Housing-News-Report-February-2018

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FEBRUARY 2018 VOL 12 ISSUE 2

BIG DATA SANDBOX

MY TAKE BY SAM FRESHMAN CHAIRMAN, STANDARD MANAGEMENT COMPANY SPLITTING THE ATTOM BY FELIX TOM ATTOM DATA WAREHOUSE DEVELOPER, ATTOM DATA SOLUTIONS P18

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THE DISTRESSED DISCOUNTS DOZEN

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SPOTLIGHT: PENSACOLA PENSACOLA A PRIMER ON JOB MIGRATION TO AFFORDABLE HOUSING MARKETS P22

DATA IN ACTION

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WHERE HOME SELLERS ARE RAKING IN THE BIGGEST PROFITS

Contents

FEATURED ARTICLE

More than six million buyers stepped up and bought a home in 2017, the most since 2006. It’s a huge vote of real estate confidence, a trillion-dollar bet that all is right with the housing market. But the tea leaves are not so clear looking ahead. There’s now a tug-of-war in the real estate marketplace which suggests that 2018 will be a year of transition, that many of the old assumptions will be tested. P1 PERSISTENT HOME PRICE APPRECIATION PRESSURES MARKET ORTHODOXIES Sam Freshman, chairman of the Standard Management Company, shares how his company made the decision to purchase a substantial amount of property in Reno, Nevada, prior to Tesla announcing the building of a Gigafactory there in September 2014, and how that decision-making process can be applied to finding great real estate investing opportunities elsewhere. P14 MY TAKE: FINDING THE NEXT RENO P18 SPLITTING THE ATTOM: HOW BLOCKCHAIN COULD TRANSFORM PROPERTY RECORD TRANSPARENCY Discover the 12 U.S. housing markets where the share of distressed home sales increased in 2017 and where the average distressed sale discount was at least 30 percent or more — both metrics counter to the national trend where the share of distressed sales dropped to the lowest level in 10 years and where the distressed sale discount averages 15 percent. P21 BIG DATA SANDBOX: THE DISTRESSED DISCOUNTS DOZEN P22 SPOTLIGHT: PENSACOLA A PRIMER ON JOB MIGRATION TO AFFORDABLE HOUSING MARKETS ATTOM data warehouse developer Felix Tom delves into the blockchain technology behind the cryptocurrency craze of late, and explains how that underlying technology could be transformative not only when it comes to buying and selling property but also when it comes to recording and maintaining public property records. Attracted by $30 million in government subsidies and assistance, the largest credit union in the world, Navy Federal, is building an operations center near Pensacola expected to employ 10,000 people — helping to fuel a housing boom while also providing employees with the opportunity to find affordable housing minutes from the beach, and pay no state income tax. P24 DATA IN ACTION: WHERE HOME SELLERS ARE RAKING IN THE BIGGEST PROFITS U.S. home sellers in Q4 2017 realized an average home price gain since purchase of $54,000, up from $53,732 in the previous quarter and up from $47,133 in Q4 2016 to the highest since Q3 2007 — a more than 10-year high. Find out which markets had the highest home seller profits and how much home sellers in your local market are raking in on average.

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HOUSINGNEWS REPORT

LEAD ARTICLE

Persistent Home Price Appreciation Pressures Market Orthodoxies

BY PETER MILLER, STAFF WRITER

More than six million buyers stepped up and bought a home in 2017, the most since 2006. It’s a huge vote of real estate confidence, a trillion-dollar bet that all is right with the housing market. By any standard 2017 was a very good year. RE/MAX reports that in the 54 markets it tracks home prices rose 8.1 percent from a year earlier. Zillow says almost a quarter of 2017 existing home sales closed above the asking price. In

November the National Association of Realtors (NAR) announced that third- quarter home prices rose year-over- year in 162 out of 177 metropolitan statistical areas (MSAs). And home sellers are benefiting from the rising prices. The average profit since purchase for homeowners who sold in the fourth quarter of 2017 was $54,000, representing a 29.7 percent return on investment since purchase –

the highest average home seller profit both in terms of dollars and percentage since Q3 2007, according to ATTOM Data Solutions. But looking ahead the tea leaves are not so clear. There’s now a tug-of- war in the real estate marketplace which suggests that 2018 will be a year of transition, that many of the old assumptions will be tested.

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BUY OR RENT IN 2018? MORE AFFORDABLE TO BUY OR RENT IN 2018 BUY RENT

Technology and outsourcing are remaking the workplace and with it the housing choices made by millions of people – and that in turn is transforming the nature of home price appreciation at the regional, local and hyperlocal level. The Inventory Shortage The most immediate impact on the housing market is a profound lack of inventory that is driving up prices, a shortfall which will continue in 2018. Figures from the Census Bureau show that between 1988 and 2016 the percentage of owners who moved each year fell from 9.5 percent to 5.0 percent. That lack of churn in move- up homeowners has pushed up the average homeownership tenure to 8.18 years as of the end of 2017 – nearly double the average of 4.22 years between 2000 and 2008, according to ATTOM Data Solutions. Americans don’t move as much as they used to and the result is fewer houses to buy. The inventory shortage is real and it pushes up home values. According to NAR, December’s unsold inventory was at the lowest level since 1999. “There’s no question that inventory shortages are slowing homebuyers in much of the country,” 2018 NAR President Elizabeth Mendenhall told the Housing News Report . “The months supply of homes for sale is well below a balanced market – which is typically six months – in most markets. Low unemployment and a strong economy

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“Low unemployment and a strong economy will continue to grow demand for buying, but supply simply needs to catch up. Homebuilders are expected to slowly ramp-up production this year, and more homeowners will likely decide to sell. Therefore inventory conditions will hopefully see some improvement this year.”

