april 2012 rci report

7/31/2019 April 2012 RCI Report

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Realtors Confidence Index

Report and Market OutlookApril 2012 EditionBased on Data Collected Week Ending May 4, 2012

National Association of Realtors

Research Department


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Table of Contents

Summary - Highlights and Market Outlook.. .. .3

Section 1: Market Conditions

Realtor Confidence 5Single Family Properties: Confidence Leveling Off/Slightly Down5Townhouse Properties: Confidence Leveling Off/Slightly Down6Condos: Confidence Leveling Off/Slightly Down.6

Fifty-eight Percent of Realtors Report Prices on Recent Transactions Constant or HigherCompared to a Year Ago ..7

Eighty-one Percent of Responding Realtors Expect Constant or Higher Residential Pricesin the Next Year, up from 78 Percent Last Month..7

Buyer and Seller Traffic Leveling Off...8Time That Homes Are On the Market When SoldSlight Decrease 8April Distressed Sales: 28 Percent of Market .. 9Distressed Real EstateBelow Market Prices.10 Property Condition Also Affects Selling Price of Distressed Properties..11

Section 2: Buyer and Seller Characteristics

Cash Sales: 29 Percent of Residential Sales in April...12 First Time Buyers: 35 Percent of Total Buyers in April 2012 ....13Buyer RelocationJob Changes. ..13Residential Sales to Investors: Currently 20 Percent of Residential Market. .. 14Second Home PurchasesAt 12 Percent of Residential Market in April....14Mortgage Down Payments....15Realtors Continue to Report Rising Rents for Residential Properties. ..15International Transactions Continue at Approximately Two Percent of Market..16

Section 3: Current Issues

AppraisalsA Continuing Problem.16Tight Credit: FICO Scores and Mortgages..17

Section 4: Recent NAR Articles

Fannie and Freddie MistakesLawrence Yun.18Rents AcceleratingLawrence Yun.20Commercial Markets: Part of the Real Estate RecoveryGeorge Ratiu ...22


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SUMMARYHighlights and Market Outlook

Jed Smith, Managing Director, Quantitative Research ([email protected])George Ratiu, Manager, Quantitative and Commercial Research ([email protected]).

Introduction

The Realtor Confidence Index survey provides residential real estate information on amonthly basis, with this months issue containing input from 3,142Realtors. Respondentscomments confirmed that the real estate markets appear to be continuing their recovery in termsof sales and price. All real estate is local, so comments were varied, diverse, and in some casescontradictory depending on the respondents location.

Respondents continued to note problems associated with real estate transactions:

Obtaining a mortgage continues to be difficult for individuals with lower credit scores orindividuals with non-standard credit characteristics, e.g., self-employed.

Bargain hunters and low-price bids continue. The short sale process continues to be slow and frustrating. Pricing continues to be a challenge. The appraisal process continues to be a problem.However, fewer respondents noted major problems than had previously been the case. Incontrast, a growing number of respondents indicated a growing number of cases of multipleoffers, fewer seller concessions, low inventories, and some increase in buyer interest. Manyrespondents noted that correctly priced properties sell quickly.

The graph for Total Home Sales on a twelve month roll (i.e., total sales for the current

and previous 11 months reported monthly) shows a market achieving stability from a salesviewpoint, with modest improvement expected based on continued economic and employmentexpansion. This is consistent with the survey conclusions.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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The media has discussed home prices in detail for the last four years. The graph Prices

By Month indicates that home prices have been headed towards stability. NARs forecast is forthe attainment of stable prices this year.

Overall Market Outlook

We expect continued expansion in residential real estate markets. However, there aresignificant risks to the market outlook:

Potentially Negative News

The Economic Recovery is slow and weaker than normal: Unexpected and unfavorableeconomic news (i.e., a European bond default, an additional run-up in gas prices) could havea negative impact on the recovery.

Credit standards imposed by financial institutions in making a mortgage are reported asexcessively stringent.

Job gains are well below normal. Consumer Confidence is lower than would otherwise be expected.Potentially Positive News

Falling Inventories of homes for sale. Stabilization of Distressed Sales in the neighborhood of 30 to 35 percent. Home Affordability: Low interest rates and attractive prices continue to facilitate home

purchases.

