Down-Payment Woes

In yet another tightening of mortgage lending, HUD has proposed the elimination of seller-funded down-payment assistance programs for loans insured by the Federal Housing Administration (FHA).

HUD has always prohibited sellers, including builders, from giving money for down payments directly to FHA borrowers, who are required to put down at least 3 percent of the purchase price. However, under current regulations, gifts are allowed from friends and family, employers, labor unions, and government agencies, as well as charitable organizations, which has led to the establishment of dozens of groups such as the Sacramento, Calif.–based Nehemiah Corporation of America.

Many of these organizations work directly with sellers, including builders. Under the seller-funded down-payment assistance model, the charitable organization provides a gift to the buyer to use for his down payment; that gift is then reimbursed by the seller, which also pays the organization an administrative fee. In the last decade, such organizations have helped 600,000 families buy homes, says Scott Syphax, president and CEO of Nehemiah.

Under the new regulation, the donation to the charitable organization could not come from the seller, “any other person or entity that financially benefits from the transaction, or any third party or entity that is reimbursed directly or indirectly” by the seller, the proposed ruling states.

It's certainly not good news for home builders, especially those that cater to entry-level buyers. Steve Palmer, CFO of Atlanta-based Bowen Family Homes, says that without down-payment assistance or the availability of 100 percent financing, 40 percent to 50 percent of first-time home buyers wouldn't qualify.

“With the meltdown of the sub-prime and alt-A markets, the loss of these programs without a true 100 percent FHA financing product to replace them would be devastating to the starter home–buying market,” Palmer says.

This is the second time in eight years that HUD has tried to do away with seller-funded down-payment assistance on FHA loans. HUD officials declined to comment about the proposed regulation during the 60-day public comment period, but provided detailed background information on its reasoning.

In congressional testimony earlier this year, HUD's inspector general, Kenneth Donohue, cited a 2005 General Accounting Office report that said the probability of default on FHA loans with seller-funded down-payment assistance was 76 percent higher than comparable loans without it.

A HUD study of the programs also cites concerns about inflated appraisals and sales prices to cover the seller's down-payment contribution and a tendency for buyers to not receive counseling that would help them make the transition to homeownership.

Syphax says his organization has tried to get HUD to address those issues over the years, with no success. With the increased number of defaults on exotic loans normally marketed to subprime borrowers, this isn't the time to eliminate seller-funded down-payment assistance, he says.

“Part of the irony of trying to kill off Nehemiah-style down-payment assistance is that funding for working families is drying up,” Syphax says. “One of the last successful programs is becoming increasingly the only game in town, and that's when the federal government tries to close the last door to opportunity for folks who have no other options.”

Well, maybe not the last door. The proposed rule doesn't ban assistance from charities that receive their funding from parties with no financial interest in the transaction. The Housing Development Fund in Stamford, Conn., for example, gets its down-payment assistance money from state, federal, and philanthropic sources. The organization avoids seller-funded assistance because it doesn't benefit the buyer, says Joan Carty, president and CEO of the Housing Development Fund.

“There's a lot of pressure to bring in an appraisal to meet the assistance [when it is seller-funded],” she says. “It's a rush job. There are additional fees and transactional costs and not enough checks in place.”

Regardless of whether HUD adopts this regulation, seller-funded down-payment assistance more than likely will disappear. The Internal Revenue Service ruled in 2006 that seller-funded down-payment assistance programs aren't charities for tax purposes; the process of examining those groups' tax-exempt status is already underway.

The Home Depot must now reassess how it can capture more business from pro customers through its retail stores after agreeing to sell its HD Supply business unit for $10.3 billion to an investment consortium that includes Bain Capital, The Carlyle Group, and Clayton, Dubilier & Rice. Last year, HD Supply generated $12.1 billion in revenue from nearly 1,000 branches nationwide that provide goods and services to residential and commercial contractors. The Home Depot, the industry's largest home-improvement retailer, projected that HD Supply would expand to between $22 billion and $25 billion by 2012, but the division's selling price fell below the $13 billion some analysts thought it might fetch.—J. Caulfield

