special report: q1 2014 real estate industry

Special Report: Real EstateQ1 2014

Executive summary For the nation’s real estate industry, Q1 2014 was a mixed bag. During the first three months of the year, activity was down overall due to a combination of rising mortgage rates and particularly bad weather in most parts of the country. However, there were pockets of resilience, particularly on the West Coast, where demand exerted the kind of upward pressure on prices we’ve not seen since the mid-2000s.

From a national perspective, sales of new and existing homes declined significantly, much of which can be attributed to the Polar Vortex, east of the Mississippi, that kept prospective buyer foot traffic to a minimum. This claim is supported by the sharp bounce back in pending home sales in March as the weather normalized in the Midwest and Northeast.

Nearly all of the recent data confirms our belief that economic activity is poised to spring forward as temperatures warm. For example, U.S. businesses added 288,000 jobs in April, the most since January 2012. Moody’s Analytics suspects monthly job growth will remain north of 200,000, on average, for the rest of 2014, which will keep the consumer recovery humming. Pent-up demand for housing also will be released as younger workers (finally) get jobs and move into their own homes or apartments after either living with roommates or relatives for the past few years. We look for home prices to continue to rise and inventories to fall.

Business credit highlightsBusiness credit trends in Q1 2014 were a study in irony. Areas with some of the greatest credit risks and delinquency rates actually had some of the lowest bankruptcy numbers. Conversely, some of our hottest real-estate markets posted the highest rates of bankruptcies in the nation. Why the seeming contradiction? In poorly performing markets, such as Florida, home builders and developers are in such dire straits that lenders seem reluctant to make the situation worse by forcing bankruptcies. If they foreclose, how would they possibly divest themselves of the properties? On the other hand, in markets where the real-estate market is sizzling, such as California, lenders are showing little patience for nonperformance. Here, bankruptcy rates are high because lenders know there will be other borrowers lining up to grab properties should a competitor go under.

On a region-by-region basis, the Northeast experienced the largest number of delinquencies, climbing to 18.46 percent from 16.32 percent when the year began. The South followed with delinquency rates of 18.25 percent, up from 16.67 percent three months earlier. Both of these increases can be attributed to the severe cold during the first three months of year, which impacted everything from new home buying to repair and remodeling work.

Delinquencies in the Midwest barely changed at all, inching up to 14.79 percent from 14.05 percent at the end of 2013. Real estate activity in the Midwest has been extremely stable over the past year, moving up and down within a 2-point band during all of 2013.

The Western region saw its delinquency rate leap to 7.59 percent from 4.85 percent. This represents an increase of nearly 50 percent in just three months. There’s no obvious explanation for the jump other than that the region’s delinquency rate was so abnormally low when the year began, it had nowhere to go but up.

Special Report: Real Estate Q1 2014

The industry by numbersCredit risk scoreThe following table shows the top five and bottom five metro areas in terms of credit risk for the real-estate industry. The higher the number, the less chance there is of 90-day delinquencies in the next 12 months.

Top performing Metropolitan Statistical Areas (MSAs) Bottom performing MSAs

Rochester, NY 65.02 Miami, FL 45.32

Pittsburgh, PA 63.60 Memphis, TN-AR-MS 46.14

Portland-Vancouver OR-WA 62.62 Atlanta, GA 47.16

Providence-Fall River-Warwick RI-MA 61.67 Fort Lauderdale, FL 49.17

Grand Rapids-Muskegon-Holland MI 61.38 Jacksonville, FL 49.93

Source: Experian Business Information Map

The Rust Belt is well represented in the top five, which has been one of the least prone to boom-and-bust cycles over the past decade. This stability provides opportunities for operators to meet their obligations and translates into low credit risks.

Conversely, the South has stalled economically in all sectors, directly — or indirectly — impacting the real-estate industry. Warehouses are going empty. Strip malls can’t find tenants. Apartment buildings can’t fill vacancies. No one is building new homes. We don’t expect the situation here to improve any time soon.

Bankruptcy rateThe following table shows the top five and bottom five metro areas in terms of bankruptcies reported in the first quarter of 2014.

Top performing MSAs Bottom performing MSAs

Albany-Schenectady-Troy, NY 0.31% Las Vegas, NV 2.49%

Stamford-Norwalk, CT 0.39% Sacramento, CA 2.37%

Honolulu, HI 0.44% Ventura, CA 2.30%

Nassau-Suffolk, NY 0.49% Riverside-San Bernardino, CA 2.29%

Nashville, TN 0.51% Fresno, CA 1.89%


The Northeast is performing at a high level, as it is with credit risks (see above). Las Vegas, on the other hand, continues to struggle, as it has since the beginning of the Great Recession. California, however, is a very different story. Despite performing higher in the other four business health categories, the Golden State is performing poorly in bankruptcy rates despite its dramatic upturn in the real-estate market. With the overall market improving, creditors are able to become more stringent on lending standards. Given the volume of credit applicants, financial institutions have the ability to work with borrowers who can stay current on loan payments.



Delinquency rateThe following table shows the top five and bottom five metro areas in terms of delinquencies reported in the first quarter of 2014.