ELIZABETH MENDENHALL 2018 NAR PRESIDENT

will continue to grow demand for buying, but supply simply needs to catch up. Homebuilders are expected to slowly ramp-up production this year, and more homeowners will likely decide to sell. Therefore inventory conditions will hopefully see some improvement this year.” If fewer people are moving then fewer homes are for sale. That’s one reason for the inventory shortage but there are others as well.

For instance, it’s been widely forecast that mortgage rates are likely to rise in 2018. If that’s the case why should homeowners give up financing now in place to sell and then finance a replacement home at a higher cost? A construction surge could ease the inventory shortage but a meaningful increase is unlikely. The National Association of Home Builders (NAHB) expects single-family home

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construction to rise 5 percent in 2018 – that’s an increase of roughly 42,250 units in a country with 327 million people. Multi-family construction starts actually fell 10 percent in 2017. No doubt new home demand is out there but, without labor, builders have no way to dramatically increase production. NAR explains that 190,000 new workers entered the building trades in 2017 whereas in the previous three years there were 284,000 annual additions. The current immigration debate very much impacts the construction industry. Natalia Siniavskaia, an NAHB economist, said that “a slow, delayed and reluctant post-recession return of native-born workers underlies the shift towards the higher reliance on immigrants in the construction work force.”

Is there a way around the lack of labor? One answer might be a turn toward automated construction. “The $12 trillion construction industry is extremely fragmented with tens of thousands of companies using minimal levels of technology. While labor- productivity growth has skyrocketed in the overall global economy, the construction industry has averaged only 1 percent annual productivity growth over the past two decades,” said Jeffrey Housenbold, managing partner for SoftBank Investment Advisers. The SoftBank Vision Fund has invested in Katerra, a construction-industry technology company which recently raised $865 million. Lastly, distressed homes have been a ready source of inventory during the past decade but that market is drying up as prices rise and equity increases. Figures from ATTOM Data Solutions show that foreclosure filings were down 27 percent in 2017 when compared with 2016 and off 76 percent from the 2010 peak. Put it all together and it seems likely that the single most important factor forcing up real estate prices in 2018 will be a simple lack of inventory. In January Zillow reported that “there are 10 percent fewer homes on the market to choose from than a year ago, and up to 40 percent fewer in housing markets where home values are appreciating fastest.” For the year ahead the worry is that inventory woes will get worse because the population is growing, mortgage

rates are likely to increase, new construction growth will be modest, and with the economy doing well foreclosure levels will remain low. Alternatively, the inventory shortage should please at least one group: if you’re a seller little supply can mean multiple offers, quick sales, and nicely rising prices. represents a lack of supply there’s also a smaller but visible lack of demand: many potential buyers simply do not have the dollars and credit needed to purchase. If more buyers enter the market then one might expect even higher prices but such a breakthrough is unlikely in 2018. According to Harvard’s Joint Center for Housing Studies some 21 million households now devote at least 30 percent of their income to rent and the result is a growing inability to save, not just for a down payment but to save in general. Nearly seven out of ten consumers have less than $1,000 in savings according to a 2016 study by GoBankingRates.com. In addition, student debt – a huge monthly cost for many potential homebuyers – amounted to $1.36 trillion at the end of the third quarter, up more than $1 trillion since 2004. Without savings, an auto repair or small medical emergency can turn into overdrafts and missed payments that lead to lower credit scores and The Rental Crush While the inventory shortage

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AVERAGE U.S. HOMEOWNERSHIP TENURE (YEARS)

earlier. And while the usual suspects in coastal California and New York were part of that 45 percent, also in that 45 percent were counties in Houston, Denver, Dallas, Austin and Nashville. Not only is ownership off the table for many potential buyers, so is renting. Freddie Mac reports that “as of 2016, 15 percent of young adults aged 25- 35 were living in their parents’ home, which is five percentage points higher than in 2000.” Living at home with Mom and Dad is hardly ideal but it could be worse. Rental costs are so high in hot markets that we’re beginning to see the emergence of people who are employed but lack the income to rent, the working homeless. A December report by Axios found that the working homeless can now be identified in such metro areas as Washington, Boston, New York, Seattle, and San Francisco.

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higher borrowing costs, making a home purchase impossible. Equally problematic on the affordability front are soaring home prices in highly desirable markets such as San Francisco. “The median SF house sales price in 2017 was $1,420,000 (up from $1,325,000 in 2016), and for condos, it was $1,150,000 (up from $1,095,000),” says the Paragon Real Estate Group.

