Archive for January, 2015


By Ben Miller

Traditional banks have returned with gusto to capital markets and are making more aggressive assumptions, says Miller.

WASHINGTON, DC—In the last 18 months, we have seen an influx of capital into the US real estate market—and not just from overseas investors. As a result, the cost of borrowing has been cut in half and construction is being spurred across the country.

A short time ago, many single-family home fix-and-flippers were getting construction loans for 65% to 75% of the total cost of the renovation at 12% annual interest rates. These terms attracted many major private equity funds, such as Oak Tree and Blackstone.

Now, those same borrowers can secure loans for 75% to 85% of the total project at four to eight percent interest rates, dramatically cutting the cost of borrowing by nearly two thirds. And this trend will stretch far beyond single-family home development. We will see lenders finance every asset class, as long as there is cash flow in place, or a strong business plan to increase returns.

Largely driven by a recovered housing market and low interest rate policy from the Federal Reserve, the lending environment has seen a remarkable change. Traditional banks have returned with gusto to capital markets and are making more aggressive assumptions. In 2012 and 2013, lenders were hesitant to provide financing for commercial real estate construction, even in top markets, often limiting loans to less than 65% of total costs. Banks are now handing out term sheets for more than 80 percent of total costs – including in secondary and tertiary markets.

To put it another way, if a $30 million multifamily housing project previously required $10 million of equity from the borrower, now banks are willing to lend at much higher levels and asking for only $5 million of equity.

Thanks to low Fed fund rates, bank financing is also as cheap as it has ever been, usually close to 3% annually during construction. As a result, a developer could borrow $25 million for a $30 million development and only pay roughly $750,000 in annual interest to the bank—significantly less than what they would pay for the $5 million in equity needed, typically requiring close to 20% returns per year.

Simply put, banks will give real estate companies nearly all the money needed for a project (around 83%), and get paid less in total than the equity (17%).

Imagine if you developed a $200,000 apartment building with a $34,000 down payment, and then owed the bank less than half of the rent you received each month. You would get to own the property and keep more than half of the rent, while putting up only a sliver of the total cost. What would happen? Well, a lot of people would start building apartments. That’s now happening.

There is even a drive now to build in secondary markets. It’s been reported that Nashville will have 4,327 apartments come online this year. Charlotte, San Antonio, and Dallas are next on the list.

Furthermore, the Urban Land Institute predicts that, even with the construction increases expected this year, there will still be a lack of supply to meet demand—which will further fuel development.

So, we expect to see a lot of new construction in the coming year—and in new markets. The lending environment has led to the rise of a builder’s economy, where the rational economic actor is compelled to build.

A relaxed Federal Reserve policy has led to aggressive lending, undoubtedly spurring growth and development, as well as further institutional real estate investment.

What will happen to these new projects if confidence in the global economy rises and base interest rates quickly move up? Though interest rates are expected to rise this year, it is anticipated that they will do so slowly, unlike the sudden spike seen by borrowers in 2013. According to the Commercial Real Estate Financial Council’s 2015 Market Outlook Survey, 69% of borrowers expect rates to increase, but there isn’t a whole lot of concern about it.

In the meantime, real estate developers around the country are seeing green (lights).

Author: Scott Morgan

Fannie Mae 2015 economic forecastAs Fannie Mae sees it, 2015 will be a good year for the housing market, even if residential real estate has to get dragged into the black.

Fannie Mae’s 2015 Economic Outlook, released Thursday, is less a picture of a purely positive housing market than an expectation of an economy so strong across several key growth sectors that it will propel the national housing market to greater heights than in 2014. Or, as Fannie Mae puts it, the economy is strong enough to drag housing behind it and create growth by default.

“Our theme for the year, ‘Economy Drags Housing Upward,’ implies that both housing and the economy will pick up some speed in 2015, but that the economy will grow at a faster pace,” said Doug Duncan, chief economist at Fannie Mae.

Fannie Mae expects strengthening private domestic demand to drive the economy up 3.1 percent in 2015—up from the agency’s earlier prediction for 2.7 percent growth.