Demographics: Sales are at a level of approximately 10 years ago, but the population hasincreased significantly.


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What Does This Mean For Realtors?

This monthsRCIshows residential markets that are continuing to recover. Theeconomic recovery is clearly weaker than the historical norm, but appears to be proceeding.Realtor confidence and price expectations are higher than was the case a few months ago,rising rental rates have favorable implications for home sales, and time on market continues todecrease. Prices and interest rates continue to be lower than has been the case in the past. Theseare the reasons that we continue to view the outlook as favorable for home purchases .

Given that the typical homeowner will occupy a house for approximately 8 years and thathome ownership is basically a lifestyle decision, one can make a very good case that this is agood time to buy a house, remembering that staying within a reasonable budget and acceptablemortgage is important.

Section 1: Market Conditions

Realtor Confidence

TheREALTORS Confidence Index is an indicator of housing market strength based on amonthly survey sent to over 50,000 real estate practitioners. Respondents indicate whetherconditions are, or are expected to be "strong" (100 points), "moderate" (50 points), and "weak" (0points). The results are the average score for each question. A score of 50 is the thresholdbetween a "strong" and a "weak" condition. Realtor confidence in the market outlook ispresented in terms of the current market and the market outlook for the next six months for

single family, townhouse, and condo markets.Single Family Properties: Confidence Leveling Off/Slightly Down


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Townhouse Properties: Confidence Leveling Off/Slightly Down

Condos: Confidence Leveling Off/Slightly Down


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Fifty Eight Percent of Realtors Report Prices on Recent Transactions Constant or Higher

Compared to a Year Ago

81 Percent of Responding Realtors Expect Constant or Higher Residential Prices in the

Next Year, up from 78 Percent Last Month

The outlook for residential home prices receives substantial coverage in the media. Most

market analysts report expectations of price stabilization during the next year. Realtors are

reporting that higher prices have already occurred in a number of cases, with a substantial

majority of Realtors expecting constant or higher prices in the next year.


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Buyer and Seller Traffic Leveling Off

Time That Homes Are On the Market When SoldSlight Decrease

As of April 2012, 26 percent of properties had been on the market for six months or morewhen sold. In contrast, 48 percent had been on the market for three months or less.


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April Distressed Sales: 28 Percent of Market

Distressed sales go through several stagesthe initial overdue status for mortgage payments,the actual foreclosure by the financial institution, and the final sale of the property, frequently byRealtors through the MLS.

Measured at the MLS sales level, distressed sales have hovered in the 30 to 35 percent rangefor a number of years, with heavy sales concentrations in a few states.

Distressed sales are currently 28 percent of total sales. 42 percent of distressed sales were for cash over the past year.What Does This Mean For Realtors: The Existing Home Sales market is bifurcated, withdistressed properties frequently being sold at significant discounts to market, frequently insubpar condition when going to market, and reported to be popular with investors seekingbargain prices. Investors pay cash in 68 percent of their overall purchases of properties (bothdistressed and non-distressed), in comparison to first-time buyers who overall pay cash in 10percent of their purchases. In the case of distressed properties with a seller who would like toclose a transaction without waiting for the buyer to obtain a mortgage, an investor may be apreferable buyer. We have received many reports of investors obtaining a property even when afirst-time prospective buyer has offered a higher price.

Currently Realtors in a number of markets are reporting shortages of inventories ofdistressed real estate: the markets are clearing distressed properties from the market at a rapidrate.


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Distressed Real Estate

Below Market Prices

Distressed properties typically sell below the market price of comparable, non-distressedproperties; the discount level fluctuates depending on sales location and types of properties.

Foreclosures have been selling at approximately 20 percent below market: 20.7 percent asof April 2012.

Short Sales have been selling at approximately 15 percent below market: 14.4 percent as ofApril 2012.


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Property Condition Also Affects Selling Price of Distressed Properties

The discount to market experienced by distressed property is affected by the propertysphysical condition. Well maintained properties tend to sell at a lower discount than is the casefor properties in poor condition. The un-weighted average price discounts to market arepresented for April 2011 through March 2012 along with information for the current month.

