(NEW YORK) Rebecca and Trent Dupaix of Eagle Mountain, Utah, spent a year searching for their dream home. The couple, who have five children, considered 15 to 20 houses before finding ‘the one’. They were thrilled when they closed on a US$227,000, rock-and-stucco home with five bedrooms and two and a half baths in March 2009.

But four months later, when a local television reporter was doing a story on housing taxes in their subdivision, the Dupaixes discovered that their sales contract included a ‘resale fee’ that allows the developer to collect one per cent of the sales price from the seller every time the property changes hands – for the next 99 years.

Rebecca Dupaix, 34, says she and her husband had no clue about the fee when they closed on the house. ‘Of course we were upset,’ she says. ‘We didn’t know about it, and our closer at the title company didn’t know about it.’

Other buyers gutsy enough to venture into the battered housing market in the hope of scoring a bargain might be wise to check the fine print before signing on the dotted line.

A growing number of developers and builders have been quietly slipping ‘resale fee’ covenants into sales agreements of newly built homes in some subdivisions. In the Dupaix contract, the clause was in a separate 13-page document – called the declaration of covenants, conditions and restrictions – that wasn’t even included in the closing papers and did not require a signature.

The fee, sometimes called a capital recovery fee or private transfer fee, has been gaining popularity among companies that have been frantically searching for new ways to gain access to cash in the depressed housing market.

‘Developers are desperate,’ says David Steffensen, a lawyer and a former developer in Salt Lake City. ‘They’re facing projects that are upside down’ because the property value has fallen below the loan balance and lenders are refusing to refinance. ‘It’s a ticking time bomb,’ he adds.

Freehold Capital Partners, a real estate financing firm founded by the Texas developer Joseph Alderman III, has been leading the charge. According to William White, Freehold’s chief operating officer, the firm has signed up more than 5,000 developers who are adding the covenant to developments worth hundreds of billions of dollars that will be built out over the next decade in 43 states.

Many developers see the resale fee as a creative way to get new financing. They are hoping to one day use the trickle of cash from these fees as collateral for a loan, or to get cash up front if pools of the fees are packaged into securities to be bought and sold on Wall Street. Freehold has begun shopping the idea of securitising the resale fees, much as sub-prime loans were packaged and sold to investors.

Someone selling a home for US$500,000, for example, would have to pay the original developer US$5,000. If the home sold again two years later for US$750,000, the second seller would have to pony up US$7,500 to the developer, and so on. Even if a home declines in value, the seller still must pay the one per cent fee. Freehold gets a cut of the resale fee; if the fees are securitised, it retains a percentage of the cash generated from the securitisation.

Freehold’s principals and lawyers have been aggressive in sales pitches to developers, but have declined to give details on their clients, securitisation efforts or the company itself. Freehold moved its corporate office from Round Rock, Texas, to New York this year as it stepped up efforts to securitise the resale fees.

Mr White characterises the resale fee as a win-win deal for the developer and the home buyer. The fees let developers spread out the cost of building the roads, utilities and other infrastructure across all homeowners in a subdivision, rather than just the initial buyers.

As a result, he said, the developer can lower the initial price of a home to the first buyer. For example, he says, a typical US$250,000 home may be able to sell for about US$5,000 less. ‘The fee is a fair and equitable way to spread development costs, and results in lower costs to the average consumer,’ Mr White says.

Ted Thieman, founder of the real estate developer Thieman Enterprises in Vandalia, Ohio, sees Freehold’s securitisation plan as the holy grail that will provide him with badly needed cash. He signed up with Freehold last year after lenders refused to provide financing for him to develop land in Dayton, Ohio.

Jeff Moseley, founder of Badger Creek Development in Brunswick, Georgia, says he signed up with Freehold after watching his business tank with the economy. He is hoping Freehold’s resale fee programme will breathe new life into his business. ‘I thought it was an intriguing and compelling story,’ says Mr Moseley, who owns two development projects, encompassing about 220 lots.

Some developers are sceptical. Qualico, a Canadian company that owns Reytex Homes of Austin, Texas, turned down Freehold’s sales pitch when it was buying land from a Freehold affiliate in Texas. Qualico wanted to use the land to build entry-level homes and didn’t think the fee would fly with that market segment. First-time buyers are more likely than others to trade up and quickly sell a home, so the home often has little time to appreciate enough to offset the fee.

