By Jeannine Aversa, AP Economics Writer

Federal Reserve Taking Rarely-Used Steps to Steady Shaky Financial Sector

WASHINGTON (AP) — The Federal Reserve is primed to aggressively cut a key interest rate even lower on Tuesday, racing to contain spreading financial fires that threaten an economic meltdown.President Bush declared “we’re in challenging times” and huddled Monday with top economic officials — including Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.

On Wall Street investors were still skittish. The Dow Jones industrials, in an erratic session, closed up 21.16 points, after having plunged nearly 200 points early in the day. Other stock indexes fell.

With the quick collapse of the investment bank Bear Stearns, fears are mounting about whether other financial companies may fall. Many believe the country has already sunk into recession and all the problems — if not contained — will deepen and prolong the pain.

“The Fed is on high alert — something you don’t see but once every quarter century; maybe, in this case, since the Great Depression. This is a very unusual period,” said Mark Zandi, chief economist at Moody’s Economy.com.

That’s because the Fed is having to fight multiple battles at the same time: a housing collapse, a severe credit crunch and Wall Street turmoil that threatens the stability of the entire U.S. financial system. All those problems feed on each other, creating a vicious cycle that can be hard for the Fed and other Washington policymakers to break. The weight of those troubles is like a millstone on the ailing economy.

“Now the issue is fighting the deeper recession,” said Brian Bethune, economist at Global Insight. “It has kind of moved to another level. The fires are spreading,” he said.

To limit the damage, Bernanke and his colleagues may ratchet down a key interest rate, now at 3 percent, by as much as a full percentage point, to 2 percent, which would put that rate at the lowest it has been since late 2004. Because that rate affects a wide range of rates charged to millions of consumer and businesses, it is the Fed’s most potent tool for reviving economic activity.

If that happens, commercial banks’ prime lending rate on certain credit cards, home equity lines of credit and other loans would drop by a corresponding amount to 5 percent, from 6 percent currently. The Fed’s goal, since embarking on a rate-cutting campaign in September, is to induce people and businesses to boost spending, thus bolstering the economy.

However, with the panicky mind-set that has swept over investors since last summer, credit — even at a lower cost — has become harder and harder to get as financial institutions, which racked up huge losses due to soured investments in mortgage-linked securities, became increasingly wary of lending and hoarded cash. So the Fed took a series of other unconventional maneuvers to deal with those problems and to restore confidence.

The Fed, in a bold action on Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. The new lending facility — similar to one that’s been available to commercial banks for years — started Monday and will continue for at least six months. It marked the broadest use of the Fed’s lending authority since the 1930s.

Also Sunday, the Fed approved a $30 billion credit line to engineer the takeover of Bear Stearns.

Senate Majority Leader Harry Reid, D-Nev., was critical. “The Federal Reserve’s latest actions appear to shift large risks to taxpayers, who may find themselves on the hook for billions in worthless securities.”

Countered Paulson: “Bear Stearns had a liquidity crisis, and so we felt it was very important that this be resolved as a way to minimize impact on our economy … This is the right outcome.”

Democrats accused Bush of not doing enough to relieve the broader economic situation.

“Now we are in the soup and we better get ourselves out of it before the consequences get drastic,” Democratic presidential contender Hillary Rodham Clinton told reporters. Barack Obama said: “History will not judge President Bush kindly for his failure to act in a way that could’ve prevented or alleviated this economic crisis.”

House Speaker Nancy Pelosi, D-Calif., who is advocating extending unemployment benefits and other relief measures, said “more must be done to begin to reverse the economic mismanagement of the past seven years.”

The new lending facility — described as a cousin to the Fed’s emergency lending “discount window” for banks — is geared to give financially-squeezed major investment houses a source of short-term cash on a regular basis.

That’s important because those big investment houses have key roles in the financial system. If one fails or is having difficulty, it could put the whole financial system in jeopardy. These big firms have complex relationships with many players in the system, including hedge funds, commercial banks and others.

A range of collateral — including investment-grade mortgage backed securities — will be accepted to back the overnight loans. The Fed also on Sunday lowered its emergency lending rate to banks — and now to big investment houses — by a quarter-point to 3.25 percent.

“These steps will provide financial institutions with greater assurance of access to funds,” Bernanke told reporters in a conference call Sunday evening. Bernanke, a scholar of the Great Depression, has been stretching for innovative ways to deal with the credit and financial crises.

The Fed has the power “in unusual and exigent circumstances” to expand emergency lending to other types of companies and even to individuals if they are unable to secure “adequate credit” from other banking institutions. Thus, economists said there’s the possibility that — if current relief maneuvers weren’t sufficient — the Fed could extend emergency credit to a wider variety of recipients.

The Fed acted on Sunday just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world’s largest and most venerable investment houses. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

The flurry of unconventional steps may risk putting the public into a more skittish frame of mind, some said.

“It all kind of sends a conflicting message — making people more nervous,” said Bethune. “Why is the Fed every week coming out with another major injection of liquidity or a bailout? What are they doing in Washington?”

In communicating with Wall Street and Main Street, sometimes fewer public utterances by Fed officials may be prudent during turbulent times. “Some talk is best left with your wife over a glass of wine in the evening,” Bethune said. “Talking publicly sometimes is not the way to go.”