Percent Discount Based on Property ConditionApril 2012

Foreclosure Short Sale

1-Above average 13.7 14.9

2-Average 18.3 13.0

3-Below average 22.4 14.0

4-Well below ave 30.0 21.9

5-Bottom 1% 48.0 13.0


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Section 2: Buyer and Seller Characteristics

Cash Sales: 29 Percent of Residential Sales in April

The high preponderance of all-cash sales appears to be due to a number of factors:

unrealistically high loan underwriting standards, a significant level of investor participation inthe market, and sales of properties as second homes.


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First Time Buyers: 35 Percent of Total Buyers in April 2012

Normally first time buyers are in the neighborhood of 40 percent of total residential sales,according to NARs Profile of Home Buyers and Sellers. Realtors have reported that investorsoffering all cash-sales to sellers have crowded out first-time buyers in some cases, particularly inthe case of distressed properties. Unsuccessful first-time buyers typically continue their propertysearch, sometimes making a number of bids before securing a property.

Buyer RelocationJob Changes

Realtors report that 13 percent of residential sales were to buyers for relocationpurposesi.e., a job move, retirement, etc. Approximately 16 percent of relocation buyers paycash.


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Residential Sales to Investors: Currently 20 Percent of Residential Market

Investors accounted for 20 percent of total residential sales in April, down from 23percent in February and 21 percent in March. Investors have reported that in many cases they

can obtain a positive cash flow converting properties to rental units, or obtain a resale aftermaking improvements. Realtors have been reporting that the market is able to absorb the largenumber of distressed properties coming onto the market. In some regions Realtors report thatthe market would clear additional properties if available. Approximately 68 percent of investorspay cash.

Second Home PurchasesAt 12 Percent of Residential Market in April


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Mortgage Down Payments

Down payments greater than or equal to 20 percent were made for 33 percent of allresidential transactions. Down payments of 11-19 percent were reported for 5 percent oftransactions.

Realtors Continue to Report Rising Rents for Residential Properties

Higher residential rents in April compared to a year ago were reported by 52 percent ofRealtors, up from 48 percent a year ago. Lower rents were reported by 11 percent ofRealtors, down from 15 percent a year ago. Constant rents were reported by 17 percent of

Realtors, up from 16 percent a year ago.


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International Transactions Continue at Approximately Two Percent of Market

Sales of U.S. residential real estate to foreigners not residing in the U.S. continue to be inthe 2 percent range. Other NAR surveys have indicated that an additional 2 to 3 percent ofresidential sales are made to international customers residing in the U.S. Additional informationon international activities is available athttp://www.realtor.org/research/research/reportsintl.Approximately 81 percent of international clients pay cash.

Section 3: Current Issues

AppraisalsA Continuing Problem

Realtor comments indicate that appraisal and lending issues are the two major marketproblems in completing a sale. Of particular concern are the use of inexperienced/out-of-townappraisers and the use of distressed properties as comps in the case of non-distressed sales.

Thirty three percent of Realtors reported having had a problem with an appraisal in thepast 3 months. This doesnot mean that 33 percent of contracts had appraisal problems; rather 33percent of Realtors had one or more problems with an appraisal in the past 3 months. Theproblems can lead to a contract cancellation, a delayed settlement, or a contract revised to alower price.
http://www.realtor.org/research/research/reportsintlhttp://www.realtor.org/research/research/reportsintlhttp://www.realtor.org/research/research/reportsintlhttp://www.realtor.org/research/research/reportsintl


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Tight Credit: FICO Scores and Mortgages

A number of Realtors responding to the March Survey indicated continuedexceptionally tight credit conditions. A comparison of FICO scores for loan transactions asreported by Realtors responding to the RCIover the February/March/April time span comparedwith FICO scores reported by Fannie Maes Acquisition Profile by Key Product Features

showing lending conditions in the pre-boom normal housing markets of a few years ago-- showsthat credit availability to lower scoring applicants appears to have declined. Realtors providedFICO information based on their understanding of thebuyers credit situations; in many casesthe information was estimated. Overall the data seem to substantiate relatively tight creditconditions.

Credit Scores in Current Markets (Variety of Buyers and Lenders)vs. Fannie Mae Credit Mix of 2001-04.


