Friday, September 30, 2011

Noodling Condos, Electric Cars and Pre-Fabs

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.

Condos to Apartments
The SF Business Times last week (report by J.K. Dineen) pointed to a number of condominium properties that have been recently purchased and are now converting to apartments. These projects are in Daley City, and San Bruno. The per unit purchase prices are staggering. They fall into the $420,000 to $430,000 range, per unit. While there are other sales in the region in the mid to high $200k, the idea that we have crossed the $350,000 per unit cost in areas like San Bruno and Daley City is troubling. What are high values locations further down the Peninsula (San Mateo and Palo Alto) going to get for developments both new and old? Are we seeing the start of a Bubble? See article HERE.   

Shocked into Reality
As a loyal reader, you know my interest in electric cars is considerable. While at some point in the hazy future they may have a place, right now they are more of a political and social statement than a real challenge to the hydrocarbon fueled vehicles we use today. Again we look to Canada for a brief touch of reality. Margaret Wente, writer for The Globe and Mail points out (again) the reality of this consumer product (please get over its life and world saving importance). Again she points out that for a $20,000 premium (over a comparable gas guzzler) you are not able to travel very far, are incredibly inconvenienced (that recharge thing), and you still don’t save the planet. It is a well-crafted and crisp article. See article HERE

No-Money-Down versus Foreclosure
One of my favorite economic writers is John Maudlin and his newsletter. It is one of the best even though it will make your head spin. He pointed out last weekend that the Feds, through the USDA – (yes the Agriculture Dept.) are offering no-money-down loans for first home buyers. From John’s newsletter:
“Borrowers don’t have to be lower income; in fact they can make slightly more than the median. To qualify for the government guaranteed loans, borrowers can earn up to 115 percent of the median income for the area. Nor do they have to buy in a rural area. They can live relatively close to a major urban area or in a popular resort community, however qualifying areas were recently redrawn to comply with the program’s rural mandate.
Best of all, no down payment is needed to get financing through approved lenders, which makes the USDA program more attractive to borrowers who qualify than FHA.” (emphasis Maudlin)
And there are actually subsidies available, so that you might not need to make the entire payment. Now, you can’t use this to buy a McMansion. You have to be in a rural area, which has come to be defined as outside the city limits (except in certain areas). There are income limits. The program does attempt to help lower-income families, and I am not trying to be snarky here, but these are government-guaranteed loans (read: taxpayer-guaranteed) at 100%, being handed out in areas where in the city homes are going into foreclosure and need someone to live in them, yet right outside the city you can buy this cute new home. Which is a situation more or less guaranteed to keep home values down in the rural outskirts, yet we want first-time buyers to snap these up!
Summing this up, the government is direct competition with market’s need to rid themselves of foreclosed homes and bring stability to the home buyer market. This is, as usual, the right hand not knowing what the left is doing. Oh for the wonderful days of yesteryear. See article HERE.

BTW, Mauldlin’s newsletter is a must, it’s free and has over one million subscribers. Go HERE to find out more.
And Lastly – Pre-Fab Homes
In today’s Business section of the Contra Costa Times (California), the headline reads: Builder to open factory. Mass. – based Blu Homes to hire about 80 people (HERE). The article goes on to point to an agreement with Blue Homes (HERE) to set up a manufacturing facility on the troubled Lennar Homes Mare Island redevelopment to build pre-fabricated homes. This is not a new idea - make homes in one place, then ship and reassemble the home or structure elsewhere. Lustron in the early 1950s gave it a go, with huge government subsidies (and involvement with Joe McCarthy and payoffs), and spectacularly failed (shades of Solyndra). Blu Homes is entirely different and relies on technology and a one-on-one relationship with its buyer – much of it on-line. Forbes featured it in a September issue of its magazine (HERE). Some have even compared Blu to Apple – maybe a stretch but appearances are important as well as the press.

Pre-fab’s have their place, but in the general housing market they have been continually beaten back by home builders. Simply put, a builder can and will find trades that will work for a price that will undercut the pre-fab home on a square foot basis. But, there will always be, and thank goodness there are, manufacturers who can provide these products in the marketplace. Log homes, panel construction, shipping container conversions, stacked boxes (like Blu’s folded and unfolded idea), and others all serve the market. Remember though, that the 80 new workers at the factory on Mare Island, are half the usual crew needed to put up a small subdivision in Anywhere, USA.

