Texas Real Estate Daily

As it struggles through the housing crisis, home builder D.R. Horton Inc. is unloading land across California at big discounts.

Horton, the nation’s largest home builder by unit volume, is jettisoning thousands of house lots in far-flung areas, partly to reap the tax benefits from selling property at a loss.

D.R. Horton recently sold this undeveloped parcel in Chino Hills, Calif., a hard-hit housing market east of Los Angeles.

As builders try to survive one of the worst housing downturns in U.S. history, land buyers and brokers expect more such tax-motivated fire sales of undeveloped land this year. That could set a new low for land prices in California and other troubled housing markets. The sales also could indicate a shift for big builders: from developing huge swaths of land in the exurbs, to building smaller developments closer to metropolitan areas.

Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs, a blue-collar community in the far reaches of Southern California’s Inland Empire, for $7.8 million, according to county records. William Shopoff, a land investor who bid unsuccessfully for the property, estimates Horton paid about $110 million for the land before spending to prepare the property for development by grading and installing infrastructure such as sewers.

Horton also recently sold a four-acre parcel in Escondido, near San Diego, for $4.4 million, about 25% of what it paid for the property in 2005, according to the county assessor.

Horton, based in Fort Worth, Texas, declined to comment for this article.

Buyers of some of Horton’s land in Southern California include a venture between Foremost Communities Inc. and Starwood Capital Group LLC, which together bought 250 house lots from the builder, according to a person familiar with the matter. The investors plan to hold the lots until the market recovers, this person said. A spokesperson for the venture didn’t return a call.

As new-home sales sank to a 17-year low, builders can no longer count on doubling their investments by buying undeveloped parcels, preparing the property and selling the homes on it. Horton, which built nearly 53,000 homes at the peak of the housing boom in 2006, has posted quarterly losses since the April-June quarter of last year.

The fire sales are a silver lining in those clouds. Tax law allows companies to apply losses from land and other asset sales to past profits and reap a tax refund. More sales are expected soon because the companies can apply losses only to profits earned as far back as two years and 2006 was the last profitable full year for most builders.

Horton told investors in June that it expects to receive a tax refund of $519 million over the next two years. At the end of last year, Lennar Corp. pocketed a $200 million tax refund after taking a 60% discount on its sale of 11,100 house lots to a joint venture it formed with Morgan Stanley.

“There’s going to be a rash of builders shedding assets,” said Tom Reimers, executive vice president of O’Donnell/Atkins, a real-estate advisory firm in Irvine, Calif. “It’s all tax-motivated.”

By dumping land, builders are chasing cash that allows them to keep current with lenders and pay overhead expenses.

Horton had $851.2 million in cash on hand at the end of its fiscal third quarter, June 30, up from $270 million at the end of last year, according to research firm Zelman & Associates. Horton owes about $210 million in annual interest payments, according to Zelman.

So far, most publicly traded home builders have managed to muddle through the housing mess. One reason is the builders’ financing arrangements. Many such large companies have long-term corporate debt that doesn’t come due for another year or two, giving them breathing room amid the credit crunch. The builders typically don’t need lender approval to keep building as long as they honor certain debt agreements at a corporate level.

Most closely held builders, on the other hand, use project-specific financing, in which they need a bank’s approval to start each new development. Lenders have completely cut off credit to most small builders, forcing many to file for bankruptcy protection. Analysts expect more than half of the nation’s small and midsize builders will fold during the housing downturn, which has already forced such private companies as Levitt & Sons of Fort Lauderdale, Fla., and Kimball Hill Homes of Rolling Meadows, Ill., to file for bankruptcy.

Still, big builders like Horton aren’t out of the woods. Horton has $585 million in debt that needs to be paid off in 2009, $362 million due in 2010 and $450 million in 2011, according to Zelman.

Horton’s recent land sales also could reflect an industry shift. Over the next few years, builders will likely build smaller developments closer to large metro areas, where house prices are expected to recover faster than in the far-flung regions. That contrasts with 2005, when builders bought massive parcels in California’s exurbs and earned big profits as land values skyrocketed during the housing boom.

Horton, for example, is interested in buying 50- to 150-lot parcels that are already developed and closer to certain cities in the San Francisco Bay area, says a person familiar with the company’s thinking.

“The builders are going to build in the better locations for the next few years, and live to see another day,” said Steve Reilly, a land broker with Prudential Realty in Danville, Calif. “The downside is they are never going to see the kind of margins when lots were doubling and tripling in value in the time it took to build a house.”

