At the end of 2008 in our year-end report (see Febuary 9th entry) we made some comparisons between owning vs. renting and found that in many instances, owning could be cheaper, especially for a first-time buyer with an FHA loan and lower down-payment. Of course, this was an analysis for general consumption, one has to factor in their own specific case to see if its personally worth it to take the step into homeownership. Considerations may include, taxes (on the property and mortgage interest deductions), your current employment situtuation and how solidified you think you are with your employment, SID's and HOA fees and benefits, how long you plan to live there and other cost-benefit judgements.

While we talked about this last year, the Wall Street Journal has an online article that states that "the relative cost of owning versus renting is swinging back in favor of homeownership in some U.S markets". Naturally, the reason cited was steep price declines. While its an undeniable fact that price declines have caused immense anguish and weakened the balance sheets of many households, for those who waited or are now in a financial postion to purchase a home, there is a lot of logic in the purchase proposition. In addition to that there may be positive emotional benefits as well. Personally, I think its a little funny that people who were telling others to buy 3 or 4 homes near the peak are now telling folks not to buy when values are the lowest in years. This is a herd mentality that will provide academics material for years. While we can't say that homeownership is for everyone, for those individuals or families that are comfortable with their financial positions and have the outlook that that position can carry them to better economic times, now might be a good time to go househunting.

Turning back to the numbers, the WSJ article stated that the the ratio for Las Vegas is below its 18-year average. My series below does not go that far back, but you can see the trajectory and that the Q4'08 ratio was the lowest during the period of measurement.

In 2006 the Chicago Mercantile Exchange launched it's Housing Futures product.  The product was to be based on the S&P/Case-Shiller Home Price Indices developed by Karl E. Case and Robert J. Shiller. There was both fanfair and forecasts for failure. Some thought it would finally allow a popular asset class to have a method of hedging risk. Others believed that it would be traded so lightly that it was basically dead on arrival. While the product has recieved some attention, it is thinly traded and therefor, price discovery is a little fuzzy. While we know that speculators do trade the contract and this is good for liquidity, is it useful as a hedging tool?

I began to research this but in the course of my initial search, found that some academics have looked at this and luckily for my favorite market...Las Vegas!  Mark Betrus, Harris Hollans and Steve Swidler perform an analysis of Hedging house price risk using the CME contracts.  If you are unfamiliar with hedging concepts, one way to look at it is that you are long whatever you own, so in order to hedge the risk of a price decline of what you own you can use a short position to offset price declines. On that short position you've sold high and bought low and took the difference as a savings against the loss in your long position.

The Betrus et al. study looks at hedging for some typical investors including:

1. Investment groups holding equity stakes in property where returns are from income and appreciation.

2. Mortgage portfolio investors where potential losses may be from increased default rates.

3. Local real estate developers who need to offset price drops while holding inventory.

4. Individual homeowners.

I believe the most useful intances are for the professional investor class. This is because of the size of the contracts which may require too steep of a financial commitment and a margin account. The contract trade unit is $250 times the index value.  So for Las Vegas if the index is 134 one would be looking at $33,500.  Further, as in my case, I won't even bother to hedge this price decline because the home I am looking to buy is priced to where the monthly payment is cheaper than my rent and I get some more footage and a garage.  I also plan to live there for a few years and don't have to put much money down.  I really don't care that much about a price decline if it makes financial sense as well as a sense of convenience for me today.  I am also not in the habit of forecasting interest rates five years from now and I do know that they are at historically low levels today.  For the investor class, I do think this can be a useful tool.  It takes a lot of homework though, since each portfolio is different and like every futures and options document says, "past performance is not indicative of future results."

Betrus et al. found that with their sample investment groups and mortgage holders would have reduced house price risk by 88% (except in submarkets where the prices moved idiosycratically from that measured by the index).  For builders, it is more difficult to hedge risk because there is weak correlation between new home prices and the index.  If they are risk averse, it probably is better to just get the inventory sold to someone either less risk averse or who can carry the product until the market prices rebound, and there are those folks out there.  Individuals, if they had cared to hedge, could have hedged significant price risk.  Compellingly, the authors also find that hedge ratios were pretty stable over time.  So to sum up, in some cases yes, these instruments can provide an effective hedge.  The study was published in the Journal of Real Estate Finance and Economics and cound be found at www.springer.com

Reference:

Bertrus, Mark, Harris Hollans and Steve Swidler."Hedging House Price Risk with CME Futures Contracts: The Case of Las Vegas Residential Real Estate"; The Journal of Real Estate Finance and Economics, Volume 37, Number 3 / October, 2008

Our Q4, 2008 Mid and High-Rise snapshots are out. These reports detail sales rates, builder pricing, closings, resale prices and sales and inventory trends. While we also offer a condominium synopsis for typical condominiums, the mid and high-rise market really is a different animal so we have this highly detailed report so you can look at homes by plan type and size as well as well as days on market.

If you are curious about this market, drop us an email at info@cbprds.com

While we rarely re-blog, I think some of our readers who also have SoCal interests may enjoy this blog.

