Is the Remodeling Slump Over?

The Dallas News

Home remodelers that have been hammered by the recession can look forward to better times in 2010.

Forecasters say the home improvement and fix-up business should pick up this year after a 25 percent slide in activity since 2007.

"The downturn appeared to stabilize in the second half of 2009," Kermit Baker of the Harvard University Joint Center for Housing Studies told builders and remodelers at the National Association of Home Builders' annual meeting last week in Las Vegas.

"We are starting to see some positives in where the market might be headed for handyman services and home remodeling."

The Harvard researchers said nationwide remodeling expenditures are likely to rise about 6 percent in the coming quarters.

Baker said the cutbacks in home improvement and repair activity during the recession were substantial but were less than half what the homebuilding business experienced.

"If you are a remodeler, times have been tough. But it could be worse – you could be a homebuilder," he said. "In this economic environment, households were spending more on home improvements like kitchen remodeling projects last year than they did on the purchase of new homes."

North Texas outlook

The outlook for increased home remodeling is good news for North Texas builders, some of whom have diversified during the downturn.

"Quite a few of our builders have expanded into remodeling," said Bob Morris, executive vice president of the Home Builders Association of Greater Dallas. "Some of our more inventive small custom builders have been doing remodeling.

"There is still work out there. It's a viable market because the economy here wasn't hit nearly as hard."

Even in Dallas-Fort Worth, some homeowners have put sunrooms and other fancy fix-up projects on hold for the last year or so.

"If you think the prices of homes are going down, it makes it hard to argue that outdoor decks or bath remodels will hold their value," said Paul Emrath, a researcher for the builders' association. "People have less equity in their properties to finance remodeling.

"Even if you don't have problems there, sometimes lenders are more reluctant than they have been in the past to finance remodeling or a home addition."

Smaller projects

Homeowners in the market for a redo are taking a more measured approach. The days of over-the-top remodeling and double-size additions are mostly gone, analysts say.

"Of those that are planning to spend money, 52 percent are doing needed repairs or maintenance, as opposed to large-scale home remodeling projects." said Eliot Nusbaum of Better Homes and Gardens, which commissioned a new housing study. "The focus is on smaller projects right now like painting a room or replacing or adding flooring.

"What we are seeing in remodeling as well as new construction is practical considerations."

Energy-conserving or environmentally friendly upgrades are still on many homeowners' must-have lists.

"The focus for future projects really seems to be about saving money," Nusbaum said.

Harvard University research points to the same frugality, Baker said.

"We have seen a pronounced shift over to replacement projects in the last two years," such as energy-efficient windows or heating and cooling systems, he said. "But we are now seeing a little more life in discretionary projects – kitchen and bathroom remodeling."

The majority of fix-it fans are doing the upgrades out of their pockets, Baker said.

"This market is heavily dominated by cash financing," he said. "Households either don't want to take out loans because they are nervous about economic conditions or they can't get loans."

Buying a Condo: Wait or Jump in?

NY Times

AS the residential real estate market in New York City continues to emerge from its deep freeze, sales at new condominium developments are starting to pick up.

But while there are deals to be had on some new condos, buyers must navigate a tricky balance between getting in early — which often means a better price — and avoiding plunking down a deposit on a building plagued by bad construction or shaky financing.

“It’s a buyers’ market and sponsors are making deals,” said Jan B. Geller, a real estate lawyer with Altschul Goldstein & Geller. “But you have to be careful. What seems like a diamond in the rough may be a rhinestone.”

It is not always easy to know how to tell the difference.

When Alison Archibald and her fiancé, Urosh Perishic, started looking for an apartment to buy last fall, they noticed that some of the buildings they were interested in were eerily dark at night.

“We were driving around looking at buildings, seeing how many lights were on,” Mr. Perishic said. “I don’t want to be the only one living there.”

The building they settled on, the 303-unit Oro Condominium at 306 Gold Street in Brooklyn, is 44 percent sold. They bought a two-bedroom two-bath for $740,000. When sales began in the building in 2007, the asking price for that apartment — on the 33rd floor with views of Manhattan and four bridges — was $1.075 million.

“We were in a position where we could buy,” Ms. Archibald said, “so we realized we should just do it.”

If you decide to do it, too, be sure to do it carefully.

There are two major minefields to keep in mind when entering the world of new developments. The first is financial. What happens to your investment if the building doesn’t sell out? The second is bricks and mortar. How can you avoid buying in a place that was poorly constructed?

