America becoming a nation of renters

Trend is helping to boost construction, and jobs, in struggling industry

Reuters, December 27, 2011, link

Brian Keith is busier than ever as the architecture firm he works for rushes to wrap up work on a 300-unit apartment complex in Dallas.

The project is one of dozens the firm, JHP Architecture, has on its hands — a surge of business driven by a rise in demand in the United States for rental properties.

The increased demand has forced JHP to expand, and it expects to keep hiring at least through the first quarter.

“We’re seeing overall work come back and there’s a backlog of contracts to go through,” said Keith, director of urban design and planning at JHP. “There’s strong interest in multi-family units and plenty of pent-up demand.”

With U.S. unemployment at a lofty 8.6 percent, home foreclosures rising and property prices under pressure, more and more Americans have given up the dream of owning, opting instead to rent, a shift that is remaking the face of the U.S. housing industry.

The percentage of Americans who own their home dropped from a peak of 69.2 percent in late 2004 to a 13-year low of 65.9 percent in the second quarter. It edged up to 66.3 percent in the third quarter of this year.

On the flip side, the percentage of rental properties that are empty fell to 9.8 percent in the third quarter from 10.3 percent a year earlier.

In a recent report, Oliver Chang, an analyst at Morgan Stanley, dubbed 2012 “The Year of the Landlord.”

“Rents are rising, vacancies are falling, household formations are growing and rental supply is limited,” the Morgan Stanley report stated. “We believe the demand for rental properties will continue to grow.”

Groundbreaking for new housing jumped 9.3 percent in November to the highest level in 19 months, fueling optimism that the battered housing market was regaining its footing.

The gains, however, were almost solely in multifamily housing. Groundbreaking for structures with five or more units shot up more than 30 percent from October to now stand at nearly double the year-ago level.

Prices reflect the shift in demand. Rental costs are up 2.4 percent over the last year, compared with an increase of just 0.6 percent in 2010.

Steve Blitz, senior economist at ITG Investment Research, says the lure of higher returns is spurring the development of apartment buildings. He argued the next “boom” in residential construction has already started.

“The reason rents were rising is that through the past 15 years there has been an under-building of rental properties because typical renters were increasingly able to garner cheap financing to buy a house,” he wrote in a research note.

While the rise in demand is great news for builders and developers, it remains unclear what the pick-up in homebuilding will mean for the economy as a whole.

“Residential construction will be a plus to GDP in 2012, but house price declines will be a negative. So net, net housing will be neutral or a small drag on the economy,” said Mark Zandi, chief economist at Moody’s Analytics.

At its peak at the end of 2005, homebuilding accounted for about 6.2 percent of overall economic activity. Now, it is only about 2.4 percent.

U.S. housing starts in April 2009 hit their lowest level on records dating to January 1959. While multifamily starts have given them a lift, 2011 may be the weakest year ever for construction of single-family homes.

“Business is slightly down from last year,” said Bill Zach, a third-generation homebuilder. His family business, the Zach Building Co. in the Milwaukee, Wisconsin, area, is mainly focused on single-family units.

To Zach, that his firm is still in business when so many of his competitors have gone bust represents some success.

“It used to be my competition was every guy that owned a pick-up truck and called himself a builder. Hundreds of them,” Zach said. “That’s no longer the case, those guys are dropping by the wayside.”

But there are signs of a turn and signals that the housing market may be close to finding a bottom.

The Architecture Billings Index, a gauge of future construction, picked up last month, breaking above the 50 level to signal growth in billings.

And the stock of homebuilders, as measured by a Dow Jones index, has shot up more than 30 percent since early October.

“Residential construction is finally beginning to rise from its post-recession lows,” said Joseph Lavorgna, chief U.S. economist for Deutsche Bank. “The true test for starts and (building) permits, as well as most of the sales metrics, will come during the spring buying season.”

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10 Essential Economic Blogs

For independent thinkers only: These online columnists see around the curves to the global economic trends that will affect your business.

