Friday, June 24, 2011

Noodling Housing and Economists

Nood-ling (nōōd’lĭng) n. 1. Fishing for catfish using only bare hands, practiced primarily by crazy people who cannot afford proper fishing gear. 2. The intentional annoyance by bloggers who are skeptical of the news as it’s reported, as in “Noodling bureaucrats is more fun than fishing bare hand for catfish and a lot more surprising.” This is now an end of the month feature.

Megan McArdle in a brief article arlier this week in The Atlantic Home asks the question, “Are There Too Many Homes in America?” She goes on to say that the issue is not that too many homes, there is, at the moment, not enough buyers. As I have argued in earlier blogs, we are silently developing an extreme shortage in housing units especially when considered against an almost invisible and growing household formation curve. Potential buyers are living at home, renting, sharing, etc. and the housing supply is not meeting any level of a projected demand. As with any product when a tipping point is reached, such as an expected increased demand spike (see the years 1946-1956), bubbles can grow.

Brendan Lowney, macroeconomist with Forest Economic Advisors, said a week ago that there is an oversupply of about 2.5 million homes on the market. This is putting downward pressure on home prices as well as consumer demand. Well, duh! I do ask, and argue though, how can the housing oversupply put pressure on consumer demand. The only pressure I can see would be on prices and that would result in a good result for the consumer. The real issues are the retreat of the buyer from the marketplace (fear), their inability to find a loan (acceptance), and unemployment (qualification). These three factors must be overcome to restart the housing engine.

I have been and will continue to be a firm believer in demographics. Simply put, I believe that people will: 1)continue to be people and have children, 2)grow older and wealthier, 3)tend to want to live where it’s nice. I went to college to come to these conclusions. But since the development industry is more complex than my in-depth knowledge of the human condition, they look at trends, buyer groups, age brackets, and other esoteric issues. The fundamental issue is this: Where is the next customer going to come from? Who are they? and, “How can I meet this consumer and sell them my product? It is, as my economist hero, Lugwig von Mises wrote in Human Action, “The market is supreme.”

My second favorite economists are good friends and fellow associates on many projects; they are Claude and Nina Gruen. Neither has let time push them around, they are still as feisty and irreverent as ever when it comes to the failings of our anointed leaders. They both continue to produce excellent books and studies on the development industry. Claude’s recent Rutgers University imprint is New Urban Development (buy here). It attacks the church of entitlements and points a finger at those that allowed all of the past five years of silliness to happen. It is an economic history course on America’s development past, thorns and roses all.

Nina, on the other hand, has coauthored (with Alan Billingsley of Americas Research) one of the best and most readable essays on the current marketplace in America, titled; Boomers, Echo’s and X’s:Generational and other Structural Shifts and Their Impacts on Future Demand forReal Estate in the Coming Decade.   Nina has forgotten more than most of us have learned about development. I won’t go into the broad study in detail but it does look at the three most dominant generations (i.e. those with the money), listed in the title. She takes a broad cross section through the development industry and teases out interesting details that will be helpful in the coming decade. A caveat that runs through the paper is the development industry’s Prime Directive: “Location, location, location” as always, drives regional markets. I will add just one more word, “and Timing.”

I am also reminded of the old Star Trek Prime Directive, General Order #1 of the United Federation of Planets. “There can be no interference with the internal development of alien civilizations, consistent with the historical real world concept of Westphalian sovereignty.” Oh, if only the tweakers, meddlers, and diddlers in Washington (that includes politicians and industry wonks and lobbyists), understood this directive and allowed the marketplace to be truly free.

Stay tuned . . . .

Friday, June 17, 2011

Are We Ready to Roll the Dice?

Before I begin, please take second and look at this short video I made of our garden this spring, if you're stressed it will help to soften your day.

After last week’s extremely pessimistic blog and enumeration of many of the problems within the housing market (it could have been ten pages longer), I thought this week I’ll take a look at the issue from a planner’s point of view.

I have been in the development industry for forty years as a designer, planner, and facilitator for my clients. Probably 70 percent of these efforts were focused on some aspect of the housing market, both rental and ownership. My clients were, and still are, merchant builders; some are developers (speculative entitlements are their meat and potatoes), some are builders (the next step after entitlements – they are the three dimensional guys), and some are both (a much rarer breed). During the last three years the speculators stayed low and dumped land like it was a toxic landfill, the builders cut staffs to nothing and many shut down their operations, and the developer-builder (if he managed his money well) went to Hawaii to wait it out (and are very bored about now).

