AB284 Part II, 3 Months Later

As Home Buying Returns, Do Apartments Face a Bubble?

A huge surge in rental demand and comparatively little apartment supply created a boom in multi-family construction in the last year, but with the single family housing market slowly beginning to show signs of life, the concern among banks and investors is that all that supply will hit the market just as rental demand drops off.

Based on preliminary estimates of Q4 '11 activity, multi-family loan origination volume increased to $82 billion in 2011, up from $50 billion in 2010, according to Chandan Economics. Understandably, some lenders and investors are starting to ask questions.

"While 2012 should be another good year for apartment REITs, there is concern amongst some investors and managements that market expectations may be hard to beat," say analysts at Sandler O'Neill. "Based on discussions with managements, revenue growth should match sentiment but expense growth may be the wildcard."

Rents have been rising steadily as apartment vacancies drop and "rental nation" pervades consumer sentiment, but 2012 will likely not see as robust rent growth as 2011; housing affordability continues to improve and renting is becoming ever more expensive than owning.

"A stretched consumer is beginning to push back harder against rental increases, and new supply and a slowly healing single-family market will begin to equalize what has been a lopsided, renter-dominated housing market for over 5 years," say analysts at Green Street Advisors.

Mortgage applications surged 23 percent last week, according to the Mortgage Bankers association, although most of that was refinances. Another positive came from the NAHB's home builder sentiment index, which saw big gains in builder confidence, citing improved sales and buyer traffic. So is there real cause for concern about apartment demand?

"Only in some markets," says Sam Chandan of Chandan Economics. "Austin is a case in point. The supply response has been unusually strong there. Apart from specific cases like that, we do not anticipate a strong reversal in the rental bias until jobs accelerate markedly."

Since 2004, when homeownership rates peaked, the population of 20-34-year-olds grew by 2.8 million, according to researchers at CoStar Group, a commercial real estate information company. But the number of households shrunk by 300,000. In other words, younger Americans were doubling up with roommates or moving back in with their parents.

Mortgages

30 yr fixed 3.91% 3.96%

30 yr fixed jumbo 4.50% 4.58%

15 yr fixed 3.24% 3.39%

15 yr fixed jumbo 3.79% 3.93%

5/1 ARM 2.87% 3.17%

5/1 jumbo ARM 3.14% 3.27%

"This suggests big pent up demand - as much as 1.4 million new households within this prime renting cohort," says CoStar's Suzanne Mulvee.

We also have to remember that many Americans now have either damaged credit or not enough of a downpayment to qualify for today's low interest rate mortgages. That could keep them as renters for many more years, as credit standards aren't likely to loosen any time soon.

Pent-up demand will, like everything else in real estate, vary from market to market. In Washington, DC, for example, investors in multi-family are still very bullish, as home prices are strengthening and apartment supply is still limited. In other areas, like Las Vegas, where distressed homes are selling at big discounts, rental demand may wane more quickly for apartments, as those unwilling to buy choose to rent single family homes.

Another headwind to the multi-family sector could be more investors buying foreclosed single-family homes in bulk to rent. With federal regulators and the Obama administration seriously considering a program to sell bulk foreclosures owned by Fannie Mae and Freddie Mac, there could suddenly be a large supply of single family rentals competing against multi-family buildings. Again, that would largely be in the sand states, as there are far fewer foreclosed homes in major cities where apartments are and will likely continue to see big gains.

Housing Picture Expected to Brighten in 2012

Housing Picture Expected to Brighten in 2012

Better times are ahead for the real estate market in the new year, according to several forecasts and recent surveys.

Fiserv, a financial information services firm, predicts that 95 percent of the 384 metro areas it tracks will see prices rise in 2012. 

Many surveys and economists are forecasting a very modest increase for the housing market in the new year, but after several years of dropping prices and rising foreclosures, even the slightest increase would signal a glimmer of hope for the market. In a survey by MacroMarkets of 100 economists and real estate professionals, respondents reported home values will likely rise slightly at 0.25 percent in the new year.

The real estate market still faces a large backlog of foreclosures that it must work through in many markets. As such, price gains through 2015 will likely just be around 1.1 percent, according to the survey. However, this is a reversal after a forecast of 2.8 percent decline in median home values for this year.

Foreclosures continue to weigh on many markets and are preventing home values from stabilizing, economists say. 

"The water is very deep in the living room, but it's no longer getting deeper and is starting to recede,” says Mark Fleming, CoreLogic's chief economist. 

Low interest rates on mortgages mixed with more affordable housing for families in the median income range are expected help the market in its rebound in 2012, economists say.  

Source: “A Smaller House Will Make a Big Difference,” Money Magazine (Nov. 14, 2011)

Investors betting on recovery for Vegas housing market.

NEW YORK (CNNMoney) -- Las Vegas has suffered through the housing bust like few others places and still has further to fall. But these days many real estate investors and home buyers are betting that it's poised to stage a comeback.

Sin City's metro area led the nation in mortgage defaults for 22 straight months through August and home prices plunged a whopping 60% from their 2006 peak, according to RealtyTrac. And prices still have further to fall. Financial analytics company, Fiserv, projects home prices in Las Vegas could fall another 16% by next June.

More here:

Investors betting on recovery for Vegas housing market. - Nov. 9, 2011