Michigan can't collect transfer tax from Fannie Mae/Freddie Mac

In 2011, Oakland County and Genesee County filed class-action suits against the firms that won nearly $200 billion in U.S. bailouts to collect real estate transfer taxes.

Oakland County said it was owed millions of dollars in transfer taxes, largely from the sale of foreclosed property by the two government-sponsored enterprises. U.S. District Judge Victoria Roberts wrote a March 2012 opinion ordering the firms to pay the taxes. Her ruling was reversed. The county said the two firms may have recorded thousands of deeds without paying any transfer taxes.

In a unanimous decision by a three-judge panel, Appeals Judge David McKeague reversed a lower court ruling that had upheld the right of the counties and state to collect the taxes.

Congress expressly said government-sponsored housing corporations the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., Freddie Mac, along with the Federal Housing and Finance Agency, were exempt from all taxes. The counties — joined by the state of Michigan — argued that when Congress exempted them from “all taxation,” it didn’t mean to include state and local transfer taxes.

“Because the statutes are clear, we are not in a position to second-guess Congress and create a new exception in the statute for state and county real estate transfer taxes,” said the opinion written by McKeague, who was a federal judge in Grand Rapids before being appointed to the federal appeals court bench by President George W. Bush in 2005.

Michigan imposes a $7.50 fee per $1,000 in value on the property sold; counties impose a $1.10 per $1,000 in value of the property fee. They are paid at the time a deed is recorded, when ownership of a property is transferred.

Fannie Mae and Freddie Mac step in when a property is foreclosed as the purchaser or entity that guarantees 65 percent of the nation’s new mortgages. After the housing market collapsed in 2008, Congress seized the two publicly traded firms as part of bailouts nearing $200 billion and placed them in conservatorship.

In July 2008, Congress created the Federal Housing Finance Agency to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. As of September 2010, the combined debt and obligations of these government-sponsored enterprises totaled $6.7 trillion

The opinion was joined by Judge Boyce Martin Jr., an appointee of President Jimmy Carter, and Ralph Guy, a former lawyer for the city of Dearborn named to the appeals court by President Ronald Reagan.

Morris Hagerman is a local real estate agent with Real Estate One in Royal Oak, Michigan.  He serves Berkley and the other Woodward 5 communities, including Ferndale, Pleasant Ridge, Royal Oak and Huntington Woods.  Hagerman is also a member of the Berkley/Huntington Woods Area Chamber of Commerce.  You can contact him by phone at 248-854-8440, email at morrishagermanproperties@gmail.com or visit his web page.

Investing in real estate

Prepare for the Next Real Estate Bubble

Elliot M. Ogulnick and Harry C. Steinmetz 05/20/2013

The most recent real estate bubble burst between 2007 and 2008, under the weight of a market saturated with overpriced properties and subprime mortgages. Unfortunately, this bubble likely won't be the last. When real estate values again spike to unsustainable levels, will you (and your clients) be prepared? What methods should real estate owners and investors use to establish accurate values for their properties before a bubble and what issues should they be prepared for if properties fall into bankruptcy?

2007-2008 Real Estate Bubble Background

A significant financial spur to the housing bubble was a sharp drop in mortgage rates. The average fixed rate mortgage declined from 8.0 percent in 2000 to 5.5 percent in 2003. Since typical home purchasers target a price range based on monthly mortgage payments, this decline in mortgage rates enabled them to borrow 25 percent more at the same monthly cost. In 2000, the 20-city average housing price index compiled by S&P/Case-Shiller rose by over 12 percent. In July 2006, housing prices had increased by 65 percent and began a slow decline that quickly gained momentum and was further impelled by the October 2008 stock market crash. By January 2009, housing prices had declined by almost 30 percent.

What made the 2007-2008 burst so painful? A sizable bubble requires leverage.

If a bubble is fueled only by cash, its rise will be self-limiting. However, during the 2001 to 2007 run-up to the crash, banks were complicit in the process. Debt allows even relatively illiquid investors to enter the market. The lower the interest rates, the higher the allowable debt limits. Variable rate and interest-only loans raised the limits even higher. If down payments can be eliminated or borrowed, then the limits to investment are further reduced. The advent of mortgage-backed securities allowed all of this new debt to be processed and resold in a fashion that facilitated the process and resulted in a horrible mess when the day of reckoning inevitably arrived.

Tax incentives and generous capital gains treatment further fueled the process. The Tax Reform Act of 1986 eliminated the deductibility of credit card interest, which resulted in increased use of home equity loans. The Taxpayer Relief Act of 1997 eliminated the onetime $125,000 capital gains exclusion for sellers over 55 and replaced it with a $250,000 ($500,000 for couples) exclusion that could be claimed every two years regardless of age. The 2003 reduction in the capital gains rate from 20 percent to 15 percent also boosted net profit potential.

