“Established to make mortgages more affordable and expand US home ownership — Fannie during the Great Depression and Freddie in 1970 — the Treasury propped them up with about $188bn in bailout funds after the housing market meltdown. While Fannie and Freddie have private shareholders, they send most of their profits to the Treasury.”
“Since then, far from being reined in as critics demanded in the aftermath of the crisis, the two ‘government-sponsored enterprises’ remain as important as ever; even more so for commercial real estate markets.”
“Fannie and Freddie are best known for their principal role as the leading source of financing for owner-occupied mortgages. But for decades, they have played another role in supporting the market for rental housing, by helping finance property companies that acquire or refinance investments in apartment blocks. This second, lower-profile, part of their business has boomed since the crisis.”
“By the end of last year the pair had a financial interest in almost $500bn of commercial mortgages, equivalent to 38% of the total outstanding across the US. That compares with almost $200bn, or 25% of the market, a decade ago. Last year alone, the pair financed almost 1.6m rental units.”
“The expansion has raised eyebrows in the industry. Competitors that provide this type of finance — banks, life insurance companies and other institutional investors — say the taxpayer’s backing allows Fannie and Freddie to offer borrowers better terms than they can.”
“Supporters say the pair have also helped stave off an affordable housing crisis, especially as a new generation of renters has been locked out of the post-crisis recovery. ‘If they didn’t exist, there would be a major problem for multi-family housing,’ says Shekar Narasimhan, managing partner at the real estate group Beekman Advisors, who was the first chair of Fannie Mae’s advisory committee on this type of housing.”
“For critics, the pair have played a central role in financing the boom. Developers have completed about 1.3m rental units in the US over the past five years, according to RealPage data, including a record 365,000 in 2017.”
“’Aggressive lending practices by the GSEs this cycle have been an important factor in the degree of over-investment and over-valuation of multi-family properties in certain key markets,’ says Michael Shaoul, chief executive of Marketfield Asset Management.”
“’I do not think that the GSEs have been as critical in commercial real estate as they were in traditional mortgages a decade ago — but they have perhaps allowed some of the more marginal projects to minimize equity capital this time around.’”
“In all, first quarter annual asking rents for ground floor retail space declined in 13 out of 16 shopping corridors, and the overall average asking rent for those areas dropped 19.5% from the previous year to $653 a square foot, according to a report from real estate services firm CBRE Group Inc.”
“The continued drop in retail asking rents comes as no surprise—as traditional companies reshape their businesses to the growth in online shopping, retailers reduce the number of brick-and-mortar stores they operate. Also, merchants continue to balk at high rents. Between 2010 and 2014, average asking rents in Manhattan jumped more than 100% across the 16 retail corridors, according to an earlier report from CBRE.”
“U.S. oil major Chevron Corp has evacuated executives from Venezuela after two of its workers were imprisoned over a contract dispute with state-owned oil company PDVSA, according to four sources familiar with the matter.”
“The Chevron workers may face charges of treason for refusing to sign a supply contract for furnace parts drawn up by PDVSA executives, Reuters reported earlier this week. The workers balked at the high costs of the parts and a lack of competitive bids.”
“There are endless reasons a big-box toy store would collapse during a retail apocalypse — and Toys R Us acknowledged a number of them in its most recent annual filing: the teetering tower of debt incurred by its private-equity owners, competition from Amazon, Walmart and Target.”
“They even wrung their hands about app stores, labor costs and potential tariffs raising the costs of the imported goods they sell.”
“But one risk stood out. Toys R Us said there just weren’t enough babies…”
“It may not have been the biggest existential threat confronting Geoffrey the Giraffe (the store’s mascot), but it’s the one with the broadest implications outside of the worlds of toys and malls.”
“Measured as a share of overall population, U.S. births have fallen steadily since the Great Recession. They hit their lowest point on record in 2016 — the most recent year for which the Centers for Disease Control and Prevention has comparable data.”
“Even adjusted for the aging population and declining share of women of childbearing age, U.S. fertility rates are at all-time lows.”
“That’s problematic for Toys R Us, which also operates the Babies R Us stores. The company claims in its annual report that its income is linked to birthrates, and it appears to be right.”
“There are, to be sure, numerous other factors at play. The same economic forces that encourage people to have children may also encourage them to splurge on toys, for example.”
“But it’s nonetheless apparent that Toys R Us’s fortunes rise and fall with the population of its target market.”
