NAR Housing Predictions by Roger Yohem

Mortgage rates that are at “unimaginable, life-time lows” will boost the housing market for two more years before inflation returns. Home prices in the Tucson region could increase by as much as 10 percent on average this year.

In the short term, the Federal Reserve’s “ultra loose” monetary policy, known as Quantitative Easing, will sustain the nation’s slow recovery from the Great Recession. This strategy allows banks to borrow money from the government at virtually zero percent interest.

Looming on the horizon, however, are seriously dark economic clouds in the form of trade and budget deficits.

“Although the fiscal cliff was avoided, it did not solve the budget deficit issue. The deficit is scheduled to go up and up, it is out of control. Put it this way, you have a $1,000 credit card debt and your rich uncle helps by giving you $60. Is that going to help your debt situation? That was the deal that was signed,” said Lawrence Yun, chief economist for the National Association of Realtors.

“There will be a continuing war of nerves in Washington, D.C. The debt ceiling comes up in about two months,” he said. Yun was the keynote speaker at the Jan. 11 Tucson Association of Realtors’ 2013 Real Estate Forecast.

Quantitative Easing is a “non-traditional” fiscal policy that enables the government “to run the economy by printing a lot of money. Inevitably, that means higher inflation by 2015,” Yun explaind.

At that time, he projects inflation will be 4 to 6 percent. For 2012, the rate was about 2 percent. This year he expects inflation will tick up slightly. And although growth in the gross domestic product is essentially zero nationally and net job creation locally “has flat-lined,” the next two years look promising for real estate in the region.

“Inflation and interest rates are related. So even if mortgages go up to 4 percent, it’s nothing to panic about. Tucson is uniquely positioned for housing price increases,” said Yun.

Looking back, 2005 was housing’s bubble year and 2008 the crash. In 2009, housing data had already started to stabilize as measured by unit sales. Prices, however, were still in a free fall as the U.S. dealt with the financial market crisis and 8 million lost jobs.

“From my perspective, the data was stabilizing. Not the market. We still had an economy where 90 percent of the population had jobs. From your perspective, 2009 was awful. And 2010 and 2011 were awful. In 2012, things were breaking out because prices always lag sales,” Yun said. “This momentum will continue into 2013.”

Last year, Phoenix was one of the nation’s hottest price-recovery markets. Investors drove prices up 20 to 25 percent and bought thousands of homes at bargain prices. For investors still wanting distressed real estate, “Phoenix is no longer in play. Many will look to surrounding areas like Las Vegas and Tucson,” said Yun.

Nationally, most housing trends will find and benefit the Tucson market. Job creation, “foot traffic,” new home construction and total sales were higher last year. Distressed “shadow inventory” is falling and listings are trending down.

For five consecutive years, household formation has been suppressed.

“This is highly unusual, rare to have such an extended period. There are many, many people living in crowded spaces,” Yun said. “Young adults moved in with their parents or found that third or fourth extra roommate. In 2012, we saw a bursting out and that increases housing demand.”

Housing is now one of the economy’s strengths, but Yun cautioned the sector still faces uncertainties. Although the economic metrics are positive, the downside concerns are almost all political.

Facets of the housing industry “are seen as potential sources of revenue in Washington. The downside is potential regulation,” Yun said, “including continuing tight underwriting standards.”

Given the nation’s massive budget deficit, the home mortgage deduction will continue to be in play. Other issues include a capital gains and/or sales tax on home transactions, larger down payment minimums and higher loan processing fees.

“Certainly two years from now, mortgage rates will be measurably higher,” Yun said.

Contact reporter Roger Yohem at or (520) 295-4254.

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2012 A Repeat of 2011? Not Exactly. KPMG Survey Finds It’s a Bit Worse

September 6, 2012 Leave a comment

Nearly two out of three (63%) commercial real estate executives surveyed by KPMG pushed back their expectations for a full U.S. economic recovery until 2014 or later.

Survey respondents said the CRE market continues to make strides in the right direction  despite a lackluster economy. However, a slower than expected rate of growth and pricing pressures will likely result in more firms seeking to increase efficiencies and reduce costs over the next year.

Nearly half (46%) of the real estate executives surveyed expect to spend the majority of their time and energy over the next two years on increasing operational efficiencies and reducing costs versus other initiatives.