What Drives a Real Estate Bubble?

The same conditions that contribute to a bubble can also sustain and accelerate it. The low interest rates that enable investors to assume massive levels of debt result in very low returns for any nonspeculative investments. Investment grade bonds barely keep up with inflation. The return on CDs and savings accounts drops so low you may as well keep it in a mattress, or better yet, buy more real estate. One of the most insidious effects of a growing residential bubble is the gradual shift in attitude that results in homeowners believing that they actually own and control the unrealized equity in their house. As this optimism spreads to their "investment" property, individuals begin to experience the "wealth effect" and spend accordingly.

The view that inflation will increase, spurring real estate prices even higher, motivates buyers to purchase during a bubble. However, if demand suddenly plunges, prices drop almost overnight. This leaves the last buyers with no equity in the properties they purchased, especially if they financed those purchases with either de minimis down payments or none at all.

As discussed above, the most recent real estate bubble was fueled by a number of factors, including:

• lax credit practices coupled with ineffective policies and procedures employed by lenders to control risk;

• incorrect credit ratings assigned to pools of securitized assets; and

• unscrupulous mortgage origination methods.

In addition, this period saw the final dismantling of the Glass-Steagall Act, created after the Great Depression to segregate the banking and securities industries.

Overview of Today's U.S. Real Estate Market

In contrast to the weak pace of U.S. real economic growth and a sluggish labor market, the real estate market was strong in 2012, as reflected in lower capitalization rates and higher property prices. Commercial real estate, especially, has held strong, providing compelling returns to investors. Core assets, such as landmark office buildings with quality tenants in primary markets, have been in high demand.

Investors have already benefited from these strong markets as profits and returns grew to record levels. In the current environment, those chasing yield question whether there is still enough product to get the yield they want.

Core real estate may be overpriced, with top properties at near five percent cap rates. When interest rates rise, these trophy assets will become highly unattractive. Investors should move forward cautiously due to an uncertain economic outlook, compressed yields and overpricing in many asset classes, as well as an increasingly competitive landscape around the world. Any deterioration in property fundamentals and/or pullback in the U.S. economy could negatively impact investment performance and returns for owners.

The View From Abroad

When assessing the strengths and weaknesses of U.S. real estate, it is helpful to take a step back and reflect on how others view the market.

In its 21st annual survey of international real estate investment trends released earlier this year, members of the Association of Foreign Investors in Real Estate (AFIRE) named four U.S. markets among the world's five top cities for real estate investment. New York heads the list, followed by London, San Francisco, Washington, D.C., and Houston. This was the first time that four U.S. cities ranked among AFIRE's top five global markets.

"The strong endorsement of both San Francisco and Houston by our members in this year's survey directly reflects the propensity for real estate investment to follow jobs—in this case, technology and energy, which are thought to be among the top drivers of the next economic wave," said James A. Fetgatter, chief executive, of the international trade group, which represents some 200 investors that control an estimated $2 trillion in real estate assets under management.

Moreover, 81 percent of the surveyed investors plan to increase their portfolio size in the United States this year, and 71 percent say they agree that improving fundamentals will make secondary markets in the United States more desirable in 2013. Multifamily properties head the list of property types that AFIRE members prefer, followed by industrial, retail, office, and hotel.

While the specific practices that led to the last real estate bubble are no longer in effect, and the U.S. real estate industry is slowly beginning to recover, valuation issues still exist in relation to properties, both single and in portfolios

Real Estate Valuation

The value of single family homes is set by comparison to other properties in their area, typically changing in value as they do.

A portfolio of rental properties is valued based on the return it produces for its owners, demonstrating the importance of a detailed valuation analysis.

Quality of tenants, lease terms, occupancy levels, rent rolls, cash flows, leverage, and overall property fundamentals must be tested when assessing value. A supportable value conclusion for the portfolio is only achievable after a thorough examination of these factors.

Depending on the circumstances or the number of properties in the portfolio, it may be difficult to obtain third-party appraisals to support the value of a portfolio and its underlying assets.

An alternative technique for valuing a portfolio is the net asset value (NAV) method, which also is a common methodology for valuing real estate holding companies. Using the NAV method, an analyst can value the holding company by 1) its real estate assets, 2) adjusting for its other assets, and 3) subtracting liabilities.

The NAV method is an asset-based approach that focuses primarily on the balance sheet. It requires a restatement of an entity's assets and liabilities in order to reflect their fair market values. It then assumes that all assets are converted to cash and all liabilities are satisfied, resulting in a net asset value for the owners.