Grand Rapids-Muskegon-Holland, MI 0.57% Nashville, TN 45.18%

Salt Lake City-Ogden, UT 0.69% Fort Myers-Cape Coral, FL 33.20%

Omaha, NE-IA 1.05% Memphis, TN-AR-MS 32.67%

Phoenix-Mesa, AZ 1.27% Melbourne-Titusville-Palm Bay, FL 31.82%

Houston, TX 1.39% Indianapolis, IN 29.55%


There is no clear pattern evident among the top five performing cities other than each has enjoyed relative economic stability over the past several years. Salt Lake City and Houston have both been particularly strong pillars of economic fortitude. Again, the South is (too) well represented among worst performing markets. The one surprise is Indianapolis, Ind. There’s no obvious explanation for its sudden appearance on this list; we suspect the recent bad weather is to blame, and the city should drift back to the middle of the pack by mid-year.

Days beyond termsThe following table shows the top five and bottom five metro areas in terms of the average days beyond term for delinquencies reported in their respective markets.


Grand Rapids-Muskegon-Holland, MI 3.19 Las Vegas, NV-AZ 15.47

Rochester, NY 3.96 Atlanta, GA 12.36

Portland-Vancouver, OR-WA 3.97 Fort Myers-Cape Coral, FL 12.21

Omaha, NE-IA 4.06 Orlando, FL 10.68

San Francisco, CA 4.10 Detroit, MI 10.31


There is substantial correlation here between this list and the others previously shown. We see strong performances among cities in the stable Great Lakes/Northeast regions, as well as the strengthening in the West Coast. The South and Las Vegas continue to dominate the lower end of the spectrum, with Detroit, still in poor shape economically, joining this list of “the usual suspects.”


EmploymentThe following table shows employment statics for Q1 2014 as reported by the U.S. Bureau of Labor Statistics (BLS). It shows a slight uptick in labor-force participation, with the unemployment rate itself holding steady.

BLS household survey (seasonally adjusted) January 2014

February 2014

March 2014

Employment, all employees, millions of workers 145.22 145.27 145.74

Labor force participation rate 63.0% 63.0% 63.2%

Unemployment rate 6.6% 6.7% 6.7%

Industry outlookDespite the jump in pending home sales in March, the first quarter average was still lower than the final three months of 2013. With many buyers still struggling financially, rising mortgage rates could be working against the budding housing recovery (see Chart 1). We don’t believe that the housing revival is in jeopardy, but it does appear that a 90-basis-point jump in the composite mortgage rate led prospective homebuyers to put the brakes on new purchases in the second half of 2013. Except for March, the National Association of Realtors’ pending home sales index fell in every month from last June to February. However, this is only a blemish on an otherwise positive story. The housing recovery is likely to accelerate by mid-year, providing a major push to the economy.

We believe personal income growth will strengthen as the labor market tightens this year and next. Indeed, much of the income-related malaise stems from a still-


debilitating oversupply of workers, especially for lower-paying positions. As noted, Moody’s Analytics is forecasting monthly employment growth to average more than 200,000 new jobs in 2014. This will help absorb many of the remaining short-term unemployed, clearing the way for applicants unemployed for more than 26 weeks to find work again. Longer term, the job market will be aided by a growing number of retirees, forcing employers to raise average wages to entice younger candidates as they replace those workers.

With the tables stacked against them, buyers have found it tough to be optimistic. The University of Michigan consumer confidence index is well above its recession nadir, but neither the current conditions nor the expectations subcomponent rests as high as before the recession (see Chart 2). Even though house and stock prices are on the rise, the final ingredient for a sustained rebound in consumer sentiment is stronger income growth — a trend we expect will be firmly entrenched by the end of the year.

About Experian’s Business Information ServicesExperian’s Business Information Services is a leader in providing data and predictive insights to organizations, helping them mitigate risk and improve profitability. The company’s business database provides comprehensive, third-party-verified information on 99.9 percent of all U.S. companies. Experian® provides market-leading tools that assist clients of all sizes in making real-time decisions, processing new applications, managing customer relationships and collecting on delinquent accounts. For more information about Experian’s advanced business-to-business products and services, visit www.experian.com/b2b.

© 2014 Experian Information Solutions, Inc. • All rights reserved

Experian and the Experian marks used herein are service marks or registered trademarks of Experian Information Solutions, Inc.

Other product and company names mentioned herein are the property of their respective owners.

05.14

Legal Disclaimers:

This special report is intended as a general discussion of the subject matter. It is not intended to be, and should not be used as, a substitute for conducting your own research or obtaining expert advice in any specific situation. This information is provided “AS IS” without warranty of any kind. Under no circumstances shall Experian or its sources, have any liability to any person or entity for any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of Experian, its sources, or any of their directors, officers, employees or agents, in connection with the procurement, collection, compilation, analysis, interpretation, communication, use or inability to use, publication or delivery of any such information, or for any direct, indirect, special, consequential, compensatory or incidental damages whatsoever, including without limitation, lost profits, even if Experian has been advised in advance of the possibility of such damages.

The analysis, statements and observations, if any, in the information contained herein are, and are to be construed solely as, statements of opinion and not statements of fact or recommendations to take any particular action. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH INFORMATION OR OPINION IS GIVEN OR MADE BY EXPERIAN OR ITS SOURCES IN ANY FORM OR MANNER WHATSOEVER.

Experian475 Anton Blvd.Costa Mesa, CA 92626T: 1 877 565 8153www.experian.com/b2b

special report: q1 2014 real estate industry

Economy & Finance