July 18, 2016
Supply and Demand in a Hot Market
The Asheville Citizen-Times quoted me in Apartment Occupancy Dropping, but Rents Not Budging Yet. It reads, in part,
Tell Marie Kerwin the city’s apartment vacancy rate has dropped a few notches – meaning a lot more units should be available – and she may beg to differ.
“There’s not a lot of options,” said Kerwin, “It took me months to find an apartment. I actually was calling every complex, every day.”
Kerwin and her husband, Christian, relocated to Asheville a year ago from Jacksonville, Florida, both taking jobs with the Earth Fare supermarket. Kerwin said they “got lucky” in finding a place at The Palisades, a 224-unit complex off Mills Gap Road in Arden that opened last summer.
For renters like the Kerwins, it might not seem like it, but the city’s apartment vacancy rate — famously pegged at 1 percent in a consultant’s report published a year-and-a-half ago that looked at Buncombe and three other counties — is dropping, meaning more units are available. That also should mean, theoretically, rents will decline, but that hasn’t happened.
A tight apartment market has dominated local discussions about affordable housing and livability in the Asheville area for nearly two years. But while that vacancy rate is dropping to a more livable range of around 6 percent, rents likely won’t fall over the next couple of years, experts say.
‘A very tight market’
“Typically, Asheville is a very tight market,” said Marc Robinson, vice chairman of Cushman & Wakefield, a global company that tracks apartment trends, including occupancy and rents.
Whether rents will drop with new apartments being built is “a hard call,” he added, “because on the one hand there is a supply entering the system, and that market has really seen lot of supply at one time — more supply than it would have historically seen. But in many markets, including Raleigh, Charlotte and Atlanta, absorption (of new units) has been better than expected.”
Robinson’s company, Multi Housing Advisors, now part of Cushman & Wakefield, issues quarterly reports on the apartment market. Its “MHA Market Insight” first quarter report for Asheville noted:
• “Properties built from the 1980s to the 2000s are maintaining an average vacancy rate in the 6 percent range, compared to 3 percent for properties built in 1970s or earlier.”
• “The average vacancy for properties built after 2009 is approximately 19 percent, which is skewing the vacancy rate upward,” in part because in a smaller market “additions to supply have an amplified effect.”
Robinson said his company’s figures from about two months ago show the Asheville area has “about a 3 percent vacancy, and in real time it may be a little higher.” In North Carolina, the rental vacancy in the first quarter stood at 8.2 percent, according to U.S. Census data.
By some estimates, the Asheville area, including surrounding Buncombe County and Fletcher, has had or will have in coming months about 2,200 new units coming online, well short of the 5,600 units the consultant recommended be built to meet demand.
“The pipeline of new construction (of rental properties) over the next three to five years will still not meet the forecasted demand so for the short-term we can expect to see the rental rates remain high, vacancy rates to remain at record lows,” said Greg Stephens, chief appraiser and senior vice president of compliance for Detroit-based Metro-West Appraisal Company.
Several firms track such information, including Real Data, a Charlotte-based real estate research firm. Using market surveys rather than sample data to compile its statistics, Real Data found the vacancy rate among apartment complexes with at least 30 units in Asheville, Buncombe County and Hendersonville was 6.9 percent in December.
Theoretically, all this should mean rents will come down, as people move from older apartments to newer ones, and apartment companies have to make concessions, such as lowering rents.
Apartments under construction has been a common sight in the Asheville area in the last two years, and that has eased vacancy rates some, experts say. This complex, the Avalon, went up in 2014 off Sweeten Creek Road and is now open.
But this is Asheville, where millennials keep moving in and retirees are drawn to great weather, arts and restaurants. From March 2015 to March 2016, Asheville saw the highest spike statewide in the average cost of renting an apartment, a 7.6 percent jump.
For the first quarter of 2016, MHA Market Insight found the average rent for one-bedroom apartments in Buncombe, Henderson, Haywood and Madison counties was $821, representing a 6.2 percent one-year growth in rent. A two-bedroom went for $964, 4.3 percent growth.
Kerwin said she and her husband are paying $1,095 a month for their two-bedroom, two-bath, 1,125-square-foot apartment. In Florida they paid $1,100 a month for an 1,800-square-foot three-bedroom.
“It’s definitely more expensive to live here,” she said.
Rising vacancy rates combined with rising rents is a national phenomenon, said Jonathan Miller, the New York-based co-founder of Miller Samuel, a residential real estate appraisal company, and the commercial valuation firm Miller Cicero.
