From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for the ‘Affordable Housing’ Category

So, folks, where are we going to live?

leave a comment »

Much has been said recently about housing starts being back up to where they were before the recession.  If this is the case, then why does Seattle, for example, have a 0.9 month supply of homes for sale?  As usual, the details are much more complicated than the headlines.

Prior to the “meltdown” (let’s say, 2004 – 2007), housing starts in the U.S. averaged about 1.865 million units per year.  Now, few analysts disagree that this was too many, but figuring out the right number is harder than one might think.  In 2008, the number dipped down to about 905,000, and hit a low of 583,000 in 2009.  Since then, the annual starts have trended up.  However, in 2016, we still were only at 1.207 million.  Of that, only 751,000 were single family units, compared to an average of 1.4 million single family homes per year in the 2004-2007 period.  Hence, nationally, we’re building about half as many homes as we were 10 years ago.

From 2004-2007, we started 7.462 million dwelling units in America, but in the past four years we’ve only started a total of about 4.432 million (all varieties).  That’s a shrinkage of about 3 million new homes, and most of that shrinkage is in the single family category.

One might posit that the decline in home ownership rates should have freed up some demand, and some of that’s true.  The home ownership rate in America peaked at 69% during the run-up to the recession, and dropped steadily after the melt-down, to a low of 62.9% in the 2nd quarter 2016.  As of the end of the 3rd quarter this year, it sits at 63.9%, or about 5 points below the peak of a decade ago.

There are about 76.146 million owner-occupied housing units in the U.S. today.  A five-percent swing in this number is a little over 3.5 million houses.  In short, we’ve now “absorbed” the decline in starts, and structurally we’re more-or-less “over” the recession, and we’re simply not building enough new homes to meet the demand.

Several consequences came out of the melt-down.  First, developing land takes quite a few years — five or more in the “hot” areas like Seattle, where land has to go thru a permitting and entitlement phase long before a house can be built.  All of this requires land planners, both in the private sector and downtown at the county or city hall. Many of these folks lost their jobs during the 2008-09 period, and indeed some county and city planning offices were eviscerated.  New home development frequently requires a significant outlay in public infrastructure, including schools, roads, and utilities.  Worse than that, many construction trades were gutted, with no replacements available.   Financing for acquisition, development, and construction is now problematic (although, arguably, it was too liberal pre-recession).

As such, it’s a sellers market for homes, and in hot markets, buyers compete by bidding up prices beyond reasonable levels.  Some pundits are nervous, and with good reason.

(Thanks to the U.S. Census Bureau for the October 31 data.)

Written by johnkilpatrick

December 11, 2017 at 11:29 am

Low Income Housing Threatened

leave a comment »

OK, folks, this gets complicated, so follow along with me.  The Reagan era tax cuts, and specifically the U.S. Tax Reform Act of 1986, adversely affected many of the incentives for investing in low income rental housing.  To provide some balance, the Low Income Housing Tax Credit (LIHTC) program was added to the Act.  This program provides a tax credit which can either be used or sold by the developer.

Usually, the tax credits are sold or syndicated, and corporations that anticipate that they’ll have taxable income over the next 15 years will buy the credits, which can be used to offset future tax bills.  The developer uses the proceeds from the tax credit sales as the equity for the low income housing development.  Coupled with the program is a substantial emphasis on fiscal discipline (audited financial statements, regular reporting, etc.) and as such, these low income multi-family developments have had a foreclosure rate of less than 0.1%, which is far better than comparable market-rate properties.

Typically, a developer will cobble together several programs, such as FNMA debt financing, Section 8 vouchers, and state and local incentives.  The LIHTC program is administered by State Housing Authorities, and of course has oversight from the IRS.

Here’s where it gets both interesting and complicated.  The selling price for the credits is a function of two things — the discount rate (which is very low now-a-days) and a company’s forward-looking tax burden.  Let’s say, just as an example, I believe my company will have $1 million per year in net income in the coming fifteen years.  My tax rate is 40%, so I’ll end up paying $400,000 in annual federal income taxes, and I’d be willing to pay for credits which would erase that tax burden.  In short, I’m agnostic as to whether I send the money to the IRS or to a developer who wants to use the money to build an apartment complex.  (Actually, it’s w-a-a-a-a-y more complicated than this, but bear with me.)  Now, my tax burden over the coming 15 years will be $6 million ($400,000 per year times 15), but the present value of that cash flow is what I’d pay today instead of the $6 million.  If my cost of capital is 5%, the present value of that 15 year tax bill is actually closer to $4.15 million.  So, I’d be willing to pay $4.15 million to avoid paying $6 million in taxes in the next 15 years.   A given developer is awarded a certain level of tax credits based on the overall value of the project being proposed.

