Category Archives: Real Estate

Mall Tenants Are Seeking Shorter Leases

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As if things weren’t bad enough for America’s mall owners, what with the having to filling their retail space with high schools, grocers and churches, it seems that retailers have grown so uncertain about the future of these 1980s relics that they’re only willing to sign 1-2 year leases these days.

As Bloomberg points out this morning, leases renewals used to be 5-10 years in length but are increasingly only being signed with 1-2 year terms.  Meanwhile, thousands of stores are closing each year and it’s only expected to get worse over time.

After more than a dozen bankruptcies this year contributed to thousands of store closures, visibility for the industry is so poor that retailers are pushing for lease renewals as short as a year or two — down from five to 10 years.

“You’re certainly seeing the renewals geared toward the shorter term, rather than the five-year renewal,” said Andrew Graiser, head of A&G Realty Partners. Retailers are now struggling to figure out how many stores they actually need, he added, and landlords are looking at them “with a much closer eye than they did before.”

Somewhere between 9,000 and 10,000 stores will close in the U.S. this year, said Garrick Brown, vice president of Americas retail research for commercial broker Cushman & Wakefield — more than twice as many as the 4,000 last year. He sees this figure rising to about 13,000 next year.

“Everyone’s trying to figure out where the bottom of the market’s going to be,” Brown said. He estimates it could occur in 2018 or early 2019.

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Not surprisingly, retailers are finding it difficult to sign long-term leases in an environment where 26% of malls around the country are expected to close their doors over the next five years.

Further complicating the lease-length dilemma is the question of which shopping centers will still be around in a decade. Cushman & Wakefield’s Brown sees about 300 of 1,150 U.S. malls shutting down in the next five years.

Perry Mandarino, senior managing director and head of corporate finance at B. Riley & Co., predicts that retail bankruptcies and restructurings will further accelerate in 2018. Some of this will be the result of a long-overdue shakeout of the surfeit of U.S. store space, but the downturn is also compounded by shifts to online shopping and consumers spending on experiences rather than physical stuff, he said.

Meanwhile, landlords are trying to fight back, though it’s a fairly difficult task both arms tied behind their backs.

Landlords “have their backs against the wall, so they’ve been fighting back, hard,” he said. “What you have is a game of chicken up to the end.”

“With all this excess inventory, landlords are trying to do whatever they can to keep malls occupied,” Agran said. “The more empty spaces, the more difficult it is to attract new tenants.”

Frankly, it’s shocking that Abercrombie wouldn’t jump at the opportunity to scoop up some prime square footage in this mall…it already has the Chili’s awning and everything.

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Source: ZeroHedge

The Fat Lady Is Singing… What To Do About It

Summary

  • The peak in credit and lending is behind us.
  • Banks have sharply pulled back on lending and have been tightening lending standards.
  • Banks are saying they see less demand so why are people saying demand is strong?

Overview

We live in a credit driven economy. Most know this to be the case. Individuals and corporations borrow money from banks for homes, cars, real estate projects and other investments. The availability for credit is perhaps the most important driver of economic growth, aside from income growth. Without credit, the economy grinds to a halt. It is not a surprise that banks have a desire to lend money when times are good and pull back lending when times are tough. This seems logical but when times are tough for consumers is exactly when they need credit to push forward with new marginal consumption.

Much of my research lately has been outlining the peak in the economic cycle that occurred in 2015. Many people misconstrue this for an imminent recession call or a stock market crash prediction when that simply is not the case.

The economy follows a sine curve. It peaks and troughs and for the most part follows a nice cyclical wave. Recessions occur when growth is negative but the “peak” of the cycle occurs well before the recession. They are not simultaneous events.

The sine wave below may help illustrate my point:

The most important point to understand is the elapsed time between the peak and the recession, where we live today.