“New development that skews to high-end rentals has been overplayed,” Miller said. But moderate rental development stock “has remained largely static.”
* * *
Solutions far off
That is not what some members of Asheville City Council want to hear right now. Councilman Gordon Smith, who’s on the city’s Housing and Community Development Committee, said the city has formulated a comprehensive affordable housing strategy and has talked about an “all of the above approach.”
That includes increasing zoning density to allow more units per acre and encouraging developers to use city-backed incentives to build apartments.
The city is also in the midst of calling for a voter referendum on a $74 million bond issue, with $25 million of that potentially earmarked for affordable housing. If passed, it could include a $5 million addition to the existing revolving loan fund for private developers to build affordable rental housing, and $10 million for land banking or repurposing city-owned land, which would involve offering that land to developers for construction of affordable housing.
Rusty Pulliam heads Pulliam Properties, a commercial real estate firm that has become active in the apartment industry in recent years, building the 280-unit Weirbridge Village in Skyland and the 180-unit Retreat at Hunt Hill. This year the company also received approval to build a 272-unit complex on Mills Gap Road in Arden, which will include 41 units designated as “affordable,” a number Pulliam agreed to bump up at council’s urging.
Pulliam said he can still make money at the Mills Gap site because demand is so high that he can build a “premium complex” and charge high enough rents to make it work. But in the long run, he said, solving the apartment crunch does not require a Ph.D.
“If we were building middle-of-the-road apartments, we couldn’t do it. But until we put out there, as the Bowen report stated, 5,600 units in the marketplace, I don’t see that rents are going to come down, especially when see we’ve got a (3.5) percent unemployment rate and rents went up 7.6 percent, even when a lot of units did come on line.”
Unemployment in Buncombe County dropped to 3.5 percent in May, the lowest in the state.
People have always loved moving to Asheville, a trend that essentially never abates. Our region continues to grow not because of the birth rate but because of in-migration.
The U.S. Census Bureau projects Buncombe County’s population to grow to 300,000 by 2030, up from 253,178 in 2015. While the mountains are known as a retirement haven, millennials are coming here, too, with growth in that segment over the past five years outpacing that of baby boomers, people of ages 50 to 69, and Generation X, which includes ages 35 to 49.
In short, that’s a lot of apartment demand.
Other cities the challenge facing Asheville, said David Reiss, a professor of law and the research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School in New York.
“During the Great Recession nothing got built,” Reiss said. “The same thing happened in New York.”
Some economists believe that “when vacancy rates are below 5 percent, you have the ability to raise rents significantly,” he said.
The MHA Market Insight first quarter report noted that “fewer than 700 units are currently under construction at five properties” in Asheville, so we’re still a long way from that 5,600 units figure.
Reiss said a full-court approach such as the one Asheville is taking can be useful, but he also urged caution.
“Whatever they decide the solution is, it takes years to implement those ideas,” Reiss said. “Whether it’s a developer or the city government, it takes a long time to get a solution in place.”
July 18, 2016 | Permalink | No Comments
July 15, 2016
The Looming Housing Crisis for Seniors
Senior Housing in Seattle
TheStreet.com quoted me in Inside the Nation’s Looming Senior Housing Crisis. It opens,
Every day, 10,000 Americans turn 65. That will be true for the next 15 years as the Baby Boomers slide into retirement. Here’s the question: where will they live?
Know that the Social Security Administration said that if you turn 65 today, you will live to 84.3 if you are a man. If you are a woman, it is 86.6. Added SSA: “And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of ten will live past age 95.”
Our retirement savings also are paltry. A Government Accountability Office 2015 study said that average Americans between 55 and 64 had about $104,000 in savings. Many have nothing saved.
In 2015 SSA said the average monthly check it issued was for $1,335.
Will there be enough housing to put a roof over every gray head? How will they pay the rent?
When the Bipartisan Policy Center, a Washington, D.C. think tank, recently looked at senior housing, it said in a detailed report: “The current supply of housing that is affordable to the nation’s lowest-income seniors is woefully inadequate. As more low-income Americans enter the senior ranks, this supply shortage — currently measured in millions of units — will become even more acute.”
The good news: many are scrambling to meet the need. There are efforts to provide low income public housing, private affordable housing, and many companies are engaged in developing senior housing for the affluent.
