Entries from June 2007 ↓

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Is there any money that is out of the new Congress’s reach? Fannie Mae and Freddie Mac, the two quasi public private mortgage funding companies are facing the long arm of Congress reaching into their pockets to the tune of 500 million dollars a year to fund new housing initiatives.

The hypocricy is that these politicians is that they are claiming it is not a tax. But they are lying like only a politician can. It is not a tax on the general public but on the shareholders of 1 company. If the government takes money from anyone in the general public, being either a company or a person, it is a tax.

Frank said the funds will go to communities without increasing government spending or the deficit. He was joined at a press conference Thursday afternoon by several community groups and lawmakers including Reps. John McHugh, R-N.Y., and Maxine Waters, D-Calif., who are among the bill’s co-sponsors.
The House approved diverting some $500 million to $600 million of profits from Fannie and Freddie to an affordable housing fund in May, when it cleared an overhaul of rules on the two government-sponsored enterprises. The bill introduced Thursday includes those funds.
Some Republicans objected to taking money from Fannie and Freddie, saying it would amount to a tax on home loans financed by the companies.
While there hasn’t been action on the fund in the Senate, Frank said Thursday he is “optimistic” that there will be soon. He said he has spoken with Sens. Charles Schumer, D-N.Y., and Jack Reed, a Rhode Island Democrat, about the proposal.
The bill would put between $800 million and $1 billion a year into the fund, for 10 years. Sixty percent of the funds would go directly to local communities while the remainder would go to states, Indian tribes and other recipients. via CNN Money

It seems that Jeffrey Mezger, CEO of KB Homes,  never saw the housing slowdown occurring. That is the reasoning given for their disappointing earnings. Many have said that the large builders are stuck in the projects they have on  the table or started, but I can not truly understand the need to go racing off the cliff. Has anyone ever told the builders that they are in a cyclical business and plan accordingly?

The building community has been caught overextending and being over optimistic in their projections. Instead of working towards building a company that is ahead of market trends, maybe missing out on some potential profits and positioning the company to be the strongest in a weak market would have  made great sense.

But these CEO’s are so focused on hitting their quarterly numbers that they fail to see the forest through the trees.

The Los Angeles-based home builder (KBH) posted a loss from continuing operations of $174.2 million, or $2.26 a share, for the three months ended May 31, compared with income from continuing operations of $184.4 million, or $2.20 a share, in the year-ago second quarter.
The results “reflect the current oversupply of new and resale housing inventory, a difficult situation compounded by aggressive competition and continued weak demand,” said KB Home Chief Executive Jeffrey Mezger in the earnings release.
Some analysts say rising home inventories and investments in risky lands will continue to pressure home builders’ cash flows.
“Housing affordability challenges and tighter credit conditions in the subprime and near-prime mortgage market have also exacerbated current market dynamics, keeping prospective buyers out of the market, slowing the absorption of excess supply and further delaying a housing market recovery,” Mezger noted.
The company said it took a pretax charge of $308.2 million against results for the latest quarter, covering inventory and joint-venture impairments as well as abandonment of land options.

UPDATE: KB Home Blames Quarterly Red Ink On Housing Oversupply, Charges.

Guy Kawasaki - The Art of Innovation 55:38 Guy Kawasaki at the 2007 Event Marketer Conference

If you are reading a real estate blog and are in the real estate business, odds are that you are looking to do something different, trying to get a jump up on your competition.

Or applying innovation to a traditional model and marketplace.

Examples are everywhere with the rise of Zillow, Redfin, and the internet as a whole. The toolkit available to a real estate agent today is completely different than the one you used 10 years ago.

And you do not need to create a Zillow to innovate. There are many ways you can do this in your local market.

If you are looking to innovate, then I heartily recommend watching the hour long presentation by Guy Kawasaki. Guy is cool. He is funny, but underneath this funny cool guy is someone who can explain innovation in a way that you do not need an MBA to understand.

As a real estate professional, you also need to present. Take the lessons in the video to heart.

