Housing market turnaround is critical to economic recovery
Real Estate News & Commentary by Chris McLaughlin, July 28, 2009
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Housing market turnaround is critical to economic recovery
According to the latest monthly reading of the Standard & Poor’s/Case-Shiller index, home prices are showing signs of stability. Analysts say that this is encouraging, given that home values drive consumer confidence. “The key to everything is single-family housing because that’s where consumption comes from,” said Sam Zell, founder and chairman of Equity Group Investments. “If people don’t have confidence in their biggest asset, they won’t have the confidence to spend.” Analysts expect the extent of housing recovery to be different across the country.
For example, in cities such as Miami, where is there is a significant supply overhang, housing recovery will take longer, than in other areas. Zell is pessimistic about the near-term prospects for commercial real estate market. “The commercial real estate sector is definitely under water,” he said. Zell is critical of government programs introduced to revive the economy and believes that stimulus spending is likely to lead to higher taxes. “A lot of these wonderful, massive programs that they’re currently considering are interesting, and maybe at the top of the market we could afford to do them,” said Zell. “To do them at this stage of the game I think is very scary.”
Government sets targets for loan modification
The Obama administration wishes to see at least 500,000 loan modifications by November 1 of this year; currently about 200,000 loan modifications are in process. Administration officials held discussions this week with 25 loan servicers participating in the modification program and asked them to do expedite the program. Borrowers have been complaining about administrative delays in processing their loan modification application. “[T]oo many homeowners are at risk of foreclosure right now,” Treasury Secretary Tim Geithner said in a statement after the meeting. “Today’s meeting was an opportunity to identify ways to accelerate the program and bring relief faster.” President Obama has acknowledged that the modification program, which was announced in February this year, has so far not been effective. “Our mortgage program has actually helped to modify mortgages for a lot of our people, but it hasn’t been keeping pace with all the foreclosures that are taking place,” Obama said last month.
Servicers who participated in the meeting made a number of suggestions on streamlining the paperwork and creating a website to enable borrowers to make applications online. Sanjiv Das, chief executive of CitiMortgage, said: “Today’s meeting was an important step toward the administration’s and our shared objective of improving the effectiveness and efficiency of the Make Home Affordable mortgage modification program.”
Mortgage-backed bonds worth $3 billion in TALF pipeline
The Obama administration introduced the Term Asset-Backed Securities Loan Facility (TALF) last March in order to revive asset-backed securities market. The next TALF window which will open in September this year is likely to see deals worth $3 billion involving Commercial Mortgage Backed Securities (CMBS). More than a dozen real estate investment trusts are expected to participate. The Federal Reserve is likely to lend CMBS buyers up to 85% of the purchase price for TALF securities.
“If the first deals are successful, we think we can get $10 to $25 billion done in the next six months,” said Kenneth Rosen, who manages a hedge fund. The program accepts securities that have the highest rating, and borrowings under the program must be repaid within 5 years. Analysts are divided on the extent to which the program will revive the CMBS market which collapsed in 2008 due to credit crisis. David Twardock, president of Prudential Mortgage Capital, said TALF will help revive the CMBS market “in a very modest way.” TALF is set to expire by the end of 2009 and some analysts are seeking an extension of the program.
Consumer confidence drops for the second straight month
According to The Conference Board, its confidence index dropped to a reading of 46.6 in July, a second consecutive decline, following a reading of 49.3 in June. The Conference Board’s measure of present conditions dropped to 23.4 from 25 the prior month. The gauge of expectations for the next six months declined to 62 from 65.5. The drop in consumer sentiment reflects the unemployment situation. “Folks are still concerned about their jobs,” said Mark Vitner, a senior economist at Wells Fargo Securities. The survey is based on a representative sample of 5,000 U.S. households.
About 46% of survey respondents said that the business conditions are “bad,” and 48.1% said jobs are “hard to get.” Just about 18% said they expect an improvement in business conditions over the next 6 months. Lynn Franco, Director of The Conference Board Consumer Research Center, said: “Consumers are pessimistic about their income expectations, which does not bode well for spending in the months ahead.” Consumer spending accounts for about 70% of the economy and any decline in consumer confidence would adversely impact economic recovery.
Orders for durable goods rise in June
According to data from the Commerce Department, orders for durable goods excluding transportation equipment, orders for goods meant to last several years rose 1.1% in June, the most in four months. Total orders for durable goods fell 2.5% in June for the first time in 3 months. This reflects shutdowns by auto-plants in companies such as General Motors and Chrysler. “Orders have stabilized,” said Harm Bandholz, an economist at UniCredit Global Research in New York. “This fits in with the bottoming in the economy. We will see a rebound in production in the second half” of 2009.
