Commercial Real Estate Index Shows Slowing Activity Expected
WASHINGTON, November 20, 2008
The economic downturn will slow commercial real estate markets into 2009 according to a forward-looking index for the commercial real estate sectors published by the National Association of Realtors®.
Lawrence Yun, NAR chief economist, said all components of the Commercial Leading Indicator for Brokerage Activity1 were down, with the exception of personal income. “Aside from weakening conditions in the index variables, the commercial mortgage-backed securities market is all but frozen, making it very difficult to rollover existing debt that is coming due,” he said. “It is encouraging to hear the Treasury Department is considering using the Troubled Asset Relief Program to help revive the commercial real estate debt market, but time is of the essence, and it must be implemented immediately.”
The CLI slowed 1.7 percent to an index of 116.5 in the third quarter from an upwardly revised reading of 118.5 in the second quarter, and is 3.1 percent lower than a level of 120.3 in the third quarter of 2007, which was the second highest index on record. NAR’s track of the commercial leading indicator dates back to 1990.
The decline in the index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, is projected to weaken over the next six to nine months.
The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of approximately 600 local market experts,2 also expects a lower level of business activity in upcoming quarters. The SIOR index has declined for seven consecutive quarters and is 33.6 percentage points below the 100 point criteria that represents a balanced marketplace.
NAR’s commercial leading indicator is a tool to assess market behavior in the major commercial real estate sectors. That index incorporates 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance, and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate.
The 13 series in the index are industrial production, the NAREIT (National Association of Real Estate Investment Trust) price index, NCREIF (National Council of Real Estate Investment Fiduciaries) total return, personal income minus transfer payments, jobs in financial activities, jobs in professional business service, jobs in temporary help, jobs in retail trade, jobs in wholesale trade, initial claims for unemployment insurance, manufacturers’ durable goods shipment, wholesale merchant sales, and retail sales and food service.
More than 82,000 NAR members offer commercial services, and 60,000 of those are currently members of the Realtors® Commercial Alliance, NAR’s commercial division.
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1NAR reviewed a wide variety of indicators, examined the relationships of indicators that demonstrated a historical impact on commercial real estate, and modeled a forward-looking index based on historic trends. Although individual indicators sometimes move in opposite directions, together they offer a better indication of future market activity.
Quarterly data for 13 selected series were reviewed back through the first quarter of 1990. The modeling demonstrated a change in commercial brokerage activity that could be seen two quarters later as measured by net absorption in the industrial and office sectors, and the completion of new commercial buildings as measured by the value of building construction put-in-place of office, warehouse, retail and lodging structures. An index of 100 is defined as the level of commercial real estate market activity during the first quarter of 1990, the first period to be analyzed.
2The SIOR Commercial Real Estate Index, conducted by SIOR and analyzed by NAR Research, is a diffusion index based on market conditions as viewed by local SIOR experts. For more information, contact Richard Hollander, SIOR, at 202/449-8200.
The next commercial leading indicator index will be released in combination with the commercial real estate market report and forecast on February 19.
For more information visit; www.realtor.org
Week Ahead: Earnings, Housing Data and an IPO
Earnings, inflation and housing will top next week’s investing agenda, along with the first initial public offering in nearly four months.
All eyes will be focused on quarterly reports from the likes of technology bellwether Dell, and retail giants Lowe’s, Home Depot and Target, for signs of where consumer spending trends are headed.
Also coming next week are economic reports that will offer insight into inflation and the current housing market.
Meanwhile, a lame-duck session of Congress will debate the merits of a bailout for the Big Three U.S. auto makers. A decision could have widespread ramifications for the stock markets.
MONDAY: Earnings from Lowe’s (LOW), and Target (TGT).
TUESDAY: Earnings from Dillard’s (DDS), Home Depot (HD), Staples (SPLS), and the government’s producer price index, which follows inflation at the wholesale level.
WEDNESDAY: Earnings from BJ’s Wholesale Club (BJ), and the release of the consumer price index, which tracks inflation at the retail level. Also to be released are figures tied to building permits and housing starts.
