By James R. Hagerty

From The Wall Street Journal Online

Just when the gloomier pundits were starting to enjoy the housing slump, optimists are piping up to declare it could be almost over.

Former Federal Reserve Chairman Alan Greenspan, whose interest-rate cuts helped create what he once called “froth” in house prices, said in a speech last week that he detected “early signs of stabilization” in the housing market. Some Wall Street economists also are saying the worst may be behind us.

Not so fast, replies Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., a Valhalla, N.Y., research firm: “It’s going to get worse before it gets better.”

Both camps are making valid points. The maximum impact of falling home construction may have hit the U.S. economy in the third quarter, some economists say. But that doesn’t mean the housing market is on the verge of a miracle recovery. Construction is expected to fall further as builders struggle to shed a glut of unsold homes. And many economists expect house and condominium prices to continue falling for at least an additional six months to a year in parts of the nation where speculators went wild.

For now, the consensus among economists is that the housing downturn will remain a drag on the economy but probably won’t sink the U.S. into a recession next year. Even Mr. Shepherdson, among the most bearish, believes the U.S. has a 60% chance of averting a recession in 2007. In any case, the weak housing market will remain painful for speculators who loaded up on credit to buy near the top — and for millions of people working in housing-related industries. Just last week, Countrywide Financial, the U.S.’s largest mortgage lender, announced plans to shed about 2,500 jobs, or 4.5% of the company’s total.

Largely because residential investment dropped at an annual rate of 17%, inflation-adjusted economic growth in the U.S. slowed to a feeble rate of 1.6% in the third quarter, according to an estimate released by the Commerce Department. Without that drop in residential building, economists said, the growth rate would have been about 2.7%.

After the third-quarter carnage, expect “some gradual improvement from here,” says Peter Kretzmer, a senior economist at Bank of America in New York. He expects residential construction to decline at an annual rate of 13% in the current quarter, 5% in next year’s first quarter and 2.2% in the second quarter before starting to grow again. Mr. Shepherdson disagrees, arguing that the drop in construction will accelerate before the market regains balance.

Offsetting the housing damage are several positives. Gasoline prices and mortgage interest rates have fallen in recent months. The stock-market rally has made some people feel richer, even as those who trust only in real estate feel poorer. And job growth, though unspectacular, continues at a “solid” pace, says Scott Anderson, an economist at Wells Fargo in Minneapolis.

With home prices flat to lower in much of the country, Americans already have less ability to tap their home equity to finance spending. But it is unclear how much effect that will have on consumer spending. Some economists believe that rising wages, the stock-market rally and lower energy costs will be enough to keep Americans loading their shopping carts with iPods and flat-screen TVs.

Mr. Greenspan sees hope in the rate of applications for home-purchase mortgages. After falling in the second half of 2005 and earlier this year, they have leveled off in recent weeks.

Some of the optimists’ arguments are dubious. To bolster its position that the housing market is stabilizing, the National Association of Realtors last week trumpeted a 2.4% decline during September in the number of previously occupied homes offered for sale through multiple-listing services. But the Realtors’ news release didn’t mention that listings almost always decline in September, when the back-to-school season means fewer people are moving. Over the past 20 years, listings have declined an average of 3.4% in September, says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse.

Ms. Zelman, who last year correctly predicted a plunge in home-builder share prices, thinks investors who now are bidding those prices back up are way too early. Sales of new homes are unlikely to start rising again before early 2008, she says. Meanwhile, “land is going down in value daily,” she says.

Joshua Shapiro, chief U.S. economist at research firm MFR in New York, is more upbeat but still thinks home prices will “stagnate” on a nationwide basis for several years, as rises in parts of the country are offset by continued declines elsewhere. After the unusually steep surge in home prices during the first half of this decade, he says, it will take time for incomes to catch up again with housing costs.

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By Mark Whitehouse

From The Wall Street Journal Online

Bryan Whalen and Ike Spirou have never met. But through the world of modern mortgage finance, their fates are inextricably linked.

Mr. Whalen, who manages a multibillion-dollar mortgage-bond portfolio at Los Angeles-based Metropolitan West Asset Management, stands to gain if Mr. Spirou, a financially stretched homeowner in New York City, reneges on his mortgage loan. That’s because Mr. Spirou’s $360,000 loan was packaged with thousands of others into a bond, and Mr. Whalen has entered a newfangled derivative contract — similar to an insurance policy — that will pay off if enough loans in the bond go bad.

“The sophistication is remarkable right now,” says Mr. Whalen. “You can profit in any scenario.”

Mr. Whalen represents a new breed of investor: people who are using financial instruments to bet against the homeowners they consider most likely to suffer in a housing downturn. Many such investors, including Mr. Whalen, don’t expect the current slide in house prices to lead to widespread economic malaise. Rather, they’re betting on trouble for folks like Mr. Spirou — so-called “subprime” borrowers who have become homeowners thanks to the increasing availability of easy credit.

Whatever happens with Mr. Whalen’s wager, there’s a lot more at stake than his fund’s performance or the roof over Mr. Spirou’s head. Subprime lending has put as many as two million families into homes over the past decade, helping push the U.S. homeownership rate up to 69% from 65% — a major shift toward an “ownership society” that politicians of all stripes have touted as one of the nation’s economic successes. As the bets play out, they will show how much of that success is permanent, and how much a temporary phenomenon fueled by overly aggressive lending.

So far, the subprime market has held up relatively well. But it’s beginning to show some cracks — most evident in the nascent derivatives trade, which provides a useful window into investor sentiment. Since August, when house prices logged their first year-on-year decline in more than a decade, the cost of insurance against defaults on bonds backed by subprime loans has risen as much as 16%, suggesting investors are concerned that more homeowners will start to renege.

“You’ve got a lot of borrowers who didn’t have credit before, and a lot of them don’t know how to manage that credit,” says Dan Castro, managing director at GSC Group, a New York asset-management firm that focuses on the mortgage market. “The place where you’re really going to see fallout is in the subprime.”

The advent of the subprime market reflects a sea change in the way banks make home loans. As recently as the mid-1990s, potential homeowners had to get over high hurdles to borrow money. Background checks could take weeks or months. Lenders typically required down payments of at least 20% of a home’s value. People with dented credit, or young folks without adequate credit histories, had few if any options.

Over the past decade, though, a convergence of factors has emboldened banks to lend where they wouldn’t before. For one, the development of the Internet and advances in computing technology have made it much easier and cheaper to process and package new loans. Electronic databases on borrowers have made it easier for banks to assess the risk of lending to people with shakier credit, while new insurance-like derivatives have helped them mitigate that risk. And robust demand from investors — both in the U.S. and abroad — has given banks a big incentive to lend, because they can easily turn around and resell the loans in the form of bonds, reaping a tidy profit.