“Expectations by commercial real estate executives for a modest but continuing sector recovery are closely aligned with their expectations for the U.S. economy as a whole,” wrote Greg Williams, KPMG’s national sector

leader, building, construction & real estate in this year’s annual survey. “This optimism is more subdued than last year’s assessments, when a larger portion of respondents hoped for a robust or even full recovery within a year

or two. In 2012, it appears the real estate industry recognizes the full extent of the downturn, and expectations have been adjusted accordingly.”

“Real estate executives in this year’s survey report that their companies are undertaking a number of well considered and strategic initiatives to squeeze out unnecessary costs, improve efficiencies, and focus on organic growth to enhance their competitive posture,” Williams wrote. “While increasing operational efficiencies and

reducing costs will be a primary focus, there is also a tempered optimism exhibited by executives as industry fundamentals continue to slowly improve and bright spots emerge.”

One such bright spot will be in the area of multifamily development, which is expected to see a significant spike in activity in 2013.

In addition, modest gains in hiring and revenue are expected to continue over the next year, further signaling positive momentum building within the industry, the survey found.

Other key highlights from the CRE executive surveys include the following:

The top three areas where executives plan to increase spending over the next year include technology (52%), business acquisition (37%), and employee compensation and training (32%).

More than two-thirds (72%) of respondents said improving real estate fundamentals will be the biggest growth driver over the next one to three years, representing a 22 percentage point increase in this category as compared to last year’s survey.

Executives cite pricing pressures (35%), lack of customer demand (25%), access to and managing capital (24%), and regulatory and legislative pressures (21%) as the most significant barriers to growth.

56% of real estate executives surveyed said their company’s revenue has increased in the past year, while 67% anticipate continued revenue growth a year from now.

47% of survey respondents reported adding U.S. employees in the last 12 months, and 58% expect to add more in the next year. Meanwhile, 23% noted that their company’s U.S. headcount has already returned to prerecession levels.

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Tucson Downtown Projects Coming to Fruition?

Cities need astrong urban core, and Tucsonans have heard for some time about downtowndevelopment. Projects downtown are coming to fruition. The streetcar will bringmore private investment along the route. In fact, we’re seeing that already.

Downtowndevelopment is important, but my focus is on more than just one part of Tucson

One of the mostpromising for economic development is what some call the Southeast EconomicCorridor. By that, the region around the Tucson International Airport,Bombardier, Davis-Monthan, Raytheon, the UA Tech Park and BioPark and the inland port.

These areas haveland, zoning, specialized facilities, Interstate, rail and air access and areespecially well-suited for technology firms, export firms, and other companiesseeking to relocate or expand.

Added to that,the business incubator at the Tech Park provides a hub for entrepreneurs toshare business as well as technical and scientific expertise. Having small,start-up tech firms in the same general area as more established and largecompanies, as happens at the Tech Park, helps create a healthy businessecosystem.

The City and theUniversity can help each other with common goals. Certainly economicdevelopment, technology transfer, and development at and around the Tech Parkand BioParks are areas of mutual interest.

The SoutheastEconomic Corridor is where Tucson’s business, scientific and researchcommunities interact. Keeping that interaction going, facilitating thosediscussions–these are important for our community.

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Downtown, medical share spotlight as sector stabilizes

Two dissimilar business zones split the spotlight for office space during the second quarter. As the downtown sector continued to lose tenants and evolve, an eastside health care cluster tended to some large-scale “vertical” new construction.

The only submarket to experience a significant change in vacancy last quarter was downtown, which saw vacancy increase by 4.2 percent to 35.7 percent.  The increase is largely due to the FBI vacating roughly 25,000 square feet, along with several other tenants contracting space on renewal leases at the office tower at 1 South Church.

At 275 N. Commerce Loop west of downtown, the FBI has occupied its new 92,000 square-foot regional headquarters.

Downtown has the region’s highest office vacancy rate at 35.7 percent, or about 340,000 square feet. The strongest area was the north central zone at 11.9 percent, gaining just over 10,000 square feet of occupancy during the quarter. This area basically covers properties north of River Road.

Properties larger than 10,000 square feet were analyzed and the region’s overall vacancy rate is 17.7 percent. CoStar tracks all office buildings and set the region’s vacancy rate at 12.2 percent. Despite a small second quarter occupancy loss of 23,347 square feet, some 68,000 square feet of office space has been absorbed year-to-date.