Wednesday will also see the first scheduled initial public stock offering in about four months, this from Grand Canyon Education Inc. (LOPE), an online college that hopes to sell 10.5 million shares for between $16 and $18, down $2 from the original price range.
THURSDAY: Earnings from Dell (DELL) and Barnes & Noble (BKS). Dell is expected to report earnings of 32 cents a share on revenue of $16.4 billion. Both figures are down slightly from year-earlier results. Dell has offered a gloomy outlook for global demand for its personal computers. The private Conference Board’s October Index of Leading Indicators is also out.
FRIDAY: Earnings from Ann Taylor Stores (ANN).
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Best Places to Sell a Suburban Home
Sellers’ markets are rare this year, but there are some suburban areas where prices are holding steady or rising and time on the market is measured in days or months, not years.
Forbes magazine took a look at the 90 days of sales activity in the 75 largest Census-defined metro areas. It narrowed its search to those communities with at least 75 homes on the market, and eliminated suburbs where it takes more than 125 days to sell an average home.
The magazine also cut out any suburb in which year-over-hear price declines were greater than 10 percent and where more than 50 percent of sellers had to reduce their asking price to sell.
What’s left? A list of the top 10 suburban markets where properties are selling at competitive prices relatively rapidly.
- Berkeley, Calif.: 14 miles north of San Francisco; median home price, $799,986; 73 days
- Bedford, Texas: 22 miles west of Dallas; $169,093; 84 days
- Venice, Calif.: 16 miles west of Los Angeles; $1.5 million; 95 days
- Kennesaw, Ga.: 28 miles northwest of Atlanta; $241,196; 104 days
- Sugarland, Texas: 20 miles southwest of Houston; $265,418; 106 days
- Midvale, Utah: 13 miles south of Salt Lake City; $255,003; 106 days
- Matthews, N.C.: 12 miles southeast of Charlotte; $320,990; 127 days
- Encinitas, Calif.: 28 miles north of San Diego; $1.23 million; 100 days
- Waltham, Mass.: 26 miles west of Boston; $790,986; 79 days
- Montclair, N.J.: 13 miles west of New York City; $450,761; 115 days
Source: Forbes, Matt Woolsey (11/06/08)
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Mortgage Rates Drop Again
Freddie Mac reports that the 30-year fixed mortgage rate dropped to 6.14 percent during the week ended Nov. 13, marking the second consecutive weekly decline. Rates were 6.20 percent the prior week.
The 15-year fixed mortgage rate fell to 5.81 percent from 5.88 percent, while the five-year adjustable mortgage rate slipped to 5.98 percent from 6.19 percent. However, the one-year ARM climbed to 5.33 percent from 5.25 percent.
Source: San Diego Union-Tribune (11/14/08)
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Another Loan Modification Plan on the Way
The Bush Administration announced a plan Tuesday that would use part of the government’s $700 billion in bailout money to encourage loan modifications so that borrowers would receive more affordable loans that requires less than 38 percent of their income to pay.
To qualify, borrowers must live in their homes, not be in bankruptcy proceedings, and owe at least 90 percent of the value of their home.
Fannie Mae and Freddie Mac would administer the program.
Critics say that the plan won’t work. FDIC Chairman Sheila Bair said it "falls short of what is needed to achieve wide scale modifications of distressed mortgages."
Source: The Wall Street Journal, Damian Paletta, Jessica Holzer and Ruth Simon (11/12/08)
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More First-Time Buyers Entering the Market
The 2008 National Association of REALTORS® Profile of Home Buyers and Sellers
reveals that the number of first-time buyers have risen as a percentage of the market share and they plan to own their homes longer than buyers in the past.
Lawrence Yun, NAR chief economist, said a higher share of first-time buyers makes perfect sense, and it’s a trend he expects to grow.
“First-time buyers are much more flexible in entering the market because they aren’t concerned about selling an existing home,” he said. “Given low home prices, plentiful supply, and affordable interest rates, it’s been an optimal time for entry-level buyers with a long-term view.
“Considering the temporary first-time buyer tax credit and improvements to the FHA loan program, we expect stronger entry-level activity as the flow of credit improves – that, in turn, should free more existing owners to make a trade in 2009.”