The resale fee ‘has disaster written all over it’, says Rick Akin, partner of the law firm Akin & Chardavoyne, which represented Qualico.

Mr Alderman, the 45-year-old Freehold founder, has a history in the real estate industry, dating back to 1990, that includes a few bumps in the road. In March 1994, he filed for Chapter 7 bankruptcy protection for businesses that operated as Alderman Homes and First Quality Homes.

He has also held positions as either a senior executive or registered agent for seven other businesses, many of which the Texas Comptroller of Public Accounts lists as ‘not in good standing’ – a designation applied when a company has either not paid franchise taxes or failed to file a tax report or both.

Mr Alderman says that the businesses were deemed not in good standing because he or his accountant didn’t file reports by the deadline and that no franchise fees are due. ‘My credit is perfect,’ he adds.

A coalition of real estate trade groups, including the National Association of Realtors, the American Land Title Association and the Center for Responsible Lending, opposes resale fees and is lobbying federal and state authorities to ban them.

‘The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn’t pass the smell test,’ says Justin Ailes, director of government affairs at the land title association.

The coalition wrote to Treasury Secretary Timothy Geithner and to the Department of Housing and Urban Development, the Federal Housing Finance Agency, the Federal Trade Commission and others, urging them to bar the fees or use the consumer protection agency – to be created by the financial overhaul – to fight them.

Often, the fee is within dozens or hundreds of pages of documents, and for some buyers, like the Dupaixes, it may be in a separate declaration that does not require a signature. Buyers may not be aware of the fee until the closing – or, worse, when they try to sell the home years later and the fee shows up in the title search, Mr Ailes says.

If the seller won’t pay the fee, he says, a lien is slapped on the property.

Opponents have made some headway. The Department of Housing and Urban Development recently issued a letter indicating that the fees violated its regulations and that the agency would not insure mortgages on properties that included them. And 17 states have either banned or placed conditions on the practice. — NYT

Source: Business Times, 14 Sep 2010

Developers picking up land at bargain prices as lenders move troubled construction loans off their books

(NEW YORK) Construction crews are returning to the Cascades of Groveland, a gated 55-and-older community west of Orlando, Florida, almost three years after its bankrupt developer left owners of the existing 238 houses surrounded by empty lots, partially built homes, and an unfinished clubhouse.

Shea Homes, a builder based in Walnut, California, bought the remaining 761 lots from Bank of America Corp in June and reopened the project on Aug 25 with a new sales office, lower prices and a changed name: ‘Trilogy.’ Residents, who had taken over the guardhouse for mahjong, bingo and poker games, will get a 38,000 square foot recreational centre with indoor and outdoor pools, tennis courts and a card room.

‘For the people here, the activity of construction equipment is music to their ears,’ said Eric Sorkin, 61, president of the homeowners association at the development, 35 miles north-west of Walt Disney World. ‘There’s a future.’ Builders are buying lots at less than half their original prices from lenders eager to move distressed construction loans off their books. Developments are being resuscitated from Florida, California, and Las Vegas to Utah and the suburbs of Washington, DC, according to Brad Hunter, chief economist for Metrostudy, a Houston-based housing researcher.

‘This is a natural progression of the cycle,’ Mr Hunter said. ‘Projects fail, the price of the asset drops until it reaches a point where it’s profitable for someone else to pick it up and remarket it. They reposition the project and then what was formerly infeasible, is feasible.’

Builders, facing record low demand, are trying to boost margins and revenue by pulling unfinished projects out of mothballs. They’re benefiting from cheap land and falling construction costs as they seek to adapt floor plans to today’s market and lure buyers with prices that, in some neighbourhoods, are little more than the cost of a foreclosed home. The 12 largest homebuilders by market value added 16,631 lots in their past two quarters, according to data compiled by Bloomberg.

The revived projects could contribute to a delay in the US housing recovery by adding to the supply of available homes, according to Mr Hunter. At the same time, builders are being cautious about flooding the market by limiting the numbers of houses they are constructing without having buyers lined up, he said. Many homebuyers also aren’t interested in foreclosures, which may be damaged or in inferior locations, Mr Hunter said.

