Archive for the ‘Finance’ Category
Apartments, economic uncertainty, and demographic shifts
The latest issue of Marcus & Millichap’s apartment research just hit my desk, and while they may some important observations, I think they may miss the bigger picture about why the apartment market is so hot today.
First, the good news — apartments are the brightest star in a recovering commercial real estate market. As M&M note, leading economic indicators are trending up — not nearly as high as the pre-crash peak, but higher than we saw at any time between 1990 and 2005 or so. Job growth is rugged, but at least it’s in positive territory, albeit not at levels we need to get America’s fiscal house in order. Apartment absorption is in strong, positive territory, with some of the best, sustained numbers we’ve seen in over a decade. These are all positive trends for the apartment investment market.
Despite the well-wishing about owner occupied housing, that market continues to be sour — home sales are moribund, with a report out today that new home sales have trended back down to 350,000/year. While some statistics show prices beginning to stabilize or rise, others continue to show cycling around 2003 levels. Our own models here at Greenfield suggest that home prices and new home sales volumes will not return to healthy levels until the home ownership rates stabilize. In addition, a recent report out of the homebuilding community points to lack of buildable lots as a very real impediment to growth in this area. We would add that structural issues in the lending arena will keep lot development at all-time lows for several years to come.
In short, many investment funds have viewed apartments as the next instant money machine, and indeed occupancy rates are frequently well above optimum levels. There is plenty of research to suggest that a “healthy”, profit-maximizing apartment market has an occupancy rate around 93%. A 100% occupancy rate suggests that rents are too low, and indeed this has happened in many markets as developers have chased occupancy rather than profitability. As stabilized apartments raise rents, NOI increases, and with them cap rates. As a result, cap rates are actually on the rise again, up from 2006 levels, and with the decline in 10-year Treasury rates, the cap-to-T spread has expanded to the widest level we’ve seen (490 basis points).
One would think that investment funds would chase this NOI, forcing cap rates down. Indeed, just the opposite is true. Funds are looking for income, not future growth, and unlike the private equity and hedge funds of the past, aren’t trying to buy low and sell high. They’re perfectly contented to buy a cash flow and hold forever, thus allowing cap rates to float upward.
Add to this the demographic part of the equation — America forms about a million new households per year, but we’re only building owner-occupied homes for about a third of them. M&M notes that we’re currently only building about half of the units needed to meet demand. They project occupancy rates by year end at about 95.6%, far above optimum levels. As such, they expect rent growth of about 5% by year end. This will flow straight to the bottom line, pushing up both transaction prices AND cap rates simultaneously.
Apartments were grossly underbuilt during the last decade, so what we have is a pure supply-and-demand play. With constrained supply, and demand pushed both by population growth (particularly in the key 20-t0-34 age bracket) and shortage of new owner-occupied housing, this trend appears to have legs.
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Real Estate Portfolio Choices
Thanks to my friends at PERENEWS.com for bringing this to my attention. It’s a fascinating story about how two funds can make subtly different choices about real estate investments and end up in two different places.
The two funds are CalPERS and CalSTRS, two of the largest pension funds in America. For those of you not familiar with them, CalPERS is the California Public Employees Retirement System, and CalSTRS is the separate California teachers system. As of March 31, 2012, CalPERS had $237.6 Billion under management, with $21.8 Billion (9.2%) of that in real estate. As of May 31, 2012, (they have slightly different reporting dates) CalSTRS had $146.8 Billion under management, with $21.2 Billion (14.5%) in real estate.
Ironically, both pension funds underperformed their own targets for the year ending June 30, and yet for both of them, real estate was their best performing asset class. Both funds have put emphasis on core, income-producing properties. CalSTRS, however, despite having a fairly good real estate year (9.2% overall return), underperformed their real estate benchmark (the NCREIF Property Index) by a full 4.2 percentage points. Notably, CalSTRS had a much higher return in the 2010-2011 period, enjoying a 17.5% overall real estate return.