The number of first-time buyers rose to 41 percent from 39 percent of transactions in last year’s survey and 36 percent in 2006. “Although modest, this is a meaningful gain for the 12-month period ending at the close of June, and more recent independent data show a stronger uptrend in first-time buyers who are helping to reduce excess inventory,” Yun said.
According to the NAR study, the median age of first-time buyers was 30, down from 31 in 2007, and the median income was $60,600. The typical first-time buyer purchased a home costing $165,000 and plans to stay in that home for 10 years, up from seven years in 2007.
The median down payment by first-time buyers was 4 percent, up from 2 percent in 2007; the number purchasing with no money down fell from 45 percent in 2007 to 34 percent in the current survey.
“The study covers transactions through the middle of 2008, so we can assume the down payment numbers have shifted recently because credit tightened and no-down payment loans all but disappeared around the close of the survey,” Yun explained.
Of first-time buyers who made a down payment, 69 percent used savings and 26 percent received a gift from a friend or relative, typically from their parents. Another 7 percent received a loan from a relative or friend, while 16 percent tapped into a 401(k) fund, stocks or bonds. Ninety-two percent chose a fixed-rate mortgage.
The percentage of buyers who purchased a home in foreclosure jumped to 6 percent of transactions in the 2008 survey from 1 percent in 2007. Another 38 percent of buyers considered purchasing of a home in foreclosure but did not, primarily because they could not find the right home.
Commuting costs factored greatly in neighborhood selection, with 41 percent of buyers saying they were very important and another 39 percent saying transportation costs were somewhat important.
“Since fuel costs began rising in the latter part of the survey period, it’s reasonable to assume they’ve become even more important to home buyers since,” Yun said. “We’ve heard from our members that commuting costs are playing a bigger role in buyers’ decisions.”
Environmentally friendly features also were important, cited by 90 percent of buyers. Heating and cooling costs were of primary importance, followed by energy efficient appliances and energy efficient lighting.
The study found that 81 percent of sellers used full-service brokerage, in which real estate agents provide a range of services that include managing most of the process of selling a home from listing to closing.
Nine percent chose limited services, which may include discount brokerage, and 9 percent used minimal service, such as simply listing a property on a multiple listing service. All of these types of services are provided by REALTORS® as well as non-member agents and brokers. The results are identical to findings in 2007 and comparable to findings in 2006.
Primarily, sellers want agents to price their home competitively, market the property, find a buyer and sell within a specific timeframe. Home buyers are consistent in their expectations of real estate agents.
Buyers thought the most important agent services are helping find the right house, and negotiating sales terms and price. Because agents often are chosen based on a referral or were used in a previous transaction, two-thirds of buyers contacted only one real estate sales associates in the search process.
Sixty-one percent of buyers are married couples, 20 percent are single women, 10 percent single men, 7 percent unmarried couples and 2 percent other.
Twenty-six percent are nonwhite, 9 percent were born outside of the United States, and 4 percent primarily speak a language other than English.
Seventy-eight percent of all respondents purchased a detached single-family home, 9 percent a condo, 8 percent a townhouse or rowhouse, and 5 percent some other kind of housing.
Fifty-five percent of all homes purchased were in a suburb or subdivision, 17 percent were in an urban area, 16 percent in a small town, 10 percent in a rural area, and 2 percent in a resort or recreation area. The median distance from the previous residence was 12 miles.
The biggest factors influencing neighborhood choice varied by household type, but overall they were quality of the neighborhood, cited by 62 percent of respondents; convenience to jobs, 51 percent; overall affordability of homes, 41 percent; and convenience to family and friends, 38 percent.
Other factors valued highly by consumers include quality of the school district, 27 percent; convenience to shopping, 27 percent; and neighborhood design, 24 percent.
—REATLOR Magazine Online
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Mutual Funds Should Trim Fees To Ease Shareholders’ Pain
BOSTON — If the job of a mutual fund manager is to deliver returns that beat a stock market benchmark or that put them near the top of their peer group, then there is little doubt that most fund managers haven’t earned their keep this year.
