C.A.R. supports “Yes” vote on Prop. 98

C.A.R. supports “Yes” vote on Prop. 98 to protect homeowners from unjust eminent domain takings

LOS ANGELES (May 13) – Imagine someone from your city or community knocking on the door of your home and telling you to move because they have found someone else who will contribute more in taxes than you do. Sound far-fetched? Not if you’re one of the thousands of people throughout California currently living under the very real threat of being kicked out of their homes by local governments to make room for more expensive stores and homes. To prevent this egregious use of eminent domain, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) today announced its support of Proposition 98 on the June 3 ballot. Prop. 98 will impose an outright ban on the use of eminent domain to take any private property – including homes, business and farms – for another private use.

“Proposition 98 on the June ballot will restore fundamental property rights by prohibiting governments from using eminent domain to take private property for another private use,” said C.A.R. President William E. Brown. “Cash-strapped local governments have resorted to abusing the concept of eminent domain to make land grabs they hope will bring in more tax revenue,” he said. “What once was a legitimate means for governments to invest in public infrastructure like roads, schools and parks is now a hammer used to destroy the rights of homeowners."

“While nobody may be knocking on your door today, a “Yes” vote on Prop. 98 will ensure you aren’t the next victim tomorrow,” Brown said. “We are urging all to vote “Yes” on Prop. 98 on June 4.”

C.A.R. also has taken an “Against” position on Proposition 99, which, if passed, would cancel the provisions protecting homeowners in Proposition 98.Proposition 98:

• Limits Eminent Domain to Public Use – Proposition 98 limits the use of eminent domain to public use projects, such as freeways, schools, or parks.
• Prohibits Price Controls on Private Property – Proposition 98 prohibits government from imposing rent control or inclusionary zoning ordinances on private property. As units are vacated, price controls will be “lifted.” Furthermore, Proposition 98 will prohibit future land use restrictions that act as a “taking” for the benefit of another private interest.
• Limits Government Taking for Similar Use – Proposition 98 prohibits government from taking private property to be used for the same purpose, such as taking property with residential housing to be used for government housing.
• Limits Government Seizures to Exploit Natural Resources – Proposition 98 will protect family farms and open space from seizures of their land by government in order to take the property’s natural resources.
• Provides Full Compensation – Proposition 98 is the only measure that requires full compensation to business owners, even when the property is seized for public projects. Owners will be entitled to compensation for temporary business losses, relocation expenses, business reestablishment cost, and other reasonable expenses.

The Baseline Mansionization Ordinance Passed

New McMansion Law: Everybody had a Say
Perspective By Ken Draper

The McMansion craze flatlined this week. On Tuesday, the City Council passed the anti-McMansion ordinance … technically the Baseline Mansionization Ordinance … making it difficult for property owners to build houses seriously out of proportion to the rest of the neighborhood. Most, but not all, of LA’s affected citizens were happy.

In looking back over the tons of testimony, it appeared that support for the new bill was about 60%. At one mid-city neighborhood council meeting … when they addressed the McMansion issue … the 150 or so stakeholders present were about evenly divided.

The idea behind the Mansionization ordinance is to stop the proliferation of oversized and out-of-context building in LA’s residential neighborhoods. Property owners putting up three story houses, built to the property lines on all sides, for example … and, altering the look, feel, comfort and property values of the community.

Among the bill’s supporters were residents who felt the historic feel and ambiance of their neighborhood were being destroyed. At the least jeopardized. And, those who simply live by the principle that any change is bad.

The opposition came from folks who wanted to increase the size of their living space by building up and out on their current property instead of moving to larger homes. The remodel was cheaper to accomplish than the purchase of another house. And, those who simply believe that an owner has the right to do with his/her property what he/she wishes. Beauty is in the eye of the beholder.

The point of this column, however, is not about who celebrated and who didn’t over the passage of the Mansionization law. It’s about the numbers of individual LA citizens, businesses and organizations that participated in the process.

Often with policy issues at City Hall, the loudest protest is not over agreement or disagreement with the outcome, but over the lack of public participation. This appears to be a case where everybody had a say in the process.

Councilman Tom LaBonge’s motion to create the Baseline Mansionization Ordinance was approved by the Council almost two years ago. The record since … plug Council File #06-1293 into the Council File Index search box … shows an exceptional history of public input. Public comment at numerous Council and PLUM meetings. Community Impact Statements and letters form neighborhood councils, homeowner groups and other community organizations … all across the city. Sixty or more people had their say last Tuesday in Council Chambers. At last count, a third of the city’s neighborhood councils had agendized mansionization at some point along the way. Media provided coverage. More than 20 related stories or opinion pieces in CityWatch alone. City Council members held hearings and input opportunities.

In contrast to City Hall business as usual, this was not a law constructed in a vacuum or behind closed doors. In one six-month stretch, it was heard in Council’s Planning and Land Use Committee four times.

And someone appeared to be listening. This, for example, from the Background section of the ordinance cover pages: When the first mansionization ordinance was proposed in May of 2007 it attempted to find one FAR (Floor Area Ratio) that could be applied to all single-family zones. That approach was resoundingly rejected by the general public and the City Planning Commission.”

There’s a difference between being listened to and being agreed with. While some who opposed the new ordinance are not happy that they were not agreed with … it appears that everyone was listened to.

Maybe this time City Hall got it right. The making of a new policy and LA’s empowered advisors had a say.