Many confuse the “peak” of the cycle with the end of the cycle when in fact, across all economic cycles, the peak occurred about ~2 years prior to the recession. After the peak of the cycle is in, growth does continue, albeit at a slower pace. It is a dangerous assumption to make when critics of this analysis say we are still growing when we are growing at an ever slowing pace. When growth goes from 3% to -2%, let’s say, it has to hit 2%, 1%, 0%, etc. in the middle. That deceleration is what occurs between the peak and the recession.

There is a large population of investors and analysts that simply look at the nominal growth rate and say 2% is still okay, without regarding that the growth has gone from 3% to 2.5% to 2% and now lower.

The time to prepare for the end of the economic cycle is after the peak in the cycle has been established. The good news, like I said before, is you typically have two years after the peak to prepare yourself.

Preparing yourself does not mean buying canned foods and building a bunker as many raging bulls like to straw-man even the smallest critics into a “doom and gloom” scenario.

Preparing yourself in my view involves reducing equity exposure, raising cash, and increasing defensive exposure.

The good news is that you can still ride the gains of the lasting bull market with an asset allocation that is slightly more defensive. You may slightly under perform the last year or two of the bull market but if offered a scenario in which you gained 3% instead of 10% in the last year of the bull market and then gained another 3% instead of -10% in the following year, I would hope you’d pick the pair of 3% because that in fact leaves you with more money.

In a raging bull market some cannot stomach “leaving” that 7% (these are clearly arbitrary numbers used to make a point) on the table.

For the rest of the piece, I will use the banking loan growth and the banking surveys to prove the peak of the credit cycle is in and we are in a period of decelerating growth, falling down the back of the sine wave as I pointed out above. The recession is in sight despite how hard many want to avoid it.

I will also at the end run through the portfolio I began to recommend on May 1st that will prepare you for slowing growth but also allows you to share in the upside should the market continue higher.

So far, that portfolio is actually outperforming the S&P 500 with a negative correlation and lower volatility. I will go through this at the end.

The Peak in Credit is Behind Us, The Fat Lady is Singing

For the analysis of the credit peak, I will use two main economic reports. First is the “Assets and Liabilities of Commercial Banks” published by the Board of Governors of the Federal Reserve and the second is the Senior Loan Officer Survey also published by the Board of Governors of the Federal Reserve.

Assets and Liabilities

The “Assets and Liabilities” report is a weekly aggregate balance sheet for all commercial banks in the United States. The release also breaks down several banking groups. The most interesting part of the report is the breakdown of loan group in which you can see auto loans, real estate loans, consumer loans and much more.

Most importantly, this is hard data and not subject to sentiment, feeling or bias. Banks are either growing their loan books at a faster pace or a slower pace. This is perhaps one of the biggest economic signals. Banks would experience lower demand or credit issues and tighten up their loan books before that lack of credit leaks into the economy in the form of lower growth.

The following data from the Assets and Liabilities report will indicate just how much banks have reeled in their lending and prove the peak in credit growth is long gone.

All Commercial & Industrial Loans:

This is exactly as it sounds; all loans banks make, the broadest measure of credit availability. This is an aggregation of all the loans made by all the commercial banks in the survey. Currently this report aggregates 875 domestically chartered banks and foreign related institutions.

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Rarely do I look at any data series in nominal terms, not year over year that is, but this chart does show the peaks in total credit fairly clearly. Credit rises week after week without ever slowing down. The only times when there was a pause, drop, or large deceleration in credit creation was during times of economic distress. Banks are fairly smart and they won’t lend if risk is too high, uncertainty is too great or credit quality is too low.

Many will speculate on the reason for a drop off in bank lending but the reason truthfully isn’t that important.

The growth rate in total credit shows you exactly when the fat lady began to sing on loan growth.

The question is not whether credit growth has peaked, that is clear. Credit growth is also never negative without a recession and we are getting dangerously close to that. If the prevailing sentiment is that demand is high, why are banks pulling back lending at a record pace?

The rate of the drop in credit growth has been accelerating. Some may point to the current administration and the uncertainty surrounding policy changes but I would push back and say that growth peaked and was falling since 2015, far before this political scenario.