That hasn’t stopped them from taking it.
Fund companies have raked in billions of dollars from investors, despite what can only be described as miserable, below-expectation performance.
The average funds in the large-cap growth, multi-cap growth, midcap and small-cap growth categories are all down more than 40% year to date, according to Lipper Inc.
The news isn’t much better in the value and core classifications for those asset classes, as the average player in those asset categories has lost one-third or more of its worth this year.
There also has been no shelter in other equity categories, with the average emerging markets fund off more than 55% this year and the average international fund down 45%. Indeed, the average fund in every equity category is down by more than 20%.
Even among bond funds, 11 of the 16 categories tracked by Lipper are negative so far this year.
Pay for performance
The question is whether the downturn is enough to have investors — and perhaps fund boards — considering whether they should push for a change the way management is compensated, further aligning the interests of customers and management by taking no fees if they fail to keep pace with an appropriate benchmark.
The poster child for this kind of activity is TFS Small Cap Fund (TFSSX) , a portfolio that opened in March 2006 with a performance-fee structure completely different than anything used widely in the industry.
TFS Capital Management of Richmond, Va. is best known for hedge funds, though it has a market-neutral mutual fund that it started in 2004 which has attracted about $380 million in assets and earned a five-star rating from Morningstar Inc. (Full disclosure: TFS invited me to be a board member of the market-neutral fund, which I declined because it would have been a conflict of interest.)
Hedge fund managers typically make money only if shareholders profit, and that was precisely the mentality TFS management brought to its small-cap fund, where the stated goal is to beat the Russell 2000 index (RUT) by 2.5 percentage points.
By topping the Russell by more than 2.5 percentage points, management could earn a bonus. That extra payment — based on how big the fund’s outperformance gets — would top out the fund’s expense ratio at 2.5%, or double what management would get with ordinary, index-like results.
If management lags the index, however, it must rebate fees to the fund. The worse the performance, the bigger the rebate.
So far, TFS Small Cap has not made much money. The fund is down about 35% year to date, while the Russell 2000 is off by 32%. Meanwhile, the fund’s losses since inception are slightly smaller than what an investor might have experienced in an index fund on the Russell, but they’re not 2.5 percentage points better.
‘Adding insult to injury’
And so, according to the fund’s Statement of Additional Information, TFS Small Cap has reimbursed the fund for all of the management fees it collected. Since inception, management has turned away some $200,000-plus dollars that most management firms would have pocketed.
To be sure, TFS Capital is not alone in having performance fees, Strategic Insight, an industry research firm, estimates that roughly 5% of all equity funds have performance fees, with Fidelity, Vanguard and Janus among the firms that have sliding scales for payment. It’s just that none of those other firms surrender everything when they fail to deliver.
TFS isn’t making an enormous sacrifice. The firm’s small cap fund has just a few million dollars in assets, and the paperwork suggests that 85 cents out of every dollar in the fund actually came from the managers, meaning that the firm is giving up fees that the firm’s top dogs would actually have had to pay.
But TFS co-founder and manager Richard Gates is right when he suggests that charging fees during times underperformance is akin to "adding insult to injury when it comes to investors who have already suffered an erosion of their principal."
And while reduced or waived fees simply appear to be the "right thing to do," there’s no rush of fund companies to make that happen.
Avi Nachmany of Strategic Insight notes correctly that performance fees have a number of practical issues which can make them hard to implement, and which also can lead to managers trying to game the system to inflate pay. As such, he doesn’t expect them to start gravitating toward performance fees any time soon.
That’s too bad. If fund companies are serious when they suggest that shareholders remain invested for some future turn-around, they could at least show some good faith and opt to waive or reduce fees to help ease the pain when it hurts the most.
Copyright © 2008 MarketWatch, Inc.
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Yun: Housing Can Save the Economy
The depth of the current recession depends on the housing market’s recovery.
"And housing’s recovery will depend on stabilizing prices and inventory absorptions,” NAR Chief Economist Lawrence Yun told a packed theater here Friday.
