About Ada County, ID

In a recent report, “The 8th Annual Demographia International Housing Affordability Survey,” which referenced NAR’s housing data, the authors look at housing affordability in 325 metropolitan markets in Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom and the United States.

The survey showed that housing affordability is highest among U.S. markets. Following the U.S. are markets in Canada and Ireland. The United Kingdom, Australia and New Zealand rank as the least relatively affordable markets.

To measure affordability, the authors divided the median house price by gross annual median household income. This is just one of the measures of affordability. More elaborate measures may account for mortgage interest, for example.

Among 81 major metropolitan markets analyzed, 24 were found to be affordable markets, 20 moderately unaffordable major markets, 13 seriously unaffordable major markets and 24 severely unaffordable major markets. All of the affordable major markets were in the United States while three of the moderately unaffordable markets were in Canada and one in Ireland with the other 16 in the United States. Table 4 summarizes the results.

The most affordable major market was Detroit, followed by Atlanta. The other 22 affordable major markets were Phoenix, Rochester, Cincinnati, Cleveland and Las Vegas, Dallas-Fort Worth, Houston, Orlando, Jacksonville, Nashville, Oklahoma City, Sacramento and Indianapolis. All major markets in Australia and New Zealand, as well as Hong Kong were severely unaffordable. Hong Kong was the least affordable major market, followed by Vancouver and Sydney.

Among all 325 markets surveyed, there were 128 affordable markets, 117 in the United States, 9 in Canada and 2 in Ireland. There were 87 moderately unaffordable markets, 64 in the United States, 19 in Canada, 3 in Ireland and 1 in the United Kingdom. There were 39 seriously unaffordable markets and 71 severely unaffordable markets. Australia had 25 severely unaffordable markets, followed by the United Kingdom with 20 and the United States with 14. Canada had 6 severely unaffordable markets, while New Zealand had 5. Table 5 summarizes all results.

To read the report: http://www.demographia.com/dhi.pdf

According to NAR’s recently released quarterly Commercial Market Survey, commercial real estate leasing volume was up two percent in the fourth quarter of 2011 compared to the previous quarter. At the state level in the past quarter activity varied. Major drivers of commercial real estate prices are jobs and the economic recovery.

Introduction
This is the second of three articles discussing how NAR data can be used by Realtors® in conjunction with local market data to provide the buyer with an overall improved understanding of the housing markets. Again, the national news focuses on housing problems. Comparing the national numbers with local numbers should give the potential buyer an improved understanding of the housing market and how the local expert—the Realtor® –can provide the understanding to move forward to take advantage of today’s prices and low interest rates. As said before, taking a tip from Dragnet’s Joe Friday, “All we want are the facts…..,” NAR’s Existing Home Sales (EHS) statistics can show the facts over an extended time period.

Home Prices—No Crystal Ball, But a Reasonable Approach
Potential buyers are well aware that median existing home sales prices have declined substantially at the national level and appear to fluctuate. There is frequently a lot of concern over whether it is “safe” to buy.

Prices Have In Fact Declined

On a 12 month rolling basis the decline in median price appears to have leveled off substantially.

Month-by-month data are important, but trends over an extended time period are helpful in providing a perspective on where the market is going. Data at the national level are in the news—but the most relevant data for the potential buyer needs to focus on local price data along with the national information about which the media are fixated. A comparison of local and national price trends should help to put the overall market in perspective.

What Does This Mean To Realtors®?
Again, all real estate is local. That is why a juxtaposition of local numbers—sales, inventories, prices—with national numbers can build confidence in where the market is headed—whether up or down. Both monthly and 12 month rolling data are relevant. In addition to the sales and price data available at http://www.realtor.org/research/research/ehsdata, the information in NAR’s Realtors Confidence Index presents information on Realtor® opinions about the market outlook. Finally, NAR’s Profile of Home Buyers and Sellers notes that home owners generally live in a home for 7 to 9 years, suggesting that a day-to-day focus on price is inappropriate. In addition, a home provides a distinctly different lifestyle from an apartment, as outlined in these two articles: Home Ownership Matters: Home Ownership and Sense of Control and Home Ownership Matters: Home Ownership and Civic Engagement. These are considerations worth buyer attention—some of the advantages of being a homeowners.

