KeNo's Housing and Economic Portal: Wednesday August 12 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Santa Cruz condo project in trouble: contractors sue to get paid - (www.santacruzsentinel.com) 2030 North Pacific condo project in trouble: Project not selling, and contractors sue developer to get paid. When the highly anticipated 2030 North Pacific condos opened last summer, they were touted as small luxury homes within walking distance of downtown and the beach -- perfect for aging baby boomers and others who wanted to leave the car at home more often. Now, though, the 70-unit complex with retail space on the first floor sits mostly empty, a glaring example of a real estate market in free fall and of the toll an ongoing recession is having across many sectors. Multiple lawsuits have been filed against Christopher Garwood of Carmel, lead developer of the property, and other investors by contractors demanding more than $2.3 million in unpaid bills. Santa Cruz city officials say Garwood has not paid them about $1.2 million in various development fees. And condos that once advertised prices between $525,000 and $760,000 are now listing for as low as $399,000. So far, 13 have sold. Attorney Caleb Baskin, with Baskin & Grant law firm in Santa Cruz, called the situation "a perfect storm" as lending markets have dried up and real estate values fall. His firm is representing Watsonville contractor Associated Construction, which is suing for $77,000 in unpaid bills. Lead contractor Michael Roberts Construction of Campbell is suing for almost $2.3 million. Most agree this will not be the last local real estate development casualty in the worst economic recession since the 1930s. The Pacific Avenue condos "would be a great place to live," said City Councilman Mike Rotkin, "But at this point, who has the money to make the down payment? What bank will give you a loan?" When 2030 North Pacific was under review in 2003, the median price for a condominium in Santa Cruz County was less than $375,000. By 2007, toward the height of the real estate market, the median price had jumped to more than $500,000. By January, however, the median price for condominiums had dropped to $289,450. Last fall, contractors placed mechanic's liens on the property, which is a claim recorded against the property by contractors or laborers to ensure they are compensated for their efforts. If a deal is not worked out ensuring payment, the condos could transfer to contractors' hands to pay the developer's outstanding debts. That would be bad news for potential buyers, as a property generally cannot be sold until a lien is removed.

Daily Show, A Lonely Condo Owner and the Market – (www.calculatedriskblog.com) Funny Daily Show video on Home Crisis Investigation. If Timothy Geithner is as bad at handling the economy as he is at picking bathroom tiles, he won't need to sell his house.

Goldman Sachs: Gambling With Your Money? - (www.huffingtonpost.com) Goldman Sachs is using its new taxpayer-subsidized status to bring increased risk to the financial system, a group of House members charged Monday. They want to know why the Federal Reserve is allowing it. The group on Monday sent a letter to the Fed asking for an explanation of why Goldman Sachs is being allowed to speculate wildly even while officially redesignating itself a bank holding company, which theoretically means stricter regulation. The bank designation gives Goldman access to dirt-cheap Federal Reserve loans. Goldman initially applied for the new designation last fall, so that it could access bailout funds (since paid back). Because bank holding companies, unlike investment banks, have access to a host of valuable taxpayer subsidies, they are required to reduce the risk associated with their investment activity. But Goldman then applied to the Federal Reserve for an exemption to the rules, saying that it takes time to alter a business model. The exemption was granted in February -- and Goldman went on to take even greater risks. Its Value-at-Risk model, a widely used measure of the risk of loss, recently showed potential trading losses at $245 million a day; in May 2008, it was $184 million a day. The bets paid off in the most recent quarter as the market rose and Goldman posted stellar earnings. Morgan Stanley, meanwhile, was similarly given an exemption by the Fed but did what it said it would do and reduced its risk. The company lost money, largely as a result of that decision. The likely result: Other players on Wall Street will follow Goldman back toward the cliff they dangled over just months ago. In announcing its lousy earnings, Morgan Stanley assured that it will increase the risk it takes in the future. Citigroup is racing to increase its exposure, too, handing another billion dollars worth of chips to its riskiest traders, bringing its hedge fund operations to close to $2 billion. On the brink of collapse, it had scaled such investing down to around $800 million. Lucas van Praag, a Goldman spokesman, declined to respond directly to the charges in the letter, but said that the firm is working to reduce its exposure. "We're very cognizant of risks inherent in risk taking. We have one of the highest capitalizations of any bank," said van Praag. He said that the Value-at-Risk numbers, while the only publicly released measure of risk, are only one metric and that internal measures show the bank has reduced its exposure over the past year. He also took a dig at other Wall Street players who have avoided using mark-to-market accounting in an effort to fluff their balance sheets. Earlier this spring, banks lobbied Congress and the Financial Accounting Standards Board to soften mark-to-market rules. The new rule allowed banks to inflate their balance sheets by claiming that an asset was worth more than it could fetch on the market because the market was frozen. Goldman Sach, said van Praag, doesn't use that slight of hand, so its balance sheet is an honest reflection of its exposure.

