Posted on Thursday, 3rd January 2013 by Robert Domini

The Residential Real Estate Outlook

First, let’s have a look at the good news. Locally, Northwestern Ohio home sales are up 21% in November from 2011. “17 straight months of gains reported” reads the headline in the Toledo Blade on Friday, December 21, 2012. The average sale price is up 9% over last year and so far this year sales are up 10% and sale prices are up 4%. The state of Ohio is faring much better with sales up 23% and the average price up 5% over last year. Sales of existing homes are the best they’ve been in five years.

Nationally, sales of existing homes are at the highest pace in years. 14.5% more homes sold this November compared to last. The best news of all is that the inventory of homes for sale has fallen to 2.03 million which is the lowest level since 2001. At the current pace there is only 4.8 months of inventory. Presumably at that point we’ll be all out of houses on the market, and buyers will have to come begging. Best of all, condominium sales are up 33% from a year ago. In one Bonita Springs, Florida condominium building there were three sales in November, all cash deals. In fact, according to a WSJ story on 12/21/12, condo sales are being driven by higher sales in places such as Washington, Georgia and Florida. Of course, prices are still at bargain basement lows.

Inventories have been declining because there are 11 million homeowners who are under water with nowhere to go. As prices creep upward, they will begin offering their properties for sale. A second factor in favor of a recovery, aside from near-zero interest rates, is that home building has been at a relative standstill now for at least four years. Overall, nationally, prices are up 5.6% over a year ago. And finally, sales of distressed homes are declining. They accounted for 22% of all home sales last month as compared to 29% a year ago.

According to the “PWC 2013 Emerging Trends in Real Estate”,  “down for so long in an excruciating bump-along-the-bottom trough, housing finally advances and markets gain some real traction, although struggling along the way.” The upper end is leading the way with some institutional interest in larger packages of properties. They also say that, “accelerating prices for condominiums in better markets like south Florida could be a leading indicator for recovery”. They go on say that many of the problem loans have been washed through the system, although as stated above, there are still 11 million home owners “under water”. Even with the low mortgage rates, lenders are now requiring more rigorous underwriting and more up-front cash, but still, mortgage money is out there and should be available to many homeowners and prospective buyers.


Why is Residential Real Estate Beginning to Improve?

Fannie and Freddie have recently issued $207 billion in mortgage-backed securities, for the year 2012, they have sold $1.6 trillion, and guess who is buying those bonds, the Federal Reserve. In the meantime, Fannie and Freddie have raised their fees 10 basis points which could put slight upward pressure on rates, but only a small uptick. Otherwise, the QE Fed policy to buy $40 billion in MBS (mortgage-backed securities) per month is putting money directly into mortgage-financing sources for housing. The Fed is buying $1.3 billion of MBS per day until the job market improves. The reasoning is that if the Fed can stimulate housing, this will bring down unemployment because the home-building industry will recover, people will feel more comfortable with some of their net worth returning and investment will increase overall in the economy.

The MBS being issued by the GSEs (government sponsored enterprises) are FNMA (Fannie Mae), FHLMC (Freddie Mac) and GNMA (Ginnie Mae). Non-agency or private RMBS (Residential Mortgage-Backed Securities), are issued by private sources. Some of these are what used to be the sub-prime bonds which were sold by banks to finance the loans which caused all or most of the trouble in late 2008. Those essentially have been gone since 2007. Therefore, the Fed bond buying, money printing, whatever you want to call it is going directly into mortgage money, and the faucet is wide open.

What does this mean for residential real estate? Unless something awful happens such as inflation rearing its ugly head and forcing rates to go up, the Fed apparently will continue to pump money into housing. So, check this out for yourselves, but the way it looks to me, we might be seeing these ultra-low mortgage rates for some time.


The Commercial Real Estate Outlook

Investor sentiment is soaring according to a Marcus & Millichap report. They say investors are gaining confidence in both the economic and commercial real estate recovery. The index is the highest it’s been since 2004. Since hitting a low point in 2008, investor sentiment has been making steady gains. Sentiment started turning negative in 2005, long before the market actually declined. Reasons given for the recent surge include the EU being able to avoid economic collapse and the QE III Fed action. In short, the real estate investment community sees the endless Fed stimulus as a good thing, and it has been for real estate and the stock market. They are cautious about the upbeat mood, however, when it comes to the fiscal cliff, which we know now has been averted. Bear in mind that many if not most of the buyers in their survey are seeking Class A investments. They say that 62% of the survey respondents are planning to increase their CRE portfolios in 2013. Most expect their portfolios to grow by somewhere approaching 25%. The report goes on to say that there is some movement towards Class B and B- properties.



