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Economist's Outlook

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Updated: 1 hour 9 min ago

Latest Weekly Unemployment Insurance Claims Indicate Improving Job Market

Fri, 06/12/2015 - 12:08

This blog post was written by Erin Fitzpatrick. Erin is a Summer Research Intern and is currently studying at George Washington University pursuing a B.S. in Economics and a B.A. in Political Science.

  • Initial claims for unemployment insurance filed during the week ending June 6 increased slightly from the previous week’s level to 279,000. This increase of 2,000 claims can be attributed as weekly volatility in the data. The 4-week moving average also increased to 278,750 claims. Most analysts consider a level of 300,000 as an indicator of normal economic activity. Initial claims for unemployment insurance are filed by workers starting a period of unemployment. Fewer initial claims mean fewer layoffs and greater job stability.

  • Initial claims data by state lag a week compared to the national level data. For the week ending May 30, the largest decreases occurred in California (-7,891), Texas (-2,580), Kansas (-2,075), New Jersey (-1,531), and Florida (-1,232). The largest increases occurred in Tennessee (+1,006), Puerto Rico (+686), Ohio (+540), New Mexico (+416), and Alabama (+359).

  • With job losses trending downward and jobs increasing at a monthly pace of about 220 thousand, NAR forecasts 5.2 million of existing home sales in 2015.

Housing Affordability Index

Fri, 06/12/2015 - 11:41

At the national level, housing affordability is down from a year ago and for the month of April as higher prices continue to outpace incomes and as home sales continue to ramp up for the spring-summer selling season.

  • Housing affordability is down from a year ago in April as the median price for a single family home in the US is up from a year ago. Regionally, the Midwest had the biggest increase in price at 11.6% while the Northeast experienced slower price growth at 4.9%.
  • The median single-family home price is $221,000 up 10% from April 2014. April’s mortgage rate is 3.95, down 44 basis points (one percentage point equals 100 basis points) from last year. Nationally, affordability is down from 168.6 in April 2014 to 164.9 in April 2015.
  • Affordability is down from one month ago in all regions, and the Midwest had the largest drop of 5.8% while the South fell only 2.2%. From one year ago, affordability is down in all regions except the Northeast which increased 2.6% as price growth slows down. In other regions, the decline from a year ago was relatively small as mortgage rates lower than a year ago helped but could not completely offset increases in home prices. The Midwest saw the biggest decline in affordability at 2.4 %. The South had the smallest decline of 1.1% followed by the West at 1.7%. Both the South and West have recently experienced healthy job growth.
  • Positive factors: Low mortgage rates, job creation, less investors, and less competition.
  • Mortgage applications are currently up and rates are expected to rise. This may be a good time for return and first time home buyers to surge back into the housing market before rates climb higher, further reducing affordability.
  • 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.

Banking Regulations Impact Capital Availability in REALTORS® Commercial Markets

Fri, 06/12/2015 - 10:19

Based on the Expectations & Market Realities in Real Estate 2015: Scaling New Heights report—released by Situs, RERC, Deloitte and the National Association of REALTORS®—commercial real estate (CRE) has been riding a wave of improved macroeconomic conditions and bullish capital markets.  CRE sales volume continued positively, with $438 billion in closed transactions during 2014, based on data from Real Capital Analytics (RCA).  The first quarter 2015 continued the trend, with sales volume reaching $129 billion, a 45 percent year-over-year increase.  Most of the transactions reported by RCA are based on data aggregated at the top end of the market—above $2.5 million.

In contrast to the large commercial transactions reported by RCA, commercial REALTORS® managed transactions averaging $1.6 million per deal , frequently located in secondary and tertiary markets (small CRE markets, or SCRE markets), and focused on small businesses and entrepreneurs.  The Commercial Real Estate Lending Trends 2015 shines the spotlight on this significant segment of the economy—a segment which tends to be somewhat obscured by reports on large Class A commercial properties.

The data underscore an important point about the recovery and growth in SCRE 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 SCRE markets, whereas LCRE deals benefit from significant equity contributions.  Based on the 2015 report, the bulk of capital in SCRE markets flowed through regional and local/community banks, which accounted for 58 percent of transactions in 2014.

The raft of financial regulations which has hit the industry over the past six years has left a deeper impression on available capital for CRE deals. With higher costs of compliance and higher capital reserve requirements for CRE loans, regional and community banks have shouldered a proportionally larger share of the costs, leading to more cautious lending activity.  In 2014, 22 percent of REALTORS® reported tightening lending conditions, compared with 28 percent in 2013.