“You thought you were buying into this beautiful luxury building that was going to be owned by people of substance, and you wind up in a building owned by a bank or being rented out for extended periods of time,” said Steven R. Wagner, a real estate lawyer with Wagner Davis. “This creates problems with financing, refinancing, buying and selling, but it also creates issues in quality of life.”

In any housing boom, some buildings are thrown up hastily. The reports of leaks and inadequate fire-stopping in new construction are enough to make any buyer nervous. And if you’re considering buying in a building that’s still being built, an even more basic question to ask is: Will it ever be finished?

The Money

The median price paid for a Manhattan apartment in a new development fell to $1.19 million at the end of 2009, from $1.54 million at the end of 2008, a difference of 23 percent, according to Corcoran Sunshine, a brokerage that sells only new developments. There was also a drop in Brooklyn, but it was smaller, down to $585,000 from $630,000, a difference of only 7 percent.

Still, as prices have come down, mortgages remain mind-numbingly difficult to get, especially for people buying in new developments. Banks are requiring much higher down payments and credit scores than in years past, and they’re also evaluating liquidity more strictly in some cases.

“It used to be you could have a 660 credit score and the bank didn’t really care,” said Melissa Cohn, the president of Manhattan Mortgage, a mortgage brokerage. “Now they want it to be well over 700.” She added, “But one of the bigger issues we’re having these days is getting the building approved.”

One qualification lenders are sure to look at is what percentage of the building has sold. As more contracts are signed, a greater variety of mortgages become available to buyers.

When a building is 15 percent sold — sold here means contracts signed — a tower of steel and glass can legally become a condominium, and deals can start to close.

At this stage, few lending institutions will give potential buyers a loan. As a result, many of these early deals are all-cash transactions.

Initial sales can also be made with the help of portfolio lenders — so called because they make loans and hold them in a portfolio rather then selling them off. These mortgages tend to be a bit more expensive than standard conforming loans, with interest rates about half a point or a point higher.

Another source for early deals: private banks, which cater to a wealthy clientele. These rarefied buyers must have millions of dollars in liquid assets after the apartment deal goes through.

When a building is 50 percent sold, getting a mortgage becomes a little easier and a little cheaper, but options still tend to be limited to portfolio lenders, private banks and F.H.A.-insured loans. The building can try to get a special waiver from the Federal National Mortgage Association, or Fannie Mae, which would open it up to standard retail banks, but that is not always an easy task.

Without that waiver, Fannie will guarantee mortgages only in buildings that are at least 70 percent sold. But once the 70 percent mark is reached, the field of financing opens up and just about any bank will lend to the building — assuming the project has sufficient insurance and reserves.

At this point, the screening becomes less about the building and more about the buyer.

“The first 30 or 40 percent of buyers are obviously taking a slightly higher risk than someone buying in a well-developed building,” said Rolan Shnayder, the director of new development lending at Home Owners Mortgage, a direct lender. “So sponsors are willing to offer better deals and concessions to those first buyers. Whereas, someone who’s waiting until the building is almost sold out, is going to pay full market price.”

But not every new building is lowering prices. In some cases it simply can’t. Construction loans dictate the lowest price at which an apartment can be sold, and these prices were set years ago in a very different market. Instead of writing down the asset on their balance sheet, some banks would rather the buildings sat empty. This situation may not be sustainable, but for now, some lenders have dug their heels firmly into the ground.

In the meantime, however, there are deals out there.

A condominium in Williamsburg, Brooklyn, called Warehouse 11, is offering low prices to kick-start sales. But the building has a troubled history. It first came to market in 2007, and then a year later, when about 30 percent of the 120 units had sold and the building was almost finished, the bank pulled the plug. The developer gave back all the deposits.

“We were told the financing wasn’t there to complete the building,” said David Maundrell, the president of aptsandlofts.com, the brokerage handling sales in the building.

This winter, the developer worked out a deal with its bank, Capital One, to keep ownership of the property, and then put the apartments back on the market at a steep discount. Some units start at $450 per square foot, about $300 less than their average contract prices three years ago. In its first two week back on the market this month, Warehouse 11 had 35 signed contracts.

“You start at a reasonable number and move your way up,” Mr. Maundrell said of prices. “You need a certain threshold, not just for financing, but because people need to be comfortable that the building is selling well.”

The longer you wait for a building to sell, the less risk there is that you’ll be at the mercy of the sponsor for years. If the sponsor controls the board, he or she may decide to do upkeep on the cheap. If the sponsor decides to rent out the building’s unsold apartments, that means you’ve suddenly invested in a rental building where turnover is high and apartments often take a beating. Another grim possibility is that the sponsor could default, which might send the building into the arms of a bank and then off to some unknown entity.

