Multifamily’s Grip Versus The Single Family Sector
We’re out in Phoenix this next couple of days, hosting a conference for multifamily housing finance executives.
Like almost everything these days, the housing crisis and broader, deeper economic crisis have polarized people into opposing sides of an economically, politically, and emotionally charged issue. One one side, there are those whose businesses’ interests focus mainly on multifamily for-rent units, and on the other, those who make a living doing single family for-sale housing.
It’s popular among multifamily executives to lay blame for society’s ills at the feet of home builders and residential developers of for-sale communities. Here’s a multifamily executive’s oft-chanted refrain these days, referring to the damage single family for-sale companies have wrought upon the universe.
- They overbuilt
- They overcharged
- They took our customers by seducing them with false come-ons and fraudulent financial processes and procedures into a homeownership dream those customers could not afford
- They ran their companies poorly, and sapped perfectly good lending institutions of their ability to sustain good healthy capital investments in multifamily deals and projects
- They are part of a conspiracy to expand homeownership in America, which devalues our competitive offerings in responsible housing
From October 1, 2008 on, the volume of the antagonism aimed at home builders by the multifamily industry sector’s leaders and trade association leadership has increased. Here’s how the National Multi Housing Council promotes its 2008 Annual Report:
2008 will long be remembered as the year that the easy credit days of the first half of the decade came to a crashing halt.
The looming credit crisis quickly expanded into a global financial crisis and eventually into one of the worst economic downturns in decades. It is also the year that policymakers and consumers had to admit—as NMHC had been warning for years—that, yes, there is such a thing as too much homeownership.
Last year, homeownership rates posted their sharpest decline in 20 years, falling from a peak of 69.1 percent in 2005 to 67.5 percent in 2008, a level last seen in 2001 and erasing all of the much-touted homeownership gains of the last administration’s “ownership society” initiative. Meanwhile the number of renter households jumped from 30.9 percent to 32.2 percent.
Multifamily companies’ access to capital, their own balance sheet exposure, their redoubled challenge to cope with rising vacancy rates and deteriorating rent power amid a rising tide of unemployment in America, all got swept into the viscious-circle vortex of soaring foreclosures, declining home values, stress on mortgage lenders, and in turn stress on commercial real estate lenders… all impacting earnings, hiring, spending, and sentiment.
Still, we feel that it’s a red-herring and a misstep for multifamily strategists to pin responsibility for the enormous dislocation in the economy on their brethren and sistren from the single family side of the housing equation.
Multifamily operators, owners, developers, and builders have a long list of opportunities, challenges, caveats, missteps, and smart tactics for survival into the next up-cycle in housing whenever that might occur over the next couple of years. No need to paint home builders as part of an evil conspiracy to siphon away renters with a panacea about homeownership for all.
Housing’s crisis is, at the bottom, a household-by-household balance sheet correction that added up to global proportions. You can see this clearly in analyses such as the one Calculated Risk has done about how people–the you and I kind of people–save and spend.
In his post, Personal Saving and Mortgage Equity Withdrawal, Calculated Risk maps out the grim difference between where savings could and should have been as opposed to where it was and is. If people are spending the phantasmagoric appreciation on their owned homes as if it is income, then we get a glimpse of how far we need to correct to pay that back. People can buy a lot of things with play money if it’s accepted currency, but when everyone realizes it’s play money after all, the false economic bouyancy comes to a sudden end.
The aggregate saving rate captures the behavior of both savers (who probably didn’t change their behavior) and “dissavers” (who borrowed heavily). The saving rate declined to zero, probably because the dissavers were using MEW as income.
Now that the Home ATM is closed, the saving rate is rising because of less borrowing – as dissavers are forced to live within their incomes.
This is the current challenge. People, especially if they fear lost income or the lost ability to generate income, save cash. Banks act on similar fears, and so they’re stuck in the limbo of our current unemployment trends.
Savers and “dissavers” alike are saving all at once.
That’s not anyone’s fault, and it’s human nature, and it’s ultimately the source of opportunity for people in housing if they can get past blaming one another for what’s wrong. Housing has an over capacity problem. Too many companies can build and operate and develop housing, and that’s what our wacky market will correct.
Meanwhile, we’re seeing good examples lately of how pricing can be a lever to move inventory and close the huge gap between the number of vacant household units there are and the demand for them. The “V” for value is still hidden somewhere in that gap.
Stranger Than Fiction
The subject line in the email forward for this Scott Adams solid gold nugget is “Life as we know it.”
You’ll have to click on the image to enlarge it to read it.
Please click on the image for an enlarged version.
Go Trigger
You’re hearing about prices, interest rates, and offer-you-can’t-refuse incentives that are pulling some of the past year’s pent-up demand from idle to active in on the home buying front.
CNBC’s queued up a circa 2002 style short list of tips for the few and far-between serious home shoppers in the current market. Notice the check-list includes a) a downpayment, and b) a caveat emptor that says “don’t count on selling this baby for a good long while.
Let’s go to the video:
I Say, About that Toxic Asset Plan…
This ADD-sufferers’ version of the Geithner Put comes from the Financial Times, which uses explainer-graphics and a we-can’t-make-this-stuff-up voiceover to make the toxic asset plan clear enough for the dullest of us knives in the drawer.
