Recovery?

For the last couple of days, the headlines have screamed that housing starts are up nationwide (Not here in Utah though. See my 15 May entry "Owee!".). You would think that means things are turning around, but headlines a great deceivers. If you actually read the articles, you find that single-family is still slumping. It's multi-family that's showing gains. In other words, investors and developers are betting that a substantial chunk of the population has now been squeezed back out of the single-family market and will remain out for a long time. If that looks like recovery to you....

Owee!

Year-on-year foreclosures were up 65% in April. Even here in supposedly robust Utah the figure is 63.1%, and that doesn't include short sales, work outs, deeds in lieu, receiverships, and other "informal" procedures that are becoming more common. And the houses keep flooding the market.

But wait, there's "hope." The housing market inventory will contract some day because construction is grinding to a halt. Utah Business reports that Q1 2008 residential building permits showed a year-on-year decline of 58.2%, which manages to beat the Q4 2007 decline of 53.4%. Before these two, the worst quarter Utah ever had was the 50.1% drop in Q3 1987. There are some of us who still remember 1987. It was a bloodbath. You couldn't give away small rentals, condos, and townhomes, and whole subdivisions of new construction were foreclosed on and dumped on the market, effectively strangling the resale market. There was a billboard on I-15 that read, "Will the last person leaving Salt Lake please turn out the lights."

If that's the neighborhood we're moving into....

Sugar House Sour

In the interest of full disclosure, my office was in these buildings until Mecham Investments booted me out so it could make its big hole in the ground. Nothing I'm reading in the paper this morning surprises me.

Craig Mecham (aka The Great Developer) has a hole in the ground that half of what's left of Sugar House could fall into, and apparently isn't going to do anything about it. At least the City is stepping up, threatening to take the performance bond and fill up the hole itself. I hope the bond covers the cost, but I'm thinking it might not.

Oh, and Mecham is hinting that, due to the downturn in the real estate market, he's having to rethink the project. Boy am I shocked. If he's just going to leave a mess there, I think the City really ought to step up, fill and landscape the hole, and use its status as a creditor to toss the project into bankruptcy, where it can be sold to someone with the wherewithal to finish it. Unless the City wants the center of Sugar House to be a full block of urban blight.

Fun with Fannie and Freddie

As I wrote back on 27 March ("This is a good idea?"), Fannie Mae and Freddie Mac have had their capital requirements reduced so they can save the mortgage markets. They also had their limits increased dramatically so they may now acquire Alt-A size mortgages, even though Alt-A is shaping up to be a bigger meltdown than subprime. And even though Fannie and Freddie posted multibillion dollar Q1 losses. Guess what, folks, you're in the mortgage business, making the world safe for stupid mortgages. Your tax dollars at work.

Another Crystal Ball

If you're trying to figure out trends in construction, I suggest you check out the American Institute of Architects' (AIA) Architecture Billings Index. It is what it says it is: a measure of the amount of work architects are doing. And it's a pretty good measure. Last July it was about 60; now it's about 40, the lowest since 9/11.

The only reason for architects not to be designing is that nobody's hiring them to. Which means no one's planning anything that needs designed. Which means the construction pipeline is cranking shut, and it will take major effort to reopen it.

Snake Eyes

Meanwhile in Las Vegas, Toll Brothers, Lennar, and KB Home are all hating life due to their stakes in two massive and failing residential developments, Inspirada and Kyle Canyon Gateway. Inspirada is so bad off that, while it was planned for as many as 13,500 homes, it's sold 162 so far. The developers have defaulted on over 3/4 billion dollars of loans. So far.

And over on the commercial side, Deutsche Bank is foreclosing on the Cosmopolitan Resort Casino. Global Hyatt and Marathon Asset Management are negotiating to bail the property out in return for taking it over (They have little choice. They hold positions junior to DB and would be wiped out if the foreclosure went through.), and the project will probably be recapped, but all the players will take some serious hits.

Welcome to the wild, wild west. Yeehaw.

A Back Door Hit to Affordable Housing

Let's face it, affordable housing is expensive. For developers and lenders, that is. The margin simply isn't there, so affordable housing wouldn't get built without incentives to give it a boost. The biggest boost has been tax credits and deductions. The problem is that credits are valuable only if there are taxes to credit against, and deductions valuable only if there are profits to deduct from. As you may have noticed, profits have been a little thin on the ground for developers and lenders lately. Consequently, they're abandoning affordable housing projects they only got into for the tax breaks. So not only has the credit crunch taken a significant percentage of the population out of the purchasing market, and not only are rents shooting up because of the sudden increase in demand, but the affordable housing in the pipeline is contracting. That means the affordable housing run-out from this downturn will be with us for several years at least.

Hey, maybe they can take the dark space in the malls and convert it to housing units.

WSJ Says Commercial Sector is AOK

I was sifting through my horrific backlog of reading material and came across this Wall Street Journal article by Peter Grant. He writes that "experts agree everything's fine" in the commercial sector, including malls, hotels, and office space. Some belt-tightening, a bit of a downturn, but no overbuilding, everything will be weathered in short order.

I wonder if the hotel owners who have 40% vacancy rates because of sky-rocketing fuel prices would agree. I wonder if mall owners watching anchor after anchor go dark would agree. As for no overbuilding of office space, maybe not in Manhattan, but take a look everywhere else. Here in Salt Lake City, several new office towers are going in and office blocks are popping up in the suburbs like dandelions, from Ogden to Provo.

Yep, no worries in commercial real estate. If you want to keep believing the Wall Street Journal is an objective news source rather than a cheerleader, good luck with that.

Forecast for Next Winter: Cold

One of the things that doesn't seem to be brought up much when discussing real estate (but that you, gentle reader, should factor in when looking at any real estate) is the cost of heating the place. Heating bills are rising beyond people's ability to pay even faster than mortgage payments. In the Spring of 2007, after the Winter cut-off moratoriums (imposed on utilities by those nasty regulators so we don't have an outbreak of people freezing to death in their homes) ended, 1.2 million households were disconnected. These were almost exclusively electric and natural gas houses, since propane and fuel oil aren't provided by regulated by utilities (As an aside, the local providers of propane and fuel oil aren't obligated to keep supplying those who can't pay, unlike the regulated utilities. Given that those two heating fuels have shot up 30-40% over the last year and are still rising, this part of the market is likely to turn into a slaughterhouse. Time to invest in companies that make space heaters and potbellied stoves.). Electricity and natural gas prices have been relatively stable (if you can call increases of less than 10% stable, which should give you some idea of the state of the energy market), but they won't stay that way.

Now is the time to come up with a plan to deal with next Winter, when prices will undoubtedly be worse. I'm afraid you're on your own on this because, if you were expecting any sort of a national policy that meaningfully addressed the problem, remember that this is an election year, and two of the three people with any chance of becoming the next president think it's a good idea to cut the gas tax for the Summer. So we shall limp into next Winter about like Napoleon and Hitler limped back from Moscow.

There will be blood.

As Phoenix Goes, So Goes SLC

The local real estate pros keep saying that the worst is over, prosperity is just around the corner, gray skies are gonna clear up, etc. Of course the only way they make money is if people believe that, so such opinions are to be expected. Just remember that less than two years ago, the pros in Phoenix were pooh-poohing those of us who thought the whole mess was a bubble, and if you think the Phoenix market has held value since then, I expect the DEA to come knocking at your door any minute to see what you're using.