 

While the figure points to an improving capital market the pace and volume remains slower than for LCRE markets. When asked if bank capital allocated to CRE projects remains an obstacle to sales, 58 percent of REALTORS® responded affirmatively.  The top reasons cited for these difficulties were legislative and regulatory initiatives, uncertainty over regulatory actions.

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Did You Know: Household Net Worth

Thu, 06/11/2015 - 14:50

  • The net worth of households and non-profits is now at $84.9 trillion in the first quarter of 2015 according to data from the Federal Reserve Flow of Funds.  This is a new record and shows that in the aggregate, household balance sheets have never looked better.  Net worth is now more than $17 trillion or 26 percent above its pre-recession peak.
  • After slowing a bit in 2014, total net worth showed a stronger bounce of nearly 2 percent in 2015 Q1 which brought the level up 5.7 percent from one year ago. This is the 22nd consecutive quarter of positive year over year growth.
  • Net worth is the value of household and non-profit assets (financial and non-financial) less any liabilities (debts).
  • While a reduction of debt contributed to the increase in net worth earlier in the recovery, the last 3 years have seen liabilities begin to grow again. Growing at a year over year pace of 2.7 percent, liabilities have yet to return to the pre-crisis minimum growth rate of 3 to 4 percent which we saw in recessions of the 1970s and 1980s.  This suggests that while the deleveraging may largely be over, credit markets may not yet be back to normal.
  • In spite of increasing liabilities, net worth moved higher which means that assets are increasing faster.  The driver of increases in net worth is the continued growth of home and stock prices.  Household real estate accounts for $21.1 of the $99 trillion in household assets and owner’s equity in household real estate is $11.7 trillion of the $85 trillion in net worth.
  • In the most recent quarter, gains were split roughly two to one between financial assets and real estate, with gains of roughly $1 trillion and $0.5 trillion, respectively.
  • Households and non-profits are grouped together because current data collection by the Fed is not at a level of detail that would make separation of the two groups possible.

Latest Retail Sales (May 2015)

Thu, 06/11/2015 - 11:21
  • Consumers spent more, though not very robustly. That is still enough to propel the economy ahead and create jobs.  Because of the stronger sales gain via ecommerce, the demand for warehouse spaces will rise at a faster rate than for retail spaces.
  • Specifically, retail sales increased 1.2 percent in May over the month and are now higher by 2.7 percent from one year ago.  One key reason for soft figures is due to a good reason of spending less at gas stations, which fell by 18 percent over the year thanks to lower oil prices.  Spending at vehicle shops meanwhile were strong, rising 8 percent.
  • In other sectors, a steady pick-up in home sales should lead to better sales at shops selling furniture, gardening equipment, and paint coating.  Sales at building material and gardening stores indeed rose solidly by 6.2 percent in May.
  • Spending via electronic shopping data will come out later, but the data trend to April and prior months suggests much stronger growth.  Generally speaking, the growth in electronic shopping has been about twice as fast as at retail shops.  Not surprisingly, job growth at warehousing has been rising faster than at retail stores.
  • What does the latest data mean for commercial REALTORS®?  There appears a better business opportunity in brokering and leasing warehouses compared to retail shops.  What does the latest data mean for the economy?  GDP will rise around 2 percent for the remainder of the year and thereby add around 2.5 to 3 million net new jobs.  Housing and rental apartment demand will rise as a result.
  • As an aside to relieve our daily boredom of being glued to the web all day, think of a vastly different shopping experience of the old days.  That is at the marketplace and fairs where everyone comes to one central location.  Think Amsterdam during the time of Rembrandt: the hawking noises of vendors, loud counter offers on the price, shouts of unlettered people returning every unkind word, the musical sounds by amateur street performers.  Just the abounding sounds themselves would have delighted our senses.

New Closing Docs – A Problem this Summer?

Wed, 06/10/2015 - 15:46

REALTORS ® are familiar with the many documents that consumers see at closing.  In an effort to streamline the documentation and to provide important consumer protections, the Consumer Financial Protection Bureau will require lenders to implement new closing documents on August 1st.  These new forms are known as the TILA RESPA Integrated Documentation or TRID.

According to responses from lenders to the 1st quarter Survey of Mortgage Originators, the vast majority of originators were consuming time and money to comply with the new TRID documentation.  However, 60% indicate that they still have unanswered questions about the new forms and how they impact closings.

