Realtors Confidence Index

Report and Market Outlook

May 2012 Edition
Based on Data Collected May 29 - June 8, 2012

National Association of Realtors

Research Department Lawrence Yun, Senior Vice President and Chief Economist

Table of Contents
Summary Confidence Continues Upward.... ..... .3 Section 1: Market Conditions Realtor Confidence ..6 Single Family Properties: Confidence is Rising.....7 Townhouse Properties: Confidence Improving..7 Condos: Confidence Still Relatively Low...8 Sixty-two Percent of Realtors Report Constant or Higher Prices on Recent Transactions Compared to a Year Ago ...8 Eighty-three Percent of Responding Realtors Expect Constant or Higher Residential Prices in the Next Year9 Buyer Traffic is Rising. Seller Traffic is Flat.9 Time On the Market is Falling...10 Distressed Sales Decline to 25 Percent of Market .11 Distressed Real EstateBelow Market Prices...11 Property Condition Also Affects Selling Price of Distressed Properties...12 Section 2: Buyer and Seller Characteristics Cash Sales: 28 Percent of Residential Sales......13 First Time Buyers: 34 Percent of Residential Buyers ......14 Buyer RelocationJob Changes....14 Residential Sales to Investors: 17 Percent of Residential Market. 15 Second Home PurchasesAt 11 Percent of Residential Marketl......15 Mortgage Down Payments..16 Realtors Continue to Report Rising Rents for Residential Properties.....16 International Transactions Three Percent of Residential Market....17 Section 3: Current Issues AppraisalsA Continuing Problem17 Tight Credit: Conditions.....18 Section 4: Recent NAR Articles Low Inventory Helps Push Prices Lawrence Yun...19 Housing Foot Traffic, A Moderating PatternKen Fears..22 Commercial Real Estate Rebound ContinuesFinancial IssuesGeorge Ratiu ....23

SUMMARY Confidence Continues Upwards

Gay Cororaton and Jed Smith The Realtors Confidence Index (RCI) Report provides monthly indicators on current conditions and the outlook for the residential real estate markets. The Report summarizes information pertaining to buyer/seller traffic, price trends, buyer profile, and issues affecting residential real estate based on responses of Realtors to a survey conducted for the period May 29 -June 8, 2012.1 This report summarizes conditions residential real estate conditions throughout the country and is drawn from the input of over 3,000 Realtors. Given that all real estate is local, conditions in specific markets may vary from overall national trends. The respondents comments generally indicate that the real estate markets around the country are continuing their recoveries in terms of sales and price2. Realtor confidence about current market conditions is rising for all types of residential property. The RCI-SF current index is at 57.5. The level of confidence in the markets for townhouses and condominiums is weak but trending up (an index of 50 reflects a moderate level of confidence while an index of 100 reflects strong confidence). Prices are also reported to be on the uptrend with 62 percent of Realtors reporting constant or increasing prices compared to the same time a year ago. Buyer demand is reported to be growing faster than supply, and many respondents are reporting multiple offers. The buyer traffic index is at 60.56, with the seller traffic index at 41.22. Many Realtors noted cases of multiple offers. 25% of Realtors reported making distressed sales (foreclosed and short sales), compared to approximately a third a year ago
May 2012 Realtors Confidence Index Current Conditions
70.0 60.0 50.0

SF: 57.5 TH: 36.0 Condo 29.4

40.0 30.0 20.0 10.0 0.0

SF

TH

Condo

1
2

There were 3,436 Realtor respondents to this survey with a sample size of about 50,000 Realtors. All real estate is local, so comments were varied, diverse, and in some cases contradictory depending on the respondents location.

Respondents continued to note problems associated with real estate transactions: There is a reported lack of inventory in many cases. REO listings are in some cases reported to be thin and the listings are not in good condition. Obtaining a mortgage continues to be difficult for individuals with lower credit scores or individuals with non-standard credit characteristics, e.g., self-employed. Thirty-three percent of Realtors reported appraisal issues. Realtors report having seen a wide range of appraisal values for the same property and that appraisals are not reflecting the pickup in prices. The short sale process continues to be slow and frustrating.

A growing number of respondents indicated cases of multiple offers, fewer seller concessions, and low inventories. Many respondents noted that correctly priced properties sell quickly. The RCI survey results are consistent with trends shown in the NAR data on Existing Home Sales (http://www.realtor.org/topics/existing-home-sales/data) and the NAR economic outlook (http://www.realtor.org/sites/default/files/reports/2012/economic-forecast-2012-0530.pdf), which outlines an economy expected to grow at 2.3 percent in 2012 (3.1 percent in 2013), creating 2.1 million jobs in 2012 (2.6 million jobs in 2013). The graph for Total Home Sales on a twelve-month roll (i.e., total sales for the current and previous 11 months reported monthly) shows a market with projections of existing home sales growth and modest improvement in prices based on continued economic expansion.

