“Foong On Finance” With Keat Foong

‘Foong on Finance’: Inflation Is Imminent, Says Analyst

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Mar 182011

By Keat Foong, Executive Editor

Could high inflation be around the corner? And if so, perhaps that would provide added impetus to the current drive by investors to buy real estate.

“The general expectation is that inflation is coming. The question is when, and by how much,” says a research analyst at a U.S. ratings agency.

The annual increase in the Consumer Price Index is now 2.1 percent, which is still below the U.S. historical average inflation rate of 3.38 percent.

Given the massive amounts of money pumped into the economy by the federal government and now the rise in oil, commodity and food prices, it could be inevitable that higher inflation would arrive. The question, says the analyst, is “how can you not expect inflation to occur?” “It is already here. It is just not showing in the core numbers yet.”

‘Foong on Finance’: February Job Gain of 190,000 May Have Been Overstated

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Mar 112011

By Keat Foong, Executive Editor

It is said that about 150,000 new jobs need to be created per month just to absorb new entrants into the labor force. For many months now, the payroll growth has fallen woefully short of that number.

Last week brought good news. We got word that payroll growth was 192,000 in February. Finally. So much of the health of commercial real estate depends on the US employment situation. The news supports the notion that the economy is really on track to recovery.

It turns out this number, like the unemployment number of 8.9 percent, may not entirely tell the whole story. How often does one hear about the types of jobs that are being created?

And, one statistician, John Williams, says on his web site Shadow Government Statistics that the number may have been overstated by 230,000 jobs—that 38,000 jobs were actually lost in February. That is because when a company goes out of business during a recession, it is assumed those jobs are still in place.

‘Foong on Finance’: Firm Predicts 5% Return for Commercial Real Estate this Year

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Mar 042011

By Keat Foong, Executive Editor

A new projection indicates that CRE returns will fall over the next four years.

John Flavin, principal of the real estate consulting and advisory firm Wolfback says that returns for institutional-grade commercial real estate will drop from 25 percent in 2010 to 5 percent beginning this year.

Flavin says his projection of strong returns in 2010 was validated by the Massachusetts Institute of Technology Transactions-Based Index (TBI), which showed that institutional real estate assets did deliver annual returns of 25 percent last year.

Wolfback’s analysis also considers CRE debt level and rate of unemployment in calculating investment returns, as the company states those are highly correlated to CRE returns.

“Last year’s healthy returns reflect strong institutional investor demand for trophy office and apartment properties,” states Flavin. “The more modest return levels projected for 2011-2014 are attributable to limited credit availability, uncertain demand, and constrained new development activity.”

‘Foong on Finance’: Obama’s Plan Calls for End to Fannie and Freddie within 10 Years

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Feb 112011

By Keat Foong, Executive Editor

The Obama Administration issued its proposal for the future of Fannie and Freddie today.

The outline proposes winding down the agencies over a period of 10 years, and it puts forward three options, none of them calling for complete privatization or complete nationalization of Fannie Mae and Freddie Mac. However, all three options arguably take a step to the right—not the left‑of the government-sponsored private enterprise system that exists today: they curtail the government’s involvement in the secondary mortgage markets.

Under the third option, rigorously regulated private entities would perhaps take over Fannie and Freddie’s role of guaranteeing the mortgages. This seems to be the framework first put forward by the Mortgage Bankers Association (MBA) in September 2009.

“We are gratified to see that one of the concepts they articulate closely tracks MBA’s proposal, released 18 months ago,” says Michael Berman, chairman of the Mortgage Bankers Association in a statement. MBA “continue[s] to believe that this is the most prudent approach, one that places the primary risk on private investors and ensures sufficient liquidity during times of economic stress in order to provide affordable mortgage finance in all types of mortgage markets.”

Will those private entities also have a housing mission—a mission to provide affordable housing‑similar to Fannie and Freddie’s? Perhaps not, if President Obama, the nation and its millionaire TV newscasters are intent on continuing to move the country away from the New Deal framework. Others question whether the proposal gives the huge, coveted, Fannie and Freddie business to the banks.

The National Multi Housing Council (NMHC) also applauds President Obama’s white paper. “We would encourage lawmakers to focus their attention-at least in terms of serving the rental housing industry‑on the third option identified in the Obama plan…” says NMHC President Doug Bibby in a statement.

NMHC favors the “federal guarantee at all times” on the rental housing finance side. It will be interesting to see if in the end, both apartment property owners and homebuyers will obtain the same plan and thereby continue to benefit from lower mortgage rates.

‘Foong on Finance’: Capitol Hill Opinion Coalescing around MBA’s GSE Framework?

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Feb 042011

By Keat Foong, Executive Editor

The Mortgage Bankers Association’s (MBA) proposed plan for the future of the GSEs may be well received by the Obama Administration.

MBA has met with stakeholders on Capitol Hill and discussed its proposal for the future of the secondary market, which it first put forward in September 2009.

MBA’s recommendations call for the creation of a number of private entities, “MCGEs,” that would replace Fannie and Freddie. These entities would provide loan-level guarantees for the mortgages. The government would continue to provide guarantees, at the securities level. There would be payment going into an insurance fund to protect taxpayers.

