Archive for the 'Economy' Category
Home prices and sales may be flat, but the rental industry is booming. The percentage of renters is on the rise, the number of households is increasing, and more Americans are downsizing, all of which point in a single direction: rents are on the rise.
At the peak of the housing boom, home ownership in America reached an all-time high at 69.2%. Today that number has plummeted to fewer than 67%, which may not sound like a huge drop, but that represents roughly 3 million households that were owner-occupied and are now tenant-occupied.
The high foreclosure rate has accelerated the transition toward leasing, but there are a myriad of other trends coalescing to boost demand for rental housing.
Read the newspapers and we’re at the brink: Global Gloom, Deepening Pessimism, Markets Drop Sharply. Is another Great Depression just around the corner? Is the US slumping to a decade of stagnation a la Japan? Is China now eating the lunch we thought we had bought cheap? Is our financial system just a Vegas vacation, making the house rich but producing no growth?
The answer is no, even though China is nibbling at that burrito and bankers are at the slots. The hero coming to the rescue of the US economy is that trusty favorite, the US Consumer. It’s a Consumer with flaws, like any modern hero, with a tendency to binge, and again wielding the weapon that often leads to trouble: the Credit Card.
After 28 straight months of pulling back on the reins, consumers have finally found a level of debt that feels good enough to allow more spending to flow. During those 28 months, the level of consumer debt per person [let's leave mortgages out of this] fell 13 percent, from $8,600 to $7,500. During the last recession with a real estate crash, 20 years ago, consumer debt dropped 14 percent. Sure, many things are different now, but some things aren’t.
Categories are graded from A thru F:
Economic Growth: C- (June 2011: D+)
The U.S. economic recovery remains sluggish. Real GDP grew at a 1.3% pace in 2Q11, following downwardly revised growth of 0.4% in 1Q11; far below the 1.9% rate of expansion previously estimated for last quarter. We now have positive Y/Y employment growth for eleven consecutive months, with payrolls expanding by 117,000 in July, up from 46,000 in June, and the unemployment rate dropping from 9.2% to 9.1%. Initial jobless claims fell to 400,000 in July. Government payrolls decreased by 37,000 in July, the ninth straight sequential drop.
The average length of unemployment increased to 40.4 weeks (new record high), and the labor force percentage of those unemployed over 27 weeks dipped slightly from 4.1% to 4.0%. On a positive note, retail sales continue to improve, with Y/Y growth at 8.5%.
Leading Indicators: C- (June 2011: C)
Leading indicators for the economy are mixed this month, with our overall grade for this subsection of indicators dropping from a C in June to C- in July. Many of the leading indicators we analyze have been trending down over the past several months, returning to levels not seen since mid-2009, a time when the U.S. economy was still in the midst of the Great Recession. For example, the ISM Purchasing Managers Index has fallen two consecutive months, dropping to 50.9 (just above the expansion threshold value), a level not seen since July 2009. In addition, the Vistage CEO Confidence Index fell in 2Q11, crossing into negative Y/Y territory for the first time since 2Q09. Corporate profit growth was revised down from last quarter, rising at an 8.8% Y/Y clip in 1Q11, the weakest annual growth rate since Q309. Other leading indicators such as the ECRI Leading Index were relatively flat versus last month.
Real estate investors are likely to be three times more active than other types of home-buyers in their local markets within the next two years, according to a national survey by Realtor.com operator Move Inc.
Market research firm GfK Custom Research North America conducted the survey on behalf of Move from April 11-15, 2011. The survey included telephone interviews of 1,200 U.S. adults, of which about 200 were identified as real estate investors. Data was weighted by age, sex, education, race and geographic region.
A third of real estate investors are planning to buy in the next 24 months, compared to 8.6% of typical home-buyers — those planning to purchase a primary residence, vacation home or retirement property. Another 9.1% of typical home-buyers, and 28% of investors, plan to purchase between two and five years from now.
Among the investors, half plan to hold their properties for five or more years while 11% expect to sell within a year of purchase, according to the survey.
Jobs, jobs, jobs! That’s what we’ll hear from now on through the 2012 election, and rightly so. Although they claim otherwise, Wall Street and the Big Banks are not the essential, indispensable, must-be-bailed-out part of the national economy: it’s people with jobs. Those people account for 70 percent of the economy (the government is 20 percent).
As we’ve already seen, those people aren’t spending very much money these days, needing no more time-share condos, full-size SUVs, leather furniture, and flat-screen TVs. Which means there are fewer jobs for the people who were making those things a few years ago.
The national economy grew at a modest annual rate of 1.3 percent in the second quarter of this year, better than the 0.4 percent of the first quarter, but there is some cause for anxiety: personal spending was flat in the second quarter, after growing between 2 and 3 percent in 2010.
