S & L Crisis vs. Mortgage Meltdown: What Happened?

Some of us remember the “the savings and loan crisis” of 1989 that swept across the country. Today we are experiencing a similar crisis, known as the “mortgage meltdown.” How do these two events compare?

First, what caused the Savings and Loan crisis of 1989? This situation had its roots in the high interest rates of the early1980’s. With rates up as high as 19%, the low interest loans held by S & L’s plummeted in value. In addition, highly regulated S & L’s were limited in the interest rates they could offer depositors. They could not compete with a recent financial innovation, the money market fund, which paid higher rates. People pulled their money out. Basically, many S & L’s were close to insolvent.

Also, at this time (1981) the Tax Reform Act was passed, allowing individuals to deduct losses on rental property from their ordinary income. Every doctor, lawyer and dentist went out and bought rental property. Negative cash flow was not a problem. Depreciation and cash flow losses were deducted from their regular income, for a nice tax savings. This set the stage for a surge in demand for real estate. Strong demand always raises prices and inventory. New loan structures, such as adjustable rates, negative amortization, and buy-downs were popular. These loans were a response to the high interest rates of the time. They allowed more people to buy real estate. And, the thing was, a whole lot of people wanted to buy real estate.

In an attempt to restore S & L’s to profitability, new laws were passed, softening their regualtion. S & L’s could pay higher interest to their depositors. And, they could make development loans, with an equity stake in the project. Developers could get a loan and a business partner at the same time. Higher loan ratios, and loose accounting practices became the norm. As interest rates came down, some S & L’s were marginally profitable again.

Then the federal government changed direction in two important ways. First, in 1985, the de-regulation of S & L’s began to go the other way. Federal regulators required S & L’s to have more net worth on their books, and curbed their involvement in development deals. And second, in 1986, the tax incentive to own rental property was phased out. Without this tax advantage, the value of real estate was significantly reduced. Properties began to flood the market. The already weak S & L’s were forced to take back foreclosed property. About 1,000 savings & loans closed.

Of the 20 largest institutions that failed, 14 were in Texas. Looking back, we can see that S & L’s, with government support, tried to regain profitability by riskier lending practices and by investing in the real estate boom of the time.

Today we are experiencing a “mortgage meltdown.” This is a complex situation that has its roots in the financial innovations of the 2000’s. Now we have “bundled debt obligations,” structured by investment firms and sold to investors here and overseas. Mortgages are “sliced and diced” and repackaged. This process brings money in to the US to fund many things - the growth of our businesses, our real estate ownership, and our credit card consumption. The risk to investors is watered down, or hedged, because their investment is spread across many different debt obligations. The perception of low risk made it very easy to find investors around the world. Financial engineers found that if you build it, they will come.

This liquidity, combined with low interest rates, fueled the demand for real estate – long considered a stable, low risk investment. Lenders were able to be more liberal in their qualification of home buyers. If you were breathing, you could buy a house. People saw 10-30% appreciation in their neighborhoods, and could get a 6% loan with no money down. A mortgage loan is one of the best, lowest interest loans you can get. New homebuyers got into the market; homeowners sold and moved up; investors came out of the woodwork. And, lots of people borrowed against their homes, and used the cash for other things.

As in the mid 1980’s, demand for real estate raised prices and inventories, as builders came into the market. For the past five years, the health of our whole economy was attributed in large part to the growth in equity that people had in real estate. The mortgage meltdown began when lots of people found that they could not sustain the payments on their loans. Foreclosures created a self perpetuating downward spiral in real estate prices. These “bundled debt obligations” turned out to be riskier than people thought.

Instead of S & L’s, it is investment firms, such as Bear Stearns, who have lost the value of their assets. Bear Stearns was offered an emergency rescue by our government because of the interconnectedness between them and other banks and investment companies. Like foreclosed homes in a neighborhood, their fall could bring down other investment firms, and threaten the stability of our financial system.

