"Housing Market is Strengthening" was originally posted as a blog post at RREA.com on January 28, 2012.

© 2008-2012 | Register Real Estate Advisors | Spring Texas Real Estate

Area homebuilders started 18,417 new homes in 2011, a 2 percent decline from the 2010 total. But the 4,387 homes started in fourth quarter 2011 represent a 24 percent increase over last year’s tax credit-depressed quarterly starts count. Just over 4,890 new homes were closed last quarter, 388 more than the year before.

At the end of 2011, the city’s new home market had an inventory of fewer than 10,000 homes, a first since 1997. A 10 percent decline in new home closings in 2011 caused new home inventory to rise from 5.9 last year to 6.4 months.

But the city’s job growth should mean more work for builders this year.

“Based on the job growth of the last 12 months, the tight housing supply and the building confidence of the Houston market should lead to an increase in new home starts through the end of 2012,” said David Jarvis, director of Metrostudy’s Houston division.

Metrostudy said the city’s unemployment rate dropped to 7.6 percent in fourth quarter 2011, a full percentage point less than the previous quarter’s reading. Employment also grew by 3.3 percent annually.

"H-Town Housing Market: Full Steam Ahead?" was originally posted as a blog post at RREA.com on January 27, 2012.

© 2008-2012 | Register Real Estate Advisors | Spring Texas Real Estate

The state created 15.4 percent of total jobs created in the United States
from October 2010 to October 2011.

Texas gained 232,500 nonfarm jobs during the period, an annual growth rate
of 2.2 percent compared with 1.2 percent for the United States. The state’s
private sector added 287,900 jobs, an annual growth rate of 3.4 percent
compared with 1.7 percent for the nation’s private sector.

The state’s seasonally adjusted unemployment rate increased to 8.4 percent
in October 2011 from 8.2 percent a year earlier. The nation’s rate
decreased from 9.7 to 9.0 percent.

All Texas industries except the information industry and the state’s
government sector had more jobs in October 2011 than in October 2010. The
state’s mining and logging industry ranked first in job creation, followed by
the professional and business services industry, and the leisure and
hospitality industry.

All Texas metro areas except Abilene, Wichita Falls, Texarkana and College
Station-Bryan had more jobs in October 2011 than in October 2010. Victoria
ranked first in job creation followed by Laredo, Corpus Christi, Odessa and
Lubbock.

The state’s actual unemployment rate in October 2011 was 8 percent. Midland
had the lowest unemployment rate followed by Amarillo, Odessa, Lubbock and
College Station-Bryan.

"Private Sector Job Growth Offsets Government Losses" was originally posted as a blog post at RREA.com on November 28, 2011.

© 2008-2011 | Register Real Estate Advisors | Spring Texas Real Estate

If you’d like to help with relief efforts, but you don’t know where to start, State Comptroller Susan Combs recommends beginning with the
following organizations:

• American Red Cross of Central Texas.
• The Texas Forest Service, which has established an emergency assistance
  fund to help overextended volunteer fire departments. According to
  the agency, Texas has more than 60,000 active firefighters, and more than
  half of them are volunteers.
• The Texas Wildfire Relief Fund,
  which supplies Texas firefighters with equipment, water, food and
  fuel.

Combs also suggests checking with your local media outlets, religious organizations, and city and county officials to find out how you can help in
your area.

"Texas Wildfire Relief: How You Can Help" was originally posted as a blog post at RREA.com on October 17, 2011.

© 2008-2011 | Register Real Estate Advisors | Spring Texas Real Estate

COLLEGE STATION, Tex. (Real Estate Center) — When it comes to responsibility for warning guests about dangerous indigenous animals and insects, Texas statutory law generally protects landowners from claims resulting from injuries received from naturally occurring hazards.

“Appellate decisions focus on a term called ferae naturae or ‘free in nature,’” says attorney Judon Fambrough with the Real Estate Center at Texas A&M University. “Basically, if the critter is free in nature and in its natural habitat, there is no duty to warn of its presence.”

