From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for June 2012

S&P Case Shiller Report

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I WISH I could be excited about the most recent home price index report.  I really wish I could.

The news is mediocre, at best — home prices in April rose by 1.3% on average from their record lows in March, and are still down 2.2% (for the 10-city composite) from April, 2011.  Not surprisingly (after March’s terrible news), no cities posted new lows in April.  Of the 20 cities tracked, 18 showed increases (NYC and Detroit being the exceptions).

So, why?  If you read my blog yesterday, you know we have a terrifically supply-constrained market.  This morning’s Wall Street Journal had an article about Chinese investors who are providing about $1.8 Billion in kick-start capital to Lennar to get a big 12,000+ home community underway in San Francisco — a project Lennar has been working on for 9 years.  While I congratulate the Chinese and Lennar for this partnership, it does not at all bode well for U.S. investment liquiity that off-shore capital is needed to get a new project off the ground in one of America’s most dynamic cities.

Recall from ECON 101 that “price” is what happens at equilibrium when supply intersects with demand.  (OK, technically “price” can emerge in disequilibrium, as well.)  Right now, supply is hugely constrained, with a lot of REO-overhang and little new construction.  If demand was healthy and growing, prices should be soaring.  Instead, prices remain flat-lined, suggesting that demand is also stagnant.  However, population continues to grow and household formation should be positive.

What’s taking up the slack?  The apartment market continues to explode, with huge demand for rental units.  What’s the end game for all of this?  I can only think of two results:

1.  The home ownership rate in America continues to languish, finding some new post-WW II low; or

2.  Eventually, home ownership will go on the rise, and we’ll have an overbuilt situation in apartments.

Where would I bet?  Sadly, given the state of the world’s economy, #1 looks more tenable in the long-term.  That doesn’t mean we’re moving from being a nation of home owners to a nation of renters, but it does mean that the tradition of home ownership which has prevailed in the U.S. for decades may be becoming passe.  Either way, in the intermediate term (the next several years), we’re probably looking at the status quo.

Written by johnkilpatrick

June 26, 2012 at 7:34 am

New Home Sales — “Much Ado About Not Enough”

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Big news today — new home sales hit an annualized rate of 369,000 in May, compared to 343,000 in April.  That’s 20% higher than a year ago.  It also beat economists collective prognostications of 350,000.

Wow…. and only about 63% less than the 1,000,000 per year we would consider health.

And about 74% below the peak of 1.4 million during the boom years.

Obviously, there’s a problem here, and unless and until we get back to “normal”, the portion of the economy which is driven by home development, construction, financing, and sales will continue to suffer.  Three things are currently terribly broken, and fixing them is no easy task.

1.  The lending market is utterly disfunctional.  There was a great headline in one of the papers the other day — if you don’t NEED money, there’s plenty of it.  Unquestionably, one of the contributing factors (not a major one — but one, none the less) to the market meltdown was the sale and financing of homes to folks who had utterly no idea how they were going to meet their mortgage payments.  However, even in good times, we know that a certain percentage of loans will go sour — call it about 2%.  The straw that broke the camel’s back was when the recession hit, that “sour loan” percentage went up to about 4% – 6%.  Unfortunately, the secondary market had “priced” these loan pools with the notion that only 2% or so would go bad.  The loan pools themselves were so badly over-leveraged (at Lehman, apparently, the pools were leveraged something like 35-to-1 or more) that an increase into the 4% range completely destroyed the secondary mortgage market.  Today, the pendulum has swung too-far in the other direction, and first-time homebuyers, who often have good jobs but little in the way of demonstrable credit, are completely shut out.  If they can’t buy “starter” homes, then the “move-up” market suffers, and the retirees (who want to buy in places like Reno and Ft. Lauderdale) can’t sell their homes to “move down”.  Fixing this lending crisis is the first order of business.

2.  The land development business is broken.  Even if we magically “fixed” the lending problem tomorrow, there is a real shortage of land in the development pipeline.  It takes years to turn a vacant field into a subdivision full of lots (or a condo site), with extensive engineering, planning, financing, and entrepreneurship efforts.  Even in good years, there is a fair amount of risk-taking and capital expenditure.  We can’t just pick up where we left off a few years ago, because many (most?  nearly all?) of these development projects burst like soap bubbles during the recession.  Thus, we have to completely hit the “re-start” button on subdivision development in America.  Unfortunately, there is absolutely no appetite for financing these projects, and many of the players have gone out of business.  After World War II, the country was able to kick-start the housing market with extraordinarly favorable financing (remember VA and FHA loans?).  None of that exists today, and the secondary market to sustain all of that has gone away.  In the absense of a Federal mandate to kick-start housing, comparable to the GI Bill of 1944, this aspect of the market will continue to be flat-lined.