Looking at both the S & L Crisis of 1989 and today’s mortgage meltdown, we see that liberal lending practices plant the seeds of their own downfall. And, that strong demand for homes, with continued price escalation is not sustainable. In 1989, we waited for the foreclosures to stop before we began to see home prices stabilize. In some areas this has happened, and inventory is dropping. And, as we move forward, we could use a new financial innovation – one that limits borrowers to what they can truly afford.

Keeping Cracks in Line

In our Taylor Road house the concrete slab will be the finished floor. Using a structural element as a finish floor cuts the cost of labor and materials. (See Concrete Experiences – Part 1 and Part 2). Why add another layer of tile, carpet or other finish? Concrete floors are attractive, livable, and easy to care for. I have seen them in many styles of homes, from craftsman cottages, to haciendas, to farmhouses. Of course, concrete floors may be too rustic for some traditional styles. I can’t imagine them in a Victorian, for example.

We just poured the slab for our current project – the house on Taylor Road. This time we ordered the concrete from Centex, and stayed with our formula of 5 sacks cement per yard and no fly ash. We wanted to avoid a lot of water in the concrete. I am not sure about allowing flyash in the concrete. This is a by product of coal combustion that is mixed with cement to make concrete more durable and easier to work with. It apparently slows down the drying of concrete. I thought that flyash might cause dark swirls in the concrete floor, but am not sure about this.

After the concrete was poured, the contractor burnished the surface to produce a slick finish. The burnishing makes the concrete harder and less porous. This time we decided to score the concrete to control the shrinkage cracking that we had on our Trail of Madrones house. Shrinkage cracks naturally occur in slabs of concrete. Our slab is quite long, and this makes it especially vulnerable to stresses and surface cracking. There is a window of time for scoring to work. If you score the concrete within 24 hours of the pour, shrinkage cracks will form inside the score lines, and not be noticeable. They will not run helter skelter around the floor.

Jim popped the lines on the concrete with a chalk string. The score lines relate to the walls, and are a part of the design of the rooms. “God is in the details,” as they say. (Miles Van der Rohe )

Concrete Experiences - Part 2

Using the concrete slab as the finished floor of the house is a choice we have made several times, and will make again. (Read Concrete Experiences – Part 1). When a structural element can be used as a finish material, you have a green opportunity. Why add another costly layer of carpet, tile, wood or vinyl if you don't have to? Concrete floors are very livable and easy to care for. They require a little extra care during construction, but the results are worth it.

In 2004, when we built our house on Trail of Madrones, we wanted to have concrete floors. I happened to see the home of Jim David, one of Austin’s premier landscape architects, and liked the light tan color of his unstained concrete floor. He told me to call Capital Aggregates, and ask for their special mix for finished floors. I did, and they gave me this mix: 5 bags cement per yard with no fly ash. However, they said that they could not control the color of the concrete. The color depends on the materials used to make the cement.

Using this mix for Trail of Madrones, the floor came out a lighter grey and there were no dark swirls (as in the Edgewater house). As before, we had the concrete burnished by the contractor after it was poured.

When framing was complete we rented the heavy waxing machine and bought 5 gallons of Kemiko wax from Cornerstone Hardware. Jim and a laborer waxed the floor. Then we covered the floor with brown paper, purchased in rolls from the hardware store. When the tape and float was finished, the paper was so dirty and torn up, we had to take it off and re-paper the floor.

We used a beige/yellow color (Sherwin Williams “Blond”) on the walls. This warmed up the space. I felt that the grey concrete needs a warm color with it. Some shrinkage cracks showed up later, which were a little disconcerting, but we just live with them.

We have a Chocolate Lab, who comes in and out. It is great not to have to worry about protecting carpet or wood floors. And it helps with Jim’s dust mite allergy. We just sweep and mop the floors once a week. They are cool in summer and heat up in winter if sun hits them. We think they are just the perfect floor.

Concrete Experiences - Part 1

Using the concrete slab as the finished floor of the house is a choice we have made several times, and will be happy to make again. I love the idea of using a structural element as a finish material. Why add a costly layer of carpet, tile, wood or vinyl? Concrete floors are very livable and easy to care for.

