Situs Newswatch 9/16

Building sprawling suburbs is better at making cities affordable than building tall towers, according to new research.

Environmentalists, urban planners, and economists are pushing cities such as New York and San Francisco to build more housing to help combat rapidly rising rents and home prices that are crowding out the middle class.

But trying to build upward in order to keep cities accessible to average families may be a losing battle, according to findings by BuildZoom, a website for contractors.

“It is basic math,” explains Ken Riggs, President Situs RERC. “It boils down to building costs and income levels on what type of housing can be produced and where it can be produced compared to what someone can afford.  In the end, the cost – in terms of the price of land and type of construction – is cheaper in the suburbs versus the city. We have seen a shift where millennials and empty nesters want to live in an urban environment to allow them to work, play and live in one place: a 24-hour city.  However, this trend is not strong enough to shift the cost-factor advantage away from the suburbs. It will stay this way until it is cheaper in the major cities to build and create housing options.”

Even cities that were able to increase the pace of housing construction without sprawl, such as Portland and Seattle, were unable to keep pace with demand nearly as well as their counterparts that spread outward. Portland saw inflation-adjusted home values increase 78% from 1980 to 2010 and Seattle saw home prices jump 119%, according to BuildZoom.

Meanwhile, Las Vegas saw real home values increase just 4.7% and Atlanta saw just a 14% jump.

Construction Unions Add to Costs In NYC

Construction union leaders are pushing hard for a requirement that all New York City residential buildings built with the 421-a tax break be required to use union labor.

Developers are resisting because using union labor in the city costs at least 30% more than nonunion and such projects will have to set aside at least 25% of the units at low rents, eroding profit margins.

Yet, oddly, union leaders claim that their members worked on 65% of all residential buildings with more than 100 units and 80% of projects with more than 300 apartments. A real estate industry study disputed those numbers, saying unions built only about 20% of all 100-plus-unit residential buildings.

Portion of workers who belong to unions

  • 2010    28%
  • 2011    21%
  • 2012    19%
  • 2013    17%
  • 2014    25%
  • 2015    28%
  • 2016    31%

Source: The State of Unions 2016 from the Joseph S. Murphy Institute for Worker Education and Labor Studies

There is no way to figure out which set of statistics is correct. But the latest study from the Joseph Murphy Institute at the CUNY Graduate Center does show that union strength in the construction sector is rebounding from the low level of the recession, as it has overall in the city.

While both unions and developers dispute the Murphy figures, the institute has been conducting this research for a long time using the detailed demographic and economic data from the American Community Survey. The trend line it captures is almost certainly correct.

read more: Crain’s NY

CRE Volume Down, But Still Tops $100B in Second Quarter

Transaction volume across the five asset classes within commercial real estate declined in the second quarter of the year, continuing a downward trajectory according to Ten-X

Total deal volume for the five sectors still reached $101.2B in Q2—a 12.7% decline compared to the year-ago quarter. “Deal flow is down pretty much across the board in all the property segments,” Ten-X Research chief economist Peter Muoio  says “Cap rates are also down—which is good to different degrees. Treasuries have been supportive in their decline over the course of the year, enabling cap rates to drop down in different segments.” Last quarter alone deal volume dropped 7.4%, according to data from Real Capital Analytics—that’s the lowest quarterly total in two years. Despite the cooling in CRE markets, transaction volume still amounted to more than $100B, a sign of continued confidence in US real estate, Ten-X reports.  “That’s sort of the conundrum, Muoio says. “Generally speaking, deal volume is off about 14% year-over-year the first half of 2016. That said, the level of deal volume across the various property segment types is still high, meaning there’s still healthy deal volume.” Four of the five sectors also outperformed their 10-year averages in terms of deal volume, another positive for the industry in the midst of financial and political turbulence. Though the hotel sector fell short, office, retail and industrial outperformed their 10-year averages by more than 20%, while the apartment sector out-shined its 10-year average by more than 55%. “[The hotel market] is approaching its peak levels and I think investors are seeing that,” Peter says. “Some of the sector’s big markets are also vulnerable to the strong dollar, weakness in China and Europe, and a lack of foreign travelers, which is having an oversized impact on hospitality.”  

read more: Bisnow.com

Wall Street’s New Scheme to Make Money on YOUR House

Do you want Wall Street to get a piece of your house?

The noted venture capitalist Marc Andreesen announced that he’d invested in a startup called Point.

Point casts itself as a solution to an intrinsic problem with home ownership: Most Americans have most of their wealth tied up in their home.

