In the monthly REALTORS® Confidence Index Survey, the National Association of REALTORS® asks members “In the neighborhood or area where you make most of your sales, what are your expectations for residential property prices over the next year?”
Among REALTORS® who responded to the May 2016 survey, the national median expected price change over the next 12 months was 3.3 percent (3.8 percent in April 2016; 3.6 percent in May 2015), according to the May 2016 REALTORS® Confidence Index Survey Report. On the one hand, REALTORS® expect housing price growth to moderate as rising prices have made homes less affordable for many. On the other hand, tight supply is leading to expectations of further price increases.
The map shows the median expected price change in the next 12 months for each state based on the March–May 2016 RCI surveys. The District of Columbia and the states of Washington, Oregon, and Colorado are the areas that are expected to have the highest price growth, with the median expected price growth at more than five to seven percent in each of these states. REALTOR® respondents from California, Nevada, Idaho, Minnesota, Michigan, Tennessee, South Carolina, and Florida also expected strong price growth, with the median expected price growth at more than four to five percent in each of these states.
With so many new entrants into the real estate field in 2015, our research analysts pondered where they all came from. We saw in a previous article An Influx of Young Members to the REALTOR® Family that NAR membership was growing. According to the 2016 Member Profile, members with less than one year experience in the industry jumped to 20 percent in 2016 up from 11 percent the year before. In addition, more new entrants were young in age. Five percent of members were under 30 years old, up from two percent in the previous year. To better understand our membership, we dug into the data to see what industries members came from before entering real estate.
For all members, the general trends are that 16 percent came from management/business/finance, 16 percent came from sales/retail, and real estate was their first career for four percent. Once we segmented the data by gender, age, and education. Across all segments, we found that members predominantly came from management/business/finance and sales/retail. But in smaller numbers, members came from other interesting career fields.
When we segmented the data by gender, slightly more males than females came from management/business/finance as well as sales/retail. Thirteen percent of women came from office/administration support compared to only two percent of men. Seven percent of men came from construction and five percent said real estate was their first career. Eight percent of women came from education, seven percent from healthcare, and seven percent were homemakers.
Next we segmented by age. For members under 30 years, nine percent from office administration, nine percent said real estate was their first career, and eight percent came from education. The younger the age, the more likely it is that real estate is a member’s first career. As age increases, the likelihood that a member came from management/business/finance also increases. The opposite is true for the sales and retail field; as age increase, the likelihood that a member came from sales and retail decreases.
Last, we segmented by education. The trends were fairly the same as for all members; however there were a few outliers. For those with only some high school education, 16 percent came from personal care services and 10 percent came from the transportation sector. For those who have some graduate work or more, NAR members came from education. For those with a doctoral degree, 28 percent came from education, 16 percent from the legal field, and 15 percent from healthcare.
In the monthly REALTORS® Confidence Index Survey, the National Association of REALTORS® (NAR) asks members to rate the past month’s buyer and seller traffic in the neighborhood or area where they make most of their sales. NAR compiles the responses on buyer traffic into a REALTORS® Buyer Traffic Index and the responses on seller traffic into a REALTORS® Seller Traffic Index.
The maps below show the condition of buyer and seller traffic using data collected from March‒May 2016, according to the May 2016 REALTORS® Confidence Index Survey Report.
Local conditions vary in each state, but the REALTORS® Buyer Traffic Index indicates that markets were “moderate” to “very strong” in all states except in Alaska, Delaware, and Connecticut where buyer traffic was “weak.”
Amid strong demand, seller traffic was “weak” in many states, measured by the REALTORS® Seller Traffic Index. However, seller traffic was “strong” in several states, including those that had benefited from the oil boom but who are now facing slower job growth due to lingering lower oil and natural resources prices—North Dakota, Wyoming, New Mexico, and Texas. The slower job growth and job cutbacks in these states have led to more home selling and a shift to a buyer’s market.Sparse new home construction has been a major factor driving prices up. Although the number of permits authorized for new privately owned housing units has been improving (1.15 million units on an annualized basis in May 2016), 53 percent of new construction has been multi-family structures, which are mostly for rental occupancy. In 2005, multi-family structures accounted for only 20 percent of new construction, so the availability of single-units for purchase among recently constructed properties is lower than is historically normal.REALTORS® reported low inventory of properties in the lower price range and for those that are move-in ready. The gap in demand and supply has led to strong price growth especially in California, Colorado, Florida, Oregon, South Carolina, Utah, and Washington. Of the 178 metro areas that NAR tracks and has price data on, 28 metro areas experienced price growth in the range of ten to 25 percent in the first quarter of 2016 compared to the levels in the first quarter of 2015.