The housing industry lost two highly respected analysts in recent months when Margaret Whelan and Ivy Zelman stepped away from the business. Whelan, who left her post as managing director at UBS' Consumer Group, where she tracked housing industry stocks, moved to J.P. Morgan Chase in July. She'll continue to watch the housing industry, but as an investment banker. Zelman resigned in June as managing director at Credit Suisse, where she also served as an equity research analyst covering 22 housing industry companies. At press time, Zelman had not publicly announced her next business venture.—E. Butterfield

Florida remains the top location for retirees, but Texas has overtaken Arizona and California for the No. 2 spot. That's from a recent study from the North Carolina Center for Creative Retirement, a nationally known center for tracking retirement migration trends. According to the study of 2005 U.S. Census data, Florida attracted 16.6 percent of retirees, down from 19.1 percent five years earlier. Texas drew 6.8 percent of retirees, who were attracted to the state for its good weather and low cost of living.—P. Curry

Indymac Bank is rewarding builders for good behavior with BUILDER Encore, a relationship-based loan approval program that offers increased loan amounts and other incentives to repeat customers with a history of strong financial performance and adherence to project timelines. The program's online project-tracking and disbursement system allows quick access to loan funds and is automated to expedite repeat loan applications. Visit www.indymacbuilder.com.—J. Sullivan

As the housing market slows, more investors are dumping real estate holdings and making the switch back to stocks. Real estate “isn't as lucrative as it used to be,” says Jack Patterson, a financial adviser in Coral Gables, Fla., so exchange-traded funds and mutual funds are looking like better options. This switch from real estate to stocks is part of the natural cycle investors go through, first loving an investment class then hating it, says Robert Shiller, a Yale professor of economics.—N.F. Maynard

SOURCE: USA TODAY

Home builders used to pump Frank Sinatra's music into the model homes of their active adult communities. Now that the first baby boomers are past 60, the in-house soundtrack is playing tunes like The Beatles' “Hello Goodbye.” Also gone are golf courses, replaced by smaller neighborhoods and jogging trails. There are no peace signs or lava lamps at Pulte's newest 55-plus community in Elk Grove, Calif., but a flat screen TV plays the 1969 movie “Butch Cassidy and the Sundance Kid.”—S. Zurier

SOURCE: SACRAMENTO BEE

What do homeowners want most in a window? In a recent online survey of more than 25,000 homeowners, conducted by New York City–based Ventura Associates for Simonton Windows, 72 percent of respondents rated energy efficiency (and specifically Energy Star status) No. 1, followed by low maintenance (11 percent), and security (6 percent). Energy efficiency also ranked as the top concern among homeowners interested in window replacement when the same survey was conducted in 2006.—J.S.

Florida Hometown Democracy, a grass-roots organization, has been gathering signatures for a state constitutional amendment that will require voter approval before any changes are made to Florida's comprehensive land-use plans. “Too many county and city commissioners just cannot say no to comprehensive plan amendments that are destructive to a community's well being,” says co-organizer Lesley Blackner, on its Web site. But in a widely published critique, Leonard Gilroy, an adjunct scholar of The James Madison Institute, a policy center in Tallahassee, Fla., writes that this “anti-growth” group's agenda is a threat to Florida's long-range economic health at a time when the state expects to add nearly 13 million more people by 2030.—J.C.

Give Away

The Home Depot pledges money for housing and trees.

Over the next 10 years, The Home Depot Foundation will distribute grants totaling $100 million to help nonprofit groups develop and build 100,000 affordable, energy-efficient homes and plant and preserve 3 million trees in urban areas.

“We believe in creating environments—both inside a home and outside in a community—that contribute to the financial stability, personal success, physical health, and overall well-being of our neighbors,” Kelly Caffarelli, executive director of The Home Depot Foundation, said while announcing the funding.

The Home Depot launched the foundation five years ago to support the building of affordable homes and has given away grants totaling $30 million. But the new increase signals a shift, Caffarelli says. It is a “statement of our commitment,” but it is also a challenge to its nonprofit partners.

“We see the announced increase as an opportunity to challenge our partners to do better—better building, more energy efficiency, more environmentally friendly housing,” she says. The foundation, she says, is interested in housing that is healthier for the long term.

