Headlines – Week of June 20, 2010

June 26, 2010

Is a Housing Shortage Coming? (from CNN/Money.com)

Some experts are saying that the next big real estate problem could be a shortage of homes.

Only 672,000 new homes were started in April. That’s less than half the number needed to meet the country’s average population growth.

In the past, an average of more than 1.3 million households have been built each year, creating demand for 1.5 million new homes. In 2009, only 398,000 new households were formed, according to the Census Bureau.

Many believe that the decline in household formation is artificial since younger adults are moving in with their parents. There is also some doubling up among working-class people.

While the optimists believe there is a pent-up demand coming others believe this view fails to take into account the changing economy or the large inventory of vacant properties.

Full Article

CMBS Comeback? (from Reuters)

According to an article in Reuters, there may be some sparks of life in securitized commercial real estate lending, which was pretty much given up for dead after the Great Recession. The company reported that the Related Cos. will soon close on its first loan slated for inclusion in a mortgage security in more than two years.

According to the article, Deutsche Bank will lend the Related Cos. about $45 million on The Harrison, a new condo and retail project in Manhattan. The property is fully occupied and presumably the due diligence has fully examined the property and its tenants.

The deal comes in the wake of an earlier announcement of a $716.3 million CMBS priced by JP Morgan Chase Commercial Mortgage Securities Corp. That securitization was composed of 36 loans on retail properties. It was only the fifth CMBS since the market for those structures evaporated more than two years ago.

In addition, U.S. banks are now beginning to expand their commercial mortgage-backed securities business and triggering a wave of industry hiring, Reuters reported. In addition to Deutsche Bank, several others have hired lenders to focus on making new commercial real estate loans to package into bonds, including Wells Fargo, JPMorgan and Jefferies. Analysts and bankers have long worried that the CMBS market, like that of home mortgages, would crater and upset the U.S. economy. Bankers and advisors who specialize in CMBS said the sector may never fully recover to the peak of $237 billion in originations in 2007. Slightly more than $1 billion in CMBS deals have been completed so far this year.

Full Article

Harvard Housing Report (from the Harvard University Joint Center for Housing Studies)

The Harvard University Joint Center for Housing Studies issued its report on the State of Nation’s Housing 2010.

Highlights of the report indicate the following issues;

  • The problems for the market include persistent high unemployment
  • Too many vacant housing units
  • The fact that people in their ’20s, who have been slammed especially hard by the recession, are wary of buying a house, even if they can
  • The way the mortgage-qualification pendulum has swung to very tight standards, and
  • The loss of the federal tax credit for home purchases.

The reports concludes that it will likely take years before the fallout from the Great Recession begins to abate.  In addition to the expiration of the homebuyer tax credit program, which may have temporarily jacked up home sales, the market faces threats from the severe overhang of vacant units, still high unemployment, and record numbers of owners with homes worth less than the amount owed on their mortgages.

The (barely) good news in all that is that houses are more affordable than they’ve been in years. Nationwide, the median sales price dropped from 4.7 times the median household income in 2005 to 3.4 times in 2009.  When combined with low interest rates, this puts mortgage payments on the median priced home closer to median gross rents than at anytime since 1980.

Among the 92 metropolitan areas consistently covered by the National Realtors Association since 1989, price-to-income ratios in 21 are now below their long-run averages.

Posted by Scott R. Lodde

The Homeownership Gap

June 25, 2010

In 1995, the rate of homeownership in the United States began a steep rise and between 2004 and in 2006, peaked at 69%. As the housing boom collapsed and the recession fueled a sharp rise in unemployment, the homeownership rate fell to 67.2% in the fourth quarter of 2009.  The most recent reading indicates a reversion to the second quarter 2000 level.

As indicated in the chart (click to enlarge), the ongoing decline in the homeownership rate is approaching in magnitude the 2.3 percentage point slide observed in the early 1980s.

