Rental Market Tightens Even Further

It will be no surprise to most that the rental market continues to experience very low vacancy, and very high occupancy rates in the current market cycle.  Our many sources indicate a broad continuation of this trend.  Those seeking rentals, especially in higher end properties, should expect to see available units rented quickly.  Those who plan ahead and maintain close contact with providers will have more and better options, and can act quickly when time is of the essence.  

 Axiometrics forecasts U.S. apartment occupancy to reach 94.9% by the end of 2013, and effective rent growth to measure 3.6%. The occupancy forecast is 0.6% above the 2012 rate but the rent growth forecast is 0.2% below the 2012 rate. Why?  Because more supply is coming into the rental market through both new building and continued growth of REO to Rental homes.

Our research has identified a clear correlation between file notice and results.  An increase of only a few days in the amount of time between the initiation to the supplier and the tour date can increase rental placements by 30%.  Conversely, an urgent (as opposed to “rush”) file presents a far higher chance that an assignee will have a less than excellent experience.  So don't let those rental files accumulate until Friday afternoon, then send them along and expect the best results.  You know who you are ....

Gettysburg

"The greatest battle ever fought on the North American continent began over shoes."  With these words, Ken Burns introduced his PBS Civil War episode on the pivotal Gettysburg campaign.  Lee once again invaded the North hoping to further damage Northern morale and perhaps encourage British and French sympathy.

He was taking great tactical risks, operating out of touch with his supply line.  His first target was the important railhead of Harrisburg PA, northwest of Philadelphia and, more important, Washington.  Union army commander Geoge Meade shadowed Lee's army as it marched north in late Spring into early summer, keeping his troops between Lee and the capital.  Only a few miles separated many Confederate and Union units, and cavalry skirmishes were frequent.

When lead elements of Lee's army arrived north of the small town of Gettysburg, they headed toward Gettysburg to ransack the local shoe factory.  But, they unexpectedly clashed with Union advance units.  Both armies rushed reinforcements into the area and by the end of the day on July 1, fighting had ensued and the rebels held the advantage. 

The key to breaking the Union line was a small hill on the left flank forever after known as Little Round Top.  Union soliers of the 20th Maine arrived first and withstood several assaults by Alabama boys.  Finally, nearly out of ammunition, Colonel Joshua Lawrence Chamberlain, ordered his men to fix bayonets.  As the rebels swelled up the hill again, the Mainers executed a perfect bayonet charge and swept the attackers off the hill.

Fighting raged at various locations around the huge battlefield.  In each case the Union was able to hold on so that by nightfall on July 2nd, there was a stalemate.  Reinforcements were on the way for Union armies, but no such luck for Lee.  So, on that fateful July 3, Lee ordered General Longstreet to send Pickett's entire division across a wide field and into a fortified Union position.  Of course, Pickett's charge failed and Lee lost the battle.

But, Lee once again got away to fight again.  Both sides together suffered 50,000 killed, wounded and captured - twice Antietam's casualties.  Lee had lost nearly one third of his army and had to race back to the Virginia border to safety.

It was a great Union victory, and most historians consider it the turning point in the war.  The South would never again mount an aggressive offensive campaign outside its borders.  But the war would still last another 22 months.

In November 1863, Lincoln traveled to Gettysburg and presented his famous Gettysburg Address in a ceremony to honor the soldiers who died on those 3 bloody days.  But there were still more bloody days ahead.

The Father of Waters

While Meade and Lee clashed at Gettysburg, Grant was tightening his noose around Vicksburg, the Mississippi River fortress city.  Confederate General Pemberton and 30,000 rebels had been under siege for months.  To escape Union artillery, residents had moved out of the city and into burrows and caves dug into hillsides.  Visitors said some looked not much different than your living room, except in a big gopher hole.

Situated high above a bend in the Mississippi, and protected by marshes, Vicksburg was the last major Confederate stronghold on the river.  By holding it, and the threat of its huge guns aimed at Union ships, the Confederacy prevented the Union from controlling the river.  New Orleans had been in Union hands since early in the war, and upriver the forts had been subdued by Grant in early 1862.  Just above New Orleans, Port Hudson continued to harass and damage Union gunboats.

But as June ended, Vicksburg's fate looked inevitable.  There was no way to break out, ammunition was low, food was scarce, and Union troops kept moving closer with each passing week.  On July 4, one day after Lee's defeat at Gettysburg, the Vicksburg garrison and city surrendered to Grant.  A fine Independence Day gift to President Lincoln.

Five days later, hearing that Vicksburg had surrendered, Port Hudson's commander Gen. Gardner surrendered too.  From this date to the end of the war, the Union controlled the Mississippi for its entire course.  The Confederacy was split, isolating Texas, Arkansas and Louisiana from the other 8 rebel states. 

Lincoln's announcement of Union success was characteristically biblical in tone: "The father of waters once again flows unvexed to the sea."  (compare that eloquence to our politico crowd of today)
Grant would next move northeast to help the Union recover from the terrible loss at Chickamauga, and lead a Union victory at Chattanooga in the fall.  As 1863 ended, the war in the west was over, and Lincoln could concentrate his efforts on destroying the Army of Northern Virginia and Robert E. Lee.

Real Estate Recovery

For the first time since the real estate collapse, we have seen several indicators move up at the same time.  The most persuasive generally are the new building permits and the Case/Shiller index showing 19 of 20 markets moving up.  Mr. Shiller, who famously warned of a real estate bubble in 2004, was interviewed yesterday about his views on the index results.  He was notably cautious and said if the numbers continue to move up like this he will be optimistic.