The media has discussed home prices in detail for the last four years. Most analysts and price metrics indicate that house prices are rising (see article Low Inventory Helps Push Prices by Dr. Lawrence Yun). The graph Prices By Month indicates that home prices have been headed towards stability.

Overall Market Outlook Realtors confidence about the outlook for the next 6 months is rising in all residential areas. The RCI sixmonth expectations indexes for all types of residential housing are also higher than the RCI-current conditions index.
May 2012 Realtors Confidence Index Six-Month Outlook
70.0

60.0
50.0 40.0 30.0 20.0 10.0

SF: 62.2 TH: 40.6 Condo 33.7

0.0

SF

TH

Condo

Continued increases in residential sales are projected along with continued price improvement, although both sales and prices will vary from market to market. There continue, however, to be risks to the market outlook:

Potentially Positive News Falling Inventories of homes for sale: Months supply is at 6.6 months compared to approximately 10 months in 2010. Lower Level of Distressed Sales if the current trend continues. Home Affordability: Continued low interest and inflation rates. Demographics: The U.S. population has expanded substantially in the past 10 years, but sales are at a level of approximately 10 years ago.

Potentially Negative News The economic recovery continues to proceed at a slow pace: job creation is positive but disappointing. Concerns about the Euro and domestic fiscal policies and their potential impact are an issue. Credit standards imposed by financial institutions in mortgage lending continue to be excessively stringent.

What Does This Mean For Realtors? This months RCI shows residential markets that continue to recover. Realtor confidence and price expectations are higher than was the case a few months ago. Rising rental rates have favorable implications for home sales. Time on market continues to decrease. Prices and interest rates continue to be lower than has been the case in the past. These are the reasons that we continue to view the outlook as favorable for home sales. Given that the typical homeowner will occupy a house for approximately 8 years after purchase and that home ownership is basically a lifestyle decision in addition to a financial commitment, one can make a very good case that this is a good time to buy a house, remembering that staying within a reasonable budget and acceptable mortgage is important.

Section 1: Market Conditions

Realtor Confidence The REALTORS Confidence Index is an indicator of housing market strength based on a monthly survey sent to over 50,000 real estate practitioners. Respondents indicate whether conditions are, or are expected to be "strong" (100 points), "moderate" (50 points), and "weak" (0 points). The results are the average score for each question. A score of 50 is the threshold between a "strong" and a "weak" condition. Realtor confidence in the market outlook is presented in terms of the current market and the market outlook for the next six months for single family, townhouse, and condo markets.

Single Family Properties: Confidence is RisingWell Above Moderate in May.

May 2012 Realtor Confidence Current and Six Month Outlook: Single Family Properties
70.0 60.0 50.0 40.0 30.0

Current: 57.5 Outlook: 62.2

20.0
10.0 0.0

Current Confidence

Confidence in Outlook

Townhouse Properties: Confidence Improving--Approaching Moderate in May.

May 2012 Realtor Confidence Current and Six Month Outlook: Townhouse Properties
50.0 40.0 30.0

Current: 36 Outlook: 40.6

20.0
10.0 0.0

Current Confidence

Confidence in Outlook

Condominiums: Confidence Still Relatively Low, But Improving Substantially as of May.

May 2012 Realtor Confidence Current and Six Month Outlook: Condo Properties
40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Current: 29.4 Outlook: 33.7

Current Confidence

Confidence in Outlook

Sixty-two Percent of Realtors Reported Constant or Higher Prices on Recent Transactions Compared to a Year Ago as of May. As reported in Lawrence Yuns article, many price indexes are reflecting an uptick in housing prices. This month 62 percent of respondents to the RCI reported constant price (30 percent of respondents) or rising prices (32 percent of respondents) compared to a year ago on a recent transaction.
Prices on Recent Transactions Relative to a Year Ago
33% 31% 30%
18% 16% 14% 14% 13% 14% 13% 12% 11% 22% 18% 14% 5% 6% 7% 2% 3% 3%

2012 Mar

2012-Apr

2012 May

Eighty-three Percent of Responding Realtors Expect Constant or Higher Residential Prices in the Next Year as of May. Realtors are reporting higher prices in many cases, with a majority of 83 percent expecting constant or higher prices in the next year.

