Smart Real Estate News & Commentary by Chris McLaughlin June 3, 2011
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500 cities see more rentals
In the aftermath of the nation’s housing-market collapse and recession, more than 500 midsize and large cities have seen a rise in the share of homes that are rented rather than owned, according to a USA TODAY analysis of Census data. Almost 4 million homes have been lost to foreclosures in the past five years, turning many former owner-occupied homes into rentals.
The shift to rental housing is potentially long-lasting and portends changes for neighborhood stability and how people build wealth, economists say. “The changes are big but glacial,” says Mark Zandi, economist at Moody’s Analytics.
The swing from owner- to tenant-occupied homes in the past decade has been dramatic in some places:
- Of the 100 largest cities, some of those with the largest shifts were Irvine, Calif., which went from about 40% of occupied homes rented in 2000 to 49.8% in 2010; Philadelphia, from 40.7% to 45.9%; and Birmingham, Ala., 46.3% to 50.7%.
- Twenty-five cities — including Baltimore, Minneapolis, Salt Lake City and Sacramento — swung from having more than half homeowners in 2000 to majorities of renters in 2010. In one — Reading, Pa. — 57.6% of occupied homes were rentals in 2010, up from 49% in 2000.
- Florida, California and Arizona had the most cities where the share of renter-occupied housing grew by at least 5 percentage points. All three states have been hit hard by foreclosures.
Nationwide, 34.9% of occupied homes — including houses, condos, and apartments — were rented in 2010, up from 33.8% in 2000. The Census data that USA TODAY analyzed for cities covered only housing within the cities’ boundaries, not their much larger metropolitan areas. Vacant properties, excluding seasonal or vacation homes, accounted for 7.9% of U.S. housing units in 2010. It’s not clear how many of those have since become rentals or owner-occupied homes. The renter household market remained fairly stable from 1990 to 2006, says Daniel McCue, senior research analyst at Harvard University’s Joint Center for Housing Studies. Since 2006, when housing prices peaked, the number of renter households in the U.S. has grown an average of 692,000 a year, while owner households have fallen an average of 201,000 a year, Census surveys show. Several factors will boost rental growth for years to come, Zandi says, including continued foreclosures, continued drops in home prices that frighten buyers and potential cuts to government subsidies supporting homeownership. On the other hand, 74% of renters think owning is superior to renting, said a recent survey by mortgage giant Fannie Mae. “There’s still a pull toward homeownership, although it’s been diminished,” McCue says.
Jobs growth paltry
U.S. employment rose far less than expected in May to record its weakest reading since September, while the jobless rate rose to 9.1% as high energy prices and the effects of Japan’s earthquake bogged down the economy. Nonfarm payrolls increased 54,000 last month, the Labor Department said on Friday, with private employment rising 83,000, the least amount since June. Government payrolls dropped 29,000. Economists polled by Reuters had expected payrolls to rise 150,000 and private hiring to increase 175,000 in May. The government revised employment figures for March and April to show 39,000 fewer jobs created than previously estimated. Stock index futures plunged following the announcement, while Treasury’s surged in price and sent the yield on the 10-year note to 2.96%. The report provides one of the best early reads on the health of the U.S. economy and it regularly sets the tone for global financial markets. Worries about the pace of the U.S. economic recovery weighed on stocks on Thursday.
The unemployment rate rose to 9.1% last month from 9.0% in April as some discouraged workers who had been inspired by the pick-up in hiring in April re-entered the labor market. The employment report showed weakness across the board, with the private services sector adding 80,000 jobs last month after increasing payrolls by 213,000 in April. Within the private services sector, leisure and hospitality fell, showing no boost from McDonald’s recruitment of about 50,000 new staff in April, which was after the survey period for that month’s payrolls. Spring is traditionally a strong hiring period for McDonald’s. Retail employment, which recorded its largest increase in 10 years in April, fell 8,500 last month. Manufacturing payrolls growth contracted 5,000 last month, while construction employment rose 2,000. The report showed the average work week steady at 34.4 hours and few signs of wage inflation, with average hourly earnings rising 6 cents.
DSNews.com – CMBS delinquencies fall
The delinquency rate on loans held in commercial mortgage-backed securities (CMBS) fell slightly in May from the new record high set the month before, according to Trepp LLC. The New York-based research firm says the age of CMBS loans 30 or more days delinquent, in foreclosure, or REO has fallen back 5 basis points to 9.60%. Trepp explained that although small, May’s decline is actually the biggest rate drop for U.S. commercial real estate loans in CMBS in about two years, setting aside October 2010 when the Extended Stay Hotels loan was resolved. Still, at 9.60%, CMBS delinquencies remain highly elevated, rising more than a full age point over the previous 12 months. Trepp reports that in May 2010, the overall delinquency rate was 8.42%.