High-priced markets such as San Francisco are, logically, most likely to hit affordability ceilings that may constrain demand, but the affordability crunch is also spreading to some surprising places. Homes were less affordable than historic affordability averages in 45 percent of 406 U.S. counties analyzed by ATTOM Data Solutions in Q3 2017, up from only 21 percent of those same counties below historic affordability averages a year

The efforts to convert renters into owners is now floundering.

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The National Association of Realtors reports that in 2017 first-time buyers represented just 34 percent of market, down from the 39 percent long- term norm. Many renters could reduce monthly costs with ownership. A January report from ATTOM Data Solutions found that in 240 of 447 U.S. counties a median-priced home was actually more affordable than renting a three- bedroom property. Mortgage Rates & Affordability The usual way to consider affordability is to see if the typical buyer, with the typical income, can afford today’s typical home given current mortgage rates. In a general sense it’s a very workable formula but 2018 will re-shape traditional notions of affordability.

NAR figures show that nationwide affordability fell between 2014 and November 2017. This happened despite the fact that during this period family incomes rose from $65,910 to $74,502 while interest rates dropped from 4.31 percent to 4.19 percent. Rising incomes and falling interest rates are a great combination in terms of affordability, but in this case they could not keep up with home prices which soared from $208,900 to $248,800. Affordability trends on a local basis rather than national estimates give us a better idea of what’s really practical. NAR’s 2016 metropolitan affordability index tells us that virtually anyone with a job and decent credit can buy a home in Youngstown, Ohio, Peoria, Illinois, or Cumberland, Maryland. Alternatively, affordability is virtually impossible with the typical salary in

San Jose, California, Naples, Florida, and San Diego, California.

It’s widely predicted that mortgage rates will rise in 2018, perhaps reaching 4.5 percent or even higher. However it’s also suggested that incomes will increase. NAR President Mendenhall explains that “weakening housing affordability for both renting and buying is a growing concern for the country right now. As the economy and job market prospers, we’re starting to see a meaningful uptick in wages. Let’s hope this continues, as it would certainly help the budgets of those renting and/or wanting to buy a home.” Average weekly wage growth exceeded home price growth in 52 percent of the 406 U.S. counties analyzed in the

Q3 2017 HOME AFFORDABILITY HEAT MAP

Q3 2017 AFFORDABILITY INDEX* (UNDER 100 IS LESS AFFORDABLE THAN HISTORIC AVERAGE)

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PROPERTY TAX DEDUCTION CAP: IMPACT BY COUNTY HOMES WITH PROPERTY TAX $10,000+ PCT OF TOTAL HOMES -8.7% 73.6%

ATTOM affordability report in Q2 2017 – the first time since Q1 2012 that wage growth outpaced home price growth in more than half of those counties. That percentage dropped down to 48 percent in Q3 2017. One way to overcome potentially higher rates would be to build smaller homes, properties with perhaps 1,500 sq. ft. “There is a tremendous market – sparked by millennials settling down, getting married and having children – for smaller new homes at entry-level prices,” said Mendenhall. “However, it’s up to the homebuilders to make the decision on whether to focus more of the production on this segment of the market. The demand is there, but the cost to build also has to make sense. Homebuilding activity at the lower end of the market appears to be slowly increasing. That’s good news.” What the national and metro figures do not explain is that the concept of “income” is now changing for millions of Americans. A regular check every two weeks is not rare but it is becoming less common. While fixed-rate mortgage payments are the same every month, for many households incomes are not. The result is what might be affordable one month may be entirely out of reach the next. “Over the past two decades,” explains Politico, “the U.S. labor market has undergone a quiet transformation, as companies increasingly forgo full-time employees and fill positions with independent contractors,

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“There is a tremendous market – sparked by millennials settling down, getting married and having children – for smaller new homes at entry-level prices. However, it’s up to the homebuilders to make the decision on whether to focus more of the production on this segment of the market.” ELIZABETH MENDENHALL 2018 NAR PRESIDENT

on-call workers or temps – what economists have called ‘alternative work arrangements’ or the ‘contingent workforce.’” Politico went on to say that “most Americans still work in traditional jobs, but these new arrangements are growing – and the pace appears to be picking up. From 2005 to 2015, according to the best available estimate, the number of people in alternative work arrangements grew by 9 million and now represents roughly 16 percent

of all U.S. workers, while the number of traditional employees declined by 400,000. A perhaps more striking way to put it is that during those 10 years, all net job growth in the American economy has been in contingent jobs.” A 2018 NPR/Marist poll comes to a similar conclusion. It finds that “1 in 5 jobs in America is held by a worker under contract. Within a decade, contractors and freelancers could make up half of the American workforce.”