Despite the glut of vacant office space downtown, a six-story mixed-use project is being planned at 1 E. Broadway. Its intended main tenant is the Pima Association of Governments/Regional Transportation Authority in a 124,000 square-foot building.

To be developed by Robert Caylor Construction, the site also would feature apartments and street-front retail space. Caylor also owns the Chase Bank building next door at 2 E. Congress St.

Much of the sector’s brightest spotlight shifted to the east side where Tucson Medical Center, 5301 E. Grant Road, is building a 200,000 square-foot addition known as the West Pavilion. The four-story state-of-the-art facility, set to open next April as part of a $109 million construction improvement program, is the first multi-story hospital building — outside of parking garages — since some two-story structures were built in the late 1920s.

Tucson Orthopedic Institute will vacate a nearby building and lease the West Pavilion’s first floor. That move and the expansion will open about 77,000 square feet of office space at the health care cluster.

The Tucson market’s total office inventory now stands at 23.8 million square feet in 2,409 buildings, according to CoStar. There are only 18 Class A offices in the sector.

At the end of the second quarter, the average quoted rate was $22.92 in Class A; $18.85 in Class B; and $14.96 in Class C. Quarter over quarter, rates in Class A and C increased slightly while Class B recorded a small decrease.

Often referred to by industry insiders as “jobs in a box,” the office sector was basically stable in the second quarter.

Looking ahead, as office markets in larger western cities continue to improve, those gains should spill over into Southern Arizona. But since Tucson is a tertiary, third-tier city, decisions affecting the local market here will be made after companies take care of their first and second tier operations.


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Apartment Market is Hot!

So what if there’s a flurry of new apartment construction? By December, will it really matter that the vacancy rate rose from 9 percent in the first quarter to 10.1 percent at the mid-year point?

In recent months, the construction of flashy new state-of-the-art, amenity-rich, multi-family housing projects have been turning heads.

In anticipation of the rush, apartment developers bought over $8 million of land last year. The largest deal was $4.15 million to develop The District on Fifth, 248 E. Fifth Street. The second-biggest purchase was by HSL Properties for $3.8 million in Marana’s Dove Mountain for 272 new units on 20 acres.

The District on Fifth opens this month and all 750 beds were leased long before it was completed. By this time next year, a surge of some 2,000 new units are projected and that will change the dynamics of student housing around the University of Arizona campus.

A 14-story complex at 1020 N. Tyndall Avenue is in the works for just under 600 students. Near campus, plans call for a 198-bed complex at 504 E. Ninth Street. Also in progress is The Retreat at 22nd Street and Park Avenue, for 183 students in cottage-style luxury units.

Downtown at 350 E. Congress, student housing for 300 is being planned by Oasis Tucson. In anticipation of the modern streetcar, several other niche apartment projects are in various stages of development and planning.

For existing properties, the volume of sales has spiked this year. And only three acquisitions were considered “distress sales.”

Going forward, all the stars seem to have aligned just right for the market. Three major areas have been addressed: the glut of foreclosures; the shortage of student housing; and the need for high-end luxury product.

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Housing Starts at a 3 1/2 Year High

Housing starts jumped 6.9% in June to a 3 ½-year high, underscoring the residential real estate’s slow recovery as a bright spot in a sputtering economy.


Construction of homes and apartments rose to a seasonally adjusted annual rate of 760,000 in June, the Commerce Department said Wednesday. That exceeded analysts’ estimates and was the highest level since October 2008. Single-family home starts increased 4.7% to 539,000, highest since March 2010, though activity that year was inflated by a federal tax credit for home buyers.


Building-permit applications, a barometer of future construction, fell 3.7% to a seasonally adjusted pace of 755,000, but the decline was driven by a 10.9% drop in multifamily permits, which can be volatile.


After hitting all-time lows in the recession, single-family starts began to pick up the second half of last year and kicked into higher gear the past six months. Multifamily construction began to turn up about 18 months ago as Americans who lost their houses to foreclosure, among others, turned to renting.


“We’re finally starting to get some traction and move up in a credible way,” said Robert Denk, senior economist for the National Association of Homebuilders.

Housing starts rose 36.9% in the West, 22.2% in the Northeast and 4.2% in the South, while falling 7.3% in the Midwest.