 

With regard to the timing of the TRID implementation, two thirds of respondents indicate that they expect the rules to delay some closings, while an additional 26.7% expect both some delays and for some loans not to close at all.  Only 6.7% expect no impact from the changes.

 

According to the most recent REALTOR® Confidence Index survey, between February and April of 2015 15% of all transactions experienced financing issues and 26% were delayed.  Thus, delayed closings are a facet of the current market.  Additional closing delays in August due to TRID could impede homebuyers, but a change in affordability would exacerbate the problem.  Mortgage rates climbed in May on European inflation, signs of health in the US economy, and anxiety around the FOMC meeting and impending decision to raise short-term rates.  These same factors are likely to reemerge in the 3rd quarter as the FOMC will meet again in mid-September and many forecasters expect the economy to improve in the 3rd quarter.  A sharp rise in rates when closings are delayed could impact home sales.

The CFPB has made efforts to reach lenders and to clarify questions about TRID.  Most recently the CFPB has indicated that it will be “sensitive” to lenders who make a “good faith effort” to comply with the rule for a short period, suggesting a limited grace period for infractions.  While changes to closing documents are unlikely to change an aspiring homeowner’s intentions, a volatile mortgage rate environment could.

Cash Accounts for 28 Percent of Commercial Transactions in REALTOR® Markets

Tue, 06/09/2015 - 15:34

Commercial real estate investment trends were positive in 2014, following on last year’s tail winds.  Sales of large CRE transactions (LCRE)—over $2.5M—advanced 21 percent year-over-year in, totaling $438 billion, based on Real Capital Analytics (RCA) data.  The investment trends continued apace in the first quarter 2015, totaling $129 billion, a 45 percent increase from the same period in 2014.

Investor demand for properties continued on an upward path, as economic fundamentals, broadening lending sources and capital followed returns.  With global economies moderating in 2014, the U.S. property market became an even stronger contender for cross-border investors, as well.  Secondary and tertiary markets remained on the list of investor destination due to higher yields. However, top markets returned to the forefront as capital sources consolidated in pursuit of top-tier properties.

In comparison to the high-end deals, 86 percent of commercial REALTORS® posted transactions below the $2.5 million threshold in 2014.  Although many REALTORS® participate in transactions above $2.5 million per deal, they serve a segment of the commercial real estate market for which data are generally not as widely reported, which we term the small CRE transactions (SCRE).

Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume increased 35 percent on a yearly basis in 2014.  The strong increase mirrored the renewed investor interest in stable market and properties offering higher yields.

Prices for REALTORS® commercial transactions advanced 8 percent year-over-year in 2014, a much slower pace than in LCRE transactions.  Cap rates averaged 8.1 percent over the year, a 40 basis point decline from 2013. Yields in SCRE markets continued to offer a premium compared with the 6.8 percent average recorded in LCRE transactions during 2014.

While lending conditions eased in 42 percent of REALTORS markets, financing remained a major concern.  For 59 percent of members, the average transaction’s loan-to-value (LTV) was 70 percent or higher, with 31 percent of total deals posting LTVs of 80 percent or above.  Just as importantly, cash deals comprised 28 percent of all transactions. While the figure represents a decline from 2014, it has hovered around the 30 percent mark for the past four years.

 

In LCRE markets, national banks provided the bulk of debt financing, actively competing with government sponsored enterprises, CMBS conduits and life insurance companies.  However, in SCRE markets, where many commercial REALTORS® are active, regional and community banks were the largest lending group, making up 58 percent of transactions.

The lending survey highlights the marked differences in the LCRE markets versus the SCRE markets.  Debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.

For commercial REALTORS®, 42 percent of transactions failed due to lack of financing, mostly on account of stringent loan underwriting standards.  With higher costs of compliance and higher capital reserve requirements for CRE loans, regional and community banks have shouldered a proportionally larger share of the costs, leading to more cautious lending activity.  In 2014, 22 percent of REALTORS® reported tightening lending conditions, compared with 28 percent in 2013.  While the figure points to an improving capital market, the pace and volume remains slower than for LCRE markets.