 The index for each state is based on data for the last three months to increase the observations for each state. Small states such as AK, ND, SD, MT, VT, WY, WV, DE, and D.C., may have fewer than 30 observations. Respondents were asked “How do you rate the past month’s buyer traffic in the neighborhood(s) or area(s) where you make most of your sales?” Respondents rated conditions or expectations as “Strong (100),” “Moderate (50),” and “Weak (0).” The responses are compiled into a diffusion index. For graphical purposes, index values 25 and lower are labeled “Very weak,” values greater than 25 to 49 are labeled “Weak,” a value of 50 is labeled “Moderate,” values greater than 50 to 75 are labeled “Strong,” and values greater than 76 are labeled “Very strong.”
 Respondents were asked “How do you rate the past month’s seller traffic in the neighborhood(s) or area(s) where you make most of your sales?” Respondents rated conditions or expectations as “Strong (100),” “Moderate (50),” and “Weak (0).” The responses are compiled into a diffusion index. A value of 50 indicates a balance of respondents who reported “Strong “and “Weak” markets. For graphical purposes, index values 25 and lower are labeled “Very weak,” values greater than 25 to 49 are labeled “Weak,” a value of 50 is labeled “Moderate,” values greater than 50 to 75 are labeled “Strong,” and values greater than 76 are labeled “Very strong.”
 https://communityimpact.com/houston/the-woodlands/economic-development/2015/12/09/falling-oil-prices-starting-to-affect-woodlands-economy/; http://www.theatlantic.com/business/archive/2015/06/north-dakota-oil-boom-bust/396620/
 Based on the latest data for the first quarter of 2016, 92 percent of the multi-family units completed were for rental occupancy with regions varying from 90 percent in the West to 100 percent in the Midwest. Source: Census Bureau. Quarterly Starts and Completions by Purpose and Design, Units Per Building, 2016 preliminary data. https://www.census.gov/construction/nrc/pdf/quarterly_starts_completions.pdf
- NAR released a summary of existing-home sales data showing that housing market activity increased for the third consecutive month, as May’s existing-home sales reached the 5.53 million seasonally adjusted annual rate. May’s existing-home sales are up 4.5 percent from a year ago which resulted in the strongest pace since February of 2007.
- The national median existing-home price for all housing types was $239,700 in May, up 4.7 percent from a year ago.
- Regionally, three of the four regions showed growth in prices from a year ago, with the West leading at 7.7 percent. The South had an increase of 5.9 percent, and the Midwest followed with a 4.8 percent increase. The Northeast had the only decline of 0.1 percent from May 2015.
- From April, three of the four regions experienced increases in sales. The West dominated regional sales with an increase of 5.4 percent. The South had an increase of 4.6 percent while the Northeast had a 4.1 percent increase. The Midwest had a sizable decline of 6.5 percent.
- All regions showed gains in sales from a year ago except the West where sales declined 1.7 percent. The Northeast had the biggest increase of 11.6 percent followed by the South with a gain of 6.5. The Midwest had the smallest gain of 3.2 percent. The South leads all regions in percentage of national sales at 41.2 percent while the Northeast has the smallest share at 13.9 percent.
- May’s inventory figures are up 1.4 percent from last month to 2.15 million homes for sale but the level is below historical averages. Inventories are down 5.7 percent from a year ago. It will take 4.7 months to move the current level of inventory at the current sales pace. It takes approximately 32 days for a home to go from listing to a contract in the current housing market, down from 40 days one year ago.
- Single family sales increased 1.9 percent while condos also increased 1.6 percent compared to last month. Single family home sales increased 4.7 percent and condo sales are also up 3.3 percent from a year ago. Both single family and condos had an increase in price with single family up 4.6 percent and condos up 6.0 percent from May 2015.
Market conditions vary across local markets, but the REALTORS® confidence and buyer traffic indices indicate that market conditions were mainly “strong” rather than “weak” in May 2016, according to the May 2016 REALTORS® Confidence Index Survey Report.
The indices also indicate that housing market activity was substantially unchanged compared to one month ago and one year ago. Across all property types, REALTORS® reported strong demand and brisker sales in their areas, but severely low inventory continued to depress sales, pushing prices up and making homes increasingly unaffordable, especially for first-time buyers. Sustained job growth and the low cost of obtaining a mortgage, with 30-year fixed rates still below four percent, are likely underpinning the strong housing demand.
First-time homebuyers accounted for 30 percent of sales. Purchases for investment purposes made up 13 percent of sales, while distressed properties were seven percent of sales. Cash sales accounted for 22 percent of sales. Nationally, amid tight supply, half of properties that sold in May 2016 were on the market for 32 days compared to 40 days in the same month last year.
