36 posts categorized "Housing"

Ninth District businesses remain optimistic

There has been a fair amount of attention given to the possibility of an economic slowdown in 2014. While only a small anecdote in the volume of economic data, a recent survey still suggests a positive outlook in 2014 for the Ninth District economy.

The Federal Reserve Bank of Minneapolis conducted an ad hoc survey of 135 Ninth District firms and asked them about their outlook for 2014 (see methodology). Over 80 percent expressed optimism for their community’s economy over the next 12 months. This is comparable to the 74 percent of respondents to the November 2013 fedgazette Business Outlook Poll. Results by sector show that construction respondents were the most positive with 9 out of 10 reporting optimism, followed by manufacturing (87 percent), professional services (80 percent) and finance, insurance and real estate (79 percent).

“Seeing improved trends,” said a Minnesota banker, reflecting the overall mood of respondents; 53 percent expect increased sales for their operations compared with only 9 percent that expect decreased sales. Part of the sales increase is due to higher productivity, which 65 percent said occurred at their firm over the past 12 months. Higher sales expectations are partially reflected in the 39 percent of businesses that expect to increase prices, while 8 percent expect to lower prices.

More companies also plan more capital investment—30 percent expect an increase over last year’s spending, while 12 percent predict a decrease. Companies are having a better time financing these capital expenditures through better access to bank credit; 19 percent reported improved access, while only 5 percent noted deteriorated access.

More companies are hiring, too, with 34 percent expecting more employment and only 9 percent expecting less. Firms are facing some challenges; 44 percent noted that securing workers was a challenge, and over half reported that complying with government regulation was a challenge. FIRE respondents, at 69 percent, reported the most concern about complying with regulations.

Ad hoc survey methodology: On Feb. 10, an email was sent to 1,000 business contacts from various sectors around the Ninth District. By 5 p.m. on Feb. 12, 135 responses were received, representing a 13.5 percent response rate. The largest number of respondents came from finance, insurance and real estate (44 percent), professional services (24 percent), manufacturing (14 percent) and construction (10 percent). The disproportionate number of FIRE responses could have some unknown influence on results.

Report: Minneapolis area real estate on the upswing

As many know, real estate runs in cycles. The market provides signals to build, and two years or more might pass before permits are approved, construction is done and people move in. If many people act at the same time, it can create a supply glut when expansion is followed quickly by contraction.

Integra Realty Resources (IRR), a commercial real estate services firm with an office in Minneapolis, has modeled and described four phases of this cycle. IRR identifies the first phase as recovery, a period in which vacancy rates decrease and there is little new construction, followed by an expansion phase with decreasing vacancy rates and moderately high new construction. The third phase is hypersupply, with high new construction and increasing vacancy rates. The last phase is recession, with increasing vacancy rates and low construction. Each phase also has three stages, or positions, within a phase.

IRR sees the current Minneapolis office market in the recovery phase (see Chart 1) with a 14 percent to 15 percent vacancy rate (depending on property class) and low construction and rent growth. There may be some movement in that market as plans for an office park near the new Minnesota Vikings stadium are under way and a medical company plans a multimillion-dollar, two-story 180,000-square-foot office, manufacturing and warehouse facility.

Integra CRE report MPLS -- CH1 -- 1-8-14

The Minneapolis apartment market is in the expansion phase, according to IRR (see Chart 2), with a 3 percent to 4 percent vacancy rate and high rent growth. But it’s in the third stage of expansion, nearing hypersupply—maybe not a surprise given the multitude of apartment buildings planned or under construction around the Minneapolis-St. Paul area. According to the city of Minneapolis, last year four of the top five construction projects by building permit valuation were apartments, with a combined value of $244 million.

Integra CRE report MPLS -- CH2 -- 1-8-14

Charts reprinted with permission from Intregra Realty Resources.


Sound the retreat? Credit scores for refinancing home loans come down a bit

As the mortgage refinancing boom ebbs, the refi market is shifting toward borrowers with less than stellar credit, according to new data from the Federal Reserve Bank of Minneapolis.

