Multi Housing News November 2011 : Page 6
executive insight We Still Have A Ways to Go Q& James M. Manzi, CFA, senior director, Structured Finance Research, at Standard & Poor’s Rating Services, talked to Keat Foong, executive editor, MHN, exploring the ratings agency’s take on a range of subjects of interest to the multi-housing industry. Manzi reveals why S&P thinks we may not be on the brink of meaningful improvements, whether in CMBS delinquencies, home prices, the economy or the agency’s ratings of U.S., Fannie and Freddie debt. Does S&P see a “double dip” for the U.S. economy? Why or why not? We once expected a half-speed recovery, but that view now seems overly optimistic. Investment mar-kets remain exceptionally volatile, and the risk of policy mistakes—both here and abroad—is high. A major injection of fi scal stimulus is a political nonstarter, and the private sector isn’t ready to pick up the slack. We expect real GDP to rise 1.6 per-cent in 2011, which is almost half the 3 percent rate of 2010. For 2012 and 2013, we expect just 1.9 percent and 2.2 percent growth. None of this seems enough to make a dent in the unemployment rate, which will likely remain above 8 percent through 2013. We’re keeping the risk of a double-dip reces-sion at 35 percent, but with every market sell-off, the risk of a recession becomes more real. As a result of a slowdown in the U.S. economy this year, will we see a decrease in occupancy levels and negative rent 6 November 2011 | Multi-Housing News A Standard & Poor’s James Manzi plots the road ahead from the ratings agency’s viewpoint growth for apartments, or will we see merely a leveling off in these metrics? A modest construction pipeline, favorable demo-graphic trends, a weak housing market and the de-bundling of households have all contributed to recent strength in the apartment sector. As of July 2011, CB Richard Ellis Econometric Advisors re-ported broad-based year-over-year vacancy declines and increases in effective rents. While the firm warns of a potential “uneven” recovery going for-ward regarding specifi c markets, locations and as-set qualities, it projects that national effective rents will continue to rise and vacancies will fall over the next three years. In our view, this should generally be positive for CMBS credit, though the recovery may not be as benefi cial for the Class B and C prop-❝ We’re keeping the risk of a double-dip recession at 35 percent, but with every market sell-off, the risk of recession becomes more real.❞ erties, which could constrain improvement in the multifamily CMBS delinquency rate. When is the single-family market forecasted to recover? Housing remains the biggest drag on the economy. Starts and sales have stabilized after plummeting earlier this year, which brought starts only slightly above the all-time low of April 2009. The spring rebound indicates that the decline stemmed from weather and the changes in regulations (including tax rebates) in several states, which took effect in January and caused a spike in late 2009. But even allowing for the weather, the housing market is weaker than we expected, and we have lowered our projections of sales and starts, expecting only 600,000 housing starts this year and an additional 670,000 in 2012. In July, the supply of unsold inventory for ex-isting homes rose to about 9.5 months from 9.2 months in June, but held at 6.6 months for new homes. Both are much better than the double-digit reading a few months ago, though both figures are still above the six-month historical average. This excludes homes in the process of, or likely to be in, foreclosure, which at least doubles that supply. Standard & Poor’s Structured Finance Research Group estimates that it could take a few more years to clear the supply of distressed homes on the na-tional market. The current average home price is below its historical average relative to income, and interest rates are near record-lows. However, high unem-ployment, tightening credit standards and a lack of savings means that fewer households can qualify to buy a home. At the same time, the glut of houses in the process of, or likely to be in, foreclosure is depressing prices even further. We expect them to continue to drop another 5 percent through spring 2012, slipping below the April 2009 trough in the S&P Case-Shiller index. Even though prices are likely to drop again, we believe housing sales and starts will improve this year. We expect 600,000 total starts in 2011, up 3.4 percent from 2010, but still dismal compared with 1.6 million starts needed to keep up with de-mographics and the 2005 peak of 2.1 million. This likely will be the fourth consecutive year that starts have been fewer than 1 million, the first time since World War II. S&P just reported that Fannie and Freddie now dominate the CMBS market. What are the implications? Class A properties are typically luxury units, fewer than 10 years old, and usually occupied by white-collar workers. Class A properties are considered to be at the higher quality end of the apartment spec-
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