October 15, 2011
Number of Bank Failures Fall from Year Ago
Ten States with Soaring Home Prices
23 Housing Markets Show Big Improvement
January 31, 2011
I recently read a posting from John Mauldin on his InvestorInsight.com newsletter on entitled Global Aging and Crisis of the 2020s. In his newsletter, Mauldin often shares the insights of other authors on subjects that may affect his reader’s investing decisions.
The article in Mauldin’s newsletter was co-authored by Neil Howe and Richard Jackson from their work with the Center for Strategic and International Studies on the Global Aging Initiative. Howe and Jackson are also the authors of “The Graying of the Great Powers” and other commentary on the impact that demographics will have on our future. You can see that paper HERE.
The article by Howe and Jackson describe how demographic trends have played a decisive role in many of the great invasions, political upheavals, migrations, and environmental catastrophes of history. They note another startling trend that will surface in the 2020s as global aging begins to have a profound effect on economic growth, living standards, and the shape of the world order.
The following are some of the important concepts taken from the full article:
- The developed world has been aging for decades, due to falling birthrates and rising life expectancy and the 2020s, this aging will get an extra kick as large postwar baby boom generations move fully into retirement.
- According to the United Nations Population, the median ages of Western Europe and Japan, which were 34 and 33 respectively as recently as 1980, will soar to 47 and 52 by 2030, assuming no increase in fertility.
- In Italy, Spain, and Japan, more than half of all adults will be older than the official retirement age—and there will be more people in their 70s than in their 20s.
- By 2030, working-age population will be stagnant or contracting in nearly all developed countries, the only major exception being the United States.
- In a growing number of nations, total population will begin a gathering decline as well. Unless immigration or birthrates surge, Japan and some European nations are on track to lose nearly one-half of their total current populations by the end of the century.
- Rising pension and health care costs will place intense pressure on government budgets, potentially crowding out spending on other priorities, including national defense and foreign assistance. Economic performance may suffer as workforces gray and rates of savings and investment decline.
- China will face a massive age wave that could slow economic growth and precipitate political crisis. Russia will be in the midst of the steepest and most protracted population implosion of any major power since the plague-ridden Middle Ages.
- Many other developing countries, especially in the Muslim world, will experience a sudden new resurgence of youth whose aspirations they are unlikely to be able to meet.
- The developed world is destined to see its geopolitical stature diminish with one important exception to the trend … the United States.
- Simple arithmetic. By the 2020s and 2030s, the working-age population of Japan and many European countries will be contracting by between 0.5 and 1.5 percent per year. Even at full employment, growth in real GDP could stagnate or decline, since the number of workers may be falling faster than productivity is rising.
- A graying workforce means less entrepreneurialism since new business start-ups in high-income countries are heavily tilted toward the young. Of all “new entrepreneurs” 40 percent are under age 35 and 69 percent under age 45. Only 9 percent were 55 or older.
- Savings rates in the developed world will decline as a larger share of the population moves into the retirement years. As a result, either businesses will starve for investment funds or the developed economies’ dependence on capital from higher-saving emerging markets will grow. The penalty will be lower output or higher debt service costs and the loss of political leverage, which history teaches is always ceded to creditor nations.
- The developed countries will have to transfer a rising share of society’s economic resources from working-age adults to nonworking elders. Graying means paying—more for pensions, more for health care, more for nursing homes for the frail elderly.
- By the 2020s, political conflict over deep benefit cuts is unavoidable. On one side will be young adults who face stagnant or declining after-tax earnings. On the other side will be retirees, who are often wholly dependent on pay-as-you-go public plans.
- With the size of domestic markets fixed or shrinking in many countries, businesses and unions may lobby for anticompetitive changes in the economy. Governments we impose cartels (tariff barriers and other anticompetitive policies) to protect market share that tend to shut the door on free trade and free markets.
- Psychologically, older societies are likely to become more conservative in outlook and possibly more risk-averse in electoral and leadership behavior. Elder-dominated electorates may tend to lock in current public spending commitments at the expense of new priorities and shun decisive confrontations in favor of ad hoc settlements. Smaller families may be less willing to risk scarce youth in war.
