Why Real Estate Is Strong Even in a Weak Economy (2001)

When the U.S. economy went through a recession 10 years ago, commercial real estate hit the pits. Vacancy rates were high, rents were low, and the downturn was so severe that it took years for real estate to return to normal. Today, although the economy again faces a slowdown, real estate is well equipped to face it. Why? Experts at a meeting organized by Wharton’s Zell-Lurie Real Estate Center offer some answers.

Stocks and bonds and real estate: (Federal Reserve Bank of New York 2001) Although stocks accounted for about a third of household assets by the end of the decade vs. around 13% in 1989, more than half of that increase came from stocks' stunning performance vs. bonds or real estate, not because Americans went on a buying spree for stocks. The majority of that increase was focused among the wealthiest half of the population.

(USA Today) A change in investment patterns accounted for "at most" 18% of the jump in the average household equity share during the 1990s as total household stock holdings soared to $12.6 trillion from $2.6 trillion.

Heady returns, an aging population and a shift to retirement plans invested by employees in stocks accounted for the remaining 82% of the increase.

Of these, the biggest contribution — 53% — came from gains in stocks which returned roughly 320% during the 1990s, while bonds gave 120% and real estate, the largest household investment, just 36%.

Real Estate Commissions: (Consumer Federation of America 2001)

6% If your agent agrees to represent you exclusively and shares the commission with another agent: 6%.

5% to 5 1/2% If your agent refuses to represent you exclusively and shares the commission with another agent.

4% to 5% If your agent represents you exclusively and isn't required to split the commission with a second party.

3.5% to 4% If your agent represents both you and the buyer.

Real Estate (Wharton 2002) Property markets have held their ground fairly well in the current uncertain economic times, but equilibrium is still some distance away, the speakers said. Office rents have been depressed for about a year now, with massive amounts of cheaper-than-usual subleased space coming on to the markets. Zell put it in perspective. “You have to be really careful when you talk about how far rents have come down,” he said, adding that of late, rents have begun moving back to 1999 levels — and 1999 was a good year. But what makes the situation worrisome is that the cost of building new space is at 2002 prices. Zell added: “The spread between current rents and the cost of replacement that creates new competition will go back to what it was in 1993, when there was a big gap. It obviously means that I see very little construction for the next four years.”

“Today the public REITs represent probably 10% or 11% of all the commercial real estate in the country and probably 30% to 35% of investment grade real estate,” he said. “In 10 years that number will be 60% of investment grade real estate.”

Home is where the heart is- and more: (Scott Burns 2002) The National Association of Realtors said that the median home resale price in 1991 was $97,100. A 20% down payment would have required $19,420, and you would have mortgaged the house for $77,680. At the end of 2001, the same home was worth $147,500.

This means your equity grew to $69,820 through price appreciation. (We are ignoring equity growth through amortization of your original debt.) Put that number in a financial calculator and the 10-year annual compound growth rate is 13.7%.

Invest the same sum in the Vanguard 500 Index fund and it would have grown to $60,593 over the same period, after paying taxes on dividends and capital gains that were distributed over the period. That computes to a compound annual return of 12.1%.

My comment- you can use whatever numbers you want about growth but I have always told people that a house is where you live. It is what you enjoy with your family. The investment element is secondary since spending your existence in something you don't like for years and years is not logical. Additionally, if you are so intent on the monetary element that you buy a house that then takes you 2 to 4 hours each day for a commute, you are destroying whatever life you could have had. 15% annually while you spend only 5 minutes a day with your kids seems illogical in the extreme.

CREDIT SCORING - (eNews 2002) The use of credit history in determining auto and homeowners insurance rates charged to consumers is gaining media attention...mostly negative. The NAIC has released a consumer alert on the subject, "Credit Scoring: How Does It Affect You?,"

Deducting points on a loan (WSJ)  The general rule of thumb is you may deduct all the points you paid in the year you paid them, as long as you meet several qualifications, such as if your loan is secured by your main home and if you use your loan to buy or build your main home. For the rest of the fine print, see IRS Publication 936, which has a handy summary on page six.

