The Signs Don’t Point to a Typical Recovery
The wounded U.S. economy has shown signs of improvement in recent weeks, but many economists are accentuating the negative, bracing for head winds that could cause the recovery to be weak. Typically, a deep downturn is followed by a robust recovery, but many of the world’s top economists — but not all — doubt that a boom will follow this time. Historically, recessions have come about when businesses over-invested or when the Federal Reserve aggressively raised interest rates. Once business inventories and staffing levels correct themselves, or once the Fed cuts rates, growth resumes. Downturns caused by financial crises play out differently. The machinery of the financial system grinds to a halt; people cannot get credit to buy things and businesses cannot borrow money to expand. According to an analysis of 14 financial crises around the world by economists Carmen M. Reinhart and Kenneth Rogoff, the unemployment rate rises an average of seven percentage points in a downturn (this one has increased the U.S. jobless rate by only 4.7 percentage points), and the crisis lasts an average of 4.8 years (this one is at the two-year point). Growth spurts can emerge, and it appears increasingly likely that the U.S. economy will grow at a solid pace in the second half of the year, as companies restock depleted inventories. But it is unclear what would come after that, given the ongoing restrictions on credit. U.S. banks have sustained massive losses already, and a wave of soured commercial real estate loans threatens to further limit their ability to lend in the year ahead. A bigger problem looms in credit markets, which account for vast chunks of mortgage lending, consumer loans and commercial real estate loans. This shadow banking system remains dysfunctional — notwithstanding a slew of programs the Fed put in place to get it going again — and no one is sure when or whether it will recover. All that makes it more expensive for people or businesses to borrow money — if they can get a loan at all — which could serve as a powerful brake on any recovery. (www.washingtonpost.com)
Washington Post (8/17/09); Neil Irwin
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Toll Says Home Buyers Tiptoe Back
Lower prices, mortgage-rate discounts and other incentives for home buyers yielded much stronger than expected orders for Toll Brothers Inc. in its most recent quarter. “Fence sitters are looking for reasons to jump in on the side of buying,” said the home builder’s chief executive, Robert Toll. He added that “price is no longer the overwhelmingly dominant factor.” Toll’s net orders — contracts signed minus cancellations — rose 3% from a year earlier to 837, the first gain since 2005. In dollar terms, those orders were down 5% to $447.7 million. D.R. Horton Inc., the nation’s largest builder by annual closings, also noted an upturn. Sales in the company’s third quarter ended June 30 rose 22% from the prior quarter. “To me, it seems like we may have found a bottom and signs are pretty good,” said Ken Campbell, CEO of California-based Standard Pacific Corp., whose company does most of its business in California and Florida. While the latest results hint that the battered home building industry might be improving as consumers gain confidence, numerous hurdles remain. They include high unemployment, tight credit standards and competition from banks’ sales of foreclosed homes. “We still need a lot more improvement before you see home builders delivering significant profits,” Campbell said. (www.wsj.com)
Wall Street Journal (7/1/3/09); Dawn Wotapka and James R. Hagerty
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Lease-Backs Turn Owners Into Tenants
Before leaving for their August break, Democrats and Republicans in the House by a rare unanimous voice vote passed the Neighborhood Preservation Act, which would enable home owners who lose their houses to foreclosure to stay in the property, leasing it back at fair market rent from the lender. The bill would remove legal impediments blocking federally regulated banks from entering into long-term leases — up to five years — with the former owners of foreclosed houses. It would also allow banks to negotiate option-to-purchase agreements permitting former owners to buy back their houses. The idea, said Rep. Gary G. Miller (R-Calif.), a cosponsor of the bill with Rep. Joe Donnelly (D-Ind.), is to “reduce the number of houses coming into the housing inventory and preserve the physical condition of foreclosed properties,” which ultimately help stabilize values in neighborhoods with large numbers of distressed sales and underwater real estate at “no cost to the taxpayer.” If the bill is approved by the Senate, participation by banks would be voluntary. But the legislation might encourage banks to calculate if they would do better financially by taking an immediate loss at foreclosure or by collecting rents and then selling the property at a higher price in four or five years. (www.washingtonpost.com)
Washington Post (8/15/09); Kenneth R. Harney
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President Shifts Focus to Renting
The Obama Administration plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities. The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates. The $4.25 billion set aside for the creation of rental housing will come from $14 billion that HUD has received from the federal economic stimulus package. Another $4 billion of the money will be used to fix up the nation’s existing housing stock of 1.2 million units. The fund for new units will be available under competitive grants. (www.boston.com)
Boston Globe (8/16/09); Joseph Williams
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Hanging On at Home
In a 2005 AARP survey, 89% of 50-and-over Americans said they would like to stay in their current home. But many are not fully prepared to do so; most seniors have not taken even basic steps to increase the safety of their own homes. To get started, these home owners need to embrace the concept of universal design, which means making various parts of their home easier for everyone to use. Universal design tips can be found in AARP’s free booklet, “Home Modification: Your Key to Comfort, Safety and Independent Living.” And to discuss the mechanics and costs of making changes to the home, the owners should make sure they consult a builder or remodeler certified as an aging-in-place specialist (CAPS) by NAHB. In preparation for aging in place, owners should place special emphasis on preventing falls, particularly in the bathroom. Every year, one in three people over the age of 65 slips and falls, says Claire Berman, author of “Caring for Yourself While Caring for Your Aging Parents.” Falls send seniors to the hospital five times more frequently than any other injury, and 20% to 30% of those who fall suffer injuries that make it harder to live independently and increase their odds of early death. (www.smartmoney.com)
Smart Money Magazine (8/10/09); Peter Keating
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Economy, Lifestyle Changes Spur Demand for Smaller Homes
Sticker shock and a sour economy spurred Lee and Donna McCollough to downsize their dream retirement home into a 336-square-foot “country cabin” near Schulenburg in South Texas. Built from vintage salvageable materials by Tiny Texas Houses of Luling, the “turnkey package” cost $70,000, McCollough said. “It’s great,” said the 62-year-old retired electrical technician. “People are impressed with the construction and coziness of it. It’s built like an Igloo ice chest.” Brad Kittel started Tiny Texas Houses in 2006 to use materials from his salvage business. Using wood from old homes and barns, he built a 160-square-foot cottage to make a point. “I wanted people to understand that salvage antiques aren’t just for decoration. Once I built the first one, everybody liked it. It got a better response than I thought it would,” said Kittel. “I figured a 12-by-20-foot would be the biggest when I started, and now we are way up to a 12-by-33,” he said. “That might be too big.” His homes drew initial interest as artist studios and weekend retreats. Now, the economy has people viewing them as full-time dwellings. Kittel has built about 30 of the petite abodes, and six more are in the works. They range in price from $38,000 to $90,000. So far, the McColloughs aren’t feeling cramped in their new home. “The only problem is if we have six to eight people over it’s kind of small,” said Lee. “The impressive thing is that it will sleep six very comfortably. It has a separate bedroom, a kitchen and a full bath with a claw-foot tub.” (www.miamiherald.com)
Miami Herald (8/9/09); Steve Campbell, McClatchy News Service
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