Associated Press writer Ben Feller contributed to this report.

Mar 6th, 2008

Home values have declined across the country, giving homebuyers the best buys they’ve had since 2004.

NEW YORK (CNNMoney.com) — It may be the best time to buy a house in more than four years.

Home prices have dropped so quickly and so far that valuations - the difference between what a home should cost and its actual price - are the lowest they’ve been since 2004, according to a report.

The Cleveland-based bank National City Corp. (NCC, Fortune 500), together with financial analysis firm Global Insight, revealed Tuesday that more than 88% of the 330 housing markets surveyed showed price declines and improved affordability during the last three months of 2007.

Housing rescue: What you need to know

“Housing valuations are almost back to long-term norms,” said National City’s chief economist, Richard DeKaser. He called current affordability “the best in the past four years.”

But DeKaser cautioned that home prices could fall even further.

“This isn’t to say home price declines are over,” he said. “We could move below historic norms. By the end of 2008, housing markets could be broadly under valued.”

Prices still improving

There are still 21 housing markets, or 6% of those surveyed, that are severely over valued, including Atlantic City and Madera, Calif. That’s down from 56 overvalued markets at the peak of the housing bubble in 2006.

The report compares actual median home prices with what the authors determine are proper home values based on population density, relative income levels and interest rates, as well as historically observed market premiums or discounts, to determine whether markets are over or under valued.

The report also factors in market intangibles that make some areas more desirable places to live, and more expensive.

“Declines are no longer confined to once-frothy markets,” said DeKaser.

The survey covered home valuations during the last three months of 2007, but DeKaser pointed out there’s reason to believe that valuations are even more favorable for buyers today.

Price declines have continued into 2008 and interest rates, although they have inched up lately, have been steady or lower compared to late last year. There have even been wage gains; personal income rose 0.5% in December. Soaring foreclosure rates have added inventory to many housing markets, depressing home prices further.

The biggest gains in affordability occurred in California, Michigan and Florida, which are areas that have also been some of the hardest hit by foreclosures. Those states registered 43 of the 50 biggest price declines.

Bend, Ore. currently tops the overvaluation list. Home prices there were judged to be about 59% higher than their fair-market value. Miami, despite a median home price decline of 5.7% last year, is the most overvalued big city, by 44%.

All the best bargains were found in Louisiana and Texas. Houses in Houma, La. were under valued by 31.2%, according to the report. Dallas was the most undervalued big city, by 30%.

By Damian Paletta
From The Wall Street Journal Online

WASHINGTON — The nation’s top economic policy makers released their broadest blueprint yet for avoiding a recurrence of the credit crunch now threatening the economy.

“Regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it,” Treasury Secretary Henry Paulson said Thursday in a speech at the National Press Club.

The policy makers’ recommendations extend to nearly every niche in the credit markets — from mortgage brokers to the Wall Street firms that package home loans into securities, to the credit-rating firms that assess the risk of those securities, to the regulators who police the system.

Amid the housing market’s deepening slump, mounting defaults by cash-strapped homeowners and an upswing in foreclosures have made investors wary of mortgage-linked securities and have made those securities increasingly difficult to value and trade. That’s led to turmoil in global financial markets.

“We aren’t singling out any group of market participants, because…there were mistakes made by all,” including regulators, Mr. Paulson said in an interview yesterday, a day in which the stock market’s euphoria over the Federal Reserve’s latest initiative to free up the flow of credit gave way to some caution.

Mr. Paulson told The Wall Street Journal that the recommendations of the President’s Working Group on Financial Markets, which he leads, include strengthening state and federal oversight of mortgage lenders and brokers. The group also recommended implementing what he termed “strong nationwide licensing standards” for mortgage brokers, a move that will probably require legislation. (Read the group’s policy statement.)

The group also proposed directing credit-rating firms and regulators to differentiate between ratings on complex structured products and conventional bonds. In addition, it wants rating firms to disclose conflicts of interest and details of their reviews and to heighten scrutiny of outfits that originate loans that are enveloped by various securities.

Another recommendation from the panel is to push issuers of mortgage-backed securities to disclose more about “the level and scope of due diligence” and about the underlying assets of the securities. The panel also seeks disclosure of whether “issuers have shopped for ratings” — that is, have had to go to more than one credit-rating firm before getting the triple-A stamp of approval.

And the panel urged global bank regulators to revisit the latest version of bank capital requirements, known as Basel II for the Swiss city where they were negotiated, so that banks that take on risks hold sufficient capital. The panel also wants regulators to complete updated standards for how banks manage liquidity.

Federal Reserve Chairman Ben Bernanke called the recommendations an “appropriate and effective response to deficiencies in our financial framework that contributed to the current turmoil in financial markets,” in a release accompanying the working group’s policy statement.

Securities and Exchange Commission Chairman Christopher Cox said the agency will use its new authority to address rating agency issues to restore investor confidence. The group is made up of the heads of the Treasury, the Fed Board, the SEC, New York Fed and the Commodity Futures Trading Commission.