Very low supply, declining affordability, appraisal issues, and lender processing delays were reported as the key issues affecting sales. Still, most respondents were confident about the outlook for the next six months across all property type. Respondents typically expected prices to increase 3.3 percent in the next 12 months.
 The indices are not seasonally adjusted.
Based on the Expectations & Market Realities in Real Estate 2016: Navigating through the Crosscurrents report—released by Situs RERC, Deloitte and the National Association of REALTORS®—commercial real estate (CRE) rode a wave of bullish capital markets in 2015. Large cap CRE sales volume continued its positive upward trend, with $543 billion in closed transactions during the year, based on data from Real Capital Analytics (RCA). However, in the first quarter 2016 sales volume dropped 20 percent on a yearly basis, to $111 billion. Part of the decline is due to the large portfolio transactions which occurred during the first quarter of 2015, and which were absent this year. In addition, investors have reached for the “Pause” button, as concern over global economic growth and financial market volatility mounted.
In contrast to the large cap transactions reported by RCA, commercial REALTORS® managed transactions averaging less than $2.5 million per deal, frequently located in secondary and tertiary markets. The Commercial Real Estate Lending Trends 2016 shines the spotlight on this significant segment of the economy.
The data underscore an important point about the recovery and growth in small cap markets. Based on comparisons of vacancies, rents, as well as sales, prices and cap rates, the rebound in smaller markets was delayed by three years and the rate of price growth has been shallower. Capital liquidity also recovered at a slower pace, as debt financing represents a much-larger portion of capital in small cap markets, whereas large cap deals benefit from significant equity contributions. Based on the 2016 report, the bulk of capital in REALTORS®’ markets flowed through regional and local/community banks, which accounted for 56 percent of transactions.
For regional and community banks—which account for 56.0 percent of all capital in REALTOR® markets—compliance costs stemming from financial regulations have made a stronger impact on available capital for CRE deals. With higher costs of compliance and higher capital reserve requirements for CRE loans, regional and community banks have been more cautious in their lending during 2015 and the first quarter of 2016, resulting in tightening of capital. The report further indicates that 59.0 percent of REALTORS® reported that insufficient bank capital remains an obstacle to sales in small cap markets.
The main reason for insufficient bank capital for commercial deals stems from new and proposed legislative and regulatory initiatives—Dodd-Frank, lease accounting, carried interest, etc.—which were cited by 25.0 percent of respondents. Another 17.0 percent indicated that regulatory uncertainty for financial institutions was an important barrier to bank lending for CRE projects, tied with U.S. economic uncertainty. The third main reason was a combination of reduced net operating income, reduced property values and equity.
For more information and the full report, access NAR’s Commercial Lending Trends 2016 at http://www.realtor.org/reports/commercial-lending-trends-survey.
The following maps show the REALTORS® Confidence Index—Six-Month Outlook across property types by state. Compared to current conditions in the single-family homes market, the market outlooks are broadly “moderate” to “very strong” in the next six months, partly because of the seasonal uptick in demand which is also underpinned by sustained job growth and the low cost of obtaining a mortgage.In the townhomes market, the outlook varies from “very weak” to “very strong” across the states, with “very strong” market outlooks in Oregon, Colorado, Nebraska, North Dakota, and the District of Columbia.
 Respondents were asked “What are your expectations for the housing market over the next six months compared to the current state of the market in the neighborhood(s) or area(s) where you make most of your sales?” The responses for each type of property are compiled into an index. An index of 50 indicates a balance of respondents having “weak” (index=0) and “strong” (index=100) expectations or all respondents having moderate (=50) expectations. The index is not adjusted for seasonality.
 The market outlook for each state is based on data for the last three months to increase the observations for each state. Small states such as AK, ND, SD, MT, VT, WY, WV, DE, and D.C., may have fewer than 30 observations. Respondents rated conditions or expectations as “Strong (100),” “Moderate (50),” and “Weak (0).” The responses are compiled into a diffusion index. A diffusion index greater than 50 means that more respondents rated conditions as “Strong” than “Weak.” For graphical purposes, states with index values 25 and lower are labeled “Very weak,” values greater than 25 to 49 are labeled “Weak,” a value of 50 is labeled “Moderate,” values greater than 50 to 75 are labeled “Strong,” and values greater than 76 are labeled “Very strong.”
Access to credit has expanded in many ways over the last two years including to borrowers with higher debt-to-income ratios, lower down payments, and even some limited non-QM offerings. But access for borrowers with lower credit scores has shown only modest progress. The Federal Housing Administration (FHA) asked for comment in April and May on its latest plan to ease lenders’ reluctance, but lenders who participated in NAR’s 10th Survey of Mortgage Originators responded with mixed enthusiasm.