The Building

“Two years ago, it was completely different,” said Tom Le, a senior vice president of the Corcoran Group. “Buyers were walking through a building that was not even completed yet — like there were no walls — and there were multiple offers on any unit. These days, most people want to see a complete product.”

Buyers who sign before construction is completed have always taken a risk that the building won’t look quite the way they imagined it. But these days, the biggest hazard of the preoccupancy purchase is that the building will lose its construction financing and then languish unfinished, wrapped in tarps — and wallpapered with your down payment — for an indefinite period of time.

If you are determined to buy in an unfinished building, research the construction lender. Many commercial banks are still on shaky footing. See if there has been any coverage in the media about the bank’s solvency. You can also try looking it up on the Web site of the Federal Deposit Insurance Corporation; go to the Enforcement Decisions and Orders page, look up your state, and see if any actions have been taken against that bank.

But even playing it safe and waiting until a building is completed to put down a deposit is not without its pitfalls.

“There’s always an inherent risk when buying new construction,” said Aaron Shmulewitz, a real estate lawyer at Belkin Burden Wenig & Goldman. “There is no track record for that building.”

The first thing you should do when considering a building is to give a close read to the condominium offering plan, a description of the project filed with the state attorney general’s office. If the brochures and brokers promise amenities that aren’t up and running, make sure the plan explicitly mentions them; if it doesn’t, the finished product does not have to offer them. If the building is complete, walk through it and make sure it delivers on the plan’s promises.

Reading the plan is just a start.

Before you sign a contract, ask the real estate broker if you can bring in an engineer or inspector to look the place over. Many sponsors won’t let your expert poke around on the roof, but you should be able to get one into the apartment you wish to buy.

Other factors that speak to the structural integrity of the building are complaints and litigation. You can look up an address on the Department of Buildings Web site and check for violations. You can also inspect court documents to see if the sponsor has been sued in connection with the project and what the judgment was. This can be done online at court Web sites or through a search engine like LexisNexis, though you might want to ask a lawyer for help to be sure you don’t miss anything.

One of the best ways to find out about any major problems is to ask the building’s residents. Stand outside and talk to people coming and going. Ask what it’s like to live there. If there have been problems, ask how the sponsor handled them.

The Developer

If a building has been standing for a only few months, there’s very little history to judge from, so the reputation of the developer becomes extremely important.

“There are some developers who have excellent reputations, do excellent construction and are well funded — and there are some buildings I wouldn’t buy in if you paid for it,” Mr. Wagner of Wagner Davis said. “So would I buy? Yes. But I would be very careful.”

Wayne Hosang recently bought a three-bedroom apartment at 80 Metropolitan in Williamsburg, Brooklyn. He says he was reassured by the fact that the developer, Steiner NYC, had completed many other projects, even though they have all been commercial.

“In a boom, anyone with two dollars and an idea can build a building,” Mr. Hosang said. “I can do anything to the inside of the apartment. What I can’t fix is what’s on the outside.”

To start researching the developer, take a look at the offering plan. It will tell you the name of the organization as well as the individuals behind it, who are called principals.

Do a litigation search for the principals as well as the organization — some developers create a different corporate entity, often using the building’s address, for each project. Look the developer up in newspapers and on real estate blogs. You might also try the Better Business Bureau to see if anybody has lodged a complaint.

Find out what other buildings he or she has built. Search for lawsuits and violations on those properties.

You might find out if the developer has other buildings on the market — look on his or her Web site, do some Web searches, ask around. Too much inventory for sale may put a developer under a financial strain.

Ultimately, no matter how much research you do, there are some things you just cannot know until you live there and until the last apartment in the building sells.

“The longer you wait, the safer it is,” said Mr. Shmulewitz of Belkin Burden Wenig & Goldman. “And if you wait a really, really long time, it becomes a prewar building.”

Look Before You Leap

BUYING a condominium in a new building these days means balancing the risks and benefits. Here are some things to keep in mind and questions to ask before you sign a contract:

• Be wary of buildings that have big blocks of apartments owned by investors. If a single entity owns, say, 20 percent of the building and cannot pay the common charge, the residents may have to make up the difference.

• If possible, get a mortgage contingency written into the contract. That way, if you can’t get financing, you can get your deposit back. If there is a long lag between the signing of the contract and the closing of the deal, this can be difficult to get. If the building is in move-in condition and ready to close, you might have better luck.

