Oklahoma City - Safe Harbor of Real Estate
Values
The stability of
Oklahoma's Real Estate Market continues to amaze
out of state observers.
According to the Oklahoma City Chamber of
Commerce, new home building permits were down
significantly from 2006 through June of 2007.
Between OKC, Midwest City, Edmond, Moore and
Norman, less than 2500 building permits have been
issued in 2007. Employment in
the Oklahoma City region has continued its surge,
with 19,000 jobs created from September 2006
through September 2007. This
accounted for about 80% of the employment growth
in the state and at a rate of 3.3%, was more than
double the national average of 1.2%.
Bucking the
national trends, Oklahoma City metro real estate
is appreciating with average selling price
increased by 4.2%. Additionally
retail sales have increased by 3.3% during the
first eight months of the year.
Within the metro, the
number of homes closed has remained relatively
constant, considering seasonal
adjustments, for the past four years.
No change in this rate is expected in the near
future.
Single family
building permits have adjusted to market
conditions
Additional charts are in
the "Statistics" Section of this
report
Systemic changes in the
Mortgage Market will Affect Real
Estate
Because home and other
real estate values have traditionally been a
significant asset, its value (or potential decline
in value) has become the biggest question
impacting the global economy and finance systems.
This, according to the Wall Street Journal, is
because form the past decade, more than $2
trillion in securities were sold globally and
backed by the loans mortgaged by US real estate.
The prevailing logic was that the value of this
real estate would not fall nationwide, people
would almost always make their mortgage payments,
and by packaging loans into securities the risk
would be reduced making the global economy more
resilient if anything went wrong.
However, at least four
interrelated things that were not originally
accounted for did go wrong:
·
First - dishonesty -
the preponderance of no-doc loans created an
incentive to avoid verification of asset and
income numbers provided by prospective borrowers.
This avoidance seems to have been a significant
factor in the increased volume of loans generated
through mortgage production brokers that did had
an economic stake in the ability of the borrower
to repay the loan (they just received commissions
for generating the loan.) This became so
significant that a number of mortgage funding
sources, including Wells Fargo, stopped accepting
loans from independent mortgage brokers, and
instead relied solely on their in-house mortgage
production organization.
·
Second - little or no
equity - the preponderance of Zero Down
Payment home mortgages meant that homeowners did
not have a financial incentive to maintain
payments when adjustable rate mortgage rates
increased beyond their ability to pay (no equity
in the property). In areas of the country where
real estate values decreased rather than
increased, many property owners became "upside
down" in that the principal amount of the loan was
greater than the value of the property. In these
upside down cases, if the property was sold at
market rates, rather than receiving money, the
seller would need to bring additional cash to the
closing. With little or no equity in a property,
there is little incentive to continue mortgage
payments.
·
Third - policy to increase
percentage of home ownership -
historically, public policy has been directed
toward increasing the percentage of the population
than owns their homes. It has been suggested that
one of the reasons that the late 1970's saw riots
in the cities was that the poor had little stake
in a community where they were rending property.
We are how at historic highs in terms of number
homeowners. However, the current problem is that
many of the poorer people who own homes are
spending an unsustainable portion of their
personal income for housing costs by using
so-called sub-prime loans. Recipients of these
sub-prime loans had low credit scores and were
typically structured as adjustable rate mortgages
within an initial under market interest rate for
the first few years. The theory was that as
property appreciated, the loan could be refinanced
before the interest rate increased. In recent
history, since property values have tended to
decrease, refinancing was not an option and
interest rates increased to a point that monthly
payments were more than the homeowner could
afford. It is estimated that in 2005, 55% (in
2006, 61 %) of all sub-prime type mortgages went
to people with credit scores (below 620) that
would not qualify them for conventional loans.