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Latest Job Openings (April 2015)

Tue, 06/09/2015 - 10:27
  • Job openings are becoming ever more plentiful.  In fact, they shot up significantly in recent months.  Also, for the first time in many years, there were more job openings than job placements, implying companies are beginning to struggle in finding workers with right skill sets.  In the meantime, those with rights skills can expect meaningful wage gains from intensifying competition for workers.
  • There are more workers quitting current employers to go elsewhere.  This is a good trend as it implies more dynamism in the economy.  Greater job changes also entail more residential moves, and hence, home sales opportunities will rise.
  • Workers are quitting because they have increased confidence that they can more easily find a better job.  Workers do not quit their jobs during a recession.  In April, the number of workers quitting was 2.7 million, while the number of hires was 5 million.
  • Not all industries are equal.  Though the service industry gets a bad label as being low paying work at a hotel or fast-food restaurants, there are higher paying service sector jobs such as in accounting, medicine, college teaching, and software development.  Specifically, placements have been solid in the Professional Business Service sector and in the Educational-Health Service sector.  Not so in the Manufacturing industry.  This divergent trend could have societal implications particularly among blue collar factor workers, who are predominantly male.  For those interested, a detailed special report on the “weaker sex” was covered by The Economist recently.

 

  • A first major seismic shift in women’s role in the workforce occurred after the First World War.  With men out in the gruesome battlefield, an increasing number of women were involved in factory work and war production.  After witnessing this event that many countries started to grant the right of women to participate in democracy.  One of the first important countries to do so was Britain.  The voting age for men at 21; for women at 30.

64 Percent of Contracts are Settled on Time

Mon, 06/08/2015 - 15:45

In a monthly REALTORS® Confidence Index Survey, NAR asks REALTORS®: In the past 3 months, think of your most recent sales contract that either went into settlement or terminated. Please explain how the deal concluded.”.

Among contracts during the three month time period February to April 2015, 64 percent of contracts were settled on time, 26 percent had delayed settlement, and 10 percent were terminated.  This is based on the responses of 1,539 randomly selected REALTORS® who answered this question in the April 2015 survey. The share of contracts that settled on time has stayed at about this level since NAR asked the question in January 2015. NAR will monitor this data in light of the RESPA-TILA changes slated August 1.

About 60 percent of REALTORS® reporting on their last contract indicated that the contract had some type of issue:  12 percent had financing issues, 8 percent had home inspection issues, and 7 percent faced appraisal issues. It is surprising that in a “tight” and “difficult” credit environment, only 12 percent of contracts that were reported to have settled or terminated had financing issues. One explanation may be that potential homebuyers are deciding to sit on the sidelines for now, so these buyers were not captured in the data.

 

Financing Continues to Impact REALTORS® Commercial Sales Transactions

Mon, 06/08/2015 - 11:00

Commercial real estate investment trends were positive in 2014, following on last year’s tail winds.  Sales of large CRE transactions (LCRE)—over $2.5M—advanced 21 percent year-over-year in, totaling $438 billion, based on Real Capital Analytics (RCA) data.  Investor demand for properties continued on an upward path, as economic fundamentals, broadening lending sources and capital followed returns.

In the first quarter 2015 sales volume rose 45 percent on a yearly basis, totaling $129 billion, according to Real Capital Analytics. Office investments comprised $33.5 billion in sales, while apartments made up an additional $33.0 billion. The largest yearly gain was recorded by the industrial sector, where volume shot up 95 percent compared to the first quarter 2014.

While secondary and tertiary markets remained on the list of investor destination during 2014—due to higher yields—top markets returned to the forefront as capital sources consolidated in pursuit of top-tier properties.  In comparison to the high-end deals, 86 percent of commercial REALTORS® posted transactions below the $2.5 million threshold in 2014.  Although many REALTORS® participate in transactions above $2.5 million per deal, they serve a segment of the commercial real estate market for which data are generally not as widely reported, which we term the small CRE transactions (SCRE).

Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume increased 35 percent on a yearly basis in 2014.  The strong increase mirrored the renewed investor interest in stabile market and properties offering higher yields. Prices for REALTORS® commercial transactions advanced 8 percent year-over-year in 2014, a much slower pace than in LCRE transactions.  The data underscore an important point about the recovery and growth in SCRE markets.  The rebound in smaller markets was delayed by three years and the rate of price growth has been shallower.

With rising asset valuations and prices, the incidence of failed transactions due to financing have been declining. According to the REALTORS® Commercial Lending Trends 2015 report, the proportion of failed sales deals falling through due to lack of financing was 42 percent. The figure compares positively with the past five years, when failure rates exceeded 50 percent, reaching a high of 67 percent in 2012. However, in light of the broadening recovery in commercial markets, the numbers paint a picture of a market in which investors continue to be negatively impacted by lack of capital or overly stringent underwriting standards.

The lending survey highlights the marked differences in the LCRE markets versus the SCRE markets.  Debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.