For loans to be insured by the FHA, lenders must certify that the loans adhere to certain standards. Lenders are required to indemnify the FHA for losses on loans that don’t meet these standards, but more recently the Department of Justice has sued several lenders under the False Claims act because of the discrepancies between originated loans and what lenders certified. Some lenders have argued that potential liability under the False Claims act and the Department of Justice’s apparent willingness to prosecute raised the risk and potential costs for them to lend. To counter this, they have used overlays on credit scores to limit defaults and potential litigation. Thus, the certification process is at the heart of the FHA’s proposed changes.
Nearly a third or 27.3 percent of participants in 10th Survey of Mortgage Originators indicated that despite the FHA’s proposed changes to its certification policy, they would maintain a wait-and-see approach before relaxing overlays on lower credit borrowers. Another 27.3 percent indicated that the change would not result in increased lending to lower credit borrowers. However, 45.5 percent of this sample, which is dominated by mortgage bankers, already lend below the 640 threshold.
Many non-bank lenders have expanded into the lower credit spectrum, but consolidation in the non-bank sector is likely. Consequently, further broadening of the lending base for low-credit borrowers is necessary from both well capitalized non-banks and banks. To this end, the FHA continues to work to expand access to credit, but it may take time for its latest effort on certifications to bear fruit.
 Some non-bank lenders have pushed down the credit spectrum since the fall of 2015, while retail banks remain unmoved.
The lending industry has struggled with recent changes to the closing process. However, the 1st quarter Survey of Mortgage Originators shows clear improvements in handling the new regulations.
The new Know Before You Owe or TILA RESPA Integrated Disclosures were implemented in October, but lenders have wrestled with incorporating the changes into their processes. However, survey respondents in the 1st quarter indicated a sharp drop in the share of transactions that were impacted dropping from 8.3 percent to 1.8 percent. Simultaneously, the share of transactions that were cancelled due to TRID fell to none and average delay fell from 6 days to 3.8.
However, a majority 70.3 percent of lenders continue to advise their clients to take rate locks that are longer than the standard 30-days. Respondents advised for modestly longer locks than in the 4th quarter including several lenders who recommended a modestly longer 7-day rate lock. Rate lock extensions also increased, but 73.3 percent of lenders who advised for longer locks felt that they could close on time without them.
Lenders made great strides in the 1st quarter to normalize operations under TRID. However, anecdotes suggest that they have increased staffing and costly manual underwriting to deal with unclear interpretations of the regulations. The CFPB has indicated that it will recommend changes to the process later this year. Clarifications and improvements from these reviews may help lenders to further normalize operations, but those changes would not come until late 2016 or 2017. In the interim, lenders continue to maintain a steady flow of financing for the real estate industry.
The 2016 Member Profile provides data on drone usage within the Real Estate industry. This question was added to the Survey in 2016, and provides information on current drone users and the optimism around drone usage in the future.
- Amongst real estate professionals, 23% of respondents personally use drones, has a colleague who uses drones or hires a contractor to operate drones for their business. Interestingly, 16% of respondents hope to use drones in the future.
- Commercial real estate specialists rely more heavily on drones than their residential counterparts. For example, 5% of commercial appraisers personally use drones and this number drops to 3% when asking the question to residential appraisers. Similarly, within property management 6% of commercial managers personally use drones and amongst residential the number decreases to 3%.
- International real estate specialists use drones the most, with 7% of commercial and residential professionals both personally using drones. Within the United States this number falls significantly with 3% of drone users in the West, South and Northeast and 2% of drone users within the Midwest.
- Of professionals who have completed over $ 10 million of real estate transactions in 2015, 7% currently use drones, 8% have a colleague within their office that uses drones and 34% hire a contractor.
- Twenty five percent of individuals who are twenty nine or younger hope to use drones in the future making this age group the most optimistic.
After steady improvements this spring, the average time-to-close, the time from contract to settlement, edged upward in May of 2016 relative to the same time a year earlier. On average, sales took 3.6 days longer to close compared to May of 2015. Last month’s disappointing reading is still well below the market peak of 5.7 set back in December.
Until May, the average time-to-close a home sale compared to the same month a year earlier, a means of adjusting for seasonal patterns, had fallen steadily suggesting that the market was adjusting to TRID-related delays. However, the May reading implies that fine-tunning of TRID closings, either on the front end or investor take-out, continues. The average delay is nearly three and a half times higher than pre-TRID levels, but lenders indicated no cancelled settlements in the 1st quarter, down sharply from the 4th quarter of 2015.
TRID or Know Before You Owe is a new set of rules governing the closing process. These rules are intended to help make consumers more aware of their financial liability, while streamlining the process. Settlement delays are likely to continue to ease as successful originators gain market share, vendor software improves, and demand from mortgage investors recovers. The CFPB has announced that it will address some of the issues raised about Know Before You Owe later this year.