·
Forth - banks stopped using
mortgage backed securities for collateral for
inter-bank loans - as default rates for
mortgages increased and losses mounted, the value
of mortgage backed securities decreased. The
resulting falling home prices and rising mortgage
delinquencies have triggered a collapse in the
market for mortgage backed securities, with
estimates losses ranging from 1% to 3% of the
Gross Domestic Product (or $150-400 billion). In
comparison, in current dollars the savings and
loan crisis of the last 1980's was estimated to be
3.2% of GDP ($189 billion) and the Tech-bust bond
defaults of the early 2000's was estimated to be
0.9% of GDP (or 93 billion). As a result, a credit
crunchn developed and the Federal Reserve is now
experimenting with ways to increase the
availability of consumer credit without
significantly reducing the interest
rates.
As a result of these new
market conditions, the market for real estate
finance changed, with many of the changes being
structural:
·
Loans
for properties above $411,000 (for which
governments guarantees are unavailable) are
available (if at all) only to high net worth
individuals with high credit ratings - ie borrower
could actually pay cash for the house.
·
While
interest rates may be down, credit is generally
available only for individuals with high credit
scores, no-doc loans are almost unavailable and $0
down payments are only available from special
governments sponsored targeted loan programs
·
a
shift in demand away from home ownership to less
expensive rentals for lower income, low credit
score individuals.
·
There
will be a temporary surplus of new homes in
inventory for both low and high income markets as
demand softens and an increasing demand for
rentals and apartments; the resulting decrease in
housing starts will trickle into a decrease in
economic growth, unless the Federal Reserve make~
significant changes in their economic policies.
Sources:
Greg Ip, Mark Whitehouse, and Arron
Lucchetti, "US Mortgage Crisis Rivals S&L Melt
Down" The Wall Street Journal, December 10, 2007,
P 1A
Rick Brooks and Ruth Simon, "Subprime
debacle traps even very credit-worthy" The Wall
Street Journal, December 3, 2007, p1A
Statistics
According to the Journal
Record which reported on the 'Manpower Employment
Outlook' Tulsa expects to higher new employees at
a hotter pace during the first part of 2008 than
Oklahoma City. Tulsa reported that 47% of the
surveyed businesses expected to hire the first
quarter of 2008; down a bit from the 50% that
expected to increase hiring in the fourth quarter
of 2007.
|
Area |
hire
|
fire
|
same
|
Don't Know
|
|
Oklahoma
City |
30
|
20
|
50
|
0
|
|
South -
US |
23
|
11
|
61
|
5
|
|
National
|
22
|
12
|
60
|
8
|
|
4 quarter
2007 |
|
|
|
|
|
Oklahoma
City |
27
|
13
|
30
|
30
|
|
National
|
27
|
9
|
58
|
6
|
For
both markets, mining (oil & gas),
transportation and public utikities sectors are
expected to add jobs.
Sources: Manpower
Employment Outlook Survey, United States 1Q/2008,
Manpower Research
Report, http://www.manpower.com/press/meos.cfm
Shottenkirk, Jerry, Survey: Tulsa Hiring to
Outpace OKC, Journal Record, December 11,
2007 P 3A
-
- - - - - - - - - - - - -
Which
issues had greatest effect on your company in 2007
-
Credit
Crunch - 49%
-
Oil
Prices - 23%
-
Insurance
Coverage - 14%
-
Green
Buildings - 13%
-
Threat
of terrorism - 1%
What
issues do you expect to become even more important
in 2008?
-
Oil
Prices - 50%
-
Credit
Crunch - 33%
-
Green
Building
- 13%
-
Insurance
Coverage - 4%
Do
you believe 2008 will be economically better or
worse than 20077
-
Better
- 23%
-
Worse
- 55%
-
About
the same - 22%
Source:
ICSC SpartBrief Year-End Report: Part 2, December
13, 2007
Mortgage Default Rate Up
for Nation but Not for Oklahoma
The third quarter showed a
rapidly increasing number of US homeowners
struggling to make their home payments. According
to RealtyTrac, Inc., nation wide, foreclosures
were up 100.1% in the months July to September
from the same year-ago period. Foreclosures were
up 33.9% during the second quarter time periods.
