Wednesday, November 12, 2008

Will Imploding Real Estate Bubble Sink Toll Gowanus Plan?

First yesterday was the Bloomberg headline: Toll Brothers Revenues Plunge 41%.

Then there was the unseemly grasping of CEO Bob Toll for a handout from the federal government. Believe it or not, Bob Toll, who cashed out stock to the tune of hundreds of millions of dollars at the height of the bubble, is now asking for a federal handout for LUXURY home builders. Can't blame him for trying, what with every investment bank and now the automakers squealing at the trough, but this would be utterly wrongheaded policy. The problem in the housing market is that home prices detached from fundamentals (household incomes and rental value) due to easy monetary policy and lax regulation.

Now to top it all off, Toll says that the New York market is hitting the skids:
“New York City was a nice stand-alone beacon,” he said in a conference call this afternoon. “Now it has joined the rest of the country.” That happened, he said, in mid-September after the financial crisis worsened.

Many people do not want to hear it, but the housing market is crashing, and for sound reason. The price of homes rose far beyond what people could afford. Price to income ratios broke through the roof during the bubble and have yet to return to sustainable levels. Most of all the fault lies on Alan Greenspan's shoulders, but the Bush administrations abject failure of regulation, after the GOP-led deregulation of the 1990s is also to blame.

Expect home prices to decline precipitously over the next 18 months. The 4th quarter 2008 and 1st quarter 2009 numbers in particular will be jarring. And builders are still churning out new units into a softening market at near record pace. Projects that have not broken ground, or even been permitted at this point (such as Toll Brothers proposed Gowanus development between Carroll and 2nd Street) have a high probability of being shelved or killed.

At this point, I imagine Toll Brothers will still proceed full steam ahead with their efforts to re-zone the property. If they are successful, they can flip it to another developer or hold onto the site for a period of years. But whether they succeed with the rezoning or not, it grows less likely by the day that this development will be built any time soon.

This will not be the end of the world, but it will be tough for many of us. We do need to take concrete steps to keep people working. I have been saying for a long time now that we need a Federal program of public works, specifically in transit infrastructure, clean energy, clean water, and high speed data networks to get our economy moving again and lay the foundation for the next generation of growth. I hope that President Obama will be even more ambitious than FDR in this regard.

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