Again, the investment of choice continues to be apartments. We’re seeing evidence of this in our apartment appraisals with some rent surveys indicating occupancies nearing 100%. Several demographic factors favor this sector including the young adults who lack the resources to purchase a home and baby boomers who are downsizing. Also, there are those who lost their homes in the housing crash. Demand has been so strong in some sectors for apartment properties that the cap rates have fallen through the floor. The only scenario which could put an end to the run would be a full-blown housing rally. That’s the idea behind the Fed and the President’s push for lower-cost mortgages. It could be quite some time before rising home sales begin to affect apartments.



The industrial sector is expected to have a good year in 2013 with at least half of the investors sending out buy signals. Most investors believe that their industrial portfolios will either stay the same or increase in 2013. The primary source of activity is coming from warehousing and distribution centers. This sector tanked in 2010, and has been on a steep upward trend since. Again, activity is strongest on the coasts due to international trade. Toledo and Wood County may be a beneficiary of this phenomena in 2013, with the North Baltimore, Wood County, OH, CSX transportation hub connecting the area to the Port of Baltimore.



Retail, on the other hand, is expected to continue to have its challenges. Office investors believe we have reached a bottom in the market and should see some improvement this year. The net lease market appears to be doing well. This is the market for name brands locating in small centers with fewer than four units. In many cases there are only two, and sometimes only one retailer on a lot. We have examples of this in Perrysburg, OH on U.S. 20 and in Bowling Green, OH on East Wooster Street near to the new Stroh Center Arena on the Bowling Green campus. We’ve seen more building of this type the last year than in the last five.



Hotels continue to turn in strong results. Hotels have been on a tear now for at least two years. Again, hotels mirror the overall economy. The hotel industry hit bottom in 2010, and is now at 2005-2006 levels. Still, investment in this sector is for the professionals.


Commercial Real Estate, Continued

PWC Real Estate Investor Survey for the Third Quarter, 2012, had a less-bullish opinion overall for commercial real estate. They talk of investors who were very positive about the economy during the first half only to see the momentum dwindle in the second half. They feel that “an air of uncertainty has returned, leaving many investors feeling discouraged and rethinking investment strategies”. They cite strong leasing activities in top CBDs during the first half weakening in the second. Instead they are moving their funds to the industrial sector because they feel the industrial sector can better weather choppy seas in the months ahead. As has been the case now for several quarters, everyone is still bullish on apartments. The reason, of course, is that since the crash in housing very few new entrants to the housing market are choosing to buy as an option. Renting has been the option of choice for the 20-somethings with a good job since the sub-prime crash. All things considered, they feel much the same as Marcus & Millichap that we are on the “cusp of a resurgence that provides vast and diverse investment opportunities relating to buying, selling, and developing”. The recommended course of action is to stay diversified.


Paul Krugman says, “Don’t Worry, Be Happy”

Like the song, Nobel laureate in Economics, Paul Krugman believes we are on a sustainable course towards a strong economy. He likens those of us who worry about annual $1 trillion deficits to Dr. Evil in  the Austin Powers movies. What’s the big problem? The deficit in 2012 is only $1.089 trillion and it will surely be lower in 2013. The buffoon, Dr. Evil, is a fool who thinks that $1 trillion deficits are not sustainable. But, yet, we have been crying chicken little now for four years and nothing bad has happened yet. He says our borrowing costs are near historic lows.

The truth is that the Fed has been on an expansionary monetary policy of unprecedented proportions now for four years. Rates on all financial instruments are at historic, all-time lows, but most importantly, it has kept interest on the national debt artificially low now for the last four years. Interest on the national debt is $454 billion annually, which is a net interest rate of about 2.8%. Prime rate has been 3.25% for years while the 10-year treasury is 1.75%, which is the rate most long-term rates are based upon. Interest rates on short-term Treasuries are very low, such as .015% for a four-week Treasury. Libor, an international rate, is 0.31%. The U.S. has the highest prime rate in the industrialized world. Canada and Australia are 3.0%, but the rest are near 1% or lower.

