The Intelligence Chronicles

Ants gone wild

by Richard Breen

Just in time for Halloween, I came across an article in The Wall Street Journal about a species of bugs terrorizing Texas. Even better is their name: crazy ants.

I checked around and they are not a threat to South Carolina yet. But they bring up the subject of insect infestation and how homeowners should deal with it.

“I often look at those insects in two categories,” says Dr. Eric Benson, a Clemson University professor and entomologist. “There are those that eat your structure. Then there are insects that excavate. They can hollow out and make a nest.”

Termites, of course, are the best-known structure eaters. Nesting activity is the main problem with the crazy ants in Texas. They can create huge nests, getting inside structures, including homes, and shorting out electrical circuits.

“I used to work in New Orleans and there you would see crazy ants,” Benson says. He says they are “quite remarkable,” with long legs, long antennae “and the ability to run around, like, crazy.”

Because they don't march in a straight path, that is how they got their name. There is a species in Florida similar to the Texas strain and Benson says another version can be found in the Charleston area. The Lowcountry strain, he says, has been around for awhile.

“Their colonies tend to be much smaller and more easily contained,” Benson says.

In the Upstate, fire ants can cause similar problems, according to exterminator Brian Strickland.

“Fire ants will nest in and around heat pumps and short them out,” he says. “We get a lot of calls during the summertime.”

Pest control is considered a basic maintenance issue and typically not covered by homeowners insurance, according to Allison Dean Love of the S.C. Insurance News Service. A sudden structure failure due to infestation by termites might be covered, however.

“Make sure you read your insurance policy,” she says. “Talk to your agent – that's what they're there for.”

Here is a link to the article on crazy ants:

http://online.wsj.com/article_email/SB125208889680087103-lMyQjAxMDI5NTAyNzAwODc4Wj.html

 

Does new home sales drop hint at future?

by Richard Breen

In a surprise for experts that were expecting another increase, sales of new homes fell in September, according to the monthly estimate released today by the U.S. Census Bureau and the Department of Housing and Urban Development.

Nationwide, new home sales were down 3.6 percent compared to August and 7.8 percent compared to September 2008. Sales had risen every month since April. The estimate reports a seasonally adjusted annual rate which accounts for the fact that sales normally fall once summer ends.

So why the drop?

First-time buyers were expected to continue to drive sales gains. Has the pool of qualified first-timers begun to thin? That is what some Upstate Realtors tell me and also what Sen. Johnny Isakson (R-Ga.) believes, which is why he has pushed to extend the tax credit to all buyers.

I am also hearing that the inventory of starter-type homes is getting weak. The national inventory of new homes for sale fell 2.8 percent in September to approximately 251,000. It is good that inventories are declining because it will help prices stabilize, but not if it creates an imbalance.

We may be getting to the point where there are still too many McMansions on the market and not enough starter homes. It could cause prices to continue to fall for big homes while also holding down overall sales if first-time buyers can't find something they like and can also afford.

The fact that inexpensive types of homes are selling this year is a less-talked-about reason why median home prices have fallen. Another reason is foreclosures, and that is expected to drive home price declines for at least another year, according to one estimate.

Fiserv Inc., a Wisconsin-based financial services technology provider, has forecast housing prices for the next two years in markets across the country. Nationally, it is predicting home prices will drop 11.3 percent between the second quarter of 2009 and 2Q 2010. Between the 2Q 2010 and 2Q 2011, they are predicted to rebound 3.6 percent.

The speculation is that the bubble in option adjustable rate mortgages (see my Oct. 26 posting for details) will burst in early 2010 and cause a new wave of foreclosures. It may not be a national phenomenon, however, as Fiserv's estimates vary greatly from market to market.

For example, prices are expected to drop by spring 2010 in familiar places such as Miami (29.9 percent), Las Vegas (23.9 percent), Phoenix (23.4 percent) and Los Angeles (20.2 percent). In fact, Miami and Gainesville, Fla., are expected to lose another 5.6 percent and 7.1 percent, respectively, between 2Q 2010 and 2Q 2011.