As a result, both the volume and variety of subprime loans have boomed. Since the beginning of 2002, banks and specialized lenders such as ACC Capital Holdings Corp.’s Ameriquest Mortgage Co., New Century Financial Corp., and H&R Block Inc.’s Option One Mortgage Corp. have made some $2.2 trillion in loans. That is more than five times the amount in the preceding five-year period, and includes a growing share of “affordability” products such as “piggyback,” “interest-only” and “no-doc” loans. These products, respectively, allow borrowers to avoid a down payment, make extra-low payments in a loan’s early years, and state their income without supporting documentation. Subprime loans’ actual interest rates are typically much higher than those on more traditional “prime” loans.

Big Role

Foreign investors have played a big role in making money available. Analyst Mike Youngblood at investment bank Friedman, Billings, Ramsey & Co. estimates foreigners snapped up about a third of the $2 trillion in subprime-backed bonds issued since the beginning of 2002, often through investment vehicles known as collateralized debt obligations, or CDOs. These divvy up pools of bonds into slices with different levels of risk and return.

Whatever the drivers, the subprime market’s growth has brought significant political benefits by boosting the home-ownership rate — an achievement that the administrations of President Bush and President Clinton have been quick to claim as their own. A recent study by two researchers at the Federal Reserve Bank of Chicago, Jonas Fisher and Saad Quayyum, suggests that subprime lending alone could account for close to half of the four-percentage-point rise in the ownership rate since 1995, almost as much as demographic changes, low interest rates and government programs combined. What’s more, they surmise that the change could be long-lasting, because the technological innovations that enabled subprime lending are here to stay.

“It’s quite remarkable,” says Mr. Quayyum of subprime’s contribution to homeownership. “This could be a permanent boost.”

That means the market for derivatives on subprime debt could be here to stay, too, along with all the other infrastructure that allows investors to parcel and trade the risk of lending to U.S. home buyers. Some believe this will make the economy more resilient to the current housing downturn by keeping the credit lines open. “You have given people better tools to manage the risks, and this gives you hope that the pendulum’s not going to swing as far back as it has in the past,” says Martin Mühleisen, an economist at the International Monetary Fund who has studied the mortgage market. “But this new financial world has yet to be tested.”

Back in 2002, Mr. Spirou entered the new world of mortgage finance in more ways than one: He launched a career as a self-described “kick-ass mortgage broker,” and he set his sights on a two-story Colonial-style house right next to his parents’ place in Queens, a middle-class borough of New York.

At the age of 23, with only a few years of credit history, he might have had a hard time getting a traditional home loan. But he found an eager lender in Option One, which lent him $266,000 toward the $300,000 purchase price. The loan required an initial monthly payment of $2,200, which after two years would start floating with short-term interest rates. Option One says it has guidelines in place to make sure its borrowers are able to pay.

At the time, Mr. Spirou could easily afford the loan. He had seen his monthly income jump to more than $10,000 in the midst of the housing boom. Still, he says, he lived beyond his means, taking friends out to dinner at Ruth’s Chris Steak House and buying new clothes for the brokers who worked under him. He also took on loans to buy two new cars — a Pontiac Grand Prix for himself and a Pontiac Grand Am for his mother.

“I was young, naive,” he says. “I had to look like a big shot.”

In late 2003, with some $64,000 in auto and credit-card debts, Mr. Spirou again tapped the subprime market. The rising value of his house allowed him to take out a $360,000 loan from Long Beach Mortgage, a unit of Washington Mutual Inc., despite the fact that his growing debts had dinged his credit rating. After paying off the old loan and some $12,000 in credit-card bills, Mr. Spirou says, the new loan left him with about $65,000 in the bank. “I started using the ATM card like it was going out of style,” he says.

A Washington Mutual spokesman declined to comment.

Warning Signals

The ease with which folks such as Mr. Spirou were borrowing against their homes sent warning signals to some investors. The concern: that in their rush to attract customers amid the housing boom, mortgage lenders were lowering their standards. In 2005, for example, the share of interest-only loans grew to about 18% of all subprime loans, from next to nothing in 2001, according to data provider First American Loan Performance. Over the same period, the share of subprime loans that required little or no documentation of the borrower’s income grew to more than 16% from about 10%.

“We looked at this and thought we’re going to see lenders who are misusing these tools,” says Mr. Whalen. “We’re going to see the performance of their bonds deteriorate.”

At about the same time, in early 2005, Wall Street bankers were developing a new kind of derivative contract that would allow investors such as Mr. Whalen to make bets based on their misgivings. Called a credit-default swap, it had previously been applied mainly to corporate and sovereign bonds. Like an insurance contract, it pays off if a subprime-backed bond suffers a certain amount of losses to defaults. The holder, known as a protection buyer, makes regular payments to a bank or other counterparty for the insurance, and also has the right to resell the contract. If defaults prove higher than expected and the bond starts to look riskier, the value of the contract rises, and the holder can resell it at a profit.

In January 2005, for example, Mr. Whalen bought an insurance contract on the Long Beach Mortgage Loan Trust 2004-2, the bond into which Mr. Spirou’s loan had been packaged. He agreed to pay the counterparty, Citigroup Inc., $20,300 a year for a contract that would pay up to $1 million if more than 3.35% of the loans originally in the bond went bad. So far, the wager hasn’t made money: He says he could sell the insurance for close to what he paid.

Mr. Whalen sees the new derivatives mainly as a hedge against the riskiest part of the subprime market. He looks to bet against bonds with high concentrations of loans to people who have low credit scores, who did “no-doc” loans, or whose homes aren’t worth much more than they owe on their mortgages.

“These are the marginal guys,” he says. “It doesn’t mean the mortgage market is a bad market to invest in. It means you have to make sure you stay away from certain borrowers.” For the most part, Mr. Whalen is still bullish: His fund owns some $300 million in subprime-backed bonds, mostly higher-rated issues.

Lately, though, more investors have started worrying about what will happen to subprime borrowers as house prices plateau and start to fall. Rising home values rescued many borrowers who didn’t have enough income to make their payments, because they were able to take the needed cash out of their homes. Now, if homeowners run into income problems and can’t sell their houses for enough to pay off their loans, they will be left with no option but to let the bank take the house.

“While prices are appreciating or steady, people try harder to make those mortgage payments,” says Stuart Feldstein, president of SMR Research Corp. in Hackettstown, N.J., which has done studies of house prices and foreclosures during previous downturns in California, Texas and other states. “But when their investments become worth less than what they owe, they tend to just walk away.”

What’s more, many will face an added shock as the monthly payments on their loans — most of which are fixed for only two years — reset to reflect higher interest rates. Christopher Cagan, director of research at First American Real Estate Solutions in Santa Ana, Calif., estimates that about $640 billion in subprime loans made in 2004 and 2005 will reset to higher rates over the next five years — a trend that he expects will lead to some 450,000 added defaults.