REALTOR Price Expectations--Next 12 Months

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Buyer Traffic is Rising. Seller Traffic is Flat as of May. Buyer traffic is rising significantly, with the May index at 60.56, well above the moderate levelanother sign of market recovery. However, the seller traffic is flat, with the index at 41.22. This disparity could have an upward push to housing prices in the coming months if demand outstrips supply.

70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204
Constant/Rising Prices Falling Prices

Indexes of Buyer and Seller Traffic

Buyer: 60.56 Seller: 41.22

Buyer Traffic

Seller Traffic

Time on Market is Falling as of May. More homes are being sold in less than a month. Approximately a third of properties were on the market for less than a month when sold, and 57 percent were sold within 3 months.

Time On Market When Sold

35%

30%
25% 20%

15%
10% 5% 0% <1 mo 1-2 mo 2-3 mo 3-4 mo 4-5 mo 5-6 mo 6-9 mo 9-12 mo >=12 mo

May-11

Apr-12

May-12

Twenty three percent of homes were on the market 6 months or more when sold, down from 27 percent last month and 31 percent a year ago.

On Market 6 Months or More

31% 30% 30%
26% 28% 29% 28% 29% 28% 26% 28% 27% 23%

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Distressed Sales Decline to 25 Percent of Market in May. Distressed declined to 25 percent of total sales. About 44 percent of distressed sales were for cash over the past year.

Distressed sales go through several stagesthe initial overdue status for mortgage payments, the actual foreclosure by the financial institution unless sold in a short sale, and the final sale of the property, frequently by Realtors through the MLS. Currently Realtors in a number of markets are reporting shortages of inventories of distressed real estate: the markets are clearing distressed properties from the market at a rapid rate. The Existing Home Sales market is bifurcated, with distressed properties frequently being sold at significant discounts to market, frequently in subpar condition when going to market, and reported to be popular with investors seeking bargain prices. Investors pay cash in 69 percent of their overall purchases of properties (both distressed and non-distressed), in comparison to firsttime buyers who overall pay cash in 11 percent of their purchases. In the case of distressed properties with a seller who would like to close a transaction without waiting for the buyer to obtain a mortgage, an investor may be a preferable buyer. We have received many reports of investors obtaining a property even when a first-time prospective buyer has offered a higher price. Distressed Real EstateBelow Market Prices Price discounts for distressed properties declined in the current period, perhaps reflecting the gap between demand and supply. Distressed properties typically sell below the market price of comparable, non-distressed properties; the discount level fluctuates depending on sales location and types of properties. Foreclosures have been selling at approximately 20 percent below market: 18.5 percent as of May 2012.

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Short Sales have been selling at approximately 15 percent below market: 14 percent as of May 2012.

Distressed Real Estate Mean Percentage Discounts

25.0 20.0 15.0 10.0 5.0 0.0

201006

201010

201102

201106

201110

201202

200902

200904

200906

200908

200910

200912

201002

201004

201008

201012

201104

201108

201112

Foreclosed

Short Sale

Property Condition Also Affects Selling Price of Distressed Properties The discount to market experienced by distressed property is affected by the propertys physical condition. Well maintained properties tend to sell at a lower discount than is the case for properties in poor condition. The un-weighted average price discounts to market are presented for the time periods May 2011 through May 2012. Prices for distressed houses with above average condition are discounted at about 15 percent, with the discount increasing significantly depending on property deterioration.

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201204

Property Discounts as a Function of ConditionMonth of May

Section 2: Buyer and Seller Characteristics

Cash Sales: 28 Percent of Residential Sales The percentage of cash sales declined to 28 percent in May, from 29 percent in April. The proportion of cash sales is double the rate prior to the downturn of the housing market in 2008. The high preponderance of all-cash sales appears to be due to a number of factors: unrealistically high loan underwriting standards, a significant level of investor participation in the market, and sales of properties as second homes.

Cash Sales as Percent of Market

40% 35% 30% 25% 20% 15% 10%

5% 0%
200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204

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First Time Buyers: 34 Percent of Residential Buyers First time home buyers accounted for 34 percent of total buyers. Normally first time buyers are in the neighborhood of 40 percent of total residential sales, according to NARs Profile of Home Buyers and Sellers3. The proportion of first-time homebuyers hit a peak of about 50 percent in 2009. Realtors have reported that investors offering all cash-sales to sellers have crowded out first-time buyers in some cases, particularly in the case of distressed properties. Unsuccessful first-time buyers typically continue their property search, sometimes making a number of bids before securing a property.