As the housing market tanked in 2008, average credit scores for those interested in refinancing their mortgage rose significantly, and until recently scores remained elevated, reflecting the stricter credit standards lenders used to reduce their exposure to the struggling sector (see chart). But in recent months, those credit scores have fallen noticeably—to 2010 levels for loans from the Federal Housing Administration and Veteran’s Administration and to 2009 levels for conventional loans. The trend is apparent nationwide and in the Ninth District, although the level of average refinance credit scores is a bit higher in the district.

The reasons for this shift are hard to pinpoint with certainty, but could indicate a combination of some relaxation of high credit standards by lenders, growing awareness and ability to respond to refinance opportunities among consumers with lower scores, or relatively sated demand for refinancing among consumers with high scores. For example, rising home prices in the Ninth District may have made it easier for consumers with somewhat lower credit scores to qualify for refinancing. Any expansion in the range of consumers qualifying for refinances would have helped boost the volume of refinancings in early 2013 or have moderated the decline in volume in the second half of the year.

These and other housing trends can be found on the Minneapolis Fed’s Housing Market and Mortgage Conditions web page, which gathers data on housing originations, mortgage performance and prices.

Credit scores refinance -- CD 12-18-13
Source: Federal Reserve Bank of Minneapolis staff calculations based on data provided by Lender Processing Services (LPS)

Housing vacancy rates (mostly) falling in the Ninth District

After seeing some of the highest rates in recent memory, housing vacancy in the United States and most of the Ninth District has steadily fallen in recent years, according to data from the Census Bureau.

Separate measures are available for housing units that are “vacant for rent” and “vacant for sale.” For rental units nationwide, the vacancy rate for year-round units fell from a peak of 11.2 percent in the fourth quarter of 2009 to 8.2 percent in the second quarter of 2013 (see Chart 1). Homeowner vacancies also fell.

Ninth District states are seeing a similar trend for rental vacancies (see Chart 2). But there are some methodological quirks. For example, smaller samples at the state level make these data noisier and less reliable. In some cases, the results are counterintuitive. North Dakota is in the midst of a housing crunch given its robust economy, yet rental vacancy rates are on the rise, according to Census data. But the Census defines a housing unit as vacant if it is occupied entirely by people who have a usual residence elsewhere. As a result, the state’s rising vacancy rate is likely the result of high numbers of out-of-state workers renting temporary housing near the oilfields.

Housing vacancy CH 1-2 -- 11-6-13

An alternative way to analyze this trend is to look at the data on vacant addresses from the U.S. Postal Service, which has an agreement with the Department of Housing and Urban Development to provide quarterly updates on the number of addresses it identifies as vacant. An address is deemed vacant if mail is not collected for more than 90 days. According to this much larger data set, there has been some decrease in the share of vacant residential addresses in most district states over the same period, though it is much less pronounced (see Chart 3; Montana and Wisconsin saw rates tick up slightly).

An interesting twist: For units vacant for less than one year, vacancy rates declined nationwide and among all district states during this period (see blue bars in Chart 3). In contrast, rates for properties vacant for more than one year increased across the board (see orange bars on Chart 3), and much of the rise came from units vacant for more than three years.

Housing vacancy CH3 -- 11-6-13

Recent past gives mixed signals for expanded mortgage lending

An improving economy and tight rental housing are leading more moderate-income renters to consider homeownership. In response, some community lenders are exploring whether to expand loan programs targeted to this market. With the housing collapse and high foreclosure rates still a fresh memory, new analysis by the Minneapolis Fed shows that the timing of home purchases can play a large role in foreclosure rates, especially when combined with credit scores.

Using data provided by Lender Processing Services (LPS) Applied Analytics, mortgages in Minnesota since 2000 were analyzed to better understand the likelihood of foreclosure. Borrowers with lower credit risk scores at loan origination had higher rates of foreclosure over this period. For example, among mortgages originated in 2003, 1.5 percent of borrowers with a 720+ credit score entered foreclosure within seven years, compared with 4.5 percent of borrowers with scores of 680 to 719 and 9.4 percent of borrowers with scores of 620 to 679 (see Chart 1).

