Headlines – Week of October 3, 2010
October 13, 2010
Most and Least Promising Metros for Investors
According to an article in the Wall Street Journal, Phoenix and Naples, Fla. are no longer among the most dangerous markets for investors.
Local Market Monitor, a North Carolina firm that measures the potential for price appreciation in real estate markets with more than 200,000 residents, recently evaluated markets for conservative investors. It identified the best metros as those with signs that prices are stabilizing. It also named markets where prices are still falling as “dangerous.”
The best markets for conservative investors show signs of price stabilization; dangerous markets are those where it appears prices will fall further and probably won’t turn around soon because of poor local economies.
High-ranking areas for investor suitability are places where there’s a positive three-year home price forecast, employment is stable and only a small share of jobs are in highly volatile industries such as construction and financial services.
Here are the 10 most-promising areas for conservative investors:
1. Tulsa, Okla.
2. Oklahoma City, Okla.
3. San Diego-Carlsbad-San Marcos, Calif.
4. Albany-Schenectady-Troy, N.Y.
5. Indianapolis-Carmel, Ind.
6. El Paso, Texas
7. Winston-Salem, N.C.
8. Cincinnati-Middletown, Ohio-Ky.-Ind.
9. Worcester, Mass.
10. Louisville-Jefferson County, Ky.-Ind.
The top 10 most “dangerous” areas are:
1. Ocala, Fla.
2. Lakeland-Winter Haven, Fla.
3. Reno-Sparks, Nev.
4. Orlando-Kissimmee, Fla.
5. Deltona-Daytona Beach-Ormond Beach, Fla.
6. Port St. Lucie, Fla.
7. Las Vegas-Paradise, Nev.
8. Boise City-Nampa, Ind.
9. Prescott, Ariz.
10. Cape Coral-Fort Myers, Fla.
Market Braces for Billions in Ballooning Mortgages
According to an article in the Boston Business Journal, the second coming of the Great Exchange, defined as the blizzard of foreclosures and fire sales that resulted from the recession of the early 1990s never quite materialized as a result of the 2008 financial crisis.
However, many fear 2011 be the year for bargain hunters and bottom feeders and the worst is still to come.
Like their residential counterparts, commercial real estate owners capitalized on their portfolios’ inflated values and borrowed heavily to fund property acquisitions and development. Many of those mortgages are slated to balloon between now and late 2013.
The borrower’s options will be able to either modify their loan terms, sell off properties at depressed values to settle ballooning debts, or turn over the keys to lenders will depend on whether they can raise enough capital, through partnerships or direct fundraising, to offset the cost to refinance their maturing debts. One expert believes that, as of a year ago, the funding gap stood at about $400 billion.
Many argue that due to low interest rates, a recent uptick in property values and a “forgiving” environment among lenders has helped delay the day of reckoning. Temporary loan extensions continue to be favored over more drastic actions such as foreclosures.
The so-called deep cleansing predicted for this year never materialized, despite precipitous jumps in loan defaults and foreclosures. However, much concern still abounds over the massive mortgages slated to mature in the next 16 months.
The article noted very large loans secured by prominent office buildings as examples including One Beacon St. and 116 Huntington Avenue, owned by Beacon Capital Partners, one of the market’s most active investors during the run-up to the crisis. These two trophy properties have a combined $245 million in debt maturing next year.
In addition, 60 State Street owned by Equity Office has a $130 million loan set to mature in March 2011.
Ethics of Strategic Default – Experts Fear for Nation’s Morals
A recent article in the Chicago Tribune explores the phenomenon of owners walking away from mortgages they can otherwise afford to pay.
Known as a “strategic default”, it represents a calculated decision to hand over the keys to a home without making good on a loan, reasoning that it makes no sense to keep paying the monthly mortgage when the home is worth thousands of dollars less than the obligation.
As Americans continue to face issues relating to the housing crisis, financial crisis and jobs crisis, many are wondering if the residue of those realities is an ethical crisis.
There are many reasons for this trend. Some simply need to move from an area to find work but can’t sell or rent the properties at a price nearly high enough to cover current payments. Others say they have little choice since their bank refused to refinance the mortgage or adjust the original loan terms.
Strategic default is a symptom of a housing market that suddenly turned from “American Dream” to financial trap. Some fear the result is America losing its grip on the notion: that people should live by the slogan, “My word is my bond.”
The article quotes a recent Morgan Stanley estimate that about 18% of defaults will be strategic. In a recent Pew Research Center survey, 36% of Americans said that walking away without paying a mortgage is acceptable, at least under certain circumstances. Fifty-nine percent said the practice is unacceptable.
Many say the practice is acceptable since both Wall Street and large banks are untrustworthy and that has allayed their guilt about walking away from their mortgages.
Many point to a sense of betrayal and blame the banks for letting this happen by giving a loan to anyone if they had a pulse. Most believe their loose lending standards led to the bubble, and the regulators should have controlled the lenders.
The article points to the ultimate consequence – when bankers don’t trust people enough to pay off their loans they demand higher interest and other assurances before lending in the future. This leads to a lending shortage, extending the housing recession and lowing prices.
Research into strategic default conducted by the University of Chicago Booth School of Business shows what is called “the contagion effect.” –the stigma goes down once you see someone else do it.
Foreign Buyers See Opportunity in the Housing Bust
As recent article in the Fort Myers News Press gives examples which seem to indicate the United States is in another real estate boom. The article notes a condominium complex in downtown Miami which has sold 262 of its 372 units since January. Known as the Viceroy, almost 90%of the buyers are foreigners -and all paid cash.
The same story is playing out across Miami as individual investors from Argentina, Canada, Colombia, France, Israel, Italy, Norway and Venezuela are getting in on what they see as one of the greatest real estate fire sales in the history of the United States.
The idea is to rent out the properties and then sell them once the economy turns around.
Prices at the Viceroy are roughly 52% off the 2007 peak. Units once sold for as much $670 a square foot – today the average price is $319.
According to the article, Miami is not the only hot spot for buyers from outside the United States. Real estate brokers say they’ve seen a surge in Washington, New York, Las Vegas, Los Angeles and San Francisco. The article points to Seattle, a city where Asians are buying property sight unseen.
In Phoenix, this year there have been more buyers from Canada than from California.
For the international investor class, the United States’ bloated inventory of homes, high unemployment and weak currency make for an unusually attractive buyer’s market.
The trend is showing up in the statistics of the National Association of Realtors which released a report July stating that 28% of brokers reported they had worked with at least one international client, up from 23% a year earlier. Among those, 18% had completed at least one sale, compared with 12% in 2009.
Although they are increasing foreign buyers cannot be counted on for a housing market turnaround since they only represent around 7% of today’s total. However, in some cities such as Miami and Washington, the foreign sales are helping to stabilize the markets.
Posted by Scott R. Lodde