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Fannie and Freddie Mistakes

On April 23, 2012, in Economist Commentaries, by Lawrence Yun, Chief Economist

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Fannie Mae and Freddie Mac: the mere mention of them arouses passionate anger in manypeople. Rightly so. These two entities, which had taxpayer guarantees, ran their businesses as ifthey were privately owned. Fannie and Freddie made huge bets on the housing market. If it hadbeen their money and their loss, then there would be no problem. But their mistakes tooktaxpayers down as well.

What went wrong and what needs to happen? Fannie Mae was born from the Great Depression inthe 1930s to help bring mortgages to the ailing housing market of the time. Fannie was agovernment corporation (not a private corporation) with the single mission of increasing liquidityby buying up soundly underwritten mortgages. Because of Fannie and its government status, 30-year fixed rate mortgages became widely available. Canada and Britain, for example, do not

have long-term mortgages, or least not at low cost, because they do not have a Fannie equivalentwith government guarantees.

Fannie, as a government corporation, like the current the Federal Reserve for example, neverneeded taxpayer funding because its revenue always covered its cost of operation. Fannie was avery boring entity with very boring business model, always playing behind the scene of thehousing market.

Then around 1970, Fannie was privatized. Freddie was introduced as a government sponsoredenterprise at around this time to add some competition to Fannie. Even though the companieswere privatewith the right to pursue profits for shareholdersboth still carried an implicit

government backing in the marketplace, which we know in retrospect to have been an explicitgovernment backing. But the mangers of Fannie and Freddie, even though they had easyborrowing costs because of their government ties, thought of themselves as profit-maximizersand were slowly and increasingly gambling with taxpayers money. During the good years, hugemulti-million dollar bonus checks were paid out to managers. For many years, theWashingtonian magazine, which carries light local news about local events and restaurantrecommendations, named Fannie and Freddie as two of the best places to work in theWashington D.C. area, evidently suggesting great perks to employees.

Then the housing market crash happened. And lo and beholdtaxpayers were on the hook formassive losses. Such entities, with perverse incentives and the ability to mete out private profits

during good times and taxpayer losses during bad times, should never have been permitted.

Currently the discussion is now over the reform, restructuring or even elimination of Fannie andFreddie. We should very mindful of what worked and what did not. What worked is the pre-1970s model as a government corporation that took a behind-the-scenes role. What did not is thestrange model of private profit with taxpayer backing.
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If the eventual goal is to make Fannie and Freddie into pure private companies then we shouldexpect higher mortgage rates, more short-term mortgages, and the occurrence of total marketfreezes in times of a financial market crisis. Ask any commercial real estate practitioner aboutcommercial mortgages in the past few years, mortgages which do not carry government backing.Ask jumbo loan borrowers about the mortgage rate they pay because of the purely private jumbo

mortgage market. In addition, large purely private financial institutions will always beconsidered too-big-to-fail and taxpayers will be asked to come to the rescue at some point in thefuture.

If the restructuring is to return these entities to their status as a government corporation then wewill have steady mortgage liquidity, continuing availability of 30-year fixed rate mortgages, andprobably no taxpayer bailout (as happened prior to the 1970s and like the Federal Reservetoday).

It is my view that government can never produce interesting consumer products. A governmentbureaucratic culture is too stifling for entrepreneurs and innovators. The Apple iPhone, for

example, simply could not be produced out of Washington. However, there is something thatgovernment may be good at and that is producing a boring product. There is next to nothing asboring as a 30-year fixed rate mortgage. It requires no innovation. If consumers havedemonstrated good credit and are willing to stay well within their budget, then the 30-year fixedrate mortgage is one of the safest financial products on the market. And because of thegovernment corporation status, consumers will be able to tap mortgages at a lower rate thanwould be possible under a pure privatization model. If the 30-year fixed rate mortgage was goodfor grandpa then it will be good for our grandkids in the future.

Though Fannie and Freddie still report headline financial losses because of legacy assets on thebooks from the housing bubble years, they have been raking in good internal profits on new

mortgages underwritten for taxpayers since being taken over by the government in 2008. Fannieand Freddie, in other words, have in essence acted as if they are a government corporation andgood bottom-line results have been flowing out for both consumers and taxpayers. That is whyNAR is opposed to the pure privatization of Fannie and Freddie.