Foreclosures Ch1 -- 10-29-13

Foreclosure rates were also strongly linked to timing. Mortgages originated in 2000 performed better than 2003 mortgages and much better 2005 mortgages with similar credit scores. For mortgages with low credit scores (620 to 679), the foreclosure rate after seven years was just 3.2 percent for mortgages originated in 2000, but reached 26.6 percent for mortgages originated in 2005.

These differences may partly reflect the boom and bust in Minnesota housing prices between 2000 and 2010. As home prices fell after 2007, homes with year 2000 mortgages were more likely to remain “above water”—that is, to have a value greater than the balance due on the mortgage—than homes with mortgages originated in 2003 or 2005. Borrowers with above-water mortgages have both stronger incentives and better options for avoiding foreclosure, such as simply selling. And many more mortgages originated in 2000 may have been refinanced early on, given that mortgage rates fell between 2000 and 2003.

High debt burdens were also linked to foreclosure (see Chart 2). For example, controlling for credit score, foreclosure rates for 2003 mortgages were about 50 percent higher for high-debt borrowers than lower-debt borrowers. For 2005 mortgages, foreclosures were considerably higher for both high- and low-debt borrowers compared with 2003 mortgages. The specific effect of debt levels was present but appears less pronounced, as foreclosures among high-debt mortgages were about 35 percent, while low-debt foreclosures reached almost 30 percent. (A comparison with 2000 mortgages was not possible due to insufficient data on debt-to-income ratios.)

If housing prices rise or at least remain stable over the coming years, the more encouraging performance of Minnesota mortgages originated in 2000 may provide useful guidelines to organizations contemplating new home lending programs. However, the weaker performance of loans from 2003 and 2005 shows the risks that could arise if housing prices or employment fall significantly again.

For related information, see the Minneapolis Federal Reserve Bank’s web page Housing Market and Mortgage Conditions in the Ninth District.

  Foreclosures Ch2 -- 10-29-13

Negative equity declines in the Twin Cities regional housing market

A number of recent and positive trends, including home price appreciation and increased home sales, have been well documented in the Twin Cities housing market. Collectively, they suggest that the region’s housing market is continuing to recover.

More evidence of that recovery comes from the number of first-lien mortgages with negative equity, which declined by more than half between 2012 and 2013 (from 15.6 to 7.2 percent), according to calculations by the Minneapolis Fed using proprietary data from the CoreLogic Home Price Index and Lender Processing Services (LPS) Applied Analytics.

Negative equity—also referred to as being “underwater”—occurs when a borrower owes more on a mortgage than the current value of the property securing the loan. The recession and subsequent collapse of housing markets had a dramatic effect on home values, which pushed many homeowners underwater on their mortgages. In turn, this reduced the net worth of homeowners and became a drag on the economy.

Negative equity also has a number of harmful consequences for homeowners and communities. For example, despite historically low interest rates, underwater homeowners who opt to remain in their homes are typically unable to refinance into lower monthly mortgage payments. A lack of home equity removes a common financing option for home repairs and improvements. Those looking to move face high out-of-pocket costs to pay off their loan at the time of sale, which may have motivated some—particularly those severely underwater—to strategically default on the mortgage, adding to the pool of foreclosures.

Nationally, the percent of residential properties with a mortgage and negative equity dropped from 22.3 in the second quarter of 2012 to 14.5 a year later, according to CoreLogic. In the Twin Cities, easily the largest real estate market in the Ninth District, 15.6 percent of all active first-lien mortgages in June 2012 were in negative equity, according to an October 2012 analysis.

Most of these underwater mortgages were originated between 2005 and 2007 and had a negative principle equity balance amount between -1 percent and -20 percent of the appraised value of the property. The percent of underwater first-lien mortgages varied across the region, but areas especially hard hit include the east side of St. Paul, Brooklyn Park, Brooklyn Center, Farmington, Woodbury, and several suburban and exurban areas in the northwest metro and western Wisconsin (see left map).

By June 2013 (the date of the most recent figures available), the number of first-lien mortgages with negative equity declined by more than half from the previous June (see chart below). A ZIP Code analysis by the Minneapolis Fed reveals a substantial decline of underwater first-lien mortgages in many parts of the Twin Cities region, especially the northwestern suburbs of Wright and Sherburne counties (see right map).