Here’s a link to The Geithner Plan Explained from FT.com. You won’t regret the time it takes to register for the site.
One Blip at at Time
Debate among economists about whether the February new-home sales release from the U.S. Census Bureau, the Commerce Department and the Department of Housing and Urban Development was postive or negative is a glass-is-half-broken (yes, not half-empty nor half-full) argument.
Anyone who claims that the gist 120-word summary for Febuary 2009 one-family new residential sales fits his or her predictive model for how housing is behaving is not mortal, or lying.
Sure, if you’re applying disciplined economic analysis, there’s no other way to look at data for Febuary 2009 vs. data for February 2009, (notwithstanding the one-day difference due to 2008 being a leap year).
But those who are raising a ruckus about the media numbskulls who are getting it wrong by noting that the month-to-month upward swing is a positive miss at least part of the point: The barrage of adverse headlines contribute to negative sentiment which feed negative trends. Barry Ritholtz’s The Big Picture blog is on a withering tear against print and TV media for inaccurately reporting on the new-home sales data.
A parade of the mathematically innumerate business writers (and even worse headline writers!) continue to misread data. The latest evidence? New Home Sales.
After incorrectly reporting the Existing Home Sales, the mainstream media misread the Census department report of New Homes.
No, New Home Sales data did not improve. In fact, they were not only not positive, they were actually horrific. The year over year number was a terrible down 41%. Sales from this same period a year ago have nearly been halved.
Why did the media report this as positive? If you only read the headline number, you saw a positive datapoint: February was plus 4.7% over January.
To get the the facts, you need to read below the headline. In the present case, it wasn’t the seasonality factor that was confusing, it was the “90-percent confidence intervals” — or as it is more commonly known, the margin of error. (more from The Big Picture post)
There are several issues at work here, but for home builders and real estate professionals, the best advice might be this. Put your fingers in your ears and don’t listen to anyone who nay-says the little gains you’re making in your communities.
Economists–whether they’re positive or negative about the data–want an audience for their business and career interests. It seems as if some of them make a good living by telling people that the media has no credibility, and asking why anyone reads a newspaper or watches a news telecast.
Economists who profess that they’ve been right all along about what is going on in the economy are doing so because the marketability of their theories redound to their financial well-being.
Journalists, on the other hand, work for at least two bosses these days. One is their management, and the other is their audience. Always and forever, the audience is the toughest boss when it comes to the so-what? factor of relevance and accuracy of facts and perspective. Also, journalists, in more ways than ever, work collaboratively with their audiences on getting the whole story that matters, especially as citizen journalism surfaces as part of every media title and channel.
It’s illuminating to get corrected perspective and insight on the new-home data. Here’s how avuncular Calculated Risk steers people to understand how not to get too overjoyed at a blip up in new-home sales from January to February.
Click on image for access to Calculated Risk post.
This graph shows the February “rebound”.
You have to look closely – this is an eyesight test – and you will see the increase in sales (if you expand the graph).
Not only was this the worst February in the Census Bureau records, but this was the 2nd worst month ever on a seasonally adjusted annual rate basis (only January was worse).
Calculated Risk’s assertion–oft-repeated these days whether the media headline is positive or negative–is that a sales volume bottom for housing is likely in 2009.
It’s important to understand, however, the level that neither The Big Picture nor Calculated Risk matter when it comes to the viability and vitality or morbidity of home builders and real estate.
Their measures of correctness or error are on a national, macro level. They can be right, and still get it totally wrong when it comes to understanding what’s going on in home building and sales organizations in the first half and second half of 2009.
Even with the full measure of their economic skills, they’re not set up to catch the first flickers of recovery, just as they do not get the challenge of marketing and selling about 340,000 homes a year into the teeth of this environment.
Clearly, home builders are telling us that where they can get some traction with their prospective home buyers, they’re making some progress. In California, where a $10,000 tax credit jolt compliments the national $8,000 first time buyer tax credit, you’re starting to see home price correction and stimulus combine to pull people off their duffs on the sideline.
While home builders, manufacturers, and trade groups are willing to support the $8,000 tax credit initiative in the fledgling $787 billion economic stimulus program, their point organization, the Fix Housing First Coalition, is carefully watching the California front in hopes of renewing its case for a bigger one-time credit for all home buyers.
Yesterday, two House Republicans, Eric Cantor (R-Va.) and Mike Pence (R-Ind.) introduced a “Responsible Homeowners Act” measure that would bring back a $15,000 tax credit for buyers of primary residences who put a minimum of 5% down on their purchase.
Economics, being the dismal science that it is, has not solved the math problem of where home prices need to correct to and what policy pushes are necessary to wrench open the spiggot of real estate transaction.
Which means home building operators and their leadership need to keep turning a deaf ear to the blather about national data points–especially ones that dowse morale, confidence, and focus–and just keep selling so that one blip can turn into two, and 30 days later, maybe a third blip in a row.
Then, even the nay-saying-est economists around will have to admit that you’re creating a blip tide, otherwise known as an economic trend.