While that prediction is still modest, Fannie Mae says it’s strong enough to “drag last year’s unspectacular housing activity upward,” according to the report. Fannie Mae credits projections for continued low gasoline prices, firming labor market conditions, rising household net worth, improving consumer and business confidence, and reduced fiscal headwinds to usher in a year of steady, if “not yet robust” economic improvement that should lead to a higher rate of household formation in 2015.

“Consumer spending should continue to strengthen due in large part to lower gas prices, giving further support to auto sales and manufacturing,” Duncan said. “We believe this will motivate the Federal Reserve to begin measures to normalize monetary policy in the third quarter of this year, continuing at a cautiously steady pace into 2016 and 2017.”

Duncan also said he suspects mortgage interest rates to stay low throughout this period, attracting steady supply of new homebuyers.
Fannie Mae’s report echoes the sentiments of the National Association of Home Builders, which also this week spoke of bluer housing and economic skies ahead. Top economists and housing experts in a panel at the group’s International Builders’ Show in Las Vegas predicted a recovering labor market, low interest rates, and improvements in credit availability for borrowers as the three main triggers for growth in the housing market this year.

These assessments, however, are not shared by everyone, at least not blanketly. Earlier this month, Trulia’s chief economist Jed Kolko warned that falling oil process could have a recessive effect on housing in major oil-producing state such as Texas, Oklahoma, and Louisiana.
Kolko did say, however, that lower fuel prices could just as likely stimulate flagging industrial economies in the north and Midwest, where oil production is virtually nonexistent.

Regardless, Duncan and Fannie Mae foresee big things, even if this year will not be a breakout year for housing. “We expect the rising share of new home sales to lead to a healthy increase in single-family construction of about 19 percent, or 765,000 units,” he said.


Carey Hill – Author,

Most millennials say they’d rather rent than buy a home — a decision that could cost them more than $700,000 over the course of their lives.

Nearly six in 10 millennials (59%) say they’d rather rent a home than buy one, with just one in four saying they are either very or completely likely to purchase a home in the next five years, according to a survey of 1,300 millennials released this week by EliteDaily and Millennial Branding. (This anti-home-buying trend can already be seen: Currently, only about one in four millennials own a home, down from about one in three in the mid-70s and early 80s, according to data from the Demand Institute.) That’s “bad news for the real estate industry,” the report concludes.

The reasons for this sentiment are many. More than six in 10 feel they simply can’t afford it, the survey revealed (whether or not they actually can’t afford it is another question entirely). Plus, millennials tend to marry and have children later (two events that often inspire home purchases) and are a generation that doesn’t like feeling stuck in one place, says Dan Schawbel, the founder of Millennial Branding.

Whatever the reason, this decision may be a costly one. “In most markets it is still cheaper to buy than to rent [each month]” — even when you factor in the insurance and property tax payments, in addition to the mortgage payments, says Daren Blomquist, vice president of RealtyTrac. And because interest rates are so low, now is a good time to buy in many markets — at least if you plan on staying in the home over the long term (Blomquist says that, as a very rough rule of thumb, if you don’t plan on staying in the home you are buying for at least five years, it may make sense to rent instead of buy).

Plus, you’re working toward owning an asset when you buy — that’s not the case when you rent. Considering that the median home in America costs $190,000 and historic annual home price appreciation is around 3%, according to data from RealtyTrac, a millennial who bought an average home today (and put $19,000 — that’s 10% — down) with a 30-year fixed rate mortgage at 4% would outright own a home worth $426,000 in 2045, and pay a total of roughly $373,000 for it (mortgage, taxes and insurance included) — a difference of $52,000. Plus, after 30 years, the person could live rent-free — a compelling prospect for retirement.

If that same millennial rented — let’s assume he pays $1,312 a month in rent this year (which is the average fair market rent for a three-bedroom nationwide, according to RealtyTrac) — and his rent appreciates at a rate of 2.7% a year (the average increase over the past decade, RealtyTrac says), he’ll end up shelling out nearly $717,000 in rent over that 30-year period — all without an asset to show for it in the end. Of course, he can cut that by having roommates, but at some age, he’s probably going to want out of the roommate game, unless it’s a spouse or love interest.

