Saturday, December 29, 2012

Home Prices in U.S. Increase More Than Forecast: Economy


Home Prices in U.S. Increase More Than Forecast: Economy

Bloomberg.


Home prices climbed more than forecast in October, indicating a rebounding real-estate market will bolster the U.S. economy for the first time in seven years.
 
The S&P/Case-Shiller index of property values in 20 cities increased 4.3 percent from October 2011, the biggest 12-month advance since May 2010, the group said today in New York. The median forecast of 30 economists in a Bloomberg survey projected a 4 percent gain. 

Property values will probably keep heading higher as record-low mortgage rates, a growing population and an improving economy spur demand for housing. The turnaround in real estate is buoying household confidence and wealth, one reason why consumer spending is improving even as concern mounts that lawmakers will fail to stave off looming tax increases.

“The housing market is definitely starting to recover,” said Ryan Wang, an economist with HSBC Securities USA Inc. in New York, who’s the second-best forecaster of the S&P/Case- Shiller index over the past two years, according to data compiled by Bloomberg. Higher property values have “added about a trillion dollars to household wealth just since the beginning of this year.”
The boost to household net worth “will provide an important benefit for consumers and for the broader economy,” Wang said.

Shares Drop

Stocks fell, sending the Standard & Poor’s 500 Index lower for a third day, as President Obama and Congress prepared to resume budget talks and retailers slumped after the Christmas holiday.
The S&P 500 dropped 0.5 percent to 1,419.83 at the close in New York. The S&P Supercomposite Retailing Index slumped 1.8 percent, while lumber futures surged to the highest level since 2005 on the continued signs of improvement in housing.

A sustained pickup in housing is a source of strength as the world’s largest economy struggles to overcome concern the so-called fiscal cliff, representing more than $600 billion in tax increases and federal government spending cuts slated to take effect next year should Congress fail to act, will slow the expansion.
Holiday sales grew at a slower pace this year after gridlock in Washington soured consumers’ moods and Hurricane Sandy disrupted shopping, a report yesterday from MasterCard Advisors SpendingPulse showed. Retail sales rose 0.7 percent from Oct. 28 through Dec. 24, the Purchase, New York, research firm said. The increase was less than half the 2 percent advance in the same period a year ago. SpendingPulse tracks total U.S. sales at stores and online via all payment forms.

Richmond Manufacturing

Manufacturing expanded for a second month in December in the area covered by the Federal Reserve Bank of Richmond, according to another report today. Nonetheless, the data showed sales and orders climbed at a slower pace than in November.

Estimates for the S&P/Case-Shiller index in the Bloomberg survey ranged from unchanged to a 4.9 percent gain.

The price increase accelerated from a 3 percent advance in the 12 months ended September. The Case-Shiller index is based on a three-month average, which means the October data were influenced by transactions in August and September.

Residential homebuilding has contributed 0.3 percentage point to gross domestic product on average in the first three quarters of 2012, according to Commerce Department data. The last time it added to growth for an entire year was in 2005, when it boosted the economy by 0.36 point.

Broad-Based Gain

Home prices adjusted for seasonal variations rose 0.7 percent in October from the prior month, with 17 of 20 cities showing gains, according to today’s report. Las Vegas showed the biggest gain with a 2.4 percent advance, followed by San Diego with a 1.7 percent increase.

Property values dropped the most in Chicago, which fell 0.7 percent over the month.
Unadjusted prices in the 20 cities dropped 0.1 percent in October from the prior month. Prices tend to decrease during this time of year, the group said.

The year-over-year gauge provides better indications of trends in prices, according to the S&P/Case-Shiller group. The panel includes Karl Case and Robert Shiller, the economists who created the index.
Eighteen of the 20 cities in the index showed a year-over- year increase, led by a 21.7 percent jump in Phoenix. Detroit followed with a 10 percent gain. Chicago and New York posted declines. Year-over-year records began in 2001.

‘Gathering Strength’

“It is clear that the housing recovery is gathering strength,” David Blitzer, chairman of the index committee, said in a statement. “Higher year-over-year price gains plus strong performances in the southwest and California, regions that suffered during the housing bust, confirm that housing is now contributing to the economy.”

Declining borrowing costs have underpinned demand for those able to get financing. The average rate on a 30-year, fixed mortgage was at 3.37 percent last week, close to the 3.31 percent from a month earlier that was the lowest in data going back to 1972, according to McLean, Virginia-based Freddie Mac.

“Record-low interest rates, attractive home prices, pent- up demand, a lower supply of existing homes for sale, improvement in the economy and employment, and greater optimism are all helping drive the housing recovery,” Ara Hovnanian, chief executive officer of homebuilder Hovnanian Enterprises Inc. (HOV), said on a Dec. 13 earnings call. “This is occurring in spite of the restrictive mortgage lending environment and the number of underwater existing home buyers.”

Home Sales

Americans bought previously owned homes in November at the fastest pace in three years, figures from the National Association of Realtors showed Dec. 20 in Washington.

The job market remains an area that is holding the world’s largest economy back from a more pronounced rebound, explaining why Federal Reserve policy makers this month said they would keep the benchmark interest rate near zero as long as unemployment remains above 6.5 percent, and if the Fed projects inflation of no more than 2.5 percent in one or two years.

In addition, if Washington lawmakers fail to reach a deal on averting tax increases and spending cuts set to take effect in January, subsequent declines in business and consumer spending may also drive down economic progress.


Sunday, November 25, 2012

Should I buy in a seller's market?



It is definitely a buyers market!!! There are many homeowners in Phoenix Metro Area stuck in the exit for so long that are now able to sell their positions to larger investors with big horsepower!

We hit the rock bottom 3 years ago here and yes, if you bought Ford stocks at $1 then you would be paying ten times more for it today as well. However, we have only gone back up to 2004 home values in most Phoenix Metropolitan Areas. At 10% running inflation since we should have been back up to what they sold for at the height of the market in 2007 and that’s exactly why the big equity funds are fueling this current frenzy in the market expecting big returns in a few more years.

The bottom line is whether you are buying one to live in or increasing the size of your portfolio, you are sitting pretty. People who have money know how to play the game. Do what large Equity Funds are doing, buying in bulk from Fannie Mae, keeping the most desirable ones, banking on the future, 4 to 5 years from now.

OK. Time out! I only have $200,000 in the bank and I want to get on the game. What do I do? I get this question every single day. Well, here is what I would do. Get my finances in line, put 35% down and buy two $250,000 to $300,000 single family homes in most desirable areas.

This is not the time to play the penny stocks! The same rule works here in Phoenix Metro. It’s time to invest in APPLE and not how many sq ft you can buy in Katmandu.

