Real Estate: Strengthening to pre-crisis conditions

Markets for mortgages, commercial buildings, continue upward march.An improving market coupled with some recent regulatory relief may be signs for cautious optimism in mortgage lending for community bankers in the Upper Midwest..Regulation has continued to be a concern, especially after a slew of mortgage rules from the Consumer Financial Protection Bureau which went into effect in January 2014.."It's become as restrictive as it has ever been because of the CFPB," said Chris Grimm, president and CEO of Iowa State Bank, Wapello. "I've heard from a lot of bankers that they're frustrated with the way the mortgage market is going, especially with regard to the regulation.".Seventy-three percent of respondents to a survey from the Independent Community Bankers of America said recent regulation had inhibited their mortgage lending. Of the 86 percent of respondents who are active in mortgage lending, 15 percent are either exiting or considering an exit from this line of lending..A January proposal from the CFPB, however, would loosen some requirements for the new rules, mostly affecting its "ability-to-repay" rule. Chief among them are expanded definitions of small creditors and rural areas..The proposal would raise the loan origination limit for small-creditor status from 500 first-lien mortgage loans to 2,000, and would continue to exclude loans held in portfolio by the creditor and its affiliates. However, the proposal does not raise the asset limit for small-creditor status from its current $2 billion cutoff, and it factors in the assets of mortgage-originating affiliates in calculating whether the creditor is under the limit..The bureau also proposed an expanded definition of rural to include census tracts that are not in an urban area, as defined by the U.S. Census Bureau. Previously, it had been limited to counties which met the bureau's definition of rural..The proposal also tweaks several deadlines and grace periods. For example, it would reduce the time period used in determining whether a creditor is operating predominately in rural or underserved areas, from any of the three preceding calendar years to the preceding calendar year..Eligible small creditors are currently able to make balloon-payment Qualified Mortgages and balloon-payment high-cost mortgages regardless of where they operate, under a temporary exemption scheduled to expire on Jan. 10, 2016. That deadline has been extended to April 1, 2016..It also creates a grace period for small creditors who exceeded the origination or asset-size limits or no longer operate predominantly in rural or underserved areas during the preceding calendar year..Low rates and building nudge outlook."Overall, I'm somewhat optimistic over last year, but I don't think it's going to be hugely different. Rates are certainly lower this year over the beginning of last year, and that's going to help," said Dan Vessely, president of the Iowa Bankers Mortgage Corporation in Johnston, Iowa..Improving rates may help, but not enough to budge the needle on the market as a whole. Their positive impact will primarily affect the secondary market, said Carl Sjulin, president and CEO of West Gate Bank, Lincoln Neb. "The rate drop over the past few months has helped spur activity in the secondary market. But what's a better indicator is new building, which has been steady for us.".West Gate's secondary market covers Nebraska and its contiguous states, and it has had pretty strong mortgage activity from the community banks they serve, Sjulin said. Housing starts across the Midwest have been slow but have showed some improvement during the past year.."We're seeing consistent demand for single family construction. Our new home building division is busy, and there's lots of mortgage action in our secondary market division," Sjulin said..No one has expressed unbounded enthusiasm for real estate prospects in the upcoming year based on current numbers, however.."Do I think real estate has completely recovered, though?" Vessely said. "I don't think incomes are increasing at a rate that would drive more sales. The natural progression is, if more people can afford to buy your home, there are more bidders, so your home may be able to command a higher price."."It's going to be really interesting to see what the spring brings. Homes generally sell faster in the spring, and we'll be able to see if we truly have any pent-up demand," Grimm added. "Where we are, the financing market for housing has fallen and construction has been slow." On the other hand, default rates are also down, taking some pressure off lenders, Grimm said.."I think real estate itself has recovered quite a bit. People who were under water a little bit ago have started to come out from under the cloud," Vessely said..Delayed homeownership among Millennials.Conventional wisdom pegs the millennial generation – those in their late teens to early 30s – as simply uninterested in home ownership, causing a dip in demand and reinforcing the slow recovery of the market.."Younger people don't have the drive to own a home the way they did five to 10 years ago. I don't think that drive is as strong as it used to be," Vessely said. "I think student loans are an obstacle. Younger people today don't have the same position on home ownership.".Student loans surpassed the $1 trillion mark last May, bumping credit card debt from the second place slot for personal debt. Mortgage loans still hold onto first place..That perception may lack some of the nuances of reality, suggests a paper from the Association for Public Policy Analysis & Management, a Washington, D.C., non-profit.."Although we do find a very modest association between debt and home ownership, we find little evidence that student loan debt is a 'major culprit' of declining home ownership among young adults," write authors Jason Houle of Dartmouth College, Hanover, N.H., and Lawrence Berger of the University of Wisconsin-Madison. Declining homeownership among young adults is more likely tied to structural changes in the economy and changes in the transition to adulthood, Houle and Berger said..The homeownership rate among heads of household age 35 or younger was 36 percent in the third quarter of 2014. That is the lowest it has been since the U.S. Department of Commerce started tracking the data in 1994..Millennials may be merely delaying home ownership rather than rejecting it outright. Two-thirds of millennials want to live in the suburbs eventually, according to a January survey from the National Association of Home Builders.."While you are more likely to attract this generation than other generations to buy a condo or a house downtown, that is a relative term," said Rose Quint, NAHB assistant vice president of survey research. "The majority of them will still want to buy the house out there in the suburbs." Part of the appeal of homeownership arises from a desire for more space than an apartment can provide, with 81 percent of respondents saying they wanted three or more bedrooms in their home..CRE perking up.The commercial real estate sector has started to pick up as well.."Overall, the commercial real estate industry has been really strong for the last 18 months, and I don't see signs of it subsiding," said Jerry Baack, president and CEO of Bridgewater Bank, Bloomington, Minn. "It's become really solid the last 12 months for us. There have been very low vacancy rates, plus low cap rates on sales.".The nine-year-old Bridgewater has made a specialty out of CRE lending at a time when most other banks have been understandably wary. Over all, real estate makes up 90 percent of the bank's lending portfolio.."We continue to concentrate on financing multi-family units, residential rehabs and larger commercial projects," Baack said. "We expect that with a recovered housing market, we will continue to see opportunities to partner with builders and actively engage in financing land and construction projects.".Vacancy rates for multi-family dwellings are at 3 percent in the Twin Cities area and not likely to go much higher in the near future, Baack said.."For us, the multi-family sector looks to continue pretty much the same. Retail has been strong, too," Baack said. "There's still some weakness in office, with vacancy rates around 16 percent downtown.".About 200,000 square feet of office space is expected to be built in the Minneapolis-St. Paul area this year, while the vacancy rate is predicted to edge upward slightly to 17 percent from 16.6 percent last year. Milwaukee's office vacancy rates have shown improvement, but still remain above 19 percent and in Sioux Falls, S.D., the vacancy rate is lower and more building permits are being issued..CRE lending also has been fairly steady in the Lincoln, Neb., market, Sjulin said. Commercial real estate activity in the Federal Reserve's Eighth District has continued to increase at a moderate pace with lower vacancy rates and stronger sales, prices and construction activity. Across the Midwest, the CRE situation has generally improved. Chicago CRE activity expanded broadly – vacancies fell, rents rose, and leasing of industrial buildings, office space, and retail space all increased.."Moving into the spring, I think you're going to see a nice round of business because rates are low and the economy is improving," Grimm said. "The lower costs of energy, which drive so much in our economy, will have some effect as well. I think you're going to see good activity moving into the spring, and banks are going to continue to find good footing."