First Tme Buyers as Percent of Total Buyers

60% 50% 40% 30%

20%
10% 0%

Buyers for Relocation/Job Changes: 15 Percent of Residential Market Realtors report that 15 percent of residential sales were to buyers for relocation purposesi.e., a job move, retirement, etc. Approximately 18 percent of relocation buyers pay cash.
Relocation Buyers as Percent of Market
14% 14% 13% 15% 15% 15% 15% 14% 14% 15% 13% 11%

In the 2011 survey, first-time homebuyers accounted for 37 percent of all buyers.

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204
12%
13%

14

Residential Sales to Investors: 17 Percent of Residential Market Investors accounted for 17 percent of total residential sales in May, down from about 20 percent in April and March. Investors have reported that in many cases they can obtain a positive cash flow converting properties to rental units. Realtors have been reporting that the market is able to absorb the large number of distressed properties coming onto the market, with sales to investors or first time buyers. In some regions Realtors report that the market would clear additional properties if available. Approximately 69 percent of investors pay cash.

Sales to Investors as Percent of Total Sales

30% 25% 20% 15%

10%
5% 0%

Second Home Purchases: 11 Percent of Residential Market

16%
14% 12%

10%
8% 6%

4%
2% 0%

201009

201010

201112

201201

201011

201012

201101

201102

201103

201104

201105

201106

201107

201108

201109

201110

201111

201202

201203

201204

15

201205

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204

Second Home Buyers as Percent of Market

Second home purchases accounted for 11 percent of residential sales. Approximately 56 percent of second home buyers paid in cash.

Mortgage Down Payments of at Least 20% Increase Mortgages with down payments greater than or equal to 20 percent rose to 37 percent of all residential transactions in May, up from 33 percent in April. Down payments of 11-19 percent have remained at 5 percent of transactions.

Percent of Transactions by Downpayment Levels

34% 37% 36%

32%

36% 35% 34% 35% 34% 34%

32%

34% 33%

37%

5%

4%

4%

5%

4%

5%

5%

4%

5%

4%

4%

5%

5%

5%

11-19%

>=20%

Realtors Continue to Report Rising Rents for Residential Properties Higher residential rents compared to a y ear ago were reported by 54 percent of Realtors. Lower rents were reported by 11 percent of Realtors. Constant rents were reported by 16 percent of Realtors. The continued trend of rising rents increases the value of homeownership.

Percent of Realtors Reporting Changing Rents Compared to 12 Months Ago

60% 50% 40% 30%

20%
10% 0%

Higher Rents

Lower Rents

Constant rents

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International Transactions: Three Percent of Residential Market Sales of U.S. residential real estate to foreigners not residing in the U.S. increased to 3 percent. Other NAR surveys have indicated that an additional 2 to 3 percent of residential sales are made to international customers residing in the U.S. Additional information on international activities is available at http://www.realtor.org/research/research/reportsintl. Approximately 71 percent of international clients pay cash.

International Sales as Percent of Market

5% 4% 4% 3% 3%

2%
2% 1% 1% 0%

Section 3: Current Issues

AppraisalsA Continuing Problem Appraisals continue to be a problem. The use of inexperienced/out-of-town appraisers and the use of distressed properties as comps in the case of non-distressed sales are cited as problems. Thirty three percent of Realtors reported having had a problem with an appraisal in the past 3 months. Approximately 10 percent of the respondents reported contract cancellation, 9 percent reported a delay, and 13 percent reported that the appraisal problems led to lower prices.

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Realtors Reporting Appraisal Problems With A Contract in Past 3 Months

50% 40%

30%
20% 10% 0%

Contract Cancelled

Contract Delayed

Negotiated to Lower Price

Tight Credit Conditions A number of respondents indicated that credit conditions continue to be too tight. Clearly interest rates are low, but the availability of mortgages appears to be significantly less than one would expect. We have received reports that financial institutions are interested in making loans only to those individuals with the highest level of credit scores. Allegedly this reluctance to lend is a result of excessively loose standards previously, which have left a number of major institutions with weak loan portfolios, which have encouraged regulators to scrutinize lending standards (thereby possibly providing an incentive for excessively high lending standards on the part of lenders), and which have resulted in a number of institutions significantly decreasing their overall lending efforts. Respondents noted that regional and community banks as well as credit unions were potential alternative sources of mortgages. A comparison of FICO scores for loan transactions as reported by Realtors responding to the RCI over the February/March/April time span compared with FICO scores reported by Fannie Maes Acquisition Profile by Key Product Featuresshowing lending conditions in the pre-boom normal housing markets of a few years ago-- shows that credit availability to lower scoring applicants appears to have declined. Realtors provided FICO information based on their understanding of the buyers credit situations; in many cases the information was estimated. Overall the data seem to substantiate relatively tight credit conditions.