Real Estate Agents and Rose Tinted Glasses - (healdsburgbubble.blogspot.com) Local agent Dave Roberts does some good work on foreclosure data in Sonoma County but I have to take issue with a recent post where he profiled two neighborhoods in South Santa Rosa, Kawana Springs and the Santa Ana area. In it he points out "the attractiveness of both sets of homes as entry level housing in Santa Rosa" but neglects some major faults in the neighborhoods. Some of the homes are dramatically off their highs (from the mid-$400,000s to low $100,000s). But while the price declines are impressive, to me, the post is more of a demonstration of how real estate agents wear rose tinted glasses. When you're a hammer everything looks like a nail, and when you're a real estate agent every home looks like a buy. But the question to ask is: "What is the upside AND DOWNSIDE of buying in this area?" Renting a home in the area is another option. Given some of the current problems in the neighborhood (most not mentioned in the post) I’d say it is the smarter one. That way you can get a real feel for the area before potentially locking yourself in for 30 years. In the Santa Ana area profiled, the post mentions some problems like "illegal garage conversions, dilapidated facades, cracked concrete driveways and patios, and failing roofs". This however is just the start of the issues. The biggest is crime. Not ideal for first time buyers looking to start a family. Don’t take my word for it, listen to the residents themselves: “You don't want to be raising your kids here,” said John Kelsey, an Aston Avenue parent who wants to move his young family of six to Sebastopol. This quote is from an article in the Press Democrat describing a break in and molestation of a 12 year old girl at duplexes on Aston Avenue, the street that parallels Santa Ana Drive. Reading the article will make your stomach turn. Kawana Springs to the south is described in the post simply as “blocks apart physically, but miles apart in terms of amenities, style, price, and maintenance.”Looking at the homes that is no doubt true. But in terms of crime they are suffering from some of the same problems. Again, from the Press Democrat last month: The break-in is the second time in as many weeks that a sleeping Santa Rosa girl has been approached by a man entering a home in the early morning hours. Last week, a man approached a 13-year-old girl in her home on Tokay Street, just a few blocks south of Tuesday's attack. He fled but the girl recognized him as a neighbor and he was arrested. Other problems include murders, shootings, gangs, drug deals, and a general feeling of unease especially at night according to the article. Is this the best place for first time buyers even if homes are going for $120,000? Some residence claim the fears are overblown, but reading the post gives no hint of any of these problems. First time buyers stumbling upon his site I think would find this information relevant. Another issue I have is when the post states: A 10% down payment is only $12,500 for the low end of this market, and that's only about twice as much as the initial deposits to rent an apartment. Since when is an initial deposit about $6250? Deposits on apartments less than a half mile away are 1/10th that amount ($600). The post also implies that the foreclosures in the area have for the most part already worked their way through the system when it states: The bubble victims are mainly gone. Banks have either taken ownership or already sold these foreclosed properties to new buyers. This map from ForeclosureRadar suggests otherwise. There are numerous homes where people have recently stopped paying their mortgage (green circles with a “P”) or where an auction has been set at the court house steps (blue circles with an “A”). Many of these will turn into foreclosures. I’m also sure we will see more delinquencies in the months ahead given Sonoma County’s double digit unemployment rate. Finally, even at these apparent rock bottom prices there is still considerable downside. Given the problems described above I wouldn't be surprised if some of the homes in the area fell below $80,000 in the coming years as interest rates rise. Because people buy real estate with leverage this would mean losing not only your down payment, but also upwards of $25,000 if you put down 10% on a $120,000 home. The post concludes stating that Kawana Springs offers "great first time buyer homes for people who can qualify for the higher payments on a house that is selling for around $300,000" and the neighborhoods "are both useful ways to get started in the housing market in Santa Rosa".