- The rapid growth in ethnic and religious minority populations, due to ongoing immigration and higher-than-average minority fertility, could strain civic cohesion. With the demand for low-wage labor rising, immigration (at its current rate) is on track by 2030 to double the percentage of Muslims in France and triple it in Germany. Some large European cities, including Amsterdam, Marseille, Birmingham, and Cologne, may be majority Muslim.
- Over the next few decades, the outlook in the United States will increasingly diverge from that in the rest of the developed world. Aside from Israel and Iceland, the United States is the only developed nation where fertility is at or above the replacement rate of 2.1 average lifetime births per woman. By 2030, its median age, now 37, will rise to only 39. Its working-age population, according to both US Census Bureau and UN projections, will also continue to grow through the 2020s and beyond, both because of its higher fertility rate and because of substantial net immigration, which America assimilates better than most other developed countries.
- Most of the developing world is also progressing through the so-called demographic transition—the shift from high mortality and high fertility to low mortality and low fertility that inevitably accompanies development and modernization. Since 1975, the average fertility rate in the developing world has dropped from 5.1 to 2.7 children per woman, the rate of population growth has decelerated from 2.2 to 1.3 percent per year, and the median age has risen from 21 to 28.
- In many of the poorest and least stable countries (especially in sub-Saharan Africa), the demographic transition has failed to gain traction, leaving countries burdened with large youth bulges. By contrast, in many of the most rapidly modernizing countries (especially in East Asia), the population shift from young and growing to old and stagnant or declining is occurring at a breathtaking pace—far more rapidly than it did in any of today’s developed countries.
- The demographic transition can trigger a rise in extremism. Religious and cultural revitalization movements may seek to reaffirm traditional identities that are threatened by modernization and try to fill the void left when development uproots communities and fragments extended families.
- International terrorism, among the developing countries, is positively correlated with income, education, and urbanization. States that sponsor terrorism are rarely among the youngest and poorest countries; nor do the terrorists themselves usually originate in the youngest and poorest countries. Indeed, they are often disaffected members of the middle class in middle-income countries that are midway through the demographic transition.
- China may be the first country to grow old before it grows rich. For the past quarter-century, China has been peacefully rising, due in part to a one-child-per-couple policy that has lowered dependency burdens and allowed both parents to work and contribute to China’s boom. By the 2020s, however, the huge Red Guard generation, which was born before the country’s fertility decline, will move into retirement, heavily taxing the resources of their children and the state.
- By 2030 China will be an older country than the United States which may weaken the two pillars of the current regime’s legitimacy: rapidly rising GDP and social stability. China could careen toward social collapse—or, in reaction, toward an authoritarian clampdown.
- By the 2020s, Russia, along with the rest of Eastern Europe, will be in the midst of an extended population decline as steep as or steeper than any in the developed world. The Russian fertility rate has plunged far beneath the replacement level even as life expectancy has collapsed amid a widening health crisis. Russian men today can expect to live to 60—16 years less than American men and marginally less than their Red Army grandfathers at the end of World War II. By 2050, Russia is due to fall to 16th place in world population rankings, down from 4th place in 1950 (or third place, if we include all the territories of the former Soviet Union).
- Sub-Saharan Africa, which is burdened by the world’s highest fertility rates and is also ravaged by AIDS, will still be racked by large youth bulges as will certain Muslim-majority countries, including Afghanistan, the Palestinian territories, Somalia, Sudan, and Yemen.
- These echo booms will be especially large in Pakistan and Iran. In Pakistan, the decade-over-decade percentage growth in the number of people in the volatile 15- to 24-year-old age bracket is projected to drop from 32 percent in the 2000s to just 10 percent in the 2010s, but then leap upward again to 19 percent in the 2020s.
- In Iran, the swing in the size of the youth bulge population is projected to be even larger: minus 33 percent in the 2010s and plus 23 percent in the 2020s. These echo booms will be occurring in countries whose social fabric is already strained by rapid development.
- During the era of the Industrial Revolution, the population in the developed world grew faster than the rest of the world’s population, peaking at 25 percent of the world total in 1930. Since then, its share has declined. By 2010, it stood at just 13 percent, and it is projected to decline still further, to 10 percent by 2050.