How do I find these gems and who should I trust if I live 3000 miles away and have no clue what I am buying? Good Question. I get calls often from investors whose agent told them this house rents for this or that, a lot more than what the market bears and when we go look at it, yes, they sold them a pretty house in a town where we would recommend but all the way at the edge, next to a cow pasture. They were told it rents for $2500, we can barely get $1600 for and who wants to live out there anyway even when the market shoot back up? So, you just made an uniformed real estate investment decision and now you expect us to deal with it. 
We are hands on in the business every day, 16 hours of it 7 days a week, 366 days of the year. We are married to your investment till we hand over the keys to the next homeowner.

I run the investment part of the business and I have a well qualified staff to lease and mange your investments. I am your eyes and ears out here on the filed while you go play and my success is tied to yours.

90% of my listings are purchased by my own investors before the hit the market. I let other agents sell the other 10% not because I don’t have buyers for but they don’t meet my expectations.

Time is of the essence. No, it is not. I would rather see you pay a few thousand more waiting for the right opportunity and if you run across an old lady from Pasadena on your way, let me know, we married up on it.  

If you have got your money and finances together, please let me know what your agenda is. I can not tell you if 20 years from now a certain area is where you want to retire but what I can do is to give you an honest opinion what I know to help you with your due diligent. 
Owing an investment property may be fun if you own the one next to the one you live in. Otherwise; please leave it to the experts. 

I follow George Clason’s 7 basic principals of financial freedom:
The Richest Man in Babylon
1) Start thy purse to fattening
2) Control thy expenditures
3) Make thy gold multiply
4) Guard thy treasures from loss  
5) Make of thy dwelling a profitable investment
6) Insure a future income
7) Increase thy ability to earn

If you are on the same page with me, I am looking forward to hearing from you. Please let me know how I can help.

Thank you.

Payam H. Raouf
Owner/Designated Broker
Arizona Property Management & Investments
info@azezrentals.com
623-776-5774

Thursday, August 23, 2012

Straight talk! Should I buy or should I sell?


Straight talk! Should I buy or should I sell?

BY:  Payam Raouf
President/Designated Broker
Arizona Property Managements & Investments
(888) 777 6664 ext 114
INFO@AZEZRENTALS.COM

It has been a while since I have given you my opinion on the market condition in Phoenix Metropolitan Area. I think it is time to have another straight talk with our investors. I don’t have a crystal ball to predict the future and I don’t claim to be right 100% of the time but if you look back at my posts through the past three years and read my predictions, you will see they have been right on the dot most of the time.

Here we go. It is time to sell if you have bought an undesirable property in Phoenix metro between mid 2009 to mid 2011. Had you followed our recommendations, you should be fine to exit at the next opportunity. Had you not and bought into the hype, let’s help you find a strategy to exit now and reinvest it into something else.

As we went through different phases, we recommended our investors to buy with a clear exit strategy in mind. It is useless now to go over that again as we have already gone through those phases. I will try to be more specific as to where we are going from here later on.

We have had a considerable spike in the market, somewhere between 15 to 30 percent in the past two months. It is time to sit down and do some hard core math. Is it a keeper or is it time to part with it?

Do I own a unique piece of real estate? It is a very difficult question to answer when you live thousands of miles away and in most cases bought in without even looking at all your options. The only consideration was, it was cheap to pass on. Most often cheap cost more in the long run. It may be time to get an expert’s opinion.

You have now owned it for some time and should have a really good idea what it has cost you. Should you take some money off the table here and reinvest it in something else with a better outlook or could you afford to keep up with it?

To give you more specifics, there will be a link to MY EMAIL below this post. Don’t be afraid to drop me a couple lines. Give me the address of the property you own and let my team go to work for you. It won’t cost you a dime. I review their findings and give you my opinion to help you make an informed decision. 

Part two:
If you bought a property in mid 2007 to mid 2009, you are most likely upside down but not by much specially after the recent price increase in the market. The bad news is, the rents haven’t caught up with the prices and even when they do, they won’t by much. You still have to cough up the difference between the rental proceeds and your monthly mortgage. Have you considered talking to your financial adviser or an attorney to see if you benefit by short selling it? If the answer is yes, why wait? We have investors who would make you a reasonable offer that is acceptable by most financial institutions. Please let us know if that is the case by FILLING OUT THIS FORM and we even help you with the entire short sale process.

Part three:
This is for you speculator investors! If you bought a property at the top of the market, from late 2004 to mid 2007, you are in it for the long haul, think 5 to 7 more years before you can break even. It is a tough call as many of you cannot afford to short sale it. The best you can do is to keep your carrying costs manageable. Our property management division understands how important it is to keep your expenses under control. We are proactive.  To compare our services and fees please click here and FILL OUT THIS FORM and one of our area managers will show you the savings.

There are a few other groups that we have not mentioned here such as the folks who bought homes for their retirement or the calculated investors with specific plan of action.

Who should be buying in this market you may wonder? Let’s first see who is doing most of the buying these days. I break them up into three groups. Believe it or not the tenants who sold their homes through a short sale process a few years ago are now qualifying to buy again. Last month 9 of our tenants with similar circumstances bough their own homes. The dilemma is, in most cases they need to come up with a larger down payment to qualify since they have to compete with their number one competitor, institutional investors with deep pockets.

Did I mention institutional investors? Oh yeah. Almost every cash offer we get on our listings these days are over the asking price with the proof of funds attached in excess of 3,000,000 and I have seen as high as $30,000,000. They are selective. For the right property, they pay as much as it takes especially one with a good tenant in place.

Did you know banks are now getting into rental business as well? They haven’t come up with the most attractive program yet but they will in time. Anything is better than nothing.

In addition to properties we manage on behalf of several banks and financial institutions, We were recently interviewed by a large hedge fund that purchased 2500 homes directly from Fannie Mae to rent out.

In the case of banks, financial institutions and hedge funds, they fix up the homes and rent it back to the tenants or the owners already in place with lower or no deposits. They have deep pockets to pay for major repairs when it is needed and can afford to keep up with the demand of today’s tenants. The other thing is, they most likely sell it back to the tenants sometimes down the road.

The number of homes for rent both on MLS and property management sites is increasing by the day. It is taking longer to rent them out to qualified tenants especially when they are asked to pay larger deposits. 

In addition to tenant’s moving out of rentals buying their own homes, more homes are being purchased by investment groups to be rented out. The question now is, are there still opportunities out there that make sense to average investors?