It is very critical to look at the above loan growth chart in the context of the sine curve at the beginning of this piece. If negative growth is a sign of recession, I think you’d be crazy not to shift defensive. Don’t sell all stocks, just know where you are in the cycle.

This is the broadest measure of all credit, so what is the specific sector that is causing the aggregate loan growth to plummet.

The context of the cycle is clear in the above chart so for all the specific loan sectors going forward I will focus on this cycle only from 2009 through today. The report is also on a weekly basis. If a data series does not start from 2009 or prior, that is because that is all the data available as some series began in 2014.

Real Estate Loans:

Credit growth in the real estate sector peaked later than overall credit but has certainly registered its highest growth of the cycle.

Real estate clearly does well in times of credit expansion and less so during times of credit growth contraction.

Mapping home price growth from the Case-Shiller Home Price Index over real estate loan growth should highlight the importance of credit growth for real estate and the dangers of disregarding its rollover.

Not surprisingly, there is a high correlation between real estate loan growth and home price growth. Just briefly skipping ahead (will return to this) the Senior Loan officer survey also shows that banks are claiming lower demand for real estate loans; mortgages and more specifically, commercial real estate.

(Federal Reserve)

(Federal Reserve)

It is hard to overstate the importance of this, specifically the commercial real estate demand. People claim “demand is booming” or something of the sort but banks, the ones who actually make the loans, are claiming demand for real estate loans is the weakest since just before the last housing crisis. Again, not making that call but this drop in loan growth and demand is telling a far different story than those who claim demand is through the roof.

Consumer Loans: Credit Cards:

Consumer loan growth in the credit card space are following trend with the rest of loan growth, still growing but decelerating and months past peak.

With credit card growth rolling over, in order to keep up with the same consumption, consumers need to spend their income. The problem is income growth is falling as well.

Total real aggregate income is near its lowest level of the cycle.

With loan growth slowing and income growth slowing, where is the marginal consumption going to come from? With this data in hand, it should not some as a surprise that GDP growth has gone from 2% to 1% and sub 1% as of the latest Q1 reading.

What are banks saying about consumer demand?

(Federal Reserve)

Across all categories banks are reporting weaker demand. Again, where is the strong demand that everyone keeps talking about? It is not showing up in loan growth data or in banking demand surveys.

I will reiterate this point continually; loans are still growing and income is still growing but at a slower pace and past peak pace. This should put into context where we are in the broader economic cycle.

Auto Loans:

Unfortunately, the auto loan data started in 2015 so there is no previous cycle to use for comparison. Nevertheless, the peak in auto loan growth occurred in the summer of 2016, and like other credit, has been declining to its lowest level of the cycle.

Not much more needs to be discussed on auto loans that is not widely covered in the media. Subprime auto loans and sky-high inventories are a massive issue. In fact, auto inventories are the highest they’ve been since the Great Recession.

(BEA, FRED)

The goal here is not to predict a subprime auto loan issue but rather to point out yet another area of growth that is slowing to its lowest level of the cycle.

Commercial Real Estate:

While the peak in commercial real estate loan growth is in as well, the peak occurred later than the aggregate index. CRE loan growth topped out in 2016 while the aggregate loan growth peaked closer to the beginning of 2015.

As I pointed out above, banks are sending a serious warning sign on the commercial real estate market.

The senior loan survey shows a triple threat of warning signs from the banks. They are claiming falling demand, tighter lending standards and uncertainty about future prices.

Weakening demand:

Tightening Standards:

The following is an excerpt from the senior loan survey on commercial real estate:

A warning from the banks.

The fat lady has been singing on credit growth…So what do you do?

How To Prepare

On May 1st, I put out a recommended portfolio that the average investor can follow. The portfolio is a take on Ray Dalio’s All Weather portfolio.

I strongly believe peak growth is behind us, and when that happens, growth decelerates until the eventual recession. I am not in the game of predicting the exact date of the next recession.

I do not want to be long the market or short the market per se.