The 2016 Member Profile shows some interesting changes in the demographics of National Association of REALTORS® (NAR) members. There are several major trends that have emerged from the data; the foremost is that there were many younger, new members entering the real estate business in the past year.
First, in NAR’s 2015 Member Profile, only 11 percent of the REALTOR® membership had less than one year of experience. That share nearly doubles to 20 percent with less than one year in the industry in 2016. Next, we see that new entrants are by and large younger in age. In 2015, only two percent of NAR members were under the age of 30. By 2016, that number increased to five percent.
The arrival of new, younger members to NAR has had a ripple effect on the demographics of its members. Most obvious is that it decreases the median age of NAR members. The median age for NAR members had been steady around 56 or 57 from 2011 to 2015. In the 2016 report, the median age of REALTORS® dropped to 53, the lowest it had been since 2008.
With so many agents with less than a year of experience, the median income decreased to $39,200 in 2015 from $45,800 in 2014. As younger agents are starting out, their incomes are lower. Thirty-two percent of NAR members with less than two years’ experience reported generating more than 50 percent of their business income from a secondary means, which is a large increase from only 14 percent in the previous year.
The typical REALTOR® in 2016 reported having 10 years of experience, which decreased from 12 years in the 2015 report. The median number of years residential sales agents (who account for 65 percent of all REALTORS®) reported being in the business dropped from 10 to six years of experience in 2016. Only 16 percent of members transferred from the management role to real estate in 2016, down from 19 percent in the previous year.
Additional indicators pointing to a younger membership for NAR abound. Members who reported they were single or not married rose from seven percent in 2015 to 10 percent in 2016. Homeownership for members 39 years and younger decreased from 70 percent in the previous year to 63 percent in 2016. Older members tend to have more vacation homes and properties for investment, which younger members cannot afford.
The share who owns a residential property (aside from a primary and vacation home) declined to 31 percent from 38 percent. The share who owns a commercial property declined to eight percent from 10 percent. The share who owns a vacation home remained unchanged at 13 percent.
NAR Members earned a median of 14 percent of their business from past clients and customers, decreasing from 20 percent in 2014. This figure declined due to the large share of new members with less than two years’ experience who reported no repeat business or referrals. Overall, it will be interesting is to see how these numbers will change in the coming years. To access the full report, go to: www.realtor.org/reports/member-profile
At the national level, housing affordability is down from a year ago as higher prices continue to outpace household income growth. Modestly lower rates and income growth have helped reduce the burden of higher home prices, but are not able to completely offset them causing a slip in affordability.
Housing affordability declined from a year ago in April pushing the index from 167.5 to 162.4. The median sales price for a single family home sold in April in the US was $233,700 up 6.3 percent from a year ago.
- Nationally, mortgage rates were down 6 basis points from one year ago (one percentage point equals 100 basis points) while incomes rose approximately 2.3 percent.
- Regionally, all four regions saw declines in affordability from a year ago. The Midwest had the largest decline of 5.6 percent. The South had a decline in the affordability index of 3.4 percent followed by the West with 2.0 percent. The Northeast had the smallest dip in affordability at 1.0 percent.
- The Midwest had the biggest increase in price at 7.6 percent. The South and the West both experienced a significant increase in prices of 6.5 percent. The Northeast has the smallest gain of 3.9 percent.
- By region, affordability is down in all regions from last month. The Midwest (6.2 percent) had the biggest decline. The South and West had a decline of 4.6 percent and 4.3 percent. The Northeast had the smallest decline in affordability of 3.4 percent.
- Despite month to month changes, the most affordable region is the Midwest where the index is 202.0. The least affordable region remains the West where the index is 119.8. For comparison, the index is 167.8 in the South, 165.0 in the Northeast.
- Currently mortgage applications are up and rates have not made the jump as expected. A shortage of inventory is having an impact on sales across many metro markets. New homes construction would support this inventory issue; builders continue to face difficulty in securing permits for condos and single family homes, but have less trouble securing them for apartments.
- What does housing affordability look like in your market? View the full data release here.
- The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.
The U.S. investment market totaled $6.2 trillion in 2015, with 57.3 percent of the figure comprising debt-based investment assets and the remainder accounted for by equity-based properties. On the debt side, chartered depository institutions (banks) accounted for the bulk of capital providers, with about half the total market holdings. The second largest share of debt holders was represented by commercial mortgage backed securities (CMBS), collateralized debt obligations (CDOs), and other asset backed securities (ABS) holders, making up 18.0 percent of total, based on data from the Federal Reserve.