How to Calculate the NAV

Determining the NAV of a real estate holding company requires three steps:

1. Apply cap rates to each rental property type and geographic segment of net operating income (NOI).Start by taking available forward-looking (or historical) NOI for each property and then dividing by an assumed cap rate to calculate the implied value of the gross real estate operating assets (i.e., the rental properties). To properly estimate cap rates, it is necessary to look at the individual properties and geographies, break out NOI by property type and geographic segment, and assign appropriate cap rates to each of them. The total value here corresponds to what the rental properties would be if they were valued properly or appraised. This number may be more or less than what is listed on the balance sheet for each property.

2. Add other assets, adjusting where necessary.With respect to construction in progress or land for development properties, one might assume that they become completed properties in the future and calculate their net present value. In this case, a return on investment (ROI) would be applied based on cost or the balance sheet value to serve as a proxy for market value. Third-party appraisals, book value, or the ROI method can be used to approximate market value of undeveloped land and other non-income-producing properties.

3. Subtract the underlying liabilities to calculate net asset value. The final step is to subtract all liabilities on the balance sheet, including noncontrolling interests and preferred equity, to arrive at a NAV for the holding company.

Considerations for Bankruptcy

By establishing accurate net asset values for the holding company, real estate owners will be prepared for any change in market conditions, including bankruptcy, should that become necessary.

Bankruptcy gives debtors breathing room to cope with adverse market conditions. Before filing for bankruptcy, real estate owners need to understand a number of key issues, including the scope of homestead exemptions in the states where residential real estate is owned; whether or not there is equity in the properties; and how best to shield other assets from creditors' claims.

One very important issue in real estate bankruptcy is the treatment of single asset real estate (SARE) entities.

The Bankruptcy Code defines a SARE as "a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental."

The Bankruptcy Code further describes circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay that are not available to creditors in ordinary bankruptcy cases.

Section 362(d)(3) of the Bankruptcy Code requires a SARE debtor, within 90 days after filing for bankruptcy, to file a plan that has a reasonable possibility of being confirmed within a reasonable period of time; or to commence monthly payments to each creditor whose claim is secured by such real estate at the nondefault interest rate.

If a SARE debtor is not in a position to file a plan, the continuation of the automatic stay will effectively be conditioned on its ability to make monthly payments—and this may be very difficult for a debtor experiencing major cash flows problems.

If the debtor fails to satisfy either of the requirements of §362(d)(3), then the secured creditor(s) will likely be able to obtain relief from the automatic stay and commence a foreclosure action(s) on property. Additionally, a secured creditor is not precluded from seeking relief from stay on the grounds that it is not adequately protected or the debtor does not have any equity in the property.

The Future of Bubbles

Will there be another real estate bubble? If so, when will it occur and what markets will it impact most?

In the wake of the 2007-2008 declines, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act and took other steps to buffer consumers from future financial storms. While these measures may slow the growth and size of the next bubble, they will not prevent it. Banks have notoriously short memories and investment banks are very skilled at facilitating and supporting the investment process. Investors, who played such a large part in the last bid-up in the residential sector in markets like Las Vegas and Miami, should have learned from their mistakes. Some may have taken the lesson to heart; some are financially insolvent; but there will always be willing participants if the market shifts and investors sense the potential for large profits. The potential for a bubble always exists—while regulation can complicate and slow the process, it cannot halt it.

The residential market was the cause of the last bubble and the residential market is highly localized. During the 2001-2006 period, inflation adjusted housing prices in seven metropolitan areas grew by more than 80 percent, while prices in six other markets increased by less than 10 percent during this period (S&P Case Schiller Home Price Indices). Inevitably, the markets that were hit the hardest will at some point stabilize, then recover more quickly than seems reasonable as investors sense the turn and move in to buy at prices well below replacement cost. This trend is already underway in some of these markets. Housing prices are currently rising at their fastest pace since 2006. As of December 2012, average home prices in all but 2 of the 20 markets included in the S&P/Case-Schiller survey have exceeded their January 2000 levels. During 2012, seven of the 20 markets had price increases of more than 10 percent. The standout performer was Phoenix with a one year increase of 23 percent.

In the commercial markets, recovery will vary by property type and region. Unless our government manages to somehow kill the recovery, conditions will improve and real estate prices will rise. Investors are currently paying extremely high prices for trophy assets in the stellar U.S. markets (New York, San Francisco and Washington, D.C.). Investors in these properties may be accused of overpaying, but this sort of investment is not necessarily symptomatic of bubble formation. These are deep pocket investors picking the best deals available and bidding up the limited opportunities. Inflation, time and economic growth still have the potential to raise returns in these buildings to more normative levels of 7 percent.

What finally brings about the demise of, or "pops" the bubble? The investor position becomes unsustainable. Inevitably, asset values stop rising and begin to trend down as doubt creeps in and the ratio of sellers to buyers increases. As thinly supported equity positions turn negative, the momentum shifts and the same haste that initially drove investments now extends to liquidation. Supply rises, leading to precipitous price decline and a market crash. Once equity positions are extinguished, there is limited incentive to maintain investment property. Banks become overwhelmed and are incapable of dealing with REO property in a structured and logical fashion. In a market flooded with troubled residential properties, rental rates plummet, further impacting the demand for homes.

