Prices in thousands

It’s not easy being a home builder these days. Total sales have hit record lows, foreclosure resales are pulling away potential buyers and people remain unwilling or unable to borrow at today’s low mortgage rates.

And, oh yeah, home prices are falling.

Rick Palacios Jr., a senior research analyst at Irvine, Calif.-based John Burns Real Estate Consulting, has a note out Friday arguing that builders need to look at the changes in consumer attitudes behind the lower prices. Buyers want affordable homes, he says, making sales between $200,000 and $300,000 the “new normal.” “In order for a genuine spring-selling season to materialize builders must pay close attention to this structural pricing shift that continues to unfold.”

As evidence, Mr. Palacios points out that since new-home prices peaked in 2007, new single-family sales of more than $500,000 have gone from 13% to 6% of the market. Sales of new homes priced under $300,000 now account for roughly 75% of all new single-family deals. On a regional basis, the West has seen what Mr. Palacios called a “radical shift,” with newly constructed homes under $200,000 doubling their share to 24% of sales in 2011. These drops have come as buyers have sought out smaller homes.

“I think it’s just kind of coming to grips with the reality of what people can afford,” Mr. Palacios said in an interview. He added the process also involves returning to pre-bubble norms for prices.

Other the other hand, all is not lost for luxury builders, the research says. There’s less competition for them, and their share may tick back up if the economy continues to improve. High-end sales also remain healthy in the Northeast, comprising 20% of new-home sales last year.

The Obama administration would like the federal regulator for Fannie Mae and Freddie Mac to begin reducing loan balances for certain troubled borrowers, a top official said Thursday.

“More and more economists across the political spectrum are recognizing [principal reduction] is a critical step,” said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, in an interview with The Wall Street Journal. “If a family is in their home for 10, 15 years and has no hope of being able to build equity again, they’re going to give up at some point.”

Officials have said for more than a year that they’d like to see mortgage giants Fannie and Freddie adopt principal reduction, and several steps in recent weeks have put more pressure on the Federal Housing Finance Agency, the firms’ regulator, to approve write downs.

“Clearly it’s an important piece of the puzzle that Fannie and Freddie move forward on this,” said Mr. Donovan. Last month, the White House said it would triple incentive payments under an existing loan-modification program that subsidizes the cost of loan forgiveness and that it would offer them to Fannie and Freddie.

When the principal reduction program was rolled out two years ago, those incentive payments weren’t extended to Fannie and Freddie, and their regulator has said there are less costly ways to help borrowers avoid foreclosure. The firms are being propped up with massive taxpayer infusions of their own, and the FHFA is tasked with preserving the firms’ assets.

By providing new taxpayer funds, the administration is making it harder for the FHFA to maintain its stance that principal reduction is less costly because Treasury funds will effectively subsidize some of those losses. The FHFA has said it is currently evaluating the newest proposal.

The firms are “working right now…to make a decision on whether they are going to begin principal reduction,” said Mr. Donovan. “We certainly hope that they will start to do that based on these incentives. That’s why we made them available.”

Separately, Mr. Donovan said he remained “concerned” about the prospect of taxpayers being forced to backstop losses at the Federal Housing Administration. Budget projections this week showed that the agency could deplete its reserves this year. The FHA, which doesn’t make loans but instead insures lenders, has played a critical role supporting housing markets amid a sharp pullback by the rest of the market.

The agency could announce within days its plan to increase the premiums charged to borrowers in order to build up its reserves. HUD also announced in recent days settlements with two of its biggest lenders over fraudulent loan claims that will net more than $680 million for the agency.

But Mr. Donovan warned of precipitous actions to boost reserves that limit the availability of credit and undermine fragile housing markets. “This is a delicate balancing act because if we go too far…what we’re going to be doing is stalling the momentum that we have in the housing recovery,” he said. “Frankly, that not only hurts homeowners more broadly in the housing market, it hurts FHA because the value of our existing investments goes down.”

By Dawn Wotapka and Alan Zibel

The apartment sector continues to fuel residential construction.

Home construction last month increased 1.5% to a seasonally adjusted annual rate of 699,000 from December, the U.S. Department of Commerce said Thursday. The results, which beat expectations, were driven by an 8.5% gain in multifamily homes with at least two units. Single-family construction, the bulk of the market, fell by 1%.

The data also showed newly issued building permits, a gauge of future construction, inched up 0.7% in January from a month earlier. Those results were slightly lower than expected, but any gain is good news these days for the ailing housing industry.

