Situs Newswatch 9/20/2017

Low Jobless Rate, Low Inflation, Sluggish Growth Expected to Continue

President Trump has promised to return U.S. economic growth to above 3 percent in 2017, but that number might be hard to reach, at least in the near term. After an initial report of 2.6 growth percent in the second quarter, the number was revised to 3.0 percent, but the average for the first six months was 2.1 percent.

Before Hurricanes Harvey and Irma hit, economists were predicting about 3 percent growth in the third quarter, but that number is now expected to be lower.

Although the President has ambitious goals for jump-starting the economy, so far he has been unable to get any major legislation passed by Congress – including “repeal and replace” of Obamacare, tax reform (with tax cuts) and increased infrastructure spending. The need for reconstruction and repairs after the hurricanes are expected to help increase growth on a limited scale in the next few months.

Signaling continued confidence in the economy, the Federal Reserve is expected to continue to increase short-term interest rates at the end of this year and next, even though the Consumer Price Index (CPI) rose just 0.4 percent in August and has stayed below the Fed’s target inflation rate of 2.0 percent. The Federal Reserve has also signaled that it plans to begin unwinding its $4.45 trillion balance sheet later this year. Mortgage-backed securities account for more than $1.7 trillion of the current portfolio.
As short-term interest rates increase, the 10-year note is expected to move in kind. Situs RERC forecasts the 10-year Treasury to reach about 2.5 percent by the end of 2017 and approximately 3.0 percent by the end of 2018.

Rising interest rates are a mixed bag for CRE. They make borrowing more expensive, which hurts CRE investment. They also make investing in Treasurys relatively more attractive. However, higher rates indicate a stronger economy, which helps all property types in the CRE market. In addition, there may be an uptick in refinancing in the near term as long-term interest rates remain historically low and property owners decide to lock in rates before they get higher.

Unemployment is ultimately one of the most closely tied metrics to CRE fundamentals, and the national rate was 4.4 percent in August. It is important to remember, however, that unemployment is a lagging indicator and its impact on CRE can take up to 18 months to come to be realized.

read more: Situs

Homes Damaged by Hurricanes Will Cost Taxpayers Big Money
With more than a million Texans displaced and about 53,000 living in hotels in the wake of Hurricane Harvey, the state is poised to go through one of the largest housing recoveries in history.

In Florida, according to Corelogic, the residential flood loss from Hurricane Irma is expected to be between $25 billion and $38 billion, with total insured and uninsured losses on all property types in the $42.5 billion to $65 billion range. As a magnet for restaurant, hotel and other service jobs, the state attracts lower-income workers who are hard pressed to pay higher rents if storm damage causes a significant decrease in the affordable rental housing stock.

“All this comes as funding for HUD faces potential budget cuts, and the overall health of the FHA mortgage insurance fund is just recovering,” says The Collingwood Group Chairman Tim Rood. “Given the expected spike in loan delinquencies and defaults that will be part of Harvey’s aftermath, HUD and the FHA will play a significant role in helping Houston homeowners get back on their feet quickly.”

Well over 3 million mortgaged properties in designated disaster zones have unpaid mortgage balances of over $5 billion.
Collingwood’s Rood says it’s especially tough in Texas: “The concentration of FHA insured properties in Houston is substantial in relative and real terms. Communities will also rely heavily on HUD/FHA’s Disaster Homeowners Assistance Programs (DHAP) to assist displaced homeowners with transitional housing needs, and Community Development Block Grants to assist with the household-level and community-level reconstruction efforts. The combined cost from credit losses and community homeowner assistance programs provided by HUD/FHA is very likely to be unprecedented.”

Collingwood Group Chairman Tim Rood discussed this and more with Fox Business Network’s Neil Cavuto.


One House, 22 Floods: Repeated Claims Drain Federal Insurance Program
Brian Harmon had just finished spending over $300,000 to fix his home in Kingwood, Texas, when Hurricane Harvey sent floodwaters “completely over the roof.”

The six-bedroom house, which has an indoor swimming pool, sits along the San Jacinto River. It has flooded 22 times since 1979, making it one of the most flood-damaged properties in the country.