• If construction halted as the building was going up, it’s important to ask when and why. The building might have sat open, exposed to the elements for months.

•Before you close, walk through the apartment, ideally with an engineer or home inspector, and make sure everything is in good working order. Try out all the faucets and the appliances, open and close all doors and windows. If there’s a fireplace, test it to make sure it vents.

Commercial Market Bottoming Out?

Atlanta Journal Constitution

One of metro Atlanta’s biggest real estate players predicts more foreclosures of office towers and other commercial real estate this year but not as many as previously had been feared.

Still, 2010 will be a good year for rental rates for tenants amid a continuing glut of office space, according to commercial real estate services firm Jones Lang LaSalle.

Warnings about a commercial real estate loan bubble that could burst as billions of dollars of debt matures this year and next year have left many investors in a “wait and see” position, the company said in its Atlanta Urban Skyline Review released Tuesday. But with many banks and other lenders in trouble, investors are more likely to renegotiate and restructure loans rather than foreclose, the company said.

The Skyline Review analyzes 53 high-profile office buildings in downtown Atlanta, Midtown and Buckhead,  including 191 Peachtree,  SunTrust Plaza, Bank of America Plaza and the big Buckhead office towers.

As new office space continues to outpace demand, the vacancy rate in those submarkets is closing in on 25 percent, the report said.

“Investment activity is likely to remain slow in Atlanta until market fundamentals show sustained growth and confidence returns to the commercial real estate market and overall economy,” Lanie Rea, research manager of Jones Lang LaSalle in Atlanta, said in the report. “So while the commercial real estate market may have bottomed in urban Atlanta, all indications point to a slow and cautious ride back to the top.”

Has the bubble burst,  experts were asked  at the company's Atlanta real estate forecast breakfast on Tuesday.

“We're hoping it's a slow leak,” said Thomas Coakley, regional director of real estate investments for MetLife. “As long as everybody does their part,  and there's no unforeseen occurrences ... we don't see anything that will cause an explosion.”

Builders Reassess the Market

The NY Times

RIVER VIEWS At Henley on Hudson in Weehawken, work continues on a 27-unit building that is scheduled to open this summer. It is the fifth building there; a sixth structure is expected to be built later.

THE number of new-housing permits issued statewide in 2009 did not even reach 12,000. The last year the tally was that low: 1945, when New Jersey was still mostly cow and corn country.

If the housing crisis was finally over and the overall economy was headed toward recovery, it would still take at least two years for housing starts to recoup, according to market analysts.

“Traditionally, after past recessions, housing starts have doubled within two years,” said Jeffrey G. Otteau, whose Otteau Valuation Group provides advice on state real estate trends. “Because of the severity of this recession, though, there may be lingering wounds.”

Yet even in the face of these sobering numbers, several builders of multifamily projects have forged ahead — some actually building, others planning on it as soon as weather permits.

Their reasons are varied, based on interviews with developers of several large projects. Some asserted that their condominium developments held special appeal despite the general slowdown in sales; others said they had used the “down time” of the economic crisis to reconfigure plans and now felt that they understood the changes in buyers’ requirements.

“We paused our construction process,” said Lisa Macchi, an executive vice president of sales and marketing at Millennium Homes, in discussing Vizcaya, a high-end development rising atop a ridge off Northfield Avenue in West Orange.

In late 2008, Millennium was at work on 40 condo flats and 46 town homes at Vizcaya; as the outlook for the housing market grew increasingly grim, the company decided to create just the “shell” for another 41 condos. On the north side of the development’s huge main structure, it simply laid in foundation and put up first-floor walls.

Then, according to Ms. Macchi, sales were surprisingly strong at the first residences despite the slowdown: About 80 percent of them sold, at an average price of $1.2 million. So the decision to wait was revised. Last summer, Millennium decided to build out the last group of condos.

Construction is set to begin in March. Contracts have already been signed for a dozen of the units that won’t be completed until early next year, she said. The average sales price for those units is now $1.4 million.

By contrast, other developers expressed the belief that demand for top-end dwellings with the most elaborate possible finishes and features has diminished for the foreseeable future.

One of them, David Barry, the president of the Ironstate Development Company in Hoboken, said his company was instead focusing on ways to create “efficient” units — “not overly large, with high amenities, but lower price points.”

Mr. Barry, who shocked some fellow developers by pulling out of the condo construction game three years ago even as the market was still booming, said Ironstate would not get back in before the end of the year.

But the company is proceeding with plans to create about 70 condos at its Pier Village rental-and-hotel development in Long Branch. One idea Mr. Barry says he is considering is a condo conversion of one rental building at the complex.

