Posts Tagged ‘Real Estate’
Tuesday, June 7th, 2011
On the blog of the Pennsylvania Association of Realtors, Smeal’s Austin Jaffe highlights a report from the Lincoln Institute of Land Policy that summarizes recent trends in the housing market. Jaffe pulls out five lessons from the report on the state of the housing market:
1. We are unlikely to see a repeat of the housing price boom and bust again anytime soon.
2. Changes in the mortgage finance industry helped brew the unanticipated collapse.
3. Housing starts, building permits, and the home building industry will take years to recover to reach their pre-bust levels.
4. Mortgage foreclosures may be slowing but there will be a surplus of foreclosed properties in many markets for some time to come.
5. Regulatory reform may help future housing markets (or it might not!) but the forces in the economy and demographics will provide important signals for future trends.
View Jaffe’s complete blog entry on PAR’s Just Listed blog for his complete analysis.
Monday, January 24th, 2011
Almost 2.9 million properties received foreclosure filings in the United States in 2010, despite federal programs like the Making Home Affordable Program, which allows some borrowers to modify or refinance their mortgages. According to Smeal’s Brent Ambrose, these programs are failing to stem the foreclosure crisis because they focus strictly on borrower payment-to-income ratios, and, as a result, do not remove the incentive to default for long.
“The programs rolled out by U.S. regulatory authorities will not significantly reduce defaults unless house prices rapidly stabilize or go up,” Ambrose says. “The only way to truly reduce the default probability is to either reset the mortgage balance to a loan-to-value ratio that is lower than 100 percent, probably around 80 percent, or have frequent, predictable balance resets.”
Yes, balance resets. Ambrose and his colleague Richard Buttimer, a professor in the Belk College of Business at the University of North Carolina at Charlotte, have proposed a new type of mortgage contract that automatically resets the balance and the monthly payment based on the mortgaged home’s market value. They call the new mortgage contract the “adjustable balance mortgage” and contend that it reduces the economic incentive to default while costing about the same as a typical fixed-rate mortgage. Under real-world conditions, including the presence of unrecoverable default transaction costs to the lender, this new mortgage contract is better for both lenders and borrowers.
It works like this: At origination, the adjustable balance mortgage resembles a fixed-rate mortgage—it has a fixed contract rate and is fully amortizing. From that point on, at fixed, preset intervals, the value of the house would be determined based on changes to a local house price index. If the house value is found to be lower than the originally scheduled balance for that date, the loan balance is set equal to the house value, and the monthly payment is recalculated based on this new value. If the house retains its initial value or increases in value, then the loan balance and payments remain unchanged, just as in a standard fixed-rate mortgage.
For example, if a homeowner was found to owe more than the current market value of her home at one of the predetermined quarterly adjustment dates, then her balance would reset to the current market value and her monthly payment would be lowered as a result. At the next reset interval, if the market had recovered and the house was now worth more than what the homeowner owes, the mortgage balance reverts back to the originally scheduled balance, resulting in a higher monthly payment but one that does not exceed the payment specified at origination.
Read more about this new mortgage contract in Ambrose and Buttimer’s paper, “The Adjustable Balance Mortgage: Reducing the Value of the Put,” scheduled for publication in a forthcoming issue of Real Estate Economics.
Tuesday, November 16th, 2010
The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform last week released their preliminary recommendations for increasing tax revenues and reducing federal spending in an attempt to bring the deficit under control. Calling the debt a cancer that will destroy the country if not fixed, co-chairs Erskine Bowles and Alan Simpson proposed cuts to everything from defense contracting to the White House budget to the federal workforce.
Below, Smeal faculty members Ron Gebhardtsbauer, Austin Jaffe and Anthony Warren weigh in on three of the recommendations.
Ron Gebhardtsbauer, faculty-in-charge of the Actuarial Science Program, on the commission’s Social Security proposals:
In the process of putting our fiscal house in order, the Obama Fiscal Commission also gets Social Security back in financial balance, which is great. The most important fix is indexing the retirement age to our increases in longevity, which makes Social Security sustainable, and encourages people to work longer. Without indexing, Social Security’s finances go out of balance as we live longer. And it’s not draconian at all. They very slowly raise the normal retirement age for full benefits to age 68 in 2050 and around age 69 in 2074. This won’t affect older workers, and middle age workers won’t be affected much. Older workers in physically demanding jobs will be able to get disability benefits under an easier disability definition.
I also like that they are finally making Social Security truly universal by covering the remaining state and local government workers (although that will be tough to get through Congress, as the large states have lots of power).
There are many other fixes, which I’ll discuss in a later blog.