Conclusion

U.S. real estate has a long history of providing investors with relatively stable returns over time, but the industry is not immune to speculative bubbles. Owners and investors that maintain current valuations of their holdings can be positioned to negotiate effectively with creditors during times of stress in the real estate market, even when conditions lead to the possibility of bankruptcy. It is important to have accurate valuations no matter the current market conditions, as a new bubble could be just around the corner.

Elliot M. Ogulnickis managing director of valuations and Harry C. Steinmetz is partner-in-charge of financial advisory services for WeiserMazars, an accounting, tax, and advisory firm.

Morris Hagerman is a local real estate agent with Real Estate One in Royal Oak, Michigan.  He serves Berkley and the other Woodward 5 communities, including Ferndale, Pleasant Ridge, Royal Oak and Huntington Woods.  Hagerman is also a member of the Berkley/Huntington Woods Area Chamber of Commerce.  You can contact him by phone at 248-854-8440, email at morrishagermanproperties@gmail.com or visit his web page.

Michigan home price rose 5.3% over last year

WASHINGTON — A survey shows U.S. home prices rose 10.5% in March compared with a year ago, the biggest gain since March 2006.

Core Logic, a real estate date provider, said annual home prices have now increased for 13 straight months. Prices are rising in part because more buyers are bidding on a limited supply of homes for sale.

Prices increased in 46 states over the past year — 11 of them posting double-digit gains. And when excluding distressed sales, prices rose in every state. Michigan prices rose 5.3%.

Nevada led all states with a 22.2% annual gain. It was followed by California (17.2%), Arizona (16.8%), Idaho (14.5%) and Oregon (14.3%).

Michigan home prices are still 39% below the peak reached in November 2005, the third largest drop in the country behind Nevada and Florida.

Home prices also rose 1.9% in March from February, signaling a solid start to the spring buying season.

Reprinted from the Detroit Free Press, 5-7-13

Morris Hagerman is a local real estate agent with Real Estate One in Royal Oak, Michigan.  He serves Berkley and the other Woodward 5 communities, including Ferndale, Pleasant Ridge, Royal Oak and Huntington Woods.  Hagerman is also a member of the Berkley/Huntington Woods Area Chamber of Commerce.  You can contact him by phone at 248-854-8440, email at morrishagermanproperties@gmail.com or visit his web page.

Economy adds 165,000 jobs in April; unemployment rate down to 7.5%

By Jim Puzzanghera

May 3, 2013, 6:02 a.m.

WASHINGTON -- The labor market rebounded last month as the U.S. economy added 165,000 net new jobs and the unemployment rate dropped to 7.5%, its lowest level in more than five years, the Labor Department said Friday.

The April jobs figure exceeded analyst expectations of about 148,000 net new jobs and helped counter concerns that hiring was significantly slowing after a disappointing report in March.

The government also issued major upward revisions for job creation in March and February.

The initially disappointing 88,000 figure for March was revised to a more respectable 138,000. The February figure was revised up to 332,000 from the initial report of 268,000. That was the most new jobs added in a month since May 2010.

The private sector added 176,000 net new jobs in April, led by a gain of 76,000 in service industry positions, the Labor Department report said. However, government shed 11,000 jobs, with the federal workforce down 8,000 positions.

The unemployment rate ticked down last month from 7.6% in March. The 7.5% rate for April was the lowest since December 2008.

"With an increase of 165,000 jobs in April, and following the significant upward revisions for February and March, the job market looks better than expected despite the sequester or issues like the rising cost of providing healthcare benefits," said Kathy Bostjancic, director of macroeconomic analysis at the Conference Board.

The economic recovery has been showing signs of slowing as tax increases, the federal spending cuts known as the sequester and the European recession combine as obstacles to growth.

The U.S. economy expanded at a 2.5% annual rate in the first three months of the year, a marked improvement over the 0.4% growth in the last quarter of 2012. But the figure was below expectations, and analysts forecast that growth will slow to about 1% in the second quarter of this year before picking up again.

Economic reports in recent days have been weak, although initial jobless claims dropped last week to their lowest level in more than five years.

Amid concerns about the pace of the recovery, Federal Reserve policymakers said for the first time this week that they were prepared to increase their controversial stimulus efforts.

Morris Hagerman is a local real estate agent with Real Estate One in Royal Oak, Michigan.  He serves Berkley and the other Woodward 5 communities, including Ferndale, Pleasant Ridge, Royal Oak and Huntington Woods.  Hagerman is also a member of the Berkley/Huntington Woods Area Chamber of Commerce.  You can contact him by phone at 248-854-8440, email at morrishagermanproperties@gmail.com or visit his web page.