That said, many millennials will likely rent now but buy a home down the road. But waiting to buy has its costs, too — interest rates and median home prices are likely to rise down the road. At current rates of appreciation, in 10 years the average home (now priced at $190,000) would be selling for about $249,000. If interest rates return to their historical norm (from over the past 15 years) of 5.6%, a monthly house payment (including mortgage, taxes and insurance) on a $249,000 home would be $1,574 a month, a 52% increase over the $1,037 house payment for a median priced home now; plus, over that 30 years, you’d pay a total of $566,640 (assuming you put 10% down) for a home worth $558,356 at the end of that period. “In this scenario you wouldn’t come out positive on your investment in the property until a year after the mortgage was paid off, in 2056 — at which point the home would have a projected value of $573,608,” explains Blomquist.

Of course, there are some compelling reasons to rent. You have more flexibility when renting, as you aren’t tied to a mortgage payment, and savvy investors can likely get higher than 3% annual returns elsewhere. And, quite frankly, “if you can’t afford it, don’t buy,” says Blomquist; you don’t want to end up in a situation where you have to foreclose on a home.

From S&P/Experian Consumer Credit Default Indices Press Release. (B. Honea)


Default rates are on the rise month-over-month for both first and second mortgages nationwide, according to the S&P Dow Jones Indices and S&P/Experian Consumer Credit Default Indices for December 2014 released Wednesday.

According to the data, the first mortgage default rate experienced its biggest monthly increase since September 2013, rising by five basis points from 0.97 percent in November up to 1.02 percent for December. The second mortgage default rate took a leap of 11 basis points, up to 0.59 percent for December.

The national composite default rate, which includes first and second mortgage defaults as well as those on bank cards and auto loans, increased by four basis points up to 1.11 percent from November to December.

“December was the fifth consecutive month with increasing national consumer credit default rates,” said David M. Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “Increases also occurred in some recent months in mortgages and auto loans. While the economy is strengthening and consumer spending is gaining, wages have shown little growth. The large drop in oil prices benefits consumers’ disposable income and should limit consumers’ financial stress. Default rates remain very low but could be a cause for concern if the rising trend gains strength.”

All default indices are down year-over-year, however. The national composite was 24 basis points lower in December than it was for December 2013; the first mortgage default rate declined from 1.27 percent to 1.02 percent year-over-year in December; and the second mortgage default rate fell from 0.76 percent to 0.59 percent for the same period.

Of the five metropolitan statistical areas tracked by the indices (New York, Chicago, Dallas, Los Angeles, and Miami), Miami had the highest default rate for December at 1.34 percent – which was less than half of what was reported for the same month a year earlier (2.74 percent). Miami was the only one of the five areas that reported a month-over-month decline, down 12 basis points from November to December.

“Chicago, Dallas, New York, and Los Angeles reported default rate increases in December. Across these cities, there is a seasonal pattern with December showing larger than typical increases in default rates, probably associated with holiday shopping and delayed payments,” Blitzer said. “New York reported the largest increase, up seven basis points from last month’s historic low, to 1.05 percent. Chicago also increased from its historical low in November, up five basis points to 1.16 percent, and Los Angeles increased six basis points to 0.86 percent. Only Miami reported a rate decrease, down 12 basis points to 1.34 percent. Despite the significant increases, all five cities –Chicago, Dallas, Los Angeles, Miami and New York – still remain below rates seen a year ago.”


Author: Tory Barringer

In the wake of the National Association of Home Builders’ (NAHB) latest confidence index, builders convened in Las Vegas this week to discuss housing trends over the last few months and what they expect to see in 2015.

In a panel at the group’s International Builders’ Show, top economists representing housing organizations and businesses projected a healthier year for housing ahead, citing a recovering labor market, low interest rates, and improvements in credit availability for borrowers.

David Crowe, chief economist for NAHB, paid particular attention to the country’s gross domestic product (GDP), which he estimated grew at a rate of 4 percent in 2014’s second half, and to the employment picture, which strengthened considerably after a slow start to the year.

“The signs point to a more robust year for housing,” Crowe said. “Household balance sheets are returning to normal levels, home owners’ equity is increasing and significant pent-up demand is rising.”

Crowe added that an estimated 7 million existing-home sales were delayed or “lost” during the downturn, at least some of which he expects to come back soon.