The precedent was set in a 1963 case involving a minor who fell from a billboard when stung by wasps. The parents sued the company responsible for maintaining the billboard for failing to warn people or make the area safe. The court ruled the ferae naturae doctrine barred the plaintiff’s negligence claim.

In general, said the court, the law does not require an owner or possessor of land to anticipate the presence of or guard invitees against the harm from wild animals. That does not apply if the owner or possessor has reduced the wild animals to possession, harbors them or has introduced non-indigenous wild animals onto the premises.

The court went further by ruling on issues of interest to most Texas landowners.

“Artificial conditions, such as farm ponds, frequently become the abode of poisonous snakes, and stinging insects are common in hunting lodges and summer homes, but no cases have been found where a duty of ordinary care (negligence) has been imposed on the owner or possessor of such premises,” the ruling stated.

A 1973 federal district court ruling also supported the landowner. An independent logging contractor sued a paper company for failing to warn him of the presence of Lyme disease on the property where he worked. The logger contracted the disease after being bitten by ticks on the defendant’s land.

The federal court ruled that although the defendant owed the plaintiff the duty to warn of hidden dangers or defects, the duty did not include a warning of the presence of indigenous wild animals, such as ticks.

As a Texas Supreme Court judge put it, “The owner may assume that the recreational user needs no warning to appreciate the dangers of natural conditions, such as a sheer cliff, a rushing river or even a concealed rattlesnake.”

Taking note that 97 percent of Texas is privately owned, the Texas legislature sought to encourage landowners to open their gates to the public. The so-called Recreational Guest Statute was the result.

The law greatly diminishes landowners’ liability when their property is used for recreational purposes and shields them when guests are injured by the landowner’s “ordinary negligence.”

Ordinary negligence is defined as failure to act as a reasonable person would have acted in the same or similar circumstances, said Fambrough. As a general rule, landowners avoid ordinary negligence by warning or making the premises safe from all dangerous conditions they are aware of or that a reasonable inspection would reveal.

For more on Texas landowner liability, see Fambrough’s article, “Welcome (But Watch Out)” in the July issue of Tierra Grande magazine published by the Center, the nation’s largest publicly funded real estate research entity.

"Landowner Liability for Dangerous Texas Critters" was originally posted as a blog post at RREA.com on August 2, 2011.

© 2008-2011 | Register Real Estate Advisors | Spring Texas Real Estate

“The recovery is happening,” said Rosen. “It just isn’t as strong as we’d like and housing is the weak link.”

The gross domestic product is likely to grow a subpar 2.4% this year compared to 4.0% “if housing were running on all four cylinders,” he said, and growth is likely to hit 3.0% for 2012, still below the 4% to 5% range that is typical for the early stages of an upturn.

A source of nagging concern for consumers, the job market has a long way to go, he said, with only about 2 million private-sector jobs gained following a loss of 8.8 million during the recession.

Job creation, which slowed down this spring, should be back on track in the fall, he said, and monthly gains this year should average between 175,000 and 200,000, roughly twice the pace of 2010. That would move the unemployment rate down to 8.9% by the end of this year and 8.1% at the close of 2012.

Unfortunately, the construction industry, which accounted for one-fourth of the nation’s job losses in a recession that was three times worse than any that preceded it, won’t be staging a comeback this year, he predicted.

If the economy bounces back in this year’s third and fourth quarters, as he expects, Rosen said that 10-year Treasuries should start moving back toward 4%, from about 3% currently, and subsequently rise into the 4%-5% range and higher.

The Federal Reserve should now be pushing its federal funds interest rate up to 2.5%, from close to zero, he said, noting that the central bank’s current stance is “not helping investors and savers,” who are receiving next to no interest, and is underestimating inflation.

Tight Mortgage Lending Standards

At this stage, Rosen said, single-family housing is struggling to recover because of overly tight credit conditions, and housing ought to be leading the economy forward. But “that’s not happening, as if no one in Washington cares anymore.”

