National housing starts rate still dropping

New government numbers show initial construction of U.S. homes fell to a 17-year low in September.

Privately owned housing starts fell to a seasonally adjusted annual rate of 817,000 in September, according to the U.S. Commerce Department. The rate was down 6.3 percent from August’s revised reading of 872,000 and 31 percent lower than September 2007.

Housing starts have fallen by nearly two-thirds from their peak of 2.3 million in January 2006, and were at the lowest annual pace since January 1991.

New construction of single-family homes — which make up the bulk of the housing market — were at a rate of 544,000, or 12 percent below August’s number. Single-family housing starts have fallen a whopping 70 percent since their peak in January 2006, and have not been at a rate this low since February 1982.

Applications for building permits, considered a reliable sign of future construction activity, fell to a seasonally adjusted annual rate of 786,000 last month. That’s 8.3 percent below the revised 857,000 rate in August, and the lowest level for permits since November 1981.

For more: www.commerce.gov.

 

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30-Year Rates Rise to 8-Week High

Interest rates for 30-year fixed-rate mortgages rose this week to an 8-week high, according to Freddie Mac, while ARM rates showed smaller gains.
The 30-year fixed mortgage rate rose to 6.46 percent during the week ended Oct. 16, up from 5.94 percent the prior week. Last year at this time, the 30-year fixed rate mortgage averaged 6.40 percent.

The 15-year fixed mortgage rate climbed to 6.14 percent from 5.63 percent over the same period.
"Recent economic reports suggest the economy is still slowing. For instance, retail sales fell for the third consecutive month by 1.2 percent in September," said Frank Nothaft, Freddie Mac vice president and chief economist.

"In addition, in its latest Beige Book, released October 15th, the Federal Reserve indicated that economic activity weakened in September across all 12 Federal Reserve Districts and that several Districts also noted that their contacts had become more pessimistic about the economic outlook."

Source: Freddie Mac

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UPS Raises 2009 Shipping Rates

By DAVID BENOIT

United Parcel Service Inc. will raise its shipping rates in 2009 by 5.9% on the ground and 4.9% in the air.

The formal rate increase for air and international shipping is 6.9%, but the world’s largest package deliverer will lower its fuel surcharge by 2%.

Last month, FedEx Corp. said it was raising its rates by an average of 6.9%, less a 2% cut to its surcharges. The rates at the two companies tend to be similar.

UPS had raised its rates for the current year by 4.9% as well, as the company tried to offset soaring prices for fuel. The increases have marked some of the steepest in the last decade.

The falling economy and drop in spending has also hampered UPS, as consumers spend less to ship and demand has dropped.

The company will report its third-quarter earnings on Oct. 23, and the results are not expected to be very strong. Analysts are predicting earnings per share will fall 15%, according to Thomson Reuters, as margins will be slim.

 

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Stocks In Focus For Friday

SAN FRANCISCO — Among the companies whose shares are expected to see active trade in Friday’s session are Honeywell, Comerica, Schlumberger and GM.

Honeywell (HON: 30.93, +1.85, +6.36%) is expected to report third-quarter earnings of 95 cents a share, according to analysts surveyed by FactSet Research.

Comerica Inc. (CMA: 29.22, +0.92, +3.25%) is projected to post earnings of 26 cents a share in the third quarter, according to analysts polled by Thomson Reuters.

Schlumberger (SLB: 53.20, -1.20, -2.20%) is forecast to post earnings of $1.25 a share in the third quarter, according to analysts surveyed by FactSet Research.

Analysts polled by FactSet Research estimated VF Corp. (VFC: 58.50, +3.76, +6.86%) to report third-quarter earnings of $2.02 a share.

Wilmington Trust (WL: 27.45, +0.97, +3.66%) is expected to report earnings of 42 cents a share in the third quarter, according to a survey of analysts by Thomson Reuters.

First Horizon National Corp. (FHN: 11.32, +0.14, +1.25%) is likely to post a loss of 12 cents a share in the third quarter, according to analysts in a survey by FactSet Research.

