Bowden's Beat

Green Building Growth

Bowden's Market Barometer reported in the April/May issue that the McGraw-Hill Companies (www.mcgraw-hill.com) recently released findings from its Green Home Builders and Remodelers Study. According to the study, the construction of green homes is projected to see a five-fold increase over the next five years growing from 17% of all residential construction in 2011 to 29% to 38% by 2016. The study also found that green building provides a competitive marketing advantage as most buyers recognize the cost efficiencies associated with the operation of a green home. To read the full release click here.

Foreclosure Down, Investment Up!

Bowden’s Market Barometer discussed the declining foreclosure activity in the April/May edition, and continuing coverage on the subject indicates that the trend has legs! 

 The volume of homes entering the foreclosure process was down more than 30% in March. This flies in the face of predictions that the number of homes entering the foreclosure process would rise immediately following the recent $25 billion settlement between banks and state governments over fraudulent mortgage servicing. New data indicate that the rate of borrowers past-due 60 days or more fell to 5.78% in Q1, the lowest delinquency rate since 2009. Further to this issue, foreclosure sales – sales of homes in the final stage of foreclosure -- dropped to their lowest level in over two years in March as banks are now making concerted efforts to modify more loans.  In Q112, 198,000 completed foreclosures were reported compared to 232,000 in Q111, representing a 15% decline. 

Some economists warn of an impending spate of foreclosures, perhaps as soon as this summer.  Shadow inventory was estimated by CoreLogic to total 1.6 million units in January representing a six-month supply, down from an eight-month supply in January of 2011.  Other estimates come in closer to 1 million units. That said, investor activity seems to be quelling a rise in distressed property inventory.

Unlike the huge run-up of for-sale homes previously exacerbated by “flippers,” the new investment strategy is to “buy and hold.”  Large investors including Colony Capital, GTIS Partners, Oaktree Capital, and the Waypoint Real Estate Group are buying up thousands of homes and filling them with tenants who are often displaced homeowners.  Waypoint, which has purchased about 1,200 homes since 2008, has kicked into high gear, recently signing a $400 million deal with private equity firm GI Partners with plans to buy 10,000 to 15,000 more homes by the end of next year.

Beazer Homes USA, one of the ten largest single-family homebuilders in the US, recently announced its contribution of 200 single-family homes in Phoenix and Las Vegas to a newly formed REIT.  Beazer Pre-Owned Rental Homes, Inc. (BPRH) was organized to acquire, refurbish and lease recently constructed, previously owned homes on a “large scale, in select US markets.”

The government’s program to turn foreclosed Fannie Mae, Freddie Mac and FHA properties into rentals is intended to clear the national backlog of distressed housing while having the side effect of growing the job market. Morgan Stanley estimates that the program can result in more than one million privately funded jobs in the construction and real estate industries. Estimates call for about eight million properties to be sold in some form of distressed sale over the next five years. Turning half of them into rentals would represent a 20% increase in the total number of single-family rentals while theoretically creating a cottage industry of an additional 800,000 permanent jobs for servicing, cleaning, managing and maintaining the units.

Perhaps by the time the next wave of foreclosures hits, the market will be ready for the competition. One school of thought is that the faster the wave hits, the quicker the inventory will be absorbed and the market will return to a more traditional balance.

Bowden’s Market Barometer is dedicated to providing “real time” data that serve to assist the decision makers of our industry in following trends that will shape the future.  Visit us often at http://www.bowdensmarketbarometer.com.  < >

Austerity Burnout?

The election of new heads of government in both France and Greece suggests a majority of voters weary of austerity measures that have so far failed to pull Europe’s fat out of the fire. Britain’s Conservative-led coalition was also battered recently as local voters favored the opposition Labour Party, a proponent of growth.  Prime Minister David Cameron recently opined: “When people think about the economy they don’t see it through the dry numbers of the deficit figures, trade balances or inflation forecasts – but instead the things that make the difference between a life that’s worth living and a daily grind that drags them down.” 

So is austerity out of vogue?  Here in the US, it’s been questionable for some time now, as affluent Americans appear to be “back to basics” buoying travel and premium brand consumption. But based on the Spring 2012 Affluent Market Tracking Study, a twice-yearly survey of the wealthiest 10% of households conducted by the American Affluence Research Center (www.affluenceresearch.org) indications are that while our wealthiest households are no longer avoiding conspicuous consumption, they appear to have developed a more thoughtful approach to it. 

Methodology:  The 21^st AARC survey focused on the 11.4 million households that represent the wealthiest 10% of all US households in terms of net worth.  These households have a minimum net worth of $828,000 and an average of $3.1 million, an average annual income of $256,000, and own a primary residence valued at an average of $651,000.  Survey respondents represent 27 states and the District of Columbia; 86% of respondents are married; the average age is 58.8 years; 61% are men; and, 39% are women.  Just a few of the survey’s comprehensive findings include:

    Respondents are much more upbeat about the economy than they have been in more than four years.  The current business condition index of 69 reflects an increase of 38 points from the Fall 2011 survey – the best rating since Fall 2007, just prior to the beginning of the recession. 

    That said, purchase intentions rose only “slightly” from the Fall 2011 survey with respect to major items such as autos and residential property.  On the other hand, categories showing double-digit increases include domestic vacation travel (+17%) and international vacation travel +(13%.)

    About 37% of respondents believe they will make a conscious effort to reduce or defer expenditures during the next 12 months, while primary investment objectives seem to continue to swing toward capital appreciation/growth versus preservation of capital, which declined by 8 percentage points since fall 2011. 