David Berson, chief economist at Nationwide Insurance, agreed that demand is in a position to pick up as the recent acceleration in job growth leads to more household formations, a statistic that has been slower to grow in the current economic expansion than it has in the past.

Berson also put a spotlight on millennials, who have so far played a relatively small part in the housing market’s comeback. While that group has suffered more than most from stagnant wages and high debt, he’s optimistic that they’ll enter the market as jobs and the economy continue to grow.

“The leading edge [of millennials] are now in their young 30s,” Berson said. “Homeownership desire is much higher for those who are in their 30s than those in their 20s.”

In terms of construction, NAHB projects that housing starts totaled 993,000 in 2014, up 6.7 percent from 2013 (in an initial figure released Wednesday, the Commerce Department estimated that starts totaled about 1.01 million in 2013).

For 2015, the group predicts new construction will accelerate, particularly in the single-family market, which is forecast to see 26 percent growth to an annual figure of 804,000 new units.
“While a good beginning, this is still well below a normal level of 1.3 to 1.4 million single-family starts,” Crowe said.

Frank Nothaft, chief economist at Freddie Mac, was slightly less optimistic in his own predictions, though he still called for housing starts to rise 15 percent this year over 2014.

For home prices, Nothaft expects a 3.5–4 percent increase over the course of 2015. While rising interest rates are also projected to push home costs up, he maintained that affordability will still be high, given economic trends.

“If we see economic growth running at 3 percent at an annualized, rate, the Federal Reserve should begin to push up short-term interest rates by the second half of 2015,” Nothaft said. “We see mortgage rates going up to 4.5 percent on the high side at the end of this year, going from dirt cheap to cheap. Overall, affordability for buyers in most markets will be well maintained in the context of strong job and income growth.”



For many investors, last year’s stock market gains helped make up for the heavy losses inflicted by the 2008 financial collapse. But it turned out to be a lousy year for private pension funds, which lost ground on their funding levels.

After gradual progress rebuilding the funds they need to pay retirees, the average private pension fund held about 80 percent of what it needs to cover those payments, according to a report by benefits consultant Towers Watson. That’s down from 89 percent at the end of 2013 and represents an overall deficit among large corporate plans of about $343 billion, nearly double the shortfall a year earlier.

Much of the shortfall came from an increase in liabilities (or the amount they now expect to owe beneficiaries). Even as companies have pared back their defined-benefit plans—the ones that pay a guaranteed check for life—the cost of keeping that promise has increased. There are two big reasons: lower interest rates and longer life expectancies.

Low interest rates reduce the amount of money a pension fund can earn from money already set aside, raising the level it needs to generate enough cash. Interest rates also affect the way pension accountants estimate the future cost of writing all those retirement checks. Accountants look at something called the “time value of money” to compare how a given amount of money today will be worth decades in the future.

The other hit to pension funding levels came from the latest data showing that retirees are living longer than the long-term assumptions that were used to calculate how much their defined benefits will cost. Last fall, new mortality tables from the Society of Actuaries showed that between 2000 and 2014, longevity for the average male age 65 rose by two years to 86.6. For women age 65, overall longevity during the same period rose 2.4 years to age 88.8.

The SOA estimated that those gains in lifespan could add as much as 4 percent to 8 percent to a private pension plan’s liability.

Pension funds did get some breaks from Congress, however.

One deal struck in Congress last summer to win support for an extension of the nearly insolvent Highway Trust Fund changes the way companies are allowed to account for the future cost of paying pension benefits to retirees.

In exchange for setting aside more money to fix an epidemic of potholes, Congress attached a rider allowing pension funds to “smooth” the way they account for long-term ups and downs of interest rates. That allowed companies to defer tens of billions in pension fund contributions, which the government expects to flow to the bottom line as bigger profits and generate higher corporate taxes.

The change makes a big difference in how much money companies now have to set aside, resulting in what amounts to a $51 billion corporate piggy bank. That’s how much Moody’s Investors Service estimated companies will save in lower pension fund contributions thanks to the road repair bill.

However, companies will still have to make up those payments in the future.