“And that’s just resets,” he says. “That’s not including things like job loss, divorce, death in the family or serious illness.”

Falling Standards

Meanwhile, data on loan delinquencies suggest that lending standards have indeed fallen. As of August, about 3% of borrowers who took out subprime loans in 2006 were more than 60 days behind on their payments — about three times the level two years earlier and more than four times the level for all types of borrowers. Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, predicts that by 2008 as many as one in five of all subprime borrowers will be in arrears, and that foreclosures will help send the homeownership rate back down by about a percentage point.

“While 80% of this is a good thing, the 20% that’s bad is going to come home to haunt us,” he says. “That’s just the way it happens: Bad practices get exposed in the downturns.”

That worry is reflected in the derivatives market. The annual cost of $1 million in insurance against moderately risky subprime-backed bonds has gone from a low of about $21,500 in early August to $25,000 Friday, and has spiked as high as $27,800. Market participants say big hedge funds increasingly are using the derivatives to make outright bets against U.S. homeowners. This summer, for example, New York hedge-fund manager Paulson & Co. launched a fund that has aimed specifically at profiting on subprime defaults.

“People are more nervous,” says Greg Miller, a portfolio manager at Saye Capital, a Los Angeles-based hedge fund active in the subprime market. “It could get ugly. If there is a significant pickup in defaults there are going to be a lot of bad bonds out there, and CDOs could be in trouble.”

Mr. Spirou’s situation offers a glimpse into the difficulties many homeowners face. As the housing boom has faded, his income from the mortgage brokerage business has fallen to about $6,000 a month. As a result, he’s gone into arrears on his own mortgage. To catch up, he must now make payments of about $3,200 a month, up from $2,600 when he took out the loan. His other payments on credit cards and auto loans add up to about $2,500. Meanwhile, he says, the interest rate on his loan is scheduled to reset in December.

“It’s going to be a fight,” he says. “I’m just waiting to see how these next couple months of business are going to be — if I can get myself back on my feet.” He says he’s been considering selling his house, but so far hasn’t found a buyer willing to pay the right price. He’s also looking into ways to get another loan.

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By James R. Hagerty

From The Wall Street Journal Online

The air continues to seep out of the U.S. housing market, according to the latest data, and some economists are warning that prices will keep declining through much of 2007.

The National Association of Realtors yesterday reported the biggest drop in home prices since the trade group began compiling price data in 1968. Specifically, the association said the median price for home sales completed in September was $220,000, down 2.2% from a year earlier. That matched a revised 2.2% decline in August. In addition to being the largest price drops in at least 38 years, the back-to-back declines are the first time median home prices have fallen since 1995.

Other data gathered by The Wall Street Journal show large inventories of unsold homes and declining price trends in most major metropolitan areas.

“Housing is still contracting,” says Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. “We haven’t yet found the bottom.” Mr. Miller doesn’t expect house prices to resume their usual rising trend until 2008.

The latest report is likely to encourage many potential buyers to hold off in the hope of further price declines. “There’s no rush,” says Robert Cook, a procurement manager living in Whitehall, Pa., who is looking to buy a larger home for his family in Pennsylvania’s Lehigh Valley.

Rather than slash their prices, some sellers are taking homes off the market until they see stronger demand. Audrey Heckaman, a pharmaceutical sales representative in Cleveland, bought a new condo in a golfing community in Naples, Fla., in 2004 for $221,000. Early this year, she put it on the market for $429,000. But she found that too many other units in the same development were on the market. After cutting her price to $384,000, she yanked the home from the market in June and found renters for part of the year. In the long run, she figures, demand from retiring baby boomers will drive prices back up.

For those who want to buy now, sellers are dangling lots of incentives. A developer in Dadeland, Fla., near Miami, is offering $5,000 of furniture as an inducement for buyers of new condominiums, says Ronald A. Shuffield, president of the brokerage firm Esslinger-Wooten-Maxwell Inc. Other developers offer to pay some of the fees and other costs usually borne by home purchasers.

Some people who are forced to sell quickly are suffering huge losses. At an auction in Naples last weekend, the highest bid for a three-bedroom lakefront house was $440,000, including commissions and auction fees. The house had sold in July 2005 for $690,000.

Despite the recent drop-off, house prices remain far above the levels of five years ago, and they continue to rise in some areas, including Seattle, Houston and Raleigh, N.C. But they are falling sharply in other places. In Massachusetts, the median price for single-family homes in September was down 8.3% from a year before, according to Warren Group Inc., a publisher and data collector in Boston. In Phoenix, the median price dropped 4.8% in September, the local Realtors association reported.

In some areas, prices are only just beginning to fall back toward realistic levels, says Thomas Lawler, a housing economist in Vienna, Va. He believes that prices could fall more than 10% from their peak levels in markets such as Sacramento, Calif.; San Diego; Las Vegas; Reno, Nev.; Phoenix and parts of northern Virginia and Florida.

Nationwide, sales of previously occupied homes in September were at a seasonally adjusted annual rate of 6.2 million, down 1.9% from August and 14% from a year earlier, the Realtors group reported.

In a mildly positive sign for home sellers, the number of homes listed for sale at the end of September declined 2.4% from a month earlier to 3.75 million. But that was smaller than the usual decline in September, when the resumption of school and the approach of the holidays typically begin to reduce the number of for-sale signs. Over the past decade, inventories of home sales have declined an average of 3.6% in September from the previous month.

Inventories in September were up about 35% from a year earlier. A surge in inventories, fueled partly by investors rushing for the exits, began chilling the housing market in mid-2005 after a five-year boom that more than doubled prices in many areas.

Despite the spreading weakness in house prices, few experts expect anything approaching a collapse. The economy continues to expand, though at a slower rate, and a recent drop in interest rates helps make mortgage costs more affordable.

To gauge residential real-estate prospects for 27 major metro areas, The Wall Street Journal gathered data on inventories of homes for sale at the end of the second quarter from a variety of local sources; pricing trends based on surveys of real-estate agents by Daniel Oppenheim, an analyst at Banc of America Securities in New York, a unit of Bank of America Corp.; and data on late mortgage payments and job-creation prospects from Moody’s Economy.com, a research firm in West Chester, Pa. Employment trends tend to drive demand for housing.

Metropolitan areas with large increases in homes on the market and weak job-growth projections include Detroit, New York and Los Angeles. Inventories have more than doubled from a year earlier in the Miami, Orlando, Tampa and Phoenix metro areas, but strong job and population growth should help to soak up excess supply in the next few years.

Even within metro areas, price trends vary considerably depending on neighborhoods and types of housing. In northern New Jersey, for instance, prices for homes below about $400,000 may start rising again slightly by next spring if interest rates remain around current levels, says Jeffrey Otteau, president of Otteau Valuation Group Inc., an appraisal and research firm in East Brunswick, N.J. At that price level, “there’s virtually zero construction,” he says. But he says there is such a glut of luxury housing in the area that prices of such homes won’t recover before 2008.