Inland Empire Economics

There is a lot of useful weekly info here and in the archives regarding macroeconomic trends, policy, transportation and detailed info abou the Inland Empire Industrial market.

Today the Federal Reserve Chairman Ben Bernake gave a speach at the National Press Club Luncheon in Washington D.C.  In his remarks, the Chairman notes three chief policy tools.

1. Financial institution access to short-term credit to ease credit in interbank lending markets(This helps with adjustable-rate mortgages, which are often tied to interbank rates such as Libor)

2. The Fed provides liquidity directly to borrowers or investors. Bernanke says that they are purchasing highly rated commerical paper and providing a backup to money market funds. He notes that this should help lead to lower rates and increased availability of credit for businesses, consumers and mortgage credit.

3. The Fed is purchasing longer-term securities, such as GSE debt. (Since they are buying securities this puts more cash into the system, helps keep rates low)

In addition to this, the Fed has what Bernanke calls the "conventional tool" which is the federal funds rate. However, this is nearly bottomed out.

So is it working? According to Bernanke it is helping. Libor, commercial paper have fallen and 30-year conforming mortage rates fell almost 1 percent since the Fed stated that it would buy GSE related securities. While there are a lot of different rates to look at, we take a look at the popular Ted spread, which is often quoted by the folks at Bloomberg, Paul Krugman, Larry Kudlow and others.

Looking at the chart, you can see that fear and confusion was unleashed in September of 2007. The Fed started monetary easing during September in response to observations of a contraction in liquidity. The Ted spread followed a band between just below 100 basis points (bps) and then around two hundred. You can see and probably remember what went on in the fall and winter of last year when fear and confusion was unleashed again and the spread went up to over 450 bps and the Treasury began working on TARP. Apparently, what the Treasury and Fed have been doing has alleviated some of the liquidity issues. Now we are hovering just under 100 bps. I would not even begin to try to forecast this series, with the way new info comes in randomly. I could just hope it continues the easing trend. We will keep watching!

It has been a difficult year to measure population and migration in Las Vegas and Nevada. With different methodologies and methodological changes from year-to-year, its hard to figure out where we stand. We do continue to see over 4,000 drivers license surrenders per month, however it is more difficult to measure the out-migration.

United Van Lines, possibly the largest mover in the country, publishes a migration study based on data that it collects in the course of it's business. Nevada continues its inbound migration history as a "high-inbound" state for the 23rd year. 59.2 percent of the Nevada moves performed by United Van Lines were inbound to Nevada.

Several other states faired well with in-bound movement, including the District of Columbia (Yes, I know its not an actual state) and North Carolina. Some western states did well too, including Wyoming and South Dakota.

States that did poorly were Michigan, indiana, North Dakota, New Jersey and several others. The theme is probably familiar, the Great Lakes and Northeastern regions continue an out-migration pattern.

You can find the whole study here.

We return to the subject of financing from our previous post about how mortage rates are established towards what type of financing are buyers actually using. After the turbulence of the last half of last year in the credit markets, with interest rate spreads leaping skywards, significant changes have occured in the mortgage markets. Mortgages are still available at some very low rates for creditworthy buyers. FHA has recently become a dominant mortgage type. FHA loans are not loans from the government but are made by private lenders with the government insuring against default. While FHA loans are not for everyone, one benefit for some folks is the small downpayment. These are not for people who require a large mortgage but at the current price points of a lot of the Valley's housing, this is a viable option for many (See chart) . For that same reason and because of the increase in professional investors entering the market, cash purchases have been stronger in the fourth quarter than the same period in 2007. It would not be surprising to see cash grow proportionately more as prices decline, especially on properties that have good tenant histories as rentals. On a further note, allegedly, the House and the Senate have finished the last pieces of the stimulus legislation and it should be on the Presidents desk next week. One of the housing related issues in the package was a change in the home buyer tax credit (supposedly $8,000 for new home buyers). There was also a discussion of extending Freddie Mac and Fannie Mae loan limits in high-cost markets. So we'll see what happens to that by next week. With affordability at the highest point in years and increasing, it looks like the price component of the market is solving a lot of the problems by returning to long-term fundamentals and people are responding, sales of single family homes in January were up 120% from January of 2008 and 154% for condominiums.

Source: Mlxchange, Coldwell Banker Premier Realty.

After having repeated questions about the differences between REO and Non-REO sales, we decided to analyze this a little further and produce another White Paper. Instead of just listing some really generic numbers we pursue a more scientific track and put some of our econometrics training into practice. This particular study looks at two recent samples of sales in the Las Vegas Valley for single family and then for condominiums. I won't post the whole study here but some highlights include:

• Yes, REO's do generally sell for less (we note some reasons why including motivation, time on the market). See also our previous post on liquidity adjusted prices.
• We notice several characteristics of REO sales, such as differences in size, DOM, lot size that effect observed prices. Regression techniques help here (See study).
• Sales Price to List Price ratios are on average higher than non-REO's.
• We map the sales so you have an idea of the distribution of REO and non-REO sales in the Valley.