CalPERS, on the other hand, enjoyed a 15.9% return, outperforming their goals by 3 percentage points. This represents a much higher return than 2010-2011, when they marked a 10.2% gain, and very much a rebound from their disasterous 37.1% loss in 2009-2010.
Notably, neither fund did poorly this year — there is nothing about CalSTRS 9.2% overall return to scoff at. But, why does CalPERS continue to trend upward while CalSTRS is underperforming? Is there something key to this difference that we should be noting and learning?
Intriguingly, CalPERS devotes more of its attention to core properties — currently at 70% with a goal of 75%. CalSTRS, on the other hand, is evenly split between core and opportunistic. Also, CalPERS is underallocated to real estate and is in a position to make significant core investments, while CalSTRS is overallocated, and is trying to get from 14.5% down to 12% by selling existing opportunistic holdings, likely at a loss. Additionally, CalPERS was aggressive in taking write-downs during the painful 2009-2010 season, but CalSTRS was not, and is thus still feeling the pain.
Finally, CalPERS was quick to move into core assets after the global financial crisis, allowing it to buy quality assets at bargain-basement prices. CalSTRS was not so quick to move, and thus waited until cap rates compressed.
Lessons to be learned? Obviously, in hindsight, cleaning up the messy books and moving forward was a smart thing for CalPERS to do. It gave them the freedom to move forward and take advantage of opportunities. Looking forward, there is clearly a sense that allocation is key.
However, the bigger picture is that two of the nation’s largest investment funds have a major committment to real estate, aiming for 10% and 12% allocations respectively. The fund that is in the accumulation side (growing from 9% up to 10%) is the one making the most money, because it can take advantage of buying opportunities in core assets. The fund that is selling is the underperformer, albeit probably for reasons other than just capital losses on sales.
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Real Estate Securities and Stock Markets
Is securitized real estate a stock, or is it real estate? It’s a bit of both, but the degree of correlation between securitized real estate (most often “REITs” in the U.S., other forms elsewhere) and the stock market in general has long been a matter of some debate. In my own work I’ve cited studies that show a high correlation between REIT returns and the S&P 500, but I’ve always been a bit uncomfortable with such gross generalizations.
In the current issue of the Journal of Real Estate Research, Prof. Nafessa Yunis of U. Baltimore does an excellent job exploring this topic, not only in the U.S. market but also nine other countries that have both mature stock exchanges as well as mature securitized real estate markets. She not only looks at inter-market correlation, but also controls for other macro-variables, including GDP changes and interest rates.
She finds that real estate securities returns are “cointegrated” with both the respective stock market returns as well as key macroeconomic factors, but that the degree of linkage varies among countries. The greater the degree of market maturity, the greater the cointegration. In general, shocks to the stock market or to macro-variables impacts the real estate market, but not necessarily the other way around. Intriguingly, shocks in stock returns, M1, GDP, and CPI have positive impacts on real estate returns, but shocks to long-term interest rates induce negative but temporary responses in real estate returns.
In a way, these findings are both useful and disturbing to portfolio managers. On one hand, Dr. Yunis’ findings help allay fears that real estate securities are “something else” and difficult to understand. However, she also notes that there are no diversification gains (she doesn’t use “arbitrage”, but I believe that’s what she means) from holding both real estate and non-real estate securities.
Full disclosure — I’m a reviewer for this journal, although I did not review her paper. The Journal of Real Estate Research is widely regarded as one of the two top real estate academic journals in the world. Inclusion in this journal is a mark of distinction for any young author, and it gives significant credence to Dr. Yunis’ findings.
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REIT Development Pipeline
On June 28, Fitch Rating Services issued a report on the REIT development pipeline that has generated a bit of discussion in the real estate community. Fitch’s emphasis was on the lack of development — with some noteworthy exceptions — and how this has “not a meaningful” implication for REIT credit risk. However, the topic is important from a fundamental perspective, and deserves a bit more discussion.