Grants—which will be approved by a 10-member board made up of The Home Depot's employees—will be issued three times a year, Caffarelli says.

To date, grant recipients include local and national nonprofits involved in housing and tree-planting activities, such as Enterprise Community Partners, Alliance for Community Trees, Global Green USA, and affiliate chapters of Habitat for Humanity.

Those interested in applying for grant money from the foundation should visit the foundation's Web site at www.homedepotfoundation.org. - Nigel F. Maynard

Half a Loaf

A Florida real estate firm offers builders a way to get assets off their books until their market rebounds.

The award for “most chutzpah during the housing downturn” could go to The Cypress Co., a St. Petersburg, Fla.–based real estate company that is offering to purchase land lots and unsold homes for 50 cents on the dollar.

Armed with a $2-billion acquisitions kitty (including $226 million of its own money, $520 million in outside equity, and a $1.5 billion credit line), this spring, Cypress sent 250 letters to potentially interested parties, including 60 of the largest shareholders of the 25 largest builders, as well as those builders themselves. It has been offering to purchase inventoried lots and homes for half of their appraised value, less interest carrying costs, plus a $5,000 fee. “Our protocol would give these companies an opportunity for an immediate cash infusion,” explains Blake Whitney Thompson, Cypress' general counsel. Sellers would also have the opportunity to get distressed assets off their books while the market sorts itself out. A builder or developer could repurchase its homes or lots from Cypress at any time over a three-year period for the sold price plus 10 percent.

Most big builders gave Cypress' offer the cold shoulder initially, but a small story in the The Wall Street Journal seems to have stimulated interest.

By mid June, Cypress was weighing several deals: one for 7,700 lots from a joint venture that involves a public and private builder; the second for 23 spec homes; and a third for 75 completed homes in two subdivisions, as well as a $390,000,000 deal in the Southwest for 9,000 lots and a $280,000,000 deal in the Midwest for 1,150 lots and houses. Thompson wouldn't identify the names of those prospective sellers, but he claims that Cypress has also been approached by consultants about whether it would be interested in operating large-scale home building companies “that are upside down.” - John Caulfield

Estate Sale

Seemingly unaffected by the turbulent economy, the ultra-wealthy are buying bigger, more expensive properties than ever.

Whatever the current state of the economy, the world's rich are getting richer and are spending more and more on lavish estates.

And 2007 could be a banner year for sales of luxury homes, regardless of how the rest of the housing market fares. Sales of homes priced above $5 million surged 18 percent in 2006 from 2005, and were up 31 percent in the first quarter of 2007 from 2006 levels, according to John Karevoll, chief analyst with San Diego–based DataQuick Information Systems.

The record for the most expensive home sale in U.S. history fell in May when financier Ron Baron bought a 40-acre oceanfront property in East Hampton, N.Y., for $103 million from Adelaide de Menil, heiress of the Schlumberger oil fortune. Baron did not even want the existing homes on the site—he donated them to the town of East Hampton to make room for his planned estate.

The previous U.S. record for home sale price was set in 2004 by the $70 million sale of financier Ron Perelman's estate in Palm Beach, Fla.

With at least five U.S. homes currently on the market for $100 million or more, Baron's record buy could fall at any time. Among the for-sale properties are Donald Trump's $125-million Palm Beach oceanfront mansion; a Saudi prince's $135-million Aspen, Colo., retreat; and a $155-million 55,000-square-foot spec home being built at the members-only Yellowstone Club in Montana by developer Tim Blixseth, according to the Dallas–based Institute for Luxury Home Marketing.

The current international sales price record is $128 million, set by steel magnate Lakshmi Mittal's 1997 purchase of an estate in London, England.

Leading the charge in the purchase of ultra-luxury homes are wealthy individuals working in the financial services industry, says Mark Zandi, chief economist at Moody's Economy.com.

“Their wealth has gone skyward; everything's been going right for them in recent years,” Zandi says. - Ethan Butterfield

Conceptual Thinking

HUD explores building technology and sustainability in its first concept home.

HUD is hoping that the energy-efficient concept home it built in Omaha, Neb., will be a blueprint for the future of American housing.

“In the past, we have worked with builders to do field evaluations of three or four building technologies,” says Michael Blanford, project manager of the concept home. “But we wanted to make a statement, so we put many of these features into one house.”

