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business newsObservations on Real Estate and the Housing Market
By
Adam Katz
Jul 07, 2011 2:15 pm
Directionally speaking, lending standards continue to tighten and as a result, home ownership continues to decline.
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The home ownership rate per capita in this country capitulated in 2005 at almost 70 percent and seems, at least to me, as though we will be experiencing a prolonged period of secular decline. Regulations imposed the Federal Housing Authority (FHA) are tight and getting tighter. As an anecdote, I have a friend who owns her own three-year-old business which struggled for a year and is now recovering. Yet, she has more than enough cash in the bank to pay for the house. However, she believes that investing the capital into her business would yield a much higher return than the 4.5% or so that she believed she could get a 30-year-loan for. She cannot get a mortgage underwritten because of her lack of consistent income. The banks don’t want to lend and so they aren’t. Would you want to loan your money out at 4% per year for 30 years with at least US inflation approaching 4% (with chances inflation will charge much higher)? If the answer is not a resounding "No!" then I would encourage you to have your head examined.
And, banks feel the same. Owner occupant home ownership is not likely to grow in a meaningful way until interest rates go up. To many, this may seem counterintuitive, however if there is one thing that we have learned about the state of our capital markets, it’s that liquidity drives prices higher and performance-chasing from institutional investors is often what drives liquidity. Right now, investors do not feel that they are being compensated for the risk of owning pools of debt backed by housing given our recent history and low yields. Furthermore, it seems likely that banks will be requiring down payments to increase because that is what the lenders they sell the paper to will want, and Fannie and Freddie will have to be tamed significantly or phased out altogether. None of this bodes well for the state of home ownership for the masses. Sorry Barney Frank. According to the census bureau, home ownership was almost at 70% at the peak of the real estate market in 2005-2006. That number has only begun to decrease as the ability for average consumers to obtain mortgages will face a stiff headwind.
There is a silver lining on the investment front for those seeking income. I’m totally talking my own book, but it’s a great time to be a buyer of residential rental properties because a) you are purchasing properties at levels that, even after fixed up are trading below replacement cost, b) inflation has been and will continue to drive replacement cost higher, c) we are still experiencing substantial population growth (census estimates that the most likely outcome is that the population will grow by approximately 30% in the next 40 years and we will be approaching 400 million US citizens), and d) for the first time in almost 10 years, rental rates on modest real estate properties are offering fabulous risk-adjusted returns.
Going forward, I’ll be following how residential real estate is being affected by macro-economic and political policy and relaying personal investment experiences as well as observations and anecdotes from the field that I believe may affect real estate markets and trends (both fiscal and design). Most importantly, I am hoping to learn a great deal from what you are all seeing on the real estate front lines of your markets.
Editor's Note: For more, check out F4designs.com.
See also: Minyanville's Housing Market Report by Keith Jurow
No positions in stocks mentioned.
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Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
