July 28, 2012
Goldman Sachs Sees ‘Strong’ Recovery for Housing
In a recent report from Goldman Sachs Group Inc. (GS), U.S. homebuilders are an attractive investment as the housing market starts a “strong” recovery that may drive a surge in new-home sales.
The report notes a “long list of positives,” for the housing market including rising prices, job growth, supportive government policies and a decline in the so-called shadow inventory of homes.
Public homebuilders reported increasing orders this year as mortgage rates fell to record lows and the supply of existing homes for sale shrank. Construction of single-family houses rose 4.7 percent in June to a 539,000 annual rate, the fastest in two years, the Commerce Department said last week.
Analysts at the Goldman Sachs believe a strong recovery in new-home sales is ahead and a number of risks to the housing market have abated, giving them confidence that rising home prices will drive a 3-7 year up-cycle in the U.S. market.
The U.S. economy has created enough jobs since the end of the recession in 2009 to fuel new-home sales at an annual rate of 550,000 to 600,000, the analysts said. New houses sold at a pace of 369,000 in May, the highest rate since 2010, the Commerce Department reported last month.
The Goldman Sachs analysts estimated new-home sales would reach 700,000 in 2014.
Government policies have improved in the past year by addressing supply instead of demand. The report notes such recent programs as the bulk sale of foreclosed single-family homes to investors and the expanded Home Affordable Refinance Program, which allows refinancing of properties worth less than their mortgages.
The supply of homes for sale has fallen to six months from 10 months in the past two years and the shadow inventory, or the homes projected to hit the market through foreclosures and short sales, is down 15 percent in Arizona, California, Florida, Nevada and Texas, while growth in building permits indicates a 34 percent increase in demand in those states.
Foreign home searches drop as prices rise
A recent report by Trulia looked at the buyers who accessed its website to check home listings. The company says that in recovering markets, the number of foreign buyers conducting a search appears to drop off as real estate prices rebound.
However, foreign buyers are still interested in U.S. real estate generally and Florida real estate specifically. Trulia listed the top 10 cities searched by foreign buyers through its website, and six are in Florida:
- Los Angeles
- Fort Lauderdale
- Lakeland-Winter Haven
- West Palm Beach
- Cape Coral-Fort Myers
- San Francisco
- Las Vegas
Trulia says that 15.7 percent of the Miami searches done through its website were by foreign buyers. Falling home prices across the U.S. real estate market have attracted foreign home searchers, most notably from Canada, the United Kingdom, Germany and Australia. However, U.S. asking prices rose nationally 0.3 percent year over year in June.
US Existing Home Sales Fall In June: 4 Important Trends
According to the National Association of Realtors, U.S. existing home sales unexpectedly fell in June, raising new doubts about the housing recovery. Resales make up the significant majority of the housing market, compared to new homes, and represent the largest single purchase for most Americans, making the sector a major factor for consumer spending and growth in gross domestic product.
June had an annual rate of 4.37 million units sold, meaning 4.37 million homes were sold in the previous 12-month period which is significantly below a Reuters forecast of 4.63 million units.
Lower home sales are directly tied to less inventory. A total of 2.39 million existing homes were on the market at the end of June, a 3.2 percent decline compared to May. At the current sales pace, there is a 6.6 month supply of homes on the market, up from 6.4 months in May and far below the 9.1-month supply in June 2011.
A six-month supply is considered relatively healthy and low supply is thought to mean a market with high demand. However, in this market, many believe a low supply in housing may actually represent a depressed market that is not attractive for potential sellers to list their property. This, in turn, gives buyers fewer options and creates negative conditions for both buyers and sellers.
The most positive change in the June report was an increase in prices, with the median price increasing on an annual basis of 7.9 percent to $189,400. It was the strongest gain since February 2006. Higher prices are generally a good thing for the housing market, because it encourages more people to consider buying, with the expectation that they are making a positive investment.
However, this also comes with a caveat, since home prices are not necessarily increasing in many markets. This is due to the fact that the market’s share of distressed sales (either foreclosures or short sales by banks) has decreased to 25 percent of the market, down from 30 percent in the prior year.
Since distressed sales are, on average, around 16 percent cheaper than market-rate transactions, the overall price increase is partially tied to a change in the types of properties that are being sold. Fewer distressed sales are another positive change for the housing market, but there are still foreclosures that have yet to be processed, thanks to the delays caused by “robosigning.”
The existing home sales report further breaks down pricing by region, which reveals major differences around the country. The Northeast had an 11.5 percent monthly drop in sales to a pace of 540,000, and its median price fell by 1.8 percent, although it remained the most expensive region at $253,700 median price.
The Midwest had 1.9 percent fewer sales compared to the prior month, but pricing rose 8.4 percent on an annual basis to $157,600 and the South saw a sales decline of 4.4 percent, but pricing rose 6.6 percent to $165,000. In the West, the number of sales fell 6.9 percent, but median price surged 13.3 percent to $233,300, compared to the prior year.