Public housing has been the traditional go-to for those lacking means, seniors included, and many big cities – such as New York, Philadelphia and Chicago – have extensive inventory of income tested senior housing. But there is nowhere near enough. In much of Chicago, the waiting list for senior public housing is over two years. In New York, it is over four. In Philadelphia the public housing waiting list is presently closed, and said the housing authority, it has 104,000 on the wait list. The Philadelphia Housing Authority added: “Due to low turnover, applicants may not reach the top of the waitlist for ten years.”
“Public housing continues to have extremely long waiting lists, so it is not a practical option for many seniors,” said David Reiss, a professor at Brooklyn Law and an expert on housing.
July 15, 2016 | Permalink | No Comments
July 14, 2016
Deductible Up, Premium Down
InsuranceQuotes.com quoted me in Homeowners Insurance: Higher Deductibles Lower Premiums, But Can You Afford to Take the Risk? It opens,
Raising the deductible on your home insurance policy is one proven way to save money on your premiums, but it’s not the best financial decision for every homeowner.
Before you reach for the phone to bump up your deductible there are two important factors to consider: Do you have enough money saved to cover higher out-of-pocket claim costs, and have you discussed potential savings and ramifications with an insurance agent?
“The bottom line is that you want to make sure you are comfortable with the deductible amount you’ve selected,” says Stacy Molinari, personal lines and claims manager of Insurance Marketing Agencies, Inc. “And that means you need to make sure you have enough of a financial cushion to cover the deductible. Otherwise it could cost you more in the long run.”
So, just how much savings are out there when switching to a higher deductible? Let’s break it down by looking at a report commissioned by insuranceQuotes.com.
The 2016 Quadrant Information Services study examined the average economic impact of increasing a home insurance deductible (i.e. how much you pay out of pocket for a claim before your insurance coverage kicks in). Using a hypothetical two-story, single-family home covered for $140,000, the study looked at how much an annual U.S. home insurance premium can decrease after increasing the deductible.
According to the National Association of Insurance Commissioners (NAIC), the average home insurance premiums is $1,034, and the study examined three different percentage increases and their respective premium savings:
- Increase from $500 to $1,000: 7 percent savings.
- Increase from $500 to $2,000: 16 percent savings.
- Increase from $500 to $5,000: 28 percent savings.
What makes home insurance deductibles so significant?
In short, a home insurance deducible is one of many gauges an insurance company uses to determine how much risk the consumer is willing to accept. A higher deductible means more risk being taken on by the homeowner, and that additional risk makes it cheaper to insure the policyholder.
“A higher deductible is a signal to the insurance company that the homeowner is less likely to file claims because they are agreeing to a higher threshold for doing so,” says David Reiss, law professor and research director at Brooklyn Law School’s Center for Urban Business Entrepreneurship. “And the less likely you are to make a claim, the lower your premium is going to be.”
July 14, 2016 | Permalink | No Comments
July 13, 2016
Caveat Rent-to-Own
WiseBread quoted me in 5 Things You Need to Know When Renting-to-Own a Home. It opens,
Your credit scores are too low. Or maybe you’ve run up too much credit card debt. Whatever the reason, you can’t qualify for the mortgage loan you need to buy a home. But there is hope: You can enter into a rent-to-own agreement and begin living in a home today — one that you might eventually be able to buy.
Just be careful: David Reiss, professor of law and research director for the Center for Urban Business at Brooklyn Law School, said that consumers need to be careful when entering rent-to-own arrangements. Often, these agreements end up with tenants losing money that they didn’t need to spend.
“Potential homebuyers should be very careful with rent-to-own opportunities,” Reiss said. “They have a long history of burning buyers. Does the law in your state provide any protection to a rent-to-own buyer who falls behind on payments? Could you end up losing everything that you had paid toward the purchase if you lose your job?”
These worries, and others, are why you need to do your research before signing a rent-to-own agreement. And it’s why you need to know these five key facts before agreeing to any rent-to-own contract.
1. How Do Monthly Rent and Final Selling Price Relate?
In a rent-to-own arrangement, you might pay a bit more in rent each month to the owner of a home. These extra dollars go toward reducing a final sales price for the home that you and the owner agree upon before you start renting.
Then, after a set number of years pass — usually anywhere from one to five — you’ll have the option to purchase the home, with the sales price lowered by however much extra money you paid along with your monthly rent checks. Not all companies that offer rent-to-own homes work this way. Some don’t ask for more money from tenants each month, and don’t apply any rental money toward lowering the eventual sales price of the home.
This latter option might be the better choice for you if you’re not certain that you’ll be able to qualify for a mortgage even after the rental period ends.