Commercial mortgage backed securities (CMBS) issuance rose dramatically from $94 billion in 2004 to $168 billion in 2005 and hit a peak of $230 billion in 2007. Originations dropped dramatically in 2008 and 2009 during the market crash, but have rebounded. In 2015, CMBS issuers offered $101.0 billion in commercial bonds. As of the first quarter of 2016, bond issuers have been impacted by financial markets’ volatility. Domestic CMBS issuance was down 29.6 percent in the first quarter, with a total of $19.0 billion.
Many of the loans issued during the 2005-07 period, and repackaged, were 10-year loans, which have been coming up for refinancing in 2015 – 2018. According to Trepp, about $205 billion in commercial loans are scheduled to mature over the 2016-18 period.
The majority of the loans are for office and retail assets, which have recorded slower comparative recoveries in fundamentals post-recession. Office vacancies still hover around the 14.0 percent mark. Retail fundamentals have made noticeable strides over the past two years with vacancies down to 5.6 percent in the first quarter of this year.
In terms of volume, $87.1 billion of CMBS is expected to mature in 2016, with an additional $105.8 billion in 2017. Maturing bonds will drop to $12.8 billion in 2018. Commercial investors have expressed concern over the large wave of refinancing coming due, in light of the potential for rising interest rates. However, according to Trepp, strong CRE fundamentals have led to a decline in delinquency to 5.1 percent. Trepp considers that, even in a rising rate environment, it would take significant hikes to trigger default concerns.
How do commercial REALTORS® find this challenge impacting their markets?
Based on the Commercial Lending Trends 2016 report, CMBS loans made up only two percent of capital in REALTORS® markets, a figure which is consistent over the past few years. In turn, as market conditions have improved over the past few years, asset valuations have risen in tandem with net operating income (NOI). Commercial REALTORS® reported that NOI for properties they sold or leased increased in 57 percent of markets.
As lending conditions eased, the share of transactions failing due to refinancing has been on a downward trend. Refinancing difficulties caused deal failures in 50 percent of transactions during 2012. The share dropped to 42 percent in 2013 and 21 percent in 2014. Based on REALTORS® latest data, refinancing failures dropped to a low of 15 percent.
Based on commercial members’ feedback, the average DSCR provided a silver lining this year, with an average of 1.4x. The DSC ratio was reported at 1.3x percent in 2012, and 1.4x percent in both 2013 and 2014. With the ratio slightly higher than the 1.2x minimum and the Federal Reserve being cautious about a rate hike, maturing debt in commercial REALTORS® markets has a certain degree of buffer over the next couple of years.
For more information and the full report, access NAR’s Commercial Lending Trends 2016 at http://www.realtor.org/reports/commercial-lending-trends-survey.
What is a 1031 exchange, who benefits from these transactions, and what is the economic impact of these exchanges?
In a presentation in the REALTOR® University Speaker Series held recently, Dr. David Ling discussed the features of like-kind exchanges, the net incremental benefit of these transactions compared to a sell-purchase strategy, and the economic impact of these transactions on revenues, investment activity, and debt financing. Dr. David Ling is the McGurn Professor of Real Estate and Director, Master of Science in Real Estate Program at the Warrington College of Business, University of Florida.
To listen to the webinar, please click here.
Section 1031 of the Internal Revenue Code Basic provides for the deferral of capital gains tax on a relinquished property that is exchanged for a like-kind property. A real estate for real estate exchange qualifies as a like-kind exchange, provided that the relinquished property(ies) and the replacement property(ies) are held for some period of time for productive use in trade or business or as an investment.
Among the highlights of the study are:
1) Most exchange transactions involve small properties, which indicate that small businesses and investors are the main beneficiaries of the Section 1031 like-kind exchange provision. In 2011, 59 percent of all exchange transactions involved a property with a sale price of less than $1 million. Anecdotally, a large qualified intermediary reported that the median proceeds from the sale of a relinquished property in 2015 Q1 was about $400,000.
2) The tax benefit to commercial real estate owners (or the loss to IRS) is often overstated. Based on IRS data from 2003-2012, the deferred gains on commercial real estate exchanges amounted to $18.8 billion, which translate to about $4 billion of deferred tax liabilities. Dr. Ling noted that even the $4 billion in deferred taxes overstates the benefit of an exchange to the taxpayer because it does not consider the negative tax consequences subsequent to the year of the exchange. The negative effects occur because of the carryover of depreciation basis and deductions from the relinquished property into the replacement property. This basis carryover lowers depreciation deductions on the replacement property, increases recapture income when the replacement property is sold, and increases capital gains on the replacement property when sold. The authors estimate that when these tax consequences subsequent to the year of the exchange are taken into account, the benefit revenue loss to the government or the benefit to commercial real estate owners is about $1 to $2 billion, lower than the $4 billion estimate based on deferred tax gains alone.