The best way to phrase my positioning is I want to be long growth slowing.

The portfolio I recommended (and will continue to update and change asset allocation on a weekly basis. Follow my SA page for continued updates) was the following:

(All analysis on this portfolio is from the time of recommendation, May 1st, to the time of this writing on May 18).

I use SCHD in my analysis as I mentioned I would choose this over SPY for additional safety but either one is fine.

Since the recommendation, the portfolio is up an excess of 0.96% above the S&P 500 with under 2/3 the volatility and a negative correlation.

The weighted beta of this portfolio, given the asset allocations above, is 0.02. This portfolio is nearly exactly market neutral and has a yield of around 2.5%, above the S&P 500. This portfolio protects you in all scenarios. If the stock market continues to rise, your portfolio should rise just slightly and you should continue to clip a nice coupon.

Should the market fall, the bond allocation will provide safety and stability to the portfolio. A portfolio like this allows you to weather the bumpy ride, stay invested, and continue to clip a dividend yield.

Of course, this is not an exact science and past performance is no indication of future results. Also, those who chose to follow a defensive, yet still net long, portfolio such as the one above can replace SPY or SCHD with their favorite basket of stocks. The reason I chose the ETF was for simplicity.

The percentages above are what I feel are best for the current environment we are in. It will allow me to share partially in the upside while mitigating my downside. At the end of the day, the most important thing is to protect capital.

If you want more equity beta, reduce TLT exposure and raise SPY exposure (or your favorite stocks).

This portfolio is the best way in my opinion to not be long, not be short, but be neutral and long growth slowing.

I will continue to update this portfolio and rotate asset allocation as the economic data changes and my positioning becomes more bullish or bearish.

Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in TLT, GLD, IEF over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

By Eric Basmajian | Seeking Alpha

 

CA Senator Feinstein’s Shady Real Estate Deal

Sen. Feinstein’s Husband’s Company Bags $1 Billion for Government Deal

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Sen. Dianne Feinstein’s husband, Richard Blum, could bag $1 billion in commissions for his company from a government plan to sell 56 US Postal Service buildings.

As the New York Post notes, “Blum’s company, CBRE, was selected in March 2011 as the sole real estate agent on sales expected to fetch $19 billion. Most voters didn’t notice that Blum is a member of CBRE’s board and served as chairman from 2001 to 2014.”

Feinstein’s office denies that she had anything to do with the USPS decision.

This is not the first time Feinstein and her husband have come under fire for engaging in crony capitalism.

In 2013, a construction group partially owned by Blum’s investment firm scored a construction contract for California’s high-speed rail project valued at $985,142,530.

Premium Homes Dominate Inventory For Sale

Don’t Call It A Comeback: How Rising Home Values May Be Stifling Inventory

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By Ralph McLaughin | Chief Economist For Trulia

U.S. home inventory tumbled to a new low in the first quarter of 2017, falling for eight consecutive quarters. Homebuyers have now been stifled by low inventory for the last two years despite prices rising to pre-recession highs in many markets.

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In this edition of Trulia’s Inventory and Price Watch, we examine how home value recovery may be limiting supply in markets that have recovered most. We find that homebuyers in markets with the biggest gains are facing the tightest supply.

The Trulia Inventory and Price Watch is an analysis of the supply and affordability of starter homes, trade-up homes, and premium homes currently on the market. Segmentation is important because home seekers need information not just about total inventory, but also about inventory in the price range they are interested in buying. For example, changes in total inventory or median affordability don’t provide first-time buyers useful information about what’s happening with the types of homes they’re likely to buy, which are predominantly starter homes.

Looking at the housing stock nationally and in the 100 largest U.S. metros from Q1 2012 to Q1 2017, we found:

  • Nationally, the number of starter and trade-up homes continues drop, falling 8.7% and 7.9% respectively, during the past year, while inventory of premium homes has fallen by just 1.7%;
  • The persistent and disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach of homebuyers. Starter and trade-up homebuyers need to spend 2.9% and 1.6% more of their income than this time last year, whereas premium homebuyers only need to shell out 0.9% more of their income;
  • A strong recovery may be partly to blame for the large drop in inventory some markets have experienced over the past five years. On average, the more valuable a market’s housing is compared to pre-recession levels, the larger drop in inventory it is has seen.