Inventory fell at an $87 billion annual rate in the first quarter. The drop in inventory is likely to set the stage for economic recovery. The economy was projected to decline by 1.5% in the second quarter of 2009. “The pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization,” Federal Reserve Chairman Ben Bernanke told Congress last week. Caterpillar, which is among large manufacturing companies, posted second quarter results which exceeded analyst expectations. “We are seeing signs of stabilization that we hope will set the foundation for an eventual recovery,” said Chief Executive Officer Jim Owens.
Now on to our real estate investor education section…
GeoDemographics 101 for Short Sales Success
Never heard of geodemographics? Don’t worry, you probably aren’t alone. However, despite the rather convoluted label, the essential information contained in this incredibly powerful tool is able to take your short sale investments to the next level. Think of it like direct marketing on steroids. Geodemograpics allow you to locate your target population with near surgical precision then tailor a custom-made marketing message designed to elicit top results. Before we get into the tools of the trade on how to get started using geodemographics, it’s important to understand a few facts:
- Locating the right clients is the first step in success. Negotiation, sales and closing the deal all come later but will never matter as much as the ability to locate the “hot targets” before the competition.
- There are over 250,000 neighborhoods in this nation with an average of approx 280 households per neighborhood. Locating your niche allows you to concentrate a message that appeals to your target market with the highest possible “conversion” rate.
- Geo = location + Demographics = Population Data. Learn how to use data about the given population of each neighborhood in order to design and refine your message.
So, what are the basic steps to performing geodemographic research? It’s actually fairly simple once you know how. Begin by estimating the size and composition of your target area. Age, gender, marital status and life-status (retired, single, family etc) all provide important insight into what is important to them and what they will likely be searching for in terms of real estate. Excellent sources of neighborhood data are available for free at www.census.gov or by calling your local HUD office. Commercial resources include www.claritas.com, www.maponics.com or http://bp.mlsli.com/neighborhood.htm.
Next, design and refine a message created specifically for your target market. It should be engaging and effective. Start with several versions to determine which garner the most response – once you find out what works, stick with it!
Property designed geodemographic research can tell you all about your target audience including where to meet them, where they most often eat out (McD’s or true gourmet), where they shop and even other influential networking opportunities with service providers such as accountants or tire shops. Imagine how nice it would be to grab the best clients simply by printing up placemats for a local diner or handing out business cards at a local dry cleaner. Believe it or not, these were exactly the types of networking and marketing activities that tend to yield the best results when combined with highly targeted and effective data.
Finally, use a feedback loop to further refine and clarify both needs and opportunities as you collect more data. Remember, whether you sign or not, all information is important. Eventually you will develop a clear picture of the personality profile of those most likely to seal a deal, walk away or refer others.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com
Copyright Loss Mitigation Institute LLC 2009.
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A large number of homeowners across the country are confronting defects in their homes largely on account of construction faults. As the housing sector expanded aggressively in the last couple of decades, the industry has been besieged with a shortage of skilled manpower and quality construction materials. In addition, tardiness of municipalities in inspecting and certifying homes contributed to the problem. Criterium Engineers, a building-inspection firm, has estimated that 17% of newly built houses in 2006 had at least two significant defects, up from 15% in 2003. Paul Amirata, vice president of claims at Axa Insurance, says construction-defect claims being filed are “pretty severe in terms of the total damage alleged.” The drop in real-estate values has exacerbated the problem. Those with faulty houses find that repairs often cost more than the value of the home. In addition, many do not have the equity to leverage in order to pay for repairs. In case of house defects what is the remedy for homeowners? The National Association of Home builders believes litigation is an inefficient way of resolving issue related to construction defects and says homebuyers should consider using “alternative dispute resolution including mandatory, binding arbitration in consumer contracts.”
According to a report released by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, the number of loan modifications rose in the first quarter of this year. The report also said there was an increase in mortgage delinquencies and foreclosures in the first quarter. John Dugan, Comptroller of the Currency, said: “While I’m very concerned about the rise in delinquent mortgages and foreclosure actions, the shift in emphasis by servicers to more sustainable, payment-reducing modifications is a positive step that should show significant benefits in the coming months.” Servicers carried out 185,156 loan modifications in the first quarter; this is a rise of 55% from the previous quarter. Seriously delinquent mortgages – loans that are 60 days or more past due – rose 9% from the previous quarter. Delinquencies in prime loans increased by over 20% from the previous quarter and foreclosures stood at 2.5% of all serviced loans. Despite the bad news, analysts believe the loan modification program introduced by the Obama administration is gaining traction and will benefit a large number of homeowners in the coming months.
