Today I was quoted in this Los Angeles Times piece discussing the merger of the nation’s two largest online real estate listings companies. In the short term, they hope to streamline costs and provide a more powerful force in the digital real estate advertising and CRM (customer relationship management) marketplace. In the long term, they collectively forge ahead in the daunting task of trying to disintermediate the deeply-entrenched role of the residential real estate sales agent.
Yesterday I released my newest policy recommendations for improving economic competitiveness in Los Angeles County through the creation of additional workforce and affordable housing units, using transit and mobility hubs as a link to jobs-rich communities. You can download the report, entitled the 2013 Livable Communities Report: A Call to Action, here.
Below is a link to yesterday’s Bloomberg piece profiling the Arrowhead Residential Funds, which my company launched just over two years ago in anticipation of the recent housing market correction. We have thus far acquired approximately 250 homes, and the pipeline is still open for further acquisition activity over the remainder of this calendar year. For more information, visit www.ArrowheadFund.com.
I am sharing a couple of links to an interview I did yesterday on National Public Radio with Alex Cohen, host of “All Things Considered.” The topic of discussion was the proposed foreclosure registry in San Diego, aimed at reducing blight across bank-owned single family homes. This is a general article about the proposal, and this is the actual podcast. My radio interview starts at 1:07:20 on the MP3 file.
Minutes recently released from the 2006 meetings of Federal Open Market Committee (FOMC) offer some disturbing insights into the failure of Fed officials to understand how deeply intertwined the housing sector and financial markets are. This New York Times piece goes into much detail regarding this and other less-than-flattering aspects of these meetings. While residential investment represents a tiny four percent (4%) of Gross Domestic Product (GDP), it has far reaching backward- and forward-linkages into many other components of GDP, such as construction, construction materials, durable goods, home furnishings, brokerage and financial services. For this reason, it is often said that when it comes to the strong effect residential investment has on the economy, that housing is the “tail that wags the dog.”
When evaluating where we are in the housing cycle, it is often useful to evaluate fundamental valuation metrics and compare current trends versus historical averages. Below is a graph (click to enlarge) depicting the national price-to-rent ratio, which depicts how homes are trading relative to their rental values. This metric is similar to the P/E (price/earnings) ratio typically used in analyzing the stock market.
This graph uses the Case-Shiller Composite 20 and CoreLogic House Price Index, and sets the baseline period at January 1998, which is assigned a value of 1.0. The current ratio (as of October 2011) on both indices is at 2000 levels, indicating that we are very close to long-run historic average metrics. While foreclosures/short sales (lagging economic indicators) still account for a significant share of existing home sales, the good news is that delinquency rates (leading economic indicators) are gradually diminishing. As such, we can expect home prices to bounce around gently for several months, then gradually start to recover based on improving fundamentals.
In response to the National Association of Realtors (NAR) August existing home sales data, released here today showing that sales compared to the previous year are up and inventories are down, I issued the following statement:
“Although the year-over-year sales numbers look very positive, the reality is that last year’s August sales numbers were unusually low due to the post-Homebuyer Tax Credit hangover effect, so this year looks higher mainly by comparison only. We’re still below healthy levels.
We are seeing the foreclosure pipeline starting to open up again, which is good news. This will help achieve price discovery and equilibrium, which has been a huge problem over the past couple of years. In fact, the average home sold in a foreclosure proceeding has been delinquent for nearly 600 days, up from 478 days the year prior. In August, we started to see banks unload foreclosures and arrange short sales at a higher pace. Homes at risk of foreclosure accounted for 31% of sales in August, up from 29% in July. And because distressed sales occur at substantial discounts, this explains the median price decrease for August.
Overall, I believe these numbers continue to show that the housing market is now basically at the bottom, and although the August numbers appear positive, I don’t believe they foretell ongoing positive movement in the short- or medium-term.”
In response to the National Association of Realtors (NAR) data, released August 18th, showing that existing home sales slipped nationally and regionally in July, I issued the following statement:
“The research released by the National Association of Realtors showing a decrease in existing home sales reflects a continuing fall in the housing market, which is now basically at the bottom, with little or no movement expected in the short- to medium-term. The reason for the continuing decline in July can be attributed to negative jobs data throughout the month of July, as well as a crisis of confidence related to the debt ceiling impasse. In addition, when purchasing a home, buyers often look to capturing the “sweet spot” between low pricing and low interest rates. The Fed’s announcement last week to keep the short-term rate at near-zero for another two years removed any urgency for buyers who now have the convenience of waiting out the market to see if prices will in fact get a bit lower before pulling the trigger. Although July 2011 sales compared to July 2010 are up, this increase is misleading, as last July was the first month of sales data after expiration of the homebuyer tax credit, meaning sales were pushed forward into the months leading up to July 2010, causing that month’s sales to be unusually low. As such, a significant increase was expected.”
Here is the link to the official release: NAR Official Release
This New York Times piece, written by Andrew Martin and David Streitfeld, highlights the latest “foreclosure-gate” debacle — that is, the shoddy preparation of mortgage documents which has stalled foreclosures in 23 judicial foreclosure states — and the effect it has on home sales. While the article focuses on sales declines, it altogether ignores the issue of price stability. With fewer homes released into the market, supply is constrained, creating a bit of temporary price stability that otherwise may not have existed. Either way, like most efforts under the current administration, this series of events will simply slow the decline to where the housing market will end up anyway. Here’s a link to the article:
M.P. McQueen’s recent piece in The Wall Street Journal highlights a concept that I routinely teach in my “Real Estate Finance and Investments” course at UCLA: the incremental cost of borrowing. This concept basically conveys the importance of knowing the cost (or interest rate) on each additional dollar of financing.
In class, the example I typically use is to compare an $80,000 loan at 12% interest with a $90,000 loan at 13% (both loans are 25-year fully amortizing, with monthly compounding). While the difference may not be immediately intuitive, the additional $10,000 under the larger loan carries with it an interest rate of over 20%! In other words, you can conceptualize the $90,000 loan as being comprised of an $80,000 loan at 12%, together with a $10,000 loan at just over 20%, to equal a $90,000 loan at 13%. Feel free to contact me should you wish to see a more detailed explanation of how to calculate the incremental cost of financing, but in the meantime, check out the article below, where I discuss a case study that applies this concept to “cash-in” refinancings. This is a critical issue given today’s market dynamics: