Headlines – Week of May 23, 2010

May 27, 2010

Data Illustrates Continuing Drop in Home Prices (from Standard & Poor)

The March 2010 Standard & Poor’s/Case-Shiller home price index showed that prices of single-family homes fell 3.2% in the first quarter of 2010, but remains above its year-earlier level.

Prices in 13 of the 20 cities tracked by the index fell in March while eight MSAs posted new index lows in March – Atlanta, Charlotte, Chicago, Detroit, Las Vegas, New York, Portland and Tampa. Las Vegas and Phoenix have peak-to-current declines of 56.3 and 51.8%, respectively.

The Case-Shiller index measures repeat sales of homes and reflects a rolling three-month average, so the March data also captured transactions that closed in February and January.

The problem is a continuing oversupply of homes on the market, particularly foreclosures. Foreclosed properties typically sell at a discount, bringing down neighboring home values.

Case Shiller is predicting that the housing glut and foreclosures will drive the index down another 6 to 8% before reaching bottom in 2011.

Capital Economics is also predicting an additional drop in prices of 5% through the end of 2011.

 Standard & Poor’s/Case-Shiller home price index

Florida Bank Losses Narrow 86% to $104 Million In First Quarter (from the FDIC)

Operating losses for Florida banks narrowed by 86% on a year-over-year basis in the first quarter of 2010 with the industry’s 278 state-chartered institutions reporting a combined $104.2 million hit to the balance sheet.

A year ago, there were 305 Florida-based banks that endured a composite loss of $756.9 million for the same period from January through March in 2009, according to data provided by the Federal Deposit Insurance Corp.

As encouraging as the narrowing in losses is for the sector, Florida banks are still lagging behind the national industry, which posted its largest net income since the second quarter of 2008. In the first quarter of 2009, the national banking industry posted a net income of $5.6 billion, according to the report.

The losses in Florida reflect the differences in the operations of so-called community banks compared to banking conglomerates.  Florida’s community banks are dependent upon real estate and business lending, two sectors that are struggling.

Banking conglomerates, by comparison, are able to post positive results by way of using profits from securities trading and other non-commercial banking activities to help offset their own ongoing losses in real estate portfolios.

Many banks in the state, especially in South Florida, are continuing to spend large amounts of time and money on workouts of problem loans, including foreclosures. Many lenders are also finding more cases where commercial real estate borrowers are having difficulty making payments.

Some banks facing that situation have the added burden of receiving pressure from regulators to boost reserves on some potential problem real estate loans. This is adding to the hesitancy toward renewing some credits and making new loans.

Florida banks had $544.8 million in loan loss provisions from January to March, compared with $950.5 million during the same period in 2009. The recent quarter’s provisions were high on a historical basis, and prospects of similar increases are likely for several more quarters.

Florida banks’ net interest income increased from $1.1 billion in the first quarter of 2009 to $1.2 billion during the same period this year. That is the difference between interest earned on loans and other investments and interest paid on deposits and other liabilities.

Although the FDIC does not provide information on loan volume, there are reports about lending for home mortgages, commercial real estate and other loans remaining at low paces in South Florida.
Banks have been benefiting from ongoing low interest rates. The FDIC data show that for Florida-based banks, the costs of funding earning assets fell from 2.20% in the first quarter of 2009 to 1.36% this year. 

FDIC Quarterly Banking Profile

First-timers, Boomers Feel Housing Downturn the Most (from The Philadelphia Inquirer)

In a study for the Mortgage Bankers Association, conducted by the University of Kentucky the current financial crisis and recession exceeds the devastation created by other post-World War II recessions.

The report concludes there are growing concerns that the effects of this economic downturn could have a long-lasting effect on the housing market.

Saving rates have risen substantially and many Americans will continue to cut spending sharply out of necessity and others out of fear of what the future holds.

High unemployment and low house prices are widely projected to remain for an extended period, as well as the rise in problem loans at banks that will restrain their willingness and ability to provide credit.

Two groups expected to feel the pinch are young first-time buyers and the so-called active-adult purchasers who downsize as their children grow and move out.

In the first-time buyer group, the impact of a higher unemployment rate for Americans ages 16 to 24 could have a lasting effect on lifetime earnings and attitudes toward risk and social policies.