However, Oklahoma and four other states (Kentucky,
New Mexico, South Dakota and Utah) reported
decreases in rates from the previous year. In
Oklahoma, the number of filings is down 19.7% over
the same period of the previous year.
Source:
Alex Veiga, " Mortgage Default up but not
for state" Daily Oklahoman, November 2, 2001
pBl
Oklahoma's Immigration
Law
With the passage of HB
1804, many businesses may be affected by
Oklahoma's immigration reform measures. The bill
contains many provisions related to illegal and
undocumented workers, the result of which may see
a decrease in employment of illegal workers in
Oklahoma. The Rev. Miguel Rivera, head of a
coalition opposing implementing the bill,
estimates that 25,000 illegal aliens have already
left the statE;. The new law was written to make
it impossible for undocumented immigrants to
secure work or receive benefits, and to prohibit
anyone from harboring or offering transport
illegal aliens.
Key provisions of the bill
include:
Provisions implemented by
state agencies effective November 1, 2007 include
that state agencies are required to check the
citizenship status of applicants:
-
for
state sponsored professional licenses (Real
estate, physician, attorney, accountant, funeral
director, etc.) and their direct and contract
employees, as well as associated continuing
education requirements
-
for
employment by state agencies
The remaining provisions
applying to the general public are scheduled to go
into effect July 1, 2008
-
A
business owner is to verify employment
eligibility for each worker or withhold the
maximum state tax from that worke(s pay. If an
employer does not follow guidelines, they are
liable for the tax.
-
Private
employers who have contracts with the state or
who subcontract with a state contractor will be
required to check the citizenship status of job
applicants
-
Private
businesses contracting with the state that fail
to make a good-faith effort to check the
citizenship status of new hires may expose
themselves to other penalties included in the
law.
-
if
an employer fires a U.S. citizen while keeping
an illegal alien on the payroll, the company
could face a discrimination complaint - unless
the business can show they make a good-faith
effort to check immigration status
-
Employers
are protected from prosecution under the bill if
they comply with the requirements of the federal
1-9 form and check the immigration status of new
hires using the Internet or a third-party
investigator ( http://www.uscis.qov/i-9)
While federal fair housing
laws, which apply to sale or rental of housing and
the provisions of mortgage loans, make it illegal
to discriminate based on race or color, or
national origin, religion, sex, familial status
(children under 18) and disability, HB 1804 makes
it illegal to house illegals. This situation
creates new difficulties for landlords, who may
run afoul of federal fair housing laws in
questioning applicants regarding their immigration
status. Yet, if they rent a property to an illegal
alien, a landlord may be found guilty of the
felony of harboring or sheltering an illegal
alien.
The new law will make it
more difficult to obtain a state-issued
identification card or a driver's license,
requiring all applicants to provide documentation
of their citizenship. Employees who legally
immigrated to the U.S. and who previously had been
issued a state-issued identification card or
driver's license will not be able to renew those
documents if their immigration documents expire.
A law suit was filed by
the National Coalition of Latino Clergy and
Christian Leaders, churches and others, including
several John and Jane Does, seeking to prevent the
law from taking effect, in part, because they
believe several provisions of the law supersede
federal labor regulations. The suite was dismissed
in federal court because of the failure of
plaintiffs to outline the injuries they allege
were caused by the law and the failure to identify
an individual member that had standing to sue.