)Read ordinance and testimony at www.lacity.org – enter #06-1293 into the File Index search box.

What Fed Moves Mean for Mortgage Rates

By Luke Mullins

Faced with a weak dollar and rising inflation, the Federal Reserve seems done with its aggressive rate-cutting campaign. Here's how this shift in monetary policy may affect mortgage rates this year:

How have fixed mortgage rates been moving recently? They've climbed. The average 30-year, fixed-rate conforming mortgage increased from 5.91 percent for the week ending March 21 to 6.11 percent for the week ending April 25, according to HSH Associates, but it's still on the low side by historic standards.

How will the rates change over the next several months? With several factors pushing interest rates higher--and not much pulling them lower--fixed mortgage rates are likely to increase modestly in the coming months. "They are right around 6 percent now, [and] they are probably going to stay there the first half of this year," says Gus Faucher, the director of macroeconomics at Moody's Economy.com. "Then they are going to gradually move higher in the second half of this year."

Is that because of what the Fed is doing? No. This upward trend has little to do with monetary policy. The federal funds target rate--the Fed-controlled interest rate that banks charge one another for overnight loans--plays only an indirect role in setting mortgage rates. Instead, the rates are being driven higher by recent developments affecting the yield on 10-year treasury notes, which influences mortgage rates more directly.

What's happening with the 10-year treasury yield? It has been on an upswing. With fear reaching teeth-chattering levels in the days after the Bear Stearns investment bank came close to collapse in mid-March, the yield on the 10-year treasury--where investors head for safety during times of turmoil--fell to near-historic lows. But after the Fed cut interest rates and created innovative new ways to get cash to banks, the market staged a turnaround. Yields climbed nearly 17 percent, to 3.87 percent, from March 17 to April 25.

So, what's driving the yield higher? There are two key reasons behind this about-face:
--Risk looks better. Some market participants think they see an end to the credit crisis. "The worst is behind us," Lehman Brothers CEO Richard Fuld recently told shareholders, according to Bloomberg. With credit markets on the mend, those safe but low-yielding treasuries suddenly don't look so appealing. Investors are "pulling money out of the safest places in order to put them back to work in perhaps somewhat more risky assets," says Keith Gumbinger, vice president of HSH Associates. Less demand for treasuries means lower prices and higher yields.
--Angst about inflation. Rising concerns over inflation are also pushing 10-year treasury yields higher. For example, in early April, the government reported that the cost of imported goods jumped nearly 15 percent in March from the same month last year. "The data only goes back to 1983, [but] we've never see inflation this high," says T. J. Marta, a fixed-income strategist at RBC Capital Markets. With inflation worries increasing, bond investors are demanding a higher return on their money at risk. "You see the yields start to rise fairly sharply because now people are focused on inflation," Marta says.

Is there anything that might help moderate this increase? There is. Not all of this increase will be passed on to consumers in the form of higher mortgage rates. Typically, rates on a 30-year fixed mortgage are about 1½ percentage points higher than the yield on the 10-year treasury. But after the housing crisis hammered their portfolios, lenders and investors have grown wary of mortgages and are demanding higher returns. As a result, the difference between the 30-year fixed-rate mortgage and the 10-year treasury yield--known as the risk premium--has ballooned about 50 percent, to 2.32 percentage points, over the past year, according to HSH Associates.

But with lenders having tightened underwriting standards--making mortgages safer investments?--these risk premiums could narrow, Gumbinger says. "If underlying interest rates do rise, my suspicion is that there won't necessarily be a corresponding increase in mortgage rates," he says. "They will probably be influenced to some degree, but there is an awful lot of spread which could be compressed." So while higher 10-year treasury yields will put upward pressure on fixed mortgage rates, some of that increase will be absorbed by narrowing risk premiums--helping moderate the rise.

What's the outlook for adjustable-rate mortgages? Adjustable mortgage rates will face similar upward pressure from rising treasury yields. The conforming 5/1 adjustable-rate mortgage--which offers a fixed interest rate for the first five years and then adjusts annually for the remaining 25--stood at an average of 5.89 percent for the week ending April 25, down from 6.08 percent a year earlier, according to HSH Associates. "By the end of the year, we might be working toward around 6.25 percent," says Mike Larson, a real estate analyst at Weiss Research.

Has the Fed's rate-cutting campaign helped struggling adjustable-rate-mortgage holders who may be facing foreclosure? Yes, but you might not see it. Although adjustable-rate mortgages are more closely linked to the federal funds rate than fixed-rate home loans are, they have fallen only about half a percentage point since September, despite the Fed's aggressive series of rate cuts. That's because exotic mortgage products have played a key role in the foreclosure crisis, making them radioactive to investors. When investors aren't eager to buy these loans, rates must increase to attract buyers. As a result, adjustable-rate mortgage holders have not seen their monthly payments decrease a great deal.

But that doesn't mean the Fed's actions have not helped borrowers who have ARMs, says Faucher of Moody's Economy.com. "The truth is that if [the Fed] hadn't cut [the federal funds rate], adjustable rates would be even higher...and the problems would be much more severe," Faucher says. "So you can't just say, 'Well, the Fed hasn't done anything.'"

The Housing Crisis Is Over - The Wall Street Journal

By CYRIL MOULLE-BERTEAUX May 6, 2008; Page A23

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.
The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high - but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 - or seven months of supply - by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.
A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.