So, what’s the problem?  Ahhh…. “problem” depends a bit on your perspective.  As it happens, the new administration, and Congress for that matter, are bent on cutting corporate tax rates.  Good for them.  I own a couple of corporations.  I’d like to save some money.  However, if a corporation envisions that their tax bills over the next 15 years will be much lower than previously anticipated, then the amount they’re willing to pay TODAY to avoid those tax bills is much lower.  How much, you say?  Well, let’s assume our company had it’s effective tax rate lowered from 40% to 15%.  The tax bill over the next 15 years would only be $2.25 million, and the present value of THAT is only $1.56 million.  Ahem…..

I’m not knocking tax cuts, but everything has a cost, and building low income housing employs a lot of people, provides a much-needed private sector solution to a public problem, and creates investment.  We’re already seeing this market dry up.  An article in today’s Pittsburgh Post-Gazette, by Kate Giammarise, outlines the problems that developers are already facing.  One solution may be for Congress to increase the level of available tax credits, so that developers can be left whole even with the tax cuts.  This will, by its nature, be a nationwide problem.

Written by johnkilpatrick

February 6, 2017 at 12:56 pm

“5 Economic Trends to be Thankful For”

leave a comment »

First, I hope everyone had a great Thanksgiving! For those of you who in countries that don’t share our festival of thanks, I hope you had a great Thursday!

Kuddos to Neil Irwin, writing in the Washington Post yesterday.  I agree 100% with his list, and wanted to reproduce it here:

1.  Household debt is way down.  Neil lists this as his first item, but I would suggest it has plusses and minuses to it.  On the plus column, we really WERE over-debted as a society.  On the minus side, changes household debt carries with it complex implications for the consumption side of GDP, as well as corporate investment (see my prior blog post) and even trade relationships.  Nonetheless, this is, on net, a good thing.

2.  The cost of servicing that debt is way down — as Neil points out, from 14% of disposable income in 2007 to 10.7% today.   Of course, remember that one person’s interest EXPENSE is another person’s interest INCOME.  Nonetheless, this constitutes a significant wealth transfer from people who HAVE money back to people who NEED TO BORROW money.

3.  Electricity and natural gas prices are falling.  It’s hard to find a downside to this one.  From last year, consumer natural gas prices are down 8.4%, and electric rates are down 1.2%.  I would add to Neil’s analysis that more of this money is staying at home — the U.S. is well on its way to being import-neutral on energy.  Of course, this has some geopolitical implications, which we’ll deal with on another day.

4.  Businesses aren’t firing people.  While unemployment remains high at 7.9%, at least the arrows are pointed in the right direction.

5.  Housing is dramatically more affordable.  Neil points out that in 2006, the typical homebuyer faced a payment equal to 41% of the average wage of a private-sector worker.  Today that’s 26%.  This is a combination of both lower house prices (which proportionally lowers down payment requirements) and lower mortgage interest rates.

Congrats to Neil Irwin and the Washington Post for an insightful and timely article!

Written by johnkilpatrick

November 23, 2012 at 9:33 am

New Home Sales — “Much Ado About Not Enough”

with one comment

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

Latest from S&P Case Shiller

leave a comment »

The always excellent S&P Case Shiller report came out this morning, followed by a teleconference with Professors Carl Case and Bob Shiller.  First, some highlights from the report, then some blurbs from the teleconference.

The average home prices in the U.S. are hovering around record lows as measured from their peaks in December, 2006, and have been bounding around 2003 prices for about 3 years.  Overall in 2011,  prices were down about 4% nationwide, and in the 20 leading cities in the U.S., the yearly price trends ranged from a low of -12.8% in Atlanta to a high (if you can call it that) of 0.5% in (amazingly enough) Detroit, which was the only major city to record positive numbers last year.  In December, only Phoenix and Miami were on up-tics.

One thing struck me as a bit foreboding in the report.  While housing doesn’t behave like securitized assets, housing markets are, in fact, influenced by many of the same forces.  Historically, one of the big differences was that house prices were always believed to trend positively in the long run, so “bear” markets didn’t really exist in housing.  (More on that in a minute).  With that in mind, though, w-a-a-y back in my Wall Street days (a LONG time ago!), technical traders — as they were known back then — would have recognized the pricing behavior over the past few quarters as a “head-and-shoulders” pattern.  It was the mark of a stock price that kept trying to burst through a resistance level, but couldn’t sustain the momentum.  After three such tries, it would collapse due to lack of buyers.  I look at the house price performance, and… well… one has to wonder…

As for the teleconference, the catch-phrase was “nervous but hopeful”.  There was much ado about recent positive news from the NAHB/Wells Fargo Housing Market Index (refer to my comments about this on February 15 by clicking here.)  The HMI tracks buyer interest, among other things, but the folks at S&P C-S were a bit cautious, noting that sales data doesn’t seem to be responding yet.

There are important macro-economic implications for all of this.  The housing market is the primary tool for the FED to exert economic pressure via interest rates.  Historically (and C-S goes back 60 or so years for this), housing starts in America hover around 1 million to 1.5 million per year.  If the economy gets overheated, then interest rates can be allowed to rise, and this number would drop BRIEFLY to around 800,000, then bounce back up.  However, housing starts have now hovered below 700,000/year every month for the past 40 months, with little let-up in sight.