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There is nothing which suggests that alternative work arrangements will somehow decline in 2018. If anything, this is a trend which will grow and such growth will continue to influence affordability concerns. Tax Reform Repercussions One of the great unknowns for 2018 will be the impact of tax reform, the 1,100-page plan passed along party lines at the end of 2017. The new rules are complex but for many owners real estate expenses will go up. The legislation itself estimates that the “repeal of itemized deductions for taxes not paid or accrued in a trade or business (except for up to $10,000 in state and local taxes), interest on mortgage debt in excess of $750K, interest on home equity debt, non-disaster casualty losses, and certain miscellaneous expenses” will cost taxpayers an additional $668.4 billion between 2018 and 2027. First, for a first and second house owners will be able to deduct the mortgage interest on as much as $750,000 in acquisition debt, down from $1 million under the old rules. Second, interest on home equity lines of credit in most cases will no longer be deductible. If you use home equity financing for home improvements the interest can be deductible. In general terms the new rules look like this:

Third, property taxes remain deductible however the write-off is limited to not more than $10,000 for the combination of property taxes and sales taxes as well as state and local income taxes. At first it seems that real estate write- offs largely remain in place, but in practice many taxpayers will not itemize. That’s because the personal exemption ($4,050 per person in 2017) has been eliminated and at the same time the standard deduction has been increased to as much as $24,000 for a married couple. The result, according to the Tax Policy Center, is that only 4 percent of all households will claim the mortgage interest deduction versus 21 percent under the old rules.

of the disincentive to buy under the new tax law,” says Mendenhall. “In other states with strong job markets and considerable buyer demand, the lack of supply will continue to keep prices moving at a steady clip of 5 percent and higher. Overall, NAR is forecasting for home prices to rise around 2 percent.” How the new tax rules will impact home price increases is difficult to say because many factors impact values. However, what’s clear is this: the tax difference between owning and renting is largely eliminated if both owners and renters take the standard deduction. What had been a major real estate selling point has been rendered largely moot by tax reform.

“In high-cost, high-tax states, home prices will likely decline some because

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At the same time, the basic urge to own is likely to remain unchanged.

are higher and home prices are actually higher than in the U.S. as well.”

and also that they went down, so take your pick:

“Most of us are hardwired with the desire to own a home of one’s own,” explains Rob Chrane, the CEO of Down Payment Resource, a service which tracks more than 2,400 down payment assistance programs nationwide. “The triggers for homeownership have remained steady across generations: high rents, marriage, starting a family, community and other quality-of-life issues.” Chrane says the impact of tax reform may be less significant than many observers believe. “The loss of mortgage interest and local and state tax deductibility may affect those buying million-dollar homes, but there is lots of data on how many homeowners benefit significantly from the MID and it’s fewer than you would think. Homeownership rates in many countries without these tax benefits

Chrane also explained that “there are still many homebuyer programs that can help reduce the down payment and closing costs, as well as mortgage credit certificates that provide an annual tax credit of up to $2,000 for the life of the loan. In the wake of the tax reform changes, it will be important to increase the visibility of these options so borrowers know about the assistance they could be getting.” Will Mortgage Rates Rise? There is a substantial disconnect between the ability of the Fed to raise bank rates, something which is unquestioned, and the ability of the Fed to move the mortgage market, something which is not certain at all. The Fed raised bank rates three times in 2017 and the result in the mortgage marketplace has been mixed. It can be argued that as a result of Fed actions home financing costs went up in 2017

• Freddie Mac says the annual mortgage rate went from 3.65

percent in 2016 to 3.99 percent in 2017, a one-year increase of 34 basis points. • Freddie Mac also says weekly mortgage rates at year-end stood at 3.99 percent, that’s down from 4.32 percent at the end of 2016. For perspective, the long-term norm for mortgage rates is 8.60 percent. There’s no question that if rates today were in the 8-percent range, unit sales would be substantially reduced. Lawrence Yun, NAR’s Chief economist, estimates that for every 0.1 percent increase in mortgage rates 35,000 home sales are lost. Under new Chairman Jerome Powell, a Trump appointee, it’s widely predicted that the Fed will hike bank rates three

“Homeownership rates in many countries without these tax benefits are higher and home prices are actually higher than in the U.S. as well.”

ROB CHRANE CEO, DOWN PAYMENT RESOURCE

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MORTGAGE INTEREST DEDUCTION CAP: IMPACT BY COUNTY SHARE OF HOME PURCHASE LOANS OVER $750K IN 2017 YTD

more times in 2018 in an effort to fend off the prospect of excess inflation. However, if those bank rate increases actually occur it’s not certain that mortgage rates will follow. The reason is that while the Fed has been able to increase the prime rate charged by banks, mortgage rates have barely budged. • 2015 – The Fed raised the federal funds target rate in December from .25 percent to .50 percent, the first increase since 2008. In 2015 the • 2016 – The Fed again raised the federal funds target by .25 percent in December. The new target was now .75 percent. The average annual mortgage rate was 3.65 percent according to Freddie Mac, the lowest annual rate going back to 1972. • 2017 – The Fed raised the federal funds target rate by .25 percent in March, June, and December, closing the year with a 1.50 target rate. The average mortgage rate for the year was 3.99 percent. Between the start of 2015 and the end of 2017 the Fed’s federal funds target rate increased from .25 percent to 1.50 percent, a hike of 1.25 percentage points. During the same period annual mortgage rates increased by just .14 percentage points. Why are Fed rate hikes not causing material increases in mortgage rates and thus affordability and home sales? average annual interest rate was 3.85 percent according to Freddie Mac.

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What If The Fed Is Wrong? A great worry for 2018 is that the Fed will act one way or another and in doing so will slow the economy. Unfortunately, the Fed, despite vast resources, has systematically been wrong. As The New York Times explained last October, “the Fed aims to keep inflation at an annual pace of about 2 percent, but it has undershot that goal consistently since the financial crisis, and the Fed says it expects to miss the target again this year.” It may be that the Fed is off the mark because in a changing economy, traditional economic models may not be telling us what’s really happening.

While the Fed reigns supreme over the banking industry a large percentage of mortgages are today made by non- banks, mortgage originators who are not part of the Federal Reserve system. Being new they don’t have the legacy costs associated with traditional banks. Being non-banks they don’t collect deposits, have ATMs or tellers, or borrow from the Fed. Non-banks get their funding from Wall Street, overseas capital, and bank loans. Combine their ability to get funding from the cheap sources worldwide with their low operating costs and they’re well-positioned to grab substantial market share in a competition where the question of price is supreme. The result is that when the Fed raises bank rates the impact in the mortgage sector has been minimal, a situation unlikely to change in 2018.

As an example, it’s hard to miss the huge number of retail closures that

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HOME PURCHASE DOWN PAYMENTS HISTORICALLY

At the same time, Paulson says the government figure “does not include retail volume from third-party sellers on Amazon.com and eBay.com. When these figures are included, the measure increases to $504 billion. After correcting for double-counting the ratio of eCommerce to adjusted U.S. retail sales is 18 percent – or double the often-cited statistic.” If Paulson is right and the retail numbers are off-base then what about other data? If the Fed is changing the federal funds rate up or down on the basis of incorrect numbers then the potential to harm the economy – including the housing sector – is significant. “As the Internet has been massively transformative to our economy, industries, and human behavior,” says Paulson, “it is hard to have confidence that historical cause-and-affect relationships continue at the same weight. Additionally, the U.S. has entered an unprecedented period of income bifurcation and demographic change. Given that this is unprecedented, there isn’t empirical evidence to study.” “As we see it,” said Fannie Mae Chief Economist Doug Duncan in January, “the traditional view of a trade-off between employment and inflation lacks solid empirical support in recent decades, and aggressive monetary policy to ward off a potentially overheating economy may do more harm than good. Managing a ‘soft

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“As the Internet has been massively transformative to our economy, industries, and human behavior, it is hard to have confidence that historical cause-and-affect relationships continue at the same weight. Additionally, the U.S. has entered an unprecedented period of income bifurcation and demographic change. Given that this is unprecedented, there isn’t empirical evidence to study.”

THOMAS PAULSON FOUNDER, INFLECTION CAPITAL MANAGEMENT

have taken place recently, something one would not expect in a growing economy where consumer spending should be up. The usual explanation is that local retailers are losing out to online competitors, but according to the Census Bureau e-commerce retail transactions only represent 9 percent of total sales. How can there be so much retail disruption with so little market share for online sites?

The answer, says Thomas Paulson, the principal and founder of Inflection Capital Management, is that the government estimate is based on old assumptions. “The 9 percent number,” says Paulson, “includes several large categories that are not relevant to this class of retail such as autos, gas and fuel sales, grocery sales, and restaurants and bar sales.”

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Q3 2017 DOWN PAYMENT HEAT MAP MEDIAN DOWN PAYMENT ON SINGLE FAMILY HOME AND CONDO FINANCED PURCHASES ($55,667) $247,000

If Feldstein’s concern regarding a recession seems strange, consider that GDP grew by 3.2 percent in the third quarter but fell to 2.6 percent in the fourth quarter, a substantial decline even as the stock market was hitting new highs. The GDP is at least something to watch. The Pricing Divide Job opportunities across the country are expected to increase during the coming decade. The Bureau of Labor Statistics estimates that an additional 11.5 million jobs will be added to the economy between 2016 and 2026. The catch is that the new jobs won’t necessarily be in the same places or require the same skills as the old ones. So-called “technological disruption” will require workers to retrain or lose out. takes hold, it typically enables a larger population of less-skilled or less affluent people to do things in a more convenient, lower-cost setting – things that previously could only be accomplished by specialists in less convenient, centralized settings. PCs, for example, brought computing power to individuals at a fraction of the cost of minicomputers, replacing the minicomputer specialist and centralized data centers in the process.” Traditionally people go where the jobs are. When Oklahoma became a dust bowl people moved to California. As the Harvard Business School explained in 2001 “once disruption

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landing’ will be a difficult but critical task for policymakers in 2018.”

time: the tax legislation will push up the federal deficit and federal debt burden; debt service costs will rise as interest rates normalize; and entitlement outlays will increase as the baby boom generation retires.” “The US economy has experienced nine recessions during the last 50 years,” wrote economist Martin Feldstein earlier this year. “What makes the current situation unusual and more worrying than in the past is the low level of short-term interest rates and the high (and rising) level of federal debt, which will limit policymakers’ ability to provide the stimulus needed to counter a recession.” Feldstein, by way of background, is an economics professor at Harvard and chaired President Reagan’s Council of Economic Advisers from 1982 to 1984.