Credits: WSJ

Tracie Staten has everything she needs to buy a house: a down payment, great credit and a job. But with the nation’s economy in turmoil, she lacks the one thing required to move forward — confidence.

“I don’t want to get this house and all of a sudden things go downhill in our economy,” said Staten, a 25-year-old insurance adjuster. “I don’t know what the next few months will hold.”

The government’s struggle to reach an agreement on a $700 billion bailout package, a tightening credit market and lingering effects of Hurricane Ike are adding to the woes of Houston’s already softening real estate market.

“Right now there’s a general pervasive attitude that everything is going down: ‘I don’t want to buy a home now because prices may go down. I don’t want to invest my money because all my friends just lost thousands of dollars in their 401(k) yesterday,’ ” said Jim Gaines, an economist at the Real Estate Center at Texas A&M University.

Houston-area home sales have fallen each of the past 12 months, making their biggest drop in August when they plunged 20 percent. September figures are still being tallied.

Housing experts said the failure of Congress to complete a financial bailout has only worsened the problem.

Sellers have begun pulling homes off the market as they wonder if it is the right time to sell, said Steve Barnes, president and chief operating officer for the Houston region of Coldwell Banker United, Realtors.

Though perceptions about the economy can be blamed for part of it, some is hurricane-related. Insurance companies are requiring buyers to have homes reappraised, reinspected and recertified.

“With Hurricane Ike, coupled with no bailout, consumer confidence has got to be at an all-time low,” Barnes said.

Despite the uncertainty, Houston could be in a better position to weather the storm.

The area housing market has outperformed many others because of energy-related job growth. While sales have been slipping, inventory hasn’t gotten out of whack, and prices have remained stable.

That’s not to say the credit crunch hasn’t affected Houstonians. For months, buyers have been subject to tougher lending standards from banks burned by defaulting borrowers.

Builders have scaled back, too, and some are having a hard time getting loans themselves.

There’s little or no money available for land development loans, also known as “ADC loans,” which stands for acquisition, development and construction, Gaines said.

For those who sell real estate for a living, volumes are down — hurting some more than others.

“Our business has just fallen off a cliff,” said Shad Bogany of ERA Bogany Properties. “We were doing OK until the bailout. It’s almost like the phones have stopped ringing.”

Though buyers are skittish and lenders more cautious, it hasn’t gotten so bad here that it’s halted mortgage lending.

“They’re still in business. And if nothing happens, they won’t make any money,” Gaines said about the lenders.

Complicating matters for would-be buyers, mortgage rates are up over the past week.

In Texas, rates for 30-year mortgages were 5.94 percent at the end of last week, up from 5.75 percent the week before, according to Zillow, a real estate Web site that tracks home prices and mortgage rates.

Still, that doesn’t necessarily mean they’re on an upward trend, said David Zugheri of First Houston Mortgage.

Rates went down when the government said it was taking over Fannie Mae and Freddie Mac, he noted.

“The one thing we all know and can agree upon is the government is fully committed to the housing market,” he said.

Consumer sentiment should improve when the government agrees on a plan that’s expected to put more liquidity in the market, experts said.

Staten, while concerned about her taxes going to rescue banks, is craving some sort of solution. She’s been saving for more than a year and is ready to sign a contract on a three-bedroom Humble-area house.

“To at least have something in place, I would feel a little bit better,” she said.

Credits: Chron

The new housing communities of Aliana and Tucker Hill are separated by nearly 300 miles of Texas landscape, but they share a common link.

Both master-planned developments — Tucker Hill, near McKinney, and Aliana, northwest of Sugar Land — are being built in suburban counties that rank among the top of the highest median household incomes in the state.

Collin County, northeast of Dallas and home to numerous corporate headquarters, finished first in recently released U.S. Census Bureau data.

And Fort Bend County, where new subdivisions and businesses continue to sprout, finished third.

Experts say high household incomes are a big reason for new houses in Aliana and Tucker Hill having price tags ranging from $350,000 to $1 million.

With a population of about 528,000, Fort Bend County had a median household income in 2007 of $77,082, compared to $75,202 in 2006.

Collin County, where Plano is located, scored the highest income figure in the state with $79,657, compared to $74,051 in 2006. Nearby Rockwall County, the smallest by size in the state, had the second highest income figure at $77,861.

The census income list is for counties with a population of more than 65,000.

Harris County placed 21st in the state with an income level of $49,936.

Economic leaders and demographers cite similar reasons for the high income levels in the three counties that topped the census list — proximity to booming cities, a business-friendly atmosphere and master-planned communities.