Intrigued? Simply take the time to send us an email at info@cbprds.com and let us know you want a copy of the study.

We sometimes hear some misunderstandings of how mortgage rates are established. Some individuals are under the impression that the government directly adjusts these rates. In some cases people hear that the Fed changed rates and ask why did the mortgage rates not go up or down that much?

 The quick answer is that mortgage rates are established in a marketplace and while they may vary with the rates that the Fed establishes, mortgage rates don’t necessarily directly follow the same path.

 The federal funds rate is a rate targeted by the Fed and is the interest rate that banks charge each other for overnight loans. This short-term rate does not necessarily mean a longer-term rate, such as mortgage rates will follow precisely. The mortgage rate incorporates expectations by lenders about such things as inflation, interest rates and risk and also fall in the context of supply and demand conditions in the market for mortgages. This is a long-term bet.

 Given these factors, it is understandable that a significant spread should currently exist between the federal funds and mortgage rates. In the chart you can see that while the Fed has dropped the federal funds rate almost on the floor, mortgage rates have followed its own path with a currently large spread between the two.

 Nevertheless, mortgage rates are historically low. For folks interested in buying a home, this is very welcome. One needs to be aware of there credit score and follow up with any errors or deficiencies. One thing that was brought up during the International Homebuilders Show was that many people surveyed that would like to own a home just had a blanket understanding that they could not qualify. Even individuals in the high 700’s FICO’s just assumed they could not qualify. Further, FHA financing is back big time so there are some options.

The Developer Services team recently attended the International Builders Show which was in our home town of Las Vegas. The homebuilding industry is changing with builders evaluating their techniques for building in a more price point sensitive environment. Here are a few highlights noted while attending several conferences.

Part of an NAHB survey:

• Living rooms are likely to get smaller
• Family Rooms and Kitchens are expected to have increased square footage
• Trend in tall ceilings should continue (9' or 10' first floor, 8' second)
• Desired kitchen amenities are bigger islands, double sinks and eating space, especially when formal dining space is limited or does not exist
• Bathrooms are becoming more spa-like
• Garages should be large enough to actually fit cars, rather than be glorified storage units

              (Source: National Association of Homebuilders.)

Focus should be put on where people actually spend time and concentrate efforts there. That's where the real value can be seen by the buyer. Increasing flex space and reducing redundancy is important. Smart land development with higher density is probably will probably be the continued trend in entry level homes. Single story homes with high quality finishes should serve boomer retirees well in the coming years. With some great re-sale homes on the market, in the next several years new homes should be built with a sense of neighborhood with strong curb appeal and efficient floorplans. They cannot look cheap, but reducing rarely used features and enhancing what is used will help achieve value for the buyer.

Developer Services releases it's January 2009 Single Family Residential Activity Synopsis which follows the trends in the single family home marketplace.

The report details:

• Average days on market
• Sales Price/List Price
• Permit activity
• Inventory
• Closings
• Months of supply
• Notices of default
• REO and Short sales
• Pricing

This is one of our more technical reports, however if you are accustomed to reading graphs, this document is for you. We have great feedback from lenders and professional investors on this one. For those who want to take a look, we will send it to you in PDF at no cost, just click here and give us your email or if you are a current client, just remind us to send it to you.

Coldwell Banker Premier Realty has recently published the 2008 Las Vegas Valley Real Estate Report. This report is useful for investors, home buyers or sellers, developers or anyone curious about the Las Vegas Valley residential market.

The report details:

• Existing Home Sales
• Days on Market
• New Home Sales
• Pricing
• Foreclosures
• Short Sales
• Vacancy Rates
• Owning Vs. Renting
• Luxury Home Sales
• Luxury Home Features

The report also discusses taking your money further in the residential market as well as some notable sales. The report utilizes crisp graphics and photos within a thoughtful narrative. If you would like this emailed to you, just register and we would be happy send this to you. Enjoy!

These Economic Letters from the Federal Reserve can be very intriguing. John Krainer, an economist with the Research Department of the Federal Reserve Bank of San Fransisco has a nice paper about liquidity pricing in housing markets. We understand that there are three key housing market variables, which Krainer notes as "changes in prices, changes in sales, and changes in time on the market." One aspect of pricing a home is a real art. We do observe selling prices, however the "liquidity adjusted" price is not a directly observed number. For example, a home was sold for $100,000 and spent 60 days on the market. We know it sold for $100,000 but what if the seller had listed it higher? It may have sold for $110,000 but may take 100 days to find the buyer willing to accept that price. Krainer delves into this further and calculates some liquidity adjusted prices as well as some implications for lenders and consumers. If you like numbers and charts, enjoy this read! Find it at the San Francisco Federal Reserve website or Click Here.

• 39% of all U.S. CO2 emissions,
• 70% of U.S. electricity consumption,
• 40% of global raw material consumption and
• Over 12% of potable water consumption.