 

In the case of failed transactions on account of lack of financing, 54 percent of REALTORS® cited loan underwriting standards as the main culprit, pointing to an increased scrutiny from banks following regulatory requirements. The other major reasons cited were appraisal/valuation and financing availability, each accounting for 17 percent and 16 percent of responses, respectively.

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Re-financing $300 Billion in Maturing CRE Debt: Perspective from REALTORS® Markets

Fri, 06/05/2015 - 14:24

Commercial debt played a major part in the commercial real estate boom of the mid-2000s. 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. Many of the loans issued during that period, and repackaged, were 10-year loans, which have been coming up for refinancing in 2014 – 2017. According to Trepp, about $330 billion in commercial loans are scheduled to mature over the four-year period, totaling about 28,000 loans.

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 16.0 percent mark, while retail availabilities have just nudged below 10.0 percent.

 

In terms of volume, $79 billion of CMBS is expected to mature in 2015, with an additional $111 billion in 2016 and a similar $111 billion volume coming due in 2017. Commercial investors have expressed concern over the large wave of refinancing coming due, in light of the potential for rising interest rates. According to Trepp—accounting for current interest rates—about 6.4 percent of maturing loans would not meet the minimum refinancing requirement of a 1.2x debt-service coverage ratio (DSCR). Moreover, assuming that rates climb 150 basis points, the percentage of outstanding loans who would not meet the minimum DSCR rises to 15.7 percent.

How do commercial REALTORS® find this challenge impacting their markets?

Based on the Commercial Lending Trends 2015 report, CMBS loans made up a scant 1 percent of capital in REALTORS® markets during 2015, 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 48 percent of markets over the past five years.

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 16 percent in 2015.

 

Based on commercial members’ feedback, the average DSCR provided a silver lining in 2015, with an average of 1.3x. 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 2015.

Latest Employment Data (May 2015)

Fri, 06/05/2015 - 13:01
  • Very solid job numbers in May.  Jobs are coming at the right time knowing that interest rates are set to rise later this year.  The positive influence to real estate from job creation can easily overpower the negative influence of rising mortgage rates.
  • Specifically, 280,000 net new payroll jobs were added to the economy.  Moreover, it is not a one-month fluke as the jobs momentum has been fairly consistent with the 12-month tally showing over 3 million net new jobs.
  • Another encouraging sign is that wages are beginning to tick up.  The wage growth rose 2.3 percent over the past 12 months, the fastest gain since 2009.
  • Thankfully, construction jobs are also coming around after a long delay.  A total of 6.4 million are working in the construction industry (including general contractors).  That is up about 1 million from a low point five years ago.  But another 1 million construction jobs will be needed to assure the home building industry has enough workers to build an adequate supply of new homes.  The one industry that is cutting jobs is in the oil & gas extraction.  The falling oil prices have greatly scaled back plans for new drillings.  It is then possible that some of the workers getting laid off here could move into the construction industry.
  • The labor force participation rate rose to 62.9 percent, possibly signaling the end to the dreadful trend of people not working and not even searching for work.  There is still a long way to go before we get back to normal in this figure, but the turning point may have occurred.
  • It is hard to imagine why an able-body person would choose to leave the labor force.  Nothing good can come of it.  To do great things, one has to try and constantly learn.  Possibly the greatest of the Russian Czars was Peter the Great.  He had an inquisitive mind and always said that he is a student first and czar second.  He traveled across Europe, always asking how this or that is made.  From the acquired knowledge he turned an all-nothing swamp into one of the most majestic cities in Europe – a city named after him – St. Petersburg.   That is, be inquisitive and be alive.

Local Price Trends for First Quarter 2015

Fri, 06/05/2015 - 12:53

Across the country, home prices rose in the first quarter 2015 compared to the same period in 2014. Stronger demand amidst lagging inventory levels caused home prices to accelerate in most of the metropolitan areas. From a sample of 174 metropolitan areas, 85% of them experienced an increase of home prices while 14% had a decrease.