To be sure, the results show that home builders continue holding back on construction as the sector limps through the worst housing downturn in generations. Builders have started construction on about 1.5 million new homes per year, on average, since records started being kept in 1959. Last year, the industry started construction on only 609,000 homes.

The single-family market’s pain is the apartment market’s gain. As fewer people buy homes, more people are renting them, creating tight supply in many markets nationwide. Developers are rushing to start construction to meet the increased demand.

Here’s what industry watchers think about today’s data:

Patrick Newport and Erik Johnson, economists, IHS Global Insight: “We believe that most (but not all) of the improvement is weather related. January was the fourth-warmest January on record and the 29th driest (data start in 1895). The weather in December and November was also milder than normal. Weather can shift activity across time, but it cannot jump start the housing market. One should therefore expect a payback in housing starts in March and April (but maybe not in February, since January’s good weather has carried over into this month).”

Paul Dales, economist, Capital Economics: “January’s housing starts data support our view that home builders are shaking off the shackles of the last five years and are beginning to contribute to GDP growth. That said, the housing sector is currently not big enough to set the economy alight.”

Stephen East, builder analyst, ISI Homebuilding Research: “January starts & permits look to be a pleasant surprise. … If the results of the year’s first month are an indicator for 2012, the first leg of the recovery for new housing will be firmly in place. Again, that will also be a more sustained positive for the builder equities, supporting the valuations witnessed of late.”

David Toti, REIT analyst, Cantor: “In recent years, the multifamily REIT recovery has been partially driven by low housing supply. While supply acceleration remains a risk, activity remains well below the 10-year historical average, to date. We continue to closely monitor supply numbers and believe that a supply threat is likely a 2013-‘14 phenomenon.”

John Tashjian, principal, Centurion Real Estate Partners: “The report is the first sign of spring for the housing market. The market really needs to clear foreclosure overhang and more attainable financing needs to come back before we can talk about a housing recovery.”

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But for the very poor, options are limited, and the situation is dire, according to a report out Wednesday from the National Low Income Housing Coalition.

Using data from the Commerce Department’s American Community Survey, the advocacy group found that for every 100 extremely low income families, there are only 30 affordable units available for rent nationwide. The number of these ELI renters grew by 200,000 between 2009 and 2010, to 9.8 million, or nearly a quarter of all the renters in the U.S. Extremely low income renters are defined as families that earn less than 30% of the median income in their metropolitan area. These people typically depend on government assistance to buy food and health care as well. But the danger with these types of renters is that after paying their rent, these households will have less than 50% of their income remaining to spend on food, medicine, transportation and childcare.

“What we’ve seen is a decline in the homeownership rate since 2008, and we’ve seen rent being pushed up,” pushing market-rate housing out of reach for an increasing number of people, said NLIHC chief executive Sheila Crowley in an interview. The gap between supply of affordable rental housing and demand from extremely-low income borrowers exists in all 50 states, but the problem is worst in Arizona, California, Florida, Nevada, Oregon, Texas, Utah and Michigan. “Where you have the biggest problems is where you have the biggest difference between rich and poor,” Ms. Crowley said.

The imbalance comes at a time when the federal government, hobbled by budget deficits and deadlocks in Congress, is unlikely to increase its support for poor renters. In its projected 2013 budget, the U.S. Department of Housing and Urban Development showed that it was requesting just $2 billion for the production of affordable housing for low- to extremely low-income families and disabled people, and reported that there is a $26 billion shortfall in the agency’s capital needs.

“There’s no doubt that there’s a gap, and it’s significant, and it’s getting worse,” said Becky Koepnick, an advisor to HUD Secretary Shaun Donovan. About 2 million low-income renters have gotten housing through the Low Income Housing Tax Credit, a Treasury and IRS program launched in the mid-1980s, Ms. Koepnick noted, but that program is not targeted at the lowest-income renters that the NLIHC is focusing on.

The bottom line is, as more and more low-income people demand inexpensive rental housing, the market and the government are increasingly unable to meet their needs, the NLIHC says.

Of course, many low-income people turn to government programs other than publicly-built housing, such as rental assistance and housing voucher programs. But the other big fear is that more people will fall into homelessness or be forced to double up with family members or live in substandard conditions.

The NLIHC also called for funding to be given to the National Housing Trust Fund, a HUD program established in 2008 to produce more low-income housing that has yet to be funded.

The National Association of Home Builders said Wednesday its housing market index climbed to 29 from 25 in January. The increase, the fifth in a row, lifted the index to its highest since May 2007. Economists polled by Dow Jones Newswires had forecast a reading of 26.