3.  Local community infrastructure development is broken.  Housing development requires a substantial public-private partnership.  In many communities, much of this is paid for as a “public good”, while in others there is the expectation of significant developer contribution.  Nevertheless, local planning agencies, transportation and utility departments, and even school districts and fire departments have to stand ready to provide infrastructure for housing.  Local government fiscal crises have frequently broken the back of these agencies.  Nationally, we’ve laid off something like 50,000 teachers in the past few years, yet new housing development and household formation will require increasing numbers of schools.  The same is true for fire fighters, EMTs, police, road maintenance, and utilities.  Until our cities, counties, and states are back on their financial feet, this segment of the equation will continue broken

Sadly, these are interactive parts of the same equation.  For example, local governments fund planning departments with fees paid by developers.  Hence, the city or county reviews tomorrow’s building permits with fees paid by yesterday’s developers.  Restarting the system will take talent, money, and some significant leadership, none of which is currently apparent.

Written by johnkilpatrick

June 25, 2012 at 9:11 am

North, to Alaska

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Now, you’re dating yourself if you recognize the name of this song/movie from 1960 (Johnny Horton sang the theme song to the John Wayne movie.  The song, which topped Billboard‘s Country chart and reached #4 on the “Top 100” chart, was significantly more popular than the film.)

Ms. K and I took a lovely cruise to Juneau, Ketchikan, and Skagway last week, on board Norwegian’s Jewel — kudos’ to them, by the way, for a great job on the cruise.  More intriguing, though, was my observations of the Alaskan economy and real estate.  I’ve been to the 49th state several times on business, and still have some back-burner projects up there.  Ms. K had never visited (ironic, given her Scandinavian background).  We did the normal tourist-y stuff, including riding the Juneau tram to the top of the mountain and riding the Skagway Railroad along the Yukon Trail gold-rush route into British Columbia.  Of course, throughout the trip, I had a careful eye on tell-tail signs of the health of the state, or at least that small part I was able to see.

Ketchikan —  This is the southeast-most “sizable” city in the state, and is often referred to as the gateway to Alaska.  The economy is heavily driven by tourism and fishing, and it serves as a marine and air hub for this part of the state.  I had more “on the ground” time in Ketchikan than in other cities, and also was accompanied by a local real estate investor.  I had the chance to meet with two bankers (one of whom is also a state official) and tour a mechanical contracting facility.  In general, the economy seemed to be booming.  There was significant construction ongoing, and I also saw significant interior shopping mall which has been successfully “turned around” by an investor.  The local bankers I met with were “conservatively positive” about the economy, and indicated that lending was ongoing.

Ketchikan has benefitted in no small part from major governmental changes in 2010.  Previously, in 2006, the Alaska state government enacted certain taxes and regulations on the cruise industry which were difficult, if not impossible, for the industry to meet.  As a result, there was a significant decline in cruise passengers into Ketchikan from 2006 – 2010.  However, the state rolled-back the taxes, and now Ketchikan is expected to receive about 470 port-calls from cruise ships this year and over 900,000 passenger visitors.  The economic impact of this cannot be under-stated.

Thus, as long as the state government continues on a business-friendly pattern, the economy of Ketchikan should continue on solid footing.

Juneau —  This is the state capital (no, it’s not Anchorage!) and about half of the employment is government related.  Juneau also receives about the same level of tourism as Ketchikan, plus it’s a significant center for commercial fishing and mining.  As such, the economy is less vibrant than Ketchikan but more solid.  (Juneau’s unemployment rate is 4.8% — the lowest in the state.)  Since my last visit to Juneau, there has been significant construction and upgrades in the “tourist” part of town, and occupancy looked strong.

Skagway — This was the launch-point for the Yukon Trail gold rush, and later a rail road was built (about 120 miles or so to the Yukon) to haul gold down to the Skagway docks.  Today, the entire town is a national park, and the population is entirely dependent on tourism.  Nonetheless, there are efforts afoot to expand Skagway’s economy, leveraging off of the fact that it’s one of the only cities in that part of the state to have road access to Canada and the lower 48 states.  New construction is almost non-existent, since nearly the entire town is historically preserved.  However, the preservation efforts seem to be paying off, and the town appears to be flush with tourism money.

I’m not trying to write a promotional piece on Alaska, nor would I suggest that the benefits in these three cities are in any way transferable to other parts of the world (how many cities could handle a daily tourism influx equal to their entire population?).  However, the efforts of locals to integrate tourism with other strengths, and to focus on being “business-friendly” so as not to kill the goose laying the golden eggs, is an admirable set of traits for other cities to study.


Written by johnkilpatrick

June 13, 2012 at 2:16 pm

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