BTW Blu, watch your debt or you will be placed on the stacked of other pre-fab builders such as Lustron. They all had a great idea and their debt and costs ate them alive.

Stay tuned . . . .

Friday, September 23, 2011

The Ubiquitous Stoplight

Stop, Wait For It, Go, - Jam the accelerator to the floor.

There is nothing more hated and appreciated (politicians included) than the traffic stoplight. This device, simple in its design, does more to manage the ebb and flow of commerce throughout the world than any instrument yet devised (my guess, in two hundred years, it will still be here, little changed). Imagine for a moment (only a moment) what this device would look like if the National Highway Traffic Safety Administration were to design something today (okay just shake your head and turn away).

Highway Administration Signal
According to Wikipedia, the first traffic lights were installed outside the British Houses Parliament in London on December 10, 1868. The first traffic accident, due to this device, was when the gas lantern inside signal exploded a few weeks later, the policeman operating the lantern was either killed or severely injured. We are not sure, traffic report was lost. The first signals in the United States were installed in Cleveland in 1914, the first three colored system in Detroit (go figure) in 1920, and the oldest working patented signal was in Ashville, Ohio. Now, 143 years later, there are three traffic signals for every man woman and child in the world. Or, at least, it seems that way.

Since those pioneering days the signal has become festooned with pedestrian crosswalk signals, bicycle signals, timers for pedestrians (or countdown clocks for sharp eyed drivers), and left and right turn arrows. The units are set vertical and horizontal, they hang over the street on metal arms, they hang and swing in the air on cables (favorite storm shot for weather), they are stacked eight high, side-by-side, and come in green, yellow, black. You can buy very expensive cases, (favorite of urban designers) or the standard box on pipes.

We all yearn for the old timey standard lights. The lights back then just changed on a set time clock, all very predictable, familiar, and understandable. Now it's a game of "Get the driver!" (I just know there are traffic engineers lurking in unmarked cars just watching us try to dance through the modern intersection). The durations are never the same, sometimes you're first to pass then next time it’s the other guy's lanes. Sometimes the lights change as you enter the intersection after two seconds, no one knows why. Next time it’s a minute and a half (true, I’ve timed one particularly troublesome light on my way home). The engineers mumbled something about traffic flows, optimum timing, computers, interconnections. I’ve got their interconnections right here!

The cost is easily north of $150,000 per intersection, yes that’s true and even more, plus the centralized cost of the urban traffic system. They are all now interconnected with a master at the control, (I try to imagine the scene in the Wizard of Oz, “Pay no attention to the man behind the curtain!”) And where would Hollywood be without the take-over of the Los Angeles traffic system with a laptop as in The Italian Job.

  The Italian Job

Yes, let us honor this humble three eyed monster. Let us bow and supplicate, in neat orderly rows, in front of this idol of commerce and industry. Let us pray that the light doesn’t change before my ninety-eight year mother-in-law finishes crossing the street. Let us squint at the pedestrian timer and judge our travel distance and speed before it counts down to zero, our toes dancing on the accelerator. Let us pray that the green left-turn arrow holds until we are through the intersection. Let us wonder at the mercy shown to us by the left turn pocket. Let us give thanks for the free right turn, except when not allowed (see red arrow). And we lift our eyes to heaven in wonder as we try to figure out the twenty signals hung over the street with our eternal question, “Which one is mine?”

Stay tuned . . . .

Friday, September 16, 2011

How “Green” is Your Subsidy?

I am never one to shy away from an opinion, especially about something I know nothing about, such as solar energy. But I like many others are roasting Solyndra (the collapsed solar company) for failing. Failure is an integral, though unwanted, option of any new company’s future, ask any entrepreneur, ask any venture capitalist, ask any failed builder.

Side Bar: If a solar company collapses (like our own sun will someday) does it turn into a black hole sucking everything including light into itself? Just wondering, the congressional hearings kind of reminded me of that.