Many of the recommendations parallel those made by others, but the endorsement by top officials carries significant weight. They reflect a consensus of the Working Group, which includes the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Each agency has considerable sway over banks, investment houses and investors.

“We are going to be mindful when we implement it to not create a burden,” Mr. Paulson said. “But we think it’s very appropriate to lay out some of the causes and some of the steps that need to be taken…to minimize the likelihood of this happening again.”

The aim is to alter rules and incentives that led to excesses that are now painfully evident: years of lending and investing at prices that didn’t fully recognize the risks by institutions with inadequate capital cushions, the development of financial instruments so complex that even the most sophisticated investors didn’t understand them, and a deterioration in lending standards.

The proposals won’t be the last word. Discussions are continuing, but President Bush has given some indications of his strategy for dealing with the housing and mortgage crises. In an interview yesterday with Nightly Business Report on PBS, Mr. Bush was asked if he was ruling out using taxpayer money to aid struggling homeowners. “No, I haven’t said that. I just need to hear what the good plan is — and without having lasting long-term damage to the economy,” he said.

“I have heard about using taxpayers’ monies to buy empty houses, which I think would be a huge mistake,” Mr. Bush added.

“That plan doesn’t help homeowners. That plan helps lenders. And we want to help homeowners.”

The Treasury already has a number of private-sector advisory panels at work on the credit crunch, and plans to create more — including one focused on credit-rating firms — and will elaborate in the coming weeks on its proposals for reorganizing the federal bank regulatory apparatus. Congress has ideas of its own and so, inevitably, will the next president. Democrats are almost certain to say that Working Group plan doesn’t go far enough.

If markets and the economy continue to deteriorate, the administration and regulators may discover their proposals weren’t ambitious enough. But any further delay by the administration in publicizing its thinking about how to avert future crises might have left it at risk of losing the initiative, allowing Democrats, Wall Street or others to seize center stage in the debate about how to change policies, rules and practices.

Most of the Working Group’s recommendations wouldn’t require legislation — except for an as-yet undetailed proposal for regulating mortgage brokers — but could be implemented by regulators or the industry. Mr. Paulson, a former chief executive of Goldman Sachs Group Inc., warned that if the industry is slow to act, regulators would be more forceful, issuing new rules and seeking new authority, if needed, to provide guidance and evaluate progress.

In some areas, regulators intend to become more assertive immediately. The recommendations call on bank supervisors to give much more scrutiny to the due diligence, risk management, and risk awareness policies at banks. Regulators will be pushed to work more closely with the Financial Accounting Standards Board to revisit accounting issues and make sure that exposures at financial companies are properly measured “across business lines.”

The Working Group also called on regulators to be less reliant on credit-rating firms’ evaluations of risk.

Mr. Paulson, in remarks prepared for delivery today, repeated his call for financial institutions — not only banks but also government-sponsored mortgage giants Fannie Mae and Freddie Mac — to raise more capital and to revisit “dividend policies,” a thinly veiled suggestion they consider reducing dividends to conserve capital, so they can “continue to lend and facilitate economic growth.”

In a meeting with investors yesterday, Freddie Mac Chief Executive Richard Syron said his company wouldn’t raise capital unless that would benefit shareholders. In the long run, he said, “We expect to thrive for the benefit of our shareholders — and for the country.”

Some of the Working Group’s recommendations resemble those in legislation passed in November by the Democratic-controlled House of Representatives. For example, the House bill would also mandate a national registration system for mortgage brokers. One significant difference is the treatment of firms that packaged many of the mortgage-backed securities now deteriorating in value.

The House bill would assign liability to certain Wall Street firms and others (though not trusts or investors) who created mortgage-backed securities using loans which borrowers didn’t “have a reasonable ability to repay.” The Bush administration’s proposal doesn’t push legal liability onto Wall Street firms or the secondary market, but it does try to pressure them to act more prudently.

“The idea that investors can abdicate their responsibility and that they can be overly reliant on ratings is something that really didn’t wash in the past and won’t wash in the future,” Mr. Paulson said in the interview. “They need to do independent analysis, and they need a better understanding of risk. There is not a free lunch.”

The Working Group’s recommendations were hashed out over seven months by the different government bodies, including two lengthy meetings among top officials from each agency. On Saturday, March 1, Mr. Paulson and Mr. Bernanke huddled for half of the day with staffers to review details.

For much of the past year, the loudest complaints in Washington about the mortgage crisis were from consumer groups and Democrats who urged more aggressive government intervention to prevent home foreclosures. But this year, much of the consternation has come from financial institutions overwhelmed by losses and write-downs.

U.S. and foreign regulators have launched multiple initiatives to try to quickly document lessons learned from the current market turmoil. A review released last week by bank supervisors from the U.S. and four other countries called for enhanced and tested risk-management policies at big financial institutions. The Basel Committee on Banking Supervision is developing new guidelines to encourage banks to have better contingency plans for liquidity. And U.S. officials are working with their counterparts in the international Financial Stability Forum, chaired by Italian central banker Mario Draghi.

Mr. Paulson also is planning to encourage the development of a domestic market for “covered bonds,” bonds issued by banks that are secured by mortgages. Popular in Europe, these could be an alternative to securitization. When mortgages are securitized, they generally leave bank balance sheets and banks don’t hold capital against them; covered bonds remain on bank books, and banks must set aside capital to back them.