You bet they are and plenty of them if you ask me. I will be doing my investors injustice if I lay them all out here. Just a quick hint, remember, location, location, location and a 3 year exit strategy! Contact me and I can show you how.

We take pride in what we do, selective when it comes to picking our players and loyal to those who have confidence in our team. Whether you have been holding off for the right opportunity, or want to improve your position or simply exit the market, please email me at payam@azezrentals.com with your information and your request. It will be answered promptly to help you make an informed decision.

With Pleasure,
Payam Raouf
President/Designated Broker
Arizona Property Managements & Investments




Wednesday, August 8, 2012

Phoenix home prices surge higher in past year to lead nation

Date: Tuesday, August 7, 2012, 10:50am MST
Home-values in both the metro Phoenix and Arizona markets eclipsed the rest of the nation once again in June -- and by a long shot.

The latest housing report released Tuesday by CoreLogic shows Phoenix-area home values, including distressed sales, surged nearly 17 percent year-over-year in June -- the fastest rate of any metropolitan area nationwide. Trailing far behind in second place was the Houston metro area’s 4.5 percent increase, followed by the 3.3 percent rise seen in the Washington D.C. market.

Home values across Arizona, including distressed sales, also posted the biggest year-over-year leap of any state in June at 13.8 percent, the report said. Idaho came in second with its 10.4 percent jump from a year ago, which was closely followed by South Dakota’s 10.1 percent hike.

Nationwide, home prices in June rose an average 2.5 percent year-over-year and were up 1.3 percent from May.

Only nine states saw declines for the month with Alabama posting the biggest drop at 4.8 percent, the report said.

CoreLogic economists said in the report that the widespread price appreciations are a response to the nation’s notable reductions in both visible and shadow inventories, meaning the number of homes currently listed and not yet listed on the market.

“At the halfway point, 2012 is increasingly looking like the year that the residential housing market may have turned the corner,” Anand Nallathambi, president and CEO of CoreLogic, said in the report. “While first-half gains have given way to second-half declines over the past three years, we see encouraging signs that modest price gains are supportable across the country in the second-half of 2012.”

To inquire about purchasing or managing an investment property in phoenix please contact Payam Raouf, Desiganted Broker at 8887776664 ext 109.
 

Tuesday, July 31, 2012

Mystery buyer snaps up foreclosure homes

Mystery buyer snaps up foreclosure homes

Catherine Reagor - Jul. 27, 2012 04:30 PM
The Arizona Republic


A few days ago, 275 foreclosure houses across metro Phoenix were purchased through a very quiet $34 million cash deal. But it's not clear yet who the buyer is.

In February, Fannie Mae announced it would auction 2,490 foreclosure homes in Phoenix, Atlanta, Chicago, Florida, Los Angeles and Las Vegas. It was the first time the government-owned mortgage firm agreed to openly sell groups of foreclosure houses located in just one metro area. Since the crash, Fannie Mae and Freddie Mac usually have sold homes they get back from lenders one by one, or in bulk with houses located all over the country.

Several buyers were interested in the Phoenix houses Fannie Mae was selling. Originally, 341 in the region were to be sold to one buyer, according to the federal government.

The sale of the Fannie Mae foreclosure homes became apparent to data guru Tom Ruff of AZBidder on Wednesday night, when he tracked metro Phoenix's REO inventory -- homes taken back by banks that haven't been resold -- and realized it had dropped by 5 percent.

In the latest sales filings, he discovered that a group called SFR 2012-1 US West LLC, located at 135 N. Los Robles Ave., fourth floor, in Pasadena, Calif., purchased 275 foreclosure homes from Fannie Mae that day. Each deal was individually recorded. Fannie Mae's Dallas office is listed as the seller.
More research shows the buyer is an LLC created by Fannie Mae.

Fannie Mae declined to comment. But a source close to the deal said Fannie Mae is transferring the properties to an LLC that the winning buyer will invest in through a private placement deal.
That means the actual sales of these homes may not be recorded in Arizona.

The Federal Housing Finance Agency, Fannie Mae's overseer, announced earlier this month that winning bidders in the foreclosure auction had been chosen, with transactions expected to close early in the third quarter. But it didn't release names.

Before February, to get 10 foreclosure homes in Phoenix, an investor might have gotten a bundle of 30 in Detroit, five in Kansas City, two in Los Angeles and one in Boise, Idaho. Most of those are not foreclosure hot spots like Phoenix.

Now that foreclosures have slowed and metro Phoenix's median home price has climbed more than 30 percent in the past year, fewer deals are available for investors. To get 275 foreclosure homes without having to individually bid on each would be a coup if the houses are priced right.

Here are few examples of the 275 Fannie Mae foreclosure houses that sold individually on Wednesday: $265,000 for a Queen Creek house; $78,000 for a Scottsdale condominium; $59,000 for an El Mirage house; and $458,000 for a Peoria house.

Most of the 275 homes are leased.
The way the sales are being handled could be problematic for the Valley's housing market because the deals could be used as comps, and its not clear yet what the winning investor will actually pay for the houses. Ruff is pulling the sales from his data so they don't skew the area's median home price.


Thursday, June 28, 2012

Mixed bag: Investors spark local recovery

Mixed bag: Investors spark local recovery


A market overview from a longtime Phoenix real-estate expert, who recently became an analyst, Mark Stapp, director of the Master of Real Estate Development program at Arizona State University's W. P. Carey School of Business.

Question: Is metro Phoenix's housing market recovering?
Answer: When you look at the statistics, it's obvious the housing sector is recovering. My concern lies specifically with how it has recovered. It is investors who dug us out of the hole, not homeowners. We currently have a single-family housing stock that is about 30 percent renter-occupied. Normally, we are at about 10 percent. Our full recovery will come when homeowners can buy existing homes, and that requires more appreciation at all price levels, and more importantly, the ability for homebuyers to get a mortgage.

Q: Are you concerned the low supply of homes for sale has made bidding wars among investors and regular buyers the norm now?
A: Yes, this puts upward pressure on prices, which is good and bad. It is good because it helps resolve the "underwater" home-value issue that persists. It is bad because it impacts affordability. Unless we see significant wage growth, appreciation at current rates will not be sustainable. It's impossible to separate regional economic development from the health of the housing market.

Q: Do you think the 30 percent-plus increase in home prices since last year is sustainable?
A: No. But, this type of appreciation will continue for a while, especially in certain sub-regions. It is important that appreciation does continue. As prices rise, as long as demand persists, new homebuilding will become more feasible, and volumes will increase, and that will start to dampen some of the appreciation.