My small part of the development industry creates plans for things that are to come; it’s all about the future. We try to anticipate what the market wants and will need four and five years from now. In 2004 my company had over 150,000 housing units in master plans, neighborhood plans, infill projects and outland parcels. These were great chunks of land that would eventually generate billions in income and thousands of jobs. In some cases these plans would alter the balances within communities, in others they would greatly improve the overall value of housing, but in general there would be significant improvements to a community’s infrastructure. What a difference five years makes and what a catastrophic difference the fall of 2008 made. Without exception every one of those projects either died or was put on hold for the last three years.

But from this development purgatory there are now glimmers of hope and change. (I am drawn to the definition in Wikipedia: The word "purgatory", derived through Anglo-Norman and Old French from the Latin word purgatorium has come to refer to a wide range of historical and modern conceptions of postmortem suffering short of everlasting damnation, and is used, in a non-specific sense, to mean any place or condition of suffering or torment, especially one that is temporary (so true, so true))

I have, both on my desk and underway, residential projects that are being released from purgatory, many were started in 2007. They are being purged of their sins, (more focused and affordable now), responsive to prayer (i.e. markets), and hope for salvation (buyers and renters). A few are being reincarnated, (changed from podium condos to townhomes), and some are just being reborn as rentals. It’s all so religious; it must be from all the praying that’s been going on at the Urban Land Institute and the BIA.

One theory that I have held for years is that the developer/builder is a gambler, the worst kind in many ways. He plays with other people’s money (OPM). When he’s good he clears the table and makes everyone happy. When he’s off his game or the OPM dries up, he walks away confident the game will resume. But at some point he will get very bored, his wife will throw him out of the house, and his back will go out from too much golf. It is about then (or now) that the itch will return, he’ll start doing ROI’s on napkins at lunch, he’ll cruise through a town he knows and sees empty lots begging for attention, he makes that call to the REIT that has had no place to put its money for three years. Our man is getting ready to put money back on the table and, I think, he’s also going to church more.

Stay tuned . . . .

Friday, June 10, 2011

My Kingdom for a House

In this writer’s opinion, the major reason for the continuing decline in the overall economy is the ongoing disaster that is the housing industry. This includes new home sales, rentals, and existing home re-sales. In every instance, the impact of the sale or rental of a housing unit has a deep and profound impact across the economy.

The Joint Center for Housing Studies of Harvard University has just published The State of the Nation’s Housing 2011 (get here). If you weren’t depressed about the housing industry, you will be after reading through this report. Here are a few of the many bullet points that could be gleaned from just the first pages from the forty page report:
  • There has been a shift of 1.4 million single-family homes to rentals in the period of 2007-9
  • In February 2011, new home sales set another new low
  • Homeownership dropped from 69 percent in 2004 to 67 percent in 2010
  • Household growth has averaged 500,000 per year between 2007-10, down from an average of 1.2 million per year the previous seven years
  • The number of renters swelled by 3.9 million from 2004 to 2010
  • It is estimated that 3.8 million baby boomers will downsize during the coming decade
  • The number of households formed by those under 35 will grow to nearly 26.5 million during the next decade
  • 19.4 million households currently pay more than half their income for housing
  • 15 percent of homeowners find their properties are worth less than their mortgage
  • There are 2.2 million properties still in the foreclosure pipeline, and, within the foreclosure mess, 67 percent of owners have made no payments for a year, and 31 percent have made no payments for two years

To understand the impact on local and state governments one only has to look at this startling fact: The amount of real home equity fell from $14.9 trillion at its peak (and generating property tax revenues) in the first quarter of 2006 to 6.3 trillion at the end of 2010. This is well below the outstanding mortgage debt for these properties of $10.1 trillion. Broadly put, the amount of property tax revenues has dropped over 50 percent; now you know why fire stations and libraries have closed. We can blame a lot on pensions and salaries and the unions, but this is the fundamental reason for the current fiscal disaster of our local administrations, the massive reduction in real property values.