• Mortgage applications for refinance activity rose in the past week as mortgage rates continue to remain at historic lows, but applications for home purchases did not change, according to Mortgage Bankers Association.
• Broadly speaking, home purchase applications have been trending sideways throughout the past 18 months.
• One has to be mindful that home sales closings and mortgage applications can diverge, because there is no data on actual approvals of those applications. In addition, there has been a big increase in all-cash deals in the past 3 years. A good one-third of home sale transactions have been all-cash, thereby completely bypassing the mortgage process. Contrary to the sideways movement in mortgage purchase applications, there has been some lift in home sales in the past two months.
• In separate economic data released yesterday, consumers are willing to borrow more in recent months, particularly related to non-revolving credit, such as with student and car loans. Credit card revolving debt, after having fallen sharply with the economic downturn from 2008, has yet to meaningfully rise. Though no doubt there are mandatory survival borrowing needs over the economic hard times, many have chosen not to take on additional debt.
• Some upturn in consumer credit implies consumer spending activity will show growth in the upcoming quarters. But no upturn in credit card debt, though it bodes well for the future of American household finances, implies slower economic growth ahead. The first quarter GDP growth could barely reach 2 percent, which would be subpar performance.

Private equity firms are jumping into distressed housing as the U.S. government plans to market 200,000 foreclosed homes as rentals to speed up the economic recovery.

GTIS Partners will spend $1 billion by 2016 acquiring single-family homes to manage as rentals, Thomas Shapiro, the fund’s founder said. That followed announcements this month that GI Partners, a Menlo Park private equity fund, expects to invest $1 billion, and Los Angeles-based Oaktree Capital Management LP will spend $450 million on similar housing.

“It’s a massive market,” Shapiro said in a telephone interview from New York. “We’re starting to see this as a billion dollar opportunity to buy rental housing.”

Creating more single-family rental properties is one of a series of programs introduced by President Barack Obama’s administration aimed at reviving the housing market. An S&P/Case-Shiller index (SPX) of property values in 20 cities has dropped 33 percent from its peak in July 2006 and 12 percent of homeowners with a mortgage are either delinquent or in foreclosure. Last week, the administration revised its Home Affordable Modification Program, offering government incentives for mortgage investors Fannie Mae and Freddie Mac (FMCC) when they forgive debt on homes that lost value as a way of preventing delinquent borrowers from losing their houses.

Increasing Rentals

Increasing rentals may reduce lenders’ losses on foreclosed and surrendered properties and curb declines in home prices, according to a Federal Reserve study Chairman Ben S. Bernanke sent to Congress on Jan. 4. Private equity funds began focusing on these investments in September, after the administration asked for proposals to sell the government’s inventory of foreclosed homes -- about half of all houses seized from delinquent borrowers.

The S&P/Case-Shiller index of property values in 20 cities declined 3.7 percent from November 2010 after falling 3.4 percent in the year ended in October, according to data released today. Economists projected a 3.3 percent drop, according to the median estimate in a Bloomberg News survey.

Even as prices dropped, the “seeds to a recovery are being planted,” Karl Case, co-creator of the measure, said today in an interview on Bloomberg Radio’s “Bloomberg Surveillance,” with Ken Prewitt and Tom Keene. “Efforts are underway to deal with a backlog of foreclosed properties,” he said.

The Federal Housing Finance Agency, which oversees Fannie Mae (FNMA) and Freddie Mac, plans to complete initial transactions in the first quarter of this year, offering some of the 180,000 foreclosed homes in their inventory to private operators as rental properties, Corinne Russell, a spokeswoman, said in a telephone interview.

Public-Private Partnerships

The Federal Housing Administration, which also will participate in the rental program, had 32,170 real-estate owned homes seized from borrowers, also known as REOs, as of Dec. 31, according to spokesman Lemar Wooley.

Possible aspects of the program include public-private partnerships to share the risk and profits, “seller financing” guaranteed by the government and rent-to-own opportunities for tenants, according to a November memo.

“It marks the first time that institutional investors are really getting involved, and in the process providing a higher quality product to a tightening rental market,” Oliver Chang, a Morgan Stanley analyst based in San Francisco, said in an e-mail last week.

$1 Trillion Liquidations

About 7.5 million homes with a current market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016, according to an Oct. 27 report by Chang. That will add to the estimated 20 million single-family homes already operated as rentals, which have yielded annual returns averaging 8.1 percent since 1990, Chang’s report said.

Rentals can produce cash flows, known as a capitalization rate or cap rate, that reduce losses more than reselling foreclosed homes at a time of weak demand, the Federal Reserve report said.

“Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8 percent -- sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property,” the Fed paper said.

While there may be opportunities, investors should be cautious about borrowing to invest in markets such as Las Vegas (SPCSLV), where a transient population and economy dependent on a single industry like gaming, make it hard to see an exit strategy, Kenneth Hackel, managing director heading securitized products strategy for CRT Capital LLC, said in a telephone interview from Stamford, Connecticut yesterday.

Track Record

“For the kind of properties I looked at, and in most cases, capital markets aren’t excited to finance the REO-to- Rental marketplace at this stage,” said Hackel, who toured Las Vegas (SPCSLV) homes on the market this month. “Once you establish a track record and have some positive cash flow in place, then perhaps you can get some interest in having leverage. But I think as a first step, investors are best served by looking at this on an unlevered basis.”

The U.S. homeownership rate fell to 66 percent for the quarter ending Dec. 31, as low as 1998 levels and down from a peak of 69.2 percent in December 2004, according to a U.S. Census Bureau report comes out today.

“New households have a much higher propensity to be renters,” Thomas Lawler, a former economist with Fannie Mae who’s now an independent housing consultant in Leesburg, Virginia. “And a lot of folks who are losing their homes to foreclosure are now renters.”

Rental Demand

Demand for rental housing helped boost shares of the 12- member Bloomberg Apartment Real Estate Investment Trust index 13 percent over the past 12 months compared with a 2.1 percent gain for the S&P 500 Index. It’s also attracting private equity funds to single-family homes, which historically have been an investment for small investors.

Cerberus Capital Management LP, Deutsche Bank AG, Fortress Investment Group LLC (FIG), Starwood Capital Group LLC, TCW Group Inc. and UBS AG are among the financial firms that submitted responses to the federal request for information in September, according to a list obtained by Bloomberg through a Freedom of Information Act filing.

“We believe we’ll easily be able to raise $1 billion this year in total,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings LLC in Santa Ana, California, which will manage the homes bought with Oaktree Capital’s money. “The ultimate fund could be several times that.”

Carrington Manages

Carrington currently manages more than 3,000 rental homes for Fannie Mae, mostly in California, Arizona, Nevada and Florida, Sharga said.

Single-family home rentals can yield cash flows that are 300 basis points, or 3 percentage points, higher than apartments, said Gregor Watson, principal of McKinley Capital Partners LLC of Oakland, California, which has invested $100 million in the past two years, buying more than 400 foreclosed homes in the San Francisco Bay Area and other western U.S. cities. McKinley’s largest financial backer is Och-Ziff Capital (OZM) Management Group, a New York-based investment fund with $28.9 billion under management as of Nov. 1, Watson said. Jonathan Gasthalter, an outside spokesman for Och-Ziff declined to comment.

“This will be a new institutional asset class in the next 24 months,” Watson said.

Forming a REIT

GTIS, which has $2 billion of assets, expects to hold its homes about five years, waiting for housing prices to recover before selling, Shapiro said. If housing prices don’t rebound, GTIS can exit by forming a real estate investment trust with shares sold to investors attracted by the rental income, similar to REITS for multifamily, industrial or office properties, he said.

“Single family dwarfs any of those asset classes,” Shapiro said. “When you think about the number of homes that are going to be rented and institutionally owned, they’re going to become its own asset class.”

GTIS, which has invested $225 million in partnerships with homebuilders such as Hovnanian Enterprises Inc. (HOV) since 2010, will hire in-house staff to manage the rental properties in each area, Shapiro said. He declined to disclose his expectations for returns on investment.

“We think the important thing is on the operations and management side as opposed to playing a numbers game, like I’m buying for 30 cents on the dollar to a 12 percent yield,” he said.

Buying in Bulk

GTIS expects to buy homes in bulk from banks, Fannie Mae and Freddie Mac, Shapiro said. Properties will also be bought individually at courthouse auctions and through short sales, when lenders agree to sell for less than the balance of the mortgage, he said.

GTIS will start buying in cities in Nevada, Arizona and California -- the states with the three highest foreclosure rates, according to RealtyTrac Inc. -- and Florida, which RealtyTrac ranked seventh in December, Shapiro said.

“The key is being able to efficiently manage these homes,” he said. “That’s why we’re targeting select markets. Our intention is to rent them, to hold them for long term.”

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net; Rob Urban at robprag@bloomberg.net.

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