At some point the lengthy expansion the U.S. economy has enjoyed must come to an end and that could be a problem. “The current U.S. fiscal position is far worse than it was at the end of the last business cycle,” explains William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York. Dudley noted that “in fiscal year 2007, the budget deficit was 1.1 percent of GDP; in fiscal 2017, it was 3.5 percent of GDP. Similarly, federal debt held by the public was 35 percent of GDP in fiscal 2007, and 77 percent in fiscal 2017. Additionally, three factors will undoubtedly cause these budgetary pressures to intensify over

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When factory jobs opened up in the Rust Belt people moved there from the rural South. What’s different in recent years is that the benefits of moving to hot areas are not attractive for many workers. Greg Kaplan and Sam Schulhofer-Wohl, economists with the Federal Reserve Bank of Minnesota, explain that “labor markets around the country have become more similar in the returns they offer to particular skills, so workers need not move to a particular place to maximize the return on their idiosyncratic abilities.” In other words, a programmer might make just as much in either Portland or Peoria, but the small town – with lower housing costs and other expenses – can be competitive by offering greater affordability and perhaps a more- desirable lifestyle.

or San Francisco. Compare Houston’s 14.6 percent growth in hiring to the national U.S. average of 10.4 percent, or Washington, D.C.’s modest 3.5 percent at the bottom of our list.” It’s not just plumbers, teachers, and EMTs who are being frozen out of high-cost areas. As Redfin CEO Glenn Kelman told CNBC in late December, “Silicon Valley is going to leave Silicon Valley – that’s already happening.” The Problem? “The technology companies, the Wall Street companies, they’re chasing the talent, (and) the talent is chasing affordable housing,” said Kelman. According to the Silicon Valley Competitiveness and Innovation Project (SVCIP), between 2010 and 2015 Silicon Valley added 367,064 jobs but only

Housing prices created by better jobs in hot markets are increasingly unaffordable thus making such communities effectively “off-limits” for new residents. How many teachers, plumbers, or EMTs can move to Cupertino, the California community where Apple is headquartered and the typical home now costs more than $1.7 million? When you look at job growth it’s not the “hot” markets which are leading the pack. LinkedIn.com explains that “Houston, Phoenix, and Dallas are growing faster than New York City and San Francisco – the Sunbelt is booming. Over the past year, hiring growth in Houston, Phoenix, Dallas-Ft. Worth, and Cleveland-Akron surpassed the national average – and blew past hiring growth rates in big coastal cities like New York City, Seattle,

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5-Year HPA

Kansas City, MO-KS

$172,098 $960,000 $224,900 $230,000 $264,000 $410,000 $207,000 $180,000 $348,050 $187,000 $233,050 $360,000 $245,000

13.4% 13.3% 12.5% 12.3% 10.9% 10.8% 10.7% 10.7% 10.5% 10.1%

36.6% 81.1% 56.2% 56.5% 58.9% 82.2% 80.0% 65.0% 61.8% 85.0% 63.7% 88.5% 100.0%

San Jose-Sunnyvale-Santa Clara, CA

Nashville-Davidson-Murfreesboro-Franklin, TN

Las Vegas-Henderson-Paradise, NV

Salt Lake City, UT

Seattle-Tacoma-Bellevue, WA Orlando-Kissimmee-Sanford, FL Tampa-St. Petersburg-Clearwater, FL Portland-Vancouver-Hillsboro, OR-WA

Jacksonville, FL

Dallas-Fort Worth-Arlington, TX Denver-Aurora-Lakewood, CO

9.4% 9.1% 8.9%

Miami-Fort Lauderdale-West Palm Beach, FL

CLICK HERE TO SEE THE ENTIRE TABLE

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FEBRUARY 2018 | ATTOM DATA SOLUTIONS

HOUSINGNEWS REPORT

PERSISTENT HOME PRICE APPRECIATION PRESSURES MARKET ORTHODOXIES

five of the last six years, according to ATTOM Data Solutions – that has not been as common historically in Kansas City and Nashville. And with 2017 median home prices at $172,098 and $224,900 respectively, those two markets have much more room for price growth than a market like San Jose, with its $960,000 median home price in 2017. The n-Tier Market While the two-tier wage market may explain much regarding the price differentials seen in individual communities, it’s a blunt approach. It presents a black-and-white, either/ or look at the marketplace. It explains high wages and housing costs in Apple’s Cupertino, but it tells us nothing about the technologist who earns a Manhattan salary, commutes by satellite, and lives at the end of a rural road. There are growing numbers of such knowledge workers and they prove that geography is not destiny. Apple alone says it’s “iOS app economy has created more than 1.6 million jobs in the US and generated $5 billion in revenue for American app developers in 2017.” Rather than a two-tier economy what’s really emerging is an n-tier housing market, a market where real estate prices reflect hyper- local, hyper-now, property-specific supply and demand. While broad pricing trends will be widely quoted, it’s the n-tier data that will power sophisticated decisions to buy, sell, lend, and insure.