Between 1979 and 2015, government records show the federal flood insurance program paid out more than $1.8 million to rebuild the house — a property that Mr. Harmon figured was worth $600,000 to $800,000 before Harvey hit late last month.

“It’s my investment,” the 49-year-old said this summer, before the hurricane. “I can’t just throw it away.”

In years past, he had considered a buyout from local officials seeking to purchase often-flooded properties. Now, he finally wants to get out. “I never want to go through this again,” said Mr. Harmon, who bought the house in 1995.

As they tally up the losses from Hurricanes Harvey and Irma, government officials are looking for ways to step up purchases of frequently flooded houses, which have become a huge drain on the financially troubled federal flood insurance program.

Homes and other properties with repetitive flood losses account for just 2% of the roughly 1.5 million properties that currently have flood insurance, according to government estimates. But such properties have accounted for about 30% of flood claims paid over the program’s history.

read more: Wall St Journal

Homes Built to Stricter Standards Fared Better in Storm
When Hurricane Wilma pummeled Florida in 2005, it nearly ripped the roof from Stephany and Michael Carr’s house in Naples, which was built before a 2002 building code took effect statewide.

After the storm, the couple retrofitted their house to comply with the new code. They added a standing seam metal roof with continuous panels connected by strong fasteners. And they invested in hurricane impact-resistant windows and doors.

The upgraded home withstood Hurricane Irma without issue.

“It looks like a bomb destroyed our trees and yard,” said Ms. Carr, a 58-year-old lawyer. “Tree branches bounced off of our roof. But the house is fine.”

Ms. Carr credits the more-stringent building code with saving her home and their lives. “For anyone who doubts these codes, I invite them to sit in a pre-code structure in a Category 3 storm or higher,” she said.

As homeowners in Florida begin to take stock of the damage from Irma, one pattern is beginning to emerge: homes that were built to the stricter building codes seem to have fared better.

“The feedback we’re hearing is positive,” said Rusty Payton, chief executive of the Florida Home Builders Association. “We’re all interested and there will be a deep dive. It appears that it did its job.”

read more: Wall St Journal

Paradise Lost
The United States Virgin Islands no longer has the air of paradise.

From above, the islands resemble conflict zones. The grassy hillsides are now brown. Leafless tree trunks jut out like burnt toothpicks. Sailboats are stranded on the rocky coasts.

On the ground, it is worse.

The Red Hook harbor in St. Thomas was desolate on a recent visit except for a few stragglers trying to evacuate. Newly homeless residents in Tutu Valley idled in 90-degree heat outside their ravaged homes. On St. John, which was hit the hardest of the three islands that make up this American territory, supply helicopters buzzed over the once-powdery beaches where vacationers had soaked up the sun.

Outside what was left of a housing project on St. Thomas, a young man opened the doors of his white van and played jazz music, the notes echoing in the now-exposed apartments. Nearby, the wall behind Ureen Smith Fahie’s grey couch had been blasted away. A cool breeze blew over the rubble inside her apartment.

read more: NY Times

Democrats Implore Treasury, FHFA to Allow Fannie, Freddie to Build Capital
Six senior Democrats on the Senate Banking Committee sent a letter to Treasury Secretary Steve Mnuchin and GSE regulator Mel Watt, urging the two men to allow Fannie Mae and Freddie Mac to build capital.

The correspondence, which includes the signature of ranking minority member Sherrod Brown, D-OH, notes: “We are simply requesting that the GSEs be permitted to build capital. We do not believe they should be released from conservatorship absent reform.”

The six also express their concern that Mnuchin is not working with Watt to “prevent another draw” on Treasury funds in the event Fannie and Freddie need another cash infusion.

Fannie and Freddie have been posting strong profits for most of the decade, but under a change made to the preferred stock purchase agreements in 2012 their allowable capital buffer declines each year at a measured pace, eventually falling to zero in early 2018.