Most people think of the real estate market as something that’s measured like the stock market—bearish or bullish. In real estate, the common expressions for a bull market are “up,” “strong,” “good,” “hot,” and “seller’s.” A bearish market is described as “soft,” “bad,” “down,” or “buyer’s.” On a daily basis, you’ll hear the media use these expressions to describe the real estate market based on facts and figures, most of which are confusing to the average investor.
Let’s discuss each of the categories for the numbers you may be hearing and see how they affect the market and, more importantly, your investing strategies.
Most people think of the real estate market as something that’s measured like the stock market — bearish or bullish. In real estate, the common expressions for a bull market are “up,” “strong,” “good,” “hot,” and “seller’s.” A bearish market is described as “soft,” “bad,” “down,” or “buyer’s.” On a daily basis, you’ll hear the media use these expressions to describe the real estate market based on facts and figures, most of which are confusing to the average investor. Let’s discuss each of the categories for the numbers you may be hearing and see how they affect the market and, more importantly, your investing strategies.
Categories are graded from A thru F:
Economic Growth: D+
Trends were mixed this month, as a few metrics ticked up while the majority ticked down, resulting in a drop from C- last month to D+ this month for overall economic growth. The employment market improved once again this month, (albeit at a less than stellar pace) and Y-O-Y employment growth has now been positive for nine consecutive months.
Payrolls expanded by 54,000 in May, the smallest gain since September 2010 when 29,000 jobs were lost, while the unemployment rate increased marginally from 9% to 9.1%. The government continues to slash jobs (29,000 this month), and has now eliminated roughly 850,000 jobs over the last 12 months. In addition, the average length of unemployment increased to 39.7 weeks (a new record high), and the labor force percentage of those unemployed over 27 weeks rose to 4%. While still down Y-O-Y, mass layoffs have been trending up over the last several months, rising again this month.
The rate of inflation (both full and core) continued to increase this month, maintaining its steady upward trend that began in Spring/Summer 2010.
The only “hedge” against inflation that we are aware of that works consistently over time, in any market, and any economy is real estate. Well bought real estate can stand the scrutiny of analyses, using historic or current data, by investing using borrowed money.
To be clear, the ability of real estate to provide a real hedge against inflation only works if you get a mortgage to acquire the property. If you use your own cash, then this capital will be ravaged by the same inflation, and in a similar manner, as if you had purchased anything else.
Although we argue strenuously that there are other benefits of investing in real estate. However, the greater the proportion of the purchase price that is funded using borrowed money, the greater the inflation-beating benefits to you.
And this is where we come to one of those great benefits of real estate that is easy to miss. Since real estate prices are subject to inflation, by borrowing the purchase price (or a large proportion of it) you can largely beat inflation, and real estate is also about the only asset class against which banks and financial institutions will let you borrow money in the first place. It’s a marriage made in heaven!
With presidential elections coming up next year, and Osama Bin Laden now dead, we’re going to be hearing a lot of political talk about the old Bill Clinton mantra,“It’s the economy, stupid.” So, let’s look at the basics.
“The economy” means jobs. From the high point of the expansion that ended in 2007, to the low point of the recession in early 2010, the economy lost about 9 million jobs. Almost 2 million of those jobs have been recovered and the economy is adding new ones at a rate of 1.5 million a year, but even if this rate improves, that’s only another 2 million before election time, still leaving us down 5 million jobs from where we were.
The culprit, of course, is ourselves. Instead of freely spending money like we did, we’ve been putting it in the bank, an extra $400 billion a year. That equals a lot of jobs, even if some of them are in China. In the long run this is a good thing because we had gone over our eyeballs in debt, but in the short run it means the economy will grow only slowly.
The S&P/Case Shiller Home Price Indices reported Tuesday are, as usual, so far behind the curve that not only did they miss the “double dip” that has come and gone, it will be at least July or August before it reports an apparent upturn in prices in March and April. S&P’s view of the data was dour. “There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing, ” said S&P’s David Blitzer. “The 20-City Composite is within a hair’s breadth of a double dip.”
There’s just one problem with that. Other price indicators that are not constructed with the Case Shiller’s large built in lag, passed the 2009-2010 low months ago. The FHFA (the Federal Agency that runs Fannie and Freddie) price index showed a low in March 2010 that was broken in June 2010 and never looked back. That index is now 5.6% below the March 2010 low. Zillow.com’s proprietary value model never even bounced. It shows a year over year decline of 8.2% as of February. Zillow’s listing price index shows a low of $200,000 in November 2009, followed by a flat period lasting 6 months. As of March 31, that index stood at $187,500, down 6.25% from the 2009-2010 low for data.
The Case Shiller Indices for February held slightly above the January level (not seasonally adjusted). I follow their 10 City Index due to its longer history. It was at 153.70 in February versus 152.70 in January. These levels are still above the low of 150.44 set in April 2009.