Tom Doyle, an agent at Naples Realty Services who compiles market data on his Web site (www.naplesinsider.com), estimates that prices for typical homes in the area are down 15% to 20% from their peak a year ago. Inventory has doubled during that time, but many of the homes on the market are priced so high that they have “only a lottery’s chance of selling,” he says. Looking ahead to this winter’s selling season, Mr. Doyle says he expects prices to be flat to lower because of the large supply of homes for sale.

Seattle has been one of the strongest markets in recent months but is showing signs of losing some steam as inventories of unsold homes rise. In 17 counties of western and central Washington State covered by the Northwest Multiple Listing Service, the median price in September was up 9.4% from a year earlier, the first single-digit increase in two years.

Mike Skahen, owner of real-estate brokerage Lake & Co. in Seattle, says inventory is still lean in good neighborhoods near the area’s biggest employers. But the overall market is slowing to a more normal pace as “buyers are feeling they can be more selective.”

Houston’s market is benefiting from job growth at energy and technology companies and draws newcomers because of its low home prices. The median price in the second quarter was $152,700, compared with a national median of $227,500, according to the National Association of Realtors.

In North Carolina, Charlotte, Raleigh and some other areas have been strong lately as moderate weather and relatively low housing costs attract employers and retirees. Pat Riley, president of Allen Tate Realtors in Charlotte, has noticed increasing numbers of people moving to North Carolina from Florida to flee congestion and high housing and insurance costs. One hitch: Some people moving to Charlotte are having trouble selling their homes elsewhere and so are delaying purchases.

The median price of new and previously occupied homes sold in the eight-county Charlotte region was $182,000 in the third quarter, up 6% from a year earlier, according to Market Opportunity Research Enterprises, a research firm in Rocky Mount, N.C. But the Charlotte market may be starting to cool a bit. The Charlotte Regional Realtors Association reported that home sales in September slipped 2% from a year earlier, while the average price edged down 0.2%.

The California Association of Realtors last week forecast that the median home price in the state will slip 2% to $550,000 in 2007, after rising 7% in 2006 and 16% in 2005. That would mark the first California-wide decline since 1996. California’s last house-price slump lasted from 1992 through 1996.

Leslie Appleton-Young, the California Realtors’ chief economist, says she doesn’t expect the current downturn to be as severe as the one in the 1990s because she thinks the job market will be healthier this time. Many people don’t need to sell and will withdraw their homes from the market until demand recovers, she says. Still, she adds, some investors who bought near the top and took on too much debt “are going to get into trouble.”

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By June Fletcher

From The Wall Street Journal Online

Ask someone to name the most influential residential architects working in the U.S. today and the list is likely to include Frank Gehry, Robert Venturi or Richard Meier. But how many would have the name Aram Bassenian?

While homeowners may never have heard of Mr. Bassenian, they may well have seen some of his work. During his 36-year career, the Newport Beach, Calif., designer estimates that builders have used his designs to produce hundreds of thousands of homes from coast to coast.

Mr. Bassenian is a production architect, part of a small, largely unknown cadre of designers who specialize in the sort of mass-produced homes typically found in housing developments and subdivisions. Working as self-employed consultants for national builders like Centex Corp., Lennar Corp. and K. Hovnanian Homes as well as for some regional and local builders, these architects, and the hundreds of designers and draftsmen who work under them, churn out dozens of plans a year for everything from million-dollar luxury residences to midpriced townhouses. (By contrast, even the most prolific and high-profile custom architects design only a handful of homes a year; Frank Lloyd Wright, for example, averaged 10 annually over a 66-year career.) Though hardly household names, top production architects are the ones who decide what most American homes look like — whether Craftsman or Colonial will be in this year, for example, or if floor plans will be single-level or multistory.

Of the 1,716,000 single-family homes built last year, 79% were production homes, up from about 60% in the early ’90s, according to the National Association of Home Builders. That’s in large part because smaller, custom builders are being bought up by big builders, which have better economies of scale with suppliers and construction workers.

But the result, some critics say, is often ubiquitous, cookie-cutter design. “It’s formulaic and not very distinctive,” says Jeremiah Eck, a Boston custom architect and former lecturer at Harvard University’s Graduate School of Design. Indeed, the cost of design typically makes up about 15% of the budget in a custom home; in a production home, it’s less than 2%.

William Sherman, chairman of the architecture department at the University of Virginia, says that too often, pressured by builders, production architects lavish too much attention and money on flashy features such as granite countertops and not enough on critical elements like framing and mechanical systems.

Quality is also an issue. A survey by J.D. Power & Associates released last month found that buyers reported an average of 14 problems with newly constructed homes, up 7% from 2005, with complaints ranging from cramped garages to cheap light fixtures.

Even so, production design has come a long way from the relentlessly homogenous subdivisions that sprang up in American suburbs in the ’50s and ’60s. “Over time, production architects began to promote the idea that people could live in exciting spaces even if they couldn’t afford their own architect,” says Barry Berkus, the venerable Santa Barbara, Calif., designer.

Chris Lessard

Though most production architects keep low profiles so they won’t upstage their builder clients, a handful have achieved star status within the industry, winning design awards year after year. Here’s a look at four of the most prominent:
When he was just starting to make a name for himself in the late 1980s, Chris Lessard was determined to break with the Georgian Colonial tradition then dominating mid-Atlantic production architecture. Every new house, it seemed, had the same gray asphalt roofs, brown brick facades and symmetrical groupings of front windows, known in the trade as “five, four and a door.”

In 1989, when he was 34, the Washington, D.C.-born architect created his breakthrough floor plan — the Grand Renoir, which dispensed with the convention that all rooms in a basic rectangular house must be boxy. Instead, Mr. Lessard designed a Y-shaped foyer that set the interior walls in most of the first-floor rooms at an angle and opened up two separate sight lines from the front of the house to the back. The innovative 4,100-square-foot plan quickly became so popular that it has been built more than 300 times in the D.C. metropolitan area alone, Mr. Lessard says, especially in tony Virginia suburbs such as Alexandria and Reston. Currently, WCI Communities is offering the Grand Renoir in Oak Creek Club in Upper Marlboro, Md., for $897,000.

The son of a home-builder, Mr. Lessard learned about budget constraints the hard way. His father sent him out to buy hardware for a project and Mr. Lessard bought the most expensive kind — solid brass. His father upbraided him and said that if any of his competitors used solid brass knobs and hinges, he’d install them — if not, Chris would have to return them. (All used plated brass, he learned in a tour of the area’s new homes.) It was an important lesson for the young architect: Everyone wants the best of everything but not everyone can afford it. The value of the production process, he says, is that experts have edited everything in the house with an eye to limiting costs.