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Section 4: Recent NAR Articles

Low Inventory Helps Push Prices--Lawrence Yun, Chief Economist Already home prices are turning up. Though many economists have been calling for no price gains or only very minimal gains over the next several years, a surprise upside looks to be quickly developing. First, lets review the data. NARs median price of all homes transacted in April showed a monthly gain of 7.6 percent. However, the median price is not a good reflection of genuine price appreciation of a persons home because it is influenced by which types of homes are getting sold during that period. If only the upper-end is moving, then the median price will be high. If only the lower-end, then the median price will be low. Also, April is the time when families with children start to buy and they typically purchase a larger-sized home that tends toward the higher price points. The median price, though it may not genuinely reflect an appreciation of a persons home, is nonetheless vital information for computing GDP contribution from home sales. There are many price indices that try to measure the price appreciation of a typical persons home. All have slightly different computation methods. But all are beginning to say the same story: that the worst is over and the prices are stabilizing or rising. The following table shows home price changes in the latest available month and what it would be if the monthly gains can be sustained over the next 12 months.

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REALTORs well understand that all real estate is local. Unlike commodities that can be easily shipped to any place, one cannot simply lift a home in Detroit and fly it over to San Francisco to exploit a price arbitrage. Local market variations therefore clearly exist, which REALTORS need to explain to their clients. Note that the latest available data is not June, the current month, because of the lag time in data collection process. It is worth noting that home price has an additional special lag that arises from the nature of the home buying process. The March data, for example, was the price negotiated and agreed to in November or December, if not earlier. So the most current house price information that is being flashed across newspapers and TV screens actually reflects what happened six or more months ago, when inventory conditions could have been measurably different than conditions now. What is occurring now is that inventory shortages are developing in increasingly more markets. The total number of homes with a for sale sign in April was 2.54 million. This figure is the lowest April tally since 2005. Recall that the housing market was booming and bubbling in 2005. We are not in a boom because one important difference between now and then is that housing demand is about one-third lower. Nonetheless, the current supply and demand dynamics is such that we are essentially back to normal. Historically 6-months supply of inventory is the norm and that is what we have been consistently experiencing for several months. Because the total inventory count do not measurably rise from April levels as we proceed through the rest of the year, the 6-months supply will stick and a 5-months supply is not out of the question. Such conditions imply home prices will be rising 3 to 5 percent annually.

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In addition to the falling inventory of existing homes, there is a dearth of newly constructed home inventory. The latest is only at 146,000 new homes for sale, it is at the lowest since the data was collected 50 years ago. The difficulties in obtaining construction loans by small-sized homebuilders are restraining growth in the industry despite the falling inventory conditions. The big builders like Lennar and Toll Brothers can issue bonds and tap Wall Street capital, but not the small homebuilders. The current rate of housing starts is less than half of historical annual average, and this low construction activity has been persistent from late 2008. Therefore, the pipeline of new home inventory is already very thin and is not filling in any notable way. This lack of new home construction will also play a bigger role in lifting home prices faster for at least the next 2 years than most analysts expect.

Finally, what about the shadow inventory those homes not yet on the market but that will surely land there given the large number of delinquent mortgages. There is clearly a shadow, but the current number of seriously delinquent mortgages (at least 3 months late or in foreclosure process) is smaller than what it was one year ago. One year ago, the shadow was smaller than two years ago. In other words, even the shadows are no longer a threat to home price growth. Based on steadily thinning out delinquent mortgages, the number of distressed property sales will fall to about one-quarter of all transactions by the year end from the current onethird. This time next year, distressed sales could comprise maybe only 15 percent. Therefore, the falling share of distressed sales over time will be another factor that lifts home prices. There
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is no reason to shop for a shadow inventory costume for next Halloween because it is no longer scary. In my view, the absolute low point in home prices has already passed in many markets. Home price measurements, due to lag time, will confirm that in the upcoming months. But given the rock bottom low mortgage rates and continuing low home prices, it is still a dandy time to be a homebuyer.

