lect 12 realestate

8/18/2019 Lect 12 Realestate

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Lecture 12: Real Estate


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Real Estate: an Important Asset

Class• Until recent stock market boom, single family

omes !alue in U" appro#imate$ !alue of entire

stock market%• &ome mortgages 1''': ()%*2 trillion Consumercre$it is only 1%)* trillion% U" +ational $ebt el$

by public is only ( trillion

-"ource: .R/, /alance "eets for U" Economy0


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Real Estate artnersips as te

a3or E#ample of a 4• Real estate limite$ partnersips represent te most

important e#ample of a 4irect articipation rogram-40, a class of in!estments tat also inclu$es oil an$ gas

e#ploration programs an$ e5uipment leasing programs• 64irect participation:7 4s are 6flo89tro8 !eicles7

an$ in!estors can $e$uct program losses on personal ta#es

• 6a# selters7 until te a# Reform Act of 1';*: losses

use$ to offset 6passi!e income%7 +o8, genuine businesses%• 4s escape te corporate profits ta#

• IR" re5uirements, notably limitation of life


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Limite$ artnersip "tructure

•


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Accre$ite$ In!estors

• Regulation 4: Accre$ite$ in!estors inclu$e

in$i!i$uals 8it net 8ort in e#cess of (1

million or 8it income in e#cess of(2>>,>>> -(>>,>>> 3oint income0 in eac of

te last t8o years

• +ational Association of "ecurities 4ealers-+A"40 re5uires suitability files an$

suitability tests for 4s


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REIs

• Real Estate In!estment rusts -REIs0 8erecreate$ by U" Congress in 1'*> to allo8 small

in!estors access to real estate in!estments%• /efore 1'*>, public companies tat o8ne$ realestate 8oul$ be consi$ere$ businesses, for 8icteir earnings 8oul$ be sub3ect to corporate profits

ta#% "o, until 1'*>, real estate 8as typically o8ne$ by partnersips, not suitable for small in!estors%

• o$ay, institutions in!est in REIs too%


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Restrictions on REIs

• ?@= of assets must be in real estate or cas

• ?@= of income must be from real estate

• '>= of teir income must be from real estate,$i!i$en$, interest capital gains

• '@= of income must be pai$ out

• +o more tan >= of income from sale of properties el$ less tan four years

B ese pre!ent regular businesses from being REI"


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e REI /ooms

• .irst boom: Late 1'*>s: interest rates rose abo!e $epositrate ceilings at banks, $epositors fle$ to mortgageREIs% /ut, 8it recession of 1'?), many REIs

$efaulte$% Economic Reco!ery a# Act of 1';1 fa!ore$ partnersips%

• "econ$ boom: a# Reform Act of 1';* eliminate$a$!antages of partnersips, so in!estors s8itce$ to

REIs%• ir$ boom: "tarting 1''2, many pri!ate real estate

companies foun$ it a$!antageous to go public as REIs,specialie$ REIs $e!elope$%


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&istory of ortgages

• In 1'2>s, @9year term loans common, balloon payment $ue in fi!e years, or

refinance or sell ouse%• In 1'>s, $ecline in nominal ome prices

an$ rise in unemployment cause$ massi!e

$efaults• ortgage len$ing in$ustry turne$ to long9term annuities


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Con!entional ortgages

• &omeo8ners fi#e$ rate mortgage: an

annuity 8ose present !alue e5uals te

initial loan%• ra$itionally, payments are montly an$

compoun$ing is montly% Fit maturity m

years an$ mortgage rate r 8e a!e:

( )

+−×=

M r r r

12012G1-12G

1

12G

1 paymentmontly balanceortgage


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+e8 &a!en "a!ings /ank

• .oun$e$ in 1;; as part of te 6"a!ings /anko!ement7 tat began in UD at begin of 1't century% A ma3or mortgage len$er

• ilantropic mission to protect small sa!ers%Carter re5uires conser!ati!e in!estments

• +o sa!ings bank 8ent bankrupt $uring great

$epression• "a!ings banks accumulate uge piles of assets,

tempting takeo!er


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"tatement from +&"/ 4irectors