By Jim Carlton
From The Wall Street Journal Online

More builders are adding “green” features to their new homes. It is a strategy born out of necessity.

In October, the Trilogy division of Shea Homes rolled out a program dubbed Shea Superiology for its 1,500 to 2,000 new homes this year. The homes will have environmentally friendly features such as increased insulation and energy-efficient electronic appliances. KB Home this year also began including appliances awarded the federal Energy Star rating for high energy efficiency as standard in homes, even though they cost more than those without the designation. And Pulte Homes Inc. is adding more insulation and energy-saving appliances at some of its subdivisions in the southwestern U.S.

Interest in green homes was high at the International Builders Show in Orlando, Fla., where the National Association of Home Builders declared Feb. 14 “Green Day” and announced a national green building program that enables builders to achieve certifications they can advertise to the public. The numerous environmental sessions included: “Ride the Green Wave or Be Swept Away.”

OCR Solar and Roofing contractors install solar panels in Danville, Calif.

The push for environmentally friendly construction comes as the housing industry remains mired in a deep and protracted slump, with single-family housing starts off more than a third from 2005 and widely expected to keep sliding this year. To stand out from the crowd, big home builders are going green for the first time or are expanding their existing programs — a departure from previous practice, when environmentally friendly building was mainly limited to a niche of smaller builders. But results so far are mixed: some developments report increased traffic but no pickup in sales. Other builders say sales are on the upswing but it is too early to tell whether it is at a faster pace than their comparable, nongreen developments. And the higher cost of green construction is proving a hurdle for some companies.

Overall, as much as 10% of all housing starts, at a market value of $38 billion, are expected to include environmentally friendly construction by 2010 — up from 2% of starts, or $7.4 billion, last year, according to the National Association of Home Builders. The trend is also getting a boost from the federal government: The Department of Housing and Urban Development has in the last year sponsored “concept homes” in Omaha, Neb., and Charleston, S.C., that include various green features.

“We definitely think [green building is] a selling point, and we think it’s here to stay,” says Jeffrey Mezger, president and chief executive officer of Los Angeles-based KB Home, which built about 23,000 homes last year.

There is some evidence that the green push is working. In KB’s Orlando division, for instance, officials say 35% more buyers have opted for upgrades like better-insulated rooftops and higher-efficiency washing machines since the program started.

Consumers have also responded favorably to Shea Homes’ new green program. Although sales prices of the homes with environmentally friendly features run 3% to 4% higher than those of comparable properties, buyers told the Scottsdale, Ariz., builder in surveys that they would be willing to pay more for a green home in return for energy savings. In one Phoenix-area subdivision, Encanterra, Trilogy officials say they have sold 83 homes since opening it in November, or twice as fast as the local market.

And in California, OCR Solar and Roofing Inc., a contractor that installs solar panels, says that at least two of its builder customers switched to making solar power a standard feature rather than an upgrade when they were each midway into building tracts in Northern California late last year.

But home builders face substantial financial hurdles. KB Home, for instance, posted a 32% drop in revenue to $6.4 billion in 2007, and analysts are expecting revenue to decline 41% this year. A spokeswoman for Shea’s Trilogy, a unit of J.F. Shea Co., Walnut Creek, Calif., says it is too early to compare sales against nongreen Shea homes.

Among other obstacles, green building can be costly. Industry experts figure that features such as energy-efficient appliances and better insulation can add 3% to 5% to the cost of a home. Ed Nardi, president of Cresset Group, is constructing three condominium projects in the Boston area with features including thicker windows and less power-consuming heating and air-conditioning systems. But he says the Boston market is so soft that his company is unable to pass on its added 2% to 3% costs for going green.

Such costs have taken a toll. Pardee Homes, a Seattle-based builder that is owned by forest-products giant Weyerhaeuser Co., is backing off a green program it started last year to include Energy Star appliances as a standard feature in its homes. It costs about $50 more for an Energy Star dishwasher than a conventional model. Dan Fulton, Weyerhaeuser’s president, cites falling home prices for the move, although he stressed the company remains committed to an overall green strategy.

A show home for green construction features a rainwater-capture system and solar shingles.

Environmentally friendly building doesn’t always result in immediate new sales. At its 78-home Timber Creek development in Las Vegas, which opened in April, Pulte Homes had retrofitted in January the models to be certified as green under local green building standards. Features include ultraefficient air conditioners, dual-pane windows with a metallic coating that blocks out the sun’s heat and low-flow toilets.

The Bloomfield Hills, Mich., builder says visitor traffic to the development has since increased, with customers drawn in part by estimated monthly savings of $60 to $80 on their power bills because of increased insulation in the Nevada heat. Still, Pulte officials say it is too early to tell what impact the move will have on sales; to date, 50 of the homes in the Las Vegas development have sold.

Overall, Pulte remains on a downward track, with analysts expecting another 27% drop in revenue this year after a 35% decline in 2007 to $9.3 billion.