But gains are also expected. Between 2Q 2009 and 2Q 2010, Fiserv predicts modest increases in communities including Kennewick-Pasco Island, Wash. (3.4 percent); Fairbanks, Alaska (2.5 percent); Elmira, N.Y. (1.8 percent); Columbus, Ga. (1.2 percent); and Pittsburgh, Pa. (0.5 percent).

By spring 2011, even some communities hit by the subprime mortgage bubble, such as Merced, Calif. (13.4 percent); Tacoma, Wash. (8.5 percent); Port St. Lucie, Fla. (2.2 percent); Bend, Ore. (4.3 percent); and Tucson, Ariz (1.5 percent); are expected to improve.

In South Carolina, the results for 2Q 2010 are mostly down: 4.9 percent in Sumter, 0.6 percent in Anderson, 0.4 percent in Greenville. But by spring 2011, they are mostly up: 2.9 percent in Myrtle Beach, 2.7 percent in Charleston and even 0.1 percent in Greenville.

It once again shows that all markets are local. But in an increasingly mobile society, when bubbles get pricked, everyone feels it to some degree.

Real estate a big part of strategy at Spinx

by Richard Breen

When you think of the Spinx convenience store chain, you probably think of the gasoline business, but it's also in the real estate business.

The company, founded by Stewart Spinks, is often willing to buy several acres at an intersection to be sure it secures just the right spot for one of its stores.

“Stewart's what I call a dirtaholic,” says Richard Phipps, vice president of real estate for Enigma Corp., which is the real estate arm of The Spinx Co. “He never saw a piece of dirt he didn't want to buy.”

Buying up all that dirt means that once a store location is selected, Spinx starts to get calls about the leftover land.

“That puts us in the real estate business,” Phipps says.

Phipps spoke Tuesday to the Greater Greenville Chamber of Commerce Cherrydale Area Council. Ironically, he says the developers of Cherrydale Point actually turned Spinx down when approached about putting a convenience store on the property. Spinx ended up locating a couple of blocks away where it can still capitalize on the 35,000 cars per day that pass Cherrydale along North Pleasantburg Drive.

At other locations, Spinx has had better luck locking up property. Down U.S. Highway 25 near the Southern Connector and S.C. Technology and Aviation Center, Spinx has a large store on one corner. It leases another corner property to CVS/pharmacy and has a third lot for sale.

“We did that to control our own destiny,” Phipps says.

In Dacusville, Spinx bought a 26-acre farm to build a 5,500-square-foot store.

“We paid a lot for it,” Phipps says. “Now it's worth every penny.”

That's because, Phipps says, “Greenville County has been a great place to invest in dirt.”

Growth has helped property appreciate to where it doesn't hurt Spinx to buy more land than it needs.

“Without the growth, that program doesn't work,” Phipps says.

Growth has also changed the stores themselves. Phipps remembers when Spinx operated the Terry Mart on Rutherford Road. It consisted of gas pumps and a small kiosk from which the clerk sold cigarettes.

“We look now for a higher demographic,” Phipps says.

Higher-income consumers have become comfortable stopping at a convenience store for grocery items and prepared food. With the added offerings come added cost. Phipps says it took $2 million just to build and equip the Dacusville store.

“Last year I built four new stores and revamped one,” he says, “and spent an average of $3 million on land and development.”

Just as rising property values have helped the Spinx real estate strategy pay off, Phipps says it will eventually help the Poinsett Highway corridor that runs from downtown Greenville to Cherrydale.

“You've got this area going back toward Greenville that really needs help,” he says.

For now, 20,000 cars per day traverse a corridor is mostly a mix of rough-looking industrial and service buildings. Phipps says that in similar situations, those uses become economically unfeasible as property values rise. They are eventually sold and redeveloped.

His advice to the Cherrydale Area Council is to figure out which needs are not being met by the current mix of businesses in the area and recruit them to that corridor.

 

“Double dip” could dunk housing recovery

by Richard Breen

The September home sales report from the National Association of Realtors paints a positive picture, but many folks watching the real estate market still have their eye out for a “double dip.”