Q: Are there now too many investor-owned homes in metro Phoenix?
A: I'm concerned about the reason why there are so many renters. Many are not renters by choice. For every foreclosed home, there is a family that has faced stress. That impacts the entire community. We cannot afford, as a community, to be seen simply as a place to buy cheap real estate. In the long run, we need to build on community infrastructure that makes the Phoenix metro area a highly desirable place to live.

Q: What about all the vacant homes? Are they finally filling up?
A: Yes. Homes that were marginal in quality and location become more desirable as prices increase. Some houses may never be desirable again or have physically deteriorated to the point they may need to be demolished. However, I don't see that problem as much in this metro area as in others.

Q: Do you think the real-estate industry has changed since the boom and crash?
A: The industry has been dealing with a down cycle for six years. The shift resulting from socioeconomic and demographic changes in our population is very significant. Now we need to pay closer attention to how these changes impact what we do, how we communicate about what we do, the value proposition we offer and the design of our products. You can't simply pick up where we left off six years ago. The market is more competitive, and buyers' attitudes have shifted. Demand has changed, so the developer, to be successful, must better understand how buyers have changed and what they want and need.

To inquire about buying, selling, leasing and managing residential investment properties, please contact Mr. Payam Raouf, President/Designated Broker at Arizona Property Management & Investments at (888)777-6664 ext 109. Thank you.

Valley home values soar 32 percent in past year

Posted: Thursday, June 28, 2012 6:39 am
Valley home prices have skyrocketed by nearly one-third in the past year as a growing shortage of units for sale keeps boosting housing values. Median sales prices were 32 percent higher in May compared with a year ago, according to the W.P. Carey School of Business at Arizona State University. Prices were up 9 percent since April, $147,000.
 
The recent trend of soaring prices is likely to end as summer settles in as people are less willing to move in 110-degree temperatures, said Mike Orr, a real estate expert at ASU.
“We’ll still see a pretty healthy transaction rate, but I think we’ve got to let people catch up a little bit on pricing and it wouldn’t surprise me if we went sideways on pricing for a month or two,” Orr said. “After all, there is a limit.”

The number of homes on the market dropped to an unusually low 8,550 on June 1. That’s down 50 percent in one year. The tight supply has led to bidding wars and buyers getting flooded with offers.
One Chandler home garnered 84 offers and a house in Glendale had 95 — only to sell for 17 percent higher than the asking price.

“If I was in the business of trying to buy a house, I’d focus on going to a new subdivision,” Orr said.
The East Valley remained the hottest portion of the market for new homes. Gilbert held the record with 187 houses, followed by Chandler’s 49 and Mesa’s 49. Phoenix logged 60 new homes in May.
However, overall home sales fell nearly 6 percent because of a short supply of listings.

Orr said looming economic woes could dampen the market, but he wouldn’t predict the market’s performance more than a few months ahead. Even if interest drops among buyers who plan to live in the home they purchase, Orr said strong investor demand will fill that gap.

New home construction shot up 57 percent in the last year as homebuilders are responding to the shortage.
“They’ll go as fast as they can but that’s not very fast because of the shortage of labor,” Orr said. “It’s not clear how quickly the labor shortage can be filled.”

To inquire about our sales, leasing and property management services, please contact Payam Raouf, President/Designated Broker of Arizona Property Management & Investments at 888-777-6664 ext 109. Thank you. 

Tuesday, April 3, 2012

Arizona Property Management & Investments
(888) 777 6664
info@azezrentals.com

Investors Are Looking to Buy Homes by the Thousands

RIVERSIDE, Calif. — At least 20 times a day, Alan Hladik walks into a fixer-upper and tries to figure out if it is worth buying.

As an inspector for the Waypoint Real Estate Group, Mr. Hladik takes about 20 minutes to walk through each home, noting worn kitchen cabinets or missing roof tiles. The blistering pace is necessary to keep up with Waypoint’s appetite: the company, which has bought about 1,200 homes since 2008 — and is now buying five to seven a day — is an early entrant in a business that some deep-pocketed investors are betting is poised to explode.

With home prices down more than a third from their peak and the market swamped with foreclosures, large investors are salivating at the opportunity to buy perhaps thousands of homes at deep discounts and fill them with tenants. Nobody has ever tried this on such a large scale, and critics worry these new investors could face big challenges managing large portfolios of dispersed rental houses. Typically, landlords tend to be individuals or small firms that own just a handful of homes.
But the new investors believe the rental income can deliver returns well above those offered by Treasury securities or stock dividends. At the same time, economists say, they could help areas hardest hit by the housing crash reach a bottom of the market.

This year, Waypoint signed a $400 million deal with GI Partners, a private equity firm in Silicon Valley. Gary Beasley, Waypoint’s managing director, says the company plans to buy 10,000 to 15,000 more homes by the end of next year. Other large private equity investors — including Colony Capital, GTIS Partners and Oaktree Capital Management, in partnership with the Carrington Holding Company — have committed millions to this new market, and Lewis Ranieri, often called the inventor of the mortgage bond, is considering it, too.

In February, the Federal Housing Finance Agency, which oversees the government-backed mortgage companies Fannie Mae and Freddie Mac, announced that it would sell about 2,500 homes in a pilot program in eight metropolitan areas, including Atlanta, Chicago and Los Angeles.
And Bank of America said in late March that it would begin testing a plan to allow homeowners facing foreclosure the chance to rent back their homes and wipe out their mortgage debt. Eventually, the bank said, it could sell the houses to investors.

Waypoint executives say they can handle large volumes because they have developed computer systems that help them make quick buying decisions and manage renovations and rentals.
“We realized that there is a tremendous amount of brain damage around acquiring single-family homes, renovating them and renting them out,” said Colin Wiel, a Waypoint co-founder. “We think this is a huge opportunity and we are going to treat it like a factory and create a production line to do this.”
Mr. Hladik, who is one of seven inspectors working full time for Waypoint’s Southern California office, is one cog in that production line.

On a recent morning, he walked through a vacant three-bedroom home with a red tiled roof here about 60 miles east of Los Angeles, one of the areas flooded with foreclosures after the housing market bust. Scribbling on a clipboard, he noted the dated bathroom vanities, the tatty family room carpet and a hole in a bedroom wall. Twenty minutes later, he plugged these details into a program on his iPad, choosing from drop-down menus to indicate the house had dual pane windows and that the kitchen appliances needed replacing.
The software calculated that it would take $25,413.53 to get the home in rental shape. Mr. Hladik adjusted that estimate down to $18,400 because he deemed the landscaping in good shape. He uploaded his report to Waypoint’s database, where appraisers and executives would use the calculations to determine whether and how much to bid for the house.