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2017 Ushers in a Dramatic Shortage of Homes

Nationally, housing inventory dropped to its lowest level on record in 2017 Q1. The number of homes on the market dropped for the eighth consecutive quarter, falling 5.1% over the past year. In addition:

  • The number of starter homes on the market dropped by 8.7%, while the share of starter homes dropped from 26.1% to 25.9%. Starter homebuyers today will need to shell out 2.9% more of their income towards a home purchase than last year;
  • The number of trade-up homes on the market decreased by 7.9%, while the share of trade-up homes dropped from 23.9% to 23%. Trade-up homebuyers today will need to pay 1.6% more of their income for a home than last year;
  • The number of premium homes on the market decreased by 1.7%, while the share of premium homes increased from 50% to 51%. Premium homebuyers today will need to spend 0.6% more of their income for a home than last year.

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How and Where a Strong Housing Market May Be Hurting Inventory

In the first edition of our report, we provided a few reasons why inventory is low: (1) investors bought up much of the foreclosure home inventory during the financial crisis and turned them into rental units, (2) price spread – that is, when prices of homes in different segments of the housing market diverge from each other – makes it difficult for existing homeowners to tradeup to the next the segment, and (3) slow home value recovery was making it difficult for some homeowners to break even on their homes. While there is evidence that investors indeed converted owner-occupied homes into rentals as well as evidence from our first report that increasing price spread is correlated with decreases in inventory, little work has examined how home value recovery affects inventory. This is perhaps due to the tricky conceptual relationship between home values and inventory: too little recovery might make it difficult for homeowners to sell their home but cheap to buy one, while too much recovery might make it easy for them to sell but difficult to buy.

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In fact, we find a negative correlation between how much a housing market has recovered and how much inventory has changed over the past five years. Using the current value of the housing market relative to the peak value as our measure of recovery, we find markets with greater home value recovery have experienced larger decreases in inventory over the past five years. The linear correlation was moderate (-0.36) and statistically significant. We also found that markets with the strongest recovery, on average, have experienced the largest decreases in inventory.

For example, the five-year average change in inventory of housing markets currently valued below their pre-recession peak (< 95% of peak value) isn’t that different from ones that have recovered to 95% – 105% of their peak. (-27.6% vs. -30.1%). However, the average change in inventory in well-recovered markets (> 105%) is 0more drastic at -45.4%.

The disparity also persists when looking at changes in inventory within each segment, although the difference is largest for starter homes. On average, markets with less than 95% recovery or 95% to 105% recovery had a 34.2% and 31.7% decrease in starter inventory, while markets with more than 105% home value recovery had a whopping 58.2% drop. These findings suggest that a moderate home value recovery doesn’t affect inventory much, but a strong recovery does and impacts inventory of starter homes the most.

L.A. to Worsen Housing Shortage with New Rent Controls

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Los Angeles, home to one of the least affordable housing markets in North America, is now proposing to expand rent control to “fix” its housing problem. 

As with all price control schemes, rent control will serve only to make housing affordable to a small sliver of the population while rendering housing more inaccessible to most. 

Specifically, city activists hope that a new bill in the state legislature, AB1506, will allow local governments, Los Angeles included, to expand the number of units covered by rent control laws while also restricting the extent to which landlords can raise rents. 

Unintended Consequences 

Currently, partial rent control is already in place in Los Angeles and landlords there are limited in how much they can raise rents on current residents. However, according to LA Weeklylandlords are free to raise rents to market levels for a unit once that unit turns over to new residents. 