“Silicon Valley is going to leave Silicon Valley – that’s already happening.” GLENN KELMAN CEO, REDFIN

57,094 new housing units were built. The situation is so bad that Alphabet, Google’s corporate parent, bought 300 modular housing units for Bay area company employees last year. Will the markets which were hot in 2017 be hot in 2018? Think of Denver, Austin, Nashville, Raleigh, Grand Rapids, and wherever Amazon elects to locate its second headquarters project, the $5 billion HQ2. The migration of talent and jobs from high-cost housing markets to more reasonably priced housing markets is

resulting in accelerating home price appreciation in those reasonably priced markets, many of which historically have posted slow-and- steady appreciation. Among metro areas with at least 1 million people, those with the strongest home price appreciation in 2017 were Kansas City, San Jose and Nashville – all of which posted annual home price appreciation of 13 percent, according to ATTOM Data Solutions. While San Jose is no stranger to double- digit home price appreciation – posting double-digit percentage increases in

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FEBRUARY 2018 | ATTOM DATA SOLUTIONS

HOUSINGNEWS REPORT

Finding the Next Reno MY TAKE

BY SAM FRESHMAN CHAIRMAN, STANDARD MANAGEMENT COMPANY

Standard Management Company has been praised and congratulated by its investors for acquiring a substantial amount of property in Reno, Nevada, shortly before the Tesla announcement in September 2014 that they would be building a Gigafactory in the area that is projected to provide 6,500 new jobs to the region. This was at a time when most real estate professionals had discounted Tesla’s pre-development activities in Reno believing that they only put pressure on Texas and California to make more concessions and encourage the company to locate in those states.

lending to make decisions in favor of a number of acquisitions that presented themselves both on market and off. During that 58-year period we acquired properties in 15 states and 27 metropolitan areas. While the real estate business is one where you make your profit when you buy not when you sell, we make two mistakes; we did not buy enough and in many cases sold too soon. When asked how I have acquired my wealth through real estate and how it was done, my answer is very simple. I made every mistake you could

Being perfectly honest that was our conclusion as well. However in doing our homework in preparation for deciding on these purchases we determined that Amazon and Apple had already made major commitments to Reno and that the city had many basic advantages, probably the most important being Nevada’s low tax rate and general business incentives. There was a trend of Bay Area high tech of relocating some of their facilities from Northern California to Reno. Buy More, Sell Slower We were able to apply our 58-year history of real estate investing and

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FEBRUARY 2018 | ATTOM DATA SOLUTIONS

HOUSINGNEWS REPORT

FINDING THE NEXT RENO

possibly make, tried to do it only once and lived a long time. Therefore if you want to get rich in real estate you simply make a lot of mistakes and live a long time. That also reminds me of the real estate joke where developers were having a big conference and were complaining how difficult it was to find good opportunities to invest and develop. Finally in the back of the room one developer said “oh I’ve found the great place; everything I am buying is increasing in value and we are doing very well.” A friend asks “where is it?” He said “do you think we are going to tell you?” Macro: Taxes and Schools I am not able to predict where the next opportunity will be but I am going to share with you some of the strategies and experiences we have had on this long road to real estate success. Our past includes 1920s high-rise bank buildings in downtown Los Angeles, office buildings and

high-rise apartments in Atlanta Georgia, industrial shopping centers, apartments and a MHP in Central Ohio, industrial and agriculture in the San Joaquin Valley and projects in Albuquerque and Dallas and many other locations. As a result we have learned that taxes have a high impact on economic development — both personal and business. If you look at a state’s overall tax picture and business incentives, you can often predict in what direction the area is going. Next would be schools. These are both macro factors in that they affect somewhat of a larger area. Micro Even More Important Most importantly in making a decision on a particular acquisition is the micro factors. If you are looking at an apartment these include such things as school system ratings, poverty ratio, the age of the property, maintenance efficiencies, occupancy and the conditions of cars in the parking lot.

The next opportunity may be within your own backyard or that may be the worst place to invest. Obviously the data and knowledge about the market may be easier to acquire close to home but we have found that the one constant is change. While your neighborhood is improving or declining, other locations are improving or declining and so on. With retail there is a different set factors such as how many cars per day go by the property and co-tenancy. Multi-family may be on a very busy street but with appropriate sound barriers and construction can be very successful. A shopping center without traffic seldom succeeds. There are numerous tests that can be undertaken with in-house underwriting — namely population trends and activities based on bank deposits, employment, post office receipts and activities etc. The key statistics with respect to property ratio, schools, residential and many other of these indicators are readily available on the internet for free. Underwriting also has to be done on-site regarding the condition of the building, quality of tenancy and operating efficiencies. If you are looking at a project and have not found anything wrong, you simple have not looked far enough. Reduce Inefficiencies Real estate is finding problems and determining whether or not you can solve them.

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FEBRUARY 2018 | ATTOM DATA SOLUTIONS