With just three years of experience, Waypoint is one of the industry’s grizzled veterans. But critics say newcomers could stumble. “It’s a very inefficient way to run a rental business,” said Steven Ricchiuto, chief economist at Mizuho Securities USA. “You could wind up with an inexperienced group owning properties that just deteriorate.”
The big investors are wooed by what they see as a vast opportunity. There are close to 650,000 foreclosed properties sitting on the books of lenders, according to RealtyTrac, a data provider. An additional 710,000 are in the foreclosure process, and according to the Mortgage Bankers Association, about 3.25 million borrowers are delinquent on their loans and in danger of losing their homes.

With so many families displaced from their homes by foreclosure, rental demand is rising. Others who might previously have bought are now unable to qualify for loans. The homeownership rate has dropped from a peak of 69.2 percent in 2004 to 66 percent at the end of 2011, according to census data.


Economists say that these investors could help stabilize home prices. “If you have a lot of foreclosures in one community you will improve everybody’s home values if you take them off the market,” said Diane Swonk, the chief economist at Mesirow Financial. “If those homes are renovated and even rented, it is a lot better than having them stand empty.”

Until now, Waypoint, which focuses on the Bay Area and Southern California, has been buying foreclosed properties one by one in courthouse auctions or through traditional real estate agents.
The company, founded by Mr. Wiel, a former Boeing engineer and software entrepreneur, and Doug Brien, a one-time N.F.L. place-kicker who had invested in apartment buildings, evaluates each purchase using data from multiple listing services, Google maps and reports from its own inspectors and appraisers.
An algorithm calculates a maximum bid for each home, taking into account the cost of renovations, the potential rent and target investment returns — right now the company averages about 8 percent per property on rental income alone. By 5:30 on a recent morning, Joe Maehler, a regional director in Waypoint’s Southern California office, had logged onto his computer and pulled up a list of about 70 foreclosed properties that were being auctioned later that day in Riverside and San Bernardino Counties.
Looking at a three-bedroom bungalow in San Bernardino, he saw that Waypoint’s system had calculated a bid of $103,000. Mr. Maehler, who previously advised investors on commercial mortgage-backed securities deals, clicked on a map and saw that rents on comparable homes the company already owned could justify a higher offer. The house also had a pool, which warranted another price bump.
By the time the auctioneer opened the bidding on the lawn in front of the San Bernardino County Courthouse at $114,750, Mr. Maehler had authorized a maximum bid of just over $130,000.
As the auction proceeded, Waypoint’s bidder at the courthouse remained on the phone with Mr. Maehler in the company’s Irvine office about 50 miles away.

“Stay on it,” Mr. Maehler urged as the bidding went up in $100 increments. The bidder clinched it for $129,400.

The sting of the housing collapse, driven in part by investors who bought large bundles of securities backed by bad mortgages, makes some critics wary of the emerging market.
“I don’t have a lot of confidence that private market actors who now see another use for these houses as rentals, as opposed to owner-occupied, are necessarily going to be any more responsible financially or responsive to community needs,” said Michael Johnson, professor of public policy at the University of Massachusetts, Boston. Waypoint executives say they plan to be long-term landlords, and usually sign two-year leases. Once the company buys a property, it typically paints the house and installs new carpets, kitchen appliances and bathroom fixtures, spending an average of $20,000 to $25,000. It tries to keep existing occupants in the house — although only 10 percent have stayed so far — and offer tenants the chance to build toward a future down payment.

Waypoint’s inspectors are evaluating hundreds of properties that Fannie Mae and Freddie Mac are offering for sale. Because the inspectors are not allowed inside these homes, they are driving by 40 of them a day, estimating renovation costs by looking at eaves, windows and the conditions of lawns.
Rick Magnuson, executive managing director of GI Partners, Waypoint’s largest investment partner, said “the jury is still out” on whether Waypoint — or any other investor — can manage such a large portfolio. But, he said, “with the technology at Waypoint, we think they can get there.”

Friday, March 16, 2012

Investors with Cash Driving Up Home Prices

Investors with Cash Driving Up Home Prices

Updated: Thursday, 15 Mar 2012, 6:11 PM MST


PHOENIX - Home sales are up across the valley. But many families looking for affordable places to live are getting squeezed out as more and more investors move in.

Investors are taking advantage of foreclosed homes and short sales, paying cash. But regular buyers -- the ones who need a mortgage -- lose out. It’s happening all over the valley.

It’s bad news if you want to buy a home because it is very competitive. But good news for people who are stuck in underwater homes -- prices appear to rising fast.

We’ve all heard the saying cash is king, but in the valley's real estate market, that old saying is truer than ever.

“The real distinction is between who have got cash and people who need a loan. And the people who have got cash are in the driver's seat,” says Mike Orr, a professor at ASU’s W.P. Carey School of Business.

“We went straight through normal and back from a fear-dominated market to a greed-dominated market with nothing in between.”

Orr says 40 percent of home sales are cash deals today, compared to about 10 percent in normal times.

Investors typically pay in cash and realtors say buyers who need mortgages just can't compete.

“It really is frustrating, some people have put in 10 or 12 offers and been shut out.”

But the good news for homeowners out there? Prices appear to increasing quickly.

“Prices are currently going up at about 1 percent per week,” says Orr. “At first the price change was quite subtle and now it is quite significant and that just makes people anxious to get their house now because next month, it might be 5 percent more expensive.”

In the $250,000-and-under range, last year, there was a 130 day inventory of homes for sale. Today, the number of homes on the market will last only 27 days -- and every month that supply is shrinking.

“I don't know yet when it is going to reach an end because there is no obvious source of new supply right now.”

Orr says the number of foreclosures is going down and so is the number of people behind on their mortgages.

Tuesday, February 28, 2012

Home prices fell in December in most US cities except in Phoenix AZ and Miami FL

Home prices fell in December in most US cities
Survey: Prices declined in 18 of 20 cities in final months of 2011, prices back to 2002 level
Associated PressBy Derek Kravitz, AP Economics Writer | Associated Press

WASHINGTON (AP) -- Home prices fell in December for a fourth straight month in most major U.S. cities, as modest sales gains in the depressed housing market have yet to lift prices.

The Standard & Poor's/Case-Shiller home-price index shows prices dropped in December from November in 18 of the 20 cities tracked. The steepest declines were in Atlanta, Chicago and Detroit. Miami and Phoenix were the only cities to show an increase.

The declines partly reflect the typical slowdown that comes in the fall and winter.

Still, prices fell in 19 of the 20 cities in December compared to the same month in 2010. Only Detroit posted a year-over-year increase. Prices in Atlanta, Las Vegas, Seattle and Tampa dropped to their lowest points since the housing crisis began.

