PropertyPak Insights: February 21, 2013

Insights:

The outlook is for the demand for rental properties to continue to grow substantially if current mortgage standards remain excessively stringent. http://economistsoutlook.blogs.realtor.o rg/2013/02/04/rental-incomes-continue-to -outpace-other-sources-of-income/

Any economist who could look at these monstrous divergences from normality and not recognize a bubble really needs a new line of work. http://rwer.wordpress.com/2013/02/12/the -housing-bubble-should-not-have-been-har d-to-see/

On the deficit, from Jed Graham at investors.com: Here's a pretty important fact that virtually everyone in Washington seems oblivious to: The federal deficit has never fallen as fast as it's falling now without a coincident recession. http://www.calculatedriskblog.com/2013/0 2/wednesday-retail-sales.html

… reversal in mortgage rates was in fact driven by the sell-off in long-dated agency MBS, which many argued would not happen this quickly…. http://soberlook.com/2013/02/what-drove- 30yr-mortgage-rate-higher.html

"Life companies, balance sheet lenders and CMBS lenders are increasingly muscling their way into the scrum with higher leverage, creative pre-payment structures and shorter loan terms," says Holly Minter, executive vice president for Jones Lang LaSalle. http://nreionline.com/finance/more-lende rs-more-choice-for-multifamily-borrowers  /

For better or worse, why many people will be renters: "Too many Americans are faced with financial challenges today that lead to an unstable future." — Don Civgin, president and chief executive officer of Allstate Financial http://insurancenewsnet.com/article.aspx  ?id=371953&type=lifehealth#.USQtXDt84fR

Do you agree that the following sounds like really sound advice? "Real estate practitioners are inherently entrepreneurial, optimistic, and flexible, so they can adapt to almost any new reality, be it slow growth or high inflation. They just need to know when, and how much. The consensus seems to be it will take two to four years to normalize, clear out the housing market, and revert to a 5 to 6 percent interest rate environment. In the meantime, money will be made by opportunistic, well-capitalized investors.

"In the interim, the best strategy is to borrow as much as possible, as long term as possible, but within prudent guidelines. Cheap, long-term flexible debt becomes an asset in a rising interest rate environment. Debt ratios of 90 percent (including mezzanine) are financial suicide. Pay particular attention to exit strategies. And whatever the pro formas indicate, make sure there is room to refinance if the sales market is constrained. Meanwhile: 'Be adaptable.'" http://urbanland.uli.org/Articles/2013/F eb/MccoyFinance

Doesn't this help investors in single-family rentals buy short sales? "When agents escalate a case, Fannie Mae will contact the appropriate agent or servicer to address the challenge that may be stalling the process. Examples of issues that can hinder the process include valuation disputes, delays by servicers, or uncooperative subordinate lien holders. http://www.dsnews.com/articles/fannie-ma e-announces-tool-to-escalate-short-sale- process-2013-02-12

Lower-paying jobs than high-tech manufacturing ones will work to keep more people in rental housing:

"…taking advantage of the benefits of localized production, such as reduced supply chain expenses and parts delivery times, manufacturers who have invested in computerized machine tools and robotics can function with greater cost-efficiency than if they offshored for cheap labor.

"Others agree that efficiency and productivity are boosting American manufacturing, allowing companies to streamline operations.

“The story of American factories essentially boils down to this: They’ve managed to make more goods with fewer workers,” the Chicago Sun-Times reports." http://news.thomasnet.com/IMT/2013/02/12  /whats-behind-the-declining-number-of-u -s-factories/

At the current absorption rate, the shadow inventory for the U.S. translates to roughly a 7.2-month supply. http://afrmortgage.com/blog/shadow-inven tory-continues-to-decline/

More reason why housing rentals won't be going away soon:
"QM rules would eliminate about 48 percent of today’s mortgage originations, and when the QRM (with a 10 percent down payment requirement) is added to the equation, about 60 percent of today’s loans would be eliminated."

However, "…for the next seven years, loans that meet the underwriting requirements of the GSEs and the Federal Housing Administration (FHA) are exempt from the new guidelines." http://www.themreport.com/articles/corel ogic-60-of-todays-loans-fail-qm-requirem ents-2013-02-12

The gap doesn't suggest that builders are overbuilding, like they did in those regrettable years when the market boomed on easy credit. They are overwhelmingly building for renters, not buyers. http://finance.fortune.cnn.com/2013/02/1 2/housing-rentals/

The firm primarily targets homes constructed within the last 20 years that have three bedrooms and two bathrooms, generally set inside homeowner associations where the properties are maintained. http://therealdeal.com/blog/2013/02/13/p ublic-storage-founder-races-to-catch-bla ckstone-in-u-s-rental-acquisition-sprint  /

"… labor force participation has fallen to levels not seen in more than 30 years. People are literally bailing out of the economy."

"…careful assessment of long-term behavior shows that the U.S. economy is already performing near its potential. It’s the period from 1997 to 2007 that is unusual. During this period, the economy likely exceeded its potential GDP. https://www.aier.org/article/7952-back-n ormal

The recovery is still uneven geographically. Many metro areas that had substantial growth in home prices and construction activity in the years leading up to 2006 then saw some of the largest declines. "Somewhat ironically," Nothaft and Kiefer say, "it is many of these metro areas where current growth prospects are most positive, as they overshot the bottom leaving room for growth as these markets return to a more normal path." http://www.mortgagenewsdaily.com/0214201 3_freddie_mac_forecast.asp

Additional Insights:

  1. http://www.globest.com/news/12_540/virgi nia/netlease/Net-Lease-Investors-Less-Ch oosy-About-Long-term-Tenants-330019.html
  2. http://urbanland.uli.org/Articles/2013/F eb/NessChinaHousing
  3. http://themortgagereports.com/12444/real -estate-investors-flock-to-multi-unit-ho mes
  4. http://www.multifamilybiz.com/News/4585/ Study_Reveals_That_Apartment_Industry_an d_Resident...

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