US Pays $2.5 Trillion for Care Costing $912 Billion - (www.bloomberg.com) The last time a president tried to overhaul U.S. health care, Americans were spending $912 billion on the system and 40 million were uninsured. Today they’re spending $2.5 trillion and almost 50 million lack coverage. President Barack Obama’s effort to revamp the system faces resistance from lawmakers of both parties who warn that the more than $1 trillion cost of the plan will break the budget at a time when the government already faces record deficits. “Despite what President Obama claims, the bill he is promoting today will make health care even more expensive,” House Minority Leader John Boehner said last week when the president visited Boehner’s home state of Ohio. The experience of the 15 years since Bill Clinton failed to win passage of legislation suggests that the price of inaction may be even higher than the cost of Obama’s plan. Congress refused to touch the issue for a decade after the collapse of Clinton’s 1994 bid. A similar outcome this year would likely add millions to the ranks of the uninsured, boost costs for businesses and workers, and do nothing about what may be the top threat to the government’s long-term fiscal health, proponents of the plan argue. “The budgetary implications of doing nothing are continued exponential growth in health-care costs, a steadily increasing health-care share of GNP, an eventual bankruptcy of the Medicare trust fund, and health-care costs becoming a prohibitive share of the federal budget,” Lawrence Summers, head of the National Economic Council, said in an interview. Soaring Costs: Health-insurance premiums for families have risen 119 percent since 1999, according to the Kaiser Family Foundation, a Menlo Park, California-based policy-research firm. Inflation has risen 28.5 percent over that period, according to the Labor Department. Premium costs are projected to rise another 9 percent next year, an increase that 42 percent of employers plan to pass on to their workers, according to a report last month by PricewaterhouseCoopers. That’s likely to further squeeze millions of Americans who find themselves in high-deductible insurance plans as wages stagnate because of the recession. Earnings per hour climbed by a 0.7 percent pace on average over the last three months, the Labor Department said earlier this month, the smallest gain since the agency began keeping records in 1964. Meanwhile, the share of insured workers with at least a $1,000 deductible has almost doubled since 2006 to 18 percent, according to Kaiser.

Arizona May Sell State Capitol Building To Balance Budget - (Mish at globaleconomicanalysis.blogspot.com) Arizona, like many states is in dire financial straits. What's unique is Arizona's plan to help balance the state budget. Please consider Desperate state may sell Capitol buildings, others. Call it a sign of desperate times: Legislators are considering selling the House and Senate buildings where they've conducted state business for more than 50 years. Dozens of other state properties also may be sold as the state government faces its worst financial crisis in a generation, if not ever. The plan isn't to liquidate state assets, though. Instead, officials hope to sell the properties and then lease them back over several years before assuming ownership again. The complex financial transaction would allow government services to continue without interruption while giving the state a fast infusion of as much as $735 million, according to Capitol projections. "We've mortgaged the legislative halls," said an exasperated state Rep. Steve Yarbrough, a Chandler Republican. "That just tells you how extraordinary the times are. "To me, it's something we're going to have to do no matter how much we find it undesirable." Earlier this month, Republican Gov. Jan Brewer vetoed such sale/leaseback provisions along with most of the rest of a fiscal 2010 state budget plan sent to her by the Legislature. But the provisions are expected to return as part of a GOP-led legislative budget proposal surfacing this week. Although Brewer spokesman Paul Senseman called sale/leaseback deals "one of the governor's least favorite options," he conceded the likelihood that they'll play a key role in any plan to close a state shortfall estimated at $3.4 billion. "This is the predicament we find ourselves in," said Tom Manos, a Brewer budget adviser. "We've exhausted the better options."
State properties now being considered for sale and leaseback include the House and Senate buildings, the Phoenix and Tucson headquarters of the Arizona Department of Public Safety, the State Hospital and the state fairgrounds, according to a document obtained by The Arizona Republic. Some prison facilities also are under consideration. In total, the list comprises 32 properties that, if built from the ground up, come with a combined replacement value in excess of $1 billion. Under the most recent legislative proposal, the state would seek a series of lease arrangements spanning as much as 20 years. Deals that would generate the targeted $735 million in revenue would mean state lease payments totaling $60 million to $70 million a year, according to budget analysts. House Majority Leader John McComish called the payments preferable to a tax increase, as proposed by Brewer, or alternative fiscal schemes such as selling future income from state Lottery sales in exchange for a lump-sum payment.