“And that’s why the company’s demise should worry the rest of us. Toys R Us focuses on kids, so it’s feeling the crunch from declining birthrates long before the rest of the economy. But it’s just a matter of time before the trends that toppled the troubled toy maker put the squeeze on businesses that cater to consumers of all ages.”
“Eventually, unless the country does something significant to encourage larger families or immigration, that narrowing base of the population pyramid will crawl upward.”
“In the end, Toys R Us will just have been the first of many businesses of all descriptions facing the same hard demographic truth: Economic growth is extremely difficult without population growth.“
“‘Thanks to low mortgage rates, buying a home is actually more affordable now than in the past 40 years,’ Alexandra Lee, a housing data analyst at Trulia, told Business Insider.”
“Mortgage interest rates hit 16.6% in 1981 in response to massive inflation in the US. In 2016, interest rates fell to about 3.5%, and they’re about 4.5% right now.”
“Trulia found that the typical household in 1980 could afford only about three-fourths of the median home price, compared with the median household in 2016, which could afford a home 1 1/2 times the median home price.”
“Twenty-two US metros crossed the threshold from unaffordable to affordable over the past four decades, according to the data. The markets that are too expensive for the average buyer now, including San Francisco, Seattle, and San Jose, California, were always too expensive.”
“Trulia ultimately found that Americans’ homebuying power has strengthened in the past 40 years.”
“Take Salt Lake City, for example. From 1990 to 2016, home prices increased 53%, but the affordability index jumped to 131 from 122. That is because interest rates dropped to 3.4% from 10% during that time. Homeownership in Salt Lake City became even more affordable over the 26-year period — and the case appears the same for many of the largest US metros.”
“Only the Denver, Miami, and Portland, Oregon, metro areas dropped in affordability during that time, Lee said.”
“By the end of 2017, a monthly mortgage payment on the median home in the US required just 15.7% of the typical household income, according to a report by Trulia’s parent company Zillow. Back in the late 1980s and 1990s, a mortgage payment took up 21% of the typical American’s income.”
Granted, coming up with a down payment on a house these days is no easy task.
Effect of interest rate rises are starting to bite.
“Interest rates for home loans have risen each week this year, so each week homeowners have had less incentive refinance their mortgages.”
“Higher interest rates caused applications to refinance a home loan to fall 2% for the week and 18% from a year ago, when rates were lower. The refinance share of all mortgage applications fell to 40%, the lowest since 2008.”
“Housing is more expensive today than it has been in a decade, and a decade ago credit was a lot easier to get. The average monthly mortgage payment is now up nearly 13% from a year ago, according to Realtor.com — a combination of higher home prices and higher interest rates.”
“Singapore remains the most expensive city in the world for the fifth year running, according to the latest findings of the Worldwide Cost of Living Survey from The Economist Intelligence Unit.”
“Honolulu Mayor Kirk Caldwell signed into law today a bill imposing a moratorium of up to two years on building permits for ‘monster’ houses, giving the city Department of Planning and Permitting time to come up with permanent rules to deal with the growing phenomenon.”
“DPP will, for the most part, not approve building permit applications during the moratorium for houses that cover more than seven-tenths of a lot under Bill 110 (2017). For example, a 5,000-square-foot lot could not have a living space that’s 3,500 square feet or larger.”
Another instance of a market where housing prices have gone well beyond what local incomes can support. As a result, people come up with ‘work-arounds’ which tend to overburden the local infrastructure and upset neighborhoods, resulting in blunt regulatory reaction. Honolulu is not unique to this problem.
“America is facing a new housing crisis. A decade after an epic construction binge, fewer homes are being built per household than at almost any time in U.S. history.“
“Home construction per household a decade after the bust remains near the lowest level in 60 years of record-keeping, according to the Federal Reserve Bank of Kansas City.”
“What makes the slump puzzling is that by most other measures, the American economy is booming. Jobs are plentiful, wages are on the rise and the stock market is near record highs. Millennials, the largest generation since the baby boomers, are aging into home ownership.”
“A combination of tightened housing regulations, a lack of construction labor and a land shortage in highly prized areas is driving the crisis, according to industry experts.”
“Even during the deep recession of the mid-1970s and the downturn in the early 2000s, builders put up significantly more homes per U.S. household than they are constructing now, in the ninth year of an economic expansion. Only at the bottom of the 1981 and 1991 economic downturns were per-household construction levels near what they are now, according to Jordan Rappaport, an economist at the Kansas City Fed. He says the only period when the U.S. might have built fewer homes by population was during World War II.”