(In a July 7 Washington Post news story on a town hall meeting via Twitter the previous day, President Obama was quoted as saying, “The continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected,” later adding that his Administration’s efforts to help struggling home owners were “not enough.”)

“There is a very big anti-homeownership bias coming out of Washington and we are going to have to fight for everything we have,” Rosen said.

Tight credit standards are housing’s biggest problem today. As the result of tight mortgage requirements, 30% to 40% of people who want to buy a home can’t, he said.

At the peak of the housing boom, when excessively easy credit prevailed and “anybody who could fog a mirror could get 100% financing” is the time when the banks should have been tightening. Now, at the bottom of the market, is when conditions should be loosened.

“It makes no sense whatsoever,” he said. In Washington, banking regulators “are not doing the right thing.”

He cited Lew Ranieri, the “godfather” of mortgage finance, and others who believe mortgage lending has become overly restrictive and who are “trying to get the ear of somebody, but there’s nobody to listen.”

Ordinarily, first-timers would be accounting for 50% of home sales, but “that’s down now because it’s harder to qualify,” Rosen said.

“The low-end consumer is not feeling very good,” he said, but there is “some light at the high-end of the housing market.”

In California — where San Francisco and the Silicon Valley are very strong, San Diego is slowly getting better, Orange County is suddenly somewhat better, Los Angeles is lagging and the Inland Empire and Sacramento are the weakest performers — homes are at their most affordable level in 20 years, he said.

“If you have 20% down and a high FICO score, now is the time to lock in financing, the cost of which will be going up over the next two years,” he said, raising the concern that mortgage rates could be ascending just as the housing recovery is shifting into high gear.

In the meantime, builders should be building 1.1 million single-family homes a year (compared to a yearly pace of 419,000 starts in May) and demographics ought to be supporting rising levels of demand, with 45 million echo boomers waiting in the wings to enter the job and housing markets over the next decade and 20% of the population nearing retirement.

New Policies Needed

Immigration is also an important part of the housing demand equation, and it could be buttressed by “stapling a green card to every foreign graduate” of a U.S. university. “We are giving up 1% of GDP a year because we are making it so hard for people [immigrants] to get here,” he said.

Attention also needs to be given to selling off the 1.6-million unit overhang of houses. “We need to clean them up and get rid of them, and get this done. But government doesn’t know how to do it,” Rosen said.

“I don’t see a big upturn until we get policy changes in Washington, maybe in 2013. In the meantime, they’re going to scapegoat the industry.”

Among the things that need to be done to put housing back on its feet, Rosen said that credit standards should be eased at Fannie Mae, Freddie Mac and the Federal Housing Administration.

Housing also needs to raise its profile. “If we solve the housing problem, we will really help the economy and job creation,” he said.

To solve the foreclosure “hangover,” Washington needs to pursue “a forceful foreclosure abatement policy working with the top 20 banks,” and that effort should be overseen by a “buck stops here” housing czar who can get the job done.

Arizona Coming Back Slowly

In addition to offering some encouraging news about improving economic conditions on the West Coast, Rosen observed that there are states beginning to do well — such as Texas, Alaska and North Dakota — and even areas whose economies have sunk to the bottom of the heap as the result of badly overheated housing markets during the boom are showing signs of progress.

From beleaguered Arizona, Elliott Pollack, CEO of Elliott D. Pollack & Company, said that that state’s recovery got underway at the start of this year, far behind the U.S. overall, and still has some serious mending to do to recapture lost population and jobs, “so it won’t be until 2013, ’14 or ’15 before things get good again.”

Foreclosures in the state are beginning to recede, he said, but remain very high and half of the home mortgages in Arizona are underwater. For the time being, “there are too many vacant homes and not enough household formations,” Pollack said.

The average price of a new Arizona home is far above the price of re-sales, which are dominated by foreclosures and short sales. Newly constructed homes are 170% more expensive, compared to 130% during normal times.