“The most obvious point is that the wealthiest suburban counties are around big cities,” said Dr. Karl Eschbach, director of the State Data Center at the University of Texas at San Antonio. “So it is not surprising that Fort Bend is in that group.”

In the Houston area, two other counties finished high on the census data list.

Montgomery County was sixth in the state with a median household income of $63,380, and Brazoria County was eighth with $60,684.

Eschbach said incomes tend to be highest in big cities, which have large corporations and professional jobs. Houston and Harris County have plenty of people making good livings, he said, but there are also large numbers of people who do not.

“The people of River Oaks need not make apologies for their wealth compared to a Fort Bend or Montgomery,” he said. “The central counties (with big cities) also have the larger lower-income population.”

Suburban counties may also be home to a significant number of low-income families, but that number often is overwhelmed by the thousands of households with much higher earning power, Eschbach said.

Those counties tend to have large numbers of new houses, often favored by people in the prime years of their earning power.

“That housing stock has largely been constructed to attract a more well-to-do population,” he said.

Master-planned communities are big draws in Fort Bend County, said Jeff Wiley, director of the Fort Bend Economic Development Council. He described a master-planned community as a large development with areas for residential, retail and commercial use.

“There are tight deed restrictions that protect people’s investments, so they know when they move in what they are moving into and those thing aren’t going to change,” Wiley said.

Houston’s strong economy is also a key factor in the county’s high ranking, he said.

Collin County, with a population of about 730,000, has benefited from the healthy corporate economy around Dallas, especially in Plano, said David Pitstick, president of the McKinney Economic Development Corporation.

Pitstick said Plano’s massive Legacy business park, where numerous large corporations such as Frito-Lay and Pepsico are located, has been a prime force in growing the local economy. The area’s good school systems attract both businesses and high-earning employees.

Credits: Chron

Lennar Corp.’s multiyear, billion-dollar effort to develop decrepit former military properties on San Francisco’s waterfront has tapped a new financing source, underscoring the home builder’s success in doing deals to survive the wretched housing market.

Lennar says it has formed a new venture with Ross Perot Jr.’s Hillwood Development Co., and the investment firm Scala Real Estate Partners LP. The venture is taking equity stakes in massive projects at former military properties across San Francisco, including a project at Hunter’s Point, which would bring development to one of the city’s poorest neighborhoods.

The new venture replaces the 50% stake held by LNR Property Corp., a unit of Cerberus Capital Management, in the Hunter’s Point project. It also is taking half of Lennar’s 50% stake in another ambitious development project on Treasure Island, home to a former naval barracks and sweeping city views.

The venture is taking half of Lennar’s 100% stake in Candlestick Point, the possible new home for the San Francisco 49ers, according to Lennar. The builder will continue to manage the projects. The developments are slated to create thousands of units of housing. The venture also took a stake in land on the New Jersey waterfront across from Manhattan.

As part of the deal, sealed during the weekend, the Lennar-Hillwood-Scala venture paid $145 million in cash to LNR, Lennar and several minority partners. Hillwood and Scala have committed to providing long-term financing to the projects, which could take 10 or more years to complete.

The capstone of Lennar’s megaprojects in San Francisco are Hunter’s Point and Candlestick Point, which were acquired from the city for a nominal fee. Lennar and its partners have agreed to spend more than $1 billion building thousands of affordable rental and for-sale housing, along with parks and a site for a new stadium for the National Football League’s 49ers. The first large phase of the project is to begin in 2010.

“We now have strategic partners committed to 50% of the cost going forward,” says Emile Haddad, Lennar’s chief investment officer, who negotiated the deal for the builder. “They are committing hundreds of millions of dollars.”

The San Francisco venture reflects the strength of the city’s housing market, where values have held up amid the national downturn — and Lennar’s ability to close land deals in such an atmosphere.

In March 2007, the builder and LNR turned heads when they reduced their stakes in a venture called LandSource. An investment vehicle for the California Public Employees’ Retirement System paid about $920 million for a 68% stake in LandSource, while Lennar and LNR each received $660 million in cash from the deal. LandSource filed for bankruptcy-court protection in June.

In December 2007, Lennar sold 11,000 house lots to a venture mostly owned by Morgan Stanley’s real-estate arm for $525 million, which was about 60% less than what Lennar carried the land on its books. Since then, land values in some of the markets where the lots are located have continued to erode.

Hillwood has experience developing big projects such as the Fort Worth Alliance Airport and the American Airlines Center basketball arena in Dallas. Irvine Calif.-based Scala has raised $200 million from Lehman Brothers Holdings Inc. and others to buy land during the real-estate downturn.