Austin Jaffe, chair of the Department of Insurance and Real Estate, on the possibility of eliminating the mortgage interest tax deduction:
Perhaps the “sacred cow” of U.S. housing subsidies has been the mortgage interest tax deduction. Even when consumer interest was disqualified, interest deductibility from a mortgage was preserved. Recent discussion has raised the possibility that subsidizing mortgage interest payments is no longer a worthwhile policy. The Deficit Commission has suggested limits on mortgage interest deductibility: The benefit would only be available for primary homes, no interest would be deductible from home equity lines of credit, and no deductions would be available on mortgages larger than $500,000.
Here are some areas of current debate:
1. The costs of lost revenue are being raised over and over again these days. The Joint Commission on Taxation estimated that it cost $80 billion in 2009 alone. About one-half of homeowners claimed tax benefits were a “major reason” to buy. Yet many households do not itemize their deductions (including about 50 percent of homeowners).
2. Poterba and Sinai’s 2010 study found that 2.8 million households with annual income over $250,000 saved about $15 billion, while 19 million households with incomes between $40,000 and $75,000, saved only about $10 billion. The savings to middle- income households amounted to $542, or $1.48 per day. This is hardly sufficient to become a homeowner.
3. Finally, commentators are now beginning to wonder if the deduction is a destabilizing force in housing markets. Inducing homeowners to borrow for consumption of housing services may add additional volatility to house prices since indebtedness adds financial risk to the system, especially when prices are dropping. This is another example of distortions created by providing incentives via the tax code.
There are other issues including the capitalization of tax benefits into current prices before the purchase takes place, comparisons of housing markets in countries without interest deductions, violation of horizontal equity of renters, and others.
After all of these years, it would truly be amazing if this well-liked tax subsidy would be rescinded even if the benefits are not as great as is typically thought relative to the costs.
Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, on the Bowles-Simpson recommendation to merge the Department of Commerce with the Small Business Administration and cut the new entity’s budget by 10 percent:
For many years the Small Business Administration has been the poor cousin among government agencies with the result that small companies have suffered from inadequate representation in Washington. Recently for example, the administration has supported larger corporations rather than the lifeblood of the economy, innovative job-creating small firms. Therefore there is a concern that smaller companies will now lose any voice that they may have had for the illusion of ever elusive cost cuts. It would be better to double the Small Business Administration and half the Department of Commerce.
Thursday, July 1st, 2010
“The number of buyers who signed contracts to purchase homes dropped in May to the lowest level on record, a sign the housing recovery can’t survive without government incentives,” The New York Times reports.
According to Smeal’s Austin Jaffe, “It’s an empirical fact that sales drop off directly after the expiration of tax credits.” Writing yesterday on Just Listed, the news blog of the Pennsylvania Association of Realtors, Jaffe says:
The increase in activity is stimulated by the government program, not necessarily in the form of additional purchases, just accelerated ones. In the period which follows the program, there are fewer purchasers left since they moved faster to get the rebate. Thus, the expectation is for a sluggish second half of 2010 in housing markets.
In addition, we continue to see low mortgage rates, typically a sufficient condition for strong housing demand. But not in this recession. The Fed finished purchasing mortgages and mortgage-backed securities this spring and the conventional wisdom is that this has kept interest rates lower than they would have been without the program. Yet the number of borrowers seeking a mortgage has fallen to its lowest level since May 1997.
As a result, Jaffe notes, “Without a reduction in unemployment or growth in household income, house prices will remain flat or perhaps ‘double dip’ (i.e., a new round of price declines will occur after recent months of stabilized prices).”
Tuesday, May 18th, 2010
1. The deductibility of mortgage interest is relatively recent in origin.
2. The current system treats all borrowers the same.
3. The current system, by providing tax deductions for borrowers, makes housing a good investment.
4. The current system helps young homeowners via the mortgage deduction.
5. The deduction of mortgage interest is a worldwide phenomenon.
6. Deducting mortgage interest is a stabilizing force in housing markets.
7. The mortgage interest deduction is the largest tax break available to households.
8. New proposals in Congress will limit or eliminate the mortgage deduction.
Read more about these myths in Jaffe’s post on Just Listed.
Friday, February 26th, 2010
Over the past year, we have discussed everything from the housing industry to Starbucks coffee, thanks to insights from our expert faculty at Smeal. Thank you for your support and readership. We look forward to the year ahead and hope we continue facilitating discussion and producing content of interest to you.
Below is a recap of some of our most viewed posts, addressing several key issues that made the past year a challenging one for business.
Several car companies took a hard hit as the economy tanked and stock prices dropped, forcing them to close plants, layoff workers, and turn to the government for support. In early June, President Obama announced that General Motors filed for bankruptcy and gave Washington a 60 percent stake in the company. Smeal’s Terrence Guay provided a detailed analysis of GM’s history, highlighting the many places they went wrong, in his post, “What Happened to GM?”
The housing industry is slowly on its way to recovery after a volatile year. An unstable mortgage market and a suffering real estate market brought about decreased lending and mortgage defaults. In September, Smeal’s Brent Ambrose addressed the transformation of Fannie Mae and Freddie Mac in his post, “Breaking Up Fannie Mae and Freddie Mac.” In addition, Smeal’s Austin Jaffe outlined ten principles to help navigate the new real estate economy in his October post.