However, by 2015, re-sale home prices will be 50% higher than today, he predicted. “When the market clears, you’re going to start making money.”

“When the balloon re-inflates, this will all be a bad memory,” Pollack said, with Phoenix going from 6,000 new housing units a year back to 30,000 to 40,000. The boom “is out there somewhere,” he said.

John Silva, managing director and chief economist for Wells Fargo Securities, said that due diligence is in order because the fundamentals that drive the economy are changing. Manufacturers who have strong growth abroad have been grabbing hold of global economic growth to achieve solid profits, but small businesses are still languishing.

In the housing market, which “has been building bigger and bigger homes for smaller and smaller families,” demand is now veering in new directions, to smaller homes closer to the city.

“Commercial real estate is coming back in many areas,” he added.

Silva questioned the absence of a strong dollar policy in the U.S. “The dollar has been going downhill for seven or eight years,” he complained, generating stronger exports but also raising prices for U.S. consumers.

“We import more than we export in the U.S.,” he said, “so we are paying more for a weaker dollar.”

"Tight Mortgage Lending Seen as Biggest Obstacle to Strong Housing Recovery" was originally posted as a blog post at RREA.com on July 17, 2011.

© 2008-2011 | Register Real Estate Advisors | Spring Texas Real Estate

The Emergency Homeowners Loan Program provides funding to help
homeowners who fall behind on their mortgage
payments because of involuntary unemployment or underemployment
caused by the economy or medical conditions.

One in every 1,074 homes in Texas received a foreclosure filing
last month.

"HUD Helping Texans Stay Home" was originally posted as a blog post at RREA.com on June 27, 2011.

© 2008-2011 | Register Real Estate Advisors | Spring Texas Real Estate

Take Real Estate Center Chief Economist Dr. Mark Dotzour, for example.

“We shouldn’t view this renewed softness in the economy as another
downturn but just a continuation of the recession that was interrupted by a
trillion dollars in federal stimulus that temporarily interrupted the
cycle,” Dotzour said Wednesday at the U.S. Real Estate Opportunity and
Private Investing Forum in New York.

He said this is the necessary and final stage of the recession where
government at federal, state and local levels is finally rightsizing by
reducing spending and employment to more sustainable levels.

“Households and businesses have already done this,” Dotzour said.
“Once this adjustment to sustainable levels of government spending and
employment is reached, then we will begin the slow process of real economic
recovery.”

"Recession: Double-Dip or Final Stage?" was originally posted as a blog post at RREA.com on June 5, 2011.

© 2008-2011 | Register Real Estate Advisors | Spring Texas Real Estate

 Ben Bernanke, current chairman of the Federal Reserve System, is widely acknowledged as a scholar of the Great Depression’s impact on the United States and countries around the world. In his recent book, Essays on the Depression, Bernanke explores the causes of the Great Depression and examines how some countries recovered faster than others.

Bernanke also posits the question of why the Great Depression lingered for an extended period compared with previous U.S. depressions. Some hints about how the Fed will respond to the severe economic contraction facing much of the globe may be gleaned from his written perspectives.

U.S. monetary policy for the past 30 years has been to tolerate modest inflations each year, in the range of 2 percent. When inflation gets higher than this, the Fed raises interest rates so that increased borrowing costs slow business expansion and consumer spending.

But what about deflation? Broadly defined, deflation occurs when there is a wide-spread fall in prices that causes producers to reduce output. It is the mirror-image of inflation. What happens when prices fall for an extended period?

History shows that deflation is a rare occurrence in the United States. The consumer price index (CPI) has declined for more than four consecutive months only five times since 1913. The most significant and lingering deflationary event began in December 1929, when prices began falling after the stock market crash in October (see figure). The CPI fell for 40 months, hitting bottom in March 1933, the same month President Roosevelt closed all U.S. banks for the “bank holiday” and devalued the U.S. dollar (in terms of gold) by over 40 percent.