Credits: WSJ

Charlene Zeman spent more than a decade in the housing business, including the last three years selling homes.

But the housing slowdown – the worst nationally in a generation – sent her, like thousands of other agents, looking for a new career.

“I had to have a more steady income,” Ms. Zeman said. “I had to know when the next paycheck was coming. And they were getting fewer and farther between.”

With home sales in North Texas down almost 30 percent since the peak in mid-2006, real estate agents are feeling the pinch of smaller commission checks and less business.

No wonder many agents in the Dallas area and across the country are switching to a new line of work.

The National Association of Realtors, the Washington, D.C.-based trade association, dropped by more than 100,000 members from the end of 2006 to this March.

Even in Texas, which has escaped the worst of the housing depression, the number of licensed sales agents and brokers is down about 3,000 from last summer. And the number of new sales agent applications is off about 30 percent from a year ago.

“The fall-off would be expected as the market slows down,” said Dr. James Gaines, an economist with Texas A&M University’s Real Estate Center.

But he said it’s impossible to draw a direct correlation between the slowdown in home sales and the decline in agents.

“And since they often pay a two-year fee, the license numbers don’t vary as quickly from year to year,” Dr. Gaines said.

Ms. Zeman didn’t need a university study to tell her it was time to get out of the home sales business.

“I was in it when it was great, in it when it was good and in it when it wasn’t so good,” said Ms. Zeman, who is now working in sales for telecommunications giant AT&T.

“I love it,” she said. “It’s been very successful. I’ve been in the top 10 since I got here in February.”

Christian Walker spent almost two years in Dallas residential sales before deciding to change direction.

“At the time, I sensed that the Dallas market was going to contract some and that this, combined with the saturation of agents, made it a good time to consider other options,” said Mr. Walker, who has gone back to school while working at a Fort Worth architectural firm.

He’s just started working full time on a master’s degree in architecture at the University of Texas at Arlington.

Mr. Walker said he “saw an opportunity to put the experience and awareness of customer needs that I had acquired to move into a related field, architecture.”

“Endless showings and open houses also gave me a perspective about customer needs and expectations that I feel will be invaluable for an architect.”

Credits: Dallas News

Standard & Poor’s on Tuesday downgraded three U.S. mortgage insurers, including PMI Group Inc. (PMI.N: Quote, Profile, Research, Stock Buzz), citing further deterioration in the housing market and concerns about the profitability of insured mortgages originated this year.

The credit agency said it expects 2008 vintage mortgages to generate modest underwriting profit for most insurers, but warned they still face risks.

“The significant uncertainty in the mortgage and housing markets — coupled with unfavorable data on early payment defaults — suggests an underwriting loss is a real possibility,” S&P said in a report.

The credit agency said it now expects U.S. home prices to decline 29 percent from the peak in 2006 compared with a 20 percent drop it projected in April. It also sees unemployment rising to above 6.2 percent in 2009 compared to the previous forecast of 5.8 percent.

S&P said higher unemployment may drive significantly greater claims for mortgage insurance.

After reexamining the industry’s fundamentals, the agency concluded the sector’s credit quality was more consistent with the lower end of “A” category.

“Our more pessimistic assessment of the sector reflects our opinion that U.S. mortgage insurers have limited opportunities for long-term growth and diversification,” S&P said.

S&P cut Old Republic International Corp’s (ORI.N: Quote, Profile, Research, Stock Buzz) counterparty credit rating one notch to “A-minus” and financial strength ratings of its key subsidiaries one notch to “A-plus,” the fifth-highest investment grade rating.

It also cut PMI Group Inc’s counterparty rating two notches to “BBB-minus,” just above the junk level. PMI’s mortgage subsidiaries’ ratings were cut two notches to “A-minus” and the agency said it may cut them again.

Radian Group’s (RDN.N: Quote, Profile, Research, Stock Buzz) counterparty credit rating was cut two notches to “BB-plus,” the highest junk level, and its insurance arm’s ratings were cut two notches to “BBB-plus.”

At the same time, S&P affirmed ratings of Genworth Financial Inc (GNW.N: Quote, Profile, Research, Stock Buzz) and MGIC Investment Corp (MTG.N: Quote, Profile, Research, Stock Buzz).

“All the mortgage insurers we downgraded today have capital adequacy ratios above Standard & Poor’s minimum ratio for a “AA” rating. However, we expect the capital adequacy ratios to decline for the next few quarters because of operating losses,” it said.

S&P’s action could further pressure U.S. mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), which must reserve for losses for claims the mortgage insurers might fail to pay.

Credits: Reuters