4 posts from July 2012

Plenty of vacancy when it comes to rental data

While there seems to be more local news today about tight rental markets and new apartment developments, you’ll read or hear very little about rental markets on a national, statewide or even regional scale, and you’ll see even less hard data connected to those reports.

That’s because macro data on rental markets are sparse and decentralized. Most data are very local, and there is little aggregation of market activity like demand, rent levels and other matters the public takes for granted in the single-family housing market. In terms of centralized sources for data across states and cities, they start and end with multifamily permits from the U.S. Census Bureau. These data show that multifamily housing construction dried up after the recession and has only recently started to rebound (see cover article in the July fedgazette).

Other surveys by the Census offer some broad-based data on local markets, but come with considerable caveats. For example, the American Community Survey (ACS) and Current Population Survey (both conducted by the Census) measure vacancy rates in the Twin Cities. Unfortunately, annual data for each run only through 2010—a turning point in many rental markets. CPS offers quarterly vacancy rates for the Twin Cities, but these figures can have seasonal volatility. In any case, results from these two public surveys do not conform particularly well with vacancy surveys conducted by private firms in the Twin Cities (Marquette Advisors, CBRE; see chart).

Rental housing -- poor data 7-29-12

Other “large” cities in the Ninth District are not large enough to attract much attention from private market research firms. The ACS offers data for smaller metropolitan statistical areas, including those in the district, but they tend to suffer the same caveats about timeliness and congruence with local sources.

As a result, understanding local markets is a hunt-and-peck effort. Local data sources are notoriously spotty, in both their volume and reliability, even for fundamental measures like rent levels and vacancies. Industry sources widely acknowledged the lack of good information on rental markets.

“We struggle with a lack of data,” particularly in outstate markets, said Mary Rippe, head of the Minnesota Multi Housing Association. She said rentals were harder to track because historically there’s been no Multiple Listing Service (MLS) that is standard with home sales (more on this in a bit). Turnover is also much higher for rentals and thus harder to track. Even the definition of vacancy introduces some complexity, as a corporate office might have a different definition of vacancy than a building manager for the same unit (if it’s empty but being repaired or updated, for example).

Some rental associations gather data; some do not. In their defense, local associations need to be wary of market surveys so as not to encourage collusion or rent setting, industry sources pointed out. For those associations that gather local data, some make that information available, but many do not. In more than a half-dozen cities with a rental association, information requests to rental associations via both phone and email were either refused or ignored.

The information gap is partially filled in some cities that publish annual reports on city housing, which typically include a section on rental housing. But most local governments “do not track rents charged by owners, and many communities do not even have a rental registration or license program. So they don’t even know who is operating rental housing in the community,” said Sue Speakman-Gomez, president of HousingLink, a Twin Cities clearinghouse of affordable rental housing information. The organization is trying to fill that void, she said, but acknowledged that “we still have a lot of work to do.”

Private data firms are starting to get their rental toes wet. Companies like Zillow have increased their abilities to identify and market local rental properties; the downside is that aggregate data are thin—there are no historical benchmarks for comparison—and privately held. MLS also has started to include rental housing, but Realtor.com—home of the National Association of Realtors—currently lists fewer than 350,000 units nationwide; this for a nation with about 40 million renter-occupied households, according to the Census.

Even among subjects with a strong policy bent, like affordable housing, surprisingly little centralized data are available that might allow for the analysis of broader patterns. For example, the U.S. Department of Housing and Urban Development confirmed that it does not aggregate waiting lists for various housing assistance programs, nor does any state, despite the fact that local housing authorities are required to gather this information. A check of local housing agencies shows that wait lists for public housing and Section 8 assistance vouchers have skyrocketed. (For more, see the July fedgazette article on low-income rental markets.)

Frac sand mining spurs rural rail

On average, railroads are four times more fuel efficient than trucks. In west-central Wisconsin, which is in the midst of a frac sand boom, that fact has increased business for railroads and spurred reinvestment in long-disused rural lines.

The region is a rich source of fine quartz sand, a vital ingredient in the hydraulic fracturing process that has opened up fresh reserves of shale oil and natural gas in North Dakota, eastern Montana, Texas and other parts of the country. Over the past five years, more than 40 frac sand mines have either opened or expanded their operations in west-central Wisconsin and in neighboring southeastern Minnesota.

In Wisconsin, many sand mining companies have built facilities adjacent to rail lines—a cost-effective way to ship raw or processed sand, often in “unit trains” of over 100 cars. In response to increased demand, railroads have ramped up their operations and rehabilitated little-used or dormant lines, at a cost of roughly $1 million to $2 million per mile.

Lakeville, Minn.-based Progressive Rail operates a 62-mile line running north from Chippewa Falls to Rice Lake and Almena, in Barron County (see accompanying map). Freight volume has increased fivefold to about 1,800 cars a month since EOG Resources completed a new sand processing plant in Chippewa Falls last December, said company President Dave Fellon. Over 90 percent of that volume consists of frac sand from the EOG plant and other mining facilities along the route.

Rising revenue has allowed Progressive to invest in human capital (payroll has increased from 65 to 100 workers over the past year) and critical line improvements. Fellon said the firm will spend $30 million to $50 million over the next five years on new railroad ties, bridges, loading facilities and other infrastructure.