Prices fell for 12 months from July 1920 to June 1920 after the huge price increases that followed the end of World War I. Prices fell for four months beginning in the summer of 1926 and for four months from November 1937 through February 1938 as the Depression lingered. A decade passed. Then prices fell for five consecutive months from October 1948 to February 1949 in the wake of staggering price hikes after World War II.

Americans did not see deflation again for 60 years, until August 2008, when prices fell for five consecutive months. Alarm bells rang at the Fed.

Most contemporary Americans have not experienced extended periods of deflation. Instead they are accustomed to the persistent inflation that the United States has experienced since the 1960s. Why can deflation be so destructive?

Economist Irving Fisher coined the phrase “debt deflation” in 1933 to explain the economic climate at the peak of the Depression. Debt deflation occurs when a sustained fall in prices occurs, and at the same time businesses and households have a high level of debt.

If the price of a house falls below the amount the owner owes on the mortgage, the owner may be unable to sell the home and pay off the note. If the price of products for sale falls too far, a business owner may not be able to make the payment on the bonds sold to fund the business. So when prices fall, it makes it much harder for homeowners and businesses to repay their loans.

 If the price of products being sold falls faster than the wages paid to employees, businesses are forced to lay off workers. If wages start to fall as well, it becomes even harder for households to make monthly payments on their debt.

If deflation lasts too long, many households and businesses are unable to make the payments on their debt, forcing them to sell their houses and businesses. This forced selling in an already depressed economy causes prices to fall even further, and even more households and businesses become insolvent. Financially distressed households or businesses may not be able to refinance or get funding at any price.

Deflation punishes borrowers. It erodes the net worth of all households and investors. When a borrower loses the equity in an asset, the bank becomes he owner of that asset. As the value falls below the loan amount, banks start to accumulate losses as well. If asset prices fall for enough, the losses overwhelm the bank, and the bank fails. This is why the Fed is determined to prevent extended deflation from occurring again. Bernanke’s book gives readers insight into how he views deflation and what steps he might be willing to take to prevent it.

Part of the reason the Depression lasted so long is that the United States stayed on the gold standard. According to Bernanke,”… some governments responded to the crises of the early 1930s by quickly abandoning the gold standard, while others chose to remain on gold despite adverse conditions. Countries that left gold were able to reflate their money supplies and price levels, and did so after some delay; countries remaining on gold were forced into further deflation… No country exhibited significant economic recovery while remaining on the gold standard.”

He goes on the state “…the troughs in both the United States and Canada corresponded almost exactly to the Roosevelt devaluation and bank holiday of March 1933, which were followed in turn by rapid monetary expansions in both countries.”

These comments reveal that printing enough money to devalue the dollar is one of the strongest tools at the Fed’s disposal to counter deflation.

Bernanke also writes that deflation leads to the firing of workers. When the price of a product falls by 20 percent, business revenues fall by 20 percent. Business owners then try to cut costs to regain profitability.

However, economists have noted that “wages are sticky” on the downside. This means that for many reasons wage concessions are hard to negotiate and achieve. Because of this, businesses are likely to lay off workers in a deflationary environment.

Bernanke maintains that “…the adjustment of nominal wages in response to declines in aggregate demand during the 1930s was surprisingly show and incomplete. Instead of cutting wages, employers adjusted on other margins, including the length of the workweek and the intensity of labor utilization. Legislatures resisted wage (and price) cuts…”

He goes on to say “…during the worldwide deflation of 1930 and 1931, nominal wages worldwide fell much less slowly than (wholesale) prices, lending to significant increases in the ratio of nominal wages to prices…Associated with this sharp increase in real wages were declines in employment and output.”

He also mentions that government intervention in the labor markets slowed the recovery in hiring. In a market of falling prices, if wage rates cannot be reduced, businesses have no choice but to fire workers. Current policies of extending unemployment benefits have obvious short-term benefits to those who receive them, but such policies can also retard the fall in wage rates needed to restore growth in hiring.