In 2002, we tried out a concrete floor for the first time, without knowing what to expect. The foundation contractor suggested that we “burn the concrete.” By burning he meant giving it a burnished, or hard troweled finish. There is a small window of time to do this. The minute the concrete can be walked on, they go over it with a machine that polishes and closes the pores of the surface. Think of a fan with four rotating paddles that scrape and smooth the surface.

After the house was framed, we took the next step with the floor. I went to Cornerstone Hardware and bought a gallon of “Kemiko” stain. This is a reactive stain – meaning that it reacts with the lime in the concrete to produce a color. The solution is clear, and has no resemblance to the color that it produces. I tried it out in an area under the cabinets, and the concrete fizzed a little when it was put on. Then it turned an orange color, which I did not like. I decided to forego the stain, and just let the floor be a natural concrete color. Generally, our style is to allow the floor and walls to be in the background, and bring in color from furniture and decorative pieces in the house.

To seal the floor, we bought five gallons of “Kemiko” wax from Cornerstone Hardware, and rented their polisher. The polisher was a very heavy machine with a stiff bristle brush. It took two of us to carry it into the house. The machine rubs the wax into the pores of the concrete. Jim poured about ½ cup of wax on a spot, and burnished it into an area of about 3 x 3 feet. Our kids took turns with the machine, and we paid them with a taco lunch.

The floor came out nice, with a grey stone-like quality. It had dark grey swirls in the concrete, which I would have preferred not to have. After waxing, we covered with floor with some leftover Masonite, given to us by another builder. We were careful to remind each contractor, especially the painters, that we had a finished floor under the fiberboard.

Later, the walls were painted white. When we removed the Masonite, I was not happy with the color combination. The concrete gray floors and white walls were just too sterile and cold. I had the walls re-painted a warm yellow-beige to counteract the cool gray of the concrete. Later when we used concrete floors, I was careful to consider the how the wall color would work with the gray floors.
------
Our real business is real estate. Get to know us at: www.weloveaustin.com Building is a side investment, fun hobby, and continual challenge. Our current project is 8716 Taylor Road. I invite you to share this job with us, and join our community of friends who are interested in building homes. We’d love to hear your ideas

Austin Positioned for Growth

In their annual CEO poll, Chief Executive Magazine, ranked Texas as the “best state to do business”. The CEO’s were asked to consider a variety of criteria, including the education level of the population, roads, infrastructure, climate, and housing costs.

Nevada was ranked #2; North Carolina #3; Virginia #4; and Arizona #5. Respondents ranked the worst states for business as California #51; New York #50; Michigan #49; Massachusetts #48; and New Jersey #47.

High ranking states have a proactive attitude toward attracting and keeping businesses by offering tax incentives, job training and other benefits. Most importantly, they have a motivated and educated work force. Lower ranked states have entitlement issues, low motivation, low state support, high taxes, onerous regulation, and high cost of living. Overall, Texas is well positioned to attract the attention of CEO’s who are planning the future of their company. Texas is already one of the top regions for biotechnology development, a growing industry for the future.

In the heart of Texas, Austin is perfectly positioned to move forward into a strong economic future. It all began in the 1980’s, with the combined efforts of the University of Texas and civic leaders to bring in MCC and Sematech. This started the engine of growth in Austin. Austin became Silicon Hills, a center for high tech.

Fortunately, Austin grew in other artistic ways as well, becoming a center for live music and movie making. Combine that with running, bicycling, and outdoor activities and you have the quality of life that is so desired by young people today.

Getting Into Hot Water

As we move the construction possess along, one of the discussions that came up is the type of water heater that we will use. Water heating is one of the top users of energy in the home, second only to the central heat/AC system. In the past, when we built homes, the decision was a simple choice between an electric or gas water heater. Today there are more choices. Here are some that we considered:

Tank Water Heater
1) Electric resistance heat
The electric resistance water heater has heating elements, similar to toaster coils, immersed in the water. The elements keep 20 – 120 gallons of water hot at all times. This type of water heater is cheaper to install compared to a gas system, because it does not need a fuel line, an exhaust flue, and combustion air for the burner. However, electric resistance water heaters cost more to operate because electricity is more expensive than natural gas.