The economists at the Federal Reserve Bank of New York produce publications and working papers of interest to policymakers, academics, business and banking professionals, and the general public.  One of these publications is entitled Current Issues in Economics and Finance. 

In a recent edition of Current Issues (Volume 16, Number 5 – May 2010), authors Andrew Haughwout, Richard Peach and Joseph Tracy wrote a study entitled The Homeownership Gap in which they argue that the official homeownership rate from the Census Bureau is overstated in the sense that owners with significant negative equity act more like renters. The authors argue that the official homeownership rate will probably follow the homeownership gap to lower levels leading to “a decline in citizen participation in local affairs, with a concomitant loss of vigilance over the quality and efficiency of public services and institutions.”

The study provides a compelling argument for lower homeownership rates and the resultant consequences for the entire country.

What follows is a synopsis of their study.

In response to the surge in mortgage foreclosures during the Great Depression, the government created the Federal Housing Administration (FHA) and the Federal National Mortgage Association (FNMA, or Fannie Mae) to establish a standard mortgage product; the thirty-year fixed rate, fully amortizing mortgage.

In addition, during the late 1960s and early 1970s, as thrift institutions came under stress from rising inflation, the government played a central role in the creation of the market for mortgage-backed securities. The Government National Mortgage Association began issuing federally guaranteed mortgage pass-through securities backed by FHA and VA loans in 1970. Soon after, the Federal Home Loan Mortgage Corporation (Freddie Mac) started issuing mortgage participation certificates backed by conventional mortgages. Ultimately, the securitization of the bulk of new mortgage loans fell to the government-sponsored enterprises Fannie Mae and Freddie Mac, largely because of the implicit federal guarantee on the mortgage-backed securities and debt issued by these institutions.

All of these government moves, along with the changes in the tax code allowing homeowners to deduct mortgage interest and property taxes and exempt capital gains from taxes on the sale of their homes, were policies enacted to encourage people to become and remain homeowners.

The government’s support for homeownership is based on the view that ownership promotes “economically efficient” action.  In principle, the economic efficiency of an action refers to the ratio of the increase in social utility (or total consumer satisfaction) that it produces to the quantity of the community’s resources that it requires. In other words, government policy (or laws) that produce the greatest return for the resources invested.

Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property. Some measures such as fixing a leaky roof are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.” All of these measures will be reflected, or “capitalized,” in stable or rising home prices.

In 2001, William Fischel suggested that these capitalization effects prompt homeowners to act in the best interest of the property and the community.  He promoted the theory called “homevoter hypothesis”, asserting a close connection between homeownership and civic engagement.  The theory promotes the idea that homeowners will take an active interest in the policy decisions of the local government because these decisions affect the long-term value of their property.

However, the authors argue that these incentives will not operate for those that have “negative equity” in their homes.  For these homeowners, any increase in the value of their house will accrue not to them, but to the mortgage lender (up to the value of the mortgage). With little to gain, negative equity homeowners will be much less likely to pursue improvements in their homes or communities. Their situation is essentially analogous to that of renters, who have little incentive to make improvements to the homes they occupy since it is the landlord who reaps the economic benefits.

Large negative equity gaps in homeownership is also leading to the consequence of “strategic defaults” in which a homeowner who can afford to keep a loan current is still defaulting on their mortgage since any future increase in value will accrue only to the lender for many years to come.

The author’s concept of a homeownership gap reflects the dramatic growth in the number of negative equity homeowners; those who owe more on their mortgages than their houses are worth in the current housing market. While the official homeownership rate tabulated by the Census Bureau includes negative equity homeowners in its count of owner-occupied houses, the authors suggest that homeowners with substantial levels of negative equity would need to ramp up their savings by formidable amounts in order to retain their homes or purchase a new home. They calculate an “effective” homeownership rate that excludes negative equity homeowners from the sum of owner-occupied houses and counts them instead as the renters they are likely to become over time.