• Don’t pound you prospects with reems of data. Make a short compelling case.
• Make your presentation legible. Mouse type for a 50 year old is never fun. Save that for the contracts.

Do you like living in the big city, well this list is of the top 10 most populous cities in the United States. New York is over double the next closest city Los Angeles and nine times as large as San Jose which holds the tenth spot.

1. New York City,NY 8,214,426
2. Los Angeles CA  3,849,378
3. Chicago IL  2,833,321
4. Houston TX  2,144,491
5. Phoenix AZ  1,512,986
6. Philadelphia PA  1,448,394
7. San Antonio TX  1,296,682
8. San Diego CA  1,256,951
9. Dallas TX  1,232,940
10. San Jose CA  929,936

Source US Census

The great housing boom over the past few years was funded by low interest rates and the use of collateralized debt obligations (CDO). These CDO’s allowed the velocity of money to be applied to the housing market and created a bubble of available cash. Since housing prices were soaring, lenders were eager to use this new found cash to fund all comers to the table.

Now that the market has slowed down, there is a risk of the CDO market unwinding and creating havoc on the economy. I have included the second to last paragraph of an excellent essay by Felix Salmon on the risks to the economy and housing markets by a meltdown of the CDO market. Please read the whole article especially if you are in the real estate business at any level. It will explain a great deal of the fears and potential troubles we may face in the coming years.

But while all the risks are real, the linkages between them all are far from clear, and the different risks don’t necessarily cascade onto and exacerbate each other in this way. They might – or they might not. If investors turn out to have reasonably strong stomachs, they might not want to liquidate at prices well below their entry points. And CDOs themselves, even the ones based on subprime mortgages, might not default nearly as much as homeowners. And without the pass-through mechanism of risks two and three, the vicious cycle loses a lot of its teeth. via Portfolio.com

Hat-tip Instapundit and The Economist

I remember as a child going to the Hialeah Park Races during the winter. The park was the centerpiece of the Florida race season when the yearlings would be broken and trained and the racing industry would flock south for the winter. Now the track has sat empty for 6 years since it closed in 2001 and developers are looking covetously at the old grand dam trying to see who can coerce city officials to grant them the rights to raze, build, and homogenize the classic structure.

Because, 220 contiguous acres in Southern Florida can not sit idle. Standards have to be kept… 

The South Florida Regional Planning Council and the development team have started discussions about the land’s use, but both sides say the proposal is in its early stages.

“You just can’t have property of that magnitude sit in the middle of the city idle. That is, in essence, what is going on right now,” City Council president and park administrator Esteban Bovo said. “We have a jewel sitting in the middle of our city. It is not operating. It’s not doing anything.”

Hialeah Park sits on prime South Florida real estate, close to freeways, a commuter train line and Miami International Airport. But the new plans for development aren’t popular with some city officials, who want to preserve a slice of history.

“We are not entertaining any type of development plans for the park,” said Hialeah mayor Julio Robaina, who said park officials can’t develop the land without the city’s approval. via Gatorsports.com

Robert Toll, CEO of Toll Brothers, is in the process of running right of the proverbial cliff and into the jaws of the waiting sharks. The home building company has had a rough time of it as the market has slowed. But instead of blaming his own company for incorrectly predicting the market and over expanding so much that the company is now in trouble, he blames the marketplace.

And worse, he is inviting the government to regulate the subprime mortgage market. As the appraisers yesterday thought that the mortgage industry led them into ruin, now Robert Toll is placing the blame on the industry. But once the government gets into an industry it loses the ability to self correct. And the bureaucracy that is a cancer on society starts to create a morass of minutia that chokes the innovations that helps markets recover.

“I think there ought to be regulation of subprime. I think there ought to be regulation of prime. I don’t think that the economy is best left to its own devices almost ever,” Robert Toll said at the Reuters Real Estate Summit in New York.
“Left to its own, every industry will sooner or later roll into a monopoly of one kind or another,” Toll added.
U.S. lawmakers are considering new rules to address recent problems in the subprime mortgage sector that has provided loans to borrowers with poor credit histories. Lenders are struggling with rising defaults as many variable interest rate loans reset at higher interest rates and U.S. home prices stagnate. via Reuters.

