Hovnanian sees better days ahead for the housing market

The worst is over for the housing market.

Or so says Hovnanian Enterprises' CEO Ara Hovnanian.

"Several signals of a housing industry bottom have become apparent," Hovnanian said in a conference call Thursday with Wall Street analysts and investors.

The Red Bank, N.J., homebuilder has seen a recent pickup in home orders and a slowing in house-price declines, Hovnanian said.

“After 15 quarters in a row of shrinking net contracts per community, we are finally seeing the trend reverse,” Hovnanian said. The pace is approaching 2006 levels, he said.

The company is responding by buying land, increasing home prices, reducing incentives and reopening developments in Southern California and Arizona that had been mothballed, he said.

Hovnanian Enterprises, which sells homes in 18 states, has begun an advertising campaign with the slogan “Pounce Before the Bounce” to persuade the public that "this may be their last opportunity to buy homes at rock bottom prices while obtaining favorable mortgage interest rates," he said.

On Wednesday, the company said it narrowed its loss for the quarter ended in July, reporting a loss of $168.9 million compared with a loss of $202.5 million in the year-earlier period. Revenue fell 45% to $387.1 million.

“It’s disappointing to have continued losses,” Hovnanian said. “On the other hand, there were many positive signs that we’re at the bottom and perhaps beginning the recovery.”

-- Nancy Rivera Brooks

Photo: A sign advertises new homes to be built by K. Hovnanian Homes at the Signature Properties Fiddyment Farm housing community in Roseville, Calif. Credit: Bloomberg
 

Broad says mortgage rates need to drop further

Eli Broad, founder of KB Home, said the areas hardest hit by the housing crisis won't rebound until mortgage rates there drop to 3%, Bloomberg News reported.

Broad, speaking in an interview at the Milken Institute Global Conference in Beverly Hills, also said the housing industry will see more mergers and acquisitions as the national housing slump continues.

-- Nathan Olivarez-Giles

Hating the bailout? You won't like the next one, either.

News item: The Dow industrials more than 350 points Monday on fears the credit crisis is spreading, and the U.S. economy weakening. CNBC's Jim Cramer, love him or hate him, warned short-term investors to get out of the market today. He defined short term as the next five years.

News item from Bloomberg this morning:

U.S. Treasury Secretary Henry Paulson's $700-billion plan to buy troubled assets from financial firms may not work because it doesn't recapitalize banks, said Edmund Phelps, winner of the 2006 Nobel Prize for economics.

“There are lots of reasons to think the Paulson plan won't succeed in cleaning up banks' balance sheets any time soon,” Phelps, an economics professor at Columbia University, said at a conference today in Washington. “It may aggravate the second problem banks have, which is that they're quasi-insolvent.”

Speaking at the same conference, New York Times columnist Paul Krugman agreed, saying the Paulson plan fails to recapitalize banks, and that another government intervention, to inject capital into the banking system, is probably inevitable.

Two cents: We're up to at least* four bail-outs now -- Bear Stearns, Fannie-Freddie, AIG, and the Paulson plan. And it appears increasingly likely that a fifth bailout is in our near future. It could be a week from now, it could be a month, it could be the subject of the next president's first prime-time address to the nation in early 2009, but it's coming.

The initial argument for the Paulson plan was that it was "systemic" rather than case-by-case. Sure enough, it is systemic. That doesn't mean it will work, and that doesn't mean there won't be another, fairly soon.

*I say "at least" four bail-outs, because I'm sure some readers will count last summer's big housing bill (Remember that one? Historic and sweeping help for struggling homeowners?) as a bail-out as well.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.
Photo credit: AFP / Getty Images

Barack's e-mail to L.A. Land

My son and I were enjoying the pennant-race atmosphere at Dodger Stadium last night when my Blackberry vibrated with an e-mail from Barack to me (no disrespect; that's how he signs his e-mails).

I made the mistake of reading it, so now you get to listen to me complain about it. The e-mail, consisting of Sen. Obama's "three principles that should guide an economic recovery plan," is reproduced below. It's yet another example of the mindless, faux-populist pandering that both presidential candidates have turned to in response to a historic financial crisis.