Meanwhile, some environmentalists accuse builders of hypocrisy in labeling homes as environmentally friendly. Authorities suspect ecoterrorism in fires Monday that gutted three homes and damaged two others under construction in a Seattle suburb where the builder was promoting the green practices used in constructing them. The development in Woodinville, Wash., had been opposed by some residents and environmentalists for being too close to sensitive areas like a pristine stream.

Nonetheless, a whole cottage industry has sprung up to help builders design green. Hilltribe Homes, an Ontario, Canada, green designer, said that after starting business in December, it has signed a contract of approximately $500 million to provide services for a development of 6,500 green homes in Victoria, British Columbia.

Meanwhile, Cherokee Investment Partners, a private-equity fund in Raleigh, N.C., in December opened a show home that has been certified by the builders’ association as the first green home built in an existing development. Officials of the equity fund, which specializes in socially-responsible investments, say they built the five-bedroom, $500,000 home with traditional-looking designs to show other builders it could be done.

Among its features: a wheat kitchen cabinet coated with a cherry veneer, and solar shingles that match the look of shingles of older homes in the neighborhood. Jonathan Philips, senior director for the firm, has moved into the home and says builders from all over the country have come to tour it.

“This green revolution is coming, whether the builder likes it or not,” says Ed Sullivan, chief economist for the Portland Cement Association, an industry trade group based in Skokie, Ill. “The consumer wants it.”

By James R. Hagerty and Kelly Evans
From The Wall Street Journal Online

A closely watched gauge of U.S. home prices shows they are falling sharply across most of the nation, as a deepening slump in the housing market threatens to damp consumer spending.

Home prices in 10 major metropolitan areas in October were down 6.7% from a year earlier, according to the S&P/Case-Shiller home-price indexes, released yesterday by credit-rating firm Standard & Poor’s. That exceeded the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession. (See a PDF summary of the report.)

New statistics from the Census Bureau, meanwhile, indicate a slowdown in the number of Americans moving to states that led the housing boom, including Nevada, Florida and Arizona. (See related article.)

The silver lining behind the latest home-price data is that they signal the market is making what most economists see as a necessary adjustment, dragging home prices back into closer alignment with Americans’ ability to pay. The market is working its way “back to reality,” says David Seiders, chief economist of the National Association of Home Builders. He thinks house prices will bottom out by early 2009.

Some other economists say that might not happen before 2010. “The housing shock is only about halfway over, and housing prices will continue to fall well into 2009,” says Lehman Brothers economist Michelle Meyer.

During the housing boom in the first half of this decade, fast-rising home prices made it easy for homeowners to take out home-equity loans or refinance their primary mortgages to extract some cash. That helped sustain consumer spending, which accounts for about 70% of U.S. economic activity.

Economists now worry that falling home prices will prompt consumers to pull back on spending enough to slow growth or even tip the economy into recession. “Eventually what’s happening in the housing market is going to catch up with us,” says Patrick Newport, an economist at research-firm Global Insight Inc.

Fears of a sharp drop in consumption were assuaged somewhat last week when the government reported that consumer spending in November grew at the fastest pace in 3½ years. And though holiday sales fell short of retailers’ expectations, consumers, spurred by discounts, spent heavily in the final days before Christmas. Economists say that even if overall spending slows in December, the strength seen in October and November would be enough to keep the economy afloat in the near term.

“The most important determinant of [spending] is always income,” says Harm Bandholz, an economist at UniCredit in New York. He said that Americans’ disposable income has risen a “solid” 2.5% over last year. He and others say that as long as the job market holds up and incomes keep growing, Americans will continue to spend.

The S&P/Case-Shiller index showed that some of the fastest declines in home prices are in metropolitan areas that were among the hottest during the housing boom. Prices were down 12.4% from a year earlier in Miami, 11.1% in San Diego, 10.7% in Las Vegas and 10.6% in Phoenix.

Home prices are still up from a year ago in some cities, such as Seattle and Charlotte, N.C. And people who bought their homes several years ago still are sitting on sizable gains in most of the country.

The boom more than doubled prices in many populous areas near the coasts. The run-up was fueled in part by unusually low interest rates, which slashed the cost of monthly mortgage payments. In addition, in the wake of the technology-stock bubble, many Americans viewed real estate as a safer investment than stocks, and so poured increasing sums into second homes and rental properties. Home sales began to slow in mid-2005. Prices leveled off and then started declining in 2006. Over the past year, mortgage defaults have soared, leading to rapid growth in foreclosures.

Bette Zerba, a Realtor with Re/Max in Phoenix, says local residents trying to sell their homes can’t compete with foreclosed homes selling for $50,000 to $100,000 less than theirs. “The sellers now are having to reduce their prices by 20% to 30% to compete,” she says.

As the market adjusts, single-family housing starts have fallen 55% from their January 2006 peak to a seasonally adjusted annual rate of 829,000. In recent months, lenders and investors have begun owning up to billions of dollars of losses on mortgages and related securities, clearing the decks for an eventual revival in lending.

But the recovery of the housing market is likely to be a gradual process. That’s partly because the boom left prices so far out of whack with incomes. As measured by the S&P/Case-Shiller national index, home prices jumped 74% in the six years through 2006. During the same period, U.S. median household income rose 15%. (Neither figure is adjusted for inflation.) That made housing unaffordable for many Americans.

