Headlines – Week of October 9, 2011

October 21, 2011

U.S. Housing Trends

Information firm CoreLogic recently predicted that consumer spending would remain slow because housing price trends had a stronger negative wealth effect impact on consumer spending than the positive wealth effect impact of stock prices. Since then, equity values have dropped over 10 percent and home prices have been flat. They concluded that unless there is a sustained increase in home or equity prices over the next couple of years, the primary driver of changes in spending will be household income.

The following is their summary from the October U.S. Housing and Mortgage Trends report:

  • Median income fell by 2.3 percent from 2009 to 2010, and real median income has declined more than 7 percent since its peak in 1999.
  • Real median income for prime home buying age cohorts in 2010 was at the same level as in the late 1970s.
  • Homeownership rates for prime home-buying age cohorts are down almost 10 percent in 2010 relative to 1980.
  • Consumers continue to allocate a higher share of household expenditures to housing, which means they have less money left to spend on non-housing consumption.
  • Of the foreclosure properties that were auctioned in 2006, 66 percent became REO properties. Once in REO, 85 percent have only sold once and have not gone back into REO.
  • The REO recidivism rate within five years of the initial REO sale is only 2 percent.
  • Investors have shifted from buying properties at foreclosure auction to buying properties at the REO sale, increasing the burden of losses on the banks holding REO properties.

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Is it Time to Buy?

A recent article in the Wall Street Journal reported that U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

With that bad news comes the fact that two key measures now suggest it’s an excellent time to buy a house, either to live in for the long term or for investment income.

The article focuses on two measurements.  First, the nation’s ratio of house prices to yearly rents is nearly restored to its prebubble average and second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades.

The article strongly points to a home’s “price/rent ratio” as a stock analyst would evaluate a stock’s price/earnings ratio, which compares the cost of an asset with the money the asset is capable of generating.

click to enlarge

For investors looking to buy real estate, a lower ratio suggests more income for the price and for prospective homeowners, a lower ratio makes owning more attractive than renting … all else equal.

According to the analysis provided in the article, the math is turning in a buyers’ favor.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody’s Analytics. The average from 1989 to 2003 was about 10, so although valuations aren’t quite back to normal, their close.

And for many home buyers, mortgage rates are a key determinant of their total costs and rates are the lowest in many years.

The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index’s historic average is roughly 120.

But not all housing markets are bargains. Home and real estate marketplace Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. Their analysis shows that Detroit and Miami are the cheapest for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

Although housing is not the magic bullet it was during the bubble, the article believes that when prices are low, loans are cheap and other investment yields are scarce, buyers should jump in.

Full Article

What’s Lurking in the Shadows?

A recent report by the National Association of Realtors (NAR) reported an 8.5-month inventory level, close to the six-month level that historically signals a balanced market, even though there’s a general feeling of uneasiness about the market.

The anxiety, they point out, is likely due to “shadow inventory” which homes placed in foreclosure or owned by lenders, and loans overdue by at least one payment.

And no one knows the true extent of the shadow inventory since the amount depends on its definition such as how delinquent must a property be to include it in shadow inventory … 1 day, 90 days?

Estimates of shadow inventory in March 2010 ranged from 1.7 million to 7 million, according to NAR. While the number of homes in shadow inventory is important, just as critical s the timing of their exact release to the market.

If banks slowly release shadow inventory to the market, the market could stabilize as the supply of homes would be restricted.

But if banks dumped all of the homes they own on the market all at once, the increase of supply would cause a decline in price and since demand could not respond quickly, the price drop would have a tremendous impact on the market.

However, as the article points out, homeowners also control the number of homes in shadow inventory. A homeowner in trouble can decide whether to pay the mortgage, seek mitigation or walk away.

Banks, homeowners and the government can modify their actions to speed up or slow down the amount of inventory added to the current supply. With each player making different moves, the moral of the story is that the timing and number of distressed properties in the market can’t be predicted. We do know it will affect your business, so monitor your local market closely. Communicate with lenders so you know the business decisions they are making, and work with distressed homeowners to help mitigate their debt burdens.

Posted by Scott R. Lodde

Headlines – Week of October 2, 2011

October 15, 2011

Number of Bank Failures Fall from Year Ago

According to an article on the CoStar Group web site, banking regulators recently closed the 26th bank in the third quarter of this year.  The 26 banks closed represent a nearly 56% decrease in bank failures compared to the same quarter a year ago.
Commercial real estate lending continues to make up the largest percentage of the failed banks’ activities. Two-thirds of the lending activity at the 26 failed banks was for CRE-related loans.
The banks had total distressed commercial real estate assets of $2.1 billion, which represented 21% of their total assets of $9.6 billion.
Of the distressed CRE totals, delinquent loans accounted for $1.15 billion of the assets, with nearly 87% of that seriously delinquent.
The banks had restructured $476 million of the commercial real estate loans on their books. Of that amount, nearly half were delinquent again.
Foreclosed property holdings accounted for $426 million of the total distressed assets.
Through the first two quarters of the years, the 26 banks had lost a collective $248 million.