Fundamentally, solar energy is great. Without solar energy we and Pluto would have similar landscapes. It’s simple technology, whether gathering heat and making steam and then driving turbines and generators or through photovoltaic cells where the sun’s energy is directly converted into useable electricity. But like every other energy source, it’s expensive to produce on a scale that makes money. See: Chevron, PG&E, Exxon, and all those other evil empires we desperately need on a day to day basis. Overall the solar and wind industry produces less than 3% of the electricity used in the United States, and with the new finds in natural gas, pressures on the production cost per watt are enormous.

Whether the problem with Solyndra was technology, management or politics (I imagine a stew made up of all of them), the real problem was that it was not approached properly as a business (swampy ground here I know, but bear with me). In the Bay Area (San Francisco/San Jose) there are millions of empty square feet of manufacturing and office space. Solyndra was in a serviceable building before the loan pushed them to build more. Why did this company think it needed to build, from scratch, an incredibly expensive NEW building to produce these panels? Sure IBM and Apple can – but they earned their billions. Their bank is not the Bank of Uncle Sam.

Every start up knows that the most expensive part of growth is the employee; that’s why you manage your overhead; critical and important things like rent, utilities, and equipment. A new building for a questionable product with a marginal design (Solyndra’s tube array versus flat panel) and unknown market was asking for trouble. It found it.

There is a market for solar energy. Even though the industry supplies a small portion of the energy we use, it can easily produce over 50% of a home’s need. Solar panels are easy to install and becoming cheaper (yes China is to blame for some of that). The industry will push more and more into the mainstream. Someday, like certain code requirements for insulation, windows, and other energy saving building elements, solar may become mandatory, but not due to some governmental mandate or ordinance. It will happen, like heating in the first half of the Twentieth Century and air conditioning in the latter half, because it makes economic and personal sense. It’s best as a choice - not a requirement.

Rushing technologies with government pushing, will fail. At some point a better product will eclipse the old guard and again politics will try to save a failed government supported industry. You only have to look at affordable housing and mandated home loan requirements to get a sense of what can happen when the federal government plays venture capitalist.

Damning the solar industry (Lord knows I am not a big fan of government mandated anything such as high speed rail and electric cars) because of Solyndra’s failure is unfair. There will be successful solar companies and many will grow rich; good for them. But I, as always, do not like the government’s involvement, whether through guarantees, subsidies, tax write-offs, grants, or outright gifts. When these happen it is never about the product but about the politics.

Stay tuned . . . .

Friday, September 9, 2011

Imagine a Pyramid

Imagine a pyramid. Imagine it upside down. Imagine that the point of that pyramid is one job, one new employee at a loan company whose job is to help fill out a loan application for a new house for a family. Imagine then the successive jobs that grow from that one application.
  • The broker who sold the lot to the new owners.
  • The architect who designed the house for the owner.
  • The contractor’s team who bid the house plans.
  • The city staff paid to review and approve the architect’s plans.
  • The sub-contractor paid to grade, level, and prepare the site.
  • The civil engineer and surveyors hired to layout the foundation.
  • The city inspector.
  • The plumber that won the contract to install the water and sewer hookups.
  • The sub-contractor hired to set the forms and pour the foundation.
  • The lumber company that wins the contract to supply the building materials.
  • The framing sub-contractor that put up the walls and roof.
  • The door and window contractor who won the contract.
  • The sub-contractor who hung the doors and set the windows.
  • The electrical contractor hired to pull the wire through the rough framing.
  • The plumber who returns to install the water and sewer lines in the house.
  • The interior designer working with the new owners on colors and finishes.
  • The orders sent to small and large firms that hire new people to make the wallpaper, the carpets, the appliances, the light fixtures.
  • The sub-contractor that wins the bid to hang the drywall.
  • The roofer contracted to put on the new roof.
  • The new jobs required at the manufacturing plant that makes roofing felt.
  • The supplier that made the new tiles for the roof.
  • The solar company that won the bid to put solar panels on the roof of the new house.
  • The flooring company that laid the new oak flooring throughout the house.
  • The small company in Michigan that cut the red oak and created the boards for the oak flooring.
  • The painters needed to paint the house interior.
  • The painters needed to paint the exterior.
  • The tile contractor that finished out the kitchen and bathrooms.
  • The companies that made all the plumbing fixtures, the sinks, the shower doors, the bathroom sinks.
  • The appliance companies that manufactured the stove, refrigerator, garbage disposal, dish washer, vacuum system, and air conditioning/heating systems.
  • The granite company that won the bid to provide the counter tops throughout the house.
  • The plumbing fixture company that provided all the faucets and toilets.
  • The electrician that hung all the lights, sconces, and chandeliers.
  • The small business owner that hung the wallpaper in the hallway and bathrooms.
  • The furniture companies that made the new couch, chairs, dining room table, and bedroom set.
  • The electronics companies that made the security system, the entertainment system, and the sound system.
  • The landscape architect employed to design the pool and garden for the new owners.
  • The landscaping company that installed the garden and pool.
  • The moving company hired to move the family from their older home into their dream home.
Now imagine the people needed to supply the food for their first dinner in their new home.