There’s a concern that if either posts a loss next year (most likely from hedging activities), Treasury funds will be needed to maintain a net worth position above zero so investors in their mortgage bonds don’t get spooked.

read more: Inside Mortgage Finance

Toys ‘R’ Us Gets ‘Amazoned’
Toys ‘R’ Us, the rainbow-colored toy emporium that for decades was the go-to spot for birthday and holiday gifts, filed for bankruptcy protection, undone by a hefty debt load and the rapid shift to Amazon and online shopping.

As part of the restructuring process, Toys ‘R’ Us plans to close some underperforming stores, according to people familiar with the matter. Its remaining locations would be reconfigured to be more experienced-based, incorporating amenities such as in-store play areas, they added.

The company expects most of its stores will be open for the holidays and it will use a large bankruptcy loan to continue buying merchandise and funding its operations, the people said.

read more: Wall St Journal

Not Even Mom and Pop Stores are Safe
While it sometimes feels like we do all of our shopping on the internet, government data shows that actually less than 10% of all retail transactions happen online.

In a world where we get our groceries delivered in just two hours through Instacart or Amazon Fresh, the humble corner store – or bodega, as they are known in New York and Los Angeles – still performs a valuable function. No matter how organized you are, you’re bound to run out of milk or diapers in the middle of the night and need to make a quick visit to your neighborhood retailer.

Paul McDonald, who spent 13 years as a product manager at Google, wants to make this corner store a thing of the past. Last week, he launched a new concept called Bodega with his co-founder Ashwath Rajan, another Google veteran. Bodega sets up five-foot-wide pantry boxes filled with non-perishable items you might pick up at a convenience store. An app will allow you to unlock the box and cameras powered with computer vision will register what you’ve picked up, automatically charging your credit card. The entire process happens without a person actually manning the “store.”

read more: Fast Company

If You Can’t Beat ‘Em … Join ‘Em
Amazon is growing its partnership with department store chain Kohl’s.

Earlier this summer, the two companies announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at 10 of its stores.

Kohl’s said it will begin accepting returns at certain U.S. locations. The retailer will pack and ship eligible items — back to an Amazon fulfillment center — for free.

“This is a great example of how Kohl’s and Amazon are leveraging each other’s strengths — the power of Kohl’s store portfolio and omnichannel capabilities combined with the power of Amazon’s reach and loyal customer base,” said Richard Schepp, Kohl’s chief administrative officer.

As an added bonus, customers visiting Kohl’s for Amazon returns can use “designated parking spots” near store entrances. In this partnership, “convenience” for consumers is key, Kohl’s has said.

read more: CNBC

This Hotel Could Challenge Airbnb
Stroll into Public, a full-service, 367-room hotel that opened this summer on Manhattan’s Lower East Side, and it quickly becomes apparent that certain features are nowhere to be found.

Sure, there’s a coffee shop and market on the ground floor, complete with fresh fruit, local gourmet hot dogs and poke bowls. But in the lobby, an escalator ride up from the market, there’s no front desk, no concierge, no luggage attendant.

Guests check in via a series of self-service tablets along a wall, where they can find their reservations, create their own room keys and proceed up an elevator to their rooms. If questions arise, they’re answered by a handful of roving, jack-of-all-trades staffers known as “Public advisors.”

These cost-cutting efficiencies are all part of an attempt by Ian Schrager, the veteran hotelier and night life impresario who owns Public, to fight back against Airbnb Inc. on behalf of the hotel industry, which he believes hasn’t properly assessed the challenge posed by the tech upstart.

“Airbnb is a mortal threat to the U.S. hotel industry,” said Mr. Schrager, 71, known for creating nightclubs such as Studio 54 in the 1970s and later the first wave of boutique hotels including the Royalton and Paramount. “The only way you can compete with a strong idea is by having another strong idea.”

A study last year from Morgan Stanley projected that 25% of leisure travelers and 23% of business travelers will have used Airbnb by the end of 2017, up from 12% for both groups of travelers in 2015. The report found Airbnb was a common substitute for hotels: 49% of Airbnb users said they had substituted Airbnb for a traditional hotel stay in the past year.

read more: Dow Jones

Have a prosperous day. And to our Jewish readers, may you have a sweet New Year ahead on this Rosh Hashanah.

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