The next few months will show whether the revived projects will inflate supply, because many builders purchased lots around the same time, and will likely market them at about the same time, said Jill Lewis, homebuilder specialist for the Land Advisors Organization, a Scottsdale, Arizona-based land broker.

In the Phoenix metro area, 48 communities have reopened with about 40 more coming in the next year, according to Land Advisors. About 6 per cent of finished lots for production are owned by banks, down from 20 per cent a year ago. On average, new homes in Phoenix are going for half of what they sold for four years ago, Land Advisors said.

Picking up where another builder left off can be complicated by the passing of years. Without attention, weeds grow, swimming pools go green, government permits expire, and homeowners associations turn insolvent, said Taylor B Grant, founding principal of California Real Estate Receiverships LLC in Newport Beach, California. Mr Grant, who works as a court- appointed receiver for properties that have gone into default, is often asked by banks to prepare developments for sale.

It can take nine to 12 months to ready a site and construct model homes, said Tom Dallape, principal at the Hoffman Company, a land brokerage advisory firm in Irvine, California. Shea Homes, which had some models in place, did it in a couple months. Soon after taking over the Cascades of Groveland, the closely held company began knocking down 16 partially built homes that ‘were sitting out there too long, and were not protected from the conditions,’ said Jeff McQueen, executive vice-president for Shea Homes Active Lifestyle Communities.

Developers also are adapting projects to include smaller, more efficient designs that cost less to build, Mr Dallape said. ‘They’re tailoring them to the market,’ he said. ‘The average new house used to be 3,000 square feet. Today, it’s 2,100.’

Publicly traded homebuilders such as DR Horton Inc, Lennar Corp, Meritage Homes Corp, KB Home, Standard Pacific Corp and Toll Brothers Inc started buying about a year ago as the market seemed to be strengthening, according to Tom Reimers, president of the California division of Land Advisors Organization. They deployed cash amassed during the recession by selling land and taking advantage of a change in the tax code that provided them higher refunds, said Megan McGrath, homebuilding analyst with Barclays plc in New York.

The housing market weakened with the expiration of a homebuyer tax incentive in April, and builder land purchases could slow as a result, Ms McGrath said. Sales so far in the restarted projects are relatively strong, Metrostudy’s Mr Hunter said.

Meritage, which builds in Texas, Nevada, Arizona, California, Colorado and Florida, has had a monthly pace of three sales per community in new projects compared with two for older developments, said Brent Anderson, vice-president of investor relations. The Scottsdale, Arizona-based company bought 100 projects with 5,400 finished lots since the first quarter of last year and has reopened about half of them, he said. ‘If these lots weren’t available, it would be damn tough for builders to make a profit,’ Mr Anderson said.

New home sales slid 12 per cent in July to a record-low annual pace, and existing-home sales tumbled 27 per cent to the lowest level in a decade of record keeping, according to separate reports last month from the Commerce Department and the National Association of Realtors. Single-family housing starts fell 4.2 per cent from June. Foreclosure filings increased almost 4 per cent in July from the previous month, RealtyTrac, an Irvine, California-based research company, said.

In Phoenix, where more than half the homes sold are foreclosures, demand is weak. The number of newly built houses and condos sold in July in the metro area fell to 641, down 50 per cent from June and 38 per cent from a year earlier, San Diego-based MDA DataQuick reported on Aug 26.

‘All of us are going to sit back and evaluate the depth of the consumer market, and whether they are going to be chasing after the same buyer,’ said Ms Lewis of Land Advisors.

Sales offices are only just starting to reopen. Newly acquired developments make up 20 per cent or less of public builders’ closings, and may reach about 50 per cent for some companies by the middle of next year, Ms McGrath said.