3) Like-kind exchanges encourage investment spending. Capital expenditures in replacement exchange properties tend to be higher than in regular acquisitions following a taxable sale.
4) Exchangers also tend to use less debt to acquire replacement properties compared to ordinary sellers.
5) The deferred tax is ultimately captured when the replacement property is sold. Approximately 88 percent of investors disposed of their replacement property in a fully taxable sale.
About the Speaker
Dr. David Ling is the McGurn Professor of Real Estate and Director, Master of Science in Real Estate Program at the Warrington College of Business, University of Florida. Prior to this, he was a Research Fellow at the University of Cambridge, and was an associate or visiting professor at the National University of Singapore, the University of Reading (U.K.), and the Swedish School of Economics. He is an author of two textbooks, Real Estate Principles: A Value Perspective, and Real Estate Perspectives: An Introduction to Real Estate. Dr. Ling received his Ph.D. and M.B.A. from The Ohio State University and his B.S. B.A from Central Michigan University. His full CV can be accessed on this site.
About REALTOR® University Speaker Series
REALTOR® University provides on-line education on real estate and other topics at the MBA and undergraduate levels. The REALTOR® University Speaker Series provides a venue to learn about and stimulate discussion of economic and real estate issues in support of NAR’s mission as the Voice of Real Estate. The Speaker Series presentations can be accessed on this webpage.
 This presentation is based on a paper by David C. Ling and Milena Petrova “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate”. This was a paper submitted to the Real Estate Roundtable (RER) which issues a call for papers in 2014. The RER is an industry coalition of leading publicly-held & privately-owned RE firms, along with the major RE trade associations.
 Properties held for use as personal residences, for stock in trade (e.g., fixer-uppers intended to be sold), and financial assets do not qualify for a 1031 like-kind exchange. The exchange does not have to be simultaneous, but the replacement property (ies) should be identified within 45 days and the exchange completed within the remaining balance of the 180 days.
 Authors’ estimate based on data from the Federation of Exchange Accommodators.
 Cash proceeds from a relinquished property that is intended for an exchange are parked at a qualified intermediary.
 The authors assume a 20% capital gains tax and 25% depreciation recapture tax rate in estimating the tax liabilities.
 Net Incremental Value of Exchange = Deferred Tax Liability in Year t
Less: Reduced Present Value of Annual Depreciation Deductions
Less: Increased Depreciation Recapture Tax on Sale of Replacement Property
Less; Increased Capital Gains Tax on Sale of Replacement Property
 Authors’ data from CoStar and National Association of Real Estate Investment Funds
A flurry of financial obstacles and lifestyle choices are stalling the journey to homeownership for many young adults, but becoming a homeowner is currently more feasible in some less expensive metro areas with steady job growth and lower qualifying incomes needed to buy, according to new research by the National Association of Realtors®.
In our recent study, we identified the best purchase markets for Millennials. Looking at the economic and housing conditions of the metropolitan areas with a larger proportion of Millennial households living and moving in the previous year (1), these are the key factors that made those areas attractive to them:
-Strong employment growth and decent wages for Millennials,
-Relatively affordable home prices
Our top ten cities had stronger employment growth than the national level. Moreover, housing affordability sets the stage for homeownership. Income for Millennials was higher than qualifying income (2) – what will be needed to buy a first-time home – and in several of those metro areas we are already seeing that Millennials have moved to a house that they own.
Thus, members in these metro areas are likely to experience a boost in market activity from Millennial Homebuyers.
Here are the top 10 Purchase Markets for Millennial Homebuyers:
1 – U.S. Census Bureau, American Community Survey 2014
2 – Qualifying Income for First-Time Homebuyers was calculated based on 10% down payment and 85% of the median home price.
- Existing-home sales increased 1.7 percent in March from one month prior while new home sales rose 16.6 percent. These headline figures are seasonally adjusted figures and are reported in the news. However, for everyday practitioners, simple raw counts of home sales are often more meaningful than the seasonally adjusted figures. The raw count determines income and helps better assess how busy the market has been.
- Specifically, 471,000 existing-homes were sold in April while new home sales totaled 61,000. These raw counts represent a 12 percent gain for existing-home sales from one month prior while new home sales increased 22 percent. What was the trend in recent years? Sales from March to April increased by 16 percent on average in the prior three years for existing-homes and rose 3 percent for new homes. So this year, existing-homes underperformed compared to their recent norm while new home sales outperformed.
