A foundation or a farce?
There is a lot of news coming out as of late from the Federal Reserve. The news I'm talking about isn't regarding QE2 or raising interest rates. The fed is in discussions about regulatory provisions from the Dodd-Frank Act (Link). These provisions are a beast at over 450 pages. The Wall Street Journal's Alan Zibel wraps it up pretty succinctly in this post on April 18th. Most notably, the standards for home loans – conventional and "non-standard" – are clearly fleshed out and easy to understand.
As of the writing of this post on April 19th, these are only proposals (here are the highlights). However, I think this an important step in helping to reconstruct a housing market that did its best, for the better part of the last decade, to run amok all the way over the cliff. Transitioning from a "no holds barred" mortgage origination paradigm to structured, concise guidelines will be a boon for just about everyone. Banks and lending institutions will have clear standards to abide by, mortgage backed securities (MBS) buyers will breathe a little easier, and, most importantly, the general public will be more secure in their future efforts to buy a home.
Reviewing the newly proposed rules, there are few interesting nuggets. The first is the need to "consider and verify" such basics as employment status, debt to income ratio, credit status, and "income or assets used to determinate ability to repay." The fact that this has to be spelled out in black and white is almost mind numbing. A "qualified mortgage," which has yet to have its down payment ratio defined, would not include loans with negative amortization, interest only payments, terms longer than thirty years, or balloon payments. In addition, there is a cap on fees and total points limited to 3%. Lastly, for many of those potentially damaging adjustable rate mortgages and other "nonstandard" loans, creditors have the option to refinance them into a "standard" loan if they meet that respective criteria.
With the impending end of Fannie and Freddie now in the foreseeable future, having clear and logical rules for "vanilla" mortgages and existing exotic loans will be a confidence booster for the consumer. Moreover, the ability to roll those exotic loans over into conventional loans with a fixed rate will help promote the recovery of the market.
These proposals, coupled with clear risk-retention rules (currently TBA), will provide a solid foundation for reliable housing growth and, more importantly, economic prosperity. There remains, however, one question that looms ominous in my mind: Will the banking/private lenders fight this regulation? Hopefully, after this last disaster’s destruction of billions of dollars of home value, the industry can recognize the sensibility of this proposal.
-The Inside Associate
Tuesday, April 19, 2011
Thursday, April 7, 2011
American dream on life support?
If you live in a house right now in suburbia look around and thank your lucky stars. If you live in an apartment take a look a round, I hope you like what you see because you might be there for a while. There are signs from the government, lending institutions, and municipalities that the status quo in buying a home is here to stay.
As we speak Congress is debating the standards that lenders need to play by. These risk retention standards are going to play a major role in how lenders decide to lend to prospective homeowners. The culture in home lending has had a paradigm shift since the early 2000's. Prospects now need a near flawless credit record, 20% down payment, and viable income ratios. In the "good ol days" with nearly nothing down and some paperwork, BAM here's your new home.
Large institutions and multifamily REITs definitely see the writing on the wall. With the impending demolition of Fannie and Freddie, multifamily has cornered a whole segment of the industry. College students transitioning to the work force, aspiring "YUPies" who haven't yet saved 20 %, and just about any other young people that don't have great credit. Multifamily REIT's across the country have buckled down on expenses and now are looking at serious growth as reflected in large stock price increases since 2008. My own employer's who for the sake of this blog we will call "Davidson" recently made major acquisitions in a high profile area looking to cash in. Furthermore, A developer from Urban Housing Group, just yesterday (April 7th 2011) walked into my office to discuss the state of the market. We were discussing the new Class A development they are breaking ground on in July.
The groundwork is laid. A much higher bar to clear to acquire a home loan, a serious demand for space in Multifamily with new college graduates every year adding to the demand. Demand price increases from a burgeoning clientele base will erode the saving power of renters. Gradual macroeconomic inflation increases will also slowly deteriorate the buying power of renters and other prospective buyers. I believe this all culminates in the creation of a new semi permanent renting class, who may not ever have the ability to have the white picket fence.