After Thursday’s closing bell, Google Inc. (GOOG: 353.02, +13.85, +4.08%) said its third-quarter net income rose to $1.35 billion, or $4.24 a share, from $1.25 billion, or $3.92 a share in the same period a year earlier. Net revenue rose to $4.04 billion. Excluding special items, Google said earnings for the quarter were $4.92 a share. Analysts on average had estimated Google would post earnings, excluding special items, of $4.74 a share, on net revenue of $4.04 billion, according to FactSet Research. See full story

Watch list

Advanced Micro Devices Inc. (AMD: 4.12, +0.21, +5.37%) reported a third-quarter loss of $67 million, or 11 cents a share, compared with a loss of $396 million, or 71 cents a share for the year-earlier period. Revenue was $1.78 billion, up from $1.56 billion for the same period last year. Analysts had expected AMD to report a loss of 40 cents a share on revenue of $1.48 billion, according to a consensus survey by FactSet Research. See full story

American International Group (AIG: 2.43, +0.01, +0.41%) will take steps to recover "improper" bonuses and payments to former executives as part of its effort to assist New York State Attorney General Andrew Cuomo’s probe into the company’s expenditures. The decision came after Cuomo informed Chief Executive Edward Liddy that unless AIG takes steps to recover the funds, Cuomo will pursue it under the law. The recovery will include compensation paid to former Chief Executive Martin Sullivan. The insurer is also canceling all junkets and perks which are not justified by legitimate business needs, including more than 160 conferences and events, for a total savings of more than $8 million. Separately, AIG named David Herzog executive vice president and chief financial officer. Steven Bensinger, who served as acting CFO, has left the company.

Capital One Financial (COF: 38.70, +0.94, +2.48%) said it made net income of $374.1 million, or $1 a share, in the third quarter, up from a net loss of $81.7 million, or 21 cents a share, a year earlier. Earnings from continuing operations in the third quarter of 2008 were $385.8 million, or $1.03 a share, the credit card and banking company reported.

Merger discussions between General Motors Corp. (GM: 6.40, +0.18, +2.89%) and Chrysler LLC are picking up pace with strong support from banks and other potential lenders that are eager to see a deal, The Wall Street Journal reported Thursday in its online edition. GM is aiming to get a deal done as early as the end of October, the newspaper said. Other major players pushing the deal are J.P. Morgan Chase & Co. (JPM:40.49, +2.00, +5.19%) and Cerberus Capital Management, according to the Journal. Cerberus owns Chrysler, while JP Morgan is one of the largest holders of Chrysler bank debt and is a key lender for GM.

IBM Corp. (IBM: 91.52, +3.23, +3.65%) reported a third-quarter operating income of $2.8 billion, or $2.05 per share, compared to earnings of $2.4 billion, or $1.68 per share, for the same period last year. Revenue rose 5% to $25.3 billion for the quarter. The company said revenue from its software segment grew by 12% to $5.2 billion during the period. See full story

Intuitive Surgical Inc. (ISRG: 214.80, +24.68, +12.98%) said its third-quarter profit rose to $57.6 million, or $1.44 a share, from $40.9 million, or $1.04 a share, in the year-ago period. Revenue rose to $236 million from $156.9 million last year. Analysts surveyed by FactSet Research estimated quarterly earnings of $1.27 a share on revenue of $226.6 million.

Leggett & Platt Inc. (LEG: 18.57, +1.16, +6.66%) reported a third-quarter net income of $32.7 million, or 20 cents a share, down from $65.7 million, or 37 cents, a year ago. Excluding one-time items, the company earned 34 cents a share from continuing operations. Revenue rose to $1.13 billion from $1.09 billion. Analysts polled by FactSet Research predicted the engineered parts maker would post per-share earnings of 30 cents on $1.05 billion in revenue. The company, citing weak market demand, said it expects to earn $1 to $1.15 a share for the full year, down from $1.10 to $1.40 estimated in July.

PMC-Sierra Inc. (PMCS: 5.59, +0.36, +6.88%) said it swung to a third-quarter profit of $16.2 million, or 7 cents a share, from a loss of $5.9 million, or 3 cents a share, in the year-ago period. Excluding one-time items, the company would have reported earnings of 13 cents a share. Revenue rose to $139.3 million from $117.5 million last year. Analysts surveyed by FactSet Research estimated quarterly earnings of 12 cents a share excluding stock option expenses on revenue of $139.1 million.

Stryker Corp. (SYK: 54.75, +1.42, +2.66%) said its third-quarter profit rose to $273.8 million, or 66 cents a share, from $228.7 million, or 55 cents a share, in the year-ago period. Revenue rose to $1.65 billion from $1.45 billion last year. Analysts surveyed by FactSet Research estimated a quarterly profit of 67 cents a share on revenue of $1.66 billion. The company forecast 2008 earnings of $2.88 a share. Analysts estimate $2.87 a share.