Housing Foot Traffic, A Moderating PatternKen Fears, Manager, Regional Economics and Housing Finance Policy A majority of the 145 markets monitored by NAR Research experienced slower foot traffic in May of this year relative to the same time in 2011. The data, provided by SentriLock, LLC., is based on the total number of REALTOR visits to properties as recorded on electronic lock boxes. Foot traffic was lower over the 12 months ending in May in 60% of the markets, while 35% expanded and 5% were unchanged. This moderating pattern, depicted in the diffusion index graphed below, suggests a broad based decline in the late spring following an equally broad based expansion in the last spring/summer of 2011 and early spring of this year.

While changes in foot traffic are closely related with the pending home sales index which is typically released a month later, movements in the diffusion index for foot traffic do not necessarily portend a shift in pending home sales or the magnitude of a change. Rather, the diffusion index just signals whether the decline or gain in traffic is felt by many or a few markets. In this case, there was a broad based surge of foot traffic in May of 2011 compared to
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2010, so what materialized last month in the diffusion index was a trend where many markets experienced a decline, possibly modest or large in magnitude, from last springs high levels. What might be driving this decline in traffic? The broad based nature of this decline suggests that it is something other than a counterbalance to seasonally strong sales in the spring due to good weather. The broad-based and precipitous decline in traffic since March is more likely due to changes in financing like the increase in mortgage insurance premiums at the FHA or dwindling inventories in local markets. Commercial Real Estate Rebound ContinuesFinancial Issues George Ratiu, Manager, Quantitative & Commercial Research Introduction Financial conditions, along with employment, are major drivers of the residential home sales market, as reported in the RCI report. Real estate credit continues to be tight, sometimes available on a limited basis even to residential buyers with strong credit scores. Similarly, credit is a problem in the commercial real estate marketsand is even tighter. This article discusses the Commercial Real Estate markets and credit issues. Market fundamentals are improving for commercial real estate, but credit availability continues to be a major issue. Commercial Real Estate Amid a backdrop of moderate-but-positive economic growth, demand for commercial space is rising and availability is declining across all property types. A main driver of the rebound comes from low levels of new construction in recent years, which have prevented a runup in supply. The other drivers are rising employment in office-using industries, increased international trade, and a housing market which has turned many owners into renters. For office properties, net absorption is expected to total 24.7 million square feet this year, leading to a projected 16.2 percent vacancy rate for the year. The 40 basis point (bps) decline in vacancy is likely to be accompanied by a 2.0 percent rise in rents. Absorption in the industrial sector is expected to reach 44.1 million square feet this year, resulting in a 100 bps drop in the vacancy rate and a 1.6 percent rent rise. The retail sector is still working through the fallout from the recession and the glut of inventory that was dumped on the market by bankrupt conglomerates. Demand is likely to exceed 8.0 million square feet this year. Retail availability will likely decline to 1.2 percent for the year (from 12.5% in 2011), and rent growth will get close to 1.0 percent. The apartment rental market is the clear standout in the commercial sector. With lower homeownership levels and a rising population, demand for apartments is growing. Net absorption is expected to reach 215,871 units this year, driving the vacancy rate to 4.4 percent (from 5.2% in 2011). Rent is projected to rise 4.0 percent this year and an additional 4.1 percent in 2013, putting apartment properties on the must-have list for many investors.

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Credit Issues Lending for commercial properties continues to remain tight in REALTOR markets. This is especially pertinent for small businesses and investors looking for properties in secondary and tertiary markets. In the wake of the post 2008-09 recession shakeout and new regulatory environment, large banks have been reluctant to underwrite commercial real estate investments. In addition, smaller local and community banks, whose concentration of commercial properties composed a large portion of their portfolios, have also taken steps to reduce their exposure. According to the REALTORS 2012 Commercial Lending Survey, almost 70.0 percent of commercial REALTORS reported having a deal fail due to financing issues, over the past 12 months. In addition, 75.0 percent of REALTORS mentioned that lending standards are as tight, or more stringent than a year ago. Adding to tight underwriting, down-payment conditions also require substantial commitment72.0 percent of closed sales required a down-payment larger than 20% to secure financing, with 7.0 percent of loans requiring 50%-60% loan-to-value ratios. Not surprisingly, cash transactions accounted for almost 30.0 percent of sales. Outlook The first quarter data provides welcome news for commercial real estate. However, it is obvious that the road ahead reserves plenty of bumps. An easing of credit conditions would be very beneficialboth to residential and to commercial markets. For more information about commercial real estate research, visit http://www.realtor.org/research-and-statistics/research-reports/commercial-real-estate.

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