November 29, 2010
7 Trends That Will Drive the Future of Housing
According to a feature article on ProSalesOnline.com, seven trends that will influence what and how builders will sell future housing. Although some of these trends will take years before they become important, others will have an impact as early as January 2011.
PROSALES Online is a source for news and information about the management, finances, and operating concerns of America’s 50,000-plus pro-focused building materials dealers. The magazine is published by Hanley Wood which focuses exclusively on North America’s residential and commercial construction industry. Hanley Wood develops magazines, Web sites, e-newsletters, exhibitions and conferences, and custom marketing and data services that support builders’ critical information needs.
The following are trends the editors believe will have the biggest impact on housing in 2011.
1. Big builders are wringing the extras out of construction costs and dropping the national average cost-to-build 36% to $52 per square foot.
2. Starting in 2011, Energy Star will ramp up its efficient design and quality installation standards. To get Energy Star certification, builders will have to install the right insulation, HVAC systems, and other features related to energy efficiency correctly every time.
3. Sheds are the next evolution. As homes get smaller, a separate shed will become a popular home addition.
4. There are 81 million “Echo Boomers” who were born from 1981 to 1999, compared to just 78 million Baby Boomers born from 1946 to 1964. These children and grandchildren of Boomers will drive home-building for years.
5. By 2015, demographers say, more than two out of every five households occupied by Generation Y people born between 1981 and 1999 will be WINKs (women with incomes and no kids).
6. Make room for the “Sandwich Generation” – Baby Boomers living with both their kids and their parents. These families like having two master suites, a second cooking area, and lots of storage.
7. Baby Boomers want to keep working and continue to live where they have always lived. They want a first-floor master bedroom near the washer and dryer and lots of convenient storage.
Moody’s hopeful on recovery, notes pent-up Fla. demand
According to Moody’s Analytics economist Chris Lafakis, the pace of the national recovery is moderating and the lift spurred by nearly $800 billion in federal stimulus spending is fading, but there are several promising signs that growth will continue, including in Florida.
The economist believes the Federal Reserve will remain aggressive with the quantitative easing plan lifting asset prices, reducing corporate borrowing costs, and increasing the willingness of consumers to spend.
Lafakis predicted substantial growth in Florida’s economy, mentioning that the Miami, Orlando and Tampa areas are expected to recover “quite significantly” due to a rebound in population growth and an increased willingness of people to travel to Florida for vacations.
Lafakis says that by the end of third quarter 2011, construction jobs will grow by nearly 27% statewide.
Nationally, corporate balance sheets are strong and business profits have “fully recovered from the recession,” he said, adding that businesses are in a position to hire more employees, though their level of willingness varies.
Household liabilities in the United States have fallen by $900 billion since peaking two years ago and a shift to spending and addressing pent-up demand for purchasing “creates a lot of economic juice.
The National Conference of State Legislatures said states are collectively facing budget gaps that total half a trillion dollars in the coming years. The good news is that State tax revenues bottomed out in fiscal 2010 and that tax collections are growing in 42 states in fiscal 2011, which began July 1.
Foreclosure expert predicts new wave of bank repossessions
A foreclosure investor said bank repossessions will return to record numbers in mid-2011, once the robo-signing scandal has blown over.
According to an article on Miami Herald.com, the foreclosure slowdown initiated by banks will lead to a sharp drop in bank-owned properties and an increase in short sales, followed by a new wave of bank-repossessions.
Rich Meyer, a Miami real estate professional and a veteran of Broward County’s courthouse foreclosure auctions, said the current halt in new foreclosure inventory would be temporary, and predicted a return to record-high bank repossessions by mid-2011.
As the market for bank-owned homes, or REOs, dwindles, there will be more competition and prices will increase. Banks are also likely to favor short sales over foreclosures in the near term.
According to the president of Bank of America’s home loan unit, mistakes were made in the bank’s foreclosure processes, causing some homeowners to be foreclosed on while they were on track for a mortgage modification. About 20% of Bank of America’s defaulting loans are in Florida.