Did the mortgage industry screw up, sure they did. And the market is now correcting for it. But did Toll Brothers over commit in an over built marketplace, they sure did and that is the true source of their pain and losses.

But Robert Toll, do not think for a second their are not 100 folks in Washington that are salivating now that you have opened your mouth asking for more regulations. They see jobs, security, and power.

And if you think this correction in the market is painful, wait till the one where the government is in the middle of it. That ship never turns quickly.

The wonderful world of Web 2.0 startups is full of twists and turns, and ShackPrices is making one of those turns re-branding itself as Estately.com and revising it’s business model. ShackPrices was focused on offering itself as a real estate search engine is now Estately.com that will offer a low cost alternative to finding an real estate agent who is best suited to meeting a specific criteria of needs.

One word of advice to Galen though, update your blog to let us know what you are doing or why. It is re-branded Estately but it’s content is ShackPrices. Those who are interested in your company will appreciate the update and the inside scoop on why the change was made.

And if you think that this turn is surprising or unconventional, it is very typical in the world of Web 2.0 as business plans change on a dime. This Question and Answer session at the Churchill Club with 5 top web entrepreneurs is illustrative (and long but entertaining) on the issues facing building a successful Web 2.0 company. So best of luck Galen.

Co-founder Galen Ward, who launched the real estate search startup last December in Seattle, said the company’s new service will attempt to link home buyers and sellers with the best agent for their specific needs. Estately will ask consumers a few basic questions — whether they are looking to buy or sell, possible price range, type of property, the qualities they desire in an agent, etc. Then, the company will spit out three potential matches from a list of dozens in Western Washington. Ward didn’t give an exact number, but he said they range from those who offer discounted services to full commission agents.

What is interesting about Agent Match is that the company will get paid by taking a 12 percent cut of the agent’s commission. That could be off putting to some agents, but Ward said it is cheaper than the 30 to 40 percent referral fees of competing services. For example, an agent who sold a $500,000 home would pass on $1,800 of their $15,000 commission to Estately. (Assuming a 3 percent commission was used in the transaction). via John Cook’s Venture Blog

Update: Galen from Estately.com left a great comment and even did a better blog post explaining the direction they are taking. Go take a look.

I love commerce. What happens when a small developer bites off more than they can chew and goes belly up in a bad market. Why of course, the big fish come on in and buy their developments at a deep discount. That is what Donald Trump is doing with the Running Horse development near Fresno that features a Nicklaus golf course as it’s centerpiece.

Fresno is part of the worst hit bubble markets in the country. However, the smart money guys know that even the worst markets are profitable if you can get in at the right price. Lots of comments are floating around that the small guys are not going to make it and that is most likely true, but the big boys with the deep pockets will come in and buy most of these projects on the cheap and make their money.

I love capitalism. It is a brutal and unforgiving game, but in the end it is painfully honest.

Purchase price is $40 million for the 420-acre project.
The 780-home housing development is planned around a golf course designed by golfing legend Jack Nicklaus and his son Jack II. Just two holes of the course have been put in so far and no homes have been built.
Repeated efforts to sell the development and golf course had failed and earlier this month it was reported that Mr. Trump had walked away from the deal, too. Central Valley Business Times

Rising interest rates and slowing home sales caused a big drop in the mortgage loan applications last week as they dropped to a 4 month low. While this is a weekly number and can not be read for a global trend, we are supposed to be at the peak of the buying season and for mortgage applications to be dropping is not a good sign.

The Mortgage Bankers Association’s weekly application index dropped to 618.6 from 643.7 the prior week.
Economists say the rising mortgage rates, falling home prices, and record numbers of houses on the market may be scaring away buyers, in turn worsening the real-estate recession. They expect a recovery in 2008, at the earliest.
The purchase index fell 4.9% to 428.9 from 450.9. The refinancing applications index decreased 2.5% to 1,731.6. Refinances represented 38.7% of all mortgage applications, a slight rise from 38% last week. via Banknet360