But you aren't always required to follow this rule. In some cases, even if you qualify to deduct your points in the year you paid them, it may be better to spread out your deductions over the life of the loan, says Martin Nissenbaum, national director of personal income-tax planning at Ernst & Young.

Suppose a couple paid 1.25 points late one year on a mortgage to buy a home. But like most taxpayers, they discovered they were better off taking the standard deduction for that year, instead of itemizing. (The standard deduction is a flat amount based on your filing status.) Thus, the couple would prefer to take the standard deduction for that year and spread the points over the life of the loan. That's okay, the IRS said in a private-letter r

That's an important choice to keep in mind since about seven out of every 10 federal income-tax returns claim the standard deduction, instead of itemizing. Remember that if you take the standard deduction, you can't deduct your interest costs for that year.

Here is an example from Ernst & Young: Suppose you took out a 15-year loan on Jan. 1 of this year and you paid $2,700 in points. Also let's assume that it's better to take the standard deduction this year than to itemize. In 2003, if you itemize, you could deduct $180 of those points ($2,700 divided by 15) as mortgage interest, he says. And you could continue to deduct $180 each year for the rest of the loan's term. "When you pay off or refinance the loan, you can deduct the points remaining, if any, in that year," he adds.

What about a home-improvement loan? The IRS says you may fully deduct those points in the year you paid them as long as you pass various other tests listed in Publication 936.

The rules are different with points you pay on a loan secured by your second home. In that case, you generally must deduct the points over the life of the loan.

That same general rule applies with refinancings: Generally, those points aren't deductible in full in the year you paid them. Spread them over the life of the loan.

But there can be exceptions. If you use part of the refinancing proceeds to improve your main home and if you meet all the other criteria listed in IRS Publication 936, then you can fully deduct the part of the points related to the home-improvement work in the year you paid it. As for the rest of the points, deduct them over the life of the loan.

For example, if half of the loan is attributable to home-improvement costs, then half of the points would be currently deductible, says Mr. Nissenbaum of Ernst & Young.

Accountants tell me some people make a costly mistake when they refinance several times. Suppose you are refinancing for a second, third or even fourth time. In that case, be sure to deduct any points from the earlier refinancing that you haven't yet deducted. The same idea applies when you sell your home and pay off the mortgage; in that case, any points you haven't yet deducted would be deductible for that year.

Here's an additional wrinkle: Real-estate agents say sellers sometimes pay points for the buyer in order to facilitate the deal. In such cases, the buyer reduces the basis of the home by the amount of the seller-paid points -- and then the buyer gets to treat the points as if he or she paid them. The seller can't deduct those points as interest, but they are "a selling expense that reduces the amount realized by the seller," the IRS says.

Real estate: According to the National Association of Realtors 2002 Profile of Buyers and Sellers, the average homebuyer is 36 years old three years younger than in 1999. And the median age of sales agents is 50, up from 42 years of age in 1978. . 42 percent of buyers are first-timers. They are a full ten years younger than repeat buyers, and accounted for 2,916,000 home sales in 2001.

The NAR 2002 Buyer/Seller Survey says that more than half of homebuyers asked them to sign an agency disclosure form indicating whom they represent in the transaction. Only 35 percent signed at the first meeting, and 26 percent when the contract was written.

Overwhelmingly, agents are white. Only two percent are black and two percent are Asian. Five percent of Realtors are of Latin, Hispanic, or Spanish backgrounds.

that 80 percent of Hispanic homebuyers last year were first-time homebuyers, many with language barriers. In 2000, 19 percent of Realtors conducted at least one percent of their business in another language besides English.

Seventy-five percent of agents have e-mail, but many do not treat it as the ringing phone that it is. While the NAR reports that seven out of ten agents used e-mail in their transactions, buyers' number one complaint about agents is that they don't answer their e-mail promptly.

Seven Reasons Buyers Need Title Insurance (Kim Daugherty 2002)

Title insurance can help ensure the buyer and the lender that title defects will not make a property unsaleable in the future because of:

1. forged documents

2. undisclosed heirs to the property

3. mistaken legal interpretations of wills or trusts

4. misfiled documents—deeds, liens, mortgage satisfaction documents

5. confusion caused by similarities in names

6. incorrect marital status

7. mental incompetence

What goes up must come down??: (NY Times 2003) Sixty-eight percent of all American families own homes, the most ever and a sizeable increase from 64 percent a decade ago. But more mortgages than ever are now being foreclosed, and more homes repossessed.