These numbers clearly show a mixed market. But brokers and developers have said consistently that prime cities like New York, Washington, D.C., San Francisco and Boston have demonstrated strong demand and rising prices. Meanwhile, the bulk of the country’s single-family properties in the middle of the country have languished, particularly in areas of weak employment. This bifurcation between high-demand cities and weaker regions is expected to continue; any housing recovery will likely be uneven at best.
Six in Ten U.S. Cities see Foreclosure Spike
RealtyTrac released its Midyear 2012 Metropolitan Foreclosure Market Report and it shows that foreclosure activity in the first half of 2012 increased from the previous six months in 125 of the nation’s 212 metropolitan areas with a population of 200,000 or more.
However, in a year-to-year comparison, foreclosure activity declined in 129 of the metro areas.
California cities made up seven of the 10 highest metro foreclosure rates and 10 of the top 20 metro foreclosure rates during the first half of the year, while Florida accounted for four of the top 20 metro foreclosure rates. Illinois accounted for two of the top 20; and Georgia, Arizona, Nevada and Colorado each had one city in the top 20.
Stockton, Calif., posted the nation’s highest metro foreclosure rate at 2.66 percent of housing units (one in every 38) in the first half of 2012, followed by four other California cities: Modesto (2.61 percent), Riverside-San Bernardino-Ontario (2.59 percent), Vallejo-Fairfield (2.56 percent) and Merced (2.15 percent).
Florida cities in the top 20 include Orlando (No.12), Miami (No. 13), Cape Coral (No. 17) and Lakeland (No. 18).
In gauging change between the last half of 2011 and the first half of 2012, the Tampa-St. Petersburg-Clearwater area had the highest foreclosure increase at 47 percent.
Posted by Scott R. Lodde
July 20, 2012
Another Construction Boom in the South Florida Condo Market
According to a recent report from CondoVultures.com, South Florida, developers have initiated construction on at least 10 new high-rises and are planning several more over the next 18 months as the post-crash development era gains momentum.
The tricounty South Florida region includes Miami-Dade, Broward, and Palm Beach counties.
Some five years after the South Florida condo market began to crash; developers in Greater Downtown Miami have completed one condo tower and are building four.
As of July 2012, at least 46 condo towers with nearly 7,900 units are proposed, planned, under construction, or recently completed in South Florida, according to the Florida brokerage CVR Realty.
Nearly 3,900 developer units created during the last real estate boom remain unsold in South Florida’s seven largest coastal markets according to a recent CondoVultures.com report.
Additionally, more than 1,800 units previously purchased by bulk buyers in South Florida’s seven largest coastal markets have not yet been sold as of March 2012.
To overcome financing hurdles, most of the newly proposed projects are requiring prospective buyers to commit to deposits to be paid in phases up to 80 percent of the preconstruction contract price.
Housing Passes a Milestone
According to data from the S&P/Case-Shiller Index, the housing market has bottomed.
Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. The slow-moving S&P/Case-Shiller house-price data recently reported the first monthly increase after seven months of declines.
Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. And the inventory of existing homes for sale has fallen close to the normal level of six months’ worth despite all the foreclosed homes that lenders own. The fraction of homes that are vacant is at its lowest level since 2006.
Many believe the reduced inventory of unsold homes is key. For the past couple of years, house prices have risen in the spring and then slumped; the declining supply of houses for sale is reason to believe that won’t happen again this year.
Builders began work on 26% more single-family homes in May 2012 than the depressed levels of May 2011. The stock of unsold newly built homes is back to 2005 levels. In each of the past four quarters, housing construction has added to economic growth.
In a good sign for the economy, in the first quarter, new construction accounted for 0.4 percentage points in the 1.9% growth rate
A recent Wall Street Journal survey of forecasters found 44 believe the housing market has reached its bottom; only three don’t.
With all the good news, however, the biggest threat is a large shadow inventory of unsold homes, homes which owners won’t put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures. A flood of foreclosures could reverse the recent rise in prices.
‘Lost Generation’ of Homeowners on Hold
In another good sign for the future of housing, many analysts predict a recovery in the job market will prompt some renters to buy homes especially since many still believe real estate can be a profitable investment.
According to a report from John Burns Real Estate Consulting, the number of first-time buyers has skidded 20 percent during the last three years and homeownership will continue to decline among the 25-to-34 age segment for the next three years.
Stagnant income growth, huge amounts of student loan debt and an 8.2 percent unemployment rate for 25- to 34-year-olds have made Millennials less willing to sink their money into homeownership. However, analysts believe Millennials will want to settle down as they age, and that credit requirements will be eased at some point although it could take years before they feel comfortable purchasing homes.
This has sparked a boom in construction of multifamily housing, particularly in areas like Denver and San Jose where job opportunities abound. In these areas, short-term leases are gaining popularity among young professionals who want to be able to move quickly to take advantage of buying opportunities.