As with all production architects, Mr. Lessard must stay atuned to shifting demographics. Now, with downsizing boomers and first-time home buyers poised to dominate the housing market for the next decade, he is looking for ways to eliminate wasted space. “I want to make houses that are as efficient as a boat,” he says. That means getting rid of two-story foyers and vaulted ceilings and resurrecting ideas from small, efficient homes from the ’20s through the ’50s, like pop-out dormers, galley-style pantries, built-in bookcases and closets tucked under the eaves. Those are some of the features found in his Craftsman-style “1920s” collection currently for sale in the community of Brambleton in Ashburn, Va. The 2,500- to 3,400-square-foot homes with detached garages in the rear are being built by Miller & Smith Homes, McLean, Va.

Aram Bassenian

If Southern California sometimes looks like Tuscany, that’s partly because of Aram Bassenian. In his 36 years as a production architect, Mr. Bassenian has borrowed plenty from that rural Italian style, inspired by frequent trips overseas, and has popularized stacked stone turrets, rough-hewn beams and waxed fieldstone floors in attached and detached homes. “I was trying to get away from that vague ‘California look,’” says Mr. Bassenian of the red-roofed, sandy-colored villas that were prevalent throughout the Southwest.

The 64-year-old architect concentrates on the upper end of the market, and so can play with a broader palette than most of his peers; his homes currently sell for about $500,000 to $7 million, and are found in 20 states, from Washington to Georgia. One of the first production architects to venture into semicustom work, which allows buyers to “customize” their homes to some extent, Mr. Bassenian designed 4,000- to 5,000-square-foot homes for Westlake Trails in Westlake Village, Calif., built by J.M. Peters Co. in 1990, with such features as a “morning room” nook off the kitchen for reading the paper and drinking coffee, a library, secondary bedroom suites and four-car garages. They were among the first noncustom homes to break the $1 million barrier.

Trying to lure buyers who could afford a custom home forced him to expand his design repertoire, he says; it also helped raise expectations among lower-end buyers. “What starts in higher-end housing eventually moves into the rest of the market,” he says. Pulte Homes, for instance, recently started offering morning rooms and libraries in Phoenixville, Pa., and an option for a four-car garage in Las Vegas, both in projects where the houses cost around $400,000.

With $2.8 million to spend on a new house, retired businessman George Beebe and his wife, Kathleen, could easily have afforded a custom home. Instead, last November they bought the “Formal Italian Plan 3,” a 4,800-square-foot semicustom home at the Cortile Collection development in Rancho Sante Fe, Calif. “They thought about all the little details so we wouldn’t have to,” says Mr. Beebe, referring to his five fireplaces, 400-square-foot detached casita and travertine floors — all included in the price.

Of course, buying production also means making trade-offs. Mr. Beebe had to spend an additional $15,000 to put in extra wiring for his 11 televisions, including a 32-inch high-definition screen in his bathroom and another television in his closet. He faults the design for not taking this into account. “The sort of people who buy these houses love technology,” he says.

Mr. Bassenian says it’s a challenge to keep a step ahead of the tastes and interests of his upscale buyers. With such high energy prices, he says that buyers are becoming more interested in customizing their houses with green and energy-efficient features. At Portico, a community he designed in San Diego where houses start at $750,000, buyers have the option of adding bamboo or palm wood flooring, carpet from recycled materials, speed-cook ovens and solar cells on the roof. He plans to build more informal designs with circular rooms to take advantage of views, master bathrooms that are bigger than master bedrooms and two-person showers.

Carson Looney

Carson Looney’s designs are as rooted in the South as his thick Memphis drawl. The architect came to prominence in 1989 for his revival of the classic Charleston shotgun house in a much-lauded development called Harbor Town, near downtown Memphis. One of the earliest “new urbanist” communities, Harbor Town featured sidewalks, front porches and shallow front yards — commonplace in older neighborhoods but unusual for new developments at the time. All were designed to encourage conversation and connections among neighbors.

A self-described “Air Force brat,” Mr. Looney grew up in cramped, spare military housing, an experience that later led him to think about how to design efficient, modestly priced homes that families could live in without feeling confined. He revived some practical ideas of the past such as open rooms, where families could socialize, combined with small “retreats” such as nooks, built-in benches and window seats.

Although Mr. Looney’s designs haven’t been as widely reproduced during his 23-year career as those of some of his peers, they have appeared in such high-profile communities as Celebration, the “small town” built by Walt Disney Co. near Orlando, Fla. “I’ve always been impressed with his attention to design detail, even when he’s doing affordable housing,” says Deb Bassert, who oversees the design committee of the National Association of Home Builders.

Mr. Looney declined to disclose his annual income, as did the others interviewed for this article. But according to the 2005 compensation survey by the American Institute of Architects, the average salary of top production architects — principals of firms with more than 100 employees — is $275,600 a year. Those with smaller firms, including most custom architects, average $180,300 a year.

While best known for his 19th-century revivals, Mr. Looney had a short flirtation early in his career with ’80s postmodernism, where the emphasis was on over-the-top, attention-getting details. He put round windows in every gable and specified vast baths that he now scornfully refers to as “Texas tubs.” It was pretentious and gimmicky, he says.

These days, he’s tossing out useless exterior ornamentation and rooms that few people use, like the living room. Instead, he is focusing on informal parts of the house that he feels have been neglected. Currently on the drawing board: an updated version of the mudroom that includes cabinets for pet-food storage, a pet shower and a nook where pets can sleep, with Dutch doors that can be partially opened so they won’t feel lonely. “Everyone needs a place for stuff,” Mr. Looney says.

Doug Sharp

In 1979, Doug Sharp designed a three-bedroom, two-bath ranch house with a new idea at the time — a “great room” that did away with the family room’s walls. Nearly three decades later, that 1,600-square-foot plan is still selling and the great room has become a fixture in almost every new home in America.

Best known for helping to popularize open floor plans, Mr. Sharp’s firm was one of the first to sell books of its architectural plans to the public. The service upped the ante on design for homeowners, who have become more discerning, says Katherine Lee Schwennsen, president of the AIA. Before, many builders without any design experience would simply take generic plans out of an old pattern book, available through entities like Sears that may not have been created by an architect. “Mr. Sharp brought real design to the process,” she says.

Mr. Sharp has always tailored his work to regional tastes and climates. But for the homes at Harbor Island in Tampa, Fla., in 1989, he went a step further and arranged rooms in a C-shape around a central courtyard, as many Latin American homes do — a look that’s widely imitated throughout the Sunbelt today. Currently he is adapting the feature to colder climates. In Astor Place, a development in Rocky River, Ohio, that fits townhouses together like puzzle pieces at 10 to 12 units per acre, he included tiny courtyards screened by ironwork and landscaping. They aren’t big enough for much more than a bistro table and a couple of chairs, but they do give owners a little breathing room.