Several areas of concern remain, though, especially where the housing market has not recovered as strongly. These areas include the east side of St. Paul, Maplewood, Brooklyn Park, Brooklyn Center, Zimmerman, and Isanti. While most areas of St. Croix County in Wisconsin improved, the share of first-lien mortgages with negative equity in that county remained higher than in the rest of the metropolitan area.

Underwater Ch1 -- 10-16-13

Underwater -- Map 1-2 10-16-13

Housing recovery? Let’s say “improvement”

In the rush to put the bad days of recession and slow recovery behind us, there are many news accounts of recovering housing markets. But recovery is a matter of economic context. Recovered compared to what? Housing sales, prices and construction have all been rising of late, but it helps to see the path recently taken.

Through August of this year, for example, Ninth District states have seen single-family housing permits rise by 22 percent over the same period a year ago, just a tick off the national average of 24 percent. Performance of individual states ranged from North Dakota (9 percent growth) to Montana (37 percent). North Dakota’s modest growth belies surging growth in housing; the state didn’t have near the drop in permits experienced by other states during the recession and is currently at record levels, having seen strong annual growth since 2009.

But North Dakota aside, permits fell so far during the recession that it’s hard to deem the most recent period a recovery. In 2004, for example, almost 21,000 single-family housing units were authorized in Minnesota through August of that year—the most ever at the time or since. By 2009, it was barely 4,000. This year, it’s back up to more than 7,000 so far through August. That’s certainly an improvement, but not likely back to full health.

Part of the problem is not knowing what a healthy housing market looks like. Post-recession, it would appear that the pre-recession housing boom was not normal or healthy. And if that’s the case, then a full recovery might not be as far off as pre-recession permit levels might suggest.

Building permits thru August -- 9-26-13

Negative equity in homes improving, but not everywhere

Signs of housing and financial recovery are becoming more common, including recent data from CoreLogic showing that the percentage of homeowners with negative equity is slowly dropping in many states.

Despite modest improvements from fourth quarter 2011 to fourth quarter 2012, almost 22 percent of homeowners nationwide with a mortgage owed more on their loan than the domicile was worth (see chart). With the exception of Michigan, all district states have negative equity rates considerably below the national average.

District states also saw decent improvements over the prior year, including Minnesota, whose rate dropped by 2 percentage points. The lone exception was Wisconsin, whose rate rose by 0.8 percentage points and was one of relatively few states that saw rates tick up slightly.

CoreLogic negative equity FOR BLOG -- 3-20-13

Mortgage defaults: District fares better than nation

When times are tough, some people cannot afford to pay on their mortgage. This was especially true during the Great Recession when nearly 9 percent of mortgage loans in the United States were at least 90 days past due or in foreclosure. But today, more people are paying their mortgage, particularly in Ninth District states.

In January 2013, the mortgage delinquency rate dropped to 6.5 percent nationwide, while district states fared better—considerably so in many cases (see chart). The lowest state delinquency rate in the nation goes to booming North Dakota. The fourth lowest is South Dakota, followed by Montana (5th) and Minnesota (6th). Wisconsin is something of an outlier among district states at 27th. The highest seriously delinquent rate goes to Florida, where nearly 15 percent of loans are at least 90 days past due or in foreclosure.

Mortgage delinquencies -- 2-28-13

District houses flying off the market

The low inventory of houses is selling at a faster pace.

Every month, Campbell/Inside Mortgage Finance surveys thousands of real estate agents across the country. Its recent January survey revealed that houses are staying on the market for less time and sellers are getting closer to the asking price in Ninth District states (see table). Comments from respondents indicated that the lower end of the market has shifted from the buyer’s advantage of a few years ago to the seller’s advantage today—for example, more offers to buy.

Several real estate agents said they are seeing more people interested in buying a home, and one Minnesota respondent commented that multiple offers occur for most homes listed under $130,000. Agents are hoping this increased demand will bring more homes to the market. It also may be driving the increase in new home construction (see previous blog).

Campbell housing survey -- 2-28-13