The BAN Report: Weak ISM Data Stokes Recession Fears / Hipsturbia / Manhattan Apartment Sales Tumble / Appraisal Relief Finalized-10/3/19
Weak ISM Data Stokes Recession Fears
The Institute for Supply Management (“ISM”) released its reports this week on both the manufacturing and non-manufacturing sector, indicating slowdowns in the US economy. For the second consecutive month, the manufacturing index showed contraction and reached its lowest level at 47.8% since June 2009. Any reading under 50% means growth is contracting.
“Comments from the panel reflect a continuing decrease in business confidence. September was the second consecutive month of PMI® contraction, at a faster rate compared to August. Demand contracted, with the New Orders Index contracting at August levels, the Customers’ Inventories Index moving toward ‘about right’ territory and the Backlog of Orders Index contracting for the fifth straight month (and at a faster rate). The New Export Orders Index continued to contract strongly, a negative impact on the New Orders Index. Consumption (measured by the Production and Employment indexes) contracted at faster rates, again primarily driven by a lack of demand, contributing negative numbers (a combined 3.3-percentage point decrease) to the PMI® calculation. Inputs — expressed as supplier deliveries, inventories and imports — were again lower in September, due to inventory tightening for the fourth straight month. This resulted in a combined 3.3-percentage point decline in the Supplier Deliveries and Inventories indexes. Imports contraction slowed. Overall, inputs indicate (1) supply chains are meeting demand and (2) companies are continuing to closely match inventories to new orders. Prices decreased for the fourth consecutive month, but at a slower rate.
“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth,” says Fiore.
Today, the non-manufacturing sector report came out at 52.6, lower than the consensus expectations of 55.3. The non-manufacturing is still expanding, but the trend is negative. This was the weakest reading since August 2016.
According to the NMI®, 13 non-manufacturing industries reported growth. The non-manufacturing sector pulled back after reflecting strong growth in August. The respondents are mostly concerned about tariffs, labor resources and the direction of the economy.”
The 13 non-manufacturing industries reporting growth in September — listed in order — are: Utilities; Retail Trade; Construction; Mining; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Public Administration; Management of Companies & Support Services; Finance & Insurance; Transportation & Warehousing; Information; Health Care & Social Assistance; and Professional, Scientific & Technical Services. The four industries reporting a decrease are: Educational Services; Other Services; Real Estate, Rental & Leasing; and Wholesale Trade.
In 2018, US GDP was 69% personal consumption, 18% business investment, 17% government spending, and negative 5% net exports. While weakening business investment often reduces consumer spending, the strength of the US consumer will determine where this economy goes. If the US consumer holds up, its hard to say the US slipping into a recession, but if consumer spending contracts, a recession is inevitable.
This weak business data raises the stakes for the US / China trade negotiations next week. Growth in China is slowing and Chinese consumers are saving more and spending less. Conditions should appear ripe for a trade deal, but both sides have been unpredictable. Continued speculation on the ups and downs of the US/China trade negotiations will continue to dominate global markets for the foreseeable future.
PWC and the Urban Land Institute have released their annual forecast on real estate. Entitled “Emerging Trends in Real Estate,” this annual survey is a great barometer on attitudes on real estate. This year’s forecast introduced a new concept – hipsturbia.
It hardly seems possible that it has been 25 years since Emerging Trends began to discuss the live/work/play environment under the rubric of the “24-hour city.” But that is a fact. Cities and their suburbs have evolved tremendously since the mid-1990s, and the “proof of concept” of live/work/play has long since been established in the sociological sense of lifestyle preferences and has also been validated in terms of superior real estate investment returns.
Success has a way of spreading, and 24-hour downtowns have provided replicable models that many suburban communities are seeking to emulate. From dense northeastern cities like Philadelphia, to Sun Belt giants like Atlanta, to boutique markets like Charleston, our interviewees and focus groups have uncovered the desire of suburbs to create their own versions of the live/work/play district. There is a term of art being heard to capture this concept: hipsturbia.