“There's been a number of people talking about this for a good while,” says Bill Harrison, a Lowcountry real estate investor and acting director of the University of South Carolina's real estate center. “NAR has done their best to put out the impression that the worst is behind us. It may be true. But I believe it's not.”

While September's national home sales figures showed a 9 percent gain, there are still factors that could drag the market down. One is a bubble in troublesome mortgages that could unleash a wave of foreclosures resulting in another slowdown in the housing market – a double dip.

Those home loans, referred to as option ARM mortgages, were a fad in 2003-05, according to Harrison. They allowed borrowers to pick how they would make monthly payments. Some paid interest only, while others didn't even pay all the monthly interest – they rolled some of it into the mortgage principal.

“They also call them 'liar's loans,' ” Harrison says, because borrowers didn't always have to prove their income in order to get the mortgage.

A lot of option ARMs were written on terms of 5-7 years, which means they could be resetting soon, if not already. Some had thought the option ARM bubble would burst this spring, but continued low interest rates have perhaps pushed the fallout into 2010-11. Here is a Business Week article that explains the phenomenon and provides a chart that shows where the bubble sits:

http://www.businessweek.com/lifestyle/content/apr2009/bw20090416_103126.htm

The Office of the Comptroller of the Currency and the Office of Thrift Supervision have begun tracking option ARMs as part of their quarterly Mortgage Metrics Report. The overall report covers 34 million loans totaling approximately $6 trillion in principal balances and represents about 64 percent of all first-lien mortgages in the country. More than 900,000 option ARMs were in that portfolio.

In the second quarter, 15.2 percent of option ARMs were “seriously delinquent,” according to the report, compared with 5.3 percent of all mortgages. Ten percent were in foreclosure, compared to 2.9 percent for all mortgages. Here is a link to the report:

http://www.occ.treas.gov/ftp/release/2009-118.htm

“Foreclosures are the single biggest problem you can have in a local real estate market,” Harrison says.

Right now, he says, many markets are dealing with a second wave of foreclosures. The first wave was related to subprime mortgages and now the second wave is being spawned by increased unemployment. Option ARMs will bring a third wave, he says, unless federal regulators can hold interest rates down for two more years.

One analysis is betting against that. Fiserv, a Wisconsin-based financial services technology provider, has forecast housing prices for the next two years in markets across the country, and the results are not pretty. More about that in an upcoming post.

 

NAR links home sales surge to tax credit

by Richard Breen

The National Association of Realtors reported an upturn in September U.S. home sales and used it as evidence that the $8,000 tax credit for first-time homebuyers is necessary and needs to be extended.

Not all observers agree, setting up a debate as time ticks toward the tax credit's Nov. 30 expiration.

The NAR reported today that sales were up 9.4 percent compared to August and 9.2 percent compared to September 2008. It continued a national trend of improvement in home sales and surpassed year-over-year gains made in previous months.

Strong sales, combined with sluggish activity in new-home construction, ate into housing inventories. The NAR counted 3.63 million existing homes available for sale at the end of September. That represents an 7.8-month supply, down from an 9.3 months in August and 15 percent below the same point in 2008.

The number of homes sold to first-time buyers in September was not reported, but the NAR said an upcoming study will show that first-timers account for more than 45 percent of sales over the past year. The association's chief economist, Lawrence Yun, expressed hope the tax credit will be extended and/or expanded, at least until the middle of next year.

“We’re getting early indications of price stabilization, but we need a steady supply of qualified buyers to meaningfully bring inventories down and return us to a period of normal, steady price growth and to fully remove consumer fears, which would then revive the broader economy,” Yun said in a NAR release.

A September sales runup led by first-time buyers is not surprising. With the tax credit scheduled to expire, first-time buyers were under pressure to make decisions. Even though the deadline is still a month away, it is already too late for most potential buyers to select a home and close the sale in time to qualify. October's sales numbers will probably also reflect the last-minute rush to buy.

With that in mind, an extension of the tax credit may help keep the housing market from sinking, but it is unlikely to sustain numbers like the ones reported for September. Many of those buyers would have bought a home in the coming months anyway, but specifically timed their purchase to qualify for the tax credit.