Text: Obama begins by observing that that "greed and irresponsibility" on Wall Street and Washington have created a financial crisis.
Analysis: Wrong. Millions of ordinary Americans helped -- they bought into the underlying housing bubble that is at the root of all this, the same bubble Obama is now afraid to discuss in plain language. Washington and Wall Street have no monopoly on greed and irresponsibility in this country.

Text: Obama then says, "Whatever shape our recovery plan takes, it must be guided by core principles of fairness, balance, and responsibility to one another."
Analysis: Wrong again. The core principle here is doing something that works, something smart, something effective, something in the best long-term interests of the American economy.

And that's what's missing from Obama's e-mail: a single, overriding big idea about what to do. Does he think the government should buy distressed assets? Make low-interest loans to banks in return for equity? All of the above? None of the above? Who knows.

There's a very specific, very expensive, very risky idea on the table, the Paulson plan. Obama says nothing about the plan itself. Instead he talks about how he would dress it up to make it acceptable. To borrow from the recent vernacular, he is describing the kinds of lipstick he'd like to see on this pig.

Two more cents: I don't mean to pick on only Obama. Both candidates have been, and continue to be, evasive on this issue. It's likely the biggest single economic issue they will face in the next four years, and neither dared to bring it up at their convention, and both seem afraid to take a stand on it today.

Click below for the entire Obama e-mail and the brief story of how it ended up in my in-box.

Bush wants $700 billion -- and more -- for unregulated bailout czar

Folks, we are at a bizarre place in American history. It began in large part with a garden-variety asset bubble, in housing prices, that most politicians to this day refuse to acknowledge. Inability to speak painful truths to the American people is the central hallmark of our democracy in 2008.

After years of denial and willful ignorance at all levels of government, this housing bubble has led us to where we are today: a predictable financial collapse, and an astounding and thorougly un-American power grab by the executive branch, which wants an economic czar with unchecked powers who would operate in private without meaningful congressional oversight.

Various links and headlines:

Section 8 of the president's bailout proposal, the creation of an economic czar:

Decisions by the Secretary (of Treasury) pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

The Los Angeles Times this morning:

...the Bush administration is asking Congress for the authority to spend $700 billion and for powers to intervene in the economy so sweeping that they have virtually no precedent in U.S. history.

...But the most distinctive -- and potentially most controversial -- element of the plan is the extent to which it would allow Treasury to act unilaterally.

... "It essentially creates an economic czar with no administrative oversight, no legal review, no legislative review. And it gives one man $700 billion to disperse as he needs fit," said Sen. Dianne Feinstein (D-Calif.), referring to Treasury Secretary Henry M. Paulson.

The $700 billion figure is misleading; it is not the limit of what the Treasury secretary can buy; it's the limit of what the secretary -- the economic czar -- can have "outstanding at any one time" in asset purchases. And don't forget, the Bush administration has already backed another $285 billion in bailouts for Fannie Mae, Freddie Mac and AIG.

When the administration originally said its plan would only purchase "assets from any financial institution having its headquarters in the United States," it was, for lack of a better word, lying. Treasury Secretary Paulson this morning told ABC-TV that foreign banks can join the party:

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said.

"That's a distinction without a difference to the American people. The key here is protecting the system."

With all due respect to Henry Paulson, what qualifies him to speak about what matters to the American people? How is it that a man who appeared clueless in the early years of this crisis (remember "containment"?) not only survives, but evidently also has the president's blessing to put himself forward as an economic czar unparalleled in American history?

Paulson has been Treasury secretary for 27 months; what was he doing during the first 24 months? I second Lou Barnes' assessment:

You hire an investment banker to look around corners for you. Relentlessly surprised, annoyed at the waste of his valuable time, Hank has only recently discovered that there are corners.

Enough Sunday morning bile and bloviation. The Ryder Cup is on. What are your thoughts? Comments?