Who are the primary first time home buyers? A lot of the time they are young married couples. Over two thirds of first time home buyers were under the age of 35 and a house hold size on average of 2.7 people, according to the NAHB. The median income of first time home buyers is $ 67 K. In addition, as of the writing of the NAHB article in 2008, barely over a third of first time home buyers (FTB) had the "conventional" 20 % down payment. So for over 50 % of FTB's, they were either given some kind of leniency or possibly were part of a program that was willing to work with them. Now, we are looking at a future home market where that "assistance" or leniency will be rare or non-existent.
This may seem trivial, "a few more renters is okay". It won't be just few it will probably be a majority of the 18-34 age demographic. The "after shock " of creating this renter class will be a major blow to suburbia, if not the death knell. Since late 2006, we've all heard of entire unfinished subdivisions all across America. We've all heard of someone who's lost a home to foreclosure or has bought a foreclosure recently.
My outlook for the future in a macroeconomic perspective is rather gloomy. The growth of suburbia which boomed through the 80's, 90's and the last decade will come to a very slow crawl. Housing growth was a major economic driver of that time period. For a lot of municipalities, that growth meant blue collar jobs from construction, varying forms of corporate investment to meet the needs of new homeowners, and an increase of the tax base. With new home starts expected to remain at minimal levels, the overall health of the economy will be suspect. The birth and growth of the "renter class" will be a huge windfall for some, but for the rest us it is a reminder the US has seen better days.
As we speak Congress is debating the standards that lenders need to play by. These risk retention standards are going to play a major role in how lenders decide to lend to prospective homeowners. The culture in home lending has had a paradigm shift since the early 2000's. Prospects now need a near flawless credit record, 20% down payment, and viable income ratios. In the "good ol days" with nearly nothing down and some paperwork, BAM here's your new home.
Large institutions and multifamily REITs definitely see the writing on the wall. With the impending demolition of Fannie and Freddie, multifamily has cornered a whole segment of the industry. College students transitioning to the work force, aspiring "YUPies" who haven't yet saved 20 %, and just about any other young people that don't have great credit. Multifamily REIT's across the country have buckled down on expenses and now are looking at serious growth as reflected in large stock price increases since 2008. My own employer's who for the sake of this blog we will call "Davidson" recently made major acquisitions in a high profile area looking to cash in. Furthermore, A developer from Urban Housing Group, just yesterday (April 7th 2011) walked into my office to discuss the state of the market. We were discussing the new Class A development they are breaking ground on in July.
The groundwork is laid. A much higher bar to clear to acquire a home loan, a serious demand for space in Multifamily with new college graduates every year adding to the demand. Demand price increases from a burgeoning clientele base will erode the saving power of renters. Gradual macroeconomic inflation increases will also slowly deteriorate the buying power of renters and other prospective buyers. I believe this all culminates in the creation of a new semi permanent renting class, who may not ever have the ability to have the white picket fence.
Who are the primary first time home buyers? A lot of the time they are young married couples. Over two thirds of first time home buyers were under the age of 35 and a house hold size on average of 2.7 people, according to the NAHB. The median income of first time home buyers is $ 67 K. In addition, as of the writing of the NAHB article in 2008, barely over a third of first time home buyers (FTB) had the "conventional" 20 % down payment. So for over 50 % of FTB's, they were either given some kind of leniency or possibly were part of a program that was willing to work with them. Now, we are looking at a future home market where that "assistance" or leniency will be rare or non-existent.
This may seem trivial, "a few more renters is okay". It won't be just few it will probably be a majority of the 18-34 age demographic. The "after shock " of creating this renter class will be a major blow to suburbia, if not the death knell. Since late 2006, we've all heard of entire unfinished subdivisions all across America. We've all heard of someone who's lost a home to foreclosure or has bought a foreclosure recently.
My outlook for the future in a macroeconomic perspective is rather gloomy. The growth of suburbia which boomed through the 80's, 90's and the last decade will come to a very slow crawl. Housing growth was a major economic driver of that time period. For a lot of municipalities, that growth meant blue collar jobs from construction, varying forms of corporate investment to meet the needs of new homeowners, and an increase of the tax base. With new home starts expected to remain at minimal levels, the overall health of the economy will be suspect. The birth and growth of the "renter class" will be a huge windfall for some, but for the rest us it is a reminder the US has seen better days.