Historically, REITs weren’t in the development business. REITs are a tax vehicle, and to maintain that status, they’re supposed to collect rents and pay 95% of those rents out to shareholders (well, that’s a gross oversimplification, but let’s go with it). As such, REITs enjoy preferential tax status, and have usually enjoyed excellent leverage. REITs have some significant limitations on the proportion of profits which are supposed to come from business enterprises, capital gains, and such, and can lose their preferential tax status if these other items exceed a certain threshold.
During hot and heavy times (let’s say, pre-2007), REITs are hit with a triple-whammy. First, they depreciate existing properties, and need that depreciation to shelter income (and thus exceed the 95% threshold, which they usually do and which investors expect). Second, they were loathe to sell fully depreciated properties in order to buy new ones, because the huge capital gains from sales would impact the preferential tax status. Finally, developers were demanding large premiums — income producing buildings were selling for amazing multiples which barely made sense (that’s called a “bubble”, folks).
The good news for a REIT was that if they developed their own properties, the development profits could be kept in-house, and there would be no fatal tax recognitions. Depreciation expenses stayed high, and they could thus pay-out higher and higher funds from operations to shareholders. It was a win-win. The only downside, of course, was that development activities were considered risky, and so the credit rating agencies kept a close eye on these practices. However, REITs were typically less leveraged than other ownership vehicles, to the riskiness was usually minimal.
A tthe peak, in 2007, the REIT universe had an aggregate investment of 7.6% of undepreciated assets in the development pipeline, or a total of $34 Billion. By March 31, 2012 (the cut-off for data in the Fitch report) that had collapsed to 2.7%., and indeed over a third of that is in the fundamentally sound apartment market.
Fitch summarizes the market as “fairly muted”, and says that “By and large, companies have not ramped up development pipelines,” according to Steven Marks, managing director at Fitch in a follow-up interview to Globe Street. “It is really growth via acquisitions and organic cash flows from existing portfolios.”
The report also noted that over the past 10 years, REIT development activities have had a high correlation with U.S. GDP changes. Thus, improvements in U.S. GDP would signal development opportunities for REITs, but continued stagnation in the U.S. GDP suggests that REITs will continue to remain quiet on the development front.
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S&P Case Shiller Report
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.
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New Home Sales — “Much Ado About Not Enough”
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.
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North, to Alaska
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.
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Wither goeth the Euro?
Observations on Greece, the Euro, and the implications for real estate finance —
First, there is extraordinary confusion over the causes of the Euro crisis, and thus confusion over the effects, particularly here in the U.S. A few observations, to set the stage:
1. Europe is in a massive demographic decline. “Native” Europeans have a birth rate which does not support the population, and as such their “native populations are getting older and smaller. Up to a point, this has positive effects on the economy, because small children cost money and a population actually gets more productive as the “bubble” in its age demographic approaches middle age (middle-agers are more productive than young folks or old folks). The REAL problem begins when that bubble starts approaching retirement, and there aren’t any younger cohorts to replace them. This is part and parcel of what happened in Japan not to long ago, and the reason why the Japanese economy seems to be in permanent doldrums.
2. As an aside, I focus entirely on Europe’s “native” population. Unlike the U.S., Europe has a terrible problem integrating immigrants into its productive society. That’s a topic for others to expound on.
3. The Euro was formed in a very different way from the dollar. When the U.S. dollar was adopted as a currency, the Federal government took on all of the state’s “operational” debts (the “Alexander Hamilton Solution”) which resulted from the American Revolution, and the states were prohibited from running operational deficits going forward. States can issue debt to pay for capital items (highways, schools) but not for operational items. Hence, a state can’t borrow money to pay interest on money it already borrowed. The Hamilton Solution means that the U.S. has a highly integrated economy, unlike Europe’s, which is more artificially integrated. (One might argue that the U.S. also benefits from a common language. Anyone who has ever traveled from Seattle to New Orleans may debate this issue.)
4. Soooo…… if the U.S. borrows money to cover its operational deficit, it can “print” money to cover those debts. (OK — a bit of advanced Econ for ya’ll — “print” is an analogy. Technically, the Fed expands or contracts bank credit to increase or decrease the money supply. “Print” is just a handy shorthand for the more complex methods.) On the other hand, Greece can’t “print” Euros — they all come from European central banks.