A variation of that argument is at the heart of the debate over whether the tax credit is worth it in the first place. Most people applying for the credit would have purchased homes anyway, they say. Rex Nutting, Washington Bureau chief for MarketWatch, argues that the tax credit merely shifts the inventory problem from single-family homes to multifamily properties.

“To attack the problem of too many houses, we need to create more households, not shuffle families from one form of housing to another,” he writes. “If we need a subsidy, why not offer one that encouraged young adults to move from their parents' basement into an apartment of their own?”

Furthermore, a Congressional subcommittee held a hearing Thursday in which government officials reported that 93,000 or more claims for the credit were invalid or fraudulent. With Congress under pressure to pass some type of health reform legislation before the holiday recess, there may not be time to also deal with a tax credit extension or expansion. It will be a test of how strong the lobbyists for Realtors and home builders really are.

Here's a link to the NAR sales release:

http://www.realtor.org/press_room/news_releases/2009/10/rebound_shows

Here's a link to Nutting's column:

http://www.marketwatch.com/story/kill-the-wasteful-home-buyer-tax-credit-2009-10-20

Golf no longer a must for upscale communities

by Richard Breen

Although golf courses created by prestigious designers still carry a lot of weight in the upscale real estate market, the Upstate is seeing a trend toward a broader definition of the “active” lifestyle.

“Golf is moving down the ladder,” says John Helmers, a partner in the Pla d'Adet development. “The ability to do healthy outdoor activities other than golf is going up. That's occurring nationally.”

Planned for 300 acres north of Greenville, Pla d'Adet will use cycling routes and training facilities as the centerpiece attraction rather than a golf course. Meanwhile, The Cliffs Communities Inc., which is best known for its golf-oriented developments featuring the likes of Gary Player and Tiger Woods, is working to broaden its appeal as well.

“The goal is to be the healthiest place to live, work and play in America,” says Jennifer Nicholson, who heads The Cliffs' wellness marketing efforts.

Nicholson describes The Cliffs' offerings as “robust.” They include five wellness centers, outdoor amenities, and access to fitness professionals, coaches and doctors. The Cliffs offers more than 3,000 classes of different types each year.

Taking the concept a step further, a Seneca developer is teaming with the Foothills Family YMCA for a mixed-use development on Lake Keowee near Newry.

“We intend to offer everything a traditional Y does and more,” says Anna Connelly, executive director with the Y.

Keowee River's developer, Scott Vick, is donating the property the Y will be built on and plans call for it to be the centerpiece for a community that will include commercial and residential development. Connelly says that with its current resources, the Foothills Family YMCA primarily serves ages 3-15. Having the new facility would allow the Y to also serve the strong base of retirees in the area.

“We plan to tap into all ages of the population,” she says.

Gated golf communities have always been considered the domain of retirees and those nearing retirement. But as amenities become more diverse and the business world becomes more mobile, buyer demographics may also be changing.

Helmers expects Pla d'Adet residents to come from ranks that include “professionals that can live anywhere and want to pursue a healthy lifestyle.”

The “professionals that can live anywhere” concept is something that I hear repeated in various contexts. As the economy becomes more technology-driven, more people will choose where they want to live and then build a career there, rather than going to “where the jobs are” and buying a house.

Upstate economic development officials are putting more effort into attracting those kinds of mobile workers. As a result, Realtors can expect to see more of them as clients.

Those active professionals may not just be trying to choose between The Cliffs, Pla d'Adet or a downtown condo. They may also be looking at similar properties in Chattanooga, Tenn.; and Boulder, Colo., at the same time. It will be interesting to see how Realtors respond to that unique customer service challenge.

U.S. home construction remains calm

by Richard Breen

The latest residential construction statistics are out, and to be honest, there doesn't appear to be anything earth-shattering about them.

The U.S. Census Bureau and the Department of Housing and Urban Development reported that building permits were issued at a slightly slower rate in September than in August. Housing starts were slightly ahead of August.

The biggest change was in housing completions. They were 10 percent below the August rate. But the margin for error was also 10 percent, so who knows what that means?

All of the September numbers were way below September 2008. That is not necessarily a bad thing, since housing inventories are still too high in many parts of the country, including the Upstate.

