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top real estate stories including financing, Federal incentives, general real estate news, laws that may affect home ownership and your federal taxes.

Cause For Optimism in the 2013 Housing Market

The Urban Land Institute recently released their forecast and statistics for the housing industry in 2013.    A turnaround beginning this year, albeit a slow beginning with 2013 showing more positive increases in value.

WASHINGTON (March 28, 2012) — A new Urban Land Institute survey of 38 leading real estate economists and analysts from across the United States projects broad improvements for the nation’s economy, real estate capital markets, real estate fundamentals and the housing industry through 2014. The findings, released today, mark the start of a semi-annual survey of economists, the ULI Real Estate Consensus Forecast, being conducted by the ULI Center for Capital Markets and Real Estate. The survey results show reason for optimism throughout much of the real estate industry. Over the next three years:

  • Commercial property transaction volume is expected to increase by nearly 50 percent
  • Issuance of commercial mortgage-backed securities (CMBS) is expected to more than double
  • Institutional real estate assets and real estate investment trusts (REITs) are expected to provide returns ranging from 8.5% to 11% annually
  • Vacancy rates are expected to drop in a range of between 1.2 and 3.7 percentage points for office, retail, and industrial properties and remain stable at low levels for apartments; while hotel occupancy rates will likely rise
  • Rents are expected to increase for all property types, with 2012 increases ranging from 0.8 percent for retail up to 5.0 percent for apartments;
  • Housing starts will nearly double by 2014, and home prices will begin to rise in 2013, with prices increasing by 3.5% in 2014

These strong projections are based on a promising outlook for the overall economy. The survey results show the real gross domestic product (GDP) is expected to rise steadily from 2.5 percent this year to 3 percent in 2013 to 3.2 percent by 2014; the nation’s unemployment rate is expected to fall to 8.0 percent in 2012, 7.5 percent in 2013, and 6.9 percent by 2014; and the number of jobs created is expected to rise from and expected 2 million in 2012 to 2.5 million in 2013 to 2.75 million in 2014. The improving economy, however, will likely lead to higher inflation and interest rates, which will raise the cost of borrowing for consumers and investors. For 2012, 2013 and 2014, inflation as measured by the Consumer Price Index (CPI) is expected to be 2.4 percent, 2.8 percent and 3.0 percent, respectively; and ten-year treasury rates will rise along with inflation, with a rate of 2.4 percent projected for 2012, 3.1 percent for 2013, and 3.8 percent for 2014.

The survey, conducted during late February and early March, is a consensus view and reflects the median forecast for 26 economic indicators, including property transaction volumes and issuance of commercial mortgage-backed securities; property investment returns, vacancy rates and rents for several property sectors; and housing starts and home prices. Comparisons are made on a year-by-year basis from 2009, when the nation was in the throes of recession, through 2014.

While the ULI Real Estate Consensus Forecast suggests that economic growth will be steady rather than sporadic, it must be viewed within the context of numerous risk factors such as the continuing impact of Europe’s debt crisis; the impact of the upcoming presidential election in the U.S. and major elections overseas; and the complexities of tighter financial regulations in the U.S. and abroad, said ULI Chief Executive Officer Patrick L. Phillips. “While geopolitical and global economic events could change the forecast going forward, what we see in this survey is confidence that the U.S. real estate economy has weathered the brunt of the recent financial storm and is poised for significant improvement over the next three years. These results hold much promise for the real estate industry.”

The survey results suggest a marked increase in commercial real estate activity, with total transaction volume expected to rise from $250 billion in 2012 to $312 billion in 2014. CBMS issuance, a key source of financing for commercial real estate, is expected to jump from $40 billion in 2012 to $75 billion in 2014 (a considerable increase from the recession’s low point of $3 billion in 2009).