One might notice that the debt/GDP ratios in Greece and the other troubled countries are no where NEAR where we’d historically see countries in dire straights (Given the dampening influence of the World Bank, IMF, the G-20, and such, we really don’t see hyper-inflation any more in emerging markets like we did a generation ago.) The big problem is that Greece can’t “inflate” itself out of debt by printing Euros. If they could, the banks would gladly loan them money so as to “kick the can” down the road a bit. If Greece had a growing, productive economy, then they could grow their way out of debt, but no-one buys into THAT fairy tale, either.
If, on the other hand, they withdraw from the Euro zone, they’ll be able to print all the Drachmas they want, albeit at terrible inflation rates. If the Greek citizenry thinks that current austerity plans are potentially painful, they should re-read some history of the German Weimar Republic (you know — that period in history when the Germans were so distraught, they elected Adolf Hitler because he promised to “fix things”.)
What does this have to do with real estate? At the core, the Greek problem (and by extension, the entire Euro problem) is a BANKING issue, not a debt/GDP problem. Admittedly, some countries within the Euro zone borrowed money that they had not idea how they would pay back. That’s a structural failure dating from the creation of the Euro, and it’s highly doubtful, particularly at this stage in Europe’s economy, that the Eurozone nations would be willing to accept such a level of fiscal unity and central governance. (Not to mention the European Union countries which are NOT members of the Eurozone — such as the UK).
Currently, in the U.S., we just came out of a banking-induced housing bubble. We’re currently IN a banking-induced housing depression. In the worst-hit states (for example, Florida and Nevada), the lending market, particularly for retirement or second homes, has nearly stopped. The Greek problem is, at its heart, a banking problem, since European sovereign debt relies much more heavily on commercial banks than in the US. Relatedly, banking is global today (Note how many HSBC Bank offices are scattered through the US?) At the back-office level, banking is almost completely global, with liquidity flowing across oceans as rapidly as phone calls and e-mails. (Recall: central bankers don’t “print” money anymore, they just fine-tune liquidity.)
With that in mind, an already damaged US banking system, with credit severely curtailed to one of the most important sectors of the economy, will be increasingly damaged if and as the Greek/Euro crisis continues to escalate. On the other hand, if the Greek citizenry recognizes that austerity under the Euro is preferable to ultra-austerity under the Drachma, then a huge sigh of relief will permeate the world’s banking customers.
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American Real Estate Society annual meetings
ARES is one of the two primary real estate academic organizations in the U.S. (The other is the American Real Estate and Urban Economics Association, “AREUEA”). While most real estate academics are members of both, ARES also attracts a significant number of practitioners (typically ex-professors who are now in the consulting or investments business) plus has a great relationship with such practitioner organizations as the Appraisal Institute and the Royal institution of Chartered Surveyors. ARES publishes several of the top real estate academic journals, including the Journal of Real Estate Research (for which I’m a reviewer), the Journal of Real Estate Literature, the Journal of Real Estate Practice and Education, the Journal of Real Estate Portfolio Management, the Journal of Housing Research, and the Journal of Sustainable Real Estate (for which I’m on the editorial board).
ARES holds its annual meeting in April, usually in a coastal city on alternating sides of the US. This year’s meeting was last week at St. Pete Beach, Florida (an island just off the St. Petersburg coast), and we believe we set a record for attendance at a real estate academic conference. Several hundred working papers and panel presentations dominated the program, along with sessions featuring research from doctoral students, and a well-attended, day-long “Critical Issues Seminar” on Wednesday co-sponsored by the Appraisal Institute and the CCIM Institute.
I presented papers in sessions, including one I chaired (“Real Estate Cycles”) and participated in an excellent panel discussion on Friday on “Real Estate Failure”, chaired by my good friend Dr. Gordon Brown of Space Analytics (and featuring Dr. Larry Wofford of U. Tulsa, Dr. Richard Peiser of Harvard, and myself).
I’m still digesting the huge volume of intellectual content that came out of ARES, and I’ll probably discuss some of these papers in future blog posts. More later!