Recently, there have been rumblings from countries such as Japan, which is getting tired of being the odd man out when it comes to having cheap currency. Their incoming prime minister, Shinzo Abe, is complaining that “central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example”. If the whole world is into bond buying as we euphemistically call it in this country, upward pressure on prices and wages could be the result.

Paul goes on to say that our deficits are high because the economy is not performing up to speed. “It’s not that we’re spending too much, it’s that we just aren’t growing enough.” Paul believes that we don’t have any problems that a good, robust economy would not cure. He believes that the prospects for a recovery are looking pretty good right now, but the political bickering could derail the recovery.

He’s right. There are many good signs such as improved housing and commercial real estate. There is a difference of opinion regarding employment. Job growth has been limping along well below almost any other “recovery”. We still have a big unemployment problem in this country which is masked by the method of determining the rate of unemployment. It does not count those who are no longer looking for work. Admittedly, however, this method of counting the rate has been around since the 1990s and should not be changed in the middle of the stream.

Paul Krugman actually stated that we in an “economic depression“. His solution is that we should leave the deficit alone. “A war on the deficit would only scare and bully those in need of our help, the poor and the middle class.”


Ken Mayland, Clearview Economics, With A Different Opinion

From the Toledo Business Journal, December 2012, in a presentation in Toledo, Ohio, Ken Mayland reported that “we have experienced a period of poor economic performance with continued high deficits.” He went on to say that “for nine of the last ten quarters GDP growth has been below 3%.” He also said that recovery from this recession is severely underperforming previous recoveries, and that this is the worst recovery in modern times. He gave a variety of reasons for the poor performance which included poor leadership from the President and Washington, poor utilization of U.S. energy resources, paying too many people to not work, paying for everyone’s health care, not being able to fire poor teachers and over-regulation. Mr. Mayland went on to say that our economy should be creating 300 to 400,000 jobs per month. As it is, our average is between 100,000 and 150,000 per month. The anemic job growth has resulted in static wage growth of under 2%, he said, and wage growth is not covering inflation. He lays the blame squarely on Washington for a variety of “wrong policies”.


Good News for the Energy Sector

The U.S. has the potential to generate tremendous economic activity in the coming few years. This is old news by now, but it bears repeating. We all know about the Utica Shale boom in eastern Ohio and western Pennsylvania and elsewhere. In 2007, production of natural gas in the U.S. was bouncing along at about 20 trillion cubic feet per year, but in 2011, it reached nearly 30 trillion cubic feet due almost exclusively to the shale revolution brought about by horizontal drilling and hydraulic fracturing (fracking) technique which is a process for removing natural gas and oil from shale rock. Prices of natural gas have fallen steeply so much so that investors are hoping to begin exporting it. The problem is that typically natural gas cannot be transported other than in pipelines. It appears that there could be a pot of gold out there in LNG, Liquified Natural Gas. The price in the U.S. of LNG is 3.70 per million BTUs, but it is $17 in Japan. In addition the Department of Energy recently completed a study suggesting that exports of LNG would produce net economic benefits for this country. In addition, the fracking also produces quantities of liquefied gas such as propane and butane. This gas can be exported and apparently there is plenty of it. Get ready for your propane bills to start falling.

Meanwhile, opposition groups are beginning to lodge protests. One is the EPA and the other is industrial users of natural gas such as Dow Chemical. At the present time there is only one terminal in the U.S. capable of converting natural gas to LNG and loading it on ships for export. The key is in the licensing, which is controlled by the Executive Branch. Approximately 20 firms have applied for licenses to build terminals with similar facilities to facilitate the exportation of LNG, but none have been approved yet. The Executive Branch holds the key to approving more terminals.


A Message From the Author

This report is brought to you by Robert D. Domini, MBA, MAI, real estate appraiser. We specialize in appraisals from both the public and the private sector. At this time of year we always remind our readers to check your property tax valuations. The time for filing begins now and will run through March 2013, but the value is based on what it was on January 1, 2012. Now is the time to take a good look at your tax value. We can give you an idea whether you have a potential case. Last year and the year before, we were able to achieve some very significant reductions for many property owners.

Remember, the property owner can file for a review or appeal as well as an attorney acting on behalf of the property owner. Attorneys and property owners, please keep us in mind when you decide to have a look at your tax values.

Continental Valuations, Inc.

Robert D. Domini, MBA, MAI

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