Texas Instruments Inc.’s board (TXN: 17.63, +0.28, +1.61%) on Thursday declared a quarterly dividend of 11 cents, up from 10 cents in the previous quarter. The dividend will be paid Nov. 17 to stockholders of record on Oct. 31.

United Airlines, operated by UAL Corp. (UAUA: 10.30, +2.95, +40.13%) , said 322 employees represented by the International Association of Machinists have taken advantage of the airline’s voluntary furlough program. Since July, United said that 1,500 flight attendants, 200 pilots and 100 mechanics have taken advantage of the program. In July, United said it needed to reduce capacity, resulting in the need for 7,000 fewer employees.

Zions Bancorporation (ZION: 40.20, +2.61, +6.94%) said third-quarter net income came in at $37.8 million, 72% lower than a year earlier when the bank made $135.7 million. Net income per common share came in at 31 cents versus $1.22 a year ago, the company reported. Nonperforming assets were $924.4 million at the end of September, up from $196.6 million a year earlier. Zions said this was driven mainly by deterioration in residential real estate acquisition, development and construction loans in the Southwest, and by continued weakening in Utah residential construction and commercial and industrial portfolios.

 

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How to Prevent New Home Defects

Buyers should take care that they’re not purchasing an inferior-quality house.

By JUNE FLETCHER

As the downturn deepens, many would-be homeowners are taking advantage of down payment and closing cost assistance, free finished basements and other incentives offered by builders eager to move their merchandise.

But buyers should take care that they’re not purchasing an inferior-quality house.

For the month of August, the producer price index for construction materials rose 13% over the same period a year earlier, according to the Bureau of Labor Statistics. As costs rise, some builders cut corners. The Consumer Federation of America says construction tops its list of the five fastest-growing complaint categories.

Bruce Barker, a Phoenix home inspector, says almost all the new houses he sees have minimum-quality windows, and about three-quarters have inadequate loose fill or fiberglass insulation; other houses he’s inspected have brand-name condensers on the exterior of the home, where buyers can see them, connected to generic furnaces hidden in the attic. Steve Showalter, a Graysonville, Md. inspector, says builders have stopped using plywood sheathing and instead use oriented strand board, which can swell with moisture unless it’s installed correctly—and it rarely is, he says. Rob Ringen, a Sonora, Calif. home inspector, estimates that 80% of the repair work that new home owners have to do today can be traced directly to poor-quality materials like twisted and split framing, and short-cuts on installation, like missing flashing over windows that allows rain to leak in. And since building code inspectors are being laid off in the downturn, and remaining ones overworked, such problems often slip by. "Homeowners get it right in the neck," says Mr. Ringen.

Since new home contracts often have binding arbitration clauses, many disgruntled buyers can’t sue—although some have taken creative steps to embarrass builders they think have cheated them. Cynthia and John Daugherty posed as orange-jumpsuited "prisoners" on the Web site they made about their Pulte-built Kansas home, listing complaints about bad foundation walls and bouncy floors. Crapconstruction.com, with a logo of a home swirling down the toilet, was created for Beazer Home buyers complaining about buckling hardwood floors, chipped tiles and cracked caulk.

Although builders have been known to sue or buy out people who start complaint sites, it’s far less stressful to prevent such problems in the first place. While visiting the house often during the construction period can uncover some problems, most homeowners don’t have the expertise to check for every defect in construction and materials. That’s why it’s essential to turn to professionals to look after your interests. Before you sign a contract, have your attorney read it to make sure your rights to legal redress for defects are protected. Before you close, make sure to hire a home inspector, preferably one with an engineering background, to ensure that no one took any shortcuts.

Also, take time to read and understand whatever warranties the builder offers. The warranty will likely exclude certain items like appliances and cracks from normal settling of the house, and may limit the amount of time you have to file a claim for damages or defects. This time period may be shorter than the time state law provides for filing a lawsuit under the principle of "implied warranty," so the builder may demand that you sign a paper waiving these rights. This is in the builder’s interest, but not yours. Don’t do it.

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Foreclosure Auctions Slow to Unload Inventory

Sushil Cheema reports:

While the number of foreclosure auctions is soaring, many transactions aren’t taking place at asking prices because some lenders are demanding too much, brokers and investors say.

So far this year 2.22% of all homes in the U.S., have entered the foreclosure process, according to estimates by the Foreclosures.comWeb site. By the end of the year, as many as one million homes in the U.S. may be in foreclosure.