Bar Banter
The 800 pound gorilla is the complex fact that there’s still more than a year’s supply of places people have been trying to sell. And the question remaining is to which mean — comparisons to rents or relationships to household income or return to 50-year pricing norms — will home prices descend to get the free-flow of sales transactions and absorptions going again?
Whatever you believe, be careful of putting eight economists in a room with the same data and the same set of questions, because you’ll be thoroughly confused by the time they finish their answers to the questions.
Click image for access to Wall Street Journal analysis of new-home sales data.
Imagine, this little picture causing such an array of conflicting, puzzling, almost bizarre observations from a veritable think-tank of specialists in the dismal science.
Here’s a snippet from the Wall Street Journal’s Real Time Economics brief today, citing Omair (not Omar) Sharif, RBS Greenwich Capital.
Overall, this report is better than we had anticipated, continuing a pattern of the February housing data exceeding expectations (recall that existing home sales bounced by 5% and housing starts climbed by 22%). To be sure, the improved data last month followed months of horrendous housing data, as activity fell off of a cliff following last fall’s financial upheaval. The pickup in February also came on the heels of an especially weak January performance, suggesting that the January-February swing may have reflected in part a weather effect. Still, the fact that starts, permits, and home sales rebounded in February despite still-challenging economic conditions suggests that, at the very least, the pace of decline in housing demand may be abating. It is clearly far too early to call a bottom in the housing market, especially given the deterioration in the labor market, but the February data have allayed some fears that the housing market would continue to freefall.
Residence Economist
National Association of Home Builders economics guru talks on Bloomberg about signs of life in the housing market… or signs of the after life.
Hat tip: Barry Ritholtz’s The Big Picture
Obama Casting Central… Where’s Econ Icon Paul Krugman?
Here’s the credit line: http://www.youtube.com/user/therockcookiebottom, https://www.e-junkie.com/ec… #77! About the famous economist, Nobel prize winner and all around cool guy. Featuring my friend Madelyn, who is in an awesome band called The Muffin Brigade.
Reality Bites as Ratings Agencies Downgrade REIT Debt
From MULTIFAMILY EXECUTIVE, by Les Shaver: Single-family sneezes and the world economy, including apartment real estate investment trusts that are assumed to run contracyclical to single-family for-sale trends, get pneumonia. The reason this venue is called Housing Crisis is that the convulsion hits equally both the supply and the demand side of housing, whether you’re talking for-sale or for rent. And it’s hitting not only the balance sheet but also the daily and weekly access to normal working capital, assuming steady cash flow.
There’s an analysis on how tumbling fundamentals and squeezed access to credit have put a pall on REITs’ business and risk outlooks for the next stretch from Multifamily Executive senior editor Les Shaver.
S&P said the ratings were prompted by constrained access to debt and equity capital and concern that the struggling economy will put even greater pressure on cash flow. The agency said “heavy credit revolver usage (in excess of 50 percent), weak debt service coverage, and an over-reliance on earnings from fee-driven and/or asset sales activity are key areas of focus.” It also views the common dividend coverage as a “drawback,” given the need for REITs to preserve liquidity.
“Fundamentals in the multifamily sector are coming under pressure,” says George Skoufis, a director for Standard & Poor’s. “Their debt protection measures are kind of weak. In the previous cycle, they came in with a little bit more of a cushion. Their numbers are a little weaker, and their leverage is a little higher.”
Multifamily and commercial construction lagged the residential for-sale downturn, and many have another leg or two down as employment deteriorates and corporate earnings erode by virture of more conservative money habits among consumers and challenged consumer sentiment. Too, anecdotally anyway, demand for one- and three-bedroom apartments has decline while demand has stayed strong for two-bedroom apartments–an indicator of increased “doubling-up” among people who might choose to live with roommates to weather the downturn.
HUD Taps Carol Galante for Key Multifamily Role
From MULTIFAMILY EXECUTIVE, by Chris Wood: The Department of Housing and Urban Development was a morale morass, and still needs attention internally it probably won’t get until its chief Shaun Donovan chalks up some wins on the foreclosure front… So, we’re talking 12 months minimum.
Click image for access to Multifamily Executive Q&A with Galante.
Every bit of new blood in the department sends a critical message, and clearly, with the hire of BRIDGE Housing Corporation president Carol Galante, Donovan’s playing from strength and resolve to change what has chronically ailed the organization for almost a decade.
Multifamily Executive, which last fall named Galante its executive of the year, assigned senior editor Chris Wood to chat at the end of last week with the new appointee, for her perspective on overseeing $58 billion in development and preservation of privately-owned rental housing as well as a key role in sustainable residential development initiatives.
A Q&A with Galante reveals she intends to serve as an important counterpoint voice to Donovan as priority focus remains on single-family–foreclosures and duress–issues.
There is definitely a role for multifamily, and I think this administration gets that. The administration understands that rejuvenating and refinancing our nation’s multifamily housing stock is critical. Equally important is keeping that housing stock healthy. Greening it, and building more of it in the right places is important as well as economic stimulus.
Read more of Chris Wood’s interview here.