Archive for May, 2016


Diana Olick CNBCNews

It is the No. 1 barrier to entry for young, would-be homebuyers: credit. Millennial’s are the first generation to come of age in a post-almost-apocalyptic housing market, where lenders, eight years later, are still paying billions in reparations for mortgage misconduct and outright fraud.

Millennial homebuyers are also paying a price.

“The mortgage industry is poised to experience a monumental shift as more millennial homebuyers begin to enter the market,” said Joe Tyrrell, executive vice president of corporate strategy at Ellie Mae, a mortgage software and data company. “There are roughly 87 million would-be homebuyers in the millennial generation and 91 percent of them say they intend to own a home one day. Lenders must prepare today to meet their needs.”

While Millennial’s are waiting longer to get married and have children, factors that are the primary drivers of homeownership, the leading edge is now entering the housing market. Millennial’s are even starting to move to the suburbs, and in fact, last year marked a turning point, where urban centers reached “peak millennial,” according to a new study from Dowell Myers, a professor of urban planning and demography at the USC Price School of Public Policy.

“After more than a decade of growing concentration, we see that the millennial trend of increased downtown living has peaked out and is now beginning a decline,” Myers wrote. “This is a dramatic human interest story with great implications for cities and real estate investments.”

Single-family rentals in the suburbs are more popular and more abundant than ever before, but the majority of Millennial’s say they do eventually want to buy. That means mortgages.

More than one-third of home loans made to Millennial’s since 2014 were Federal Housing Administration loans insured by the federal government, according to Ellie Mae’s new Millennial Tracker. This is far higher than the 22 percent overall share that FHA commands in total mortgage volume today. FHA allows borrowers to make just a 3.5 percent down payment, which is attractive to younger buyers who are cash-strapped to begin with, but additionally burdened by a sky-high rental market.

FHA, however, comes with a price: mortgage insurance premiums.

The additional cost, on top of higher credit score requirements, continues to sideline young buyers. While household formation is growing, only one-third of those new households are owner-occupants. The rest are renters, which is why the homeownership rate in the U.S. is falling again, now down to 63.5 percent, according to the U.S. Census, just one tick higher than its 50-year low.

“The more the homeownership level drops, the more attention there will be to the question of whether government policy changes implemented in the wake of the financial crisis are keeping people from buying homes,” Jaret Seiberg of Guggenheim Securities wrote in a note last week. “Our view is that government policies are keeping credit conditions unnecessarily tight. So this attention could be a positive in getting regulators to reassess whether they have properly balanced consumer protection and homeownership opportunity.”

Seiberg points specifically to continued pressure from the Justice Department on loan originators, but given that the DOJ is unlikely to back off, he suggests FHA further cut premiums in the fall.

“This could mean eliminating life-of-loan coverage, reducing the upfront premium or cutting the annual premium. That might convince more borrowers to seek FHA loans,” Seiberg added.

Mortgage interest rates are still near historic lows, but home prices are rising far faster than incomes, negating much of the savings from these low rates. The 0.35 percentage point drop in interest rates since the start of 2016 would have saved the average homebuyer $44 per month, but home price increases have cut that to just $18 a month nationally and even more in major cities, according to Black Knight Financial Services.

The highest percentage of closed home loans for millennials are far and away in the Midwest, where home prices are lowest, according to the Ellie Mae tracker. The average FICO score for female loan applicants in March was 724 and for men, 727, both much higher than the national average credit score.



DENVER—There seems to be no downside to the Denver retail market–and that includes the suburbs as well as the CBD, where the famed LoDo district is, in the words of Jeff Hallberg, exploding. Of course, the headline continues to be the way the marijuana market is changing the face of local retail, a potential bellwether of what other cities will be like if and when pot is legalized in all 50 states.

Hallberg, a principal in the local office of Lee & Associates, says that the pot market “is an ever growing piece of the local retail pie. The nice thing for landlords is that they pay really well. You can probably get 15 or 20%–even 30%–more in rent than for a traditional retailer because the tenant will pay for location.” In fact, he tells of one client for whom he found space that would ordinarily go for “$16 a foot. For marijuana it was $40.”

But it should be noted that, in a classic good-for-goose-and-gander scenario, the shops do pay out, and Hallberg tells of one 1,000-foot store that produced $500,000 a month in revenues.

In large part the rents are driven by the premium for space. Restrictions in place limit where the shops can go, including their proximity to schools, rehab centers and liquor stores. By the way, they also have to close by 7pm, at least in Denver.

And there are potential traps for the landlord as well. For a lot of them “the main issue is refinancing,” he says. “Will a traditional lender finance that use?”

Of course, the marijuana business, newsworthy though it clearly is, remains only a segment of the macro-hot Denver retail scene–one that shows no signs of cooling, despite talk of market peaks. “In Denver, we’re a bit different than most other metro areas in that we haven’t overbuilt,” he says, clearly a lesson learned during the heady days leading up to the last economic dump.

“Over the past four years, there’s been about six million square feet of new retail space delivered.” That compares favorably–very favorably–to the 5.7 million delivered in 2007 alone. “We’ve been working hard not to overbuild,” which shows in the Denver MSA’s 5.6% vacancy rate.

And it shows in the rental rates, which he pegs around $30 a foot on average, with new product leasing space in and around $50 a foot NNN in the above-mentioned LoDo, RiNo (Lower Downtown and River North) and Central Platte Valley submarkets, all awash in gentrification and reflecting the fitness-center, Trade Joe’s, Fresh Market tastes of the millennials flocking in.

That compares to the mid-$20s that, depending on the anchor, suburban spaces are getting. But the Mile-High City is different here too, as Hallberg explains and, unlike other MSAs, the Denver suburbs have a secret–the ever expanding light rail. In fact, the metro’s Regional Transportation District in late April completed a leg connecting Denver International Airport with downtown’s Union Station with multiple suburban stops.

“Since we started with light rail throughout Colorado,” he tells, “transit-oriented developments have been thriving, especially because ridership is so high.” Not only commuters but developers as well are flocking to those high-use stops, “gentrifying the suburbs as well.”

Again, the rental rates tell the tale, and Hallberg reports that those high-density suburbs break the out-of-town mold with rents approaching downtown’s $30 a foot.

Clearly, Denver is firing on all cylinders, and redefining the market as it goes. Not surprisingly then, Hallberg is optimistic.

“Interest rates are always a wild card,” he says. “But Denver is one of the most sought-after living destinations in the country. If we continue to manage our development we will weather whatever comes next year better than most other metro economies.”Unknown