It is still very hard to get construction financing, he noted, and conversion is less expensive than new construction. Also, the move would be in line with his notion of “efficient” apartments. The rental units are 700-square-foot one-bedrooms and 1,000-square-foot two-bedrooms.

“This could allow an entry-price point of something like $349,000, not $500,000,” he said, “which is more in line with today’s market.”

Mr. Barry said he and his brother Michael, the other principal at Ironstate, were also back at work on plans for the next phase of building at Port Liberté, the Hudson Riverfront complex in Jersey City. “I don’t know if we’ll start going in ’10,” he said, “but we are starting to work with architects again.”

At Henley on Hudson in Weehawken— part of the Port Imperial complex, which stretches into three towns along the Hudson — work is under way on a 27-unit building that is to open in July. It will be the fifth structure at Henley, with condos priced from the mid-$500,000s, for an 881-square-foot one-bedroom, to the $700,000s for certain two- and three-bedroom units. A sixth building is to be built later with the same configurations.

Michael Skea, the director of operations for Lennar Urban’s Northeast Division, which is developing Henley on Hudson in partnership with the Roseland Property Company, said that for the last 18 months the complex had had nothing available under $1 million. Penthouses and four-story town houses there go for more than $3 million.

“We get a lot of visitors who are enamored of the finishes and amenities we offer,” Mr. Skea said, “but they cannot pay prices that high. We wanted to press ahead with providing homes that are affordable to more buyers. ”

K. Hovnanian Homes, a large builder of single-family and condo developments, has several projects that continued to sell at a healthy pace over the past couple of years, said Steven Caporaso, an area vice president. As a result, construction has continued.

The final phase at Hunter’s Brook in Hackettstown, consisting of 21 single-family houses, is now under construction, for example. Eighty homes have sold since the project began marketing in late 2007, Mr. Caporaso said. This last group of houses is priced from $400,000 to the low $500,000s, for three- and four-bedroom homes. “We want to get the remaining homes ready for someone to purchase prior to April 30,” he said. That is the deadline for the federal tax-credit program for first-time buyers.

Weak Commercial Market Hides Deals

The Wall Street Journal

Bonds aren't getting a lot of love lately, as high-profile investors such as Warren Buffett say they favor equities right now.

Bill Bemis, portfolio manager for Aviva Investors, a unit of Aviva USA Corp., manages the group's securitized asset portfolio. He believes there are some great bond deals to be had, particularly in securities backed by commercial mortgages--even as expectations for a downturn in that market grow.

Aviva Investors is a global asset manager whose customers are primarily institutional investors. The group had $362 billion in assets under management at June 30, 2009.

Bemis buys securities backed by "seasoned" 2005 and earlier mortgages. After that, underwriting on the loans began to deteriorate, he said, just as it did in the residential market, though not to the same degree.

Aviva Investors' fixed income capabilities can be summarized by comparing the net performance of their Core Aggregate portfolio to the Barclays U.S. Aggregate. In the fourth quarter of 2009, Aviva Investors rose 0.77%, compared with the benchmark's 0.2% rise. Over three years, Aviva Investors rose 7.33%, compared to 6.04% for the benchmark.

The minimum investment required for the Core Aggregate portfolio is $25 million. "We expect higher delinquencies, falling property values and lower rents, and commercial mortgage property values will decline in 2010 as well," Bemis said. Market fear over the performance of commercial mortgage bonds is still high, he said, but "that doesn't necessarily mean there is no value in [commercial mortgage-backed securities]."

Even though he said he expects to see the commercial real estate market continue to deteriorate for at least the next year, Bemis said his group is adding exposure to commercial mortgage-backed securities, but only at the highest credit enhancement level, which typically means the triple-A or most protected of the securities.

Bemis buys securities backed by "seasoned" 2005 and earlier mortgages. After that, underwriting on the loans began to deteriorate, he said, just as it did in the residential market, though not to the same degree.

"Our view is that currently you are getting more than compensated for the risks which lie ahead in the commercial real estate market," Bemis said.

Bemis is more bearish on mortgage-backed securities packaged by Fannie Mae (FNM) and Freddie Mac (FRE), the government sponsored enterprises that ran into trouble as the residential mortgage market imploded over the past two years. Bemis expects those securities to underperform in 2010, as the Federal Reserve pulls back on purchasing.

"That is a general theme for 2010," Bemis said. "What happens as the government starts to pull back on some of the stimulus they have put out there?"