Total returns for equity REITs are expected to be 10 percent in 2012, 9 percent in 2013 and 8.5 percent in 2014, a sharp decrease from the surging REIT returns of 28 percent in both 2009 and 2010, but settling closer to the more sustainable level seen in 2011.Total returns for institutional-quality real estate assets, as measured by the National Council of Real Estate Investment Fiduciaries Property Index, have also been strong over the past two years and these returns are expected to remain healthy, providing returns of 11% in 2012, 9.5% in 2013, and 8.5% in 2014.

“Commercial real estate returns for institutional quality and REIT assets have performed very well in recent years, and this performance is expected to remain strong but trend lower over the next three years,” said Dean Schwanke, executive director of the ULI Center for Capital Markets and Real Estate.
A slight cooling trend in the apartment sector – the investors’ darling for the past two years – is seen in the survey results, with other property types projected to gain momentum over the next two years. By property type, total returns for institutional quality assets in 2012 are expected to be strongest for apartments, at 12.1 percent; followed by industrial, at 11.5 percent; office, at 10.8 percent; and retail, at 10 percent. By 2014, however, returns are expected to be strongest for office, at 10 percent, and industrial, at 10 percent; followed by apartments at 8.8 percent and retail at 8.5 percent.

  • Apartments – The forecast predicts a modest increase in vacancy rates, from 5 percent this year to 5.1 percent in 2013 to 5.3 percent in 2014; and a decrease in rental growth rates, with rents expected to grow by 5 percent this year, and then moderate to a growth rate of 4.0 percent for 2013 and 3.8 percent by 2014. This may be indicative of supply catching up with demand.
  • Office – The improved employment outlook is reflected in predictions for the office sector. Vacancy rates are expected to keep declining, reaching 15.4 percent in 2012, 14.4 percent in 2013, and 12.3 percent by the end of 2014. Office rental rates are expected to rise steadily, increasing 3.0 percent in 2012, 3.7 percent in 2013, and 4.3 percent in 2014.
  • Retail – The strengthening economy is expected to boost the retail sector. Following years of rising vacancies, vacancy rates are expected to tighten to 13.0% by the end of 2012, 12.5% by 2013, and 12.0% by 2014. Retail rental rates are projected to rise by a slight 0.8% in 2012, and then increase more substantially in 2013 by 2 percent, and by 2.8 percent in 2014.
  • Industrial/warehouse — Vacancy rates are expected to continue declining to 12.8 percent by the end of 2012, 12.1 percent in 2013, and 11.5 percent by the end of 2014. Warehouse rental rates are expected to show growing strength, with an increase of 1.9 percent anticipated for 2012, 3.0 percent in 2013, and 3.6 percent in 2014.

For the housing industry, the survey results suggest that 2012 could mark the beginning of a turnaround – albeit a slow one. Single-family housing starts, which have been near record lows over the past three years, are projected to reach 500,000 in 2012, 660,000 in 2013, and 800,000 in 2014. The national average home price is expected to stop declining this year, and then rise by 2 percent in 2013 and by 3.5 percent in 2014. The overhang of foreclosed properties in markets hit hardest by the housing collapse will continue to affect the housing recovery in those markets. However, in general, improved job prospects and strengthening consumer confidence will likely bring buyers back to the housing market.

Greening the Multiple Listing Service

Over the last few years REALTORS® have been instrumental in greening their local MLS.  The value here is:

  • Sellers to attract Buyers wanting those features of their home.
  • Buyers wanting to find existing “green” homes.
  • Appraisers to have a tool to add value to the home for a new mortgage loan.

Since I am an integral part of the core group in Phoenix, AZ to add green features in the ARMLS (Arizona MLS) I understand the process and thinking of the MLS board.  The importance of the accuracy and validity of each featured added is the basis for appraisers to be able to incorporate the added value through their appraisals.  This link (click here) goes to the National Association of Realtor’s Green Resource Council “Green the MLS” page where they have listed those cities across the nation that have green features in the local MLS.