Mr. Sharp says it’s difficult to design for today’s smaller lots, but he’s trying to overcome mistakes he made in the past, such as making porches that were too shallow to hold a chair. Currently, he is reviving Art Deco and mid-’50s contemporary styles, though with higher ceilings and green materials. “The ranch house is back,” he says of the Eisenhower-era icon, perfect for downsizing boomers. (Indeed, a survey of 500 residential architects by the AIA shows that demand for single-level homes has increased 10% in the first quarter of this year, to 39%, over the same period a year before.) To keep the homes from feeling confining, Mr. Sharp is making ceilings taller — up to 13 feet, while eliminating little-used spaces like the living room.

There are trade-offs, of course. Marleen Korkik, 52, a sales and marketing administrator, paid $300,000 for a two-bedroom ranch that Mr. Sharp designed for Lowry West, a new development in Denver. She likes some of the homey details like shutters and flowerboxes. But Mr. Sharp put the master bedroom in the front of the long narrow lot and the garage in the rear so it doesn’t dominate the streetscape. That’s a problem for Ms. Kordik, who now has to listen to folks chatting on the sidewalk, which is just 20 feet away from her bedroom.

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By Laura Mandaro

From The Wall Street Journal Online

Homeowners looking for a good deal on a retiled bathroom or a repaved driveway are, for the foreseeable future, out of luck.

Price rises in the materials used by general contractors continue to outpace overall consumer and business inflation and will likely keep up their rapid climb for the coming year, according to a report by the Associated General Contractors of America released after their midyear meeting in San Francisco late last week.

Boosted by higher metals, concrete and fuel prices, construction input prices jumped 8.8% in August from the same month a year ago. The price index for highway and street construction jumped 13.8%, and home construction gained 8%, said the contractors group’s analysis of Labor Department data.

Those gains easily overtook the 3.8% rise in the consumer price index — the broadest gauge of consumer inflation — and a 3.7% rise in the producer price index, which tracks the prices of wholesalers’ finished goods.

“Contractors have been experiencing significant increases in the costs of construction materials and, in some instances, shortages,” Stephen Sandherr, chief executive of the contractors group, which represents builders who work on commercial projects like retail stores, public works and hospitals.

“The trend we’re seeing is that the inflation rate for material prices is likely to continue to be greater than the CPI or PPI,” he said in an interview.

Demand for materials that go into new housing, highways and factories skyrocketed over the past few years thanks to a fast-growing housing market and rapid industrialization in China and other developing countries. But with the U.S. housing market in retreat and the economy slowing, some of that pressure has let up.

The AGC expects construction material costs to rise faster than overall prices during the next six to 12 months, if not as rapidly as they have in the past year.

Pushing costs above average, contractors are generally locked into buying fixed quantities of materials. Plus, transportation costs run high, since most materials have to be transported to the construction location.

The group says a “realistic inflation target” for construction materials may be 6% to 8%, with periods of 10% increases possible.

In recent months, the prices of some key materials, such as lumber, have dropped. Plus, natural-gas, crude-oil and gasoline futures have fallen sharply, signaling future relief on the prices of petroleum-based materials like the PVC pipe used in plumbing.

But many raw materials needed for building projects have posted double-digit price gains.

Over the 12 months ending in August, the Labor Department’s price index for asphalt paving mixtures jumped 38% after rising about 4% a year for each of the prior three years, according to the contractors group.

Concrete prices rose 10%, while brick and structural clay tile climbed 8%. Copper products’ prices ballooned 81%. And gypsum products, like wallboard, gained about 20% a year in 2004, 2005 and the last 12 months.

Over the next six to 12 months, the group expects diesel, plastics and gypsum costs to decline from year-ago while prices like asphalt and copper to remain “elevated but not stratospheric.”

Gypsum prices should decline as new residential construction slows.

Spending on private residential projects fell 1.5% in August from July, the Commerce Department said Monday. But commercial construction outlays gained 3.4%, bringing overall construction growth to a greater-than-expected 0.3% rise.

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By Karen Hube

From The Wall Street Journal Online

It seems that many retirees have a bit of Donald Trump in them these days.

In recent years, older investors have been increasingly buying second homes, land and commercial properties to shore up their nest eggs. While stocks were going nowhere after tanking in 2000, real-estate prices logged their biggest rise on record between 2001 and 2005, with an average annual 9% gain. Some markets, such as Las Vegas, Southern California, Phoenix and Miami-Dade County saw double-digit returns of at least 20%, according to the National Association of Realtors.

But with mortgage rates climbing and home prices in some markets falling, is there still a chance to make money in real estate? Or is the retirement and pre-retirement crowd better off stashing its dollars in a traditional mix of stocks and bonds?

The answer, according to financial planners and real-estate analysts, is that most retirement portfolios should still include some real estate. That’s because land and property are “loosely correlated to the stock market,” says Seth Pearson, a certified financial planner in Dennis, Mass. In other words, the value of real estate tends to rise when stocks are going down.

At the same time, though, real estate should be a relatively small part of most nest eggs, no more than 20% of your overall portfolio, Mr. Pearson advises. And investors with dreams today of making a killing in residential and commercial property need to lower their expectations — sharply.

“You can’t figure on returns being what they have been, or you’ll be very disappointed,” says Christopher Cordaro, a financial planner in Chatham, N.J.

If you’re thinking about jumping into the real-estate game, or already have purchased a property or two, consider the following stories of three real-estate investors who followed differing strategies with varying degrees of success.

Buy, Fix and Flip

Flipping is the tactic that received the most attention — and notoriety — during the real-estate boom. It’s when an investor buys a property with the intention of selling it quickly — usually in less than a year — betting simply that the demand for, and value of, the property will increase significantly in that brief period.

Risky as it sounds, flipping became wildly popular in some markets. In 2005, short-term investors in parts of Florida, Nevada and Southern California posted annualized returns of more than 50% on average, according to First American Real Estate Solutions, a research firm in Santa Ana, Calif. In one of the hottest markets in the Miami area last year, investors who flipped properties within three to six months scored an average annualized return of 150%.

The problem: Flipping today isn’t as lucrative as it was only a year or so ago. Given that many communities are now buyers’ markets, “it’s a lot harder to make money,” says Christopher Cagan, an analyst at First American. And the process isn’t as easy as it looks, especially because buying and selling real estate carries high transaction costs.

Terry Bryan, age 53, is a flipper. A retired stockbroker in Colorado Springs, Colo., Mr. Bryan decided to try his hand at real-estate investing in 2001, after the stock market tanked. For the most part, his bets have paid off.

“I don’t get excited over a 10% return for the year,” Mr. Bryan says. “I put $10,000 down on a property” and walk away with $20,000. “That’s a 100% return, and I do that in six months.” He adds, though, that his real-estate investments are “really my full-time job.” He buys two or three properties a month, typically single-family homes or apartments.

