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.

Home Affordability Offering Up 40-Year Deals

Home affordability is at 1971 levels, due to falling home prices and record low mortgage rates, pushing home ownership in reach to more families, according to the U.S. Department of Housing and Urban Development (HUD).

Home owners are bringing in nearly double the median income they need to cover the cost of an average home, HousingPredictor reports.

"With interest rates at historically low levels and markets across the country beginning to improve, home ownership is within reach of more households,” Bob Nielsen, chairman of the National Association of Home Builders, said in a statement.

Home sales have been ticking up, according to recent reports by the National Association of REALTORS®, the National Association of Home Builders, as well as the Obama administration’s December Housing Scorecard.

However, some consumers are finding more stringent lending standards for getting a mortgage a roadblock to home ownership, and some housing experts have blamed tighter underwriting standards in recent years for continuing to hold back the housing market.

Home Affordability Offering Up 40-Year Deals

Bank official says lessons learned from robo-signing

It's not the new Nevada law that has scared banks from filing notices of default.

It's lessons learned from the robo-signing scandal that emerged late last year, a Bank of America spokeswoman said Tuesday.

"We want to do everything properly," Jumana Bauwens said from Bank of America's corporate office in Los Angeles. "Before proceeding with foreclosure activities, Bank of America is ensuring that our processes are designed to be carried out in accordance with the new legislation in Nevada."

The main component of Assembly Bill 284, the law that took effect in October, requires that lenders filing a notice of default submit an affidavit stating they have the authority to foreclose on the property, basically that they own the actual note and deed of trust.

That has become a major obstacle for some lenders, particularly those in "judicial foreclosure states" such as Florida, New York and New Jersey that require court approval to foreclose. Foreclosures in New York take an average 986 days, compared with 379 in Clark County.

The new law has already throttled foreclosure proceedings in Nevada. Lenders filed 897 notices of default in Clark County in October, compared with an average of 4,453 a month from January through September, Discovery Bay, Calif.-based foreclosure information company ForeclosureRadar.com reported. The number fell to 259 through the first half of November.

AB 284 has affected all banks, Nevada Bankers Association President Bill Uffelman said. They are reviewing processes and procedures to make sure they comply with the law's requirements, he said.

"At least one community bank had to turn foreclosures over to outside counsel versus using in-house counsel, increasing their costs," Uffelman said. "Like all things that change, we will work through it."

ForeclosureRadar Chief Executive Officer Sean O'Toole said one section of the law appears to be specifically targeted toward Bank of America and its subsidiary, ReconTrust, which acts as the trustee in foreclosure proceedings.

The law says the beneficiary can't be the trustee, so Bank of America will have to find a new trustee in Nevada, O'Toole said.

Bank of America's Bauwens said ReconTrust served as trustee for most of the mortgages in hardest-hit states such as Nevada, Arizona and Florida. However, the bank uses other trustees and foreclosure activity should start moving forward in the coming months, she said.

PROTECTING HOMEOWNERS

The new law protects homeowners from improper foreclosures and protects the integrity of the homeownership system, Nevada Attorney General Catherine Cortez Masto said.

It was crafted largely in response to unscrupulous business practices such as robo-signing that produced false documents used to justify improper foreclosures, she said.

"The significant drop-off in filings of notices of default may be attributed to the fact that robo-signing is occurring and now those servicers cannot legally foreclose or that foreclosure servicers are taking the time to re-evaluate their procedures to ensure compliance with the new law," Masto said in an email.

"Either way, one month of data is too early to draw any strong conclusions," Masto said. "In addition, we understand that complying with any new law requires businesses to make changes in their prior business practices, which may not be accomplished overnight."

Masto said the dramatic decrease in foreclosure filings -- which has thrown local real estate agents into a panic over future inventory -- is not an "indictment" of the new law.

She's confident that legitimate businesses pursuing proper foreclosures will devote the effort necessary to comply with the law. They will incorporate those requirements into their business practices, just as they did when they had to adapt to the new foreclosure mediation program several years ago, Masto said.

Officials from Wells Fargo had no comments on the law.

Wells Fargo is challenging the constitutionality of the Nevada's foreclosure mediation program. The bank has appealed to the Nevada Supreme Court an order from a state District Court that rewrites several terms of a defaulting homeowner's mortgage. Attorneys argue that the program violates not only the state's basic charter, but also the takings, contract and due process clauses of the U.S. Constitution.

WHO OWNS THE NOTE?

Mark Connot, real estate attorney with Fox Rothschild in Las Vegas, said the law is good in that it addresses the robo-signing issue. Beyond that, it remains to be seen whether there will be any significant and long-term impact on foreclosures, he said.

An important question revolves around the interpretation of the statute that requires an affidavit, based on personal knowledge and under penalty of perjury, that "the beneficiary under the deed of trust (bank or lending institution), the successor in interest of the beneficiary or the trustee is in actual or constructive possession of the note secured by the deed of trust."

The key phrase is "actual or constructive possession," Connot said.

Constructive possession is generally defined as the power to control and intent to control a particular item of property. An employee of the bank or lending institution will have to sign an affidavit that the lender is in constructive possession of the note.

"In essence, the person signing the affidavit would be stating that the bank or lending institution has both the power and the intent to control," Connot said. "The power to control is the element that will be litigated.

"Even if the note has been bought and sold several times," he said, "the present holder of the note probably has the power to control possession even if it does not have actual possession."

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.