Existing home sales are, in fact, trending up a bit, but part of this comes from the fact that in California and Florida, two of the hardest-hit states, we find fully 1/3 of the entire nation’s aggregate home values.  The demographics in these two states are very different from the rest of the nation — mainly older homeowners who can afford now to trade up.

An additional concern comes from the Census Bureau.  Note that for most of recent history, household formation in the U.S. rose from 1 million to 1.5 million per year (note the parallel to housing starts?).  However, from March, 2010, to March, 2011, households actually SHRANK.  Fortunately, this number seems to be correcting itself, and about 2 million new households were formed between March, 2011, and the end of the year.   C-S note that this is a VERY “noisy” number and subject to correction.  However, the arrows may be pointed in the right direction again.

Pricing still reflects the huge shadow inventory, but NAR reports that the actual “For Sale” inventory is around normal levels again (about a 6-month supply).  So, what’s holding the housing market back?  Getting a mortgage is very difficult today without perfect credit — the private mortgage insurance market has completely disappeared.  Unemployment is still a problem, and particularly the contagious fear that permeates the populus.  Finally, some economists fear that there may actually be a permanent shift in the U.S. market attitude toward housing.  Historically, Americans thought that home prices would continuously rise, and hence a home investment was a secure store of value.  That attitude may have permanently been damaged.

“Nervous, but hopeful”


U.S. housing market — good news and bad

leave a comment »

The good news, such that it is — home sales are inching up — a 0.7% rise in January from the previous January.

Now, for the bad news — the median home price in America, measured on a January-to-January basis, just hit its lowest point in 10 years, according to a recent announcement from the National Association of Realtors.  Indeed, 35% of home sales were “distress sales”, driving the median home price down to $154,000.

graphic courtesy CNN-Money

This represents a 6.9% price decline from 2011, and a drop of 29.4% since the peak in 2007.

Why would anyone buy a house during this free-fall?  Actually, even in a falling market, buying a home makes some sense.  For one, interest rates are at amazingly low levels, and if you have great credit, loans are available.  On the other hand, rental rates are on a sharp increase, due in no small part to the lack of apartment construction in recent years.  Putting the two together (and if you buy into rational expectations), then buyers who look at an alternative of renting would find that buying a house, even in a declining market, may make some economic sense.
Second, a LOT of the distress-sale buyers are investors who plan to convert former “owner-occupied” stock into rental homes.  Indeed, we will probably see a significant increase in the stock of rental homes in America in the coming years.  Again, the rapidly rising rental rates induces investors to want to get on that bandwagon quicker rather than later.  Since investor-buyers are usually in for the long-run, eventual re-sale prices are inconsequential to the decision.
The real challenge is for appraisers.  They are typically backward-looking in forming sales adjustment grids, and assume both linearity and continuity in market conditions adjustments.  Neither of these assumptions are valid today.  PLUS, when appraisers “get it wrong” in a declining market, they are often held to blame.  In short, appraising a $100,000 house today which turns out to only be worth $92,000 a year from now can get you in hot water, even though, following good appraisal practice, the house legitimately pencils out for $100,000 today.
Oh, and let’s not forget the challenge faced by tax assessors.  In some jurisdictions (like the one I live in), tax rates can rise when assessment rates fall, so that county and city budgets remain constant.  In other jurisdictions, however, either legal constraints or public opinion keeps tax rates flat, and thus a 30% decline in property values translates into a 30% decline in local budgets.  Since property taxes fund police, fire protection, and schools in most jurisdictions, this translates into some real pain for local officials.

Written by johnkilpatrick

February 22, 2012 at 10:26 am

Housing News

leave a comment »

I was just at a luncheon (sponsored by the local chapter of the Appraisal Institute) on apartments.  One of the speakers noted that a real problem in doing adequate analysis was getting a handle on the single-family housing market — the data simply stinks due to the foreclosure mess, the number of homes being turned into rentals, etc.  Thus, as we try to ALSO project the future of the homebuilding industry (really down for the count the last few years), that same dirty-data problem is a real issue.

That aside, the National Association of Homebuilders released a report today noting that the NAHB/Wells Fargo Housing Market Index rose in February for the fifth consecutive month.  As I discussed back in November (click here for a link) this index attempt to project home sales based on model home traffic, customer inquiries, and such.  Even though the over all stock market was down today, this news sent homebuilder prices higher — indeed, Beazer Homes (BZH) rose by 3.1%, albeit to just over $3/share.

NAHB’s Chief Economist David Crowe said, “this is the longest period of sustained improvement we have seen in the HMI since 2007.”  Great news for homebuilders — we hope it stays this way.  For a full copy of the article, on Fox Business News, click here.

Written by johnkilpatrick

February 15, 2012 at 4:54 pm