In the three months that ended in June, the association reports, creditors across the country began foreclosing on 134,885 mortgaged homes, or about 4 in every 1,000 — the highest rate in the 30 years that the association has been monitoring mortgages. Creditors' backlogs of foreclosed homes reached 414,772, another record.

Foreclosures among the 26.4 million families with sound enough credit to get conventional loans are rare but growing. Since late 1999, as the boom was slowing, the association reports, the number of foreclosed conventional loans has climbed 45 percent, to 76,526, the highest level in 11 years.

people with subprime mortgages, which were rare five years ago but are commonplace now, were eight times more likely to default than those with prime, conventional mortgages.

With the rise in foreclosures, record numbers of families have applied to hold on to their homes under Chapter 13 of the federal bankruptcy code. At midyear, the Administrative Office of the U.S. Courts reports, Chapter 13 covered 220,720 homeowners, 8 percent more than a year earlier and the most ever.

Real Estate Bubble (2003)- Home prices rose at a significantly slower pace in the third quarter than in the previous period, a sign that the housing market may finally be facing a correction. In the U.S. existing home sales are up 6.1% since last October, while the median home price rose 7.2% to $161,800. Personal income, meanwhile, is up 3.3%.

San Francisco- • Existing home sales: + 2.3% ,• Median home price: $530,900

• Change in prices: + 12.0%

• 30-year mortgage rate: 6.38%

• Median family income: $86,100

• Change in income: + 7.5%

• Mortgage delinquencies: 3.1%

• Unemployment rate: + 5.4%

Changes are year over year.

Las vegas- • Existing home sales: + 20.0%

• Median home price: $163,200

• Change in prices: + 7.5%

• 30-year mortgage rate: 6.22%

• Median family income: $54,300

• Change in income: + 4.2%

• Mortgage delinquencies: 5.0%

• Unemployment rate: 5.1%

San Diego- • Existing home sales: + 2.3%

• Median home price: $379,200

• Change in prices: + 21.5%

• 30-year mortgage rate: 6.34%

• Median family income: $60,100

• Change in family income: + 5.6%

• Mortgage delinquencies: 3.1%

• Unemployment rate: 4.1%

 Portland- • Existing home sales: - 2.2%

• Median home price: $182,700

• Change in prices: + 4.5%

• 30-year mortgage rate: 6.25%

• Median family income: $57,200

• Change in income: + 2.3%

• Mortgage delinquencies: 3.0%

• Unemployment rate: 6.9%

Seattle- • Existing home sales: - 1.9%

• Median home price: $261,500

• Change in prices: + 11.7%

• 30-year mortgage rate: 6.34%

• Median family income: $77,900

• Change in income: + 7.9%

• Mortgage delinquencies: 3.3%

• Unemployment rate: + 6.8%

Changes are year over year.