According to Trepp’s market analysis, the value of delinquent loans within commercial mortgage bonds now stands at $61.5 billion. There were seven loans with balances of over $50 million that moved into the 30-plus day delinquent category in May, Trepp reported. That contrasted sharply with April when five loans of over $100 million ($1.07 billion in total) moved into the delinquent bucket. “[In April] the delinquency rate posted its biggest rate of increase since late 2010 – a 23 basis point jump,” said Manus Clancy, managing director of Trepp. “The increase took many CMBS pros by surprise as it came after three consecutive months of improving results.” Clancy noted, “While there may be additional bumps along the way, we think the May numbers accurately reflect a leveling off in the market.” Based on Trepp’s report, the industrial and office delinquency rates worsened last month while all other major property types saw improvement. The industrial delinquency rate spiked 120 basis points in May, boosting the rate to nearly 12%. Six months ago, the rate was under 7%. The office delinquency rate was up three basis points in May, yet remains the best performing major property type at 7.23%. Delinquencies in all other major property types – retail, multifamily, and hotel/lodging – declined for the month.
Moody’s warns of US credit rating
Moody’s Investors Service said yesterday Moody’s it would put the Aaa U.S. rating on review for a possible downgrade if lawmakers in Washington do not make substantive progress in budget talks by the middle of July. “Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely,” Moody’s said. The ratings agency, whose announcement follows a similar warning from Standard & Poor’s earlier this year, said if the debt limit is raised and default avoided, the Aaa rating will be maintained. Still, the rating outlook will depend on the outcome of debt talks in Washington, Moody’s said. “Moody’s downgrade adds pressure on Congressional leaders to work hard at reaching an agreement to increase the debt ceiling,” said Kathy Lien, director of currency research at GFT Forex in New York. If a downgrade were to occur, Moody’s said it would put the U.S. credit in the Aa range.
Olick – 20% mortgages under fire
“To call it an uneasy alliance is too simple, but that’s exactly what the characters were going for when they called their morning press conference in downtown DC. The new president of the Mortgage Bankers Association, Dave Stevens, arrived carrying a message from Wall Street and Main Street money makers in the breast pocket of his navy blue suit; he was seated in a row just down from Ethan Handelman of the National Housing Conference, who sported a pony tail and an agenda favoring low-income borrowers. In between them was Ken Edwards, of the Center for Responsible Lending, who referred to the group as, ‘an eclectic mix.’
Adversity makes strange bedfellows, and today’s mortgage market is nothing short of adverse. The group came together to argue against what Edwards called ‘draconian requirements’ for a the proposed ‘Qualified Residential Mortgage’ (QRM) standard. The QRM is part of new risk retention rules, mandated by the Dodd-Frank Financial Reform legislation of last year. The proposal, which is under comment period until the end of next week, includes a 20% down payment for a home loan to qualify as a QRM. If the loan does not meet the QRM standards, the lender must hold on to 5% of the risk. They call that ‘skin in the game,’ but banks big and small say it will make mortgages more expensive and difficult to obtain, while consumer advocates say it is nothing short of discrimination. ‘We believe that the regulators, while being very thoughtful through this process, have overreached by adding loan to value and DTI (Debt to Income), which will create societal boundaries, which we believe were unintended by those who drafted the law in the first place,’ said Stevens, who as recently as a few months ago headed up the Federal Housing Administration (FHA), currently the only low down payment option available for low-income borrowers. John Taylor of the National Community Reinvestment Coalition was a tad more blunt: ‘It’s coming from the very agencies who had the job and the responsibility to prevent the predatory lending, the kind of abusive lending products, that got us into this mess. We now get a solution that’s going to constrict access to housing in a way that we haven’t seen since the Jim Crow era.’
These gentleman join nearly 40 Senators who have signed onto a letter calling for the QRM proposal to be re-written more broadly. They characterize the 20% down payment as ‘unnecessarily tight.’ I personally don’t know what the right down payment number is, 10, 20, 5%? I don’t claim to have any better answers than anyone else. I just report what everybody else claims is right. But here’s a thought: All these organizations, companies, entities, etc. want to see the free flow of credit again. That’s really the only way housing can regain its footing and the economic recovery can start cooking with gas. The nation’s banking system was infected with greed and that infection spread to everyday homeowners and individual investors all over the nation. In the end, it was deadly. Now the government, federal regulators, whoever, are trying to re-invent the market, to make sure it is infection-proof in the future. But now it seems as if many of the players who themselves were hurt by this crisis would rather see the ills of the mortgage market treated with Novocain than with medicine.”
Factory orders decline
According to a Commerce Department report, overall factory orders fell 1.2% to a seasonally adjusted $440.4 billion after an upwardly revised 3.8% rise in March. That was steeper than the 1% fall that Wall Street economists surveyed by Reuters had forecast for April and implied some weakness in the factory sector that had performed relatively well until recently and helped support economic recovery. Transportation orders plunged 9.3% in April, nearly wiping out a 10.6% rise in March orders. It was the sharpest falloff in monthly transportation orders since an 11.9% fall in December. But order declines were widespread in April, affecting categories including primary metals, machinery, computers and electrical equipment in addition to cars and other transportation goods.
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Chris McLaughlin
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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.
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.
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.
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.