--Peter Viles

Photo: Vice President Cheney and President Bush. Credit: Associated Press

Bush, describing his bailout, avoids the "b" word

The President this morning described his plan -- if it comes from his Treasury Secretary, it's his -- for what will likely be the biggest bailout in United States history.

Funny, though, he couldn't summon the courage, or the honesty, to use the "b" word. What else is it when government scoops up hundreds of billions of dollars worth of financial trash that no smart person in the world wants to buy? It is a bailout.

The president called it "essential intervention," "decisive action," an "unprecedented step" that would entail "putting taxpayer dollars on the line."

Right. So what is it? He says it's ".. the federal government's purchase of illiquid assets, such as troubled mortgages, from banks and other financial institutions."

Right, a bailout.

We know he is capable of using the word -- he used it in this press conference in February when he warned Congress not to "bail out lenders and speculators." That was then.

The president also said, "This is no time for partisanship," and on that I agree. This mess was created and is owned by both political parties, and they purchased it on an installment plan that entailed years of unflinchingly loyal service to the financial services industry.

Those searching for misery this morning can read the entire Bush statement below, as filed by the A.P.

The next foreclosure flipper: Your government

The L.A. Times' William Heisel takes a close look at the federal government's new $4-billion buy-and-flip foreclosure program, under which local governments will get federal money to buy foreclosed houses.

Heisel: "But the program -- included in the landmark housing bill signed by President Bush last month -- faces growing doubts among real estate experts and economists, who point out that the government will now be competing with lenders and private homeowners who have been struggling to sell in a depressed market."

More: "What's more, an analysis by The Times shows that the California communities with the most foreclosures -- and therefore likely first in line for federal aid -- already have a relatively ample supply of affordable housing."

Money quote No. 1: "I'm not sure this is the most cost-effective use of these funds," said Kerry Vandell, director of the Center for Real Estate at UC Irvine. "Sometimes an experiment like this is just that, an experiment. And you don't find out until later that it doesn't really work out too well."

Money quote No. 2: "I think if the government had wanted to buy homes a few months ago, maybe it would have helped, but if they're going to start six months from now or later, it can only hurt," said Pamela Vose of the Greater Antelope Valley Assn. of Realtors.

Commentary: Agreed. I've always thought this program was a mess waiting to happen, and that President Bush was right to oppose it. If bargain-hunters are already snapping up foreclosed properties — and they are, according to this week's MDA DataQuick report on the surge in July home sales — why is it necessary for the government to wade into the housing market? The $4 billion would be better spent on down payment assistance programs for individual buyers.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Photo credit: Getty Images

Are we there yet? When will housing prices hit bottom?

Today's MDA DataQuick report shows that home sales are now rising in most of Southern California, and raises the second-most popular question* on this blog: When will housing prices hit bottom?

Rather than offer a guess, or a theory, I thought it would be instructive, if a bit complicated, to look back at the last housing cycle in Southern California. I'll use the metric of single-family home sales in the San Fernando Valley, because that's the metric I have in front of me, courtesy of the Southland Regional Assn. of Realtors.

Previous cycle:
Peak sales volume for July: 1,495 in 1988 (Median sales price at that time: $210,000)
Peak median sales price for July: $241,000 in 1989
Trough sales volume for July: 670 in 1992 (Median sales price at that time: $216,000)
Trough median sales price for July: $156,500 in 1996 (35% decline from peak)

Recap: In the early 1990s cycle, sales volume peaked one year before prices peaked; sales levels then declined for four years. Prices bottomed four years after sales bottomed. Prices fell by 27% after sales bottomed. Prices then remained at the bottom for 19 months, from September 1995 to March 1997.

Current cycle:
Peak sales volume for July: 1,273 in 2003 (Median sales price at that time: $373,500)
Peak median sales price for July: $655,000 in 2007
Trough sales volume for July: Not yet known, but quite likely July 2007
Trough median sales price for July: Not yet known

Recap: Sales volume peaked four years before prices peaked. If my prediction of a slight increase in sales in July proves correct, sales levels declined for four years -- which would match the previous cycle. We don't yet know when prices will bottom out.