Yet the housing market is still far from healthy. IHS Global Insight expects about 765,000 homes to be built this year, up from 612,000 in 2011, but that’s about half the 1.5 million annual starts that would constitute a normal market, said IHS economist Patrick Newport. He and Denk said it will take three to four years for construction activity to return to normal.


Credit conditions remain tight and nearly a quarter of homeowners owe more on their mortgages than their homes are worth, keeping them from moving to new units. And foreclosures continue to dump an outsized supply of homes on the market.


But despite a slowdown in payroll growth the past three months, employers have added nearly 4 million jobs in the past two years, prompting young adults who had moved in with parents or friends to rent apartments or buy homes, Newport said. At the same time, he said, inventories of about 144,000 new homes are near record lows and less than half the normal supply.


Meanwhile, home prices have stabilized recently, giving some Americans the confidence to trade up to new homes, Denk says. “There’s a lot of pent-up demand,” he says, adding that a weakening recovery likely would slow but not derail the construction rebound.

After hampering the economy the past few years, Newport expects the housing market to add about a quarter of a point to expected economic growth of 2% this year.


Ed Kopal, owner of Kopal Building and Design in Tyler, Tex., plans to build 12 to 14 homes this year, up from five last year as his revenue increases sevenfold to about $7 million. For the first time in several years, he’s building homes worth at least $1 million as well as a community of 32 houses that don’t have buyers yet.


Buyers, he says, want to take advantage of low-interest rates. “They feel like interest rates will go up next year,” he says, and want to act before this fall’s presidential election potentially alters the economic landscape.

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Short Sales at a 3-year High

Foreclosure-related sales have picked up, particularly pre-foreclosure sales. So says Brandon Moore, chief executive officer of RealtyTrac. “Pre-foreclosure sales hit a three-year high in the first quarter even as the average pre-foreclosure sales price dropped to a record low for our report,” he says.

According to Moore, lenders are approving more aggressively priced short sales, which in turn is resulting in more successful short sale transactions. Meanwhile, he says, “the average price of a bank-owned home is stabilizing and even increasing in some areas where a slowdown in REO activity over the past year has resulted in a restricted supply of REO homes available.” Still, he says, REO sales did increase on a quarterly basis in 21 states, “indicating that lenders are still working through a bottleneck of unsold REO inventory in many areas.”

The firm’s recent foreclosure sales report further details Moore’s comments, pointing out that sales of homes that were in some stage of foreclosure or bank owned accounted for 26% of all US residential sales during the first quarter—up from 22% of all sales in the fourth quarter and up from 25% of all sales in the first quarter of 2011. And according to the firm, third parties purchased a total of 233,299 residential properties in some stage of pre-foreclosure—defaults and scheduled foreclosure auctions—or bank-owned during the first quarter, an increase of 8% from the previous quarter and virtually unchanged from the first quarter of 2011.

First quarter pre-foreclosure sales were at their highest quarterly level since the first quarter of 2009 and pre-foreclosure sales accounted for 12% of all sales during the first quarter, up from 10% of all sales in the previous quarter and 9% of all sales in the first quarter of 2011, says the RealtyTrac report.

Third parties purchased a total of 123,778 bank-owned homes in the first quarter, up 2% from the previous quarter but down 15% from the first quarter of 2011, says the RealtyTrac report. REO sales accounted for 14% of all sales in the first quarter, up from 13% of all sales in the previous quarter but down from 15% of all sales in the first quarter of 2011. The report also points out that the average sales price of a bank-owned home in the first quarter was 33% below the average sales price of a non-foreclosure home, down from a 34% discount in the fourth quarter and a 37% discount in the first quarter of 2011.

The latest MarketPulse report from CoreLogic says the Home Price Index, including distressed sales posted two consecutive months of year-over-year increases in April 2012, the first such increase since the summer of 2010 when the housing market was benefitting from tax credits. According to chief economist Mark Fleming and senior economist Sam Khater, who authored the report, “While Arizona had one of the largest declines in the HPI since the peak (falling 47% from June 2006), that state had the highest year-over-year appreciation in house prices, posting a 9% increase in April.”

According to CoreLogic, listing information suggests price appreciation will last in the short term. “The asking price of new listings, a leading indicator of HPI, showed strong month-over-month increases through March,” according to the report. “In addition, the price of sold listings shows both year-over-year and month-over-month increases since February 2012.”


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