In the city of Austin a recent change has been made to the building code: “In all one and two family units in excess of 500 square feet, the primary source of hot water may not be electric resistance. An electric resistance system is permitted if piped in series with (another type of) primary system.” So, in the city of Austin, electric resistance water heaters are no longer permitted in new homes. They are not a green alternative.

2) Gas heat (natural gas or propane)
In our previous homes we have had natural gas water heaters. In our current home, natural gas is not available, so we used propane. We have noticed that the cost of propane has gone up substantially during the past three years. As gasoline prices have gone up, so has propane. It is on a par with electricity, and may be higher in the future. For the house we are building on Taylor Road, natural gas is not available, and we would like to avoid propane.

3) Electric Heat with Heat pump

We felt that the best alternative for our situation is an electric water heater with an added heat pump appliance, sometimes called a heat recovery or heat transfer unit. The cost is higher than a simple electric heat water, but the energy cost to run is lower. The heat pump appliance reduces energy use by capturing heat from the air and transferring it to the water tank.

This type of water heater works well with our floor plan, which has the laundry room outside the air conditioned area. We wanted to keep the clothes dryer out of the heated and cooled area because dryers pull a lot of air from the house (and vent it to the outside) while they are running. The water heater will be in the non air-conditioned laundry room space. It will take heat from the air in the laundry room and transfer it to the hot water tank. So the water heater will heat water, and will serve as an air conditioner for the laundry room space.

4) Solar Assisted
These were popular in the 1970-1980’s. They are designed to serve as pre-heaters for tank water heaters. Because the initial cost is high, we did not choose to go this route.

5) Desuperheater

This system combines the AC system for the house with the water heating system. Heat that is removed from the living space by the air conditioning system is moved to the water heater tank. During cold months, the water heater will use electricity or gas to heat water.

This type of system makes a lot of sense for our warm climate because it uses waste heat from the AC unit. On the AC side, it unloads the extra heat that is removed from the home without the need for an electric powered fan. On the water heater side, the water tank serves as an efficient transfer point for the AC waste heat, and water is heated without electricity or gas.

We would like to use this system. However, after talking with contractors and considering the installation cost, we decided that the technology is not developed enough for us to reasonably use at this time. So far as we know, there is not an AC package that offers the water heater combined with the AC equipment.


Tankless Water Heater
1) Electric
In all tank systems, there is some standby heat loss from the tank and from the pipes as water is pumped to the kitchen and bathrooms. The tankless water heater does not maintain hot water in a storage tank. It heats water as is passes through the water heater on it way to the fixture. The drawback of this system is the flash pull of electricity needed to heat water instantaneously. The load on the electrical panel is substantial. Tankless electric water heaters are not allowed in Austin Energy's service area because of the high electric demand while they are operating.

2) GasGas powered tankless systems provides better hot water flow rates than the electric models. A medium sized unit will raise water temperature about 45 degrees at a rate of 4 gallons per minute. Water temperatures in Austin range from 50 – 85 degrees.

The tankless system, whether powered by electricity or gas, makes sense for bathrooms that are used only occasionally. Why keep a tank of water heated 24-7 for a guest bathroom? Another positive aspect of this system it that is does not require as much room as a tank system. The water heater can be placed near the point of use, reducing the loss of heat from piping water long distances.


Circulating pump system:

A continuous circulation system can be used with both tank and tankless water heaters. It moves hot water through pipes at all times. The positive aspect of this system is that it reduces water loss from waiting for hot water to arrive at the fixture.

We currently have this system in our home now, and do not recommend it. We can feel the warm pipes in the slab while walking on our concrete floor. While this is pleasant in winter, it works against the air conditioning in our mostly hot climate. And, there is a lot of heat loss from water constantly circulating through pipes. For the home that we are building, we will not have a continuous circulation system. We plan to use an “on demand” circulating system. This requires you to flip a switch to start the circulating system before drawing hot water. This will offset the heat loss from long piping needed to get hot water to all points of use.