There is a “coalescing of opinions” around MBA’s “general outline,” reports Michael Berman, MBA chairman, and president and CEO of CWCapital. Speaking in a teleconference with reporters last week, Berman said that “it is safe to say the proposal has been well-received.”

‘Foong on Finance’: Affordable Housing Sector Awaits Obama Budget

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Jan 282011

By Keat Foong, Executive Editor

President Obama’s State of the Union speech does not seem to be a speech that is particularly underpinned by a conservative economic philosophy. One has to watch the President’s actions, and await the release of the Administration’s budget proposal in a few weeks, to see his intentions.

At the annual National Housing Conference and New York Housing Conference luncheon in December, speakers were not optimistic about the prospects for funding for affordable housing in the current environment, and were girding themselves for tougher times ahead. More funding cannot be expected; only level funding at best.

President Obama, who proposed a five-year freeze on domestic discretionary spending in his speech, does also mention the need for government investments: in innovation, education and infrastructure. Housing was mentioned directly only in reference to the need for the government to be more efficient: “There are at least five different agencies that deal with housing policy,” said President Obama.

Also, the President did mention the federal deficit commission, which he had appointed to look into ways to cut the federal deficit. The commission had recommended scaling back or at least reforming the mortgage interest deduction program. This measure may be a boon to the market-rate apartment industry, though maybe not so much to homeowners looking to build equity in their lives.

Affordable housing proponents can hope at this point that housing is included in the investment in “infrastructure” that Obama mentions. Sheila Crowley, president of the National Low Incomes Housing Coalition, said in a statement, “I hope that the President intends to include affordable housing in the list of infrastructure improvements and to spare safety net housing programs from the spending freeze.”

‘Foong on Finance’: Rising Interest Rates Torpedo Acquisition Deals

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Jan 212011

By Keat Foong, Executive Editor

The multifamily acquisitions market became a buyer’s market as early as the beginning of last year.

Cap rates for apartment properties have now slid back down to levels last seen in the mid- to late-2000s. For example, cap rates are 5.5 percent in certain California locations and in New York City, says Nathan Collier, founder and chairman of the Collier Companies.

Collier spoke at a session last week at the National Association of Home Builders’ International Builders’ Show. Speakers at the session, which addressed the acquisition of multifamily properties, suggested that rising interest rates (which have increased by as much as one percent at various points) could in turn push up cap rates.

Investors want a spread of 50 to 100 basis points over the cost of the debt, says Collier. A lot of deals that were begun three to four months ago are now falling through, possibly because of the rising interest rates. Indeed, Collier is receiving calls asking if he would be interested in these deals.

Lance Swank, chief operating officer at the Sterling Group, says the best opportunities await all-cash buyers who can close quickly.

‘Foong on Finance’ with Keat Foong: The Apartment Market Recovers

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Jan 072011

The news looks good. The unemployment rate in December fell from 9.8 percent to 9.4 percent.

However, the number of jobs added was only 103,000—less than the roughly 150,000 new jobs that are needed per month just to keep pace with entrants into the labor market.

And everyone knows by now that half of December’s decline in the unemployment rate is attributed to those who dropped out of the labor force and are no longer counted in the unemployment rate.

Still, the apartment market is due to have a good 2011, even it will probably take many, many years for the labor market to recover, if at all.

Maybe the apartment market has even recovered, at least in many locations. Gleb Nechayev, senior economist at Global research Consulting-Econometrics Advisors at CB Richard Ellis, forecasts that the average apartment rent will reach $1,130 per unit by the end of this year. This level is a mere 3 percent below the $1,167 average rent that was achieved at the height of the apartment market in the third quarter of 2008. See MHN’s January 2011 issue (p.24) for further details.

‘Foong on Finance’ with Keat Foong: Demography is Destiny

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Dec 312010

It does not seem that long ago that we took note the U.S. population had increased from less than 250 million to about 280 million. That was in the year 2000.

The U.S. Census Bureau announced last week that its latest tally of the U.S. population, as of April 1, 2010, stands at 308,745,538. The South and the West are obtaining most of the population increase.

The U.S.’s population growth rate in fact exceeds that of China’s.

One would think a growing population generates greater demand for apartments, and is generally good news for apartment property owners. Where are the development sites to meet the needs of the growing population? Happy New Year!

‘Foong on Finance’ with Keat Foong: Obama’s Tax Cuts Extension Package Passes Congress

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Dec 172010

By Keat Foong, Executive Editor

The Bush tax cuts extension that Obama has very skillfully prepared for, and sheperded through, a Democratic Congress now awaits his signature.

Joined-at-the-hip to unemployment benefits extension and middle class tax cuts, a long list of measures in the bill are pretty favorable to the real estate industry.

The carried interest tax will remain at 15 percent. However, the housing industry failed to obtain an extension of the TCEP program that allows states to trade a portion of unused Low Income Housing Tax Credits for affordable housing grant dollars.

Treasury rates increased in expectation of higher budget deficits and economic growth as a result of the tax package. The 10-year Treasury yields rose to the 3 percent range for the first time since this summer.