kiplinger connection
Housing Woes • Property • Business Costs

Housing Woes: State governments are moving to help faster than is Washington.
Property: The nonresidential construction market should remain relatively stable.
Business Costs: Construction material prices keep rising: some 2008 projections.

Housing Woes
With foreclosures at near record levels and likely to top 2 million this year and next,
Washington is finally moving to help.
But only with a series of small steps. Distressed homeowners won’t get a big bailout, and lenders holding bad loans will get nothing.
State governments are doing the most, especially those that have been hit hardest: Ariz., Calif., Fla., Ga., Mich., Ohio, and Texas account for around 70% of all foreclosures.
State aid is taking several forms:
Hotlines. Many states now have them. Some even help homeowners bargain with lenders or assist them with refinancing plans.
Financial aid. States may offer loans to pay refinancing fees. Ohio, for example, will sell up to $500 million in bonds to create a fund for low-incomers to tap.
Delays. Some states, such as Mass., are postponing foreclosures, buying time for homeowners to try to work out problems.
Federal regulators and policymakers are also jumping in, though in some cases only when pushed by Congress. Among the actions:
Interest rate cuts. Federal Reserve moves will help homeowners with adjustable loans, limiting the hike in monthly payments they face.
Loan purchases. Fannie Mae and Freddie Mac now have permission to expand their portfolios by 2% to hold more mortgages, easing logjams in the secondary market. That’ll help some stressed homeowners. But the two giants handle few subprime loans and no jumbo loans.
Jawboning. Regulators want lenders to be flexible. New guidelines issued by Washington urge them to spot trouble early and be proactive, even waiving penalties or cutting prepayment fees that block refinancing.

Congress, meanwhile, is moving quickly to thwart future problems. Legislation to modernize the Federal Housing Admin., reducing red tape and letting the agency handle more refinancings, will pass this year. Also assured: A crackdown on predatory lending, with new regulations and legislation to increase disclosure and tighten subprime requirements.

What should beleaguered homeowners do? Seek assistance early. Most loan officers will try to work something out to avoid foreclosure. They have leeway, even if loans were bundled and sold to big investors. Local government agencies can also lend a hand by acting as mediators between lenders and homeowners and providing other useful services.

Property
Will commercial construction spiral down as home building has?
No, but the nonresidential side won't emerge entirely unscathed. Clearly, there is carryover ... some merited, some not ... from housing woes: Notably, less home building will cool interest in shopping centers, though not in Houston, Phoenix, L.A., San Francisco, and Washington, D.C. And a housing-led slowdown in job creation will temper the office sector. Overall, however, commercial property will remain in decent health.

Most areas have no bubbles about to burst. In fact, housing ills since last year have actually helped prevent nonresidential overheating.
In offices, builders have been more cautious than in the 1980s, when towers were routinely financed and built without tenants signed up. That led to huge oversupply when the economy slowed late in that decade.
Returns to buyers of prime office space are likely to hold up, though sales prices will cool from the frenzy of the past three years. Having fewer bidders for properties means improved potential returns. Closely watched capitalization rates ... the first-year investment returns on rented office buildings ... will probably climb to an average 6.3% by year end from 5.8% last quarter. Five years ago, the average was 8.5%.
Outperformers will include Manhattan, Boston, and Salt Lake City.
Among weak markets: Miami, Las Vegas, Phoenix, and Cincinnati.

Nonresidential building won’t be enough to offset housing's drag in coming quarters. Though business spending on commercial structures advanced a whopping 28% from early March through June, we expect the gains in the next four quarters to be more modest ... most likely in the mid-single digits.

Commercial construction's strongest suits: Hospitals and other health facilities plus energy projects, especially power plants. Also, brisk foreign trade will boost demand for warehouses in coastal areas near ports, but otherwise, demand should ebb somewhat. The average warehouse vacancy rate, now 9.4%, will creep up to 9.8% by the middle of 2008.

Business Costs
Construction materials will cost a bit more next year, despite the housing recoil. An industry index of about 20 items is likely to show a 6% or so rise next year, after a 5% gain this year. Markets for many items are global. Brisk building in China and India, for example, will continue to fuel orders for a variety of materials.
Our estimates: Concrete products will gain 6% in 2008. Steel mill items, 7%. Metal plumbing fixtures, 6%, slowing from 2007. Gypsum, heavily used in housing, down 5%. Oriented strand board, flat, after a 15% plunge this year. Lumber, up 4% on average for the year, though it won’t gain much traction until the second half of 2008.