Candlelight Homes, a South Jordan, Utah, homebuilder that bought lots in 20 stalled projects, recently introduced a new slogan: ‘Quality new homes, less than foreclosures.’ ‘We’re buying lots for less than the cost of the improvements,’ said Joe Salisbury, a partner at Candlelight. ‘If someone offered me raw land for free next door, I wouldn’t even want it because it would cost me more to build out the lots.’ – Bloomberg

Source: Business Times, 9 Sep 2010

US existing-home sales dive in July, to lowest level since 1999: industry group

(WASHINGTON) US home sales are plunging despite rock-bottom mortgage rates as high unemployment prevents people from buying houses and threatens to curtail economic recovery.

Existing-home sales plunged for the third straight month by a whopping 27.2 per cent in July to levels unseen in more than a decade, an industry group said on Tuesday.

Sales of single-family homes, townhomes and condominiums dropped to 3.83 million units from 5.26 million units in June, said the National Association of Realtors.

The slide was more than double the 12.1 per cent expected by most economists, with sales at the lowest level since 1999.

‘The disappointing US home sales data has investors worried that the global recovery is unravelling,’ said Chris Lafakis, an economist at Moody’s Economy.com.

Single-family home sales – accounting for the bulk of transactions – were at the lowest in 15 years, the association said, providing the latest statistics on the housing sector, which was at the epicentre of the financial crisis that plunged the nation into recession in December 2007.

If sales do not improve, rising inventories – there are nearly four million unsold previously owned homes in the market – could eat further into prices.

‘The first worry is that we are not seeing much response in demand to the historic drop in mortgage rates,’ said Societe Generale analyst Aneta Markowska.

Thirty-year mortgage rates have fallen to a record low 4.42 per cent, but mortgage applications for new purchases as of early August were sitting very close to cyclical lows.

‘This inability to induce demand may be explained in part by poor employment prospects,’ Mr Markowska said. ‘If businesses scale back further on hiring plans, it would be hard to imagine any material improvement in housing demand.’

Unemployment at 9.5 per cent is the biggest concern of President Barack Obama, whose Democratic Party faces the possibility of losing control of Congress in mid-term elections in November.

The economy began growing since the middle of last year from recession but expansion has slowed, triggering worries of a double-dip recession.

The government is expected this week to significantly revise lower the US economic growth chalked up in the second quarter to 1.4 per cent from 2.4 per cent previously, most analysts said.

‘Housing and employment continue to be major problems for the US recovery,’ said analyst Andrew Busch of BMO Capital Markets.

The sharp July home sales decline was payback for a May expiry of a government homebuyers’ tax credit incentive introduced to boost economic recovery.

‘All of the action earlier this year appears to have been driven by the tax credit,’ said Nigel Gault, chief US economist for IHS Global Insight.

Mortgage applications for purchase have been moving sideways since June even as mortgage rates plunged.

‘There’s no sign of any underlying recovery despite rock-bottom interest rates,’ Mr Gault said. ‘A sustained upturn will depend on an improvement in the jobs market, which at the moment is slowing down rather than gathering pace.’

No part of the country escaped the July home sales carnage. The best performing region – the US south – posted a nearly 20 per cent drop.

‘It is not clear if the housing market hit a huge air pocket or crashed and burned, but for now, this sector looks to be flat on its back,’ said chief economist Joel Naroff of Naroff Economic Advisors. — AFP

Source: Business Times, 26 Aug 2010

(NEW YORK) Housing led the US out of seven of the last eight recessions. This time, it may kill the recovery.

Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling.

‘If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,’ said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. ‘The housing market and the broader economy are closely intertwined.’

Spending on home construction and items such as furniture and stoves accounted for about 15 per cent of gross domestic product in the second quarter, according to West Chester, Pennsylvania-based Moody’s Analytics.

Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.

A report today by the Chicago-based National Association of Realtors shows July sales of existing homes plummeted 12.9 per cent from June, the biggest monthly loss of 2010, according to the median estimate of economists surveyed by Bloomberg.

New-home sales, which account for less than a 10th of housing transactions, stayed at the second-lowest level on record last month, economists predict Commerce Department data will show tomorrow.

‘Housing continues to be stuck in the doldrums,’ said Jeffrey Frankel, a member of the business-cycle dating committee at the National Bureau of Economic Research, the arbiter of when US recessions begin and end, and a professor at Harvard University in Cambridge, Massachusetts.

With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties.

One in seven mortgages were delinquent or in foreclosure during Q1, the highest in records dating to 1979, according to the Washington-based Mortgage Bankers Association.