1. Seeking Alpha Market Currents: If a tree falls in the forest without making a sound but with an economic impact, you’ll find out about it here. Even I can’t read everything they put out in the course of a day. It’s not just a fire hose, though. It’s curated enough to keep the information relevant.
2. The Big Picture: You’re already reading Barry Ritholtz, right? Even if you aren’t you’ve probably seen him on the financial TV networks. There’s a reason for that. In addition to being a great talker this Wall St. money manager consistently pokes fact-based holes in received wisdom and popular opinion.  He is also a New York Knicks fan. As a Chicago Cubs fan, I understand completely.
3. Real Time Economics: One of several fine Wall Street Journal blogs. This one sifts through the numbers to find what matters.
4. DealBook: Andrew Ross Sorkin and crew are a great source for all the deals and the news that’s going to impact the deals. They cover so many different things that you don’t need to know everything they report – but there’s guaranteed to be something important here for you.
5. Financial Armageddon: Is Michael J. Panzner an alarmist or a realist? I vote for alarming realist. Panzner, a financial pro and writer, is smart and digs deep to find stories, angles and implications you won’t see in many other places. Despite the name of the blog, he’s definitely not a screamer.
6. FT Alphaville: The view from Europe. A great outsider perspective on the U.S. and one of the best insider sources for news and perspective about the entire Euro mess.
7. Zero Hedge: Don’t know much or care much about international economics? ZH will take care of both of those for you. The editors/writers all use pen names so all I can tell you about them is they’re smart and detail obsessed. These folks doubt everything—and I mean that as a compliment.
8. Naked Capitalism: Views things more from the Keynes side, but facts and not ideology are the driving force here. NC isn’t so much in favor of government intervention as it is honest, well-regulated markets. These days that’s enough to make you a heretic.
9. Calculated Risk: Bill McBride does a great job of connecting the dots as well as serving up brief, thorough and understandable synopses of key economic stats and news. He has an amazing ability to separate wheat from chaff.
10. Mish’s Global Economic Analysis: Mish Shedlock, a registered investment advisor, is as good as it gets when it comes to finding the key facts, stories or stats in far distant lands. I define key as meaning “ripple with incredibly high likelihood of becoming a tsunami.”

I’ve left out a bunch of great ones, but I’d be remiss if I didn’t also mention my two must-listen podcasts: NPR’s Planet Money and EconTalk. Planet Money pulls off the amazing feat of being great for people who know a lot about economics and those who know nothing at all about it. EconTalk is hosted by George Mason U. Professor Russ Roberts. He goes deep into a top with interesting hour-long conversations on a particular topic.

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Thousands of Dollars of Work Offers Shaky Assurance

CAROL POGASH, New York Times, December 22, 2011, link

Craig Irving just bought a 1920s bungalow in the Rockridge neighborhood of Oakland last October “and the house starts to move,” he said. The fact that his new house had been seismically retrofitted — a common procedure to reinforce older buildings in the Bay Area against possible earthquake damage — had been a selling point, he said, but even so his first thought was, “Please don’t let this be the big one.”

Peter DaSilva for The Bay Citizen

Anchor bolts used in the project.

A home inspector he hired gave him the bad news: A part of the previous retrofit job was “virtually decorative.” Mr. Irving, who is in the catastrophic risk insurance business, said his house is 1.3 miles from the Hayward Fault Zone, and his wife is five months pregnant. He said it will cost $7,500 to have the house re-retrofitted.

Many homeowners are paying to have their houses seismically retrofitted after the recent swarm of earthquakes along the Hayward Fault Zone. But the owners may be unaware that California does not have mandatory state-sanctioned standards for seismic retrofits, and does not offer specific licenses for retrofit contractors.

“As long as a contractor doesn’t do something that will hurt the house, anything is allowed,” said Peter I. Yanev, a structural and earthquake engineer in Orinda and co-author of the book “Peace of Mind in Earthquake Country.”

Three years ago Carol Dutra-Vernaci paid a contractor thousands of dollars to do seismic retrofits of both her rental property and her office. “Everything was fine,” she said, until this year, when Thor Matteson, a structural engineer, crawled underneath.

The hardware used by the contractor was “only 20 percent as strong as I would want to see in a retrofit,” Mr. Matteson said after inspecting the previous work. Ms. Dutra-Vernaci, who is in charge of Union City’s disaster preparedness program, said she was unhappy to have to pay an additional $12,000 to strengthen the two structures that she thought had already been retrofitted properly. But now, she said, “I have peace of mind.”

Bay Area residents in older homes who have paid for seismic retrofits “live with a false sense of security,” said Danielle Hutchings, an engineer who coordinates the earthquake and hazards program at the Association of Bay Area Governments. By her estimate, one-third to two-thirds of home retrofits in the Bay Area are inadequate to prevent structural damage in the event of a major earthquake.

