Hope Springs...a Disastrous Leak

Hope springs eternal in the human breast;
Man never Is, but always To be blest:
The soul, uneasy and confin'd from home,
Rests and expatiates in a life to come.
--Alexander Pope,
An Essay on Man, Epistle I, 1733

Most people would probably agree that the English poet's words aptly describe the human spirit -- relentlessly optimistic even in the face of great adversity. Unfortunately, when the odds are overwhelmingly bad, hanging on in hope, rather than cutting-and-running, can prove disastrous. For one sector of the economy, the decision to ride out the early stages of the Great Unraveling appears to have been a serious error of judgment, as Reuters reveals in "Clock Ticks for Debt-Laden US Suburban Developers":

After three years of trying to wait out the worst U.S. housing crisis since the Great Depression, debt-laden suburban developers around the country face a tough choice -- sell at a discount or go bust.

That crunch may also spell fresh trouble for U.S. housing and banking sectors still struggling for stability under mountains of foreclosures, debt and doubt.

Hannaford Farm in the northwestern Chicago suburb of Sugar Grove, Illinois, is a typical example of how the irrational exuberance that gripped the construction industry and the banks that financed them during the property boom has now gone sour.

At the market's peak the "McMansions" -- huge homes on small lots that typified the excesses of the boom -- in this half-built development sold for up to $1.3 million. The peak national U.S. average home price hit $230,300 in July 2006.

There are still roads, sewer lines and water mains in place for what should have been 131 homes at Hannaford Farm. But half of those lots display thick, tall weeds instead of houses.

Unable to sell the remaining vacant lots here, the developer was forced to offer them at a steep discount -- fast.

"We are dealing with a seller who is very motivated and doesn't have the luxury of choice," said Jim Blanchard, the broker at Inland Real Estate Auctions Inc brought in to run the "Summer Land Rush" for Ed Saloga Builders. "The developer here needs to cut their debt and inventory quickly."

Empty lots originally sold for $205,000. But in the recent auction 20 of them were priced starting at $66,500. A dozen bids were received, and nine lots are now under contract.

Paul Amore, a home builder himself, owns a home in Hannaford Farm that had been valued at $825,000 and he said the auction had under-cut that value by more than $120,000.

"The banks are forcing developers to sell and sell cheap," he said. "Everybody's getting a bailout except people like us. We're stuck just trying to ride this out."

Hard numbers on the nationwide number of "developable" lots are scarce. But what evidence there is suggests many developers -- especially those selling lots for luxury homes -- face a similar choice to that of Ed Saloga Builders.

"The inventory of these lots dwarfs the inventory of existing homes," Blanchard said. "There will be a lot more product like this coming through the pipeline."

HUNGRY FOR LAND

Before house prices began falling in late 2006, developers were in a land rush of their own, snapping up prime farm land like Hannaford Farm at any cost.

"During the boom, developers couldn't wait around because prices were rising so fast," said Dave Hanna, head of the Chicago Association of Realtors. "Now some of them can't give that land away."

U.S. home prices have fallen 32 percent in the past three years, erasing trillions of dollars of equity. Foreclosure filings hit a record of 1.9 million in the first half of 2009. Although there are some signs the market is stabilizing, there are also untold numbers of empty lots out there.

The National Association of Home Builders uses filings from the publicly traded home builders, which account for 30 percent of the market, to provide a best guess.

In 2005 those home builders either owned or had options to buy 2.25 million developable lots, which fell to 735,000 in 2008 as they sold off lots or did not exercise buy options.

"This means a whole lot of lots didn't get built on," said Stephen Melman, the association's economic services director.

He said the worst-affected areas mirror the housing crisis -- Florida, California, Nevada and Arizona.

Small lots for cheaper homes are easier to sell.

Steve Dallenbach, a partner at home builder Dallenbach & Larson in Des Moines, Iowa, said smaller "starter" homes left over by the collapse of regional developer Regency Homes in April 2008 "are moving at a discount of around 30 percent."

But selling lots for luxury homes is a different matter in the credit-scarce world of the recession.

"The majority of people who would have qualified for a home like this a few years ago can't get financing," said Michael Lefevre, head of the National Association of Mortgage Professionals. "It's depressing."

Developers therefore have no choice but to slash prices.

"Home owners and developers are waiting as long as they can to sell," said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate companies. "But in the end, someone has to take the loss."

Hedlund says his forecasts for 2010 include the possibility that the year could be worse than 2009.

"In the meantime, communities may have trouble maintaining the infrastructure on unused land," he added. "Eventually, many lots will have to be bulldozed."

Comments

[E B]

Here in the far southwest suburbs of Chicago (New Lenox and Manhattan) there are several large brand new subdivisions that sprouted up in the middle of corn fields and have little or no houses. I've been wondering what is going to happen to those developers--there is such an oversupply of housing (despite the recent propoganda suggesting otherwise) I'd honestly be surprised to see new houses being built in any of these locations--at least, not without a price drop.

