By George Ratiu
Manager, Quantitative & Commercial Research
National Association of Realtors®
As a recent article in the Wall Street Journal pointed out, major banks are taking a passive approach to mortgage lending. As the article denotes, they choose to stay on “cruise control” mostly keeping originations tight, while generating great revenues from refinancing activity. While this makes good business sense for the banks, it does not provide enough liquidity for a real estate market—both residential and commercial—which still needs capital to strengthen its recovery.
On the residential side, evidence of tight underwriting standards is not hard to find. Based on responses to NAR’s monthly Realtors® Confidence Index survey, buyers with FICO scores of 740 and higher accounted for over 50 percent of the market in February and March of this year. In addition, the percentage of home purchases made with cash has been steadily rising, from about 20 percent of all sales in 2008-09 to over 30 percent of sales during the first quarter of 2012.
More poignantly, the percentage of first-time homebuyers paying all-cash for their home purchase has also being growing. During 2009, only 6.8 percent of first-time buyers paid cash for a home. That ratio rose to 9.5 percent in 2010 and 10.6 percent in 2011. During the first quarter of 2012, first-time buyers who paid cash made up 11.3 percent of all sales.
On the commercial side of real estate markets, fundamentals have certainly turned the corner in 2011 and are poised for a welcome rebound this year. However, lending standards for commercial properties have certainly registered a two-tiered environment, split along valuation lines. For small business and smaller properties lending standards continued tightening over the past year, leading to failed transactions and unsold properties.
Properties priced at $2.5 million and above have recorded a good year in 2011, totaling $205.8 billion in sales. The capital drivers for many of these deals came from major banks, insurance companies, institutional investors and equity funds. However, for the universe of properties below the $2.5 million line—which account for the largest number of properties traded—the past year has been quite different. Based on the 2012 Realtors® Lending Survey, 85 percent of commercial transactions were for properties priced at $2.0 million and below. The main capital funding sources for these transactions have been small local and regional banks, small private investors and the Small Business Administration.
Given the realities of the markets and the tight lending requirements, almost 70 percent of Realtors® involved in commercial transactions reported a failed sale due to lack of financing. Not surprisingly, the proportion of all cash purchases was close to 30 percent. Commercial brokers and agents find themselves in an environment in which available capital would go a long way towards broadening the base of the recovery.
The good news is that with a continued macroeconomic recovery, real estate markets will see improved conditions. For the residential sector, affordability conditions are at records highs and a growing population coupled with rising household formation should provide a boost to sales. For the commercial sector, strengthening fundamentals should improve asset values and result in higher sales. However, in the short to medium term, overly stringent bank underwriting standards are likely to provide headwinds in the markets.
Over the last few years the use of social media has grown by leaps and bounds across all industries. Every day we are exposed to some kind of social media advertisement, whether it is a local or national business advertising on television suggesting we can visit their Facebook page or maybe even follow them on Twitter.
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