Bernanke notes that the U.S. banking crisis did not happen until several years after the stock market crash. The first wave of the crisis occurred in 1931, after almost two years of deflation. But it did not reach its crescendo until March 1933, fully 3 ½ years after the stock market crashed.

At this point, President Roosevelt closed the banks and declared the bank holiday. The effects of 40 months of deflation finally caused businesses and households to be unable to repay their loans. By the end of 1933, the number of operating banks had declined almost 50 percent from 1929.

Says Bernanke, “The disruptions of 1930-33 reduced the effectiveness of the financial sector as a whole in performing these services. As the real costs of intermediation increased, some borrowers (especially households, farmers and small firms) found credit to be expensive and difficult to obtain. The effects of this credit squeeze on aggregate demand helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression.

He also details the pervasive level of debt across the country. Fifty percent of all properties had a mortgage in 1929, and by the beginning of 1933, 45 percent of farm owners were delinquent. In cities across America, the homeowner mortgage delinquency rate was between 21 and 60 percent. By March 1934, 37 cities with populations over 30,000 had defaulted on their municipal obligations.

Credit contracted slightly immediately after the stock market crash, but a sharp drop in bank lending began in November 1930 with the first banking crisis. Banks switched out of loans into more liquid assets.

The shrinkage of commercial loans at that time illustrated that banks were pressuring customers for repayment of loans and refusing to grant new loans. The people hardest hit by credit reductions were households, farmers, unincorporated businesses and small corporations.

“This was certainly the pattern in the 1930s,” Bernanke says. “The extraordinary rate of default on residential mortgages forced banks and life insurance companies to ‘practically stop making mortgage loans, except for renewals.’”

Interest rates fell, but credit was not easily available.

“The idea that the low yields on Treasury of blue-chip corporation liabilities during this time signaled a general state of ‘easy money’ is mistaken,” says Bernanke. “Money was easy for a few safe borrowers, but difficult for everyone else.”

This quote sounds eerily similar to what is heard today.

Bernanke discusses why it takes time to revive or establish new channels of credit flow after a period of deflation. It also takes time, he says, to “rehabilitate” insolvent debtors.

As pressure on the bank’s capital grows… it may have to call in loans or refuse new ones… The final result is usually a government take-over of the intermediation process… Thus, effectively, government agencies became part of the intermediation chain…

The banking crisis associated with the Depression also severely limited the amount of mortgage lending in the 1930s. Bernanke notes that “…real estate defaults and foreclosures continued high through 1945… Some traditional mortgage lenders nearly left the market; life insurance companies, which made $525 million in mortgage loans in 1929, made $10 million in new loans in 1933 and $16 million in 1934.”

He also sheds light on government attempts to revitalize the mortgage market in the years immediately following the bank holiday.

To the extent that the home mortgage market did function in the years immediately following 1933, it was largely due to the direct involvement of the federal government… The government “readjusted” existing debts, made investments in the shares of thrift institutions, and substituted for recalcitrant private institutions in the provision of direct credit. In 1934, the government-sponsored Home Owners’ Loan Corporation made 71 percent of all mortgage loans extended.

Chairman Bernanke offers insight into the challenges facing the United States in today’s economic environment. Deflation can destroy an economic enviers perceive that prices will fall in the future, they postpone purchasing today. This leads to less demand and even more pressure for prices to fall, which ultimately leads to a collapse of the banking system.

This aversion to deflation explains why current monetary and fiscal policy seems so excessive. The amount of reserves pumped into the banking system and deficit spending by the U.S. government is almost too high to comprehend. The goal appears to be to avoid deflation at all costs.

 Written by Mark G. Dotzour

Published in Tierra Grande Journal of the Real Estate Center at The A&M University

October 2010 Issue

"Deflation" was originally posted as a blog post at RREA.com on April 1, 2011.

© 2008-2011 | Register Real Estate Advisors | Spring Texas Real Estate

"Consumer Confidence Up" was originally posted as a blog post at RREA.com on September 7, 2010.

© 2008-2010 | Register Real Estate Advisors | Spring Texas Real Estate