Many of these “cool” suburbs are associated with metro areas having vibrant downtowns, illustrating the falsity of a dichotomy that pits central cities against ring communities. One of our Jacksonville, Florida, respondents noted, “You can’t be a suburb of nowhere.” Even in an enviably active small downtown, such as Charleston, South Carolina, our focus group related, “People want to work in a mixed-use environment,” even as they seek more manageable housing costs than in the booming center of town.
Leading hipsturbias cited included Brooklyn, NY, Hoboken, NJ, Santa Clark, CA, and Evanston, IL. With recent census data suggesting that millennials are leaving downtowns, many are projecting these types of suburbs will benefit disproportionately, as they can offer many downtown amenities at a more favorable price point. Additionally, we have argued that downtowns are doing a poor job at providing home ownership options to millennials.
Manhattan Apartment Sales Tumble
According to the Wall Street Journal, home prices on Manhattan apartments plummeted in the third quarter to the weakest levels in 4 years.
The Manhattan co-op and condo market had been in a slump for several years as buyers resisted many sellers’ overly optimistic prices, according to Gregory J. Heym, the chief economist for brokerage firms Halstead and Brown Harris Stevens. He said that the gap between buyers and sellers was now shrinking.
“The data is terrible,” he said. “Even with the rush before the taxes and hangover afterwards, we are still in a sluggish market.”
The declines for properties selling for $2 million or more was striking, illuminating the powerful impact of tax increases even on very affluent buyers.
During the second quarter, the median price of a Manhattan apartment rose 19.3% to a record of nearly $1.4 million, after accounting for a rush of sales during the last week in June. But in the third quarter, the median price fell to just over $1 million, a decline of 25%, to the weakest pricing since 2015. The figures include sales filed with the city as of Sept. 27.
The average price of a Manhattan apartment fell to $1.7 million from just under $2.5 million in the second quarter, a decline of 32.4%.
Some of the volatility is due to increased state and local transfer taxes, which saw increases in July. Some are calling this the worst real estate market since 2008. According to an analysis by the New York Times last month, one in four of the new condos built since 2013 are unsold. In addition to a potential slowing economy, it has been more difficult for foreign buyers to launder money by purchasing luxury apartments.
Appraisal Relief Finalized
It’s been a tough week, so glad to report some good news! This week, the Banking Agencies finalized a new rule that allows banks to avoid appraisals on transactions under $400,000. Banks can obtain evaluations instead.
The appraisal threshold was last changed in 1994. Given price appreciation in residential real estate transactions since that time, the change will provide burden relief without posing a threat to the safety and soundness of financial institutions.
For transactions exempted from the appraisal requirement, the final rule requires institutions to obtain an evaluation to provide an estimate of the market value of real estate collateral. Evaluations are generally less burdensome than appraisals and have been required since the 1990s.
The final rule incorporates the appraisal exemption for rural residential properties provided by the Economic Growth, Regulatory Relief, and Consumer Protection Act and similarly requires evaluations for these transactions. The final rule also requires institutions to review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice.
The agencies have consulted with the Consumer Financial Protection Bureau (CFPB), and, as required by statute, have received its concurrence on the increased threshold. The CFPB released its letter concurring that the increased threshold provides reasonable protection for consumers who purchase 1-4 unit single-family residences.
Effectively, this means that a $399,000 loan will on a residential property will not require an appraisal. Additionally, rural residential properties (defined in 12 CCR 1026.35) are exempt as well. In 2010, the Agencies defined what needs to be in an evaluation.
An evaluation must be consistent with safe and sound banking practices and should support the institution’s decision to engage in the transaction. An institution should be able to demonstrate that an evaluation, whether prepared by an individual or supported by an analytical method or a technological tool, provides a reliable estimate of the collateral’s market value as of a stated effective date prior to the decision to enter into a transaction.
BPOs are excluded as acceptable alternatives. We have only seen a few banks use internal evaluations, so it remains to be seen whether other banks will develop their own internal evaluation systems. Banks could save their customers money and time if they adapt internal evaluations.