn't heard from the agent since.

The type of offer Sotelo received prompted his boss, Jose Palma, to devote a recent staff meeting to a discussion of how to avoid potentially fraudulent deals, since giving cash back without telling the lender creates legal liabilities for the broker and seller.

"Because the market is changing right now, I think people are trying to be a little bit more creative," Palma said. "We tell our agents: 'There's a black area and a gray area.' I tell them to stay away from the gray area."

Offers abound from sellers willing to pay closing costs, several months of mortgage payments and, in some cases, cash. Giving cash back allows a seller to sweeten the offer without having to lower the stated value of the home.

Statistics overlook perks

Buyers are taking the incentives, and economists say the practice could be inflating reported prices and distorting our view of a market already suffering from higher mortgage rates and a sense that the market is enduring a significant correction.

Fears that overextended homeowners would default on mortgages led banking regulators last month to direct banks to explain the risks to borrowers from interest-only and other nontraditional mortgages, which had helped many home buyers buy expensive homes during the boom. The Government Accountability Office told Congress last month that from 2003 to 2005, nontraditional mortgages rose from less than 10% of all mortgages to about 30%.

Inflated prices potentially harm banks, which could take a hit if the mortgage holder defaults and the home turns out to be worth less. It also could affect buyers of neighboring homes, who may be making decisions based on faulty data.

When sellers use incentives to reduce the actual price without cutting the reported price, "then the reported prices are an overstatement of the true net selling price," said Lawrence White, deputy chairman of the economics department at the Stern School of Business at New York University. "So that very likely means that the real drop in home prices is greater than what the standard sources, like the National Association of Realtors, have been reporting."

The Realtors association reported that prices of existing homes fell in August for the first time in a decade. The median price of a home sold in August fell to $225,000. That was down 2.2% from July and down 1.7% from August 2005. That marked the first year-over-year drop in home prices since April 1995.

In calculating the much-watched home price statistics, cash and noncash perks are left out, implying that true prices are even lower than the statistics indicate.

Noncash incentives, such as improvements paid for by the seller, also have an effect since any add-ons change the quality of the houses but aren't reflected in the prices -- or for that matter, the statistics.

"It's simply not reflecting the pace of change in them," said Doug Duncan, chief economist of the Mortgage Bankers Association.

"If you look at the federal statistics on price, it's not adjusted for the quality change," he said. "So if you take the house and list it for $250,000 and you add a finished basement and granite countertops, is it still the same house? Not really."

In the current slowdown, sellers and builders are moving beyond kitchen remodels to offering just plain cash. "An economist would call that a price cut," Duncan said. "That's not captured in the data."

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 6, 2006 Wall Street Journal

Housing Downturn May Not Crimp
Spending, Treasury Official Says

By BENTON IVES-HALPERIN
October 6, 2006

WASHINGTON -- A Treasury official played down the potential effects of a rapidly cooling housing market on Americans' spending habits, saying U.S. consumers have weathered larger asset corrections in the past.

"It's hard to see how the housing wealth effect is going to really undermine consumption going forward," Treasury Acting Assistant Secretary for Economic Policy Robert Stein said during a briefing with reporters. "Fears of a wealth effect on consumption are overblown."

Mr. Stein pointed to positive consumption growth during the recession of 2001, even as the country lost about $9 trillion in stock market wealth, as evidence that U.S. consumers can soldier on in the face of large corrections to asset value.

He also noted that the reduction in real estate wealth isn't likely to be as large as the previous stock market adjustment. And even if the coming housing correction is as severe as the stock market adjustments earlier in the decade, "there are ways to wring out that overvaluation without a drop in housing wealth," Mr. Stein said. For example, there could be an increase in rents or an increase in incomes, Mr. Stein said.

Earlier this week, Federal Reserve Chairman Ben Bernanke said the rapidly slowing housing market will probably slice about one percentage point off U.S. economic growth in the second half of 2006 and continue to drag on growth next year. Mr. Stein agreed that the Fed's estimates for a significant reduction in economic activity from the cooling housing sector are likely on target.

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 October 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.