When the next big quake hits — one is predicted in the next 30 years — Ms. Hutchings’s agency warns that 150,000 homes will be left uninhabitable and thousands will be homeless.

“It’s not a great message if we were to come out and say strongly, ‘Your house is retrofitted but it was probably done wrong and you need to do it again,’ ” Ms. Hutchings said.

But that is indeed the message homeowners need to hear, according to structural and seismic engineers and local building officials.

Although many governmental agencies have a stake in earthquake preparedness, none oversees the seismic retrofit industry. Even though California issues contractor licenses for painting, dry walls, fencing and landscaping, there is no license for seismic retrofitting. Contractors can and do make unsubstantiated claims and use substandard hardware. The state’s seismic retrofit code is voluntary. Building inspectors approve projects as long as houses are not left weaker than before.

In 2006, The Contra Costa Times commissioned two veteran building officials and seismic safety experts to inspect 35 retrofitted houses along the Hayward Fault in Oakland, Berkeley, El Cerrito and Albany. Only 11 of the houses “would probably withstand the shaking of a high magnitude temblor,” they concluded.

Little has changed since 2006, said William Schock, one of the inspectors in the newspaper’s study and the chief building official in San Leandro. San Leandro offers training and classes in seismic retrofitting for contractors and homeowners.

Kelly Cobeen, a structural engineer with Wiss, Janney, Elstner Associates in Emeryville, said some contractors are qualified to do retrofits and some are not. “Lots of times a contractor will say, ‘I know things I can do that make it better,’ and sometimes they do and sometimes they don’t,” she said.

Homeowners can be attracted by impressive Web sites. For example, Earthquakesafety.comasserts that its “highly skilled inspectors attend regular training programs,” and lists programs from four federal, state and local agencies. Two of the agencies no longer exist. Of the remaining two, one has not offered a class in five years, the other in two years.

In a phone interview, Wayne Harrison, the owner of Earthquake Safety in Berkeley, described the information on his Web site as “marketing.”

“There is no formal training for retrofitting,” Mr. Harrison said. What counts, he said, is experience. Earthquake Safety has been in business since 1984, and has retrofitted thousands of homes, he said.

But a history of retrofitting is no guarantee that the houses will be protected.

Many retrofit contractors, including Mr. Harrison, use angle irons to anchor floors to foundations, even though they are not as effective as other hardware that costs about the same.

Mr. Harrison said he has to work within homeowners’ budgets. “We use decent solutions that are not perfect,” he said.

If a one- or two-story house sits on flat land, retrofitting can be a do-it-yourself effort. A simple retrofit might consist of bracing the short wall between the floor and the foundation with plywood, bolting it to the foundation and connecting it to the floor. Directions can be found on the Internet.

Staeppan Snyder bought his house in Berkeley in 2008, and found that the previous retrofit was insufficient.

“It’s pretty unbelievable,” Mr. Snyder said. “We have standards for electrical and plumbing, and I understand this is a more difficult area,” Mr. Snyder said. “It’s kind of disturbing that there are no regulations in place or inspection standards.”

The state adopted a seismic retrofit code last year but it is voluntary and applies only to simple houses on flat land. Contractors are not required to follow the state code, said Janiele Maffei, chief mitigation officer for the California Earthquake Authority.

The earthquake authority is a publicly managed organization created by the Legislature in 1996 to offer catastrophic earthquake insurance policies and to educate homeowners on earthquake safety. Through its member insurance companies, it sells most of the residential insurance policies in the state.

Ms. Maffei said the authority will begin a pilot project next year offering rebates to homeowners who retrofit their homes, but the agency will not address the issue of training and testing contractors, she said.

“There are others that do that,” she said, pointing to training by the Association of Bay Area Governments.

The association halted its contractor retrofit training nearly six years ago, after the organization learned that some of the contractors it had trained were responsible for some of the poorly retrofitted homes in The Contra Costa Times article, Ms. Hutchings said.

“We will revamp and strengthen it and do it again,” Ms. Hutchings said of the training programs, adding, “We are not in the business of testing and licensing. The state really should take this up.”

“A lot of bad stuff is going on,” said Tom Anderson, a mechanical engineer who has specialized in seismic work for 22 years.

“That’s the kicker,” he said. “If a contractor does substandard work, you won’t know it until after the earthquake.”

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