In a separate move last month, lawmakers finalized a last-minute, behind-the-scenes deal to shore up the government’s pension insurance fund by raising premiums and allowing some troubled pension plans covering more than one employer to cut retiree benefits.

The provisions, which drew loud opposition from unions and other groups representing retirees, were part of a massive $1.1 trillion spending bill signed by President Barack Obama last month.

Proponents argued that the changes would keep the failing pension plans afloat and keep benefits flowing to retirees. But some union officials and retiree advocates, such as AARP, slammed the benefit cuts as a sneak attack on a decades-old promise to workers and their families.

The fix proposed by Congress would allow some underfunded multiemployer plans to cut the benefits they pay to some current and future retirees to help cover higher premiums to shore up the Pension Benefit Guaranty Corp., the government insurance fund backing these plans. (Benefits reportedly would not be cut for disabled pensioners or those 80 years and older.)

About a quarter of the roughly 40 million workers who participate in a traditional defined-benefit plan are covered by multiemployer plans, according to the Bureau of Labor Statistics.


By Quentin Fottrell

The American Dream of owning a home just got more affordable, but that’s partly because the average American now spends nearly 30% of their income on rent.

U.S. home buyers making the nation’s median income and purchasing the typical U.S. home spend around 15% of their income on their monthly house payment, excluding insurance and taxes, down from the historical norm of 22% during the pre-bubble period from 1985 to 1999, according to data released in December by housing website Zillow. On average, U.S. renters spent nearly 30% of their monthly income on rent in the third quarter of 2014, up from 25% historically. “What keeps me up at night is the fact that it still remains so difficult for so many potential buyers to make those particular stars align [being able to afford to own a home] largely because renting is so unaffordable these days,” says Zillow chief economist Stan Humphries.

This is supported by earlier studies on the subject. Renting has become significantly less affordable in recent years, according to a report released last year by the Harvard Joint Center for Housing Studies. According to that report, 50% of U.S. renters spent more than 30% of their gross income on rent (the traditional measure of affordability) in 2010, up a record 12 percentage points from the 38% of households facing such a burden a decade prior. And many of those households, about 27% of renters, spent more than half of their salary on rent, up from just 19% of renters who did so a decade ago. Landlords are hiking rents as salaries—particularly for younger Americans—remain stagnant, it found.

Read: 10 best cities for renters

Nationwide, rents rose 6.1% year-over-year in November, according to separate data released by Trulia on Tuesday. Rents increased most dramatically in Denver—where the median rent for a two-bedroom apartment hovers at $1,550—a 14.2% year-over-year bump. They rose 12.2% in San Francisco ($3,600 for a two-bedroom apartment) and increased 11.9% in Oakland ($2,450 for a two-bedroom apartment). The median price of a new house sold in the U.S. hovers at $208,300, up 5% on the year in October, according to data released last month by the National Association of Realtors. Jed Kolko, chief economist at real estate website Trulia, calls this the “millennial mismatch—they can afford markets where they don’t live, but they can’t afford many of the markets where they do live.”

Read: Landlords are getting even meaner

Millennials tend to live in areas where jobs are more plentiful, but where home ownership is less affordable. In metros with a higher population of millennial residents, homeownership tends to be less affordable for younger Americans, says Kolko. In Austin, Honolulu, New York and San Diego, 20- to 34-year-olds account for at least 23.5% of the population, putting those metros in the top 10 metro areas with millennial residents. Fewer than 30% of homes for sale in those markets are within reach of the typical millennial household. There are cheaper markets, like Oklahoma City and Baton Rouge, that have a high share of millennials, Kolko says, “but they’re the exception.”

Homeownership rates in the U.S. have steadily declined in recent years in part because millennials have delayed buying homes. Still, Humphries says it’s likely that millennials will overtake Generation X as the biggest group of U.S. home buyers, a transition aided by widespread home affordability. Population numbers may also explain the jump in buyers. There are 89 million millennials (also known as Generation Y, born roughly between 1981 and 1996) and 75 million boomers (born between 1946 and 1964) in the U.S., compared with just 49 million Gen Xers. “The allure of fixed housing payments and building wealth through home equity will draw more buyers out of rentals and into homeownership,” he says.