Ten States with Soaring Home Prices

Several states are posting year-over-year gains in home values, according to a newly released index for August by CoreLogic, which tracks price changes in repeat sales of homes.  The report by CoreLogic tracks price changes in repeat sales of homes.
Home prices increased in 12 states and Washington, D.C., on a year-over-year basis in August.
West Virginia led all states with an 8.6 percent rise in home prices, followed by Wyoming at 3.6 percent, and North Dakota at 3.5 percent.
Nationally, single-family home prices were down 4.4 percent year-over-year in August, according to the index. Nevada posted the largest drop, falling 12.4 percent year-over-year.
CoreLogic August Home Price Index (year-over-year change)
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23 Housing Markets Show Big Improvement

According to the National Association of Home Builders/First American Improving Markets Index, which debuted last month, the number of housing markets that moved into the “improving” category this month doubled compared to last month.
Twenty-three housing markets qualified as “improving” compared to 12 last month. Metro areas are considered “improving” if they show an improvement in housing permits, employment, and housing prices for at least six months. Texas cities appear the most frequently on the list.
The following are the 23 markets labeled “improving” in October, according to NAHB’s index:
Full Article
Posted by Scott R. Lodde

Headlines – Week of September 25, 2011

October 6, 2011

Primary Users – Only 13% of New South Florida Coastal Condos
According to report by Miami-based CondoVultures only 13% of the more than 43,200 South Florida coastal condo units created and sold since the real estate boom began in 2003 are owned by primary users who filed for Homestead Exemption.
The study is based on a review of every folio property identification number within the 987 projects with nearly 125,000 units on the coastal markets of South Florida.
According to Peter Zalewski, a principal with Condo Vultures, Freddie and Fannie typically require 51% primary users in order to provide financing for a building. Based on his research, only 175 buildings out of the 937 reviewed would quality for financing.
Of the 76,100 units created through the year 2002, nearly 27,100 units, approximately 36 percent have obtained Homestead Exemptions from their respective counties. Overall, South Florida’s seven largest coastal condo markets have a Homestead Exemption rate of 27%.  Zalewski believes renters are now occupying a majority of the coastal condos built during the South Florida real estate boom.
The report reinforces the fact that second buyers and investors are the primary drivers in the South Florida market.  Only one out of every ten condo transactions are local buyers. Foreign investors with strong currencies and domestic second-home buyers are the lifeblood of the South Florida coastal condo market.
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10 States for the Cheapest Real Estate
The following is a list of states ranked by the lowest median list price of homes viewed at real estate search site Realtor.com in August:
Top 10 States with Lowest Median List Price of Homes Viewed at Realtor.com in August 2011

State Med. List price of homes viewed
U.S. $214,990
Michigan $134,900
Nebraska $142,000
Nevada $147,000
Indiana $150,000
Iowa $150,000
West Virginia $154,900
Kansas $158,500
Oklahoma $159,900
Kentucky $159,900
Ohio $159,900
Chart – Median List Price of For-Sale Homes Viewed at Realtor.com in August, by State (ranked from highest median list price to lowest median list price)

Commercial market hits a snag in rebound
According to a recent Wall Street Journal article, some companies looking for office space have delayed their plans as uncertainty looms in the economy, stalling what had been a two-year rebound.
The commercial market had been picking up in recent months based on expectations that rents and occupancies would continue to rise. But the economy and fears of a double-dip recession has worried some investors about moving forward.
Companies such as UBS AG, Morgan Stanley and the Quidsi unit of Amazon.com Inc. have all recently postponed looking for office space in New York.
In the first half of 2011, U.S. commercial-property sales boomed, rising 107 percent over the same period a year earlier. Firms completed more than $93 billion in deals in that time, according to Real Capital Analytics Inc. Since then, sales growth slowed considerably.
More companies still planning to press ahead find deals falling apart when funding evaporates, thanks to banks that remain squeamish on issuing commercial loans. About 400 banks have failed since 2008, and bad commercial real estate loans are considered one of the primary culprits, according to a new report by Deutsche Bank AG analysts.
Some investors view any slowdown in the commercial market as temporary, particularly in hot spots like New York and Washington. Low interest rates and prices and rents in niches like high-end retail are still a major lure, analysts say.
Full Article
Posted by Scott R. Lodde

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