Many investors, who make up the bulk of active bidders at auctions, say the banks are asking too much for the homes. So far this year, 748,381 homes—or 46% of the foreclosures—have gone into the possession of the banks as real-estate owned, or REOs, because no bidders were interested in them at auction.

With the banks’ inventory piling up as the properties fail to sell, the banks will likely have to discount their prices more in order to unload the homes, real estate experts predict. Such discounts could continue to drive the broader real estate market lower.

Few people placed bids at a recent auction run by the Sheriff’s office in New Jersey’s Bergen County. “If you want to go back a few years ago, it was standing room only,” said Don Pfleger, a real estate broker who said he has bought about a dozen properties at auction over the past several years. “Now it’s getting thinner as the weeks go on, as more and more properties are up for sale.” On this day at the end of September, only three of the 23 properties on the block went to a bidder. The remaining 20 went back to the banks. Eric Van Auken, a real estate broker who runs the Sheriff Sales Online site, has attended the auction in Bergen County weekly for the past 10 years. Up until the recent housing downturn began, he would personally buy properties at auction to fix up and would sell about one a month. But he’s purchasing foreclosed homes less frequently since the current real estate market downturn began because of the “ridiculous values” banks are demanding for them, Mr. Van Auken said. “We didn’t want to pay what they were willing to let them go for.”

Individual buyers looking for deals at auctions will likely not find one, says Foreclosures.com President Alexis McGee. Making it harder for individuals: it is generally not possible to examine the properties in person before buying them and buyers must have money with them to make a down payment on the home.

Mr. Van Auken predicted the banks will have to further slash their prices to attract buyers, which could pressure regular sellers to lower their prices for their homes as well. “For the average person putting their house on the market, it’s going to be very difficult,” Mr. Van Auken said.

Counties that run the auctions also suffer when the houses on the market fail to attract bidders, said Bergen County Sheriff Leo McGuire. The county collects commission on any sales. When the banks buy the properties back after they fail to sell, the county gets little money. “”There’s so many effects that this economic downslide is having,” Mr. McGuire said.

 

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U.S. to Buy Stakes in Nation’s Largest Banks

Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort

By DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI

WASHINGTON — The U.S. government is expected to take stakes in nine of the nation’s top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government’s guarantee behind the basic plumbing of financial markets.

To kick off Tuesday’s expected announcement, the government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. — including the soon-to-be acquired Merrill Lynch — Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.

Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Treasury Secretary Henry Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government’s response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.

Other elements of the plan, which will be announced Tuesday morning, include: equity investments in possibly thousands of other banks; lifting the cap on deposit insurance for certain bank accounts, such as those used by small businesses; and guaranteeing certain types of bank lending. It builds on an earlier plan to buy up rotten assets dragging down banks, which failed to calm investor fears, and follows similar moves by major European countries.

Formulated jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., these moves are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.

Along with the government’s involvement come certain restrictions, such as caps on executive pay. For example, firms can’t write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.

Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.

A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the recently approved $700 billion bailout plan.

Treasury will buy $25 billion in preferred stock in Bank of America — including Merrill Lynch — as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.

The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don’t come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.

The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government’s stake, a person familiar with the discussions said.

Among the other key components of the plan: The FDIC is expected to offer to temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.

The FDIC is also expected to temporarily offer banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.

The FDIC’s central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency’s power.

The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.

“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.”President Bush in a joint statement with Prime Minister Berlusconi of Italy

The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury’s main goal is to attract private capital. To make sure private investors aren’t scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.

The government’s new focus is raising questions about why it didn’t adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn’t participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.

Senior executives and advisers to some of the nation’s leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.

House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury’s decision to inject capital into the banking system.

"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Jared Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"

Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn’t have the authority to make such a comprehensive move until Congress passed the bailout bill. The government’s various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.

The government’s hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won’t come at their expense.

For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.

The other steps, including the FDIC’s role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again. The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through instruments called commercial paper will start in about two weeks.

William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury’s initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.

But Treasury’s new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.

"Investors need to be confident that the banks they’re dealing with are unquestionably solvent, and it’s in the interest of banks to assure investors that that’s the case," he said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."

Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, argues the country may have turned a corner on the financial panic — the fear that has kept banks and investors from making even the most prudent loans. "I think we’re through the worst on that," he said. "Maybe I’ll be proven wrong, but it really was at an extreme last week."