Here is the list of the metropolitan areas which were at the top:
Visualization 1

https://public.tableau.com/profile/national.association.of.realtors#!/vizhome/LMR-Q12015/Dashboard1

When home prices increase in most of the metropolitan areas, people ponder whether the value of their house increased more or less than in other locations. Comparing with the prices of the first quarter 2012 and 2008, we see that the metropolitan areas below had the highest gains[1] in prices during the last three and seven years, accordingly:
Visualization 2

https://public.tableau.com/views/LMR-Q12015/Dashboard2?:embed=y&:showTabs=y&:display_count=yes

Based on the chart above, we see that the list of the top ten metro areas with the highest price appreciation changes when we select three years period and then seven years period. This means that the “right” time to buy or sell your house differs from metro area to metro area. Of course it is impossible to know the exact “right” time to buy or sell a home.  This likely explains why data from the 2014 Profile of Home Buyers and Sellers shows that affordability of homes ranks 6th on the list of primary reasons why people purchase a home and 3rd on the list of primary reasons for the timing of a home.  The buyer’s desire or readiness to own a home was the number one reason for the purchase and for the timing.

Where does your metro area stand?  For more information on recent trends in your metro area, see the Local Market Reports for the first quarter of 2015.

 

 

[1] Note: Equity gain reflects price appreciation only.

Financing Continues to Impact REALTORS® Commercial Sales Transactions

Thu, 06/04/2015 - 15:35

Commercial real estate investment trends were positive in 2014, following on last year’s tail winds.  Sales of large CRE transactions (LCRE)—over $2.5M—advanced 21 percent year-over-year in, totaling $438 billion, based on Real Capital Analytics (RCA) data.  Investor demand for properties continued on an upward path, as economic fundamentals, broadening lending sources and capital followed returns.

In the first quarter 2015 sales volume rose 45 percent on a yearly basis, totaling $129 billion, according to Real Capital Analytics. Office investments comprised $33.5 billion in sales, while apartments made up an additional $33.0 billion. The largest yearly gain was recorded by the industrial sector, where volume shot up 95 percent compared to the first quarter 2014.

While secondary and tertiary markets remained on the list of investor destination during 2014—due to higher yields—top markets returned to the forefront as capital sources consolidated in pursuit of top-tier properties.  In comparison to the high-end deals, 86 percent of commercial REALTORS® posted transactions below the $2.5 million threshold in 2014.  Although many REALTORS® participate in transactions above $2.5 million per deal, they serve a segment of the commercial real estate market for which data are generally not as widely reported, which we term the small CRE transactions (SCRE).

Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume increased 35 percent on a yearly basis in 2014.  The strong increase mirrored the renewed investor interest in stabile market and properties offering higher yields. Prices for REALTORS® commercial transactions advanced 8 percent year-over-year in 2014, a much slower pace than in LCRE transactions.  The data underscore an important point about the recovery and growth in SCRE markets.  The rebound in smaller markets was delayed by three years and the rate of price growth has been shallower.

With rising asset valuations and prices, the incidence of failed transactions due to financing has been declining. According to the REALTORS® Commercial Lending Trends 2015 report, the proportion of failed sales deals falling through due to lack of financing was 42 percent. The figure compares positively with the past five years, when failure rates exceeded 50 percent, reaching a high of 67 percent in 2012. However, in light of the broadening recovery in commercial markets, the numbers paint a picture of a market in which investors continue to be negatively impacted by lack of capital or overly stringent underwriting standards.

The lending survey highlights the marked differences in the LCRE markets versus the SCRE markets.  Debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.

 

In the case of failed transactions on account of lack of financing, 54 percent of REALTORS® cited loan underwriting standards as the main culprit, pointing to an increased scrutiny from banks following regulatory requirements. The other major reasons cited were appraisal/valuation and financing availability, each accounting for 17 percent and 16 percent of responses, respectively.

 

For more information and the full report, access NAR’s Commercial Lending Trends 2015.

Latest Employment Situation by State (April 2015)

Thu, 06/04/2015 - 09:01
  • The best state for job creation is Utah, which sped at 4.0 percent.  The West region is doing well with Washington, Nevada, Oregon, California, and Idaho making the top-ten list.  The South was also doing well with Florida, Georgia, South Carolina, and North Carolina in the top-ten.
  • Even though 49 of the 50 states are creating jobs (West Virginia was the sole exception with fewer jobs over the past 12 months), more states are weakening in job creation compared to the month before: 29 states showed slower pace of job creation while 20 states had stronger pace.
  • Not surprisingly, the real estate market is most vibrant in the states with fast job creations.  More people working means more income and more potential homeowners.  More jobs also entail more office leasing and increased rental housing demand.  Nothing like jobs to support real estate.
  • At the metro level, the jobs were plentiful in the following cities:

 

 

 

 

 

 

 

  • The current U.S. residential mobility rate is one of the lowest in history.  There are many reasons for it.  However, low residential mobility is presumably implying less economic mobility as well since in a dynamic economy like the U.S. there would always be job destructions there and job creations here.  With on-going complaints of sluggish job market, why are Americans less willing to move to where the jobs are?  In the worst economic period of the U.S. during the Great Depression, as depicted in the Grapes of Wrath, people moved West in search of work … and dignity.  Americans did not drop out of the labor force back then.  There is today solid job growth in America in the West and South, yet the labor force participation rate is very low.