Imagine a pyramid, imagine its point. Imagine the jobs balanced on that one point, Mr. President.

Imagine the 750,000 homes not built last year.

Stay tuned . . .

Friday, September 2, 2011

Can Housing Find A New Home?

The single family housing market is expected to build 22% of the number of homes they built in 2005, which was 1.3 million. Whether they will even sell that many houses remains to be seen. The national public builder’s share values are off over 20%. KB Home is off over 50% since the first of the year. Most of the mergers have taken place, all the layoffs have been made, and soon even the feds won’t be there to help (thanks, it’s like your dad continuing your allowance when he’s unemployed).

Insanity is to continue doing the wrong thing over and over hoping that at some point you will get it right.

Builders continue:
  • to buy land hoping that the market will catch up,
  • to reduce the sizes of the house they build cheapening them until they are worthless,
  • “right size” to the market (whatever that means),
  • change their stripes from single family to condos,
  • cooperate with the feds over their questionable lending practices and lose even more cash due to fines,
  • to burn cash - cash they don’t have.

I’m not one to tell a company how to run thier business, lord knows the business of businesses is a murky alley with many foul and onerous and odorous things hanging about the darker edges. And today the one business I wouldn’t start is a home building company. Very high entry (land), high costs (construction materials), and a questionable market (reminds me of the nascent electric car industry – don’t get me started). The one good thing it has is the number of available and experienced out-of-work employees.

To be sure the marketplace is there and every minute grows by more and more people. They want a place to live. This need is not being met at the moment. Yes, the media makes an issue about the homeless and the unemployed; they are easy faces to find for the camera. What they don’t show are the kids living in their parent’s home, after college, married, with children. The families doubled up in apartments. The empty homes and apartments frozen out of the market by rental laws. The people living in their boats as pointed out in a newspaper article this week.

I would suggest a few strategies for home builders that want to stay in the market.
  • Be flexible, look at the rental market, build single family homes FOR the rental market.
  • You know how to build, build apartments.
  • Hold these rental properties on short term leases, learn how to rent to own. Don’t leave it to others to pick up your mess and make money on it after you are gone.
  • Remember that the market is a cruel mistress that must be obeyed. Explore smaller neighborhood infills where there is growth in specific industries.
Throughout the Marcellus shale region of the eastern US small towns are beginning to quickly grow due to the exploding gas and fracking industry. I will bet you they are suffering from a lack of housing, even if it’s twenty or thirty homes. Track the gas producers, look for the potential. These are literally in our own backyards.
        College campuses are facing severe housing shortages. Build homes for this market, rental or even develop residential for sale products that allows multiple students to share ownership and grow equity (they can ask their parents what that means, they might remember) while they attend school.
        Locate, design and build high-end Boomer villages in suburban neighborhoods. Focus on the detached single family house, fully and highly amenitized, for those that kept their investments during the last five years and even flourished.

The shakeouts and the last man standing rule will continue to roil the builders. There are hundreds of brilliant men and women out there running their companies well, some will survive. But will they be in the right position when this game of musical chairs finally stops? Me, I would listen closely to the tunes being played.

Stay tuned . . . .