- The collective GDP of the developed countries will also decline as a share of the world total. The Group of 7 industrialized nations’ share of the Group of 20 leading economies’ total GDP will fall from 72 percent in 2009 to 40 percent in 2050.
- The United States is only one large country in the developed world that does not face a future of stunning relative demographic and economic decline. Due to its relatively high fertility rate and substantial net immigration, the U.S. current global population share will remain virtually unchanged in the coming decades. The US share of total G-20 GDP will drop significantly, from 34 percent in 2009 to 24 percent in 2050. The combined share of Canada, France, Germany, Italy, Japan, and the United Kingdom, however, will plunge from 38 percent to 16 percent.
- According to information published by the United Nations, in 1950, six of the top twelve populations were developed countries. In 2000, only three were. By 2050, only one developed country will remain—the United States, still in third place.
- The conclusion of the authors; “… population trends point inexorably toward a more dominant US role in a world that will need America more, not less.”
Posted by Scott R. Lodde
January 3, 2011
2011 – The Year of the New Normal
According to many economists, 2011 is the first full year of the New Normal, an entrenched period of slow economic growth, high unemployment, and volatility.
So what will the “New Normal” look like for commercial real estate? Some believe it will return to the ‘Old Normal’ … before the bubbles of the early 2000s, when nonrecourse commercial real estate loans were a rarity and home owners didn’t spend the equity in their homes at the mall.
Many reports seem to indicate that brokers in major markets are seeing multiple bids on Class A, top-tier properties even if the transaction numbers are still a fraction of those in 2007 or 2008. Lenders are taking calls again—if not yet making many commercial real estate loans. Cap rates for some Class A properties are nearing pre-credit crisis level.
And what about jobs, the real catalyst for economic recovery? According toCBRE Econometric Advisors in Boston, the good news is that the pace of new job creation should pick up to about 100,000 jobs a month in the near future. They predict the increase will begin in mid-2011 and last a year or so before leveling off. In the longer term, job growth will “settle down to about 50,000 a month, much slower than the 2003–2007 recovery, but still the fastest growth of any developed economy.
Another positive factor — the record high corporate profits and funds available for investment. As of the second quarter of 2010, U.S. companies saw the internal funds available for investment increase by $61.1 billion, according to the U.S. Bureau of Economic Analysis. The addition of $30 billion in federal funds for small-business lending in fall 2010 could also boost business confidence and thus hiring.
Office rents have also repriced, but instead of moving up to better space, some tenants are moving away from top-of-the-line space as companies don’t want to be perceived as overspending This shift away from ostentatiousness to value is all part of the New Normal lifestyle.
A prevailing sense of economic uncertainty is making commercial real estate more attractive to investors. Most of what investors are buying falls into two diverse pools—Class A core assets in major markets or severely distressed properties.
The quest for the best has increased the deal volume through August 2010 to $54 billion. That’s half of the deals done over the same period in 2008 but up 45 percent from 2009′s lows, according to Real Capital Analytics.
At the other end of the investment spectrum, distressed buyers are still active. Vultures with patience are being rewarded with more product to choose from and price drops of about 20 percent last year compared to 2007 highs. Lenders have taken on too many extend-and-pretends and are moving some off their books.
However, regulatory pressure that discourages lenders from foreclosing and selling repriced assets to entrepreneurial investors is keeping the market from clearing. Lenders have learned that they aren’t the best owners of commercial real estate and are less eager to seize assets
This regulatory pressure from the FDIC not allowing commercial real estate loans exceed 300 percent of the bank’s equity has kept most lenders from making new loans.
Five Predictions for Residential Real Estate in 2011
According to the analysts at Freddie Mac, key macroeconomic drivers of the economy – such as income growth, unemployment rate, and inflation – will affect the performance of the housing and mortgage markets in 2011. With fiscal policy supporting aggregate demand for goods and services and an accommodative monetary policy providing low interest rates and ample liquidity to capital markets, the economic recovery should accelerate gradually over the year, with the second half of 2011 exhibiting more growth and job creation than the early part of the year.