Denver- • Existing home sales: - 3.9%

• Median home price: $233,600

• Change in prices: + 4.3%

• 30-year mortgage rate: 6.17%

• Median family income: $69,900

• Change in income: + 8.5%

• Mortgage delinquencies: 3.1%

• Unemployment rate: 5.2%

Houston- • Existing home sales: + 0.1%

• Median home price: $134,300

• Change in prices: + 9.9%

• 30-year mortgage rate: 6.20%

• Median family income: $59,600

• Change in income: + 1.9%

• Mortgage delinquencies: 6.2%

• Unemployment rate: 5.9%

Fort Meyers- • Existing home sales: + 3.0%

• Median home price: $142,100

• Change in prices: + 6.2%

• 30-year mortgage rate: 6.17%

• Median family income: $52,100

• Change in income: + 6.3%

• Mortgage delinquencies: 5.1%

• Unemployment rate: 4.2%

Atlanta- • Existing home sales: + 7.3%

• Median home price: $148,500

• Change in home prices: + 6.1%

• 30-year mortgage rate: 6.11%

• Median family income: $71,200

• Change in family income: + 7.1%

• Mortgage delinquencies: 6.0%

• Unemployment rate: 5.1%

Washington DC- • Existing home sales: + 0.8%

• Median home price: $259,300

• Change in prices: + 17.0%

• 30-year mortgage rate: 6.20%

• Median family income: $91,500

• Change in income: + 6.9%

• Mortgage delinquencies: 5.0%

• Unemployment rate: 3.5%

New York- • Existing home sales: - 0.1%

• Median home price: $328,000

• Change in prices: + 19.4%

• 30-year mortgage rate: 6.22%

• Median family income: $62,800

• Change in income: + 6.3%

• Mortgage delinquencies: 4.6%

• Unemployment rate: 6.6%

Boston- • Existing home sales: - 7.2%

• Median home price: $415,800

• Change in home price: + 13.2%

• 30-year mortgage rate: 6.27%

• Median family income: $74,200

• Change in family income: + 6.0%

• Mortgage delinquencies: 3.3%

• Unemployment rate: 4.9%

Monmouth County, NJ- • Existing home sales: + 1.5%

• Median home price: $273,500

• Change in prices: + 26.0%

• 30-year mortgage rate: 6.13%

• Median family income: $69,900

• Change in income: + 6.6%

• Mortgage delinquencies: 4.7%

• Unemployment rate: 4.7%

Indianapolis- • Existing home sales: - 1.3%

• Median home price: $120,400

• Change in prices: + 0.2%

• 30-year mortgage rate: 6.23%

• Median family income: $64,100

• Change in income: + 5.6%

• Mortgage delinquencies: 5.8%

• Unemployment rate: 4.5%

Chicago- • Existing home sales: + 2.4%

• Median home price: $230,200

• Change in prices: + 8.7%

• 30-year mortgage rate: 6.25%

• Median family income: $75,400

• Change in income: + 7.0%

• Mortgage delinquencies: 4.9%

• Unemployment rate: 6.3%

Minneapolis- • Existing home sales: + 0.7%

• Median home price: $189,400

• Change in prices: + 11.1%

• 30-year mortgage rate: 6.22%

• Median family income: $76,700

• Change in income: + 2.7%

• Mortgage delinquencies: 2.9%

• Unemployment rate: 4.1%

Underinsured: (2003) three-quarters of all homes nationwide are undervalued for insurance purposes, by an average of 35 percent, according to a study last year by Marshall & Swift/Boeckh

rising construction costs and property values have increased the cost of replacing a home. From 1996 to 2002, the cost of building a home rose 28 percent in the Northeast and 33 percent in the West, according to the Census Bureau.

Over the same period, many insurance companies, stung by big losses on homeowner policies in the 1990's (in part because of hurricane and wildfire claims), have dropped "guaranteed replacement cost" coverage.

most companies offer "extended replacement" instead of guaranteed replacement coverage. These policies insure the home for a specific value, and usually add a 20 percent to 25 percent cushion

House: (2003) Boston's AEW Capital Management, a real-estate investment adviser, calculates that home buyers in late 2001 were borrowing an average 67.3% of a home's purchase price, compared with 41.3% two decades earlier.

Homeowners don't seem to be in any rush to rid themselves of this debt. According to the Federal Reserve, total mortgage debt stood at 44.4% of home values in late 2002, up from 30.1% in late 1982.

Mortgages: (2003) From 1992 through first quarter of 1994, about $1.1 trillion worth of mortgages were refinances. From 2000 through 2002, the total was $2.7 trillion.

In the 1990-91 recession, consumption fell 0.4%. In the 2001 recession it rose 2.1% even while real disposable income rose just 0.1%. So spending was kept high even while income growth stalled. Part of the reason: refinancing and cash-out refinancings put more money in consumers' pockets.

Recognize this volatility- Over the past two years, mortgage rates moved a quarter percentage point in a single day only once. Over the past three weeks, it's happened eight times.