Distressed Sales: 10 Percent of Sales in April 2015

Wed, 06/03/2015 - 15:50

In the monthly REALTORS® Confidence Index Survey, NAR asks REALTORS® about the characteristics of their last sale for the month. For reported sales for April 2015, distressed sales accounted for 10 percent of sales (10 percent in March 2015; 15 percent in April 2014). About 7 percent of reported sales were foreclosed properties, and about 3 percent were short sales.[1]

With rising home values and a declining foreclosure inventory (except for states with judicial foreclosures such as NY, NJ, CT), sales of foreclosed properties have declined as well. The decline in foreclosed properties on the market may help to explain to some degree why investment sales have generally been on the decline.

Foreclosed property sold at an average 20 percent discount, while short sales sold at an average 14 percent discount.  For the past 12 months, distressed properties in “above average” condition were discounted by an average of 9-11 percent, while properties in “below average” condition were discounted at an average of 15-20 percent. Having fewer foreclosures creates further pressure for prices to move up in the coming months.

[1]               The survey asks respondents to report on the characteristics of the most recent sale for the month.

Net Operating Income Increases in 48 Percent of REALTOR® Commercial Markets

Wed, 06/03/2015 - 10:33

Commercial fundamentals continued on an upward trend in the first quarter 2015, despite a slumping economy, however the pace moderated. Net absorption rose across the property types, driving rents higher. As employment gains are expected to continue into 2015, demand for commercial space is expected to advance.

Office absorption is projected to total 51.8 million square feet in 2015, leading vacancy rates on a gradual decline to 15.5 percent by the end of the year. Office rents are forecast to rise 3.4 percent in 2015.

Industrial markets—anticipating the opening of the Panama Canal—have seen high warehouse demand. Industrial net absorption is expected to total 108.8 million square feet in 2015, driving availability rates to 8.2 percent by the fourth quarter.  Industrial rents should experience a 3.1 percent gain for the year.

With rising consumer confidence, the outlook for retail markets is looking up. Absorption is expected to reach 15.7 million square feet nationally in 2015, lowering vacancies to 9.5 percent by the last quarter of the year. Rents are projected to rise 2.6 percent this year.

Multifamily demand is expected to benefit from growing household formation, with net absorption is estimated to reach a little over 172,500 units in 2015, while new apartment completions will add 230,200 units. Apartment vacancies are expected to rise throughout the year, and close the fourth quarter at 4.4 percent. Rent growth is projected to slow from above 4.0 percent over the past few years to 3.6 percent in 2015.

Underpinning these improving fundamentals, commercial asset cash flow is certainly on the rise. Based on the REALTORS® Commercial Lending Trends 2015 report, net operating income (NOI) increased in 48 percent of markets. For 17 percent of REALTORS®, NOI increased in the 1 – 4 percent range. For 14 percent of respondents, NOI rose between 5 – 9 percent, while for 17 percent of commercial practitioners, the increase in NOI occurred in the 10 – 15 percent range.

According to the 2015 data, the increase in NOI moderated from the accelerating trends of the past few years. The percentage of REALTORS® who reported “No Change” in NOI rose from an average of 25 percent during 2012 – 2014 to 32 percent in 2015. The figure indicates a broadening in the patterns of CRE fundamentals recovery.

For more information and the full report, access NAR’s Commercial Lending Trends 2015 at http://www.realtor.org/reports/commercial-lending-trends-survey.

A Looming Renaissance in Special Financing?

Tue, 06/02/2015 - 15:49

Most REALTORS® are not familiar with the nuances of mortgage regulation … they are busy brokering real estate deals.  However, many noticed that it became more difficult to find funding for special clients two to three years ago.  The housing finance market appears to be thawing, but in the meantime it is important to seek out a special lender, for your special client.

Regulations introduced in 2014 made it tricky to find funding for some clients with special characteristics:

  • Borrowers with high debt to income ratios in high cost areas
  • Borrowers who use interest only loans
  • Borrowers who use some ARM products, and
  • Borrowers who may have trouble documenting their income but who earn enough to qualify by traditional standards.