Thursday, March 31, 2011
Umm, yeah Miami Sounds good
I have always been a fan of people or groups willing to take a "big swing". I really enjoy seeing people seize the moment. Taking big risk and getting a big reward is a great feeling to have, like when Charlie and Rain man take Vegas. For the Foram Group, this big swing is going to miss. It's not going to just miss, it's going to miss bad.
In a New York Times article dated from 2006 near the highs of the real estate boom, there is noted criticism about growing too fast without the visible need for more office space. The fact that Foram Group was building A+ office space with over half a million square feet in an already over built space seems foolish.
The irony of it all is that former mayor of Miami, Manny Diaz, in the above article is, "cheer leading" much of the over development. "The developers building in that area that I know are responsible folks." Apparently the Mayor has a lot of faith in developers knowing when enough is enough. I guess Manny didn't get the memo, developers only get paid when they build something.
George Soros in his book "The Alchemy of Finance", espouses the idea of "market equilibrium" as an idea as faulty as the Theory of Efficient Markets.
He believes that markets do not always come to a balance that it will burn itself out and then start over and repeat the loop. From seeing the different booms and busts over the last 25 years, who can really disagree? Unwise gambles like building a 600,000 sq ft premium green office space at the end of building boom in an area known more for beaches then business doesn't prove Soros wrong.
Maybe a warning flare should have gone up when Foram had to cancel it's effort to build a second phase to its office complex, or losing its anchor tenant, Bilzin Sumberg law firm in 2009.
This reminds me of something that happens a lot in the world of pop culture and sports. Normally a sports team dangles itself out there and suckers a city into building a new arena. The city uses hundreds of millions of tax dollars and "to be even" the team throws in two million. Citing all kinds of unseen benefits to the economy that will make this deal a "no brainer". Well this time the city won. The city got all kinds of benefits of new construction jobs ,zoning and building fees. The developers for all their vision currently have no tenants as of the writing of this article. That comes as no surprise because in Q4 of 2010 Miami ranked in the top 10 across the nation in square footage of new office completions and under construction (click on completion and construction).
I am a firm believer if you offer criticism you should offer a solution. Foram if you look at their portfolio. Eight of their nine properties are in the Southeast region, with the exception of Triple J ranch in Colorado. Going off the idea they wanted to emphasize staying in the south. Orlando just makes a lot of sense. Orlando is dead last in square footage of new completions(55 K) and fourth worst in under construction(105 k). A high end green space would command its lion share of rents, as well as stand out compared to the construction currently underway.
I understand Miami and Orlando are different. Orlando doesn't have the same beaches, same atmosphere, or same reputation. Business that requires high end office space is done during the week, not the weekend or with a Mojito in your hand. The sensible choice for Foram should have been a development in Orlando. Let's see how they do.
-The Inside Associate
In a New York Times article dated from 2006 near the highs of the real estate boom, there is noted criticism about growing too fast without the visible need for more office space. The fact that Foram Group was building A+ office space with over half a million square feet in an already over built space seems foolish.
The irony of it all is that former mayor of Miami, Manny Diaz, in the above article is, "cheer leading" much of the over development. "The developers building in that area that I know are responsible folks." Apparently the Mayor has a lot of faith in developers knowing when enough is enough. I guess Manny didn't get the memo, developers only get paid when they build something.
George Soros in his book "The Alchemy of Finance", espouses the idea of "market equilibrium" as an idea as faulty as the Theory of Efficient Markets.
He believes that markets do not always come to a balance that it will burn itself out and then start over and repeat the loop. From seeing the different booms and busts over the last 25 years, who can really disagree? Unwise gambles like building a 600,000 sq ft premium green office space at the end of building boom in an area known more for beaches then business doesn't prove Soros wrong.
Maybe a warning flare should have gone up when Foram had to cancel it's effort to build a second phase to its office complex, or losing its anchor tenant, Bilzin Sumberg law firm in 2009.