• In +&"/Hs case, formi$able business risks a!e been stea$ily emerging o!er te lastse!eral years%

• e /oar$ as a fi$uciary responsibility to make sure tat +&"/ is successful, an$ it isclear to us tat te /ank as to gro8 if it is to break out of its current stagnation% If +&"/ 8ere to rely 3ust on its istory an$ goo$8ill in te community, it 8oul$ risk te

!ery real possibility of becoming obsolete o!er time%• ese are uni5ue callenges, an$ tey call for outstan$ing lea$ersip% +&"/ is fortunate

to a!e 3ust tat in its resi$ent an$ CE, eyton R% atterson, an$ er e#ecuti!emanagement team% e /oar$ brougt s% atterson to +&"/ base$ upon er istory of being able to 3umpstart momentum at financial institutions, an$ er strong belief incommunity banking% ur confi$ence in er an$ er team as been confirme$ innumerous 8ays, but most notably 8it te pen$ing ac5uisitions of "a!ings /ank ofancester an$ ollan$ /ank, an$ te propose$ plans to con!ert te /ank to public

o8nersip%• Fe are aiming to put more money back into te community 99 +&"/ is more tan

5ua$rupling te sie of its .oun$ation, by allotting to it (> million of te stock raise$troug a public offering%


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C /anking Commissioner Jon % /urke,

Appro!al of Con!ersion Jan 2>>)• e +e8 &a!en "a!ing /ank -+&"/0 submitte$ an

application on "eptember >, 2>> for te con!ersion froma mutual sa!ing bank to a capital stock bank an$ for te

ac5uisition of an$ subse5uent merger of te "a!ings /ankof ancester an$ ollan$ /ank 8it an$ into +&"/% ecombine$ entities 8ill operate un$er te name

+e8Alliance /ank%• o a$$ress te comments recei!e$ on te concern te ne8

institution 8oul$ be sol$ in te near future, te appro!e$ plan of con!ersion restricts te ac5uisition of more tan1>= of any security of te &ol$ing Company 8itout te

prior appro!al of te Commissioner for a perio$ of @ yearsfollo8ing completion of te con!ersion%


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+&"/ Con!ersion lan

• As part of te lan of Con!ersion, +e8 &a!en "a!ings /ank 8illcon$uct a subscription offering of common stock to eligible$epositors, in accor$ance 8it applicable con!ersion rules% ursuant togo!erning regulations, te common stock is being offere$ for sale in a

subscription offering, in $escen$ing or$er of priority, to 10 +e8 &a!en"a!ings /ank account ol$ers 8it a balance of at least (@> or moreon June >, 2>>2K 20 +e8 &a!en "a!ings /ankHs ta# 5ualifie$employee stock benefit plans, inclu$ing te employee stock o8nersip planK 0 account ol$ers 8it (@> or more on $eposit as of te 5uarteren$ before recei!ing appro!alK )0 +e8 &a!en "a!ings /ank 4irectors,officers an$ employees an$ @0 +e8 &a!en "a!ings /ank Corporators%


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6+&"/ "ares Likely to "oar7

• +&"/ sent prospectus to its $epositors on .eb 1',2>>)

• rice per sare (1>, ma#imum or$er (?>,>>>sares

• 4ea$line to or$er sares arc 11, 2>>)

• As many as 1>2%@ million sares may be sol$

• "+L .inancial report .eb 2>, 2>>): 6te stock price 8ill most likely 3ump )> percent to @>= onte $ay te company goes public7


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.re$$ie ac

• .e$eral &ome Loan ortgage Corporation-.re$$ie ac0 create$ by Congress in 1'?>%

• .rom beginning, it securitie$ mortgages:sol$ pools of mortgages, calle$ a participation certificate -C0 to in!estors%

• In 1';1, .annie began to compete 8it.re$$ie in pooling mortgages, 8it itsmortgage backe$ securities -/"0