“A pitfall is if the tenant buyer signs into the program but will never be approved for financing, thus never purchases the house,” said John Matthews, president of operations of Chicago Lease to Own. “That is how the scammers out there have used rent-to-own to hurt people. They sell it to those who should never have been in the program and take their portion of the rent every month used ‘for the purchase of their home’ knowing that the tenant will never qualify to buy the home.”
Make sure you know — and are comfortable with — the home’s final sales price and monthly rent payments before you agree to a rent-to-own arrangement. And if you don’t want to pay extra in rent each month for a home that you might never end up buying? A rent-to-own agreement might not be for you.
July 13, 2016 | Permalink | No Comments
July 12, 2016
Owning v. Renting Smackdown
Forbes quoted me in Are You Really Just Throwing Your Money Away When You Rent? It reads, in part,
There are a number of reasons for wanting to buy a home over renting and most are valid. Some people want to buy because their current rental unit may have restrictions on owning a pet, while home ownership would, in most cases, not have this limitation. Others want to diversify their assets beyond the stock market. Still others may be pressured by friends and family – loved ones may claim you are simply throwing your money away if you rent, but with owning, you could be building equity every month.
Is this really true?
You Are Building Equity As A Homeowner, But…
It is true that you are building equity each month as a homeowner. However, the amount of equity you’re building is equivalent to the portion of your monthly mortgage payment that goes toward paying down principal.
Because most mortgages are structured to have a uniform monthly payment for the life of the loan, in practice, this means that your early payments will consist of more interest than principal. So while you are paying down principal and building equity, you may not be building as much as you imagined.
For example, let’s say you had a 30-year fixed rate mortgage with an interest rate of 4% and a starting loan balance of $500,000. Your monthly payment would be $2,387, but just 30% of this payment or $720 would go toward “building equity” during the first month. Over the first five years, less than 35% of your total mortgage payments go toward paying down principal (i.e. about $48,000 out of $143,000 of total payments).
Scott Trench, director of operations at real estate investment social network BiggerPockets, added, “Yes, equity can make you feel good, but it’s not really money you can use freely until you’ve sold the property. And if you end up selling in a down market, you may not end up realizing as much equity as you expected.”
* * *
The Transaction Costs Are Large For Buying!
The costs of buying and selling real estate are significant, and those costs don’t go toward building equity either.
“Buying a house entails many transaction costs that add up to three, four, or five percent of the price of the home and sometimes even more,” said David Reiss, a professor who teaches residential real estate at Brooklyn Law School. “Many advise that homebuyers should have at least a five-year time horizon or they risk having those transaction costs eat into any gains they were hoping to get out of the sale of their home. Even worse, those costs can lead to a loss, if the local market is soft.”
That’s why your expected time horizon in a home is one of the most important factors to consider when deciding whether it is the right time for you to buy. A longer time horizon gives your home a better opportunity to realize sufficient price appreciation, to offset those large transaction costs.
July 12, 2016 | Permalink | No Comments
July 11, 2016
Does Housing Finance Reform Still Matter?
Ed DeMarco and Michael Bright
The Milken Institute’s Michael Bright and Ed DeMarco have posted a white paper, Why Housing Reform Still Matters. Bright was the principal author of the Corker-Warner Fannie/Freddie reform bill and DeMarco is the former Acting Director of the Federal Housing Finance Agency. In short, they know housing finance. They write,
The 2008 financial crisis left a lot of challenges in its wake. The events of that year led to years of stagnant growth, a painful process of global deleveraging, and the emergence of new banking regulatory regimes across the globe.
But at the epicenter of the crisis was the American housing market. And while America’s housing finance system was fundamental to the financial crisis and the Great Recession, reform efforts have not altered America’s mortgage market structure or housing access paradigms in a material way.
This work must get done. Eventually, legislators will have to resolve their differences to chart a modernized course for housing in our country. Reflecting upon the progress made and the failures endured in this effort since 2008, we have set ourselves to the task of outlining a framework meant to advance the public debate and help lawmakers create an achievable plan. Through a series of upcoming papers, our goal will be to not just foster debate but to push that debate toward resolution.
Before setting forth solutions, however, it is important to frame the issues and state why we should do this in the first place. In light of the growing chorus urging surrender and going back to the failed model of the past, our objective in this paper is to remind policymakers why housing finance reform is needed and help distinguish aspects of the current system that are worth preserving from those that should be scrapped. (1)
I agree with a lot of what they have to say. First, we should not go back to “the failed model of the past,” and it amazes me that that idea has any traction at all. I guess political memories are as short as people say they are.