Their findings indicate that the difference between the official and the effective rates (the homeownership gap) is significant, measuring 5.6 percentage points for the nation as a whole and rising as high as 39 percentage points for the metropolitan areas that have been hit hardest by the housing crisis.

Their main argument is that the current effective homeownership rate is a good guide to the future path of the official rate. That is, unless house prices increase substantially, many negative equity homeowners will in fact convert to renters in the years ahead, and the measured rate of homeownership will decline toward the effective rate.

Homeownership gives individuals a financial stake in the long-run outlook for their homes and communities. A shift in the rate of homeownership may have significant implications for communities throughout the United States.

Posted by Scott R. Lodde

Headlines – Week of June 13, 2010

June 18, 2010

Where America’s Money Is Moving (from Forbes.com)

Forbes.com recently published an article ranking the areas of the U.S. where wealthy Americans are relocating.  To find places the rich are moving, Forbes used IRS data on household moves broken down by county and income. 

Collier County (which includes the city of Naples) is a favorite relocation destination of the wealthy, according to the report.

The average income for the 15,150 people who relocated to Collier County in 2008 was $76,161, the highest in the nation, according to the data. Although slightly more taxpayers moved out of Collier County than into it, the departing residents’ average income came out to just $26,128 per person.

Often, the arrival of wealthy residents can have economic benefits for all residents.  The economic theory is that as income rises, consumption rises.

According to the article it is no surprise that America’s wealthy like warm weather and low taxes.

Households that moved to Collier County principally came from other parts of Florida, with Lee, Miami Dade, Broward, Palm Beach and Orange counties leading the list. Big northern cities also sent lots of migrants: Cook County, Ill. (home to Chicago); Oakland County, Mich. (near Detroit); and Suffolk County, N.Y. (on Long Island) each sent more than 100 people to Collier County during 2008.

In second place is Greene County, Ga., with a population of just 15,743 at the Census Bureau’s last estimate. Rounding out the top five: Nassau County, Fla., near Jacksonville; Llano County, Texas, 70 miles northwest of Austin; and Walton County, Fla., 80 miles east of Pensacola.

The dominance of the list by Florida and Texas–the former has eight of the top 20 counties, the latter four, makes sense since neither state has an income tax.

After accounting for property taxes, Texas has the fourth-lowest personal tax burden in the country, and Florida has the eighth lowest. Eight states that have targeted wealthy households with extra-high tax brackets: California, New Jersey, New York, Maryland, Hawaii, Oregon, Connecticut and Wisconsin. Six of the top 10 counties the rich are fleeing are located in those states.

Full Article

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Lee County leads in job growth, but lags overall

According to a report released by the Brookings Institution. Lee County led the largest metropolitan areas in job growth early this year, but the local economy remains hobbled by the recession,

The MetroMonitor, a barometer of the health of America’s metropolitan economies.  It attempts to look “beneath the hood” of national economic statistics to portray the diverse metropolitan landscape of recession and recovery across the country. It aims to enhance understanding of the local underpinnings of national economic trends, and to promote public and private sector responses to the downturn that take into account metropolitan areas’ distinct strengths and weaknesses.

The June edition of the Monitor examines indicators through the first quarter of 2010 (ending in March) in the areas of employment, unemployment, output, home prices, and foreclosure rates for the nation’s 100 largest metropolitan areas.

The report found that, “employment recovery has been much less widespread and less consistent than output recovery.

Lee County’s total employment increased 1.1% in the first quarter of 2010, enough to top the Austin metropolitan area as the top job growth area, according to the quarterly MetroMonitor report issued by Brookings.

This is the first increase seen in Lee County since the recession began. The Top 100 metro areas averaged a 0.1% job loss in the first quarter, according to the report.

Although Lee County showed employment growth, it still ranked near the bottom of the top 100 metro areas in the other nine statistics tracked in the report.

Lee ranked 99th in total employment since the economic peak in 2006, with a total decline of 16.4%. Only the Detroit metropolitan area was worse.