For a few years, lax lending standards — some loans required no down payments and offered low introductory interest rates — meant borrowers could buy more expensive houses than they could really afford. But lenders have been burned by a surge in defaults that started in 2006, and such mortgages generally are no longer available. That means house prices will have to fall to a level potential buyers can afford.

Mark Zandi, chief economist of Moody’s Economy.com, a research firm in West Chester, Pa., predicts that on average U.S. house prices will decline about 12% by the second quarter of 2009 from their peak in the second quarter of 2006. He expects household income to rise by about the same amount over that period.

Signs of this adjustment are apparent in the latest quarterly analysis of house prices by National City Corp., a Cleveland banking concern, and Global Insight. Economists at the two firms look at home prices in relation to household income and other factors, including population density (an indication of how much land is available) and past differences in prices caused by factors like climate and schools. In the third quarter, they found, prices in 38 of the nation’s 330 metro areas were more than 33% above a level that could be explained by fundamental drivers of housing costs. That was down from 48 metro areas in this “overvalued” category in the second quarter.

“Parts of the housing market are scratching bottom right now,” says Richard DeKaser, chief economist at National City. Sales of new and existing homes are down about 32% from their mid-2005 peak, he says, and probably won’t fall much further before leveling off or starting to recover slowly.

Prices of new homes are likely to start recovering in the first half of 2008 because builders are aggressively chopping prices to clear inventories, says Edward Leamer, an economics professor at the University of California, Los Angeles. Recent price cuts by builders may have reduced demand in the short term because they encourage potential buyers to expect further discounts.

But prices of previously occupied homes are likely to continue falling slowly for several years, Prof. Leamer says. That’s because people trying to sell their homes often don’t have an urgent need to move, and try to hold out for a price they consider fair.

On average, prices of previously occupied homes, as measured by the S&P/Case-Shiller indexes, are likely to drop another 7% in 2008 before flattening out in 2009, says Thomas Lawler, a housing economist in Vienna, Va.

Inventories of unsold homes remain very high and may increase in the new year as lenders dump more foreclosed houses on the market. The number of detached single-family homes listed for sale in October was enough to last 10½ months at the current sales rate, according to the National Association of Realtors. That was more than double the level of two years ago and the highest since 1985.

Along with inventories, the nation’s home ownership rate will have to adjust to today’s realities as many Americans who stretched too far to buy homes in recent years go back to renting. The home ownership rate in the third quarter stood at 68.2% of households, down from a peak of 69.2% in 2004. Even a small drop in that rate has a big effect on housing demand. Economists at Goldman Sachs have warned that falling home ownership rates may force a further 40% drop in housing starts next year, to an annual rate as low as 500,000 units, before construction starts to recover.

The mortgage market also needs to adjust further. Most of the funding for home loans comes from investors who buy securities backed by bundles of mortgages. Since August, many of those investors have shunned the market amid fears of rising defaults. As a result, lenders generally are focusing on loans that can be sold to government-sponsored investors Fannie Mae or Freddie Mac, or insured by the Federal Housing Administration. So-called jumbo loans — those above $417,000, too big to be sold to Fannie or Freddie — have grown much more expensive, deterring buyers in high-cost areas.

The current scarcity of funds available for mortgage lending creates a chicken-and-egg situation, says Prof. Leamer. Investors who provide funding for home loans don’t want to commit more money until they believe the housing market is getting better. But it’s hard for the housing market to rebound as long as mortgage credit is tight. Lower prices eventually will break this impasse, by luring buyers back into the market and reassuring investors that the market is finding a bottom, he says.

By Sara Lin
From The Wall Street Journal Online

It’s not the best time to be selling a house in much of the country. But increasingly, it’s a good time to build or renovate one.

The housing slump has pushed down prices on everything from lumber and drywall to labor and design fees. Legions of carpenters, tile layers and landscapers are idle. Architects are taking on small renovation projects they once would have sniffed at and contractors are offering their services at a discount. Some people in the building trades are even posting fliers at construction sites to drum up business.

It’s a striking contrast from the heady days of the real-estate boom, when builders and contractors could hardly keep pace with demand, prices of materials soared and a six-month wait to start a kitchen renovation was commonplace.

Now, some homeowners are moving forward on renovation or building projects they’ve put off for years. Others are exacting substantial price cuts from contractors desperate for work.

A few months ago, Mike Bowes remodeled the bathroom and guest bedroom of his $200,000 condo in Las Vegas. The job, which cost $14,000, included a walk-in shower, a new vanity, bamboo flooring in the guest room and retextured plaster on the walls and ceilings. Last year, the same work would have cost nearly twice as much, he estimates, “and I would have had to beg someone to do it.” Now, the 47-year-old commercial roofing sales manager is planning to upgrade his kitchen, living room and porch. While prices remain low “I’m going to keep going,” he says.

Even small repair jobs, once the province of independent plumbers, electricians and handymen, are getting scooped up by larger firms. When a bathroom pipe burst at the home of Julie Gebhardt, a schoolteacher in Manchester, Mich., she called a local builder for a referral. Instead, the firm, Peters Building Co., said it would take the job itself. The company needs the work, says President Jim Haeussler. Before the slump, the company built 70 to 80 houses a year to sell on the market at $300,000 to $500,000. So far this year it has built just 18 houses, Mr. Haeussler says.