Canadian National and Union Pacific have also refurbished long-neglected rail lines linking Wisconsin frac sand operations to distant markets. This summer, CN began clearing brush and laying new ties on a 45-mile section of rail between Cameron and Ladysmith to connect existing and proposed sand mines with a main CN line running north into Canada and south to Texas. The railroad backed out of a pending sale to the state that would have let Progressive operate the line, opting to retain ownership of a potentially profitable sand route.


For more on the economic impact of frac sand mining in the district, see the recent article in the July fedgazette.

REOs: A speedwagon in Minnesota and Michigan

The sluggish housing story is by now an old one, but there continue to be perplexing elements. Data recently released by the Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, offer one such nugget.

The latest FHFA report on home foreclosure mitigation efforts by the two government enterprises shows that Michigan leads all states in the number of homes owned by Fannie Mae and Freddie Mac as a result of foreclosure (so-called real estate owned, or REO, in banking parlance). The two agencies held more than 20,000 REOs in Michigan at the end of March, the result of an economy decimated by the recession. The good news is that the state’s economy has been rebounding, and the number of REOs there fell by almost 1,700 just since the end of December.

Maybe more surprising, Minnesota ranks sixth nationwide in REOs, at about 8,500—ahead of states with much bigger populations (New York), those more negatively affected by the housing collapse (Arizona, Nevada) or those with seemingly weaker economies (Ohio). California, with seven times the population of Minnesota and an epicenter of the housing crisis, has merely twice the number of REOs. The Gopher State has more than twice as many REOs as neighboring Wisconsin (about 4,000), despite the fact that Fannie and Freddie hold similar portfolios in the two states.

As a percentage of total loans held by Fannie and Freddie, the rate of REOs in Michigan and Minnesota are tops in the country (2 percent and 1.3 percent, respectively; see chart) and almost double the rate of all but six states. The feeder system to REOs—delinquent loans—is not particularly out of whack in either Michigan or Minnesota. The number and rate of seriously delinquent loans (90 or more days past due) are elevated in those two states but well below the national average (see chart) and ranking (positively) in the top half of states.

REOs - 7-10-12

There appear to be few easy answers behind REO rankings. Queried by the fedgazette, officials with FHFA could not pinpoint reasons for Minnesota's high rank, but indicated that elevated loan delinquency rates, a high incidence of both negative home equity and adjustable-rate mortgages, and even fraud might all be involved (a late-June release of the Mortgage Fraud Index ranked Minnesota third-highest in the country).

Another possible reason is regulatory in nature, as Minnesota and Michigan have longer-than-average redemption periods during the foreclosure process. The right of redemption gives an owner a window of time to completely pay off house-related debt (including fees and other costs) and reclaim the house from foreclosure. Typically, the redemption period begins after the foreclosure sale, according to a Fannie Mae handbook on REO sales, during which time the property cannot be marketed, which “puts most of the sales activities on hold” until the redemption period expires.

Currently, only 15 states have any redemption period, and those for Michigan and Minnesota happen to be the longest, running between six and 12 months, depending on the size of parcel. Redemption periods of one to four months are most common; only three states have redemption periods of six months, and the two of them are North and South Dakota, two states that have had neither the economic nor the housing problems seen in the rest of the country.

The tax man giveth away, too

It is widely said there is nothing certain in life, save for death and taxes. But in today’s world of politics and special tax treatment, maybe taxes should come with an asterisk, given the many carve-outs in today’s tax code.

A recently released report by the Minnesota Department of Revenue cataloged more than 300 so-called tax expenditures, which are statutory provisions that reduce the amount of tax revenue that would otherwise be generated. Such provisions are approved by federal and state lawmakers and come in a variety of forms, including exemptions, deductions, credits and lower tax rates. For states to balance their budgets, as required by law, they have to increase other taxes to generate the revenue not collected as a result of tax expenditures.

For fiscal year 2012, tax expenditures allowed consumers and businesses to avoid almost $14 billion in taxes. Minnesota’s 2012 tax collections are expected to come in around $34 billion, which means a little more than one dollar of tax is forgiven or otherwise taken off the table for every two and a half dollars of revenue collected by the state.

Roughly half of Minnesota’s tax exemptions are quite small—totaling less than $1 million in foregone taxes—for such mundane items as bovine tuberculosis testing (less than $50,000), small raffles ($200,000) and ski area equipment ($400,000). The bulk of tax expenditures go toward a comparatively small handful of items; more than 80 percent ($11.4 billion) are generated by just 27 tax code provisions (see table for top 10).

MN tax expenditures -- Table 7-3-12

One might think that special tax treatment is a fairly recent phenomenon. But federal and state lawmakers have generated a relatively steady pace of such tax provisions over decades. Before 1933, there were just five. The federal government, as part of the New Deal, generated 38 in 1933 alone that still stand today. Things slowed considerably over the next couple of decades, but gained momentum over time (see Chart 1).

Some of the largest tax expenditures have long legislative roots. Major provisions passed in 1933 include the home mortgage interest deduction, write-offs for charitable contributions and employer contributions for medical care and insurance premiums. The 1960s were also a boon for tax write-offs; 45 percent of tax expenditures this fiscal year come from provisions passed that decade, including a slew of sales tax exemptions for things like clothing, drugs and many services, such as those provided by lawyers and accountants.

And while state governments struggle to balance budgets, tax expenditures are expected to continue accelerating by about 5 percent annually, topping $16 billion in FY2015, according to the Revenue Department (see Chart 2).

MN tax expenditures -- Charts 1&2 -- 7-3-12