This creates a situation of perverse incentives that do a disservice to both renters and landlords. Under normal circumstances, landlords want to minimize turnover among renters because it is costly to advertise and fill units, and it’s costly to prepare units for new renters. (Turnover is also costly and inconvenient for renters.) 

By limiting rent growth for ongoing renters, however, this creates an incentive for landlords to break leases with residents — even residents who the landlords may like — just so the landlords can increase rents for new incoming renters in order to cover their costs of building maintenance and improvements. The only upside to this current regime is that at least this partial loophole still allows for some profit to be made, and thus allows for owners to produce and improve housing some of the time

But, if this loophole is closed, as the “affordable housing” activists hope to do, we can look forward to even fewer housing units being built, current units falling into disrepair, and even less availability of housing for residents. 

Why Entrepreneurs Bring Products to Market 

The reason fewer units will be built under a regime of harsher rent control, is because entrepreneurs (i.e., producers) only bring goods and services to market if they can be produced at a cost below the market price. 

Contrary to the myth perpetuated by many anti-capitalists, market prices — in this case, rents are not determined by the cost of producing a good or service. Nor are prices determined by the whims of producers based on how greedy they are or how much profit they’d like to make. 

In fact, producers are at the mercy of the renters who — in the absence of price controls — determine the price level at which entrepreneurs must produce housing before they can expect to make any profit. 

However, when governments dictate that rent levels must be below what would have been market prices — and also below the level at which new units can be produced and maintained — then producers of housing will look elsewhere. 

Henry Hazlitt explains many of the distortions and bizarre incentives that emerge from price control measures: 

The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it. With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit. If, as often happens, the government finally recognizes this and exempts new housing from rent control, there is still not an incentive to as much new building as if older buildings were also free of rent control. Depending on the extent of money depreciation since old rents were legally frozen, rents for new housing might be ten or twenty times as high as rent in equivalent space in the old. (This actually happened in France after World War II, for example.) Under such conditions existing tenants in old buildings are indisposed to move, no matter how much their families grow or their existing accommodations deteriorate.

Thus, 

Rent control … encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space. 

Nor surprisingly, when we look into the current rent-control regime in Los Angeles, we find that newer housing is exempt, just as Hazlitt might have predicted. Unfortunately, housing activists now seek to eliminate even this exemption, and once these expanded rent controls are imposed, those on the outside won’t be able to bid for space in either new or old housing.

Newcomers will be locked out of all rent-controlled units — on which the current residents hold a death grip — and they can’t bid on the units that were never built because rent control made new housing production unprofitable. Thus, as rent control expands, the universe of available units shrinks smaller and smaller. Renters might flee to single-family rental homes where rent increases might still be allowed, or they might have to move to neighboring jurisdictions that might not have rent controls in place. 

In both cases, the effect is to reduce affordability and choice. By pushing new renters toward single-family homes this makes single-family homes relatively more profitable than multi-family dwellings, thus reducing density, and robbing both owners and renters of the benefits of economies of scale that come with higher-density housing. Also, those renters who would prefer the amenities of multi-family communities are prevented from accessing them. Meanwhile, by forcing multi-family production into neighboring jurisdictions, this increases commute times for renters while forcing them into areas they would have preferred not to live in the first place. 

But, then again, for many local governments — and the residents who support them — fewer multi-family units, lower densities, and fewer residents in general, are all to the good. After all, local government routinely prohibit developers from developing more housing through zoning laws, regulation of new construction, parking requirements, and limitations on density. 

And these local ordinances, of course, are the real cause of Los Angeles’s housing crisis. Housing isn’t expensive in Los Angeles because landlords are greedy monsters who try to exploit their residents. Housing is expensive because a large number of renters are competing for a relatively small number of housing units. 

And why are there so few housing units? Because the local governments usually drive up the cost of housing. As this report from UC Berkeley concluded: 

In California, local governments have substantial control over the quantity and type of housing that can be built. Through the local zoning code, cities decide how much housing can theoretically be built, whether it can be built by right or requires significant public review, whether the developer needs to perform a costly environmental review, fees that a developer must pay, parking and retail required on site, and the design of the building, among other regulations. And these factors can be significant – a 2002 study by economists from Harvard and the University of Pennsylvania found strict zoning controls to be the most likely cause of high housing costs in California.