Conclusion:
In choosing a water heating system for our house on Taylor Road, we looked for a balance between installation cost and operating cost. We found that the electric heat pump system was the best choice since we do not have natural gas available. The water heater can also serve to cool the laundry room, which is outside the air conditioned part of the house. An “on demand” circulation system will reduce water loss from waiting for hot water, as well as heat loss from hot water pipes.
-------
Our real business is real estate. Get to know us at: www.weloveaustin.com Building is a side investment, fun hobby, and continual challenge. View our homes here and here.
Our current project is 8716 Taylor Road. I invite you to share this job with us, and join our community of friends who are interested in building homes. We’d love to hear your ideas

Eight Ways to Live Green and Feel Better

Why would you build a new green home or remodel your home to be greener?

According to a survey by the National Association of Home Builders, most people said that "reduced energy costs" was their top motivation for buying a new green home or remodeling their home to be greener. "Because it would be healthier, was the second most popular response. And the third reason was because “it's the right thing to do for the environment."

The idea of reducing energy needs, living healthier, and doing something for the environment really resonates with people today. Just a few years ago, this was not a top of mind consideration. In fact, living green has gone beyond just making better construction decisions. It is about making better lifestyle choices.
I decided to make a list of things that we could do that would combine these objectives. What can we do to reduce energy costs, live healthier, and do the right thing for the environment? If you have an idea, email me, and I’ll add it to the list. I’m open to suggestion. Here’s my list:

1. Add more walking into your everyday life. Exercise lifts your mood and adds to your energy level. Walk within your neighborhood, to the grocery, or to school. Park farther away, and walk an extra block. Improve your health and reduce pollution at the same time. And have more fun.

2. Buy the smallest car possible for your needs. And make sure it is gas efficient. Or get a hybrid car, if you can afford it. Reduce gas cost, reduce stress, and reduce pollution all at once.

3. Get rid of a lot of stuff. Let go of the buying impulse. Hoarding costs money, and requires more space for storage, and energy to clean and manage. Many purchases are trashed because they are not needed. With less stuff, you’ll feel freer and lighter. Physical clutter leads to mental clutter. Use your personal resources in another way. You’d be surprised how little you really need to buy to be perfectly happy.

4. Change your landscaping to include more native plants. Get out and dig in the soil for better physical and mental heath, and create a beautiful yard with reduced water needs.

5. Turn off the TV. Breaking this addiction opens up your life to so much more – more connection with people, move movement, more real life. Join the Children and Nature Network. There is a “No Child Left Inside” group in Austin, listed on the children and nature network. Children ages 6-10 spend an average of 6 hours per day in front of a TV screen or monitor, and over 50% of children have TV’s in their room. And what is the result? More obesity and attention deficit, and less creative thought and problem solving. Give your children the gift of a healthier, TV free life.

6. Break out from under the tyranny of advertising. And, more importantly, consider the effect of constant ad bombardment on your children. I remember when my daughter received a handmade doll that she really loved. After a few months, she had received several more dolls. I realized that all the extra dolls diminished the experience, rather than added to it. I saw this scenario many times in raising our four children. Through television, children are encouraged to collect and hoard toys. One plastic toy is not enough. They have to have 15 or 20 almost identical ones in order to have the whole set. Buy less and enjoy more.

7. Don’t’ smoke, or allow it in your home. The cost, plus personal and environmental pollution is a sad combination.

8. Avoid buying small bottles of water for personal use. This is expensive, and tossing away a bottle every time you have a drink of water is a wasteful thing to do. And that cannot be good for your mental health.

I’ll stop here, and let my readers add to the list. Clearly, there is one issue that I’m passionate about, and that is the subjecting of children to hours of television programming and sales pitches.

Which green living issue are you passionate about? What do you think will contribute to energy saving, better health and also do the right thing for the environment. Let me know.