The Case Shiller index showed a recovery in prices in 2009-10 only because of the weird methodology it uses. Read more »
Categories are graded from A thru F:
Economic Growth: C-
Economic growth trends were mixed this month, as several key metrics ticked up while others ticked down. The employment market improved once again as year-over-year employment growth has now been positive for seven consecutive months, and unemployment now stands at its lowest level since March 2009.
In addition, retail sales improved this month, while real GDP for the fourth quarter was revised slightly higher to 3.1%. On the downside, the rate of inflation (both full and core) continues to increase, while the average length of unemployment increased to an all-time high, currently at 39 weeks.
Affordability: D+
Affordability has rarely been better for entry-level buyers, and rarely worse for move-up and move-down buyers, who need to extract equity from their existing home. As such, we continue to grade our overall affordability indicator at a D+. After increasing every quarter from Q1-2009 through Q2-2010, owner equity declined for the second consecutive quarter in Q4-2010; a reflection of the continued downward pressure on home prices.
Mortgage rates remain near historical lows, and home prices have dropped from unrealistic boom levels to entirely sustainable levels, with some markets like Las Vegas well into “over-correction” territory. Our housing-cost-to-income ratio remains low, now at 22.4%, and our JBREC Affordability index stands at a remarkable 0.0, which is the highest possible rating for affordability. The median home price-to-income ratio has declined to 2.8, which is less than the long-term historical norm and near a level conducive to market health.
This week’s issue of Fortune Magazine proclaims the “return of real estate”. I didn’t think I would see an article like this from a mainstream publication so soon – especially from one of the most trusted financial magazines. Could this mark the beginning of more good news to come?
“Forget stocks. Don’t bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing,” writes Shawn Tully.
The article covers five trends as justification for improvement in the real estate market:
- The steady decline in prices which has been going on nationally since 2005 has finally hit a level where it costs less to own a house than to rent in many cities.
- The supply of renters has increased sharply in the recent past, which has already begun to cause rapid increases in rental rates.
- Home builders have held back on building new homes for several years, creating the conditions for a shortage of new homes when demand goes up just a little bit.
- Investors, responding to the big demand for rental units, are rapidly buying down the overhang of foreclosed homes which has dogged the market.
- Finally, the U.S. economy seems to be on the path to improvement, although we still struggle with high unemployment and weaker-than-normal consumer spending.
It is an out-of-favor asset class that has attracted the attention of David Ackman, a hedge fund manager with a fondness for contrarian investments. “The best investments we’ve made are the ones no one else would touch,” Ackman explains. That’s why he’s so hot on Single Family Home Rental Property. They are cheap, he says. They are a buy.
Ackman argues that Single Family Home Rental Properties possess the identical investment attributes that strongly performing stocks typically possess. Says Ackman:
We believe we’ve identified an investment with:
- A low valuation – The lowest valuation in at least a generation.
- Forced sellers – A large number of distressed transactions.
- Extremely attractive financing available – High loan-to-value, low-rate, fixed-rate, long-dated, non-recourse debt, pre-payable without penalty.
- Favorable long-term supply dynamics – Short-term oversupplied market, but long-term supply is controlled.
- Favorable long-term demand dynamics – Demographically driven demand growth.
- Out-of-favor – Currently, this is a somewhat shun asset class.
Ackman’s bullish perspective flies in the face of the pervasive pessimism about home-buying. “Experts Say Housing is a Lousy Investment and it Always Will Be,” an August 2010 headline on Yahoo! Finance declared. “The US Housing Market is Headed for a Complete and Total Nightmare,” another financial news service predicted. And just last week, a CNNMoney.com headline warned: “Why Home Prices Could Fall Even More.”
According to a recent survey released by the Mortgage Bankers Association (MBA), the “latest delinquency numbers represent significant, across-the-board decreases in mortgage delinquency rates in the U.S.,” according to MBA’s chief economist, Jay Brinkmann[1]. In fact, total delinquencies (not including homes already in foreclosure) are at the lowest levels since the end of 2008, and mortgages with one payment past due alone are at their lowest level since 2007, which MBA marks as the “very beginning of the recession.”
Perhaps even more more promising: at the beginning of 2010 90-day-or-more delinquencies were at an all time high at the beginning of 2010 but have now fallen 28 percent, and 48 of the 50 states experienced a drop in this area.
Investors love real estate because it acts as a hedge against inflation. This occurs for several reasons:
One, on an historical basis, housing prices rise just as fast or faster than the rate of inflation. Two, although investors can’t always raise rents to account for inflation (due to fixed-rent leases of one year or more), the value of the property itself will increase. Three, when real estate investors have a fixed-rate loan, expenses will stay the same, and they pay back that loan with money that’s worth less than what they borrowed! In effect, it’s a form of debt reduction. It just doesn’t get any better than that!
Inflation should be moderate in order to benefit investors. Hyperinflation or its opposite – deflation – are definitely bad news for everyone.