Blanket guarantees, however, might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don’t want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.

One sticking point could come from Congress, which wrote into the original bailout bill requirements that Treasury tamp down executive pay. Rep. Frank said Monday he wants the government to set tough conditions for any company that receives a capital injection. If Mr. Paulson didn’t enforce such rules, Mr. Frank said the Treasury secretary could be "making a big mistake."

 

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House Designers Don Hard Hats

Architect-Contractors Gain High-End Following

By SARA LIN

Despite the financial crisis and the housing slump, the phone is still ringing in Peter Gluck’s office. "We’re OK for now," says Mr. Gluck, whose office of 50 architects specializes in high-end residences costing $5 million and up.

That may be explained by the fact that Mr. Gluck and his associates aren’t just the architects for their homes. They’re the general contractors as well, unlocking gates in the morning and stepping onto scaffolds to direct construction.

This architect-as-contractor model, called design-build, had already been gaining new traction at the highest echelons of the housing market, as clients seek ways to execute cutting-edge designs without the headaches often associated with such construction. Membership in the American Institute of Architects’ design-build community has nearly tripled over the past five years, and teachers at several architecture programs across the Midwest report that enrollment in design-build classes has doubled.

And while critics argue that allowing one firm to handle both design and construction duties could result in out-of-control costs, advocates argue the opposite, saying double-duty firms are faring better in tough times because it’s easier for them to keep costs in check. "The design-build process may be as close to a fixed cost contract that an owner can expect in today’s construction world," writes Barry B. LePatner, a prominent construction lawyer, in his "Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry."

In some cases, the savings have been significant. In midtown Manhattan, a client hired Mr. Gluck’s firm to tear down an old brownstone and replace it with one with a loft-like interior. Four months away from completion, the townhouse boasts stone counters, a four-story bookcase, glass stair railings, an elevator, a double-height dining room, a roof deck and an all-glass back façade. The cost: $1.95 million. At $550 per square foot, the townhouse costs nearly half of what experienced builders say it would cost to tear down and rebuild a townhouse with lesser-quality finishes.

Of course, the vast majority of buildings are still built the conventional way, with an architect drawing up plans that the client bids out to general contractors. And for many years, the idea of marrying architects to contractors was viewed with deep suspicion. The American Institute of Architects banned its members from doing design-build from its founding in 1857 until 1979.

Some skeptics still believe the practice is unethical, saying it is a conflict of interest for designers to determine a building’s budget. "In theory clients like it because it sort of simplifies their life. But they’re paying with one less level of protection and oversight," says New York architect Richard Dattner. "There’s either a conflict or an appearance of a conflict."

And not all architects are anxious to change their roles. Taking out a second insurance policy to cover architects as general contractors isn’t cheap. Some architects dislike the less glamorous parts of the job: scaling ladders, negotiating labor contracts, dealing with inclement weather and occasionally hauling trash to a dump.

But design-build advocates argue the conventional method is problematic. When builders run into situations that aren’t explained in the drawings, they wait for the architects’ office to resolve the issue or they engineer a solution themselves, even if their fix doesn’t mesh with the architect’s original design. In either case, the homeowner is saddled with change orders, delays or a compromised design. And when things go wrong, as they often will, architects and general contractors often blame each other.

"People hire an architect they don’t know and hire builders who gave them the lowest bid and they sit there and pray," says New York developer Jeffrey M. Brown.

When Richard Yulman hired an architect to design a copper-clad guesthouse next to his vacation home in Lake George, N.Y., he steeled himself for months of headache. After all, his experience with an architect 15 years earlier had been fraught with disagreements between the designer and contractor and finger-pointing afterward when his new glass roof leaked. "It was a terrible experience," recalls Mr. Yulman, the 63-year-old retired chairman of mattress maker Serta International.

Mr. Yulman hired Mr. Gluck in 2005. "When I’m not happy, there’s one phone call I make," he says.

Skip Paul remodeled and restored three architectural homes, each time hiring separate designers and builders. Last year, the entertainment executive hired Marmol Radziner + Associates to design a Modernist home in Beverly Hills, Calif., with terrazzo flooring, stack-stone fireplaces and an open kitchen-living-dining space enclosed by a glass facade offering views of Los Angeles. Although the firm usually builds its own projects, Mr. Paul still wanted a general contractor. "I didn’t want a bunch of architects to build my house," he says.

But over time, Mr. Paul became impressed with how the architects used their construction knowledge to push the design, so he asked them to bid on the entire project. The firm came up with an amount similar to general contractors, and after watching the contractors leaf through the drawings and puzzle over complex features like the three different roofs that appear to float atop the house, Mr. Paul decided to stick with the architects. "I will end up with the house I wanted for less money," says Mr. Paul.

Many architects became their own contractors out of frustration. After doing architectural restorations of several leaky houses designed by Frank Gehry, Leo Marmol and Ron Radziner became convinced that traditional building methods wouldn’t work on daring architecture. About a dozen of their former staffers have left over the years to start up their own firms, building their own designs. (Mr. Gehry could not be reached to comment on these projects.)

In Omaha, Neb., architect Randy Brown was tired of spending extra hours helping his clients’ general contractors find subcontractors willing to build the warped walls or custom millwork he had designed. "We were doing all the work of the general contractor and not getting paid for it," recalls Mr. Brown, who took on his first house as an architect-contractor in 1998.

To keep subcontractors’ estimates on budget early on, Mr. Gluck uses extremely detailed drawings. Rather than giving the subcontractors one giant roll of drawings to thumb through to determine their estimates, Mr. Gluck puts together an individual set of drawings for each trade. It’s a lot of extra work — as many as 30 different sets of drawings for one project — but it eliminates guesswork and costly change orders. The drawings get into such mundane details as where to place screws and caulking.

To assure his clients that they’re not being taken for a ride, Mr. Gluck keeps his payrolls transparent. His clients have online access to his ledgers through a secure server. Subcontractors’ bids, payments, daily work orders and pictures from the jobsite are uploaded daily.

Beyond homeowners, Mr. Gluck says the architect-as-contractor model goes a long way towards making architecture affordable for nonprofits and schools, which make up about half of his portfolio. That said, Mr. Gluck doesn’t expect to be entirely immune from the current economic climate. "Nobody’s canceling projects, but that’s probably because lot of ours are in construction. We can’t just stop those," he says.

He hopes that he’ll have enough work to keep his office busy through the downturn, but he does note he hasn’t signed any new residential clients in the last month.

 

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World Leaders Take Big Steps Against Credit Crunch

Government leaders in the U.S. and abroad took big steps this weekend to battle the financial ‘flu’ that has spread across the globe.

In an effort to thaw the credit crunch, Europe’s euro-backed countries decided Sunday to guarantee bank refinancing through the end of 2009 and took measures to prevent more banks from failing. Fifteen European leaders met in an emergency meeting in Paris on Sunday to address the crisis, aiming to help bolster banks’ confidence in lending with one another and get credit flowing once again.

While no sum was given on how much the efforts would cost, French President and summit host Nicolas Sarkozy said each nation would determine how much to spend and implement the measures.

"I want to tell our compatriots in all the countries of Europe that they can and should have confidence," he said.

At the same time, the World Bank announced Sunday it will work to develop and strengthen the economies of developing countries. At a joint news conference with Dominique Strauss-Kahn, head of the International Monetary Fund, World Bank President Robert Zoellick said Sunday that any extended contraction of credit could cause further turmoil in developing countries’ ability to provide for their citizens, who already face high energy and food prices.

Zoellick called for a revamping of the global economic system to ensure that a financial crisis of this level “never happens again.”

International efforts to stem the credit crisis reached a peak on Wednesday, as central banks made an unprecedented decision to take a coordinated interest rate cut. The move came during a week in which global markets suffered some of their worst losses on record.

As finance leaders from the Group of Seven (or G7) met Friday to come up with a unified plan to battle the credit crunch, Treasury Secretary Henry Paulson announced that the U.S. government will buy an ownership stake in some of the nation’s private financial institutions – a move not seen since the Great Depression.

“This is a period like none of us has ever seen before,” Paulson said in a news conference late Friday.

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World Is United To Tackle Financial Crisis, IMF Says

WASHINGTON — Financial policymakers from 180 nations around the world are united in their resolve to tackle the financial crisis, Youssef Boutros-Ghali, head of the International Monetary Fund’s policy committee, said Saturday. The International Monetary Fund endorsed the plan of action released Friday by the Group of Seven nations, he said. "The crisis is global, so the solution has to be global," he said. "No tools will be spared." Later Saturday, a smaller group of the 20 most important economies will meet to hammer out more details of what each country can do to restore confidence in markets. "No one is going to let an important financial institution fail," IMF Managing Director Dominique Strauss-Kahn said.

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