HOUSINGNEWS REPORT

FINDING THE NEXT RENO

Some of the best opportunities can be low cap rate properties that are inefficiently operated and where there is opportunity to value-add, which can bring the income above the existing cap rate. We have found that in purchasing property in the neighborhoods that we want and meeting our goals of positive leverage we need a 5 percent to 5.5 percent cap rate today. However if there is an opportunity to upgrade units that will bring substantial rent increases, our return can reach 15 percent to 25 percent and sometimes higher. We can bring the cap rate up in the first five years usually to 7 percent or better, increasing the value of the properties by at least 40 percent. As to the properties you already own, spending capital on them can create a better return than you can find spending that money in acquiring a new property. Regardless of the general economy there are always some areas that are improving and some that are declining. Obviously in a recession it is easier to find a good buy but the risk of catching a falling knife is greater. One partner has the ability to find the best buy and improve it and the other has the ability to fund the equity required. When I started out 50 years ago there were opportunities far in excess of our reserves to purchase. We never looked at a property unless it was a 9 cap or better. Today the reverse is true. We have almost unlimited capital offered to us continuously and have a pool of over 100 investors which is constantly growing — even though we do not

advertise, we do not used Wall Street, and we work almost entirely on word of mouth. Funds are almost unlimited but the number of opportunities is much harder to find. In the beginning it would take only perhaps 10 potential property inspections to find a good deal, but today the ratio is probably over 100 to 1. One hundred come in and probably 80 are immediately rejected in a two-week period. Then we underwrite 20, and that’s reduced to five;, then we make offers on five and if we are lucky we get one. Not Rocket Science Real estate is not rocket science; it is just sixth grade arithmetic. But it takes a lot of due diligence, work, and time to find a project that makes sense. Once it is found then there is a lot of effort involved in getting the proper financing as the financing you get often determines the success of the project. With interest rates so low, we have shifted to financing that has a

long maturity. There are others who view a short term floating rate debt as the way to maximize cash on cash. It depends on how conservative you are. So far while we have been expecting rising interest rates for a number of years, we have had a longer period of low interest rates than almost everyone expected. That means those who went for a floating rate and short terms have come out better. However, I remember when first mortgage rates were as high as 13 percent and you if do something relying on low rates in that environment you could be in deep trouble. The Chinese say that luck is preparation. While we say it is much better to be lucky than smart, a lot of preparation and due diligence is required to be successful continuously. Be careful not to over-improve. Appreciation versus high cap rate. Good luck and if you find the next Reno give me a call.

SAM FRESHMAN

Mr. Freshman founded and was the managing partner of the law firm Freshman, Marantz, Orlanski, Cooper & Klein, which is now the Los Angeles office of K&L Gates. Mr. Freshman is also an acknowledged expert on real estate investment and syndication. He has served as Adjunct Professor of Real Estate at the USC Marshall School of Business, and as an expert witness in over eighty cases. In addition, Mr. Freshman is the author of numerous articles on real estate matters. His book, Principles of Real Estate Syndication, is the bible on the subject. He is Chairman Emeritus of Stanford Professionals in Real Estate (SPIRE—www.spirestanford.org— a global organization composed of Stanford University alumni working in the real estate industry). Mr. Freshman received his Bachelor of Arts degree from Stanford University and his law degree from the Stanford Law School.

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FEBRUARY 2018 | ATTOM DATA SOLUTIONS

HOUSINGNEWS REPORT

SECTION TITLE

P r Public Records T a Tax Assessor D e Deed F c Foreclosure P m Plat Maps D g Demographics

L s Landslide E q Earthquake F i Fire N h

ATTOM Table of Data Elements

M I Mortgage Loan

P b Parcel Boundaries F I Flood S p Spills H h Health Hazards

P f Pre-foreclosure

O w Ownership S c Schools

E r Environmental Risks N c Neighborhood Characteristics P c Property Characteristics

S f Superfund Sites D I Former Drug Labs H c Home Condition

B f Brownfields A q Air Quality

R p Registered Polluters U v UV Index

U t Underground Storage Tanks R d Radon

Natural Hazards

F t FCC Towers

S h Sinkholes

C r Crime

C o Criminal Offenders

B p Building Permits

H v Home Values

A v Assessed Values

U S Utility Score

P v Pre-mover

MLS Analytics M s

Quantum AVM Q a

Coming Soon

Coming Soon

Coming Soon

Public Records Environmental Risks

Property Characteristics Neighborhood Characteristics

Natural Hazards Health Hazards

www.attomdata.com 1-800-462-5125

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FEBRUARY 2018 | ATTOM DATA SOLUTIONS

HOUSINGNEWS REPORT

SPLITTING THE ATTOM

How Blockchain Could Transform Property Record Transparency

BY FELIX TOM ATTOM DATA WAREHOUSE DEVELOPER

Introduction to Bitcoin and Blockchain Technology

It’s hard to go a day without news about Bitcoin these days and it’s easy to understand why. The cryptocurrency Bitcoin’s rapid rise late last year drew a lot of attention from the financial sector, with analysts espousing investment opportunities on one end and speculation of a bubble bursting on the other end. While the financial side of Bitcoin has garnered most of the focus, something that is most often missed is the technology behind it, blockchain technology, and how its applications will outlast Bitcoin.

the thousands of copies of said ledger are distributed across the world and are maintained by their users, whom update and ensure all copies match each other. A distributed ledger solves the problems that arise when data is stored in only one location — as existing money transfer systems do. Physical records like an accountant’s ledger can be vulnerable to natural disasters; digital records can be vulnerable

Both Bitcoin and the blockchain were established together in 2009 as a method of transferring money from one person to another without having to rely on a third party like banks, credit cards, or money transfer services. Where Bitcoin is the currency and asset side of the equation, blockchain technology is the ledger for transactional record keeping. The main difference between the blockchain ledger and the traditional banks is that

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FEBRUARY 2018 | ATTOM DATA SOLUTIONS

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