This reminds me of something that happens a lot in the world of pop culture and sports. Normally a sports team dangles itself out there and suckers a city into building a new arena. The city uses hundreds of millions of tax dollars and "to be even" the team throws in two million. Citing all kinds of unseen benefits to the economy that will make this deal a "no brainer". Well this time the city won. The city got all kinds of benefits of new construction jobs ,zoning and building fees. The developers for all their vision currently have no tenants as of the writing of this article. That comes as no surprise because in Q4 of 2010 Miami ranked in the top 10 across the nation in square footage of new office completions and under construction (click on completion and construction).
I am a firm believer if you offer criticism you should offer a solution. Foram if you look at their portfolio. Eight of their nine properties are in the Southeast region, with the exception of Triple J ranch in Colorado. Going off the idea they wanted to emphasize staying in the south. Orlando just makes a lot of sense. Orlando is dead last in square footage of new completions(55 K) and fourth worst in under construction(105 k). A high end green space would command its lion share of rents, as well as stand out compared to the construction currently underway.
I understand Miami and Orlando are different. Orlando doesn't have the same beaches, same atmosphere, or same reputation. Business that requires high end office space is done during the week, not the weekend or with a Mojito in your hand. The sensible choice for Foram should have been a development in Orlando. Let's see how they do.
-The Inside Associate
Tuesday, March 29, 2011
A New Day, A New Blog, A New Perspective
It's my great pleasure and personal honor to welcome you to my blog The Inside Associate. The idea to have a blog has been marinating on my brain since about late December of 2010. I wanted a forum to point out interesting developments in RE coming about from Macro-Economic events.
My personal goal for this blog is to be a place where somebody involved within the industry can visit. Look around and add to their perspective on current events and things happening in our field. I will focus on things directly and indirectly "making waves" in RE and provide thoughts that are "Sub Rosa" hence the term "Inside". I will be looking at this from the point of view of a "Young Turk" making my way through our industry hence the term "Associate".
I will consistently try and gather information from both sides of orthodoxy. The optimist, the pessimist, the bull, the bear, the extravagant, the frugal. I will not try to referee who or what is right or wrong at the time. In my experience life and business isn't black or white. Many times it's shades of gray.
The format will revolve around finding an interesting view on the industry in it's current state. I will try to do some groundwork and provide a take to add to the topic or news and move from there. Every so often, I will try to get some opinion leaders, industry movers, and thought drivers to provide their perspective on things.
So to recap, this blog will provide a point of reference on large scale events causing ripples or movements within the RE industry. This blog will try to give context and proportion, and a little of the "inside baseball" that is beneath the surface. What this blog won't be is political beyond talking about government actions and ideas or a platform to push an agenda. What this blog will be is informative, expansive, unafraid, and possibly a little irreverent.
For now, that's all I got. I'm looking forward to getting underway and getting your feedback.
Till next Time
The Inside Associate
My personal goal for this blog is to be a place where somebody involved within the industry can visit. Look around and add to their perspective on current events and things happening in our field. I will focus on things directly and indirectly "making waves" in RE and provide thoughts that are "Sub Rosa" hence the term "Inside". I will be looking at this from the point of view of a "Young Turk" making my way through our industry hence the term "Associate".
I will consistently try and gather information from both sides of orthodoxy. The optimist, the pessimist, the bull, the bear, the extravagant, the frugal. I will not try to referee who or what is right or wrong at the time. In my experience life and business isn't black or white. Many times it's shades of gray.
The format will revolve around finding an interesting view on the industry in it's current state. I will try to do some groundwork and provide a take to add to the topic or news and move from there. Every so often, I will try to get some opinion leaders, industry movers, and thought drivers to provide their perspective on things.
So to recap, this blog will provide a point of reference on large scale events causing ripples or movements within the RE industry. This blog will try to give context and proportion, and a little of the "inside baseball" that is beneath the surface. What this blog won't be is political beyond talking about government actions and ideas or a platform to push an agenda. What this blog will be is informative, expansive, unafraid, and possibly a little irreverent.
For now, that's all I got. I'm looking forward to getting underway and getting your feedback.
Till next Time
The Inside Associate
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