The Conference Board (TCB), an industry group, said consumer confidence dropped in June after rising in May. TCB’s index of consumer attitudes declined to 49.3 in June from a reading of 54.8 in May. The Present Situation Index, which measures overall consumer sentiments toward the present economic situation, dropped from 29.7 in May to 25.8 in June. Millan Mulraine, economics strategist with TD Securities, said: “On balance, this was a disappointing report as it has clearly bucked the trend of improving consumer sentiments in the past few months. Moreover, with the details of the report uniformly weak, we are left with the impression that this was an outright slump in consumer confidence.” Among the consumers who participated in the survey conducted to gather information on consumer sentiment in the current quarter, 4.6% said they had plans to buy an automobile within 6 months; in contrast to 5.7% in the previous quarter. Those with plans of buying a home dropped from 2.8% to 2.7% while those planning to buy a major appliance dropped to 26.5% from 29.2%. Inflation rate expectations for 12 months rose to 5.9% from 5.6% in May. “Consumers are making a more somber and accurate assessment of the economy and their own financial position,” said Mark Vitner, senior economist at Wachovia. “Consumers may be thinking less bad is not good enough.”
New York private-equity firm Quadrangle Group has offered a three-year sublease for 10,000 square feet at $85 a square foot, a discount of 32% to the 2006 rate. Taconic Capital Advisors has offered 50,000 square feet near Central Park at $80 a square foot, denoting a 22% discount to the rate being paid by Taconic. Hedge funds and other firms, when they sublet space, are likely to lose millions of dollars over the life of the building lease. Buyers looking for space are getting great bargains. Brian Rance, U.S. managing partner of law firm Freshfields Bruckhaus Deringer, says, “It’s a complete buyer’s market.”
KB Home, a large homebuilder, has reported a lower loss for the quarter ended May 31 as compared to the earlier quarter. Analysts say this could be yet another sign of housing sector recovery. The company said new home orders, which totaled 2,910 units in the quarter, were up from the beginning of the year. In addition, the company’s cancellation rate improved. Net loss for the quarter was $78.4 million, or $1.03 a share, compared with a loss of $255.9 million, or $3.30, a year earlier, KB Home said in a statement. Michael Rehaut, an analyst at JP Morgan, said the result was worse than expected, and was “in sharp contrast” to the prior quarter’s order growth. Builders such as KB Home are competing with foreclosed homes up for sale. According to RealtyTrac, foreclosure filings, including default and auction notices as well as property seizures, rose 18% in May from a year earlier. Jeffrey Mezger, chief executive of KB Home, was cautiously optimistic. “Although key economic indicators remain mixed, we are beginning to see signs that some negative housing market trends may be moderating at both the local and national levels,” said Mezger.
Homebuyers are losing interest in McMansions – oversized homes with 3,000 to 5,000 square feet of living space – amid the recession, and are moving towards smaller sized homes. Smaller homes are cheaper to buy, furnish, and maintain, say homebuyers; particularly those buying a home for the first time. “Entry-level buyers are coming out of rentals and coming out of apartments, and they are not looking for 3,000 or 4,000 (square) feet,” said Steve Hilton, chief executive of Meritage Homes. Homebuilders, in order to cater to the change in customer preference, are going along with the trend. The median new-home size, which grew from less than 1,000 square feet in the 1950s to over 2400 square feet in 2004, has been falling in the last couple of years. In 2008, the median home size was 2,200 square feet. The current recession is bringing it down further. According to a survey conducted by the American Institute of Architects (AIA), Americans are increasingly looking at smaller homes and lower ceilings, in part because of energy costs. “Home sizes have been trending down recently,” said AIA chief economist Kermit Baker. “The era of the ‘McMansion’ could well be over.”
The Reuters/University of Michigan Surveys of Consumers are monthly surveys which provide a gauge of consumer anticipation of changes in the economic environment. According to the latest survey results, the Index of Consumer Sentiment (ICS) rose from a reading of 68.7 in May to a 70.8 in June; this equals the reading in February 2008. The Index of Consumer Expectations, which is a sub-index of ICS, moved lower to 69.2 in June from 69.4 in May. “Over the past four months, sentiment has improved moderately, suggesting that consumers’ attitudes about the economy are improving,” said Steven Wood, chief economist at Insight Economics. “However, they remain very cautious. Nevertheless, these data do suggest consumers are no longer shell shocked.” ICS has gained 15.5 points since a low of 55.3 last November. “Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon, as consumers begin to increase their spending on houses, vehicles, and large household durables,” the Reuters/University of Michigan Surveys of Consumers said in a statement.
