Posts Tagged ‘Real Estate’

Ten Rules for the New Real Estate Economy

Thursday, October 29th, 2009

With the housing bubble burst and the real estate economy forever changed, Smeal’s Austin Jaffe recently outlined ten principles to consider regarding the new real estate market. From his post on the Pennsylvania Association of Realtors’ blog, Just Listed:

1. The valuation of homes will no longer be a function of the appreciation potential (or growth option) in house prices. We expect an extended period of no price appreciation.

2. In markets where appreciation was a primary selling point, prices have sunk the fastest and declined by the largest percentages. These markets were where speculative fever struck the hardest (e.g., Arizona, California, Nevada and Florida).

3. Mortgage interest deductibility has little, if anything, to do with the returns to owning housing since tax shelter benefits are already capitalized into prices. The opportunity to deduct mortgage interest is likely to have benefitted the initial owners when the tax law was implemented in 1917; subsequent buyers just passed along the premium built into the price.

4. In the next several years, the market for residential real estate will be based primarily on the housing services available to its owners. Housing is all about housing services once again rather than about chasing tax shelter benefits, capital gains and refinancing to free up new equity.

5. Supply constraints on location will remain important. Special locations will continue to be in demand.

6. The decision to purchase a home will be based upon household consumption expectations and needs which are provided by this long-term, depreciating consumer durable. Housing has always been a consumer durable.

7. The real estate business will live on and prosper in this new world since households will continue to spend large portions of their budgets on housing services. The market for housing will remain strong without the inflated financial parameters of the past decade.

8. The speculative fever and over-leveraging of housing budgets, especially by low- and moderate-income households, will largely be a remnant of the past. Easy availability of credit will settle in as  part of the history of the housing bubble.

9. If inflation and inflationary expectations are low, mortgage rates can be low. If economic growth is limited, mortgage rates can also be low. Historically low mortgage interest rates do not mean housing will be a good investment.

10. Over time, real estate prices will not likely change much but there will still be an active market for both new and existing housing stock. Housing will remain a major sector in the U.S.

Tags: Economy, Jaffe, Real Estate
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Property Rights Fight

Wednesday, October 14th, 2009

New York’s highest court today is hearing arguments in a case to decide whether the state constitution prevents the government from seizing private property, including homes and small businesses, to turn it over to a private developer. About a dozen property owners in Brooklyn are fighting to protect their properties, which the New York State Urban Development Corp., a government agency, wants to confiscate and turn over to the owners of the New Jersey Nets to build a new arena for the NBA team.

The case mirrors the 2005 U.S. Supreme Court case Kelo v. City of New London, which resulted in a 5-4 decision stating that the U.S. Constitution allows the government to seize private property and turn it over to redevelopment companies.

In a 2006 op-ed, Smeal’s Austin Jaffe wrote about the Kelo case and weighed in on the importance of private property rights:

Susette Kelo purchased a home in Connecticut in 1997 and the next year the city of New London decided to allow the New London Development Corp.—a private organization—to condemn Kelo’s and six other families’ homes for the purpose of “economic development.”  The plan was to assemble these sites as part of a $270 million global research facility to be built by Pfizer, which had a plant nearby.

Kelo argued that her property rights were violated because eminent domain is a power reserved only for government and only when it meets the public use requirement in the Fifth Amendment’s takings clause. Ultimately, the court decided that local governments have the right to take private property and give these rights to other private parties in the interest of economic development. The decision outraged spectators across the political spectrum, and for good reason.

Private property is a vital part of our economy. Without the protection of property and the rights associated with it, families are uprooted, small businesses are bankrupted, and entire communities are destroyed in favor of newer, more profitable enterprises that benefit wealthy investors and enrich public coffers. Even worse, our entire economic prosperity becomes vulnerable.

(more…)

Tags: Business Law, Jaffe, Real Estate
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Breaking Up Fannie and Freddie

Thursday, September 10th, 2009

The Mortgage Bankers Association last week called for “Congress to transform Fannie Mae and Freddie Mac into several smaller privately held companies that would issue mortgage securities carrying an explicit government guarantee,” The Wall Street Journal reports.