Built under the agency's Partnership for Advancing Technology in Housing, the house features more than 60 efficient and sustainable products and systems. In addition, it is built to incorporate flexible floor plans; efficient organization of systems to provide easy access to repairs, upgrades, and remodeling; and improved production processes.

The home features insulated concrete-form basement walls, prefabricated floor systems, and panelized building that improves production. It has a graywater system, sealed ducts, soy-based expanding foam insulation, and tankless water heaters, among many other green and sustainable features. In fact, the house meets the requirements for both the LEED and Energy Star rating systems.

“The house is a concept house so we realize that no builder will be able to include all of these in a single house,” Blanford admits. “But there is enough here that builders can learn from.”

Designed by Silver Spring, Md.–based architectural firm Torti Gallas and Partners, the 2,100-square-foot house will eventually be sold. HUD's next PATH Concept Home will be built in Charleston, S.C., and will focus on withstanding hurricanes, flooding, and termites.

For more information on the concept home, visit www.pathnet.org. - Nigel F. Maynard

Emissions Dispute

A California builder trade group asks the state's attorney general to reconsider a controversial lawsuit over land-use plans.

The California Building Industry Association (CBIA) held a private meeting in May with state Attorney General Jerry Brown to discuss its concerns about a lawsuit filed by his office, which seeks to require San Bernardino County to rewrite its land-use plan to take into consideration the impact of development on greenhouse gas emissions.

The lawsuit comes on the heels of Brown's efforts to take on the federal EPA over tailpipe emissions and six lawsuits over development in California similar to the one against San Bernardino County, the bulk of which were filed by the environmental group Center on Biological Diversity.

Builders are miffed that Brown used a lawsuit to require San Bernardino County to adjust its 25-year land-use plan to comply with AB 32, a law signed last year by Gov. Arnold Schwarzenegger that requires a 25 percent reduction in greenhouse gas emissions statewide by 2020.

“How is the county supposed to establish a plan that people have to follow with no guidance, no policy, and no instructions on what to mitigate?” asks Tim Coyle, CBIA's senior vice president of governmental affairs, who adds that the state Air Resources Board isn't required under AB 32 to issue regulations until 2012.

Coyle says that, while the meeting with Brown was positive, CBIA will continue to fight any efforts to prematurely implement AB 32 through activist lawsuits. - Steve Zurier

Grassroots is Greener

McStain puts new homes in old neighborhoods—one by one.

Mcstain Neighborhoods' commitment to sustainability has long been evident in large-scale redevelopment projects such as Stapleton and Lowry, and, more recently, in its introduction of solar homes to TNDs in and around Denver.

Now the Louisville, Colo.–based builder/ developer is taking its green ethos to the grass-roots level with the launch of the McStain Collection, a scattered site–infill venture that will compete with smaller builders for teardown projects in the city's most venerable, old-growth neighborhoods.

It's an unorthodox move for a company that closed more than 300 homes in 2006 and ranks among the nation's top 200 builders, but one that CEO Eric Wittenberg sees as consistent with McStain's founding principle (and tagline) of “Building a Better World.”

“Resale has always been our largest competition,” he observes. “Our thought is that if we ramp up to doing 10 to 15 of these infill homes annually, we'll be able to eliminate one greenfield project per year.”

The first five homes in the pilot are spec houses, but the long-term “urban intensification” strategy anticipates fee-for-service contracts with homeowners wanting to teardown and build new. New homes in the collection have been designed to meet specific setback and height limit requirements on the standard 50-foot-by-125-foot lots found in older Denver neighborhoods.

With its portfolio of traditional Craftsman, Tudor, farmhouse, and colonial elevations, the McStain Collection honors history, but also improves upon it with homes that are Colorado Built Green, Energy Star–rated, and, in some cases, armed with three-kilowatt photovoltaic systems that feed power back into the grid.

“We feel we can bring something to the marketplace that no one else is offering,” says Brian Tippett, director of neighborhood land management for McStain. “We aren't just doing one or two houses a year. We have expertise in sustainability, we stand behind our product, and we have a strong track record.” - Jenny Sullivan