There are mechanisms for “taking out” some of the equity built up as a mortgage is paid down, such as home-equity lines of credit or home-equity loans.

But they require paying interest — not to mention having good credit. They also don’t help homeowners diversify their investments.

Diversification was the driver behind an earlier version of what Point offers. Allan Weiss, who helped create the S&P/Case-Shiller price indexes, created a platform he calls “indexed fractional ownership.” His idea came in part from a conversation with a neighbor who said he was looking forward to “cashing out” of an expensive home he’d owned for a long time — just before the housing market crashed.

If you own a home and offer some of the equity to an investor like Point, the idea goes, you could take that money and invest it in a different asset class, like stocks.

And what does Point get?

If the house appreciates before it is sold, Point benefits. If the house depreciates, according to Andreessen Horowitz’s website, “Point gets paid back after the bank, but before the homeowner, in the event of a sale.”

Point is a little vague on the specifics, which has prompted some skepticism.

A blog post on Point’s site notes that, in addition to an initial appraisal, Point may require a “risk adjustment” that “offsets the chance that the home will depreciate before the end of the term.”

read more: Market Watch

Warren: Next Administration Should Probe, Maybe Jail Wall Street Bankers

Massachusetts Senator Elizabeth Warren is marking the eighth anniversary of Lehman Brothers’ bankruptcy with a new push to investigate—and potentially jail—more than two dozen individuals and corporations who were referred to the Justice Department for possible criminal prosecution in 2011 by the Financial Crisis Inquiry Commission, a government-appointed group that investigated the roots of the 2008 financial crisis.
None was ever prosecuted.

The names of the referrals—including former Treasury Secretary Robert E. Rubin, who held a top job at
Citigroup, and Citigroup’s former CEO, Charles Prince—became public earlier this year when the National Archives released new documents.

In a letter to the Justice Department’s inspector general, Warren calls the lack of prosecutions “outrageous and baffling” and asks the inspector general, Michael Horowitz, to investigate why no charges were brought. “[T]he DOJ record of action on these individuals, nearly six years after DOJ received the referrals, is abysmal,” she writes.

In an interview with Bloomberg Businessweek, Warren cited the anniversary of Lehman’s collapse as “a good occasion to stop and ask where the real accountability is and get some answers out of the Justice Department about why they haven’t prosecuted anyone.” She said Comey’s rationale for disclosing details of the Clinton investigation—Comey said it was warranted by “intense public interest”—creates a new precedent that obligates him to shed light on why the bankers and financial institutions referred by the FCIC to the Justice Department were never prosecuted. “Those same standards ought to apply to the worst economic crisis since the Great Depression,” Warren said. “There’s a clear public interest in finding out why none of these individuals or corporations were held responsible.”

read more: Bloomberg

Mortgage Rates Though the Roof

U.S. 30-year fixed mortgage rates have increased to their highest level since June according to Freddie Mac.

  • 30-year fixed-rate mortgage (FRM) averaged 3.50 percent with an average 0.5 point for the week ending September 15, 2016, up from last week when it averaged 3.44 percent. A year ago at this time, the 30-year FRM averaged 3.91 percent. 
  • 15-year FRM this week averaged 2.77 percent with an average 0.5 point, up from last week when it averaged 2.76 percent. A year ago at this time, the 15-year FRM averaged 3.11 percent. 
  • 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.82 percent this week with an average 0.4 point, up from last week when it averaged 2.81 percent. A year ago, the 5-year ARM averaged 2.92 percent.

“The 10-year Treasury yield rose 18 basis points to 1.73 percent, its highest level since Brexit,”  says Sean Becketti, chief economist, Freddie Mac. “The 30-year fixed-rate mortgage followed suit, rising 6 basis points to 3.50 percent this week. This is the first week since June that mortgage rates were above 3.48 percent, snapping an 11-week trend.”

Racing Against the Recession

At the beginning of 2013, Joseph Chetrit and David Bistricer set New York City’s real estate circles abuzz when they outbid 21 competitors to buy the Sony Building on Madison Avenue for an astonishing $1.1 billion. The team planned to convert the massive 850,000-square-foot office tower into luxury condos, a hotel and retail space. The cherry on top of the 37-story building, it was later revealed, would be a record-shattering $150 million penthouse.

“It’s 2007 all over again,” Dan Fasulo, the former head of research at Real Capital Analytics, told the New York Times at the time, adding, “It’s a real trophy in a great location, but that’s a big number for a transitional asset.”