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Welcome to April
…and welcome to Florida. I’ve been in the southeast corner of the U.S. for the past two weeks in a hearing. I happen to love Florida, and if I ever get around to retiring, I’ll probably end up here. Thanks to personal choice, some business, and just a little bit of kismet, I get to travel here at least 3 or 4 times a year. Indeed, by the end of April, I will have made 3 trips here in 2012, with at LEAST two more planned.
In many ways, Florida is the poster child for the current economic problems plaguing the U.S. It has all of the hotbutton issues in one place — overbuilt housing, lending practices to match, and huge demographic shifts. The latter is almost humorous — Florida is jokingly referred to as “God’s waiting room”, not withstanding the fact that suburban Las Vegas, Orange County, California, and Scottsdale, Arizona, are all fighting for that moniker. Indeed, about 15 years ago, I was relegated to represent my university at the annual meeting of the American Association of Retirement Communities. I learned (among other things) that the two Carolinas, when taken together, actually get as many retirees every year as does Florida. However — and here’s the funny part — the “source” of Florida’s retirees is primarily the New England and Mid-Atlantic region. The “source” of the Carolinas’ retirees is Florida — they’re called “half-backs” because they move to Florida, find the weather to be abysmal, and move half-way-back home.
Being that as it may, Florida is still the destination for seemingly millions of retirees, a large proportion of whom seem to be “snow-birds”. They live in Florida 6.01 months of the year (just enough to qualify for Florida citizenship, and thus preferential Florida taxes) and then head back up north on March 31 every year. (I was in Florida on March 31, and the out-migration seemed to clog the interstates).
Before the melt-down, the whole housing industry in Florida existed to provide half-year housing for these snow-birds. Pick what you want — condos, townhouses, detached homes, we’ve got it at every price-point, size, color, and configuration. It would be hard to imagine a housing solution that wasn’t available in Florida. Financing? No money down? No problem. Move right in. While a surprisingly large number of homes were paid for with cash, there was certainly lots of available financing for the retiree who didn’t want to tap his funds for a down payment. And why tap your funds? When the stock market is growing at 10% per year, and real estate is going up by 15% per year, who would avoid a 4% mortgage? And what bank wouldn’t make that mortgage? After all, Grandpa and Grandma are great credit risks, and if they die before the loan is paid off, certainly the property can be re-sold for a profit. It’s a win-win, right?
Yeah, we don’t need to re-visit the meltdown, but the aftermath is a fascinating war zone. First, a lot of cond0-dwellers simply walked away. A lot of single-family dwellers tried to hang on, but often to no avail. Nothing would re-sell, so the market just froze. But, remember that a LOT of the buyers paid cash or had very low LTV loans. Those folks are particularly harmed — they are sitting on nearly unsellable property, with no end of the pain in sight.
If you visit Sarasota or Naples or any of the dozens of “retirement” communities on the Florida coast, you’ll get two distinct pictures. The beaches are filled, the hotels are filling back up, and the neighborhoods look healthy. Visit the county government complex, though, and you get a distinctly different picture. Floridians are a distinctly tax-averse lot, and so many county and city governments thrived on fees paid by developers. With that market frozen, the local government finances are a mess. Couple with it an actual and meaningful decline in property tax collections, and you get a local finance problem that won’t get fixed anytime soon.
With that in mind, millions of Americans (and an increasing number of South Americans and Europeans) see Florida as the best of all retirement solutions. The weather is great most of the year, there is excellent infrastructure and health care, and plenty of recreational opportunities. The cost of living is among the lowest in the U.S., providing ample opportunity for “worker bees” who move here to care for the retirement cadre. However, the housing market continues in the doldrums. A good friend of mine, with excellent credit and not unsubstantial resources, recently bought a Florida condo. The BEST loan he could get was 40% LTV, and even that was a paperwork nightmare. There is plenty of demand for Florida housing, but the financing side of the equation continues to be an issue. Unless and until the financing problem gets fixed, the housing problem will still be with us.
From a small northwestern observatory... 