“The National Association of Home Builders estimates builders will start fewer than 900,000 new homes in 2018, less than the roughly 1.3 million homes needed to keep up with population growth. The overall inventory of new and existing homes for sale hit its lowest level on record in the fourth quarter of 2017, at 1.48 million, according to the National Association of Realtors.”
“That, in turn, is pushing up prices at what economists say is an unsustainable pace. The S&P CoreLogic Case-Shiller National Home Price Index rose 6.3% in 2017. That was roughly twice the rate of income growth and three times the rate of inflation.”
“Builders cite numerous factors contributing to the construction slump. A decades long push for young people to go to college has driven down trade-school enrollment, depriving builders of skilled labor. Declining numbers of immigrant construction workers have sapped builders of unskilled labor.”
“The construction workforce in the U.S. declined to 10.5 million in 2016, from 10.6 million in 2010, when the real-estate market was near bottom, according to an analysis of U.S. Census data by Issi Romem, an economist at BuildZoom, a startup that tracks construction data for building contractors.”
“Nationwide, membership in the National Association of Home Builders peaked at 240,000 in 2007, then dropped to 140,000 in 2012, where it has remained throughout the recovery.”
“Builders in far-flung exurbs are encountering stiffer resistance from young buyers even as prices ratchet higher for land closer to cities. Economists say that in many large metropolitan areas, suburbanization might simply have reached its limits, as potential buyers increasingly reject long commutes. During the 1950s, buying a home in a new suburb, where land was plentiful and cheap, often meant driving half an hour to a job in the city. Today, commutes from new developments can be several times that long.”
“’There’s a tremendous mismatch between the places where people want to live and the places where it’s easiest to build,’ says Edward Glaeser, a professor of economics at Harvard University who studies constraints on housing supply.”
“But building remains below historical averages, and economists say it is unlikely to return to those levels before the next recession.”
“’It’s hard for me to see on single-family how you can build your way out of this,’ Mr. Rappaport says. ‘Even with these heroic efforts’ to overcome barriers to building new housing, he says, there is little chance ‘that you’re going to get a new stream of single-family homes that can relieve demand.’”
“Coastal cities such as San Francisco, Los Angeles, New York and Boston have taken criticism for their restrictive building codes, which make it more difficult to create enough housing to keep up with population growth.”
“Even metropolitan areas with more permissive approaches to building are lagging behind their historical construction levels. Housing permits in Memphis, Tenn., were 44% below their historical average in 2017, according to the latest Census figures analyzed by real-estate data firm Trulia, while permits in the Minneapolis metropolitan area were 16% below average.”
“In business, the mantra goes, the customer is always right and should get the best deal.”
“The opposite is happening in private equity where investors, including large pension funds, endowments, sovereign wealth funds and family money, face unfavorable fund terms and, in all likelihood, lower returns.”
“Private equity firms are clearly calling the shots and that is illustrated by the record amount of money they are turning away.”
“Huge institutional investors have so much money burning a hole in their pockets (Singapore’s GIC alone has $100bn of assets under management) they are under enormous pressure to find a home for this cash somewhere.”
“Hence their willingness to commit their cash to funds even if managers cut or reduce the so-called hurdle rate, which is the return that is guaranteed before a buyout group can claim a share of the profits. The industry standard is a preferred return of 8% on deals.”
“Advent International, the Boston and London-based group, raised eyebrows in 2016 when it announced it was closing a mega $13bn buyout fund without offering minimum returns to its investors. Last year, CVC, the former owner of F1, also said it was cutting its hurdle rate from 8% to 6%. The buyout firm also scrapped early-bird discounts given to new investors.”
“Rather than take their money and run from unfavorable terms, investors have doubled down on these private equity funds, which raised record amounts of cash in their fastest time ever. Advent had set out to raise $12bn and received more than $20bn of interest from investors. CVC raised €16bn but closed the door on billions more because demand was close to €30bn.”
“Rubbing salt into the wound of poorer terms, private equity managers are also warning them that returns should come down.”
“’The investors have accepted the idea of lower returns as OK,’ said the head of a private equity group. ‘It used to be that investors would earn 20% net internal rate of returns. Now they are happy with 14% or 15% net internal rate of returns.’”