[HSpencer]

Why can't these builders learn that if they want to stay in business, they need to build $120,000 houses including the lot. Then get them financed by Fraudy-Mae for a 30 year fixed 4.5% loan. You could do them for $500.00 down including closing costs subsidized by the gubbermint. Wake up America, it's 1970! Get you an FHA starter home and LIVE in it, and be happy you got a roof. No, it wont have GRANITE, it wont have STAINLESS STEEL, no BONUS room, no THREE car garage, and of course NO POOL. Sorry HGTV, with all your BS "House Hunters" shows. HGTV needs to admit that a couple fresh out of college with a zillion in student debt just cant really affored a $350,000.00 CONDO (750 sq ft). HGTV needs to stop showing all that crap where a family of four "wants" to relocate and buy a $400.000 McMansion, and if they really are "preapproved for" then the pre-approver needs to either lose his license or go directly to jail. HGTV has become a laugh.

[Morocco Bama]

Couldn't agree more, HSpencer, but sadly that's not going to happen voluntarily. Many we know believe the "recession" is over and are back to their old ways, to the extent that's possible considering reduced wages, joblessness and tightening credit. One example is a couple who abandoned their $350,000 house last spring because they couldn't make the payments. They were prepared to have the home foreclosed. They had alreay moved into a another home (renting), and were crying poor mouth to everyone, especially the woman's employees. She held her declining economic condition over her employees' heads. Well, as fate would have it, they managed to sell the home for $350,000 two months after they vacated it, and avoided foreclosure by the hair of their chinny chin chin. Two months after the home sold, they have moved again and are now mortgaging another McMansion. When my wife spoke to this woman she said "things are turning around and getting better in the economy."

I don't know whether to cry, laugh, or just put a gun to my head. Swine Flu can't come fast enough, if only it would take the right people. I've often thought that about the Rapture bullshit. Please, God (if there is one), take them now and let us live in peace and harmony.....oh, and take the mess they've made with them. It's not fair that we should have to clean up after them.

[Mar]

Hspencer, I agree. We watch House Hunters for laughs, especially the episodes from 2006-2007. I always wonder what happened to the people who bought those places, especially in the high foreclosure areas (Vegas, Florida, California, etc.) The more recent episodes seem much more reasonable, but there are some homebuyers who still seem like idiots.

Morocco, I know a couple people like that. Forget them, they'll never learn and they'll luck out on the swine flu as well! Never try to teach a pig to sing, it's a waste of your time and it annoys the pig!

[HSpencer]

In this house business, people will have to realize that their mortgage payments will HAVE to be affordable. Its not just the mortgage payment, it's all the other stuff that goes along with it. Median Income (who makes that?) must support the payments on a Median priced house--we know it does not! The American Dream is to OWN a home, not to simply finance one! The goal is that every nail in the place belongs to YOU!

[farang]

Everything Hunky, and everything Dorry....

Why? Because the lying liars that got us here SAY SO: better "hold tight", the US economy is going to JET UPWARDS!!!!!!

From Bloomberg:

[No New Normal JPMorgan Sees V-Shaped Recovery in U.S. (Update1)
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By Steve Matthews

Aug. 14 (Bloomberg) -- Instead of a so-called New Normal of subdued growth, the U.S. may be heading for a robust recovery.

The worst recession since the 1930s has created a reservoir of demand that will buoy the economy, say a growing number of economists led by James Glassman at JPMorgan Chase & Co., former Federal Reserve Governor Laurence Meyer and Stephen Stanley at RBS Securities Inc.

“Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly,” said Glassman, a senior economist at JPMorgan in New York. Glassman and his colleagues this month said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given “pent-up” consumer demand.

JPMorgan’s outlook contradicts the view popularized by Mohamed El-Erian at Pacific Investment Management Co. that elevated unemployment and record wealth destruction will keep growth at 2 percent or less for years. The divergence highlights the dilemma for policy makers, who must decide whether to maintain record fiscal and monetary stimulus or begin to pull back and prevent a surge in inflation should growth accelerate.

El-Erian, chief executive officer of Newport Beach, California-based Pimco, said “the indicators we follow continue to point to sluggish medium-term growth in the U.S.,” when asked to respond to arguments for a so-called v-shaped recovery.

Retail Sales

A report from the Federal Reserve today added to signs of recovery as industrial production rose 0.5 percent in July, the first increase in nine months. A separate government report showed consumer prices were unchanged, emphasizing companies lack pricing power after the biggest drop in U.S. gross domestic product in any recession since the 1930s.

Confidence among U.S. consumers unexpectedly fell in August for a second consecutive month as concern over jobs and wages grew, according to the Reuters/University of Michigan preliminary index of consumer sentiment today. The U.S. has lost 6.7 million jobs in the recession that began in December 2007.