Second, “until Congress acts, the FHFA is stuck in its role of regulator and conservator.” (3) They argue that it is wrong to allow one individual, the FHFA Director, to dramatically reform the housing finance system on his own. This is true, even if he is doing a pretty good job, as current Director Watt is.
Third, I agree that any reform plan must ensure that the mortgage-backed securities market remain liquid; credit remains available in all submarkets markets; competition is beneficial in the secondary mortgage market.
Finally, I agree with many of the goals of their reform agenda: reducing the likelihood of taxpayer bailouts of private actors; finding a consensus on access to credit; increasing the role of private capital in the mortgage market; increasing transparency in order to decrease rent-seeking behavior by market actors; and aligning incentives throughout the mortgage markets.
So where is my criticism? I think it is just that the paper is at such a high level of generality that it is hard to find much to disagree about. Who wouldn’t want a consensus on housing affordability and access to credit? But isn’t it more likely that Democrats and Republicans will be very far apart on this issue no matter how long they discuss it?
The authors promise that a detailed proposal is forthcoming, so my criticism may soon be moot. But I fear that Congress is no closer to finding common ground on housing finance reform than they have been for the better part of the last decade. The authors’ optimism that consensus can be reached is not yet warranted, I think. Housing reform may not matter because the FHFA may just implement a new regime before Congress gets it act together.
July 11, 2016 | Permalink | No Comments
July 8, 2016
Spreading Mortgage Credit Risk
The Federal Housing Finance Agency has released the Single-Family Credit Risk Transfer Progress Report. Important aspects of Fannie and Freddie’s future are described in this report. It opens,
Since 2012, the Federal Housing Finance Agency (FHFA) has set as a strategic objective that Fannie Mae and Freddie Mac share credit risk with private investors. While the Enterprises have a longstanding practice of sharing credit risk on certain loans with primary mortgage insurers and other counterparties, the credit risk transfer transactions have taken further steps to share credit risk with private market participants. Since the Enterprises were placed in conservatorship in 2008, they have received financial support from the U.S. Department of the Treasury under the Senior Preferred Stock Purchase Agreements (PSPAs). The Enterprises’ credit risk transfer programs reduce the overall risk to taxpayers under these agreements.
These programs have made significant progress since they were launched in 2012 and credit risk transfer transactions are now a regular part of the Enterprises’ businesses. This progress is reflected in FHFA’s 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions (2016 Scorecard), which sets the expectation that the Enterprises will transfer risk on 90 percent of targeted single-family, 30-year, fixed-rate mortgages. FHFA works with the Enterprises to ensure that credit risk transfer transactions are conducted in an economically sensible way that effectively transfers risk to private investors.
This Progress Report provides an overview of how the Enterprises share credit risk with the private sector, including through primary mortgage insurance and the Enterprises’ credit risk transfer programs. The discussion includes year-end 2015 data, a discussion of which Enterprise loan acquisitions are targeted for the credit risk transfer programs, and an overview of investor participation information. (1, footnotes omitted)
This push to share credit risk with private investors is a significant departure from the old Fannie/Freddie business model and it should do just what it promises: reduce taxpayer exposure to credit risk for the trillions of dollars of mortgages the two companies guarantee through their mortgage-backed securities. That being said, this is a relatively new initiative and the two companies (and the FHFA, as their conservator and regulator) have to navigate a lot of operational issues to ensure that this transfer of credit risk is priced appropriately.
There are also some important policy issues that have not been settled. The FHFA has asked for feedback on a series of issues in its Single-Family Credit Risk Transfer Request for Input, including,
- how to “develop a deeper mortgage insurance structure” (RfI, 17)
- how to develop credit risk transfer strategies that work for small lenders (RfI, 18)
- how to price the fees that Fannie and Freddie charge to guarantee mortgage-backed securities (RfI, 19)
Congress has abdicated its responsibility to implement housing finance reform, so it is left up to the FHFA to make it happen. Indeed, the FHFA’s timeline has this process being finalized in 2018. The only way for the public to affect the course of reform is through the type of input the FHFA is now seeking:
FHFA invites interested parties to provide written input on the questions listed [within the Request for Input] 60 days of the publication of this document, no later than August 29, 2016. FHFA also invites additional input on the topics discussed in this document that are not directly responsive to these questions.
Input may be submitted electronically using this response form. You may also want to review the FHFA’s update on Implementation of the Single Security and the Common Securitization Platform and its credit risk transfer page as it has links to other relevant documents.
July 8, 2016 | Permalink | No Comments