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Rents Accelerating

On April 24, 2012, inDid You Know, by Lawrence Yun, Chief EconomistMore Sharing ServicesShare|Share on twitterShare on facebookShare on emailShare on print

By now most are aware of the rising rent phenomenon. Our Realtor surveyindicated only asliver of the market will see falling rents, with a vast majority of areas experiencing positivethough not higher than 5 percent rent growth. According to the rent index in the consumer priceindex as measured by government statisticians, rents are rising by 2.5 percent.

Rent growth will, more likely than not, accelerate higher. Demand for rentals has been muchgreater than the supply coming onto the market. It is just inevitable that rents will rise at a fasterrate over the next 12 to 18 months, unless there is another economic recession or if there is

sudden ramp-up housing permits for multifamily units. Multifamily housing starts are slowlycoming around. But they are still well below normal and there is a lag time between starts andeventual completion. In addition, the number of single-family homes available for rent is nodoubt shrinking because of the overall decline in inventory of homes for sale. Therefore, rentgrowth in 2013 may reach 5 percent on average. San Jose may even witness 10 percent rentgrowth because of Facebook millionaires.
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Commercial MarketsPart of the Real Estate RecoveryGeorge Ratiu, Manager, Quantitative & Commercial Research

Activity in the commercial sector is also recovering. Sales have increased frompreviously low levels, but credit is tight. Most NAR commercial Realtors deal with properties

under $5 million, and many report looking to regional and local financial institutions for creditneeds.

Investment activity recorded a positive 2011. Based on data from Real Capital Analytics,more than 13,000 major properties traded hands during 2011, totaling $205.8 billion in sales,representing a 51.0 percent increase from 2010.

The data analyzes properties priced at $2.5 million and above. Based on the 2012Commercial Lending Survey [http://www.realtor.org/reports/commercial-lending-survey].

REALTORS handle an even larger number of transactions of properties valued at less than$2.0 million. In 2012, 85.0 percent of commercial sales were for properties priced under thatthreshold.

Cash Sales of Commercial Properties are Close to 30%. Lending conditions continue to

remain tight for commercial real estate investments. This is especially pertinent for small

businesses and investors looking for properties in secondary and tertiary markets.

0% 5% 10% 15% 20% 25% 30%

< $250,000

$250,000 - $500,000

$500,000 - $1,000,000

$1,000,000 - $2,000,000

$2,000,000 - $5,000,000

$5,000,000 - $10,000,000

> $10,000,000

What was the value of your most recent sales transaction?
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In addition to tight underwriting, down-payment conditions also require substantialcommitment. According to the 2012 Commercial Lending Survey[http://www.realtor.org/reports/commercial-lending-survey], 72.0 percent of closed salesrequired a down-payment larger than 20% to secure financing, with 7.0 percent of loansrequiring 50%-60% loan-to-value ratios.

REALTORS report that cash transactions account for almost 30.0 percent of sales.

REALTORS report local banks as the largest source of finance capital. Lendingconditions continue to remain tight for commercial real estate investments. This is especially

pertinent for small businesses and investors looking for properties in secondary and tertiary

markets.

In the wake of the post 2008-09 recession shakeout, large banks have been reluctant tounderwrite commercial real estate investments.

According to the 2012 Commercial Lending Survey[http://www.realtor.org/reports/commercial-lending-survey], large national banks accountedfor only 21.0 percent of commercial deals.

In contrast, local banks provided the bulk of financing capital for commercial deals, with64.0 percent of closed sales.

Private investors and regional banks were the other major sources of funding, with 45.0percent and 44.0 percent of sales, respectively.

The Small Business Administration provided funding for 29.0 percent of closed transactions.

0% 5% 10% 15% 20% 25% 30%

Financing: 90% LTV

Financing: 85% LTV

Financing: 80% LTV

Financing: 75% LTV

Financing: 70% LTV

Financing: 65% LTV

Financing: 60% LTV

Financing: 55% LTV

Financing: 50% LTV

100% Cash

How were most of your sale transactions in the past 12 months

completed?

Source: NAR
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0% 5% 10% 15% 20% 25% 30%

National banks (Big four)

Regional banks

Local banks

Credit unions

Life insurance companies

REITs

Private investors

Public companies

Small Business Administration

Other, please specify

Current sources of financing for commercial deals

Source: NAR

april 2012 rci report

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