Nationwide, prices have fallen 34 percent nationwide since the housing bust, back to 2002 levels. A gauge of quarterly national prices, which covers 70 percent of U.S. homes, fell to its lowest point on records dating back to 1987.

"The pick-up in the economy has simply not been strong enough to keep home prices stabilized," said David M. Blitzer, chairman of the S&P's index committee. "If anything, it looks like we might have reentered a period of decline as we begin 2012."

The Case-Shiller monthly index covers half of all U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The December data is the latest available.

Home values remain depressed despite some hopeful signs at the end of last year.

Builders are growing more optimistic after seeing more people express interest in buying this year. Sales of previously occupied homes are at their highest level since May 2010. More first-time buyers are making purchases. And the supply of homes fell last month to its lowest point in nearly seven years, which could push home prices higher.

Homes are the most affordable they've been in decades. And mortgage rates have never been cheaper.

Much of the optimism has come because hiring has picked up. More jobs are critical to a housing rebound.

But home prices tend to lag behind sales, which are still below healthy levels. And a large number of vacant homes are sitting idle on the market, which means prices will likely stay unchanged for several years.

Conditions are improving for those in position to buy a home. Still, many people can't afford to buy or are unable to qualify for mortgage. Some people in position to buy are holding off, worried that prices could fall even further.

The biggest reason why prices are still falling is foreclosures, which are still high across the country. Foreclosures and short sales — when a lender accepts less for a home than what is owed on a mortgage — are selling at an average discount of 20 percent.

Monday, February 27, 2012

Why Renters Rule U.S. Housing Market (Part 3): A. Gary Shilling

Why Renters Rule U.S. Housing Market (Part 3): A. Gary Shilling
By A. Gary Shilling Feb 23, 2012 5:01 PM MT

Think of all the recent federal programs to keep people who can’t afford them in their four- bedroom houses.

There are the Home Affordable Modification Program, the Home Affordable Refinancing Program and the Emergency Homeowners’ Loan Program. In addition, there are Hope Now, Hope for Homeowners, the Hardest Hit Funds and, most recently, the proposal to expand HARP to distressed mortgages not covered by Fannie Mae and Freddie Mac.

-- Hopeless HAMP: The administration initially said this program would relieve 3 million to 4 million distressed homeowners, but it’s been a miserable failure. That was to be expected because loose-lending practices put many people in houses so unaffordable that, short of canceling their monthly mortgage payments completely, no modification would return them to financial health. About the only thing HAMP has done is delay foreclosures while lenders, under federal government edict, attempt to modify home loans to reduce total monthly payments on mortgage, credit-card and other debt to 31 percent of income.

Through December 2011, 1.8 million HAMP trial modifications had been initiated, but the monthly pace of new modifications continues to drop. Only 43 percent of the HAMP trials -- 762,839 -- made it to permanent status. Nevertheless, the administration still has hope for the program and has extended it through December 2012.

-- HARP and EHLP: HARP was initiated in June 2009 by the White House to aid 4 million to 5 million homeowners by allowing those with mortgages guaranteed by Fannie Mae and Freddie Mac (NMCMFUS) -- which back almost half the $10.4 trillion of outstanding home loans and 87 percent of recent originations -- to refinance their loans even if they exceed the property’s value by 25 percent. Yet only 894,000 mortgages were subsequently refinanced. And even though Fannie and Freddie (FRE) guarantee about 5 million underwater mortgages, just 70,000 of those refinancings were loans that significantly exceeded the value of the home. Undaunted, the administration liberalized HARP in November and extended it through 2013.

EHLP was set up by the 2010 Dodd-Frank financial reform law to help 30,000 homeowners by providing zero-interest loans of as much as $50,000, which could be forgiven after five years if borrowers stayed current on their mortgage payments. Despite the attractiveness of this offer, of the 100,000 troubled homeowners who applied for EHLP by the Sept. 30, 2011 deadline, only 10,000 to 15,000 are expected to qualify, meaning the program will dispense $330 million to $500 million of the $1 billion it was allocated.

Most recently, the Federal Housing Finance Agency extended HARP to the one-third of all mortgages not covered by Fannie and Freddie and that are instead owned by banks or grouped in mortgage-backed securities sold to investors. The new loans, refinanced at lower interest rates, would be guaranteed by the Federal Housing Administration.

The administration says the program could benefit 3.5 million homeowners in addition to the 11 million who could be helped by programs for borrowers with loans backed by Fannie Mae and Freddie Mac. But as with those efforts, this measure transfers money from mortgage holders to homeowners. The new program will cost $5 billion to $10 billion, which the administration wants to pay for by taxing large banks. Because this would require congressional approval, Republican opposition makes enactment highly unlikely.

-- Try, Try Again: And don’t forget the tax credit for new homeowners that was in effect from 2009 to April 2010, and resulted in a temporary increase in house prices. Many speculators were encouraged to conclude that the price collapse was over and bought foreclosed houses for a quick flip and lots of profit. But as prices fell again and turned expected gains into losses, those investors became landlords and rented their properties hoping that rents and appreciation would bail them out at some point.

Also recall the Fed’s attempts to aid housing by pushing down interest rates. When it cut short-term interest rates to 0 percent, not much happened: Banks were too scared and too restricted to lend, and creditworthy borrowers had plenty of cash and little interest in spending and investing in a very uncertain economic climate.

So the Fed moved to quantitative easing, buying huge quantities of securities. Those purchases provided money to investors in stocks and commodities in late 2010 and early 2011, but there was no multiplier effect. Banks didn’t want to lend the $1.5 trillion in excess reserves created in the process to any but the most reliable creditworthy borrowers, who didn’t want or need to borrow.

With the second round of quantitative easing, initiated in November 2010, the Fed also hoped to push down 10-year Treasury note yields, which would then push lower 30-year fixed-rate mortgage rates, to the benefit of homeowners. This moved the Fed beyond monetary policy and into the realm of fiscal policy, but maybe dire circumstances justified the resulting potential loss of the central bank’s independence.

Nevertheless, the Fed’s second round of purchases didn’t do much to revive house sales or prices. Mortgage rates are only one factor influencing housing activity, and their decline continues to be offset by fear of further drops in prices, high unemployment, strict lending standards, higher loan fees and underwater mortgages.

Yet just as the administration hasn’t given up on its failed attempts to aid housing, lack of success hasn’t deterred the Fed. It subsequently embarked on Operation Twist, selling short-term Treasuries and buying longer issues to push long rates lower without further bloating its balance sheet. And the Fed has hinted at further action if the economy falters this year, as I’m forecasting, perhaps by buying more mortgage- related securities.