If housing prices stabilize, the current recession could be mild and recovery could come in the second half of 2009. Without stabilization, the recession could drag on until 2010, he said.”Economic conditions are worst than in the last two recessions, so the current downturn could be deep and prolonged, said Yun.
The good news, said Yun, is that even if the recession is prolonged ” housing doesn’t necessarily follow the economy.”
Housing demand is driven more by affordability and mortgage rates than economic performance, he said. “Even with the 6 percent current unemployment or the 9 or 10 percent that could come with a severe recession, most people will have jobs and will buy homes if the pricing incentives are there,” said Yun.
More positive news is that home sales—although not prices—showed their first uptick in three years during the last quarter. “We are beginning to come back, but recovery won’t happen until inventories are reduced from their current 10-month levels back to a more normal six months.
Fannie and Freddie also need to continue to fulfill their public mission of lending in difficult markets to keep mortgage rates low, Yun said.
But even more critical to a housing recovery are stabilizing home prices. Only then will new buyers get back into the marketplace and underwater buyers be able to consider moving up, he added.
A federal housing stimulus package for home buyers and the promised federal actions of buying troubled loans are also need to support home markets, he said. He urged members to make their congressional representatives aware of the need to help housing.
—Mariwyn Evans
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Bankrate: Mortgage Rates Decline In Latest Week
NEW YORK — Mortgage rates declined in the latest week, according to Bankrate Inc.’s survey released Thursday. The average conforming 30-year fixed mortgage rate pulled back to 6.44% from 6.77% a week ago, while the average 15-year fixed mortgage rate decreased to 6.21% from 6.46% a week earlier. Adjustable mortgage rates also slipped, with the average 5/1 ARM dropping to 6.46% from 6.67%. Bankrate said it expects the volatility in mortgage rates to continue amid “weak economic fundamentals and mounting mortgage delinquencies.”
-by Michelle Donnelly
Copyright © 2008 MarketWatch, Inc.
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1031 Exchanges: Tax-Deferred, Not Tax-Free
There are many complex rules governing 1031 exchanges, but one of the most important rules is easy to remember: “If you take the cash, you pay the taxes,” said Craig Brown, a vice president of IPX1031 Exchange, which specializes in exchange transactions.
He instructed a preconference course in Orlando on 1031 Exchanges. The 2008 REALTORS® Conference & Expo in Orlando officially kicks off on Friday, Nov. 7 and runs through Monday, Nov. 10.
If a seller exchanges one like-kind investment property for another, and the transaction results in any cash for the seller, that amount is taxable—even if the seller is taking on additional mortgage debt.
“Debt does not offset cash,” said Brown, who is based in Dallas.
Capital Gains Concerns
If your client expects to see cash from a 1031 exchange, it may be better to initiate the transaction in 2008, when the capital gains tax rate is only 15 percent, he said.
“You can’t predict what will happen next year to the capital gain rate, but many of my clients are concerned Congress will increase it next year, and they want to take advantage of the current rate,” Brown said.
If an exchange isn’t completed until 2009, the investor may choose to pay taxes on the gain in either 2008 or 2009 under IRS installment sales rules.
What Qualifies as a 1031?
To qualify for a 1031 exchange, a property must meet four basic rules:
- Be held for an investment or used for productive purposes in a business.
- Be exchanged with a like-kind property (any other type of real estate).
- Investor must identify replacement properties for the one being exchanged within 45 days.
- Exchange transaction must be completed within 180 days.
While it’s not possible to exchange a principal residence, a recent court ruling has clarified rules that make it possible to exchange a second home or a vacation home, Brown said.
The property must meet these requirements: The owner has held the property for at least two years; rented the property for at least 14 days per year at fair market value; and used the property personally for no more than 14 days of each year.
Dream House Rules
The same ruling spelled out circumstances under which owners could defer taxes when exchanging any type of investment property for a “dream house,” that they will eventually live in full-time.
First, the investor must rent out the dream home for 14 days a year for at least two years, and use it for no more than 14 days per year. At the end of the two-year span, the home could be converted to a principle residence for the owner’s use.
The two-day session on 1031 exchanges was presented by the REALTORS® Land Institute. For more information, visit www.riland.com
—Mariwyn Evans
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