All three components of the builders’ index increased. Builders’ assessment of traffic from potential buyers, current sales conditions and expectations for sales over the next six months all reached the highest point since mid-2007.

To be sure, the reading remains low. A number above 50 in the NAHB index would show more builders view conditions as good rather than poor. And keep in mind that the reading remains well below the boom, when numbers hit the high 60s and 70s. Of course, it is much better than the depressing eight seen in early 2009.

Builders have been through a lot in recent years and they know headwinds remain. Bargain-priced foreclosures continue competing for new-home sales. Buyers, even ones with solid credit scores, are also having trouble securing mortgage funds from jittery lenders. Meanwhile, while unemployment is no longer sky-high, plenty of Americans remain out of work or under employed.

Still, today’s reading put some pep in builder stocks: No major public builder shows a loss. Shares of Beazer Homes USA and Hovnanian Enterprises Inc. are up nearly 5%. KB Home and Standard Pacific have gained more than 3%.

Is this report a head fake or a true sign of recovery? Here’s what industry watchers had to say:

• Cooper Howes, economist, Barclays: “While the absolute levels of the headline index are still low compared with the history of the series, we see this report as consistent with our view that housing will not hinder economic recovery in the same manner that it did at the end of the last recession.”

• Joshua Shapiro, chief U.S. economist, MFR: “The next few months will be critical in determining to what degree homebuilders follow their more optimistic talk with action. While some improvement in starts seems likely (particularly in January on the back of unusually mild weather in much of the nation), we continue to believe that the massive supply overhang of existing homes will present brutal competition to the new home market for the foreseeable future, and therefore it is unlikely that single family housing starts will make sharp gains from current rates anytime soon.”

–Jeff Bater and Alan Zibel contributed

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The deal is among the largest real estate transactions ever for CPPIB, which oversees roughly $153 billion of assets, including $14.4 billion of real-estate investments. Sydney-based Westfield, which owns 55 malls in Australia and New Zealand and 55 in the U.S., will continue to manage the 12 properties as their majority owner.

The deal amounts to an initial annual yield of 5.6% for CPPIB, with the portfolio valued at $4.8 billion. Included in the portfolio are Westfield Annapolis in Maryland, Westfield Topanga in Los Angeles and Westfield Southcenter in Seattle.

The malls generate average annual sales per square foot of $456 with average occupancy of 93.4%. The portfolio carries roughly $600 million of debt, of which CPPIB will assume a 45% share.

Also on Tuesday, Westfield announced it is selling its stake in three U.K. shopping centers for $240 million and that it will buy back up to 10% of its stock. Westfield is still trying to sell 17 lower-quality malls in the U.S., and Starwood Capital remains a bidder for some of those, according to a person familiar with the matter.

Mark Battrell Photography Inc.

Jacques Gordon, of LaSalle Investment Management

With Europe in economic turmoil, Developments asked Jacques Gordon, global investment strategist, LaSalle Investment Management, what the debt crisis could mean for commercial real estate in the United States. A subsidiary of Jones Lang LaSalle, LaSalle Investment Management manages $43 billion in real-estate investments for pension funds, insurance companies, governments and individuals.

This exchange has been edited for clarity and length.

WSJ: How will the European debt crisis affect U.S. real estate?

Mr. Gordon: We expect going forward the biggest impact will be on office tenancy. It’ll be modest. We expect downsizing of European banks and financial companies on the East Coast in cities like Boston and New York.

WSJ: What about the impact on U.S. credit markets?

Mr. Gordon: As far as the ripple effect in terms of credit contraction happening here the way it’s happening in Europe, we don’t see that. There’s a very severe credit contraction going on in all industries in Europe and real estate industry is getting hit hard. Major lenders in Europe are shutting down their real estate lending desks. Very little lending is going on except for prime properties and prime borrowers. The question being, with that massive credit contraction which is almost at the 2009 level intensity in U.S. terms, would that come over here? We’ve looked at that and we don’t see that.

WSJ: Why not?

Mr. Gordon: European lenders after the financial crisis never came back here in a significant way. European lenders had a large market share in terms of 2002 and 2005 time frame. But in 2010 and 2011 they pretty much folded up shop….Also, our subprime debt was bought by German and French banks. I don’t think the reverse is true. I don’t think American lending institutions have lent to empty office buildings in Greece or condos in Madrid or Italian shopping centers. American lenders if anything got overexcited about lending here to residential but they did not get overexcited about Europe.