Lee County remained at the bottom of the list for gross metropolitan product change since late 2006, (down 15.1%) and total number of bank-owned properties per 1,000 (18.95).

Seven of the eight Florida metropolitan areas ranked in the bottom 20% of the areas in the study. Only Orlando ranked higher but was still in the bottom half of all areas.

The strongest performing areas in the study included all six large metropolitan areas in Texas, Washington, D.C., and several on the Great Plains.

Full Report

Posted by Scott R. Lodde

Headlines – Week of June 6, 2010

June 15, 2010

Nonperforming Loans Jump at Florida Banks in First Quarter

According to an article published in the South Florida Business Journal, the ratio of late or unpaid loans on the books of Florida banks rose to 7.74%  in the first quarter from 6.59% for the same three-month period in 2009 and 2.66% in 2008.

Between January and March, 8.71% of all real estate loans held by Florida banks were noncurrent, up from 7.37% during the same period a year earlier and 2.99% in 2008, according to the report based on the latest FDIC data.

Traditionally, regulators regard noncurrent ratios higher than 1% as an indication of problems that could lead to high numbers of loan charge-offs and other problems.

While the residential real estate sector has stabilized, lenders have yet to deal with an expected wave of commercial problems. Many of the problems for the Florida banks are loans associated with construction and land development. Nonperforming loans in this category jumped to 21.67% in the first quarter of 2010 compared to 16.6% in the same period in 2009 and 6.02% in 2008, according to the FDIC’s quarterly data.

The Business Journalhas reported on the wave of troubled South Florida properties tied to commercial mortgage-backed securities that defaulted in the first quarter, including the Royal Palm Hotel, The Shore Club, Sagamore Hotel and the Carlton Hotel – all in Miami Beach.

According to data from New York-based Trepp LLC, South Florida had $1.44 billion in delinquent CMBS loans as of March 31, representing 9.2% of all the securitized commercial loans in South Florida. That’s worse than the national rate of 7.6% and up from 8.5% delinquency on Dec. 31. (see article below)

As would be expected, Florida is generally faring worse than the rest of the country.

The noncurrent ratio for all loans at the nation’s 7,932 banks was 5.46% as of March 31 – more than 2% lower than the quarter’s ratio for Florida-based banks.

Nationwide, including Florida-based banks, the nonperforming loan ratio was 5.38% in the fourth quarter and 3.77% in the first quarter of 2009.  For real estate loans, the noncurrent ratios were 8.71% for Florida-based banks and 7.55% for the country’s banks at the end of the first quarter

See Full Article 

Hotels Hit Hard as CMBS Delinquencies Reach Historic High

According to an article in the National Real Estate Investor, the delinquency rate for commercial real estate loans in commercial mortgage-backed securities (CMBS) jumped in May, rising 40 basis points to 8.42%, the highest rate in the history of the CMBS industry, according to research analytics firm Trepp.

The figure includes loans 30 or more days delinquent or in foreclosure, as well as real estate owned by lenders. The percentage of seriously delinquent loans, at least 60 days delinquent, jumped 41 basis points to 7.55%. The serious delinquencies include non-performing balloon loans, as well as foreclosures.

The national delinquency rate has climbed steadily for months. In March, it was 7.61%, and in April, 8.02%.

Among all property types, hotels had the highest CMBS delinquency rate in May, 18.45%, up from 17.16% in April. The multifamily delinquency rate increased 28 basis points, from 13.06% in April to 13.34% in May.

Office delinquencies rose from 5.37% a month earlier to 5.81% in May, and retail delinquencies climbed from 6.44% in April to 6.86% in May.

See Full Article  

Study: Homeownership Rate Declines

Homeownership rates are down 2 percentage points from their 2006 peak, but could fall another 5 percentage points in the next couple of years, according to a study by the Federal Reserve Bank of New York.

The study subtracts the number of home owners who are underwater from the official homeownership rate calculated quarterly by the U.S. Census Bureau.