Looking at the past 13 months, there are some trends worth noting. Single-family housing starts made their big drop after October last year. The last four months have been better than any months since last October, so housing starts may have already bottomed.

Pretty much the same story with the issuance of single-family building permits. The past three months have been the best since October 2008.

As for the number of single-family homes under construction, the past four months are as low as they've been since the national bubble burst. That should help the inventory problem.

Same thing with single-family housing completions. September was the lowest recorded volume in the past 13 months.

While working on an assignment for the November issue of Greenville Magazine, I have spoken with several local builders. There is a consensus that they would like to build more – that's what they do. But can't get the financing to do it. They feel like the banks are putting them out of business.

The banks have their own problems, however. Under pressure from regulators to shore up their books, they see the large inventories of unsold homes in the Upstate and wonder how anybody could justify loaning money to a builder right now. Several local banks were burned by builders and developers that went under.

While the high-margin, $400,000 homes that the local builders like to build aren't selling, some feel they could still build $175,000 homes that would appeal to first-time buyers utilizing the $8,000 tax credit. That could generate some cash flow for builders that would help keep them afloat until the $400,000 home glut starts to sell.

But banks are not necessarily buying that logic. They see financing such a move as taking on additional risk.

As one banker told me, “we're creditors, not investors.”

Finally, S.C. home sales improve

by Richard Breen

Home sales were so bad at the end of 2008 that it won't take much to show an improvement this year. This autumn is indeed off to a better start, according to September sales figures from the S.C. Association of Realtors.

Year-over-year monthly sales were up statewide for the first time this year, an indication that we may have found the market bottom. There were 3,877 units sold in September 2009 compared to 3,816 last September. In September 2007, unit sales were 4,718, which reiterates how bad last September was.

The state association tracks 15 MLS boards across South Carolina. The monthly sales numbers can be pretty volatile, especially in small regions. In September, there were only 25 sales in Cherokee County, but that was up by 93 percent over 2008, when there were 13 sales.

It may be helpful to look at the regions not only individually and as a statewide total, but as an aggregate. Year-over-year monthly sales in September were up in nine of 15 regions, which is perhaps a sign that recovery is spreading across the state.

Greenville and Spartanburg MLS regions were among those showing a loss. The Western Upstate (Anderson, Oconee, Pickens) region was up by 7.6 percent. But both it and Spartanburg have been up and down for most of the year compared to Greenville's steady narrowing of the home sales gap (down only 1.8 percent in September).

For the third quarter, sales were down statewide by 5.6 percent compared to 29.5 percent and 18.9 percent in the first and second quarters, respectively. In 2008, third quarter sales were down by 23.1 percent compared to 3Q 2007. Once again, the trend is that of improvement.

In the fourth quarter last year, home sales were down by 29.4 percent. But that was comparing a terrible 2008 to a better 2007. Now we get to compare 2009 to a terrible 2008, so it won't be hard to maintain some kind of momentum.

And like I said Friday, if consumers start to see that sales are up (even if it wasn't that hard to be 'up'), they are more likely to get off the fence and back into buying and selling homes. In this case, thinking things are better may actually make things better.

The wild card is the $8,000 tax credit for first-time homebuyers. Any kind of extension/expansion of the credit could boost sales further. If the credit expires Dec. 1, sales could plummet. Of course, they could drop next year anyway if the tax credit was merely stealing first-time buyer sales from 2010 and moving them to 2009. After all, despite how the tax code is written, most of us are only first-time buyers once.

Greenville home sales nearly catch 2008

by Richard Breen

A while ago, I mentioned that if Greenville home sales continued their 2009 trend, they would catch back up to 2008 sometime during the fall. Well, we are almost there.

The latest sales report from the Greater Greenville Association of Realtors shows that 597 homes were sold in September. In September 2008, 608 were sold.

With first-time buyers rushing to close homes before the expiration of the $8,000 tax credit, expect October's sales to surpass October 2008's. That is going to make everyone feel better, especially if they don't spend too much time figuring out why this October is better than last October.