Turns out the price tag may have indeed been too big. This past April, amid ever-heightening concerns about the state of the luxury condo market, the duo pulled the plug on the project, electing to sell the building for $1.4 billion to a partnership led by the Olayan Group. The Saudi family-run company is planning to maintain the Sony tower as an office building.

In a phone interview last month, Bistricer told The Real Deal that it was “a lot easier to transact” than to move forward with a condo conversion. But he added that there would “always be a market” for high-end luxury in the city.

read more: TheRealDeal

Does a College Degree Increase Chances of Home Ownership?

As student loan debt has mounted and young-adult home ownership rates have fallen over the past decade, considerable attention has focused on the nexus among student loans, education, and home ownership. Recent analyses suggest that the benefits of attaining a college education outweigh the downsides of student loan debt when it comes to achieving home ownership.

Although valuable, this recent research doesn’t fully disentangle the complex, interconnected avenues by which educational attainment and other factors shape the home ownership prospects of young adults. In particular, the intergenerational channels by which parental resources affect their children’s home ownership status have not been fully separated from the roles of their children’s education and other endowments. Parental wealth enhances children’s chances for home ownership through direct financial assistance around the time of home purchase.2 But prior to that, family economic resources might also support college attendance by the children. In turn, higher education supports higher earnings and thus provides a financial foundation for achieving home ownership. Without knowledge of parental resources, children’s educational attainment might assume an exaggerated importance in home ownership achievement.  However, if education has an effect that is independent of parental resources, it would suggest that public policies to promote higher education could have the added benefit of promoting greater home ownership attainment. 

In the second of a series of studies sponsored by Fannie Mae, Dowell Myers, Gary Painter, and Julie Zissimopoulos of the University of Southern California unpack the complex relationships among adult children’s home ownership attainment, their education and other characteristics, and their parents’ resources. 

Perhaps the most striking finding of the study is how little the education effect on home ownership is dampened when parental resources are controlled. Including parental endowments reduces the association between education and home ownership for adult children by less than 2 percentage points. This finding suggests that the educational boost to home ownership is largely independent of the parental resources that may have helped increase education.

The implication of finding this independent education effect is that home ownership attainment could be increased via policies that promote higher education and increase human capital.

read more: Fannie Mae

Buffett Loses $1.4 Billion as Wells Fargo Tumbles on Scandal

Warren Buffett had $1.4 billion wiped from his fortune Tuesday after Wells Fargo & Co. fell 3.3 percent as the fallout continued from revelations that bank employees had opened more than 2 million accounts without clients’ approval.

Berkshire Hathaway Inc., the lender’s biggest shareholder, fell 2 percent, causing the 86-year-old’s fortune to drop more than anyone else’s on the Bloomberg Billionaires Index. The U.S. investor is the world’s fourth-richest person with a net worth of $65.8 billion.

Wells Fargo was overtaken by JPMorgan Chase & Co. as the world’s most valuable bank on Tuesday. It has fallen 5.9 percent since Thursday, when the Consumer Financial Protection Bureau announced fines stemming from the fake accounts. The drop since Thursday compares with a 2.5 percent fall for the Standard & Poor’s 500 Index.

Don’t Fear the Robots

While new technologies are giving rise to a “jobs gap” – or a mismatch between the jobs people want and the ones that are available – they’re also affording new opportunities for workers, Goldman Sachs Group Inc. argues in a new report.

The rise of automation, online tools, and big data echoes industrial revolutions of the past, with occupations and businesses following a “natural evolution” as technology advances, the bank argues. While the transition can be painful, it can also be helped along by new policies seeking to better share the temporary discomfort of rapid tech-driven change.

“The fact that technological change and innovation affects everybody across the political spectrum and the social spectrum means that there is a lot of focus on finding new approaches to bear the risk and to help people adapt,” Sandra Lawson, director of Goldman Sachs Markets Institute, said in an internal interview last week to discuss the report.

It’s not just that there’s a lot of effort is going into solving the problem — technology is constantly evolving, which Goldman argues can make adapting easier. In the meantime, workers are already responding to the new employment landscape by taking on “adaptive occupations” that are better insulated from the rise of the machines. Such occupations include nurses and web developers but can also extend to more traditional vocations such as carpenters, plumbers, and tailors.

“The fact that it’s a series of steps as opposed to one or two giant steps also makes it much easier to make adjustments to,” said Steve Strongin, head of Goldman Sachs Research, who co-authored the report.

read more: Bloomberg