The New Normal theory predicts that the recession will leave unemployment, forecast to reach 10 percent for the first time since 1983 early next year, higher for years. Glassman and Meyer dispute that.

“The thing I object to most about the New Normal idea is that we are stuck and have to accept higher unemployment -- if you look at the Fed, they are doing everything they can to fight it,” said Glassman, who formerly worked as a Fed economist in Washington.

Meyer’s Projections

Meyer, who served as a central bank governor from 1996 until 2002, said he and his colleagues “don’t find any evidence” that the unemployment rate consistent with stable inflation is now higher. Meyer is now vice chairman of St. Louis-based Macroeconomic Advisers LLC, whose economic estimates are monitored by the National Bureau of Economic Research panel charged with dating U.S. recessions.

Meyer expects GDP to jump by 3.6 percent in 2010 and 3.9 percent in 2011. Annual growth surpassed 3 percent only once so far this decade, in 2004, and has averaged just 2.2 percent.

“The big driver of that is home prices,” said Meyer, referring to his recovery forecast. “If home prices stabilize, that is a tremendous boost to housing that dominates every other variable in our equation. There is a lot of pent-up demand in that particular area.”

Home construction has subtracted from GDP growth for a record 14 straight quarters through June 2009. Consumer spending has also dropped in four of the past six quarters, and is down 2 percent from its peak in July-to-September 2007, the biggest retrenchment since 1980.

‘Very Depressed’

Housing and automobile sales are at “very depressed levels” and are likely to contribute to growth even if they don’t reach prior peaks, said Stanley, chief economist at RBS Securities in Greenwich, Connecticut, who used to work at the Richmond Fed.

“Consumers are holding off on practically all of their discretionary purchases,” said Stanley, who sees the expansion picking up from 2.9 percent next year to 4.4 percent in 2011 and “about” 3.5 percent in 2012. “There is a lot of pent-up demand.”

Recoveries from the past two recessions were weaker than in previous decades. After the 2001 recession, the economy expanded just 1.6 percent in 2002, picking up to 2.5 percent the next year. The 1990-91 recession was followed by 3.3 percent growth in 1992 and a 2.7 percent gain in 1993.

U.S. Roared

By contrast, the U.S. roared out of the 1981-82 recession. In 1983, GDP rose 4.5 percent, accelerating to a 7.2 percent pace in 1984, when Ronald Reagan won re-election with victories in 49 of 50 states.

Alan Blinder, the former Fed vice chairman who is now an economics professor at Princeton University in New Jersey, has described himself as “skeptical” of the New Normal scenario.

“To accept a 2 percent trend, you have to believe in about a 1.2 or 1.3 percent productivity trend -- I don’t,” Blinder said in an e-mailed response to questions. He added that he sees growth sustained at “closer, but not quite, to 3 percent” in coming years.

Fed policy makers in their latest projections submitted in June anticipated an expansion of 2.1 percent to 3.3 percent from this year’s fourth quarter to the same period next year and 3.8 percent to 4.6 percent in 2011.

‘Leveling Out’

Chairman Ben S. Bernanke and his Federal Open Market Committee colleagues two days ago said the economy is “leveling out.” The central bank has pumped about $1 trillion into the banking system in a campaign to end the crisis, triggered by mortgage defaults, that has caused more than $1.6 trillion in losses and writedowns among financial firms worldwide.

President Barack Obama last week said: “We are pointed in the right direction,” in remarks at the White House. “We’ve rescued our economy from catastrophe.” The administration anticipates a gathering impact from its $787 billion fiscal stimulus into next year.

Some companies are also seeing signs of a turn in the economy.

Karen Hoguet, chief financial officer at Macy’s Inc., the second-biggest U.S. department store chain, said on a conference call Aug. 12 that the Cincinnati-based company is “cautiously optimistic” its sales trends will improve.

A rebound in equities in recent months will help repair households’ balance sheets and buttresses the outlook for spending, said Glassman at JPMorgan.

The Standard & Poor’s 500 Stock Index has climbed about 50 percent from its low in March. U.S. stock-market capitalization has increased by almost $4 trillion in that time.

Economists’ Forecasts

Economists this month lifted their projection for third- quarter growth by 1.2 percentage points to 2.2 percent compared with July, according to the median of 55 forecasts in a Bloomberg News survey. That is the biggest such boost in surveys dating from May 2003. Forecasts for 2010 were raised to 2.3 percent from 2.1 percent.

Neal Soss, chief economist at Credit Suisse Group AG in New York, played down concern that the economy may suffer a “double dip” recession.

“Historically these double dips are routinely forecast and actually very rarely come to pass,” Soss said in a Bloomberg TV interview this week. “Once the economy tends to get some upward momentum, it tends to keep going that way.”

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.
Last Updated: August 14, 2009 11:23 EDT]

Bwahahahahahaha, can I haves what they is smoking, please? Let's go back in one year, and see who the "experts" were......