So if your optimism is easily deflated, don't read the next two paragraphs.

This October and November, sales will be artificially inflated by the $8,000 tax credit – even more than they have been so far this year. Sales in October and November of 2008 were artificially deflated by the meltdown in the worldwide financial system and distracted by the presidential election (Don't blame Obama – it happens every four years.). You can see the making of these trends in September's sales numbers.

This year, sales only fell by 1.6 percent between August and September, a time when home sales typically begin to trail off. Last year, the August-September drop was 15.6 percent. For the next few months, even though we will be comparing apples to apples, we will be comparing this year's shiny apples to last year's wormy apples.

But don't let that get you down. Sociology has a way of making some delusions real. If people start seeing improvement in the real estate market, they will be more likely to get active. That will encourage additional listings and sales, which can set off the chain reaction of financial transactions necessary to get the economy moving forward again.

The nearly closed sales gap isn't the only good news from GGAR. As of Oct. 10, there were 278 fewer active listings on the market than the same time last year (and about 150 fewer than last month). Shrinking inventories are a good sign that prices will stabilize. It may also signal to banks that it's time to start lending to builders again.

The homes that have sold so far this year are averaging 102 days on the market. That compares to 86-96 days in 2005-08. One extra week on the market isn't that bad a difference, but I dug deeper and found even better news.

Most homes are selling in the starter home price ranges. In September, 214 homes sold in the $80,000-$140,000 range and their time on the market was around 87.5 days. Even better, the 40 homes that sold in the $160,000-$180,000 range averaged 67 days.

Homes are selling quickly if they match the current marketplace. Realtors are telling me that some of their listings in the $100,000-$180,000 range are being snapped up by first-time buyers who are trying to beat the Nov. 30 expiration of the $8,000 tax credit.

If September's trends hold, October may be more treats than tricks this year.

HAMPering the foreclosure market?

by Richard Breen

We have pointed out that the foreclosure market has changed. It is no longer homeowners with subprime mortgages; it is homeowners with good credit, traditional mortgages – and no job.

That fact apparently has not sunk in with the Obama administration.

A recent report by a Congressional Oversight Panel criticizes the administration's Home Affordable Modification Program, which was put in place to facilitate loan modifications for homeowners at risk of foreclosure.

“It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now,” the report states.

HAMP was part of the massive stimulus bill promoted by Obama and enacted by Congress earlier this year. The Congressional Oversight Panel makes three main points of criticism with with the program.

First is scope. The program hopes to prevent 3-4 million foreclosures. The report states, however, that the types of loans and types of homeowners HAMP is targeting no longer match the marketplace.

Second is scale. The report points out that as the infrastructure is still being created to operate HAMP, foreclosure starts are outpacing the program's trial loan modifications at a more than 2-to-1 rate.

“Some homeowners who would have qualified for modifications lost their homes before the program could reach them,” the report states.

Third is permanence. “It is unclear whether the modifications actually put homeowners into long-term stable situations,” the report states. Some of the modifications are lowering monthly payments but putting homeowners deeper under water. And it doesn't matter what your mortgage payment is if your income is zero.

“The result for many homeowners could be that foreclosure is delayed, not avoided,” the report states.

That could drag out the housing recovery, which could keep the economy bouncing along a no-growth bottom even after the recession is officially over.

Maybe we just need to rip the Band-Aid off, have the government buy a bunch of underwater mortgages, move the homeowners into rental properties where they belong, and either sell off the homes at market prices or tear them down to immediately shrink the housing inventory. Heck, use the new greenspace to plant community gardens like the one on the White House lawn.

Remember how President Obama and Congress pitched the stimulus bill as something that needed to happen right now in order to quickly address problems in the marketplace and take on “shovel ready” projects? Remember how the Obama administration backtracked earlier this summer, saying that they knew all along most of the stimulus wouldn't take hold until 2010?

Watching HAMP's slow buildout toward immediate obsolescence is what makes people cynical. It is what makes people believe that stimulus was about making government more powerful, not about helping people.

Here is a link to a copy of the panel's report:

http://www.scribd.com/doc/20830220/Congressional-Oversight-Panel-s-October-Report