The Business Lending Market Environment in 2015: California and Comparison to Key Cities
In March 2015, the National Association of Realtors (NAR) randomly surveyed 49,485 realtors and asked them about housing market conditions in their particular state over the past year. 791 people – 1.61 percent – responded. As a real estate agent working in California, I found it informative to go through the different reports, categorize them into hard and easy conditions, and summarize in comparison to California real estate conditions during 2015.
Commercial lenders, investors, or anyone interested in buying or selling property may find this analysis informative and interesting. Here it is.
Some states found the market environment feasible.
Some states, like Illinois, considered 2015 a boom time for real estate. Agents in Chicago revealed in opportunities.
This broker said this:
[… ] The best market in my 40 year history. These are the “good old days”! – Tennessee Property taxes are out of control, especially for commercial properties.
But another added
Property taxes are out of control, especially for commercial properties.
Other states suffered from their market environment.
There were the common complaints: recession, economic uncertainty, rising prices, overcoming delinquencies, homes languishing due to unaffordable prices, or struggling or unstable markets.
Said this agent in New York:
Economic uncertainty is a third option close to point 3 above. The ‘local’ commercial investor continues to be heavily affected by the recent recession. There is still significant vacancy for many ‘neighborhood’ centers.
And other:
We live in a distressed area, which makes it very difficult to start or maintain a business in small town America.
Montana in 2015 was another expensive area. Estate agents there noted:
Diminishing rates of return. The current 7% is reduced by low annual increases to the point that leases are a detriment the longer they are in place and that hurts a bank and buyer who are attracted to them. Net present value of the future yield of the dollar: 10% every 5 years ends up being a loser in the long term, since it cannot be maintained even with a historical inflation of 3% or 4%.
fussy lenders
Other states this past year saw picky lenders who were more reluctant to lend. Much of this was due to more stringent government regulations and increased consumer protection that was especially strained for residential property.
In Missouri, for example, real estate agents mentioned that:
Subject Property and Borrower’s reduced net operating income, securities and equity positions (higher equity contribution to the transaction and lower loan-to-value) have a HUGE impact on the decisions lenders are considering and making. Money does NOT seem to be the problem.
Government regulations have been on their side and, while definitely helpful to the borrower, they have proved provocative for private lenders. In North Carolina, this is what representatives of the real estate industry had to say about their situation:
Dodd-Frank has made letters for the sale of estates, the house must be valued at 35% of the sale price.
And said another in Indiana:
Government overregulation stifles growth.
The private lending industry has grown by leaps and bounds in the past year, but apparently the larger the private lending market, the stronger the federal government’s grip. Florida saw the worst in 2015. (These next few months do not forecast any better.) Said a broker who works in Miami:
Future Flood Insurance Rates are a Big Issue in Florida Commercial Real Estate
The Market Environment in California in 2015
California home prices topped all the charts and went off the charts. For one thing, the land was packed with architectural designs and attractive buildings, some of which were erected by the most famous names in the field of architecture. Wealthy expats and foreigners flocked to the land and took money out of their pockets to buy buildings. The buildings included houses and commercial properties. Prices in general rose to new heights.
In most California cities, supply increases space. Apartments were the in-demand stock, probably because they were the most affordable. But even here, one had to be relatively wealthy to afford them.
Housing in California has long been more expensive than most of the rest of the country, but between 1970 and 1980, California home prices went from 30 percent above US levels to more than 80 percent more. Today, an average home in California costs $440,000, about two and a half times the national median home price ($180,000). Additionally, California’s median monthly rent is about $1,240, 50 percent higher than the rest of the country ($840 per month). And prices are expected to rise (albeit slightly) next year.
Additionally, there is not enough housing in the state’s major waterfront communities to accommodate all the households that want to live there. This competition drives up house prices and rents. Some people who find coastal California unaffordable turn to inland California communities, causing prices there to rise as well. In short, California became famous for its expensive homes, leading experts to predict a housing bubble that would surpass the 2006 one in scope and intensity. (But whether this is so remains debatable.)
High home prices here also put homeownership out of reach for many. Faced with expensive housing options, workers in California’s coastal communities commute 10 percent more than workers elsewhere, largely because there are limited housing options near major work centers. Californians are also four times more likely to live in overcrowded housing, leading at least one private commercial lender working in California to note that:
Vacant land is always a problem.