‘Now Is the Best Time’

The Joint Center for Housing Studies at Harvard University estimates that 1.3 million homes will be built this year in the U.S. — down from just over two million in 2005. On Tuesday, the Commerce Department said construction of single-family houses fell 25% in October from a year earlier.

Meantime, more homeowners will renovate their kitchens this year — 7.57 million, up from 7.44 million in 2006 — but they will spend a lot less, $96.2 billion compared with $127 billion, according to the National Kitchen & Bath Association. Bathroom renovations this year are expected to rise by 5.3% to 10.9 million from 2006, while spending on them will grow 3.8% to $70.2 billion from 2006, the trade group projects.

One reason some renovations will cost less this year is the falling price of many key building materials. The price of oriented strand board, a plywood substitute used for walls and roof sheathing, dropped 40% from the third quarter of 2005 to the same quarter this year, according to the National Association of Home Builders. During the same period, framing-lumber prices fell 24%, says the association. And drywall prices — which soared during the real estate run-up to a record — dropped 35% from last year’s third quarter, according to United States Gypsum Co., the largest manufacturer of drywall in North America.

“If you’re going to do any kind of construction…now is the best time you’re going to have to do that in the next five years,” says Bill Harrison of Harrison Design Associates, an Atlanta-based architecture firm that specializes in high-end homes.

It’s also a good time to be shopping for an architect. Bryan Jones, of Jones Pierce Architects, also of Atlanta, says his 12-person company used to concentrate on remodeling jobs valued between $250,000 and $750,000. But now, he says, inquiries about new projects are down by nearly half from a year ago, and the firm is taking on smaller jobs to make up for the lost work. “We’re chasing stuff we definitely wouldn’t have done a year ago,” he says.

The same goes for builders. After Russ Nank Jr.’s three-bedroom ranch house in Rock Creek, Ohio, burned down last year, he snagged Payne & Payne Builders, a Cleveland-based firm, to erect a four-bedroom Cape Cod-style home. The firm took on the $179,000 project even though it was located outside its usual territory and was about one-third the size of its usual jobs. “The timing could not have been better for us,” Mr. Nank says, adding that he was able to afford a bigger home with more costly upgrades, including hickory cabinets and granite counters, than he had expected.

Two years ago, says company co-owner Dave Payne, he would have politely declined such a project. “We had a map, we had a line and we didn’t go outside of that line,” he says of his company, which is about 45 miles from Rock Creek. But as he watched his list of prospective projects shrivel to five from 30 last fall, Mr. Payne says he threw out the rules. In April, his company even built a $25,000 one-room addition for one client. “We’re chasing every lead,” he says.

Not all parts of the country have been affected equally. Builders in Seattle, New York and Los Angeles, where the job and housing markets have remained firm, report business as usual. And many architects who specialize in high-end homes say they are as busy as ever.

But the picture is much different in states like Nevada, Florida and Arizona, building hotbeds during the housing boom that have since gone bust. The same is true in Midwestern states such as Michigan and Ohio, particularly hard hit by foreclosures and subprime-mortgage defaults. In these areas, builders, contractors and landscapers say they’re watching their backlog of work shrink to a few weeks from months, as new projects dry up.

Prices Too Low?

Amid the flurry of competitive pricing from hungry builders comes a warning for homeowners: Prices that seem too good to be true very well might be. “If somebody’s low-balling it, they’re probably cutting out something that’s important and you need to know what it is,” says Deborah Pierce, an architect in Newton, Mass.

This spring, Nicki Tragesser, 54, of Atwater, Calif., started building a 635-square-foot, two-story addition for her ranch house. She had called 10 contractors and chosen the one who gave the cheapest estimate after being impressed by a house he’d just finished.

“I felt flabbergasted he was only going to charge me $69,000 for what I wanted,” Ms. Tragesser says. Only after she signed a contract did she learn that she would have to purchase an air-conditioning unit herself and pay an electrician separately to do the wiring. And that was just the beginning. Four months after construction should have wrapped up, her cement floors are cracking, the flooring upstairs is uneven and doors hang lopsided on their hinges. The contractor has quit and Ms. Tragesser spent an extra $12,000 trying to correct his work. The contractor didn’t return a call seeking comment.

But others have used their newfound bargaining edge to their advantage. Amy and Bob Phillips of Tucson, Ariz., began work on a four-bedroom, Adobe-style house in February. With newly lower pricing on a variety of items, including stucco, wood and labor, the Phillips were able to afford upgrades such as solid wood doors, glass doorknobs and steel garage doors on their $800,000 budget.

While their builder did most of the bargaining on materials for the house, the couple bid out a backyard pool themselves. By pressuring contractors to lower their bids, the Phillipses have knocked $8,000 off the cost. “We’re definitely playing people off each other, and they’re definitely dropping their prices,” says Mrs. Phillips, 44, a convention planner.