We should respect his views and the authority with which he wields it (I know it's hard for you Harvard men and women to defer to an Eli from New Haven).  We have many indices to consult on home values, including FHFA tracking of 379 real estate markets.  In our business, we don't have the luxury of relying on national or regional trends.  We're focused on local influences, and fortunately there are tools to help there. 

Other factors constrain us - or at least add complexity.  For example, Millenials (those born after 1982) prefer renting.  The rental market, even for single family homes, is hot with prices rising and supply short in most places.  We have to factor rental market influences both as a preferred lifestyle alternative, and on how they affect home sales.  Some have told me they wish appraisers had paid more attention to the rental v. home price gap in markets like Miami prior to 2008, and that we should take a lesson from that experience. 

We also have to keep in mind that millions of foreclosures, delayed due to several influences, are once again entering the pipeline.  Since about a third of these are suburban homes, be on the lookout for activity and concentrations in markets your clients move people into and out of.  There is good data on this activity from several government websites, and from RealtyTrac.

All in all, despite the fits and starts of past predictions that recovery was underway, my view is that we are in a slow climb nearly everywhere.  Except for local influences that might bring a market down (a plant closing, base closing, storm impact), we should see continuing modest improvement.  As I wrote in early 2009, the Fed will continue to keep rates low and mortgage rates will be at or near historic lows for a long time to come. 

I'd like to hear your views.

REO Rental Initiative Update

Now that the Federal Reserve has given a go-ahead to the REO to Rental initiative, investors and lenders may proceed with more confidence.  FHFA, Fannie and Freddie's regulator, has responded to questions about the program and the first pilot of 2500 properties in several states.  They have named 3 main goals of the program: 

- Gauge investor appetite for bunches of homes
- Will the initiative persuade investors and service providers to improve market conditions for real estate
- Can the model be replicated and become a "standard" program for REO sales

What does this have to do with relocation?  Not sure, but bulk sales of properties have to influence local markets, and valuations must account for them.  National and regional statistics on home values have to take into account these sales.  And, these homes may be an attractive alternative to a relocating family that needs space and is stuck with an underwater departure home.

Younger folks are renting anyway in bigger numbers - rising rents and higher occupancy practically everywhere.  Keep an eye on the FHFA program and make adjustments as needed.  You may find the markets used for the 2500 home pilot at fhfa.gov.

Homes for Rent from your friendly Fannie Mae

As many of you know, Fannie Mae and Freddie Mac have embarked on a national initiative to turn the foreclosed homes and condos they own into rental properties.  The idea is to attract investors to purchase or merely rehab the homes and offer them for rent in this robust rental market.  The two entities own about 240,000 homes!

The RFI issued in September generated 4,000 responses, and FHFA (Fannie and Freddie regulator) recently announced a pilot program.  The investor will purchase homes, rehab them and offer them as rentals in certain locales.  If the pilot is successful, most observers predict the program will be rolled out across the nation.  The Federal Reserve just last week chimed in and blessed the idea as acceptable management of REOs (bank-owned homes).

Since rental occupancy is high and rents are increasing, the entry of the Fan and Fred homes should help the supply/demand situation.  A rehabbed, rented home is a better influence on a neighborhood or local market than an empty, perhaps boarded-up home.  The taxpayer investment in Fan and Fred ($150 billion) may perhaps realize a payoff (of sorts) if the intiative works - especially since younger folks seem more inclined to rent, less interested in buying.  And, if home value appreciation continues to be slow, at least cash flow from a tenant creates value for the investor, for Fan & Fred and, presumably, for lenders who take a similar approach with their own REO homes.

There are about 600,000 such homes on lenders' balance sheets, and another 700,000 currently in foreclosure.  We're not out of the woods yet, but maybe this effort will ease some of the gravity weighing on the housing market.

Chancellorsville

Now that the slaves were considered free in all of the Confederate states, the war for many became a crusade.  Any slave who escaped to the Union lines was declared a free person; often they immediately volunteered to fight for the Union.  However it took a while before blacks would wear the Union uniform.  The film Glory depicts the brief history of the 54th Massachusetts regiment, the first all black unit in the Union.

Lincoln once again changed commanders after Ambrose Burnside disappointed his superiors.  Fighting Joe Hooker, an aggressive corps commander at Antietam, was promoted to command the Army of the Potomac.  His orders were to destroy Lee's Army of Northern Virginia, and was given vast resources to complete his task. He devised a very sound plan to trap and destroy Lee. 

He moved the army into Virginia and crossed the Rappahannock River in April with a force fully 30,000 men larger than Lee's army.  In early May he began execution of his plan to flank Lee near Chancellorsville and destroy the Confederate force once and for all.  But Lee, taking great risks, divided his smaller army not once, but twice and outmaneuvered, surprised Hooker's flanking force.  Lee's army, led by the audacious, pious General Stonewall Jackson, drove the Union force back in disarray.  Hooker was stunned when a shell slammed into a porch he was standing on and took him out of the battle.  But he was completely unnerved by that time and later apologized to Lincoln for his failure.

Chancellorsville is considered Lee's masterpiece.  His tactical brilliance and exceptional use of resources are still studied at military academies today.  Prussian observers were so impressed with Lee's management of the army that they incorporated much of what they learned in their 1870-1 victory over France.  Lee's stunning success further added to his gathering legend, and added to Union morale problems. 

But Lee suffered one loss that would have profound impact throughout the rest of the war.  On the evening of the second day of the battle, Stonewall Jackson was shot by friendly fire as he inspected the lines.  He died a few days later, and his last words were reported as "let us cross over the river, and rest under the shade of the trees."

Nevertheless, Lee decided the time was right to invade the North again. He prepared to strike north and west of Washington toward the important railhead of Harrisburg PA.  The stage was set for Gettysburg, the greatest battle ever fought on the North American continent.