- Why are seasonally adjusted figures reported in the news? To assess the overall trending direction of the economy, nearly all economic data – from GDP and employment to consumer price inflation and industrial production – are seasonally adjusted to account for regular events we can anticipate that have an effect on data around the same time each year. For example, if December raw retail sales rise by, say, 20 percent, we should not celebrate this higher figure if it is generally the case that December retail sales rise by 35 percent because of holiday gift buying activity. Similarly, we should not say that the labor market is crashing when the raw count on employment declines in September just as the summer vacation season ends. That is why economic figures are seasonally adjusted with special algorithms to account for the normal seasonal swings in figures and whether there were more business days (Monday to Friday) during the month. When seasonally adjusted data say an increase, then this is implying a truly strengthening condition.
- What to expect about home sales in the upcoming months in terms of raw counts? Independent of headline seasonally adjusted figures, expect busier activity in May and even better activity in June for existing-home sales. For example, in the past 3 years, May sales increased by 10 to 13 percent from April and with more gains in June when sales typically rose by 7 to 16 percent from May. For the new home sales market, the raw sales activity seems to be volatile in May and June. For example, in the past 3 years, May sales rose by 10 percent in 2014 while they decreased by 2 to 7 percent in 2013 and 2015. Similarly, sales in June increased by 8 percent in 2013 while they decreased by 6 to 12 percent in 2014 and 2015.
Contract Settlement Issues in February-April 2016: Financing, Home Inspection, and Appraisals are Major Issues
In the monthly REALTORS® Confidence Index Survey, the National Association of REALTORS® asks members “In the past three months, think of your most recent sales contract that was either settled/closed or terminated. Please explain how the deal concluded. What problems did you encounter, if any?”
In reporting on their last contract that went into settlement or was terminated over the period February–April 2016, 66 percent of contracts were settled on time, 28 percent had delayed settlement, and six percent were terminated.
Among contracts that had a delayed settlement (28 percent), financing, appraisal, and home inspection issues were the primary causes of the delay.
Among contracts that were terminated (six percent), home inspection issues were the major cause of termination, followed by issues related to the buyer obtaining financing.
Economic performance for the first quarter of 2016 was upwardly revised this past week by the Bureau of Economic Analysis. Real gross domestic product (GDP) advanced 0.8 percent on an annual basis, up from the initial estimate of 0.5 percent.
Payrolls rose at a solid pace, adding 609,000 net new jobs. Average weekly earnings of private employees rose by 2.1 percent in the first quarter of this year, compared to one year earlier. The unemployment rate averaged 4.9 percent in the first quarter 2016. The average duration of unemployment declined from 31 weeks in the first quarter of 2015 to 29 weeks in the first quarter of this year.
The labor force participation (LFP) rate rose slightly as more Americans returned to the labor markets, but continued to hover at historic lows. The LFP rate was 62.8 percent in the first quarter of 2015, slid to 62.5 percent in the third and fourth quarters, and rose to 62.9 percent in the first quarter of 2016. In comparison, before the Great Recession the LFP rate was 65.9 percent.
Consumer confidence, as measured by The Conference Board, was unchanged at 96.0 in the first quarter of 2015, compared with the prior quarter. Separately, the Consumer sentiment index compiled by the University of Michigan moved up slightly in the first quarter of the year to 91.6, compared with the 91.3 value from the fourth quarter. Both remain lower on a year-over-year basis.
With improving employment prospects and a return to labor markets, household formation has returned to its long-term trend. Historically, household formation averaged 1.3 million every year over the 1958-2007 period. Between 2008 and 2013, the average number of new households dropped to 579,000 per year, underscoring the severity of the Great Recession and ensuing slow recovery. During 2015, household formation advanced at a rather moderate pace of 191,000 new households. So far, 2016 is off to a slow start, as the first quarter’s data recorded a 306,000 decline in net household formation.
Demand for multifamily properties softened during the quarter, but remained on an upward trajectory. Renter occupied housing units totaled 42.9 million units in the first quarter of 2015, a 363,000 unit advance from the first quarter of 2015, based on U.S. Census Bureau data. National vacancy rates averaged 7.0 percent for rental housing during the first quarter, 10 basis points lower than the same period in 2015. Median rents for rental units averaged $870 in the first quarter of this year.
Commercial fundamentals in smaller markets continued improving during the first quarter of 2016, but at a slower pace. Leasing volume during the quarter rose 1.3 percent over the prior quarter. Leasing rates advanced at a slower pace as well, rising 1.9 percent in the first quarter, compared with the 2.5 percent advance recorded during the fourth quarter. As rising new supply loosens major markets, apartments in SCRE markets experienced availability decreases, with the national average declining 61 basis points year-over-year, to 7.2 percent in the first quarter of 2016. Average apartment rents for the first quarter were $785 per unit.
Access the Commercial Real Estate Outlook: 2016.Q2 report here.