Those active-adults nearing retirement are delaying it and re-entering the labor force in an effort to rebuild some of the retirement wealth that was wiped out by the recession.

The housing industry had been banking on both of these groups to sustain growth during the coming decades, especially the empty-nester baby boomers.

The tougher economic circumstances for twenty-somethings and fifty-somethings will weigh on housing demand over the coming decade according to Moody’s Economy.com’s and the first-time buyer and second-home markets will be most directly impacted.

Today’s financing market is imposing more discipline by requiring bigger downpayments and better credit scores for buying homes. And the financial-reform package passed last week by the Senate includes provisions that, in addition to restricting prepayment penalties and controlling mortgage-broker compensation, would force lenders to consider applicants’ income, assets, and credit history before making a loan.

If this change is permanent, perhaps homeownership rates will come down to pre-1995 levels – the year they started to climb.

The homeownership rate slipped to 67.2% in the first quarter of 2010, its lowest reading since the first quarter of 2000.

Homeownership rates averaged 64% from 1985 to 1994, but accelerated in 1995 because of government policies that encouraged homeownership, especially for previously underserved low- and moderate-income buyers.

Rates reached record highs of 69% because of easy lending during the housing boom.

Although it is probably likely that the lack of good-paying jobs will delay the entry of the current 16- to 24-year-olds into the homebuying market, it is less clear what effect the re-entry into the workforce of baby boomers is going to have. In some cases, this may keep inventory levels down, as the boomers stay in their current homes while going back to work. On the other hand, they may opt to ‘trade down’ in an effort to maximize their retirement dollars while they’re replenishing their IRAs and 401(k) accounts.

Full Article

Commercial Vacancies to Peak in Early 2011 (from the National Assocation of Realtors)

According to a report published by the National Association of Realtors, vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the end of this year or early 2011.

Lawrence Yun, NAR chief economist, says there is one bright spot in commercial real estate as the multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year.

However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011.

The Society of Industrial and Office Realtors in its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts, confirms that significant fallout from the recession remains, but to a lesser extent.

The SIOR index, measuring 10 variables, increased 2.7% points to 38.2 in the first quarter, compared with a level of 100 that represents a balanced marketplace. This is the second gain following nearly three years of declines; the last time the market was in equilibrium was in the third quarter of 2007.

Development activity remains at a standstill with nine out of 10 respondents saying that it is virtually nonexistent in their markets.

Looking at the overall market, commercial vacancy rates appear to be approaching a plateau, according to NAR’s latest Commercial Real Estate Outlook. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office market

With an elevated level of sublease space available, vacancy rates in the office sector are projected to increase from 16.9% in the first quarter of this year to 17.6% in the first quarter of 2011, but should ease later next year.

Annual office rent is likely to fall 2.3% this year and decline another 2.1% in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast to be a negative 24.6 million square feet this year and then a positive 25.5 million in 2011.

Industrial market

Leasing activity in the industrial sector is below historical levels with higher vacancies, more tenant concessions from landlords and a steeper decline in rental rates. In addition, obsolete structures remain on the market. Industrial vacancy rates are expected to rise from 14.3% in the first quarter of 2010 to 14.8% in the first quarter of 2011, then decline modestly as the year progresses.

Annual industrial rent will probably drop 6.3% this year, and decline another 1.5% in 2011. Net absorption of industrial space in 58 markets tracked is seen at a negative 90.0 million square feet this year and a positive 135.6 million in 2011.

Retail market

Retail vacancy rates should rise modestly from 12.6% in the first quarter of this year to 12.8% in the first quarter of 2011, and should hold at that level for most of next year.

Average retail rent is projected to decline 1.5% in 2010, then edge up by 0.4% next year. Net absorption of retail space in 53 tracked markets is likely to be a negative 3.7 million square feet this year and then a positive 8.9 million in 2011.

Multifamily market

The apartment rental market (multifamily housing) is expected to benefit from an improving economy and job market. Multifamily vacancy rates are forecast to decline from 7.3% in the first quarter of this year to 6.3% in the first quarter of 2011.

With recent additions to supply, average rent is likely to slip 1.5% this year, and then rise 1.2% in 2011. Multifamily net absorption should be 145,700 units in 59 tracked metro areas this year, and another 214,500 in 2011.

NAR News Release

Posted by Scott R. Lodde

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