Here's the likely source: Holders of mortgage-backed securities can use treasuries to hedge their portfolios. Treasuries help them lengthen or shorten the average age of the cash flows in their portfolios and protect them against prepayment from refinancing. In general, when mortgage rates fall, increasing the chances of prepayment, MBS holders buy treasuries for this protection. When mortgage rates rise, decreasing the prepayment rate, MBS holders sell.

This wasn't a problem when mortgage refinancing was a rare option. Now, the value of mortgage-backed-security debt has exploded relative to treasury debt. According to John Lonski of Moody's Investors Service, the ratio of MBS to treasuries was 67% in 1993. Now its 175%. That means huge swings in treasuries when mortgage rates move because more MBS holders are buying and selling relatively less in treasuries.

a half-percentage point increase in mortgage rates could force the sale of $300 billion in treasuries.

the average size of a loan has risen substantially. It now stands at $166,000 for an agency loan, one conforming to standards of Fannie Mae or Freddie Mac. Back in the early 1990s, the average value was $100,000.

The larger the loan, the more sensitive the holder is to smaller changes in interest rates. Before a borrower might have required a full percentage point move to make refinancing worthwhile. Now a half percentage point move will do.

Over 80 percent of seniors own their homes rather than rent   (2003Of the  17,513,000 owner-occupied elderly households in the U.S., 73 percent or 12,792,000 are owned free and clear, i.e. no mortgage. Mean home value of householders age 65 or older is $113,071. Multiplying 12.8 million free and clear homes of the elderly times the mean value of $113,071 gives $1.45 trillion.

There are 3,838,000 elderly home owners with one or more mortgages, the median outstanding principal amounts of which are $34,147. Assuming the value of the mortgaged homes is the same as the homes with no mortgage and that the median principal amount approximates the mean, then the average equity in these mortgaged properties would be $113,071 minus the remaining loan balance of $34,147 or $78,924. Multiplying the equity in mortgaged homes owned by the elderly by the total such homes (3.8 million) gives an additional $302.9 billion in home equity held by elderly households.

Adding the $1.45 trillion in unmortgaged home equity of seniors to the $.30 trillion of equity in mortgaged homes gives a total of $1.75 trillion.

Researchers Study 2.7 Million Auto Records and Find Irrefutable Connection Between Credit History, Risk of Loss (2003) In the largest and most comprehensive study ever undertaken on the connection between credit history and insurance risk, a team of researchers has found that a consumer's credit-based insurance score is unquestionably correlated to that consumer's propensity for auto insurance loss. Even more significantly, the study found that insurance scores are consistently among the most important rating variables used by insurers.

For sale by owner (National Association of Realtors 2004) Among the property owners who sold their homes in 2003, some 14 percent - or one in seven - bypassed agents. That is down from the record level of 18 percent, in 1997, but up from 13 percent in 2001.

Housing bubble?: (NY Times 2004) The average home price in the nation rose 7.71 percent in the 12 months ended in March. But the first three months of this year showed far slower growth than previous periods. Prices rose only 0.96 percent, according to the Office of Federal Housing Enterprise Oversight. In nominal terms, United States home prices are up 60 percent since 1995; in real terms, adjusted for inflation, they are up 37 percent. Viewed historically, home prices are up twice as much now as they were in the bullish real estate markets of both the mid-1970's and the 1980's.

withdrawals from home equities have recently totaled 6.3 percent of household disposable income. In the late 1980's, equity withdrawals reached only 2.5 percent of disposable income.

Federal Reserve studies indicate that as much as half of the equity withdrawals went into personal consumption and home improvements. As a result, the equity cash-outs added 1.75 percent to the growth in the gross domestic product in 2003. That is a significant increase from the 1.25 percent kick that equity withdrawals added in 2002.

There are areas that a WAY overpriced- San Francisco for example. While there may not be a major reduction in prices, they have to drop to something like 1% per year for awhile. Otherwise, almost everyone will be priced out of the market- if they haven't been already.

Real estate and an alternative to the 1031 tax deferred exchange: (2004) A tenants-in-common structure is a form of joint property ownership whereby two or more individuals each own an undivided interest in the property. Tenants-in-common shares are not required to be of equal size or value, and—unlike partnership interests—they may be bought, sold, and left to heirs independently of the approval of other owners. And, also differing from partnership interests, they are tax-advantaged to boot.