Fed Chairman Comments on Housing Market

At the recent International Builders’ Show in Orlando, FL, Federal Reserve Chairman Ben Bernanke addressed the audience with his thoughts on the 2012 housing market.  From’s recap of Bernanke’s speech:

Housing Markets in Transition
The economic recovery began more than two years ago, but it doesn’t feel like much of a recovery for many Americans—certainly for those of you who depend on the housing sector for your living, as well as for the millions of others who have seen their home values plummet or lost their homes through foreclosure. Though some progress has been made in reversing the losses in jobs and income sustained during the recession, the pace of expansion has been frustratingly slow and the unemployment rate remains very high by historical standards. The state of the housing sector has been a key impediment to a faster recovery. In the typical economic recovery, a resurgent housing sector helps fuel reemployment and rising incomes. But as you know all too well, that scenario has not played out this time. Although the precipitous declines in construction that began in 2006 are, thankfully, now behind us, home building remains depressed in most areas, relative both to where it was before the downturn and to where it will need to be to meet the needs of a growing population in the longer term.

The Federal Reserve has a keen interest in the state of housing and has been actively engaged in analyzing the housing and mortgage markets. Issues related to the housing market and housing finance are important factors in the Federal Reserve’s various roles in formulating monetary policy, regulating banks, and protecting consumers of financial services. Traditionally, mortgage interest rates have been a key transmission channel of monetary policy; and banks’ mortgage lending policies directly affect their own safety and soundness as well as the access of creditworthy households to mortgage credit.

Overview of the State of the Housing Market
One way to understand conditions in the housing market is to focus on the balance of supply and demand. For the past few years, the actual and potential supply of single-family homes has greatly exceeded the effective demand. The elevated number of homes that are currently vacant instead of owner occupied reflects the imbalance. According to the most recent estimate, about 1-3/4 million homes are currently unoccupied and for sale. While this figure has declined slightly during the past few years, it is nonetheless up dramatically from the first half of the 2000s, when readings of about 1-1/4 million vacant homes were the norm. Of course, housing conditions vary by region, and vacancy rates in some locations are substantially higher than the national average. For example, here in Florida the homeowner vacancy rate in the third quarter of 2011 averaged 3.2 percent, compared with the national average of 2.4 percent.

Moreover, a very large number of additional homes are poised to come on the owner-occupied market. In each of the past few years, roughly 2 million homes have entered the foreclosure process, and many of these homes have been put up for sale, crowding out much of the need for new building. Looking ahead, the relatively high rate of foreclosures is likely to continue for a while, putting additional homes on the market and dislocating families and disrupting communities in the process.

At the same time, a number of factors are constraining demand. Household formation has been down, particularly among young adults. High unemployment and uncertain job prospects may have reduced the willingness of some households to commit to homeownership. Availability of mortgage credit is an important constraint as well. Additionally, housing may no longer be viewed as the secure investment it once was thought to be, given uncertainty about future home prices and the economy more generally.

Not surprisingly, the large imbalance of supply and demand has been reflected in a drop in home values of historic proportions. Nationally, house prices have plunged about 30 percent in nominal terms from their peak and nearly 40 percent in real, or inflation-adjusted, terms. The imbalance of supply and demand has also been reflected in the decline in home construction. Since 2009, the pace of single-family housing starts has averaged less than 500,000 units per year. During the 15 years before the financial crisis, the pace of single-family starts had never fallen below 1 million units per year.

In contrast to the situation for owner-occupied homes, rental markets around the country have strengthened somewhat. In particular, vacancy rates for rental properties have declined and now stand near the lower end of their range over the past eight years. Not surprisingly, rents have been increasing and the construction of apartment buildings has picked up.

To recap, the housing sector continues to suffer from serious imbalances—a marked excess supply for owner-occupied housing accompanied by a stronger rental market. The narrative of the housing market over the next several years will revolve around the resolution of those imbalances.