The Congressional Oversight Panel recently released a report stating that the potential fallout from “foreclosure irregularities” could be significant.
Florida leads U.S. in serious mortgage delinquencies
According to an article in The Palm Beach Post, Florida still leads the nation in the percentage of homeowners who are “seriously delinquent” on their loans.
In the state, 19.5% of borrowers were either 90 days past due or in foreclosure in the third quarter. Add in borrowers who are 30 and 60 days late, and nearly one in four Floridians are behind on their loans.
The good news is that Florida’s seriously delinquent rate is down from 20.1% in the second quarter. But no other state has Florida’s high level of late payers. Nevada was No. 2 at 17.83%, while Illinois’ 10.8% ranked third.
In Florida, 48% of the state’s homeowners are underwater and many have given up and have stopped paying their mortgages.
According to the Mortgage Banker’s Assocation, part of the blame lies with the way foreclosures are handled in Florida. Florida and other states where foreclosures go through the courts have foreclosure inventories that are twice as high as so-called non-judicial states.
Of course, the court system is only partly to blame for Florida’s delinquency problem. The bigger culprits are a withering collapse in prices and an 11.9% jobless rate that’s well above the national unemployment rate of 9.6%.
Posted by Scott R. Lodde
November 23, 2010
In a prior posting, I covered Chapter 1 entitled Entering the Era of Less. This week I will summarize Chapter 2 of the report which is entitled Real Estate Capital Flows.
My comments follow each of the bullets.
Chapter 2 – Real Estate Capital Flows
- “In 2011, the “huge spin game” of extend and pretend also finally starts to run its course.” – In the years following the meltdown, lenders were deferring losses to build up capital, trying to keep the regulators off their backs.
- “… lenders will drop the hammer on troubled borrowers (the have nots), and rationally leveraged owners (the haves) will be able to obtain precious refinancing when their loans reach maturity.” – Owners who that are “in between” the haves and the have nots may be able to get an extension and continue to kick the can down the road … as long as they can cover debt service.
- “CMBS loan delinquencies rise to record levels” (see chart) – lenders (special servicers) have already begun the process of taking more writedowns on discounted payoffs so they can raise cash to put out another fire.
- “Loan-to-value (LTV) ratios are not as important. “Who really knows what the value of some of these assets is?” – We are in a “deleveraging” era. The new buzzword is “financial structure right-sizing”.
- “The brightening outlook for major market financial institutions and their better-capitalized clients does not necessarily extend to hobbled banks based in commodity markets. These regional and local banks, which serve less well-heeled investors, developers, and businesses, must continue to kick the can down the road surviving on low-interest-rate life support” – Evidence of this is the amount of FDIC takeovers. Through November 19th, the FDIC closed a total of 149 institutions this year. Many predicted that between 150 to 200 would fail in 2010. The FDIC Deposit Insurance Fund has now been drained by $2.4 billion in the fourth quarter to date, which brings the deficit to an estimated $20.0 billion.
- “Some local and regional banks face more daunting challenges; outsized distressed debt portfolios deteriorate further without a vibrant employment outlook and improving demand for housing and commercial space. They cannot sustain restructuring or marking loans to market – values have declined too much – and they have little or no capital to refinance or make new loans” – This is a situation being played out throughout the country but especially here in Florida. ANY type of loan is hard to come by. Most banks are too afraid to approve anything unless the borrowers are rock solid or if a government guarantee is in place (USDA, SBA).
- “ … CMBS markets have begun to resuscitate. The only way to head off a repeat of the recent debacle is to require issuers to retain a percentage of each securitization and force underwriting discipline. Rating agencies can’t do the job. They were overwhelmed by the sheer volume of assets in offerings and have conflicts because sponsors pay their fees”. This has been a common theme throughout the aftermath of the real estate fallout. The other major complaint involves the special servicers since those companies ring up more and more asset management fees the longer it takes to resolve a problem loan.