Foreclosures probably will top one million this year, said RealtyTrac Inc, an Irvine, California-based data company.

Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Program, 48 per cent were cancelled by the end of July, the Treasury Department said on Aug 20.

More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said on June 23.

Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in Q1, according to Laurie Goodman, an analyst in New York at mortgage- bond broker Amherst Securities Group LP.

As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

Those sidelined house hunters include Marion and Jim Lasswell, who said they spend most weekends looking at homes for sale near Raleigh, North Carolina.

His engineering job at iRobot Corp is secure, the couple’s credit is good, and they have saved enough for a 20 per cent down payment, Marion Lasswell said. The problem: they don’t think the market has hit bottom.

‘We’re still watching prices drop,’ Ms Lasswell, 38, a registered nurse, said in a telephone interview. She said they won’t buy ‘until there’s an awesome deal’.

Home prices tumbled 33 per cent from their July 2006 peak to the low in April 2009, according to the S&P/Case-Shiller 20- city index.

They may drop another 20 per cent by 2012 if the economy slips back into a recession, according to Ms Chen, the Moody’s Analytics economist.

Gross domestic product increased less than 1.5 per cent in Q2, the slowest rate since the recovery began, according to the median forecast by economists in a Bloomberg survey.

That’s down from the 2.4 per cent rate initially reported by the Commerce Department last month. Growth may ease to 1.3 per cent by Q1 of next year, according to the New York- based Conference Board.

Consumer spending rose 1.6 per cent in Q2, down from 1.9 per cent in the previous three months.

Purchases of home furnishings and appliances fell 1.7 per cent to an annual pace of US$256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis.

‘There is an epidemic of thrift,’ said Nariman Behravesh, chief economist at IHS Inc in Lexington, Massachusetts.

‘Households and businesses are super-cautious right now. Sometime in the next six to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire.’

Federal Reserve policymakers on Aug 10 made their first attempt to shore up the recovery by pledging to keep their holdings of securities and prevent money from draining out of the banking system.

They said the economic expansion probably will be ‘more modest’ than earlier anticipated.

The Fed has held the target for its benchmark lending rate near zero since December 2008 and purchased US$1.43 trillion worth of debt to keep rates low and bolster housing. – Bloomberg

Source: Business Times, 24 Aug 2010

Economist says increasing foreclosures and falling prices could cause another recession

NEW YORK: Housing led the United States out of seven of the last eight recessions. This time, it may kill the recovery.

Home sales collapsed after a government tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of last year, has been waning, with jobless claims rising and factory orders falling.

‘If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,’ said Moody’s Analytics economist Celia Chen. ‘The housing market and the broader economy are closely intertwined.’

A report yesterday by the National Association of Realtors was set to show that last month’s sales of existing homes plummeted 12.9 per cent from June, the biggest monthly loss for this year, according to the median estimate of economists surveyed by Bloomberg.

Economists predict that Commerce Department data will show tomorrow that new-home sales, which account for less than one-tenth of housing transactions, had stayed at the second-lowest level on record last month.

With 14.6 million Americans out of work, home owners are struggling to hold onto their properties. One in seven mortgages was delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, said the Mortgage Bankers Association. Foreclosures probably will top one million this year, said data company RealtyTrac.

Government efforts to help have had little success. Of the 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Programme, 48 per cent were cancelled by the end of last month, the Treasury Department said last week. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said last month.

The number of homes repossessed or in default that eventually will be offered for sale stood at 7.3 million in the first quarter, said analyst Laurie Goodman at mortgage-bond broker Amherst Securities. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

Home prices fell 33 per cent from their July 2006 peak to the April low last year, the S&P/Case-Shiller index showed. They may drop another 20 per cent by 2012 if there is another recession, said Ms Chen.

Home construction and property sales led the way out of the previous seven recessions going back to 1960, said mortgage insurer PMI Group. New-home sales improved for about eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery.

That did not happen in the last recession. Sales of new houses fell in five of the eight months before economic expansion began in the second half of last year. Housing starts fell in two of seven months.

BLOOMBERG

Source: Straits Times, 24 Aug 2010