Smeal’s Brent Ambrose, director of the Institute for Real Estate Studies, explains a few of the pros and cons of the industry group’s plan and details some of the issues currently surrounding Fannie and Freddie:

What do we do with Fannie Mae and Freddie Mac? These Government Sponsored Enterprises (GSEs) were created by Congress to provide liquidity and stability to the U.S. mortgage markets. They carry out this mission by purchasing mortgages from originators and then repackaging them into mortgage-backed securities (MBS) or holding them in their retained portfolios. In 2008, Fannie and Freddie purchased 80 percent of all mortgages originated in the United States and the value of their combined mortgage assets was $1.5 trillion (as of June 30, 2008). They were placed into conservatorship by the Federal Housing Finance Agency (FHFA) on September 7, 2008, as a result of the rapid decline in their capital base during the economic turmoil of last summer. As the housing and capital markets weakened last summer, the value of their assets (i.e. their mortgage holdings) declined significantly while the value of their debt issued to purchase these assets remained fixed. Effectively, Fannie and Freddie were insolvent. Unfortunately, as GSEs, the close relation between them and the federal government created the impression among investors that the debt securities issued by Fannie and Freddie were guaranteed by the federal government. Since being placed into conservatorship, the government converted this “implicit” guarantee into an explicit guarantee and Fannie and Freddie have continued to purchase and securitize mortgages. Their actions are a critical link in the Obama administration’s efforts to support the housing market. However, the future of Fannie and Freddie remains uncertain.

(more…)

Tags: Ambrose, Economic Crisis, Politics, Real Estate
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The End Is Near (for Falling Home Prices)

Thursday, August 6th, 2009

BusinessWeek.com reports: “Clear Capital, which provides real estate valuation data for investors, said today that U.S. home prices jumped 5 percent in the quarter ending July 25 compared to the previous quarter. The index showed an 11.2 percent quarter-over-quarter gain in the Midwest, a 5.3 percent gain in the South, a 2.4 percent increase in the Northeast, and a 1.1 percent rise in the West.”

This news, coupled with last week’s Case-Schiller index recording a 0.5 percent increasein home prices after 34 straight months of decline, may be signaling that the housing market has finally bottomed out. Not so fast, says Smeal’s Austin Jaffe, writing on the Pennsylvania Association of Realtors‘ blog, Just Listed:

I believe that the nationwide upturn in house prices is a significant signal that if the bottom hasn’t been hit, it will soon. But—and this is important—you need to be cautious in making predictions based on a few month-to-month changes. Remember, the annual price decline is still significant and is expected to continue to decline over the months ahead.

Foreclosure sales have declined, in part because many lenders have agreed to keep some properties off the market to attempt to stabilize prices.  If successful, this will be a short-lived victory. There are still millions of Alt-A and Option ARMs about to be reset over the next several months.  These will doubtlessly add to the foreclosure experience.

Unemployment is expected to rise to double-digits soon and despite rhetoric to the contrary, job creation is proving to be problematic for government policy-makers.  This factor will ensure that any economic recovery will be quite slow and very moderate.

Finally, swirl all of these (and other factors) together and what do we get?  House prices will likely continue to decline a bit longer, even if the end is in sight, to be followed by an extended period of “no growth” in property values.  Stay tuned!

Tags: Economic Crisis, Economy, Jaffe, Real Estate
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Should I Refinance Now? … How About Now?

Wednesday, June 3rd, 2009

With mortgage interest rates hovering around record lows for several months before rising last week to their highest levels since January, many homeowners are wondering if they should refinance now or wait to see if rates fall again. Writing on the Pennsylvania Association of Realtors‘ blog Just Listed, Smeal’s Austin Jaffe says homeowners have a lot to gain by timing their refinancing just right. Unfortunately, he says, “there is no evidence that one can predict (mortgage) interest rate changes from period to period.”

More from Jaffe:

Since the evidence is overwhelming that it is impossible to predict short-term changes (period-to-period) in interest rates, you should not try to play this game. As a result, it is best to refinance whenever it makes sense to do so and not try to time the market. If you try to play the game, you are not likely to win more than half the time. Thus, do the calculations and if it is significantly worthwhile to refinance, do it before the advantage is gone.

Tags: Jaffe, Real Estate
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Housing Bottoming Out

Tuesday, May 5th, 2009

The New York Times reports that Sacramento, Calif., one of the first cities to suffer from the real estate collapse, is beggining to show signs of recovery. “Investors and first-time buyers, the traditional harbingers of a housing rebound, are out in force here, competing for bargain-price foreclosures,” The Times reports. ”With sales up 45 percent from last year, the vast backlog of inventory has diminished. Even prices, which have plummeted to levels not seen since the beginning of the decade, show evidence of stabilizing.”