There are a number of reasons that the two housing cycles could be very different. The early '90s cycle was punctuated by a recession (1990-91) and an earthquake (1994). The current downturn has its own unique characteristics, many involving the availability of credit.

Takeaway: In the last housing cycle, prices in the Valley bottomed out four years after sales hit bottom. We are likely at or near the bottom for sales in the current cycle right now.

-- Peter Viles

*The most popular question on this blog is: When will home prices start falling in (insert name of reader's favorite neighborhood here).

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Photo credit: Getty Images

Why buying at the peak was a brilliant move

If you bought a house in L.A. in the summer of 2007, paid peak prices and have watched your home's value drop by 33%, you have to admit: You made a really bad financial move, right?

Er, wrong, according to a contrarian opinion piece in today's L.A. Times that argues that buying L.A. real estate in 2007 -- even at peak prices -- was "a smart investment."

The author, and proud peak buyer, is Chris Ayres, who lives in L.A. and writes for the Times of London. He argues, "Those of us who purchased nonspeculative property from 2004 to 2007 for the gratuitously self-indulgent purposes of raising a family and investing in our neighborhoods will ultimately have the last laugh."  The words "cheeky Brit" do come to mind.

Ayres' logic: Peak buyers got easy financing on good terms. Interest rates were low. Inflation -- possibly a bigger factor in coming years than in the recent past -- means the value of of his home in dollars will someday rise, while his loan payments will become relatively cheaper.  Perhaps the biggest advantage, he argues, is "the glorious all-American instutition that is the home mortgage interest tax deduction." 

His back-of-the-envelope math on savings from the peak purchase of a $1.2 million home (not necessarily his home, just an example Ayres chose):
--$20,000 per year in income tax savings, for $200,000 over the next 10 years.
--Another $200,000 over 10 years by getting a lower interest rate on his bubble-era loan.
--Another $700,000 in savings and equity that 5% annual inflation will ultimately add to the value of his home and increasing affordability of his mortgage.

He concludes: "The penalty for having bought at the height of the worst real estate bubble in history adds up to a potential $1.1 million gain."

My two cents: He's trying to have it both ways on rising interest rates and future appreciation. If interest rates do settle two points higher than they were last summer, as Ayres argues, home prices will take an even bigger hit, and his home will not increase as much in value -- regardless of what inflation does.

Off topic but tangentially related: Ayres is a journalist, a trade with a glorious history and a questionable future income stream. Salaries for journalists are not likely to keep pace with inflation over the next 10 years. If you haven't noticed, free content is putting downward pressure on the cost of paid content. An era of 5% inflation will not be kind to journalists.

--Peter Viles
Your thoughts? Comments?
Photo Credit: Home of the Week from this week's L.A. Times, by Charmaine David.

A tipping point? Housing bears, everywhere

A tipping point? You can't swing a 44-pound foreclosed cat without hitting a profile of an I-told-you-so housing bear in the news today:

Fortune.com posts a long profile of bearish analyst Meredith Whitney (pictured), who in 2005 predicted "unprecedented credit losses" for subprime lenders and now predicts an ugly, 1980s-style recession. CNBC piles on with an interview in which Whitney says housing prices will fall "much more than people expect." Random background: She's 38, a former Fox News commentator, a graduate of Bikini Boot Camp and is married to WWE pro wrestler John Layfield, a.k.a. "the J.R. Ewing of pro wrestling."

The New York Times profiles bank analyst Richard X. Bove: Since 2005, Bove "has gained a certain reputation as one of the few bank analysts to predict the blow-up in the housing market and subsequent problems at many banks." Random background: He's 67, works from his home in Lutz, Fla., and believes some bank stocks are now "too cheap."

Barron's gives the floor to bearish economist Noriel Roubini, who observes, "We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up." Random background: A Turkish native who grew up in Italy, Roubini blogs at REG Monitor.  In September 2006 he told New York Magazine, "...there was a speculative bubble. And now that bubble is bursting."

-- Peter Viles
--Hat tip: Calculated Risk
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Bloomberg News