Mr. Bryan says he has learned several lessons that help him steer clear of trouble in a cooling market. First, he buys a property only if he can get it for less than market value. The way to do this, Mr. Bryan says, is “to look for motivated sellers — such as someone going through a divorce or who has to move quickly — or properties in foreclosure.”

While that might sound simple, Mr. Bryan has had to build a network of close contacts, including trusted real-estate brokers, mortgage lenders, real-estate attorneys and members of local real-estate clubs. His goal: be the one they call when they hear of a great deal.

That’s what happened in August, when Mr. Bryan got a call from a Realtor he knows who told him about a home in foreclosure. “The owner had passed away and left the property in a trust, but the trust couldn’t keep up with the payments,” Mr. Bryan says.

He bought the home for about 30% less than its value; after paying transaction costs and maintenance and doing some work on the property, he estimates he will make about 10% on the deal.

If you think you might want to try your hand at flipping, one of the most important rules is to “have an exit strategy,” says William Bronchick, author of “Flipping Properties: Generate Instant Cash Profits in Real Estate.” “If you can’t flip the property, will you rent it? Lease with the option to buy? Know the answers before you buy.”

Let Your IRA Do The Buying

Last year, James Burns, a 60-year-old lawyer in Bath, N.Y., considered buying real estate purely as an investment. But Mr. Burns faced having to sell some of his investments to free up cash to buy property. And he didn’t want to get stuck with a large capital-gains tax bill.

His solution: buy a property through his individual retirement account.

And he’s far from alone. IRAs have become increasingly popular vehicles for real-estate purchases in recent years. “That’s where many people hold most of their assets, and they haven’t wanted to miss the real-estate boom,” says Jaime Raskulinecz, chief executive officer of Entrust Northeast LLC, a retirement-plan administrator in Verona, N.J.

To buy property through your IRA, you need an IRA custodian that specializes in real-estate purchases. Typical IRA custodians — banks and mutual-fund companies, for example — buy stocks and bonds, but they generally don’t get into real estate because it’s more labor intensive to add to a portfolio and manage.

Mr. Burns sold shares of a stock index fund in his IRA and used the cash for the real-estate purchase. This avoided an immediate tax bill because all taxes incurred in an IRA are deferred until funds are withdrawn.

And when he sells the property, “I’ll be able to make money without paying taxes right away,” Mr. Burns says.

Once your IRA owns a property, you may not use the property for your benefit. “It must be considered an investment only, meaning you and relatives — parents, children, grandchildren — can’t live in it or rent it,” Ms. Raskulinecz says.

What’s more, you must pay for maintenance, upgrades or any costs related to the property with funds from your IRA. Likewise, if you rent your property, income must go directly into your IRA.

But keep in mind that the rules governing this kind of transaction are complicated. One wrong move and you risk losing your IRA’s tax-sheltered status. That would mean owing income taxes on all of your account’s assets and a 10% penalty if you aren’t yet 59½.

Mr. Burns figured that raw land was the perfect IRA investment, “because there’s not much in the way of expense and not a lot of insurance to carry,” he says. His 8.5-acre property on Lake Keuka, in New York, “is wooded, with a couple of streams running through it,” Mr. Burns says. “If I had bought a building, I’d have to generate income on it because the taxes and insurance would be higher.”

Look Abroad

Paul Zelnick wanted to buy a second home to use for a few months of the year in retirement. But the 64-year-old retired financial analyst from Chappaqua, N.Y., had a tall order: He wanted a charming home in a vacation hot spot that would appeal to renters and be a good long-term investment — all for no more than $400,000.

In the U.S., where properties in the hottest markets fetch closer to $1 million or more, that would be a pipe dream. But Mr. Zelnick found what he was looking for — in San Miguel de Allende, Mexico.

Like Mr. Zelnick, many retirees are looking to foreign markets for properties that are not only their dream homes, but sound investments as well. Among some of the hot spots with good deals: Panama, Honduras, Malta, Thailand and Malaysia.

But investing abroad comes with its own set of difficulties, says Tim Leffel, author of “The World’s Cheapest Destinations: 21 Countries Where Your Money Is Worth a Fortune.” “You have to realize that things work differently in markets outside the U.S.,” he says, “and you have to play by different rules.”

Mexico has attracted numerous Americans like Mr. Zelnick because of its proximity to the U.S. But near as it is, its business practices are vastly different.

“Most real-estate transactions go off without a problem, but you have to be careful or you could end up losing everything,” says Raoul Rodriguez Walters, a financial planner in San Miguel de Allende. “For example, Mexico doesn’t have a real-estate board to regulate brokers, so you can get caught up in unprofessional situations.”

That’s what happened to Mr. Zelnick. Months after paying cash for a $365,000 property, he still hadn’t received the deed. Such delays are common enough in Mexico for Mr. Zelnick to be unconcerned, so he proceeded with some $50,000 of construction on his property, “knocking walls down to create bigger rooms, putting in new, bigger windows and creating two extra bedrooms upstairs,” he says.

But partway through the construction, he learned that five Mexican charities had laid claim to the property, and a judge ordered all work to halt.

As it turns out, the former owner had two wills: one in the U.S. and one in Mexico. The will in Mexico cited the charities as the beneficiaries of the property. Mr. Zelnick bought the property from the owner’s nieces in the U.S., who were named heirs in the U.S. will.

To make matters worse, one of the attorneys from the Mexican realty company that Mr. Zelnick worked with absconded with the cash.

“It’s all a huge mess, and it’s costing me,” says Mr. Zelnick, who purchased the property in late 2003, and had been looking forward to renting it out for some extra income. “Now I have to work through all of this, and it could be another couple of years before it’s all resolved.”

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By Ryan Chittum and Janet Morrissey

From The Wall Street Journal Online

Larry Siegel stepped down as chief executive of Mills Corp. after a year of mounting problems at the real-estate investment trust. But some on Wall Street expressed concern about the size of the payment he will receive and the fact that he may participate in development of the $2 billion Meadowlands Xanadu shopping mall that contributed to the firm’s woes.

According to a filing with the Securities and Exchange Commission, Mills agreed to pay Mr. Siegel $10.5 million if the company is purchased by the end of 2007, in addition to a $2.5 million severance payment. Mr. Siegel remains chairman until the Meadowlands Xanadu deal is closed.

Analysts generally applauded Mr. Siegel’s departure — as well as disclosure that the New York Stock Exchange would delay until next April a decision to delist Mills — as clearing the way for sale of the company. While the company has been exploring “strategic alternatives,” including sale of the company, questions about its financial condition have made would-be bidders reluctant.

Mark S. Ordan, who came to Mills in March as chief operating officer, was named president and chief executive. Mr. Ordan reiterated in an interview yesterday that Mills plans to “sell the whole company or part of the company.”

Ross Nussbaum, a Banc of America Securities analyst, said in a note the change-of-control provision and Mr. Siegel’s new role as nonexecutive chairman “creates a serious conflict of interest as it could incentivize (Mr. Siegel) to vote for a sale of the company at a lower price than if he were receiving a stock payment.”