Contrary to what housing activists seem to think, declaring that rents shall be lower will not magically make more housing appear. Put simply, the problem of too little housing — assuming demand remains the same — can be solved with only one strategy: producing more housing

Rent control certainly won’t solve that problem, and if housing advocates need to find a reason why so little housing is being built, they likely will need to look no further than the city council.

By Ryan McMaken | Mises Institute

Can Short Term Rental Income Hurt Your Mortgage Refinance Application?

One of the most significant financial trends to sweep the country is more of a hit with homeowners than refinance mortgage lenders.

Logically, it sure seems as though a loan application which shows extra income through short-term room rentals would be a winner, something that would greatly please mortgage lenders.

The catch is that it’s not a sure thing, and in some cases, room rentals could actually be a negative.

New Trend Creates Uncertainty

Across the country, a number of electronic platforms now allow those with extra space to provide short-term housing.

National services such as Airbnb, Flipkey, HomeAway and VRBO are at the heart of this new business, one which takes an idle asset – that unused mother-in-law suite or extra bedroom – and puts it to use.

The result is that many homeowners are now getting cash for their quarters, money that can help with monthly bills and even mortgage payments.

At first, short-term home rentals seem like a win-win business proposition: the homeowner earns income while the traveler gets space for a few days, space that might be a lot cheaper than standard-issue hotel rooms.

The catch is that although the cash earned from short-term rentals is real, it may not automatically count on a mortgage application.

Home Rentals And Your Refinance Mortgage

For a very long time, there has been a business which offers short-term rentals — the hotel industry. Like most industries, it has not been shy about seeking legal protections for its products and services.

Check the local rules for virtually all jurisdictions, and you will find laws on the books which prohibit unlicensed short-term rentals or leases of fewer than 30 days.

These laws are largely unenforced, but that is changing. According to the New York Post, on October 21, 2016, New York Governor Cuomo signed a bill that would impose fines of up to $7,500 against hosts who posted short-term rentals. A California couple who had already paid $2,081 for their room found themselves with nowhere to stay when another resident reported their host to the authorities.

Rental Income: Is It Reported?

For lenders, the new surge in short-term rentals raises a number of issues. The money is nice, and congratulations on that, but whether such funds can be counted in a refinance home loan application is uncertain. Here’s why:

First, the lender will want to see that the rental income has been reported on tax returns. If income is not reported, it doesn’t usually count.

Note that if you report short-term rental income, it may not be taxable, depending on how many nights the property was rented. See a tax professional for details.

Is It Legal?

Second, if the income is reported, was it legally obtained? Here we get back to those sticky local rules that ban short-term rentals.

Lenders like to see income that’s ongoing, because mortgages tend to be lengthy obligations lasting 15 or 30 years.

If cash is coming from unlicensed room rentals, there is the possibility that the money might be cut off at any moment by an irate neighbor who reports the matter to local authorities.

Is It Your Primary Residence?

Third, is the property a residence? Mortgage lenders generally are in the business of financing homes with one-to-four units, and the best refinance rates go to those being used as primary residences.

New York state found that six percent of the units it studied captured almost 40 percent of the private short-term rental income.

In other words, some properties did a lot of short term rentals, a volume which will make lenders wonder whether the property is a comfy residence or an unlicensed hotel.

It’s not just lenders who will have such questions. The property will have to be appraised and that’s where problems are likely to arise.

Home, Sweet Boarding House?

Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and a nationally-recognized valuation authority, notes that “a room rental situation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.

“If there are more than four units, the property is outside the one to four units certified residential appraisers are permitted to appraise, and outside the one to four unit limitation for loan purchase by Fannie and Freddie.”

The Future Of Short-Term Rentals

While the current situation is muddled and puzzled, there’s a very great likelihood that short-term home rentals will be increasingly legitimatized.