According to Casey’s Daily Dispatch (highly recommend this daily newsletter if you want to increase your government paranoia, it’s free), home prices measured against gold, are actually lower today than at the bottom the Great Depression (maybe a name change is now in order for the Great Recession). In 1930 a new home sold for 24.5 lbs of gold, in 1935 a new home sold for 6.83 lbs of gold, and today a new home requires 9.5 lbs of gold at about $1500 per ounce. In 1935 the price of a pound of gold was $560, today it is $24,000. Yes, home price are now very affordable but the impact on local government operations is catastrophic.

All housing markets are local. So to broadly paint the national market with the same brush is unfair, some markets are blacker than others. Yet it was announced last week that the Washington D.C. housing market is expanding, go figure. If we could find a way for these immigrants to our nation’s capital to stay in Washington and not have their policies meddle with our local economies, all’s the better. In fact keep ‘em.

Over the next few weeks I will take a long look at the current signs and opportunities beginning to peek their collective heads over the gray horizon. Yes, there are signs of change: tea cups are being read, bones are being thrown, and the Greek Oracles are being interviewed on CNN (at least those temples that haven’t been foreclosed).

Stay tuned . . . .

Friday, June 3, 2011

Vancouver Redux

As a follow-up to last week’s missive about our travels in the American and Canadian Northwest, I will throw out a few points that I picked up regarding Victoria and Vancouver. We were in Vancouver last August (see this), and it is a treat to spend more than just a few nights in these delightful and very interesting cities.

Random thoughts:
Victoria, B.C. is connected to the rest of the world by either boat or plane, you can drive there but it requires a ferry at some point during the trip. Victoria is actually south of the primary latitude that splits the U.S. from Canada (Bellingham, Wa. is further north). It sits at the southern end of Vancouver Island, which is the world’s 43rd largest island. It was named for Queen Victoria, and, as North American cities go, is very young, founded soon after its settlement in 1841, and it is the capital city of British Columbia. There, the geography lesson is done!

This is a government town and a tourist center. You get both bureaucrats and visitors from around the world. Winter was long this year, and even the famous flower baskets that are hung on lamp standards throughout the town hadn’t been placed yet. Even at the world renowned Butchart Gardens, the tulips were still in bloom, maybe a month later than normal. A must visit.
Butchart Gardens
We stayed at the Fairmont Empress, a wonderful hotel and a jewel in the Fairmont Hotel chain that includes The Plaza in New York and the Savoy in London among many others; High Tea is a delight.

It is a comfortable and enjoyable town, there are the usual touristy things and shops, but it carries an international grace about itself. I recommend it and it’s the gateway to the rain forests of the western side of the island.
B.C. Parliament Building and Victoria Harbor
After our visit last August, we took the opportunity to spend four days in this world class city. I mentioned in last February’s blog that the future for American cities could be seen in Vancouver and I still believe it. It is a prosperous and dynamic city that rivals, and in most cases surpasses, anything below the 49th parallel. It is continually ranked as one of the best places to live, in the world. Its climate is mild (compared to Denver and Chicago and others in Canada), and even with its reputation as a rainy city, it does not dampen the outlook of the residents.

But it is also expensive. It has one of the highest housing costs to income ratios in the world. The HST (Harmonized Sales Tax) is 12%. Food and restaurant costs are not much different than Seattle or even San Francisco, but still expensive. It is a diverse and financially driven economy. It has one of the largest Chinese populations outside of China and is a gateway city into the Chinese market for Canada.

It has, for the last twenty years or so, pushed heavily into becoming a vertical city. These glass and steel residential towers dominate the southern and northern parts of the core of Vancouver. They add density (people) into what were formally low density neighborhoods. This city planning has had its fights and detractors but it has also allowed a growth in jobs and commercial uses that American cities would die for. One example is Yaletown, in the southeast corner of the urban core.
Yaletown, Vancouver
This former heavy industrial area with its warehouses and rail yards is now one of the densest neighborhoods in the city. It fronts on False Creek and includes marinas, converted warehouses (high end shops and restaurants), apartments and condominiums. There are few other cities in North America like it.
Yaletown, Vancouver
Little of the original housing stock remains, the new housing is exciting. Yaletown is well-connected regionally by a portion of the transit system that is underground through the main part of the city (yes a subway, but very different than what you might think of – they call it Sky Train). It goes above ground after it leaves the core and does reach the airport to the south and to ferries going north.

I will be back, if for nothing more than the seafood (I have to admit this is not a drinking town, they pour by the ounce. If you want to drink - go to Chicago!).

Stay tuned . . . .