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Implicit


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ri!ate ortgage Insurance

-I0• Companies, suc as =%

• Contro!ersy: 8it recent real estate price increases,L as $ecline$ belo8 ;>= for many omeo8nersstill paying for mortgage insurance% e Is $ont

notify tem%• Impossibility of Is insuring


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Collateralie$ ortgage

bligations -Cs0• Cs $i!i$e te cas flo8 of a mortgage

pass9troug security into a number of

trances in terms of prepayment risk%• "e5uential9pay Cs -first create$ 1';0:

.irst trance recei!es first principal

payments, after it is pai$ off te secon$trance recei!es principal payments%


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/ea!ior of "ingle .amily &ome

rices• +ot a ran$om 8alk, substantial inertia

• ccasional booms an$ busts

• "are$ mo!ements o!er 8i$e regions of

country, but not sare$ o!er entire country

• /oom of late 1';>s infecte$ many of largest

cities of 8orl$


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Caracteristics of Real Estate

/ooms• Case "iller "ur!eys of &omeo8ners 1';;,

2>>

• "ur!eye$ recent omebuyers in AnaeimCA -boom0, il8aukee FI -no boom0 an$

/oston A -post9boom0

• +early 1>>> responses eac sur!ey


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Long9erm E#pectations

6n a!erage o!er te ne#t ten years, o8

muc $o you e#pect te !alue of your ome

to cange eac yearM7Los Angeles il8aukee

1';; 2>> 1';; 2>>

1)%= 1%1= ?%= 11%?=


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.ears of /eing Left ut

6&ousing prices are booming% Unless I buy

no8, I 8ont be able to affor$ a ouse in te

future%7Los Angeles il8aukee

1';; 2>> 1';; 2>>

Agree ?'%@= );%;= 2?%;= *%)=

4isagree 2>%@= @1%2= ?2%2= *%*=


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erceptions of E#citement

6ere as been a goo$ $eal of e#citementsurroun$ing recent ousing price canges% I

"ometimes I tink I may a!e beeninfluence$ by it%7

Los Angeles il8aukee

1';; 2>> 1';; 2>>Nes @)%= )*%1= 21%@= )%;=

+o )@%?= @%'= ?;%@= *@%2=


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For$9of9out Communication

6In con!ersations 8it frien$s an$ associates

o!er te last fe8 monts, con$itions in te

ousing market 8ere $iscusse$%7Los Angeles il8aukee

1';; 2>> 1';; 2>>

.re5uently @2%'= 2%'= 2>%>= 2?%*=


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6"tock arket is /est In!estment7

6e stock market is te best in!estment for long9term ol$ers, 8o can

3ust buy an$ ol$ troug te ups an$ $o8ns of te market%7

1''* 1''' 2>>> ct 2>>1

9.eb 2>>21% "trongly agree *'= ?*= *= *>=

2% Agree some8at 2@= 2>= )= 1=

% +eutral 2= 2= 2= =

)% 4isagree some8at 2= 1= 1= @=

@% "trongly $isagree 1= 1= >= 1=

-U% "% In$i!i$ual in!estorsK numbers for 2>>> are mi$9year, after

peak of market%0


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6Real Estate is /est In!estment7

6Real estate is te best in!estment for long9term ol$ers, 8o can 3ust buy

an$ ol$ troug te ups an$ $o8ns of te market%7

Los Angeles il8aukee

2>> 2>>1% "trongly agree @%?= 1%=

2% Agree some8at %1= )@%'=

% +eutral 1>%= 11%=

)% 4isagree some8at 2%?= '%1=

@% "trongly $isagree >%>= 2%1=


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Effects of Real Estate /ooms

Crases on .inancial Institutions• 4efault rate on mortgages is function of

loan to !alue ratio, 8ic $eclines as prices

rise, rises as prices fall%• ortgage insurance companies suffere$

massi!e losses in 1';>s 8it $ecline of real

estate prices in e#as%


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Real Estate arket o$ay

• Late 1''>s a!e so8n soli$ price increases in

many cities

• "an .rancisco increase$ 2;= 1''' III to 2>>> III,fell )%@= bet8een 2>>19I an$ 2>>19I %

• ore lo8 $o8npayment loans to$ay

• Risk of stock market $ecline arming real estate

market, tereby te Is, an$ mortgage len$ers

lect 12 realestate

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