Official Says Bad Data Fueled Rate Cuts, Housing Speculation
Richard Fisher, the president of the Federal Reserve Bank of Dallas, said in remarks to the New York Association for Business Economics that the Federal Reserve under its former chairman Alan Greenspan kept interest rates too low from 2003 to 2004, thereby fueling speculative housing activity, because of faulty inflation data. From 2002 to 2003, he said, inflation as measured by the price index of personal consumption expenditures (PCE) excluding food and energy, was running below 1%, suggesting that a serious shock to the economy could turn inflation to deflation and make it difficult for the Fed to boost growth by engineering deeply negative interest rates. To reduce the risk of falling prices, the Fed lowered the Fed funds rate to 1% in June 2003 and held it there until mid-2004. Fisher noted that subsequent revisions of the PCE showed that inflation was actually a half a percentage point higher than originally estimated. “In retrospect, the real Fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been,” Fisher said. “In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today…the housing market is undergoing a substantial correction and inflicting real costs to millions of home owners across the country. It is complicating the [Fed’s] task of achieving…sustainable noninflationary growth.” (www.realestatejournal.com)
Real Estate Journal.com (11/6/06); Greg Ip, Wall Street Journal Online
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Some Builders Hopeful for a Late 2007 Housing Rebound
Beazer Homes USA Chief Executive Ian McCarthy said that he is hopeful that the deteriorating housing market will turn around by the end of 2007, at least in the markets where his company builds homes. He said that there may still be some pockets where there’s overhang, such as Miami and San Diego, which saw huge price run-ups and speculative buyers, but, for the most part, he believes the industry will be rebounding. “The demographic support for the housing market is so strong that this (slowdown) is an aberration, he said. “It’s not something that will last three or four years.” Elliot Eisenberg, housing policy economist with NAHB, said it’s “eminently reasonable” to assume that 2007 will be the turnaround year for housing. “The economy is still doing nicely in terms of job creation, job growth and low unemployment numbers, and interest rates are still at good levels,” which work in the industry’s favor, he said. He noted that many builders are taking steps to reduce the overhang by pulling back on new construction and offering incentives and discounts to sell existing homes. Builders have also been taking write-downs related to land and land options, and many are introducing new product lines that offer lower-cost homes with fewer amenities for price-sensitive buyers. He said Wall Street is forcing the builders to act with discipline in this environment, which can only help speed up the rebound. “There’s a realization things have changed and they’re acting accordingly,” he said. “So we shouldn’t see the prolonged pain” that occurred in the recession of the late 1980s and early 1990s, he said. (www.dowjones.com)
Dow Jones Newswires (11/8/06); Janet Morrissey
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The Vanishing Class — Middle-Income Neighborhoods Are Disappearing From Cities
Architect Alexander Gorlin was hired by the Nehemiah Housing Development Fund — a nonprofit developer established by the East Brooklyn Congregations in New York City that has built several thousand low-cost, mostly single-family homes in the neighborhood since the 1980s — to give a new row house development a more sophisticated look. Gorlin created a color palette from the available shades of Hardiplank, a cement-board siding popular in affordable housing — such as Evening Blue and subdued Countrylane Red. “We just made them as bold as possible,” he said of the facades. He threw in some easy urbanistic tweaks — like moving the parking spaces from the front yard, where Nehemiah has been putting them for years, to a real alley. “This is more like Siedlungen,” he says, referring to the German workers’ houses built in the first decade of the 20th century. “Or Brooklyn brownstones. Or Queens, where I grew up.” The much-coveted houses will be sold by lottery. Fifty percent of them must go to those who already live in the neighborhood; 5% are reserved for uniformed officers of the NYPD. About 12,000 requests have been received for the 637 available houses. They will be mostly two-story, 1,600-square-foot, three-bedroom homes costing $204,000 with a $46,000 subsidy from the city. A handful of two-family homes, priced at an unsubsidized $357,000 and three-family homes, at $488,000, will also be built. The maximum income for a one- or two-person household is $85,080 and for a three-person household is $99,000. (www.metropolismag.com)
Metropolis Magazine (11/8/06); Karrie Jacobs
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Florida Foreclosures Increase Again in October
Florida’s foreclosure rate increased by 21% last month, according to Default Research, leading some expects to say that the time to buy real estate in the state is now. “The holiday season is coming up and south Florida condominiums could be the bargain of the season,” said Serdar Bankaci, president and chief executive officer of Default Research. “There were a lot of condos bought for investment purposes, and with the downturn in the real estate economy, many investors are being forced to sell their condos for much cheaper than what they paid for them.” The highest increases in the foreclosure rate came in Clay County (40%) and Lee County (38%). Foreclosures were up 26% in Palm Beach County, 25% in Miami and 23% in Broward. Bankaci does not see this trend slowing down anytime soon. “The large inventory of homes creates an excellent opportunity for investors to buy homes below value, specifically condos,” said Bankaci. “South Florida, in the long run, will be home to many baby boomers looking for retirement residences or families looking for seasonal housing.” (www.rismedia.com)
RisMedia.com (11/9/06); Beth Bresnahan
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Vegas Developers Draw Wild Card: Spiraling Costs
Harrah’s Entertainment Inc, MGM Mirage, Wynn Resorts Ltd. and Boyd Gaming Corp. all have massive redevelopment projects in the works in Las Vegas that, if completed, promise to remake parts of the Vegas Strip over the next decade. The companies are vying to build self-contained empires with so many lodging, shopping and eating options that guests won’t be tempted to venture outside. But rising materials and construction costs are in almost every case either driving up the price tag substantially or prompting the developers to hedge their bets and scale back. Harrah’s has spent nearly $1 billion over the past year buying up 350 acres on and around the Strip, but the company hasn’t revealed exactly what it plans to do, and one reason for the silence, in addition to the rising building costs, is a shortage of steel, concrete, window glass and other materials. Huge developments underway in China, the Middle East, Europe and the U.S. have helped create the shortages. Some contractors working in Las Vegas have placed staff members in China to work directly with factories to lock up supplies. “China went out and bought 50% of the world’s scrap steel and ore 18 months ago,” says Tony Marnell, chief executive of Marnell Correo, which built many of the most famous Las Vegas casinos, including the Bellagio and the Wynn. “We’ve had a man in China for two years making contracts to buy things direct.” (www.realestatejournal.com)
Real Estate Journal.com (11/3/06); Peter Sanders and Christina Binkley, Wall Street Journal Online
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Wind-Driven Blaze Levels Fontana Lumberyard, Threatens Homes
Santa Ana winds gusting up to 50 mph turned a small brush fire into a 640-acre blaze last Monday morning, leveling a lumberyard and threatening hundreds of homes in Fontana and Rialto, Calif. before it was contained by San Bernardino County firefighters. The fire began near an onramp to Interstate 15, where a welder was working on a bridge. Sparks and melted metal fell into vegetation along the wash, and winds quickly carried the fire south. The damage was estimated at more than $1.2 million. Sam Reveles, who owns San Gabriel Valley Lumber Co., which was destroyed by the fire, said he saw black smoke billowing up from the fire’s origin when he arrived at work. After watching the fire move south in a narrow band along the Rialto-Fontana border, Reveles told his 20 employees to leave immediately. “With this wind, I just knew it was going to be upon us so quickly,” he said. (www.latimes.com)
Los Angeles Times (11/6/06); Maeve Reston and Jonathan Abrams
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