Mr. Siegel couldn’t be reached for comment yesterday. Mr. Ordan said the $10.5 million payment was less than what was called for in Mr. Siegel’s contract. Mr. Ordan said Mr. Siegel’s resignation “was a decision made mutually by the board and Larry.”

The SEC filing also showed that Mr. Siegel must repay Mills $362,156 for “personal use of the company-chartered aircraft and personal flights erroneously paid by the company.”

Matthew Ostrower, an analyst with Morgan Stanley, said the change-of-control agreement and disclosure about personal air travel are likely to anger the average Mills investor.

Throughout his 11-year tenure, Mr. Siegel was seen as an aggressive innovator, pushing his malls in new directions that used entertainment attractions to draw shoppers into a unique mix of outlet shops not found in typical regional malls. But he also was criticized for over-promising, particularly at the Meadowlands Xanadu project, a massive shopping-and-entertainment complex under construction in the New Jersey Meadowlands near Manhattan.

Costs have soared to $2 billion from the $1.2 billion projected as recently as this spring. Under an agreement announced in August, Colony Capital Acquisitions LLC and Kan Am USA Management XXII Limited Partnership agreed to arrange construction financing and fund the remaining balance. In yesterday’s SEC filing, Mills said if the Colony/Kan Am deal is completed, “Mr. Siegel may join the new venture” while remaining on the Mills board and resigning as executive chairman.

Mills shares have been battered by financial restatements, canceled development projects, a 60% dividend cut and an investigation into Mills’s accounting. When Mr. Siegel took over as chief executive of Mills in March 1995, its shares traded at $16.63. They reached a peak of $66.44 in August 2005, but yesterday were down 1.4% to $16.48 in 4 p.m. NYSE composite trading.

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By Michael Corkery

From The Wall Street Journal Online

Home-builder stocks are bucking a trend — one that has the rest of the housing industry in a tizzy.

The Dow Jones Wilshire U.S. Home Construction Index of home-builder stocks has increased about 15% since July 18 — even as each passing week shows the nation’s housing statistics heading down. While the index is still down for the year, that recent rise has outpaced broader market indexes and set off a debate among investors about whether the slowdown might end sooner for the home builders than many expect.

Some bulls believe builder stocks hit a bottom toward the end of July, around the time that the Federal Reserve signaled it was considering a pause in its two-year campaign of interest-rate increases. Since the housing sector is so sensitive to mortgage rates, the signal mattered to home builders. The question now is whether the Fed’s pause — and a recent drop in long-term interest rates — will be enough to bolster a sector so exposed to a housing slowdown that seems to be getting worse.

According to the National Association of Realtors, sales of existing homes were down 12.6% in August from a year earlier, and the median price of homes sold dropped 1.7% over that period — the first year-to-year price decline in 11 years. Sales of new homes were down 17.4% in August from a year ago, according to the Census Bureau.

Some stocks seem unfazed by the headlines. For instance, shares of Lennar Corp., which reported on Sept. 8 that it was reducing third-quarter earnings estimates because of the continued housing slump, have risen roughly 6% since then. In 4 p.m. trading Friday on the New York Stock Exchange, Lennar’s shares were down 52 cents to $45.12, giving the company a market value of $7.26 billion.

“If the sector stops going down with bad news, it may imply that it has found a bottom,” says John Buckingham, chief executive of Al Frank Asset Management, which has $800 million under management and whose investment newsletter, the Prudent Speculator, has recommended more builder shares in recent months. But Mr. Buckingham says his funds haven’t added to their home-building stake recently.

These are volatile stocks and bears believe the recent gains could easily be reversed as the housing market continues to slide. Banc of America Securities analyst Daniel Oppenheim last week downgraded Pulte Homes Inc. to “sell” from “neutral” and D.R. Horton, to “neutral” from “buy,” citing the recent appreciation of their stocks.

But some bulls aren’t dissuaded. Citigroup analyst Stephen Kim declared in a report last month that it is “a buyer’s market” for the stocks. Josh Spencer, an analyst who covers the home-building sector at T. Rowe Price in Baltimore, says builder stocks are too inexpensive to pass up.

Even after their rally, many builders trade slightly above their book value, which is a company’s assets minus its liabilities, and is often regarded as a rough estimate of how a business would be valued if liquidated. The big players like Pulte, Lennar, Horton and Toll Brothers also trade at less than six times earnings, based on the four most recent quarters of results.

“All historical metrics tell you [to] buy the stocks here,” says Mr. Spencer, who says his firm has increased its home-builder holdings in recent months.

Besides being cheap, the bulls argue home-builder inventories may have peaked in some markets. And the pull back in interest rates could help renew demand.

Citigroup’s Mr. Kim, whose firm has investment-banking relationships with several home builders, says the stocks could get a boost when the companies report fourth-quarter earnings because cancellations on orders for new homes could decrease and the year-over-year comparisons will be easier. By the first quarter of next year, he believes cancellation rates will be lower and order trends will be better than the first quarter of 2006.

Yet trying to time a rebound in this sector is an extraordinarily risky game, because the fundamentals of the overall market still look so weak, even to the builders. Many builders aren’t giving earnings guidance for next year because the outlook is so murky. Moreover, builders are still using incentives to lure in buyers, which eat into their profit margins. A report by Moody’s Economy.com said house prices could keep falling until 2008 or 2009 in some areas. Private-equity groups — investment pools that look for companies they can buy on the cheap, fix up and resell — have been looking at the battered sector, but are expected to hold off taking any companies private until the housing market bottoms and begins to stabilize.

“We are in uncharted waters and you just don’t know if there is reef ahead,” says Edgar Wachenheim III, chairman of Greenhaven Associates, a Purchase, N.Y., investment firm, with $3.5 billion in assets under management, who sold off his builder stocks a year ago and is staying away from the sector. “I don’t know how any reasonable person can know where the stocks are going to go.”

Another dark cloud over the sector is the threat that builders’ land holdings will lose value as land prices decline. That could mean that some land may be worth less than they paid for it. The bulls counter that the land issue is overstated because builders are increasingly using options, which allows them to walk away from land deals and minimize their losses.

Some problems may lie ahead when builders construct more houses on land they bought more recently at higher prices. As of the end of last year, 28% of land owned by home builders was negotiated in 2004 and 2005, 46% in 2003, when land prices started to take off, and 26% in earlier years, according to a report by analyst Ivy Zelman of Credit Suisse, which does business with several home builders.

Last week, Ms. Zelman downgraded Horton to “neutral” from “outperform” after estimating that 48% of its owned land is at prices negotiated in 2004 and 2005. Meantime, she upgraded MDC Holdings Inc. from “neutral” to “outperform,” citing its relatively short supply of land.

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