Officially, homeownership was 67.2% at the end of 2009, but the report says that effectively the rate is about 62% if those home owners likely to lose their homes are subtracted from the total.

Cities cited as having very low effective homeownership rates include Las Vegas, Phoenix, San Diego, Los Angeles, San Francisco, Miami, Tampa, Detroit, and Washington, D.C.

See Full Article

See Federal Reserve Study

Posted by Scott R. Lodde

Headlines – Week of May 30, 2010

June 7, 2010

The ‘Staycation’ Phenomenon(from Ypartnership/Harrison Group)

One of the consequences of the Great Recession was the emergence of a new form of leisure travel called a “staycation.”  In their 2010 Portrait of American Travelers the Ypartnership/Harrison Group suggests this phenomenon is growing.    

Specifically, fully one in four U.S. leisure travelers with an annual household income of more than $50,000 took at least one overnight leisure trip/vacation within a 50-mile drive radius of their home during the previous 12 months as an alternative to vacationing in a farther destination. This type of trip ranked higher among younger travelers than older travelers, yet equally evident across all households regardless of their annual household income. 

Staycations are more than a short-term trend brought about by the poor economy and appear to be real and represent a discernible shift in consumers’ leisure travel behavior. It is important to understand, however, that the typical leisure traveler takes an average of four trips annually, so one should not come to the conclusion that staycations have necessarily replaced all well-established patterns of leisure travel.  However, the implication for lodging marketers is clear; local and regional origin markets retain considerable potential for generating incremental room nights in the years ahead, and this potential is likely to remain robust through the duration of 2010 and well into 2011. 

Lodging Industry Forecast Shows Recovery in Sight (from PricewaterhouseCoopers) 

In the company’s updated U.S. lodging forecast, PricewaterhouseCoopers’ expects continued recovery of demand, with the ability to increase room rates returning in 2011, after two consecutive years of decline. The initial months of 2010 suggest that a sustainable recovery of lodging demand has begun. As businesses and consumers gain further confidence in the strength of economic recovery, discretionary spending is expected to continue to increase, contributing to progressive increases in lodging demand through the remainder of 2010, though the pace of recovery is expected to moderate. 

With lodging supply growth expected to lag demand growth for the first time since 2006, PWC expects hotel occupancy levels in 2010 to increase. Average daily rates (ADR) are not expected to increase until early next year, resulting in a moderate occupancy-driven increase in revenue per available room (RevPAR) in 2010, with a more substantial, rate-driven recovery in RevPAR expected in 2011. 

The PWC quarterly lodging forecast is based on an updated macroeconomic forecast from Macroeconomic Advisers, LLC (MA).  MA expects real gross domestic product (GDP) growth to be above its long term average, but below the typical growth expected after a deep recession. MA expects GDP to increase 3.5% in 2010, followed by a 3.9% increase in 2011. 

The current slowdown in hotel construction activity is a key element in the foundation for recovery in operating performance of existing hotels. The pace of new construction starts fell from 134,000 rooms in 2008, to 47,000 in 2009, and most recently to a pace equivalent to approximately 29,000 rooms (annualized) through the first quarter of 2010. 

This sets the context for progressively slower supply growth of 1.9% and 0.4% in 2010 and 2011, respectively. This constrained supply growth, combined with gradual recovery in lodging demand, is expected to result in increases in occupancy levels to 56.6% and 58.2% in 2010 and 2011, respectively. The industry has experienced a more pronounced rebound in transient demand. However, until group bookings pick up, realizing significant increases in room rates in many hotels and markets will be challenging. As a result, PricewaterhouseCoopers forecasts ADR levels to decrease a further 1.7% in 2010, before growth resumes with a 3.5% increase in 2011. 

 PricewaterhouseCoopers U.S. Lodging Forecast 2010 and 2011 

Click to enlarge




Sources: Smith Travel Research and PricewaterhouseCoopers

Posted by Scott R. Lodde

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