Posted by Scott R. Lodde
July 17, 2012
In one of the most contentious hotel management contract disputes in recent memory, Marriott International and the owner of The Modern Honolulu hotel in Waikiki have reached a settlement in their court case over the property, which was formerly the Waikiki Edition. Marriott was ousted as the manager of the Edition on August 28, 2011.
The amount of the payment was not disclosed; however, the bankruptcy court judge had ruled in early June that a reasonable estimate of how much Marriott should be paid for lost management fees and expenses was $20.7 million. Marriott had sought $72 million for what it contended was an unjust breaking of a 30-year management contract.
Also settled recently was the little-publicized takeover of the Turnberry Isle Resort & Spa in the Miami where the owner terminated a “no-cut” hotel management contract with more than 50 years left to run and expelled Fairmont from the property.
Extremely interesting is the fact that unbeknownst to each other and separated by 6,000 miles and a 6 hour time difference, the owners of the Edition Waikiki and the Turnberry Isle Resort both took both control of their hotels at virtually the same moment on Sunday morning, August 28, 2011 — 2 am Honolulu time which is 8:00 am Miami time.
According to Jim Butler of JMBM Global Hospitality Group, the firm that represented the owners of Turnberry Isle, there are many important parts to the Turnberry opinion, but one major theme is summed up in this statement by the Court:
“The notion of requiring a property owner to be forcibly partnered with an operator it does not want to manage its property is inherently problematic and provides support for the general rule that a principal usually has the unrestricted power to revoke an agency.”
According to Butler, the 71-page opinion in the Turnberry decision is destined to become one of the most cited cases in the area of hotel management agreements. Although infallibly grounded on legal precedent — going back hundreds of years in English common law, a landmark U.S. Supreme Court case by Chief Justice John Marshall, and a well-known line of hotel cases – Butler believes it is one of the best-written, most thoroughly researched and comprehensive decisions in the area of hotel management law.
Posted by Scott R. Lodde
July 5, 2012
According to the recently released June 2012 edition of Hotel Horizons®, PKF Hospitality Research, LLC (PKF-HR) is projecting RevPAR for U.S. hotels will increase by 5.8 percent in 2012, and another 6.6 percent in 2013. These forecasts are identical to the RevPAR forecasts presented in the March 2012 edition of Hotel Horizons.
PKF-HR affirms its strong forecasts of RevPAR growth for the nation’s lodging industry despite news that will likely influence the short-term economic performance of the U.S. economy.
Sluggish job growth and economic chaos in Europe have been in the news for a while, and despite these conditions, the performance of the U.S. lodging market during the first quarter of 2012 was just as strong as their original forecast.
The 2012 annual RevPAR growth forecast of 5.8 percent is the result of a projected 1.6 percent increase in occupancy and a 4.1 percent gain in average daily rate (ADR).
PKF-HR is forecasting average quarterly RevPAR gains of 4.9 percent during the second half of 2012. This is less than the estimated 6.9 percent RevPAR growth enjoyed during the first six months of the year.
One of many economic measures monitored by PKF-HR is The Conference Board’s Leading Economic Index® (LEI). The firm believes there is a six to eight month lag between changes in the LEI and movements in lodging demand. The decline in the LEI observed during the last quarter of 2011 suggested a softening in the demand for hotel rooms during the third quarter of 2012. However, the LEI bounced back during the first half of 2012, thus perpetuating our optimism for 2013.
PKF-HR is now projecting more robust ADR growth in future years. From 2014 through 2016, the firm has increased their annual ADR growth rates by an average of 150 basis points. The solid growth in lodging demand exhibited in 2010 and 2011, combined with limited increases in hotel supply, will serve as the base for above long-run average occupancy levels from 2013 and beyond. As a result, hotel managers should be able to leverage these market conditions and raise room rates.
In 2012, 29 of the 50 Hotel Horizons® markets are expected to achieve occupancy levels above their long-run average. With demand growth forecast to continue to rise greater than supply in most cities over the next two years, 42 of the 50 markets are projected to exceed their long-run average occupancy levels by 2014.
Previous research conducted by PKF-HR has found that profit growth is greatest for hotels when revenue gains are driven by increases in ADR.
Luxury and upper-upscale properties achieved the greatest gains in RevPAR during the initial stages of the industry recovery; however, going forward, PKF-HR believes the greatest gains in annual performance will shift to the more moderate-priced segments.
In addition to mid-priced properties, hotel markets in the mid-section of the nation are starting to participate in the recovery. The cities of Nashville, Houston, New Orleans and Salt Lake City are forecast to experience the greatest gains in demand in 2012. The early stages of the U.S. lodging industry recovery favored the large gateway markets. The return of demand to cities in the nation’s midsection is a sign that the recovery is expanding beyond the Atlantic and Pacific coasts.
Posted by Scott R. Lodde