These forces will support a gradual recovery in the housing and mortgage markets. Here are five features that will likely characterize the 2011 housing and mortgage markets:
- Low mortgage rates. With Fed observers expecting the central bank to keep the federal funds rate at its current target range of 0 percent to 0.25 percent for most (or all) of 2011, relatively low mortgage rates will be a feature of the 2011 mortgage market. Thirty-year fixed-rate loans are likely to remain below 5 percent throughout the year, and initial rates of 5/1 hybrid adjustable-rate mortgages will likely remain below 4 percent in 2011.
- Prices have hit bottom. House prices are likely to begin a gradual, but sustained recovery in the second half of 2011.
- Housing will remain affordable. With affordability high, many first-time buyers will be attracted to the housing market in the New Year, likely translating into more home sales in 2011 than in 2010.
- Refinances will dwindle. Many eligible borrowers have already refinanced and the federal Making Home Affordable refinance program is expiring on June 30. While fixed-rate loans are likely to remain low, they will move up gradually, making it even less likely that refinances will be attractive to most home owners.
- Delinquency rates will decline. Based on the last several business cycles, the share of loans that are 90 or more days delinquent or in foreclosure proceedings — known as the “seriously delinquent rate” — generally crests within a year of the start of the recovery in payroll employment, and this economic recovery appears to fit within that pattern. Payrolls began to rise last January, and by the spring the seriously delinquent rate had begun to fall.
Top Ten Issues Affecting Commercial RecoveryHere are the top five issues facing commercial real estate in 2011, according to consultant Deloitte LLP.
- The market remains uncertain. The recovery isn’t following previous trends. While there is some indication that the worst may be over, some markets continue to decline.
- Impact of “amend and extend.” Some banks are recognizing that they will never recover full value on some properties and are willing to work with borrowers. This has made it more difficult to tell when the business has hit bottom.
- High maturities remain a challenge. The high level of maturing debt over the next several years remains a significant barrier to recovery. In addition to commercial mortgage-backed securities (CMBS), loan delinquencies and commercial real estate loan defaults, there is also an increase in strategic defaults as more commercial borrowers make a pragmatic business decision to exit profit-draining investments in order to divert money to performing projects or shareholders.
- The number of deals is increasing. A good sign.
- The economy is recovering very slowly. This increases opportunities in distressed properties, but the overall market isn’t in a hurry to pick up.
- Fundamentals moderating, but recovery may be slow. Absent a strong boost from the economy, the performance of commercial real estate fundamentals has remained weak for an extended period. However, while trends vary by property type, some key industry metrics indicate that sharp declines experienced during the height of the downturn are in the process of stabilizing.
- REIT rebound continues. Commercial real estate fundamentals may be in the early stages of a slow recovery, but another key element of the market — Real Estate Investment Trusts (REITs) — has already demonstrated a strong rebound. Return on investment for REITs has outperformed the competition recently, and firms are taking advantage of the spotlight by raising funds, which could eventually lead to increased acquisition activity for the segment.
- Capital markets — lending stabilizes; demand subdued. As commercial real estate struggles to deleverage, key lending sources have demonstrated flexibility in the treatment of existing debt, but have remained somewhat strict in terms of new loan origination. New lending is expected to remain subdued in the near term; however, stabilization is evident and alternative sources such as CMBS are showing signs of renewal.
- Regulations directly and indirectly impact CRE. In 2008 and 2009, government intervention in the form of stimulus programs, including the Troubled Asset Relief Program (TARP) and the Term Asset- Backed Loan Facility (TALF), indirectly impacted commercial real estate by injecting liquidity into the financial system and helping prevent the financial crisis from intensifying further. In 2010 and 2011, newly introduced financial and health care regulations should also impact commercial real estate both directly and indirectly, perhaps leading to increased demand for commercial space, as well as decreased access to capital.
- Positive signs for global CRE. Global commercial real estate has shown signs of improvement, following a pause in the industry’s globalization as a result of the financial and economic downturn that originated in the United States. In non-U.S. markets, investment trends began to demonstrate a return to growth in the first half of 2010, but a rebound to robust, pre-crisis levels is challenged by some of the same lending and distress-related issues that have been prevalent in the United States. As the global market begins to recover, the Asia Pacific region is expected to be a catalyst for growth, both as a destination and a source of investment into the U.S. market.
Posted by Scott R. Lodde