TIC structures have been used for years, but they existed in a gray area of tax law before the Internal Revenue Service issued guidelines for them in March 2002 (Revenue Procedure 2002-22). The guidelines don’t provide a safe harbor ensuring the qualification of all such programs for use in a 1031 exchange, but they do establish 15 conditions under which the IRS will consider issuing a private-letter ruling (see “A Framework for Building TIC Deals,” on page 18). “The revenue procedure’s true impact was legitimizing the TIC structure by acknowledging there is a proper way of structuring one,” says Kevin Fitzgerald, president of U.S. Advisor, a sponsor of these investments in Napa, Calif.

With the IRS guidelines in place, tenants-in-common structures are increasingly being packaged for advisers’ consumption on behalf of their clients. Though they are used for other purposes as well, about 95 percent of the arrangements function within a 1031 exchange, estimates Julianna A. Clementi, vice president with Cole Taylor Deferred Exchange, a qualified exchange intermediary affiliated with Cole Taylor Bank in Chicago. One reason they’re popular for 1031 exchanges is that they come in various sizes—some as small as $50,000 or $100,000 increments so investors have greater flexibility in finding appropriately valued replacement property within Sec. 1031 deadlines. To qualify for tax deferral, investors must identify replacement property within 45 days of the original sale and complete its purchase within 180 days of the sale date. Finding a single property at the right price in a hot real estate market can be very difficult. But as more and more TIC ownership interests become available, program sponsors say, advisers and their clients will be better able to identify suitable exchange candidates, as well as backups, within the allotted time frames. Equity invested in commercial real estate using tenants-in-common is expected to exceed $2 billion this year, double the amount invested in 2003.

Housing: (2004) The MetLife Mature Market Institute released the results of a poll “The Future of Retirement Living,” which finds that almost all pre-retirees (people aged 50 to 65) want to live in their own home during retirement. After a preference for one’s own home, the next most popular living situations are an adult retirement community that has services and amenities or a home/apartment for people 55 and over.

On a related note, Del Webb, the nation’s largest builder of retirement housing, released the results of a survey of baby boomers finding that they are ready to reclaim their independence and enjoy being empty nesters. Del Webb also says that an increasing number of people buying into Del Webb’s adult communities are working baby boomers whose children have moved out.

Mortgages: 27% of boomers expect to carry a mortgage into retirement.

Homes: (2004) there are nearly 100,000 homes per year that federal agencies end up owning because of borrower defaults and foreclosures?

The three federal agencies that control the bulk of these properties -- the Departments of Housing and Urban Development, Veterans Affairs and Agriculture -- have joined to offer these homes for sale in one place for buyers and shoppers nationwide.

The HomeSales.gov website allows you to search in cities or states where you might be interested in purchasing a house. You'll find what's on the market at that moment. Each listing will indicate if there are any problems with the home, such as mold or flooding, and some listings will also give an estimate of repairs needed to get the house up to code.

Anyone can buy a home for sale by Uncle Sam, but you need a real estate agent or broker to submit an offer or bid for you.

"Do Stock Prices Really Reflect Fundamental Values? The Case of REITs" (2004) Real estate investment trust (REIT) stock prices deviate substantially from net asset values (NAV). Using REIT data since 1990, we find large positive excess returns to a strategy of buying stocks that trade at a discount to NAV, and shorting stocks trading at a premium to NAV. Estimated alphas from this strategy are between 0.9% and 1.8% per month, with little risk. Trading costs and short-sale constraints are not prohibitive and the results strengthen when we control for differences in liquidity or the extent of institutional ownership. We find that some variation in P/NAV makes sense, as premiums are positively related to recent and future NAV growth. However, there appears to be too much volatility in P/NAV, giving rise to potential profits from short-term mean reversion. The closed-end fund literature has some similar findings on stock price deviations from fundamental value, but compared to closed-end funds REITs are much larger and have much higher insider and institutional ownership. These differences suggest that REIT premiums and discounts reflect more than just small investor sentiment, which is a common explanation of why closed-end fund prices deviate from their fundamental value.