In the same way that Uber has disrupted the traditional cab industry, the odds are that the same thing will happen with short-term rentals. The reason is that the private rental rules now on the books were passed when no one cared and are largely unenforced.

Now, the landscape has changed. A very large number of homeowners want to be in the short-term rental business, or are at least disinclined to report their neighbors.

The police surely don’t want to break into homes in search of paying guests, and state and local lawmakers really want homeowner votes.

Be Careful Out There

For the moment, homeowners with an interest in earning a few extra dollars from short-term home rentals should get advice and counsel from a local real estate attorney before signing up guests.

In addition, speak with your insurance broker to assure that you have adequate coverage. Some policies allow short-term rentals, some do not, and there are differing definitions regarding what is or is not an allowable short-term rental.

By Peter Miller | The Mortgage Reports

Realtors Busted With National Lender In Mortgage Kickback Scheme

CFPB orders Prospect Mortgage to pay $3.5 million for improper mortgage referrals

Regulator calls alleged activity a “kickback” scheme

The Consumer Financial Protection Bureau today ordered Prospect Mortgage, a major mortgage lender, to pay a $3.5 million fine for improper mortgage referrals, in what the regulator calls an alleged “kickback” scheme.

The lender paid illegal kickbacks for mortgage business referrals. But Prospect Mortgage isn’t the only one being fined. The CFPB also dealt out penalties to two real estate brokers and a mortgage servicer who took kickbacks from Prospect. These three will pay a combined total of $495,000 in consumer relief, repayment of ill-gotten gains and penalties.

“Today’s action sends a clear message that it is illegal to make or accept payments for mortgage referrals,” CFPB Director Richard Cordray said. “We will hold both sides of these improper arrangements accountable for breaking the law, which skews the real estate market to the disadvantage of consumers and honest businesses.”

Here are three reasons the CFPB said it is fining Prospect Mortgage:

Paid for referrals through agreements: 

Prospect maintained various agreements with over 100 real estate brokers, including ReMax Gold Coast and Keller Williams Mid-Willamette, which served primarily as vehicles to deliver payments for referrals of mortgage business. Prospect tracked the number of referrals made by each broker and adjusted the amounts paid accordingly. Prospect also had other, more informal, co-marketing arrangements that operated as vehicles to make payments for referrals. 

Paid brokers to require consumers – even those who had already prequalified with another lender – to pre-qualify with Prospect: 

One particular method Prospect used to obtain referrals under their lead agreements was to have brokers engage in a practice of “writing in” Prospect into their real estate listings. “Writing in” meant that brokers and their agents required anyone seeking to purchase a listed property to obtain pre-qualification with Prospect, even consumers who had pre-qualified for a mortgage with another lender.

Split fees with a mortgage servicer to obtain consumer referrals: 

Prospect and Planet Home Lending had an agreement under which Planet worked to identify and persuade eligible consumers to refinance with Prospect for their Home Affordable Refinance Program mortgages. Prospect compensated Planet for the referrals by splitting the proceeds of the sale of such loans evenly with Planet. Prospect also sent the resulting mortgage servicing rights back to Planet.

Prospect is prohibited from future violations of the Real Estate Settlement Procedures Act, will not pay for referrals and will not enter into any agreements with settlement service providers to endorse the use of their services, according to the CFPB.

Three of the companies that accepted the illegal money, ReMax Gold Coast, Keller Williams Mid-Willamette and Planet Home Lending, were also fined by the CFPB. ReMax Gold Coast will pay $50,000 in civil money penalties, and Keller Williams Mid-Willamette will pay $145,000 in disgorgement and $35,000 in penalties. Under the consent order filed against Planet Home Lending, the company will directly pay harmed consumers a total of $265,000 in redress.

HousingWire reached out to Prospect Mortgage for comment, but has not yet received a reply. This article will be updated when and if we receive one.

Article by Kelsey Ramirez | Housingwire