Sources:
Marie Price, "Immigration law hearing ends
without injunction" The Journal
Record,
November 1, 2007 p 1A
Janice Francis-Smith, "Attorneys:
Immigration law concerns employers, others" The
Journal
Record, October 19, 2007 p 1A
Janice Francis-Smith, "Immigration law may
affect businesses sooner" The Journal
Record
September 13, 2007 p 1A
Marie Price, "Judge dismisses immigration
law challenge" The Journal Record,
December 14, 2007 p 5A
http://webserverl.lsb.state.ok.us/2007-08bilis/HB/HB1804
int.rtf
Year End Tax
Pointers
Small Business Tax Credit
for Disability Accessibility
A Qualified Small Business
(gross receipts of less than $1 million or no more
than 30 employees) can claim a disabled-access tax
credit for making your business more accessible to
disabled individuals. The tax credit is up to 50%
of the first $10,000 of qualified expenses, or a
maximum of $5,000. A qualified expense is anything
that must be incurred to meet the requirements
established by the Americans with Disabilities Act
(ADA). Examples of qualified expenses include
removing architectural, physical, or
transportation barriers that prevent a business
from being accessible to disabled individuals;
acquiring or modifying equipment or devices for
disabled individuals or providing other services
as described by IRC Sec 44(c). The disabled
-access credit can be taken on form 8826
(http://www.irs.gov/pub/irs-pdf/f8826.pdf ).
Capital Gains Rate Changes
The 2003 Tax act and the
Tax Increase Prevention and Reconciliation Act,
which reduced maximum tax rate on long-term
capital gains from 20% to 15% for everyone in an
ordinaryincome tax bracket above 15%. For
individuals in the 10% and 15% tax brackets, the
capital gains rate dropped to 5%, in most years,
but drops to 0% between 2008 and 2010. After 2010,
the capital gains rate reverts to 20% for
everyone. In 2007, the threshold for 15% bracket
was $63.700 for married couples filing jointly, or
$31,850 for single
filers.
Payback for Home
Improvements
Remodeling Magazine's 20th
annual "Cost vs Value Report" done in cooperaton
with Realtor ® Magazine has been released.
Information for the Tulsa
market shows that Bathroom and Kitchen remodels
have the highest return on investment of the
remodel projects, with home office remodel having
one of the lowest returns.
Detailed information of the survey
including specs and costs for 29 upscale and
midrange projects and estimated percentage return
at resale can be found at www.costvsvalue.com .
Kitchen
models assume a functional but dated 200 sf
kitchen with 30 linear feet of cabinetry and
countertops. Major kitchen
remodel includes a 3 by 5 ft island, laminated
counters and standard stainless double-tub
sink. Major kitchen upscale
remodel includes stone countertops, commercial
grade range and vent hood and cork
flooring. Bathroom remodels
assume a 35 sf to 100 sf space within the existing
house footprint. Basic bathroom
remodel assumes 30 by 60 inch porcelain on steel
tub. Upscale bathroom remodel
assumes relocation of all fixtures, customized
whirlpool, stone countertops, and electric
in-floor heating among other things.
Upscale window replacement includes
replacement of 10 3x5 double hung windows with
insulated, low-E simulated-divided-light wood
windows. Information below is
for the Tulsa market:
|
|
Tulsa,
Oklahoma |
National
Average |
|
|
Job
Cost |
Resale
Value |
Cost
Recovery |
Job
Cost |
Resale
Value |
Cost
Recovery |
|
Bathroom
Remodel Midrange |
$13,383 |
$11.144 |
83.3% |
$15,789 |
$12,366 |
78.3% |
|
Bathroom
Remodel Upscale |
$44,261 |
$31,909 |
72.1% |
$50,590 |
$34,588 |
68.4% |
|
Kitchen
Remodel Minor |
$19,561 |
$17,268 |
88.3% |
$21,158 |
$17,576 |
83.0% |
|
Kitchen
Remodel Major Midrange |
$49,002 |
$39,872 |
81.4% |
$55,503 |
$43,363 |
78.1% |
|
Kitchen
Remodel Major Upscale |
$101,282 |
$81,208 |
80.2% |
$109,394 |
$81,069 |
74.1% |
|
Window
Replacement (vinyl) Upscale |
$11,018 |
$8,992 |
81.6% |
$
13,479 |
$10,913 |
81.0% |
|
Source:
http://www.costvsvalue.com
|