-- The Courts: The third branch of government is also trying to keep homeowners in their abodes, especially those who can’t afford them. The Massachusetts Supreme Judicial Court recently voided foreclosure sales on two houses because owners of the loans couldn’t prove that the mortgages had been assigned to them before they were securitized. The frequent change of ownership in the securitization process led to sloppy paperwork with the names of the owners left blank.

In some so-called judicial states, such as Florida, New York and New Jersey, lenders have to go to court to be able to foreclose. This greatly increases the foreclosure time, to 986 days in New York as of the third quarter of 2011 and 749 days in Florida.

Washington’s efforts to reverse the trend away from homeownership and toward rentals will probably continue to be futile, even though the National Association of Realtors reported this week that sales of existing homes increased 4.3 percent in January, to a 4.57 million annual rate, the highest level since May 2010.

Rental apartments should continue to be an interesting investment area for years, as rising rents provide attractive returns. Single-family rentals may also be fruitful if the problems related to large-scale management of houses can be resolved.

(A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. Read Part 1 and Part 2 of the series.)

Why Renters Rule U.S. Housing Market (Part 2): A. Gary Shilling

Why Renters Rule U.S. Housing Market (Part 2): A. Gary Shilling
By A. Gary Shilling Feb 22, 2012 5:01 PM MT

In making my case for continued housing weakness, I’ve emphasized the negative effect of excess inventories on house sales, prices, new construction and just about every other aspect of residential real estate.

In housing, as in every goods-producing sector, excess inventories are the mortal enemy of prices. Lower prices are needed to unload surplus inventory, yet they also lead to the creation of more inventory by anxious sellers. The plight of house sellers and the reluctance of buyers are made worse by the realization that house prices can fall, and are falling for the first time in 70 years.

There are about 2 million excess housing units in the U.S., over and above normal inventory working levels. Before the housing collapse began in 2006, housing starts and completions were volatile but averaged about 1.5 million per year. So a 2 million excess is much more than the previous annual average build.

Furthermore, that excess is rising as homeownership declines as a result of foreclosures, unemployment, inability to meet mortgage standards or reluctance to own a depreciating asset.
Inventory Count

Many people think that house inventories are coming under control. They point to the declines in inventories in relation to sales for new and existing homes, yet that calculus doesn’t include the 5 million or so housing units with delinquent mortgages or those in foreclosure, much less the additional troubled loans that are probable in years ahead.

They also don’t include foreclosed vacant houses that haven’t been listed for sale and vacant units that owners pulled off the market. These vacancies are included in the Census Bureau category called “Held off the market for other reasons,” and they now number 3.6 million, up 1 million from 2006. Falling house prices are associated with declining residential listings as disappointed sellers retreat in hopes of higher prices later.

-- Foreclosures Down: New foreclosures have dropped considerably in the last two years, but for temporary reasons. RealtyTrac Inc. estimates that there were 804,000 bank repossessions in 2011, down from 1.05 million in 2010. Nevertheless, the Federal Housing Administration’s seriously delinquent mortgages, often foreclosures in waiting, jumped from 8.2 percent of the loans it guaranteed in June 2011 to 9.6 percent in December.

The federal government encouraged lenders and mortgage servicers to delay foreclosures as modifications were attempted. There was also the voluntary moratorium on foreclosures during the robo-signing flap. This pause continued while the five largest mortgage servicers -- Ally Financial Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- worked on the recent settlement with the federal government and state attorneys general that called for $25 billion in mortgage writedowns and other aid to homeowners.

-- The Logjam Breaks: With that settlement completed, mortgage servicers and lenders will probably step up foreclosures. When they do, the so-called real estate owned -- the properties owned by lenders -- will be dumped on the market with all deliberate speed.

The effect on prices will be dramatic. The National Association of Realtors’ survey for December 2011 found that foreclosure sales were at an average price discount of 22 percent, compared with 20 percent in December 2010. Short sales, in which the lender forgives the difference between the sale price and the mortgage principal, closed 13 percent below market value. As of the second quarter of 2011, RealtyTrac found that real-estate-owned sales were at a huge 40 percent discount while short sale discounts averaged 12 percent.

These discounts tend to drag down the prices of other existing houses and force homebuilders to sell properties below cost in order to compete.

The trigger of renewed foreclosures will probably initiate another big drop in house prices, returning them to the long- term trend identified by Robert Shiller of Yale University. This measure of median single-family-house prices is adjusted for general inflation and for the tendency of houses to get bigger over time and therefore more expensive.

With these two corrections, prices in 1990 were about the same as they were a century earlier. Then came the bubble, followed by collapse, but it still will take a 22 percent decline to return prices to the flat long-term trend that prevailed between 1890 and 2000. Because corrections often overshoot on the downside, our forecast of a further 20 percent decline may be conservative. That would bring the total peak-to- trough decline to 46 percent.

-- Spreading Effects: That further drop would have devastating effects. The equity of the average homeowner with a mortgage has already dropped to 17 percent, from almost 50 percent in the early 1980s, due to home-equity withdrawal and falling prices. An additional 20 percent price decline would push homeowner equity into single digits with few borrowers having any appreciable equity left. It would also boost the percentage of mortgages that are underwater to 40 percent, from the current 22 percent, according to my calculations. The existing underwater loans have already created a $750 billion gap between mortgage principals and house values, according to CoreLogic Inc. The negative effects on consumer spending as well as mortgages and mortgage-backed derivatives would be substantial.

-- How Long?: A principal reason that median single-family- home prices are likely to fall an additional 20 percent is that it will take years to work through the excess house inventory, giving plenty of time for surplus units to depress values. I expect housing starts and completions, now about 650,000 at annual rates, to average 700,000 annually in future years. About 300,000 of those will replace housing units that are torn down or converted to other uses. So the net supply is about 400,000.

The demand side is determined by net household formation. Contrary to popular belief, household formation isn’t closely correlated with population, at least not in a cyclical time frame. By definition, a household is one or more people occupying a separate dwelling unit. So all the forces that make people want to rent or buy -- house prices, unemployment and mortgage standards -- play a role.

Household formation is about as volatile as housing starts and homeownership rates. It surged a decade ago when owning houses was the route to quick wealth; it dropped as prices collapsed. In the boom days when house prices increased 10 percent a year, a homeowner with a 5 percent down payment made a cool 200 percent on his investment each year, neglecting mortgage interest, maintenance and taxes. And, as a bonus, that person had a place to live rent-free.