By Kay Hymowitz
From The Wall Street Journal Online

While Hillary Clinton attempts to storm the Oval Office, some of her less renowned sisters are busy liberating one of the few other remaining male strongholds: the hardware store. Strange as it sounds in a country still steeped in Tim Allen reruns, gals are becoming fix-it guys. And at least in some places tools are replacing brass-studded leather totes as the newest female life-style accessory.

The home-improvement industry has always been a no-woman’s land known for its drab aisles lined with nail bins and mysterious steel objects whose purpose was understood only by grunting guys in flannel shirts. Now it is going designer pink. Companies such as Tomboy Tools, Barbara K Enterprises and Girlgear Industries are offering the female do-it-yourselfer fabulous pink hammers and saws in stores and on the Web. These items usually fit snugly inside a smart satchel of the same hue, the tool box as it might be interpreted by Sarah Jessica Parker. Tomboy Trades, a Canadian concern, has also recently introduced adorable pink work boots; they also come in stylish, but less assertively girly, red, blue and green. Pink or blue, these boots are made for workin’.

There has been an explosion of womantargeted self-help books, videos, radio shows (including one called “A Repair to Remember”), TV spots and home-improvement Web sites. Some sites — including bejane.com and toolgirl.com — are specifically for women, while others offer female-friendly links and columns. Home Depot has introduced “Do It Herself” clinics for women interested in learning how to use a stud finder; the classes are evidently a success since, as NPR has reported, in some locales the store is becoming known as a hot singles spot. Even schoolgirls are joining the revolution. The Girl Scouts now offer a Ms. Fix-It badge for members eager to learn how to rewire a lamp or fix a leaky toilet, and an outfit called Vermont Work for Women has introduced a summer program called Rosie’s (as in Rosie the Riveter) Girls promising “hands on instruction in the skilled trades.”

It’s not hard to see what’s driving the fad: Women are increasingly home alone and emboldened. Perhaps the largest group eager to seize the pink hammer is single young women. Many of today’s young women are marrying well into their 20s; an increasing number are waiting until their 30s. But they often aren’t waiting for that gold band before they commit to a house or condo. The National Association of Realtors reports that in 2006 single women made up 22% of the U.S. real-estate market; the median age for first-time single female buyers was 32. It helps that having grown up with computers, cellphones and iPods, this you-go-girl! generation doesn’t look at small machinery the way Barbie looked at math. These women are not only gung-ho about buying a home on their own dime; they’re ready to lay the tile and patch the drywall too.

Other women learn the drill when they find themselves on their own after a divorce. Barbara Kavovit says that the epiphany that ultimately led her to launch her tool company, Barbara K!, came when her husband moved out of the house and took the family tool box with him.

But not every female tool-user is single or divorced. Sometimes she’s a wife sick of hectoring her husband to make time to hang a bookshelf. Julie Sussman and Stephanie Glakas-Tenet were both wives of never-home CIA men (yes, that Tenet) when they wrote “Dare to Repair”; they have since added a video and another title, “Dare to Repair Your Car.”

If you think about it, while the pinking of home improvement is new, it’s not all that radical. Keep in mind that women are not trying to join the construction trades in any great numbers. Women make up at least half of the country’s medical and law students, yet they still constitute fewer than 3% of construction workers; blue-collar sexual discrimination can’t fully explain these discrepancies.

No, the pink-hammer brigade is less interested in expanding career opportunities for women than in enlarging the traditional art of homemaking. Not so long ago, custom limited women’s activities in that area to cleaning, sewing, cooking and perhaps a few crafts projects for those with extra time on their hands. Installing smoke alarms and reconfiguring a closet are simply an extension of the old domestic urge. That helps explain why single women are twice as likely to buy homes than single men, despite having considerably lower median incomes. According to Fannie Mae, the number of single female homeowners will soon almost double, to 31 million by 2010 from today’s 17 million — at least that was the prediction before the recent mortgage meltdown. It seems that you can take women out of the kitchen and nursery, but you can’t take them out of the nest.

Women tool-users are also part of a grand American tradition of self-sufficiency, manual competence and can-doism. On the frontier and in older farm communities, women, like men, had no choice but to cultivate self-reliance. But optimistic practicality also jibed with political principle, and it lives on today in our entrepreneurs and do-it-yourselfers.

The only thing to give pause in the pinkhammer revolution is the occasional whiff of ideology that emanates from its leaders. Hang around the movement’s Web sites and before long you’ll hear rhetoric that implies that learning to install a dimmer switch is not simply a practical means of increasing domestic pleasure; it’s a Radical Statement for Women’s Progress. “It’s more about Empowerment with a capital E,” reads the toolgirls.com manifesto. Most of the rhetoric is more Oprahesque heavy breathing than Steinem-style fuming, but it still may not be the most suitable tone to take around people preparing to take up potentially lethal tools. “My true desire is to inspire women to become more self-reliant and confident in their abilities,” Barbara K! writes on her Web site. “We all have ‘it’ within ourselves to do things we never imagined we could.”

Well, maybe. But the truth is that while women may want a lovely home, most of them would also like a good man to share it with. You can be sure that, unlike their female counterparts, few single men are spending their weekends restoring the crown molding in their living rooms. Men’s domesticity has always been a group affair; they fixed the faucets and built the shelves not for themselves but for their wives and children. Women ought to know that selfreliance isn’t everything.