- “For years Emerging Trends … have predicted a mountain of lawsuits between tranche holders over failed CMBS investments. Only a limited number of lawsuits have been filed despite significant losses.” The lawsuits have failed to develop since the resulting brain damage of litigation is not worth the just liquidating at market prices. Another issue is that many asset managers have never been through a previous meltdown and are paralyzed by the sheer volume of the problems they face.
- “Filling the recapitalization gap looks ready-made for mezzanine debt investors, who can claim less-risky positions in the capital stack or angle for loan-to-loan deals.” This is where the best opportunity lies in my opinion but ONLY for those mezz lenders who retain asset managers that have experience in running assets and are not just financial engineers looking for a quick buck.
Posted by Scott R. Lodde
November 22, 2010
Homeownership stays at lowest level in a decade
According to an article by The Associated Press writer Alan Zibel, the nation’s homeownership rate remained at its lowest in more than a decade, hampered by a rise in foreclosures and weak demand for housing.
The percentage of households that owned their homes was unchanged at 66.9% in the July-September quarter, the Census Bureau said Tuesday. That’s the same as the April-June quarter.
The last time the rate was lower was in 1999, when the rate was 66.7%.
For decades, 64% of American homes were owned by their occupants. That began to climb in 1995, as both Congress and various administrations pushed for mortgage buyers Fannie Mae and Freddie Mac to purchase more loans targeted toward low-income Americans.
Homeownership hit a peak of more than 69% in 2004 at the height of the housing boom. But the housing bubble burst in 2006 and the rate has been declining gradually since then.
A record number of foreclosures and tight lending standards are expected to keep pushing the homeownership rate down and it will eventually return to pre-1995 levels according to IHS Global Insight.
About 18.8 million homes, or 14.4% of all houses and apartments, were vacant, according to a government survey. Without vacation homes, that rate would be 11%.
The number of vacant homes has soared over the past four years from about 16 million at the start of 2006. It has been hovering around 19 million since the end of 2008. There are around 131 million housing units nationwide, according to the Census Bureau.
About 2.5% of all primary residences were vacant and for sale and 10.3% of all year-round rental units were listed as vacant and for rent.
Banks have seized more than 816,000 homes through the first nine months of the year and are on pace to seize more than a million, according to foreclosure listing service RealtyTrac Inc.
31% of defaults could be strategic
According to an article written by Marcella S. Kreiter for United Press International, the financial crisis and ensuing recession apparently changed the mindset of Americans toward their homes, turning what long has been the American Dream into just another financial investment.
The result has been an increase in strategic defaults, a term used when people walk away from property and mortgages not because they have to, but because they can.
Some experts estimate nearly a third of all mortgage defaults – 31 percent – are of the strategic variety.
RealtyTrac reported 2 million foreclosures in September and said one in 371 housing units received a foreclosure notice.
Easy mortgages made people glorified renters rather than proud homeowners, with no emotional or financial ties.
People who made the decision to buy at the wrong time got stuck in a house that may not recover its value for 10 to 15 years.
As the housing bubble burst, real estate values plummeted and homeowners found themselves “underwater” – owing more than their homes were worth. Many with properties that are underwater decide to walk away from their loans because they can’t sell or rent the properties for enough money to cover the monthly payments.
Many believe the banking system has made the situation worse, giving people who wanted to refinance a hard time, even refusing to do anything for them at all – sometimes because the homeowners were still making payments.
But home ownership still is usually one’s biggest investment and there are indications attitudes toward mortgages are changing although foreclosures are running 65% higher than last year in the third quarter, according to RealtyTrac.
Florida is hot attraction for Middle East buyers
According to an article in GulfNews.com, Middle Eastern and African investors have spent almost $1 billion on properties in Florida in recent years.
Home price deterioration has made property purchases in Florida tourist areas more affordable to overseas property shoppers, with a median price of $219,400.
Low prices combined with the fact that Florida has historically had one of the highest in-migration rates among all the U.S. states and one of the highest population growth rates, makes it the most favored destination for foreign buyers.
Since 2007, as Florida’s real estate prices have declined significantly from their peaks, investors were able to buy developed residential land or second/investment homes around the major tourist areas for rental income.
Posted by Scott R. Lodde