-- Annual Absorption: Household formation in the fourth quarter of 2011 was 659,000 at annual rates. Over the last decade, it has averaged about 900,000, a number that seems reasonable in years ahead. Note, however, that this number may be on the high side if significant doubling up reduces household formation. Demand of 900,000 and net supply of 400,000 per year, as discussed earlier, will absorb 500,000 of the excess inventory annually. So the 2 million surplus of housing units I’ve identified will take four years to work off.

That would extend the bear market in housing to 2015, a full 10 years after it started.

One of the biggest contributors to this lengthy resolution is that Americans, armed with first-hand experience of falling prices, are beginning to separate their abodes and their investments. In the days when owners thought house values never fell, they bought the biggest homes they could finance. They now know otherwise. Further weakness in the prices of single-family houses and condos due to the depressing effects of excess inventories will add fuel to the fire.

Contrary to general belief, a single-family house, excluding the effects of increasing size and general inflation, has been a flat investment for more than a century. Such properties provide a place to live, but that value is offset, at least in part, by maintenance, taxes, utilities, real estate commissions and other costs. Furthermore, even with the tax deductibility of mortgage interest, renting a single-family house or apartment is cheaper than owning, absent price appreciation. This trend will accelerate in the years of deflation I foresee, when nominal house prices will probably fall on average.

The separation of abodes from investments should work to the advantage of rentals in future years, as it has since the housing bubble burst in 2006.

I’m not suggesting that Americans will give up on single- family owner-occupied housing. That ambition is too deeply embedded in our culture. But many will be more inclined to rent, including empty-nesters who decide to unload their suburban money pits, especially because their homes are falling in price.

Young couples may decide that because houses are no longer a great investment, there’s no reason to strain their financial, physical and emotional resources to buy big, expensive ones as soon as possible. They’ll stay in rental apartments a bit longer and wait until their children are of the age that a single- family house makes sense.

Retiring postwar baby boomers -- those who aren’t locked into underwater mortgages -- are also likely to rent as they separate their investments from their abodes.

-- Single or Multifamily?: I’ve made the case for about 4 million new renters in the next five years or so. But will they rent apartments or single-family houses?

Investors are buying foreclosed and other housing units, most of them single-family. Some did so in 2010, when the new homeowner tax credit briefly raised prices. They expected to flip them promptly, but instead became landlords as prices resumed their decline. Nevertheless, the interest of investors, who are often all-cash buyers, persists. The Realtors’ association reported that in December 2011, 31 percent of all existing house sales were for cash, 21 percent went to investors and 31 percent to first-time homebuyers.

For investors, however, managing single-family houses is challenging. An apartment usually has one or two walls exposed to the weather, but a single-family house has four plus a yard to maintain and a roof that can leak.

-- Apartment Building: Even as investors are buying single- family foreclosed houses, rising apartment rents and declining vacancies have spawned a miniboom in multifamily housing starts, albeit from close to a zero base. Furthermore, some of the growth may be in anticipation of demand from new retirees. Multifamily completions have yet to reflect this trend because it takes about 12 to 18 months to finish an apartment building.

Supply will probably continue to be augmented by conversions of unsold condos to rental apartments. Will multifamily housing soon become more overbuilt and end the increase in rentals and decrease in vacancy rates?

Those in the industry say that until recently, multifamily developers have been cautious. Tight financing has been one reason, with lenders providing 50 percent to 60 percent of the financing, compared with 80 percent in the salad days of 2006. Also, developers, accustomed to 8 percent to 10 percent capitalization rates, are reluctant to accept today’s returns of 4 percent to 5 percent. And banks are hesitant to lend to developers with bad records and favor borrowers with fortresslike balance sheets.

In addition. Fannie Mae (FNM) and Freddie Mac (NMCMFUS) have shied away from multifamily housing after getting stuck with bad apartment loans they bought in 2007 and 2008 as private lenders withdrew. The agencies’ share of multifamily loan purchases leaped to 85 percent in 2009, from 29 percent two years earlier. By 2009, they owned or guaranteed 40 percent of the $325 billion multifamily mortgage market.

-- Slow Start: According to Reis Inc., a New York-based commercial real estate research company, less than 40,000 new multifamily units were finished in 2011, the lowest number in 30 years. In 2012, Reis expects 72,000 to 85,000 new units. Even with robust apartment demand, net absorption -- the surplus of demand over new supply -- fell to 153,000 units in 2011 from 225,000 in 2010. In October of last year, the National Multi- Family Housing Council, a trade group, reported that its National Tightness Index was 56, down from 82 in July and a peak of 90 in April. A reading above 50 indicates that markets are tightening.

My industry contact indicates that conditions justify apartment-building in some markets, such as Los Angeles, San Francisco, New York, Boston, Chicago and Washington, where capitalization rates of about 5 percent for Class A buildings prevail. In many other areas -- such as Detroit and Cleveland -- rents don’t justify new construction and capitalization rates of 6 percent to 7 percent for existing apartment buildings are the rule.

On balance, lender caution will probably curtail any developer zeal to overbuild rental-apartment buildings for a number of years, at least in most cities.

-- Single-Family/Apartment Split: It’s difficult to estimate exactly how the 3.9 million net new renters I forecast through 2016 will be split between rental apartment dwellers and renters of surplus single-family homes, but I will venture some projections. The return of the rental vacancy rate to its earlier norm of 7.6 percent would provide about 750,000 units. An additional 1.5 million would result from an increase of multifamily starts and completions to the earlier norm of 300,000 per year, from the recent annual rates of 200,000. That would leave 1.7 million to be supplied from single-family rentals.

These projections are in line with my estimate that the 2 million excess inventories would be eliminated over the next four years. This consistency suggests that in four or five years, the housing market will return to normal, with the ownership rate back to its 64 percent norm and 3.9 million new rentals supplied by the elimination of excess inventories as well as the return of multifamily starts and completions to the earlier 300,000 annual rate.

Single-family starts and completions in this scenario would continue at current depressed levels of about 400,000 per year, but the elimination of 1.7 million single-family units in excess inventory by converting them to rentals would relieve the downward pressure on prices.

-- Only Projections: These numbers, however, reflect plausible but uncertain assumptions. A lower homeownership rate than the 64 percent average is possible now that Americans know house prices can and do fall. If so, more single-family houses would probably be converted to rentals and apartment construction could be stronger. If more people double up, household formation will be weaker and it will take longer to work off excess inventories, unless weaker new residential construction provides an offset.

In any event, excess house inventory, over and above normal working levels, will be gradually worked off over the next four or five years by new household formation. But about 4 million of the 4.5 million increase in households will be renters of apartments or rental single-family houses.

(A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. Read Part 1 of the series.)