While the practice of austerity appears to have worn thin with the wealthy, there remains a general attitude that a return to pre-recession levels of spending is largely dependent upon fully recovered home and investment portfolio values. A more practical approach to spending is evidenced by the discount wholesale club Costco ranking #1 as the “highest quality retail chain” among respondents, and the relative popularity of loyalty programs becoming increasingly prevalent among those in higher income and net worth groups.  Among those that belong to a hotel loyalty program, for instance, almost two-thirds (64%) say that the loyalty program influences them to spend more with the hotel company than they would otherwise spend. 

Look for more findings from the AARC survey in the June issue of Bowden's Market Barometer (www.bowdensmarketbarometer.com).  < >

Employment Situation – 05.04.12

Employment seemingly disappointed in April, adding just 115,000 jobs on the heels of an upwardly revised March estimate of 154,000 jobs and 259,000 jobs in February.  The result:  unemployment dropped to 8.1%, or as some pundits would say, “changed little.”

 While that purview may be accurate on some level, let’s compare year-over-year unemployment rates for some perspective. 

 April 2012: 8.1%

April 2011: 9.0%

April 2010: 9.9%

While the current rate is admittedly well above April 2007 when it was a celebratory 4.5%, it has been trending downward consistently for nearly 2 1/2 years.    There are a myriad of reasons for current conditions, but one significant factor is the absence of construction and related jobs, which buoyed our economy for decades. Currently, employment sectors seeing growth include professional and business services, retail trade and manufacturing, which is good news.  Perhaps most importantly, small and mid-size businesses saw gains of 58,000 and 57,000 jobs, respectively, last month, supporting "Main Street" stabilization. 

Looking at the big picture, the difference between the number of gross job gains and gross job losses in Q3 2011 yielded a net employment change of 753,000 jobs for the private sector, the largest net job gain since Q12006.  Further, employment growth is relatively universal on a geographic basis: Unemployment rates in March 2012 were lower in 342 of the 372 metropolitan areas and unchanged in 14 areas, while 17 areas registered rates of less than 5.0%.  The largest year-over-year unemployment rate decreases were gratefully registered in the Detroit-Warren-Livonia, and Monroe, Michigan metros, down 2.5 percentage points each, while 18 other metros saw decreases of 2.0 percentage points or more.

In keeping with the consistent increases in employment, personal and disposable personal income increased again in March, 0.4% each, up from 0.3% and 0.2% in February, and  personal consumption expenditures were up 0.3% as well.

As is typical, bad news sells and negative headlines are the first step in attracting attention to it.  But in this era of high-speed delivery and rapidly changing indicators, interpretation of the data as it applies to a specific industry can be tricky.

Bowden’s Market Barometer has been at it for 30 years, providing timely, relevant commentary specific to the residential and resort development world.  Check us out at BowdensMarketBarometer.com and if we meet your expectations, please subscribe.

In Their Own Words . . .

Sage Advice from Lew Goodkin

Goodkin Research Corp. provides real estate market research, analysis, and advisory services for new and existing residential and commercial development.  The company also provides valuation services for institutional and private investors and consults with lenders on repositioning and disposition strategies for distressed properties. Other services include market growth assessments and expert witness services.  

Our interview in the most recent issue of Bowden's Market Barometer was with well-known real estate market analyst Lew Goodkin, Chairman and President of Miami-based Goodkin Research Corp.  The following is an excerpt.

BMB:            Lew, while your residential and commercial real estate practice is international in nature, you’ve long been considered a veritable guru with respect to Florida development, so let’s start there.  How has Florida fared in comparison to other markets during the housing crisis?

 Goodkin:   The areas hit the worst by the housing bubble were those that had the highest levels of speculative buying. Because Florida is a market that benefits from very high consumer recognition, it has been one of the nation’s strongest domestic and international tourism markets resulting in a high level of speculative buying.

 BMB:            What other conditions contributed to the intense investment in the Sunshine State?

 Goodkin:   Florida has very appealing physical characteristics along with a contemporary real estate environment. It is an area with many water-oriented urban areas, extremely favorable weather and convenient air connections. It also has a wide variety of residential communities and housing products that includes new construction, resale inventory, and conversion opportunities. . Florida has the widest variety of community offerings in the nation, including large and small recreationally driven master-planned and mixed-use communities, retirement communities, country club communities, and resort communities.  When you add in the state’s multi-faceted domestic and international demand, you have the perfect formula for solid investment – in a healthy economic environment.

 BMB:            So what happened?

 Goodkin:  Investors began pouring money into the state, causing the run-up in prices that created the housing bubble. Most of these investors were indulging in pure speculation, often flipping units during or shortly after completion of construction.  Conversely, longer-term investors have been the backbone of sales during the ensuing downturn, participating in bulk purchases, short sales and foreclosures. 

 BMB:            What role did the banks play in the scenario?

Goodkin: The banks provided ridiculously easy financing during the run-up. Then, of course, they pulled back. Now, the absence of mortgage financing has made cash king.  Even as the market stabilizes, we continue to see a tighter market for mortgages for end-user buyers than existed before.  This remains the biggest inhibiting factor with regard to end-user sales.

BMB:            Who benefits from this constricted lending environment?

Goodkin:   This tight financing environment plays very well for investors, as it largely curtails any real momentum from end-user demand, greatly limiting the competition.  It also buoys the rental market where most of these investor units are being parked pending the evolution of more favorable market conditions. At that time, I expect many of these units will resurface as for-sale housing inventory.

To continue reading this comprehensive interview, go to BowdensMarketBarometer.com to purchase the current issue.  Lew may be reached directly at lewis.goodkin@goodkin.com or click here to visit the Goodkin Research website for further perspective.