With the Obama administration came the appointment of various czars. One that made headlines was Kenneth Feinberg, the pay czar, proving that executive compensation was a hot topic in 2009 and Smeal’s Don Hambrick, Ed Ketz, and Tim Pollock had much to say about it. In May, Hambrick noted that an increase in CEO’s stock offerings could potentially lead to more risk-taking by the CEO. In his study, he suggests a better way to compensate CEOs. In addition, Ketz recommends giving shareholders more influence over corporate boards in his July post. Pollock goes as far as to say that it is going to take a cultural shift, not a pay czar, to rein in executive compensation.
Retailers had to adjust their strategies given the decrease in consumer confidence and lack of spending. In July, handbag retailer Coach, Inc. aimed to lower prices, while maintaining its luxury image. Smeal’s Lisa Bolton offered various strategies for marketers to position their luxury brands in a weakening economy. Starbucks went through the same dilemma as they adjusted pricing to portray the image of being both an affordable and premium brand. Smeal’s Jennifer Chang Coupland thought this might be a rather risky approach and outlined the reasons why in her August post.
Tags: Ambrose, Coach, Coupland, Executive Compensation, GM, Guay, Hambrick, Housing, Jaffe, Ketz, L. Bolton, Management, Marketing, Pay Czar, Pollock, Real Estate, Smeal, Starbucks
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Monday, January 25th, 2010
The Wall Street Journal and the Heritage Foundation last week released their annual rankings of the freest economies in the world, with Hong Kong and Singapore retaining the No. 1 and No. 2 spots, respectively, for the 16th straight year. Smeal’s Austin Jaffe recently visited these two areas (along with South Korea), and wrote about their real estate economies on Just Listed, the blog of the Pennsylvania Association of Realtors:
Though capitalism has been in vogue for a generation in these countries, it sometimes takes different forms from the American version we’re used to.
For example, Singapore is one of the most dynamic city states in the region, yet its government is involved in virtually every decision (certainly all real estate decisions) on the island. Democratic principles sometimes give way to government mandates and many controversies remain close to the surface. Hong Kong is a Special Administrative Region of mainland China and has a delicate relationship with Beijing. South Korea remains dynamic and considerably different from its closed and very poor neighbor to the north.
There are also similarities among real estate markets in each of these three countries. For the most part, the decision to develop land is strictly a government affair; state agencies maintain tight control over the supply of land. Given the high population densities, especially in Hong Kong and Singapore, most housing units are apartments or condominiums. In Singapore, home ownership rates are among the highest in the world (over 90 percent) since the Singaporean government has long had a policy of privatization of flats to sitting tenants at deep discounts, using the state’s pension fund for financing. Given Singapore’s continuing economic growth, trading up from “HDB flats” (public housing projects) to higher quality condominiums (generally privately developed and managed) is a national obsession.
It’s said in Hong Kong that real estate is the only business in town. Indeed, I heard about the new record price of a condo sale in Hong Kong: HK$92,000 (or almost $12,000 USD) per square foot! The talk of the real estate community for several months, this vast sum is thought to be even too high by local standards.
In Singapore, prices continue to rise and construction continues around the site where one of two casinos is being developed. Once considered offensive to Singaporean sensibilities, the casinos are scheduled to open next year—with entrance fees of more than $100 USD! In Seoul, real estate values are escalating, along with bumper-to-bumper traffic.
Read Jaffe’s complete post here.
Tuesday, January 19th, 2010
With the Supreme Court now weighing a decision in yet another property rights/eminent domain case, Smeal’s Austin Jaffe explains the concepts behind the Fifth Amendment’s Takings Clause and recent developments in property law:
In recent years, thousands of property rights disputes involving eminent domain claims by governments seeking to convert private property into something else have appeared. Traditionally, the cases dealt with government plans to limit, alter, or suspend private usage for which property owners typically claimed that these plans constituted a taking. There is a fundamental difference between “takings” and “regulations”: only the former are compensatory under the Fifth Amendment of the U.S. Constitution. Every government agency generally tries to argue that their action was regulatory; every citizen argues that it was a taking of private property.
Historically, the debate was generally about what constituted a taking. “Just compensation” was required to be paid if it was a taking and the power of eminent domain could only be used for takings when there was a “public use” involved. This is the literal language in the Fifth Amendment.
In 2005, Kelo v. New London shifted the focus away from the issue of public versus private usage. In an amazingly unpopular and yet far-reaching 5-4 decision (e.g., to date, most states have banned or eliminated eminent domain usage for economic development via legislation or court decisions), the U.S. Supreme Court allowed governments to take private property and hand it over to other private owners if they were expected to redevelop the site and increase its value. So much for the importance of private ownership protected by the Constitution.
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.
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.