"Mark to Market" affecting the economy

There have been a number of stories in the local media lately about favorable signs in the local housing market. Among other things, home prices gradually are starting to increase, mainly because construction has slowed significantly the demand is starting to absorb supply.

Still, there’s a huge problem that needs to be resolved in the national economy, and soon.

“Mark to Market” works like this: most assets held by financial institutions need to be repriced constantly, to reflect the value of those assets if they were dumped on the marketplace. MTM is intended to avoid the excesses of the 1980s, when banks were loaning much more than what things were really worth and enjoying, for a time, increased returns.

But in the current climate, MTM is causing severe damage in the housing market and development industry. Let’s say a developer is building a subdivision for $10 million. Typically, banks can’t have more than 80 percent equity, so they loan the developer $8 million and he has to come up with the rest. As long as housing prices increase or at least remain stable, this works fine and everyone earns a fair profit

But if market values have declined – let’s say the subdivision is now worth $7.5 million – the bank could have more than 100 percent equity. Under Federally-enforced MTM rules, the bank must reassess the value of the subdivision and demand the developer pay them enough to bring the bank’s equity back to 80 percent. If the developer can’t pay up (a common problem when people aren’t buying homes), the bank must seize the property and sell it for whatever it can get, to cover its losses. The developer just loses his subdivision and the bank loses its investment.

This is good if you’re looking to buy cheap land, but it’s disastrous for the developer and the housing market. These fire sales drive down the market price of land even more, forcing banks to revalue other developments for even lower prices. In theory, the downward spiral would continue until no one had any equity or value left.

Banks don’t like doing this either, as they know they’re cannibalizing the housing market and destroying their future returns. However, banks must enforce MTM to satisfy Federal Trade Commission requirements.

One solution is for people to by more homes. Fed Chairman Ben Bernanke has lowered the auction rate, but mortgage rates haven’t fallen in return. In some areas of the country, regulators are aware of the problem and are hesitant to enforce the letter of the law at this time, as doing so would severely damage the development industry, the banking industry and impair national economic recovery.

There are some regionally owned, privately-held banks with strong capital positions who are not forcing MTM because they know what they could trigger if they do. But if a builder has multiple banking relationships, he could be vulnerable. If banks are publicly traded, they’re under more scrutiny and may feel compelled to enforce MTM as failing to do so could violate their covenants.

We’ve heard about the federal government loan hundreds of billions of dollars to bail out financial markets. In the case of Mark To Market, however, a bailout isn’t the solution. The market may be able to take care of itself with sensible enforcement of rules.

Come enjoy the party at Walnut Creek

One of the more fun parts about my job is hosting community events such as block parties. This Saturday, Sept. 27, we're holding Family Fun Day, a grand opening for the Walnut Creek development, complete with prize drawings, bouncy jumps and a Dad's Football Throwing Contest. We will also have free food, including walnut apple pie at 3 p.m. The Dan Sevy Band of Marsing will provide live classic country music. We have also invited local school groups to sing and a Scout Troop to lead us in the flag raising. Everything is free and open to the public.

Walnut Creek is on Heartland Street, which is off Ten Mile Road, between Hubbard and Deer Flat roads, on the east side of Ten Mile, and the fun lasts from 1 p.m. to 4 p.m. Two homes have been constructed (one outfitted as a model home) and tours of the 58-lot development will be conducted.

We're happy to be in Kuna and Kuna is happy to have us. In researching Kuna, I found there's not much there for people who are ready to move up from a starter home and Walnut Creek is intended to meet that market demand.

Up to this point, I have focused on building smaller homes and most buyers are single people or older people looking to downsize. We had several families approach us who wanted to stay in Kuna, but couldn’t find anything a step above a starter home. There are people looking for this opportunity and we want to capture that market. But the homes will still have our signature warranty and quality.

Walnut Creek has a country cottage/farmhouse feel, with bold Craftsman-styled homes. It will have four acres of open space, consisting of greenbelt and neighborhood parks large enough for a pick-up game of baseball or soccer. It’s off of Ten Mile Road about four miles south of Interstate 84 and construction on an interchange is set to begin there in 2009.

Walnut Creek is a change for us. We’ve been doing downsized products for a while and due to Kuna’s minimum home and lot sizes, Walnut Creek homes are at least 2,200 square feet (and most will be larger) and lots are at least a third of an acre. But this is a good niche and I wanted to build in Kuna because it’s a Main Street America type of place. It’s a great town with a strong feeling of community – people rally around the sports teams and there’s a lot of focus on making Kuna a nice place and we want to be part of that.

A story of courage

As you know, we are a major sponsor of the St. Luke's Women's Fitness Celebration. We are very happy to host a presentation by Anne Audain, one of the founders of this event 15 years ago.

Anne has an amazing story. After having reconstructive surgery on her feet at age 13, she went on to win more road races than any other female distance runner in the 1980s and has remained an advocate of fitness. Audian will be speaking Thursday, September 11 from 7 p.m. to 8:30 p.m. in the Coronado Room Courtyard Marriott Meridian, 1789 S. Eagle Road. You don’t need to be a runner to appreciate Anne’s determination. I invite you to hear Anne’s amazing story. Light refreshments will be served.

UPDATE: Anne's talk was truly inspiration. Thanks to all for turning out!

EnergyStar!

I’m pleased to say that Ted Mason Signature Homes are now EnergyStar certified.

EnergyStar certification is an important goal for many builders, who use it in marketing to show their commitment to energy efficiency. To date, more than 5,000 home builders have partnered with EPA to construct more than 840,000 Energy Start homes. By the end of the decade, more than 2 million homes are expected to earn Energy Star.

However, while EnergyStar is a great program, we have been doing many of the things required by EnergyStar, some of which are law under national building codes. We go the extra mile by reinforcing the insulation in crawl spaces, for example, and using 93-percent-efficient furnaces, compared to the old standard of 80 percent. EnergyStar’s extra requirements, however, ensure our homes will meet the highest standards of efficiency.

Compared with standard homes, Energy Star homes use substantially less energy for heating, cooling, and water heating-delivering $200 to $400 in annual savings. Over the average 7 to 8 years you may live in your home, this adds up to thousands of dollars saved on utility bills. Additional savings on maintenance can also be substantial.

Properly installed energy efficient improvements deliver better protection against cold, heat, drafts, moisture, pollution, and noise. An energy-efficient home helps ensure consistent temperatures between and across rooms, improved indoor air quality, and greater durability.