WSJ: Do you agree with the notion that the European debt crisis was one of the reasons U.S. real estate investment sales slowed in the second half of the year?

Mr. Gordon: I would put Europe’s problems in the top two reasons. I’d probably say our own downgrade in our government debt and concerns about U.S. debt market were also a factor. My sense is a lot of the nervousness just in the last 45 days is starting to lift again.

WSJ: Does the debt crisis pose a challenge in 2012 for top-tier U.S. markets that have relied on foreign investors for investment sales?

Mr. Gordon: I’d say no. There are other sources for money that are not European, such as Korean money and other sovereign wealth funds outside Europe. Norway is just getting started. I don’t see that the pullback of German money, which was a predominant source of investor capital, will change pricing in our iconic properties because there are other buyers. Also German international funds are still getting modest levels of investments so they do not have pressure to sell.

WSJ: Are any pockets of the U.S. real estate markets benefiting from European distress?

Mr. Gordon: The fall in the euro has helped European exports. French, German and Italian goods are coming in at levels that are almost back up to pre-2008 levels. So European occupiers of office space in U.S. may be shrinking but European providers of goods and occupiers of retail spaces may actually be increasing. It’s too early to tell if there’s going to be a real trend there but our own observation is European goods in shopping centers we run are all doing very well.

WSJ: Do Europe’s problems provide real-estate investment opportunities for U.S. investors?

Mr. Gordon: As the U.S. real estate market continues to recover….more North American investors will start to look to Europe for enhanced returns. It might not be a part of the world that’s growing but it’s a part of the world where mezzanine debt is scarce. Banks are not willing to lend more than 50%. So as loans come due, the borrower has to do something, either pay down the loan or refinance it. I think a lot of American investors are looking at that opportunity. I think it’s a good one. It certainly gives a yield that’s three or four times higher than buying the underlying real estate…The idea that Europe is an economy or civilization in perpetual decline is not correct. In the last thirty years we’ve seen a lot of positive surprises.

So-called option adjustable-rate mortgage bonds returned 6% in January alone, according to J.P. Morgan Chase & Co. That’s triple the return on subprime RMBS and about twice that of bonds backed by prime jumbo loans. It also was enough to erase the losses those “option ARM” securities suffered in 2011.

The performance of option ARMs is remarkable because the underlying loans let borrowers roll part of their monthly interest into the principal, increasing loan balances when home values were plummeting. The resulting loss of equity is a risk because borrowers could just walk away from homes if they become worth less than the balance on their loans.

But investors are finding things to like about the securities. One was prices well below 50 cents on the dollar after the slide last year. Another is that analysts think homes financed with option ARMs may hold their value better than other parts of the market. Most of the 5.5 million homes that could be dumped on the market after foreclosure will direct pressure on lower-cost properties, worth $299,000 or less, not on those tied to option ARMs whose average balance is about $450,000, said John Sim, a strategist at J.P. Morgan Chase.

“There’s a belief that higher-priced homes are not under the same supply pressure,” said Mr. Sim. That may make them more sensitive to a market rebound. “If you believe in a recovery, there are reasons to believe that (option ARMs) might do better.”

One perverse reason to like option ARMs is that so many are deeply under water, which means the homes are worth far less than the loan balance. Some investors may anticipate they could benefit from principal reductions pushed by the government, Mr. Sim said.

The reversal of fortune for option ARMs has come as U.S. economic data fuels hopes that the housing market is near a bottom, and as investors grow more confident that Europe’s debt crisis will subside. Trading in private RMBS has surged this year and has led Wall Street to wake from a six-month slumber and bid for parts of a Federal Reserve Bank of New York portfolio, which has included option ARMs.

Option ARM bond prices climbed to 50.33 cents on the dollar as of Jan. 31, from 47.85 in December, J.P. Morgan data show. Despite double-digit gains in derivative indexes, subprime bonds were little changed at just above 28 cents on the dollar, J.P. Morgan data shows. Both have gained about a cent on the dollar this month.

Other pricing sources indicated bigger gains in the cash market.

With $166 billion outstanding, option ARMs are one of the smaller parts of the market for bonds issued by private issuers during the housing boom. Another $386 billion are subprime, with the majority in bonds supported by prime jumbo loans and mortgages to borrowers with limited documentation.

Hernandez-Eli

Click for ‘before and after’ photos.

The workers have packed up their tool boxes, and hauled away their saw, drills and some dusty bags of grout. They’ve left behind a renovated apartment.

