Housing Recovery Signals Are Real This Time, Says S&P

by devteam April 23rd, 2013 | Share

After what it called years ofrntenuous signals indicating that the housing recovery was underway Standardrn& Poor’s (S&P) Ratings Service say this time it is different.  S&P’s Ratings Direct summarizedrnproceedings of Housing and Commercial Real Estate Roundtable it sponsored onrnApril 9 where a number of staff from various S&P divisions discussed thernhousing recovery.. </p

Why is this timerndifferent?  Roundtable participants saidrnthe most critical factor is the 6.8 national increase in home prices inrn2012.  S&P projects that prices willrnincrease another 8 percent this year.</p

“Rising prices are a good cure for a lot ofrnheadaches,” Erkan Erturk, a senior director in S&P’s StructuredrnFinance Research Group said. rn”Prices also provide a good summary of the broader housingrnmarket.  </p

Erturk said the housing market recovery has positivernimplications for the economy, consumers, and local governments as sources ofrntax revenue.  Robust sales, falling ifrnstill elevated mortgage delinquency rates and foreclosure sales and increasingrnresidential homebuilding are all key indicators that the sector is rebounding.</p

“There were a few false recoveries in 2010, drivenrnby tax credits and other government supports,” Erturk said.  The housing market had bounced around thernbottom for several years, but a recovery began shaping up in late 2011 intorn2012.  “2012 was a significant yearrn- the recovery was strong, and the turnaround came faster than we’drnanticipated.”</p

Other positive signs include the shadow inventory whichrnis diminishing because of rising home prices which are also pushing about twornmillion homeowners into positive home equity positions.  Still, affordability remains high forrnwould-be-homeowners.</p

Despite these improving indicators Erturk said a fullrnrecovery will require correction of regional and national imbalances such asrnthe existing 40 percent gap between new and existing median home prices.  “In the long run,” he said,rn”we would need to see existing median home prices rise to be consistentrnwith historical 20 percent levels.”</p

Government intervention such as Federal Reserve purchasesrnof mortgage-backed securities (MBS) continue to cause distortions.  “So you could argue if the supportrndisappeared, the market couldn’t sustain the recovery,” Erturk said.</p

S&P credit analyst George Skoufis aid the housingrnrecovery has had a powerful effect on homebuilding and multifamily real estaterninvestment trusts (REITS).  He expects,rnas a member of S&Ps Corporate Ratings/Commodities Group, to take few if anyrnnegative ratings actions over the next 12 to 18 months as improvingrnprofitability enables homebuilders to strengthen their balance sheets and fundrnmore and more of their growth through operating profits.  They will draw down on their sizable cashrnbalances before supplementing with unsecured revolving credit facilities.  </p

Skoufis said that builders have already turned to therndebt markets to “opportunistically raise debt to fund land purchases andrndevelop investments to meet future growth, resulting in improving – but stillrnelevated – leverage” Many homebuilders, he said, have taken advantage ofrnreceptive debt markets and historically low interest rates although in somerninstances it is possible that rising debt balances could outpace expectationsrnand delay recovery in key credit metrics, affecting ratings.  He expects a 20 to 25 percent volume increasernfor rated homebuilders in 2013 although availability of land and rising pricesrnfor obtaining it could constrain growth.  rn</p

Ratings for apartment REITs should stay stable this yearrnwith operating performance coming off of 2012 levels.  Apartment occupancy should remain high andrngrowth, while declining, will remain positive at around 4-5 percent.  Expenses are likely to rise so net operatingrnincome (NOI) will slow from 7.3 percent in 2012 to 4 to 5 percent.</p

Vandana Sharma, a director and analytical manager inrnS&P’s Residential MBS (RMBS) group said private label RMBS will increase torn20 billion in 2013 compared to $6 billion in 2011.  “We know the market will rebound, wernjust don’t know how quickly,” she said. </p

Sharma also discussed the ways in which the market isrnevolving such as large investors or private equity players bidding up thernsupply of homes and converting them into rentals.  Those mortgages entering RMBS pools are alsornof higher credit quality than was seen before the downturn although, she said,rnthat could change once the market begins growing again.</p

According to Larry Witt of S&Ps Tax-Exempt HousingrnGroups, a steep drop-off has occurred in housing finance authority singlernfamily bond issuance since 2008.  Thernmarket has been seeking out alternatives such as selling loans to the GSEs orrnpackaging them into GNMA MBS and hindering the HFAs’ ability to issuernbonds.  </p

Mikiyon Alexander, also from the Tax-Exempt Housing Grouprnsaid that there were no AAA affordable housing ratings at the end of 2012 comparedrnto 109 in 2007.  The ratings in thatrnsector were historically guaranteed by bond insurers and carried the rating ofrnthe insurance company.  Once the bondrninsurance industry experienced credit deterioration most insurance ratings werernwithdrawn and ratings are now based on the financial performance of thernproperty itself. Therefore the rating shifts were more of a reflection of therncounterparty and not due to a significant reduction in the performance of thernindustry as a whole, Alexander said.</p

Vacancy rates are something we’re concerned about inrnnonsubsidized affordable rental housing, such as with renters who are moving homeownershiprnor more affluent markets, he said. rnSubsidized housing, however, has very strong occupancy rates which arernexpected to continue given current economic conditions.</p

Sequestration has already had varied effects on thernhousing market according to Valerie White, another director in the Tax-ExemptrnHousing Group.  She expressed concernrnbecause the bulk of public housing is tied directly to some form of governmentrnsubsidies and includes operational subsidies, mortgage insurance, loanrnpurchases, and loan securitization as well as subsidies for rent. The effectsrnof sequestration are clear where the government provides subsidies to rentersrnand local housing authorities which will be cut 5 percent from last year’srnappropriation amount.  . </p

White said eliminating the mortgage interest deductionsrn”are also a galvanizing topic for the sector.”  While the expectation is these cuts won’trnhappen, the very fact they are being debated indicates they could be morernseriously considered in the future and “we anticipate it would have arnnegative impact on the public finance market.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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