These borrowers fall into a group who don’t qualify for an exemption to a new set of lending rules.  The exemption is called a qualified mortgage (QM) and the rule is the ability to repay (ATR), which is intended to protect consumers.  The exemption is for the lender who originates the loan and it helps them to reduce their legal liability in case something goes wrong with the loan.  Hence, lenders prefer to stick with mortgages that fall within the QM exemption to the ATR rule.

Things appear to be improving, though.  In NAR’s 6th Survey of Mortgage Originators, lenders indicated that their willingness to originate non-QM loans improved in the 1st quarter of 2015 for the first time in 5 quarters.  As depicted below, willingness to originate these loans plunged in the 3rd quarter of 2014, shortly after the new rule was implemented.

 

What’s driving the change in originators attitudes?  Most lenders in the Survey of Mortgage Originators do not have portfolios, which means that they need investors to buy the loans that they originate.  Thus, investor takeout is critical.  As shown below, the share of respondents reporting an improvement in investor demand surged to 37.5%, nearly doubling the 19% from the 4th quarter.

 

Furthermore, as depicted by the blue bars in the right side of the chart below, the lenders who responded to the survey expected  investor demand to rise over the next six months for the non-pristine types of credit which have had issues in recent years: non-QM, rebuttable presumption, and lower FICO prime borrowers.  As a result, originators expect access to credit for these same borrowers to improve over this time frame.  Improvements in investor demand appear to be loosening up the log jam in non-pristine lending.

However, while willingness to lend these non-pristine loans among those lenders who offered the products has improved, only about 40% of respondents indicated that they offered non-QM mortgages and 75% would originate QM loans with a rebuttable presumption designation.

Confidence among lenders who specialize in non-pristine financing appears to be gaining steam, driven by improvements in the investor space.  It may take time for a robust expansion of non-QM lending, but REALTORS should be aware of the option and maintain multiple lending contacts to meet their special clients’ needs.

Raw Count of Home Sales (April 2015)

Tue, 06/02/2015 - 11:02
  • Existing home sales dropped 3.3 percent in April from one month prior while new home sales increased 6.8 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 compared to the seasonally adjusted figures.  The raw count determines income and helps better assess how busy the market has been.
  • Specifically, 445,000 existing homes were sold in April while new home sales totaled 49,000.  These raw counts represent a 10 percent gain for existing home sales from one month prior while new home sales increased 9 percent.  What was the trend in the recent years?  Sales from March to April rose by 16 percent on average in the prior three years for existing homes and by 2 percent on average 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 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 rose by 12 to 13 percent from April, and we saw more gains in June where sales typically rose by 3 to 7 percent from May.  For the new home sales market, the raw sales activity in May and June tends to be only modestly better compared to those occurring in April.  All in all it’s no time to be thinking of vacation at these months of the year for REALTORS®.

Latest Construction Spending (April 2015)

Mon, 06/01/2015 - 11:06
  • Construction spending kicked higher in April to its highest level in over 6 years.  Everything real estate is coming alive.  More gains are in the cards for later in the year since home construction will no doubt increase from the shortage of housing inventory.  Commercial real estate construction is also needed since vacancy rates across all property types have been inching down.
  • Specifically, the total construction spending dollars rose for the third consecutive month and is now higher by 4.8 percent from one year before.  Moreover, it crossed the $1 trillion (on an annualized basis) for the first time since 2008.
  • The recovery has been primarily in the private construction sector.  Spending for public construction projects has not recovered, attesting to careful budget spending plans at all levels of the government.  Of the public spending, spending for highways and streets are rising.  But spending for public water supply plants are not.  With the news of droughts and floods becoming more common, the lack of spending for water treatment plants is discomforting.
  • With housing inventory very low – few homes for sale and falling rental vacancy rate – housing starts will be rising meaningfully over the next few years.  This trend nearly assures greater construction spending in the months ahead and more hiring of construction workers.
  • Too small to be in national statistics, it is unclear what new construction is being done related to housing people with mental illness.  This past month, economists and society lost a “beautiful mind” of Professor John Nash, whose life brought topic of mental illness to the general public via the Oscar-winning movie.  Another brilliant mind who likely had undiagnosed similar illness was Jonathan Swift, the author of Gulliver’s Travels.  His contemporaries thought him as the worst possible misanthrope who hated life and human beings.  With no friends but some financial success from writing, his will revealed all his money going towards building homes for the mentally ill.  A beautiful final act from another person with a beautiful mind.

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