Writing on the Pennsylvania Association of Realtors‘ blog Just Listed, Smeal’s Austin Jaffe says the California rebound bodes well for real estate nationwide because trends in the Golden State are typically leading indicators for the rest of the country.

More from Jaffe:

The latest data (end of February 2009) from California indicates residential sales are up about 80 percent from a year earlier, with more than 600,000 transactions (yet the number of transactions is still down 40-60 percent from its peak). Lower prices attract attention in markets but it may take some additional time for this cycle to play out. Inventories are finally being reduced (reportedly down to a 6.5 month supply from 15 months previously). Typical inventories are thought to be about 6 to 7 months and the current national supply figure is about 9.7 months.

… Yes, there are indications of renewed life in the worst of the battered real estate markets, even if at significantly lower prices. House prices are expected to continue to fall but at a lower rate, another sign of a strengthening market. One estimate forecasts an additional 19-percent price decline by the end of 2009. Even the bearish Wall Street Journal reported on April 17 that a “bottoming” in house prices appears to be underway.  This is truly the market at work: New interest is stimulated to come into the market at significantly lower prices now and in the near future. 

Tags: Economic Crisis, Jaffe, Real Estate
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$300 Billion HOPE Plan Helps One Homeowner

Thursday, April 16th, 2009

NPR’s Morning Edition reported this morning on the federal HOPE for Homeowners Act, which designated $300 billion to help an estimated 400,000 homeowners refinance into more affordable mortgages. However, in the six months since that the program has been in existence, it has helped exactly one homeowner refinance, despite receiving 752 applications.

Smeal’s Austin Jaffe says: “Do not worry. In the new bankruptcy-reform bill in Congress, an updated version of HOPE is included and largely unchanged.”

More from Jaffe:

Although Rep. Michael Castle from Delaware has called HOPE “one of the most failed programs we’ve had in a long time,” it lives on in Washington. Another more recent plan allocates $75 billion more to help allegedly up to 9 million households stay in their homes.

Apparently housing is thought to be sufficiently different from other assets as numerous politicians claim that mortgage foreclosure moratoria are now needed, or, more likely, mortgage bailouts are required to save our system. These bailouts are often unpopular as only some folks are recipients and others wish they were so selected.

Still, expect to see politicians continue to push for these mortgage bailouts on newspaper front pages as much as possible. The devil, however, is in the details—and the results.

Tags: Economic Crisis, Jaffe, Real Estate
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Housing Recovery Likely Distant

Thursday, February 26th, 2009

Two real estate indices released this week piled on the evidence that the country’s housing market troubles continue. On Tuesday, Standard & Poor’s released its Case-Shiller report, which found that home prices declined by 18.5 percent in its 20 U.S. cities from December 2007 to December 2008, the sharpest drop on record. A day later, the National Association of Realtors announced that sales of existing homes fell 5.3 percent in January to the lowest levels since July 1997.

According to Smeal’s Austin Jaffe, these indices have been in free-fall mode for the past 25 months. The most discouraging thing, Jaffe says, is that the rate of decline continues to accelerate. “Once there is a bottoming out of declining home prices, market psychology is likely to change quickly,” he says. ”This day will come sometime—perhaps in late 2009 or during 2010—but it is not expected to come much sooner.”

Meantime, President Obama’s $75 billion Homeowner Affordability and Stability Plan aims to help struggling borrowers who have negative equity of no more than 5 percent by allowing them to refinance at lower rates with Fannie Mae and Freddie Mac. The program, Jaffe says, is expected to help as many as 5 million homeowners, but there are as many as 12 million U.S. homeowners facing negative equity. He says the president’s plan will provide some short-term relief, but in the long-run, the market fundamentals must change. 

More from Jaffe:

There continue to be too many houses on the market due to declining prices and foreclosure sales.  New construction is at record lows and there are serious questions about the future of homebuilding as an industry for the next several years.  It’s a toss-up as to whether these mortgage relief programs will stabilize prices. 

My best guess is that they will help many borrowers, but they will not solve the problem.  Those who are not close to making payments will not be helped. And the overbuilding of the past at significantly higher prices will require drastic adjustments by the market.  These adjustments will likely take some time and appear to be in the distant future.

Tags: Economic Crisis, Economy, Jaffe, Real Estate
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