The gut renovation of our Queens apartment is done. We’ve moved in, unpacked most boxes and begun to turn this strange place that was for so long a construction site into a home.

Oddly, I’m already feeling the renovation hubbub’s absence.

Since August, my days and nights have been consumed with the make-over. I obsessed over the finish of subway tiles, the dimensions of the refrigerator, the look of lights. I exchanged a blizzard of emails and texts to our architects and contractor over choices like a nice-but-affordable toilet.

During off hours, I ventured over to the apartment, eager to see the latest bit of progress, from the sight of the shower drains to the hanging of kitchen cabinet doors. Often, I brought my young son, who tiptoed into his bedroom closet and smiled at the mention that this dusty mess of a room we were standing in would soon be his.

The renovation was always stressful: We had a tight budget, short timeline and I’m naturally indecisive confronting decisions. (And, boy, are there a lot of decisions.)

It all became a regular part of my life. The architects, the contractor and his workers even became a kind of social circle. The contractor, Halit Dervishaj, told me his life story while replacing the kitchen floor, starting with his escape from Kosovo during the Balkan Wars. Over dinner and drinks, my wife Sumathi and I traded stories of meeting, dating and getting married with the two architects, Juliet and Jhaelen Hernandez-Eli.

A highlight was a trip with the contractor and architects to a nondescript stone warehouse in Queens. It was a cold day. I ran my fingers over the various stones that could be our countertop. I watched a bulky machine loudly cut granite. At first sight, I loved the dark, veined slab that a crane hoisted into view and is now ours.

What I came to appreciate is why some friends are serial renovators. There is something appealing, alluring, even addictive about taking a space and making it your own. For me, it was the adult version of an early childhood dreaming of, and then sketching out, fancy spacecraft, high-tech cities and intergalactic civilizations.

We had an idea for a home, and with the generous help of the architects and contractors, the support of family and friends and the tolerance of neighbors, we created it.

Here are five new products we took note of while wandering the floor last week at IBS 2012:

Kohler’s Numi toilets: For a cool $6,400, you can have a toilet that sings to you, warms your legs, washes your underside with multiple streams of water, and remembers your favorite settings for when you return. The Numi was introduced by Kohler last year as the companies “most advanced” commode. Other models made by Kohler range from $150 to about $1,000, but the Numi, which the company says was influenced by high-tech toilets from Asia, comes with a steep price tag because of all the bells and whistles. In addition to an iPod-ready stereo system (sound comes off speakers on the rear of the toilet), leg-warming porcelain, ground lighting and multiple bidet settings, the Numi is designed so that you never have to touch it. Instead, motion sensors and a remote control open its top, prepare a comfortable seat and flush it for you. It’s the singing, warming robot toilet you never knew you needed. (Oh, and there’s this sexy ad campaign, shot in Los Angeles last year.)

BluWorld iAqua water walls and countertops: Ever wish your home was more like a Japanese steakhouse? Orlando-based BluWorld, which makes decorative indoor water fountains and fireplaces, had a cool line of flat, upright water walls, which are transparent, flat screens through which rivulets of water and bubbles cycle up and down. You can almost hear the smooth jazz playing. One of them even had a flat-panel TV screen installed in it, so that you can watch TV as if through a rainstorm. These walls — particularly the iAqua, a “bubble panel” filled with distilled water and lighted with color-changing LED lights — can be flipped over horizontally and used as a countertop, which would give homeowners the smoothest basement bar ever.

Progress Lighting’s Bingo lights: In addition to making hundreds of fairly normal-looking light fixtures, Progress makes these circle-shaped compact fluorescents, which when strapped to a wall give off a nice ambient glow. They provide a cool effect, as Developments discovered when visiting IBS’s staging homes.

Beach house-style walls and furniture: In one of the IBS houses at rear of the convention center, we noticed a trend being pushed for new-home builders: surf-shack style materials being used for walls and cabinets. These fixtures, including pine siding by the Chilean company Arauco on the inside of a house, and 1950s-style cabinets by Merillat, have clean symmetrical lines, often with distressed-wood finishes. The result is a really charming look that evokes summer, the country and sunshine.

Savant home automation with iPad: For a few years now, builders have been pushing systems that allow homeowners to program their TV, turn on a thermostat, or shut off the lights remotely using their smart phones. But those systems almost always use proprietary computer software and expensive hardware. Massachusetts-based electronics company Savant last year launched a system that allows you to monitor energy consumption, raise and lower window shades, adjust heating and HVAC settings, and control appliances using an iPad. Not the most necessary feature, but certainly a fun one.