Below is a transcript from the Podcast pulished by the Invest Flroida Show. You can listen to the podcast by going to www.InvestFlorida Sh.ow.com At that website you will find many interesting topics on real estate investing in Florida
Steven Silverman: Today we have with us Carl Hudson. Carl is Director of the Center for Real Estate Analytics at the Federal Reserve Bank Atlanta. The center informs the decision-making by identifying and analyzing systemic impacting real estate and the economy financial institutions and consumers. Carl’s research has been published in leading publications such as the Journal of Financial Economics, The Journal of Banking and Finance, Journal of Accounting and Economics, Journal of International Money and Finance and Financial Management, Carl thank you for being with us today. We’re looking really forward to learning a little bit today.
Carl Hudson: My pleasure to be here.
Eric Odum: Thanks Carl. Good to have someone from the Federal Reserve. It’s an honor for Steven and I.
Carl Hudson: Well, it’s a Federal Reserve eager to get its message out and engage the public and let people know what’s going on.
Eric Odum: Can you tell us a bit about your role in Federal Reserve.
Carl Hudson: Well the Federal Reserve has several different functions. One that most people are familiar with is the role in monetary policy. And so the Federal Reserve Bank of Atlanta President sits on the Federal Open Market Committee. That’s what you here about in the news most often when they’re talking about interest rates. And so part of our bank supports our president in helping him make and form comments at the FLMC. That’s it; I really do need to say that what we’re hearing from me today are my personal views. I’m not speaking for the Federal Reserve or the FLMC or the Federal Reserve System. That’s a standard disclaimer.
Eric Odum: Well let’s skip that line first because we don’t need Wall Street having a melt down or something that there was thought of you’ve said or not said, right?
Carl Hudson: Right, especially, you know, the current context of, you know, it’s interesting what’s going on with the monetary policy. These are strictly my views and not the official views of Federal Reserve Bank of Atlanta or Federal Reserve System.
Steven Silverman: And just so we understand how it’s set up, you’re based in Atlanta but you’re actually Florida falls under your jurisdiction, correct?
Carl Hudson: That’s right. The US is split into twelve districts and Atlanta is one of the twelve reserve banks. And we cover all Florida, Georgia, Alabama, and then the Eastern 2/3 Tennessee, the southern half of Mississippi, and the southern half of Louisiana. So we have a very diverse economy that we cover. We have the entire host from the Georgia South Carolina border all the way to the Texas Louisiana border.
Eric Odum: And of course, you know, here in Florida, you’ve been talking to us a little bit offline about you’ve been doing some research on Immigration Florida?
Carl Hudson: Yes.
Eric Odum: So what’s happening there?
Carl Hudson: Well, interesting thing was Florid and the population changes. You know population change can be either natural that is births minus deaths, or they can be immigration. And the second part, the immigration is very sensitive to economic trends so if you look at the Florida population changes, it was over 300,000 a year starting in 2000 up through 2007, roughly 300,000 per year increase in Florida. Once the housing crisis in recession hit the great of the population growth fell dramatically and is now under 100,000 per year in 2008, 2009 and it’s just recently been increasing, you know, one thing said is the expectation is not to really get back above the 300,000 per year but maybe, I’ve seen some reports talk about maybe 250,000 per year. So that’s important for an economy like Florida where growth is substantial parts of its development.
Eric Odum: It’s a real estate driven economy, the State of Florida. As much as economic development official want it to try to push it out of that box, it’s still very heavily real estate driven needs immigration for that real estate to move along.
Carl Hudson: Yes and that point said where is this people coming from and obviously a large part of the population growth has to do with retirees moving to Florida. And a lot of the jobs are related to servicing the needs of retirees. So when there’s a housing crisis, Florida is probably a little bit less attractive primarily because a lot of retirees couldn’t sell the house and move to Florida.
Steven Silverman: So then there’s less employment at the same time when real estate goes down. How’s Florida doing now on employment?
Carl Hudson: Well let say they, I was just given some figures here as of June 2015. Year over the year job growth was 3.4% which is pretty good, that’s the best in the Southeast region. Which are true in South Carolina, North Carolina and Virginia and with that, that’s good news. The less good news is that they changed from pre-recession peak is only at .2% just for put that in context in Georgia. The last year over year percentage change is 2.6 but the change from pre-recession peak is 2% greater. So the good news is all jobs that were lost in terms of the number of jobs are gotten back to where it was prior to the recession. For Florida is barely gotten back but at least its one year trend is very good at 3.4%. So it’s probably slow, the best way to characterize it is slow to recover but it’s recovering. You could probably say it’s strong. You can also put it in context that US, year over year; job change is 2.1% and the percentage change from previous session peak is 2.5%.
Steven Silverman: So we’re definitely lagging the rest of the country.
Carl Hudson: Definitely. But again at 3.4% year over year, that’s fairly strong compared to the country as a whole.
Eric Odum: Yeah a little bit slower to get moving but now it’s moving it’s picking up speed.
Carl Hudson: Yes.
Eric Odum: I know it’s a sensitive topic for you but to the extent that you can give us information on interest rates in terms of historically and where you see it’s going forward, any update on that?
Carl Hudson: Well obviously, in the light of the recession, a monetary policy in attempts to meet the mandate of the Federal, the term mandate being to foster for appointment. And to have stable prices so the main tool of monetary policy is the federal funds rate so in order to stimulate the economy, the federal funds rate was lowered eventually in December 2008. The federal funds rate was essentially zero and it’s been hell there since December 2008. So the federal really just sets this Federal funds rate, the rate which banks lend reserves to each other. That’s the very short term rate but it provides basis for other rates. Federal does not really have direct control over medium and long term rates. Federal also engages in something popularly known as quantitative easing which was the purchase of treasury securities and mortgage back securities in an attempt to put additional downward pressure on what this medium and long term rates.
Eric Odum: There are some correlation still with movement in federal funds and the tenure which is typically benchmark for real estate mortgages, in typical, there are some correlations correct?
Carl Hudson: There are some correlation that the tenure rates is probably, thought of this, where people think short term interest rate is going to move over the upcoming years. So if you increase the short term rate and you may have an impact on expectation in future short term rates so yeah there are some correlation, it’s not a perfect correlation because short term rates can be much more of a hurtle than long term rates. So they can go up a lot. And long term rate will not go up so much.
Steven Silverman: So we spoke a little bit about immigration and the effect that it may have in real estate. What is the trend with first time buyers in Florida Housing Market?
Carl Hudson: Well, interestingly some of my colleagues have done some work on first time home buyers and we do have a blog it’s called real estate research and what they have found and this is more about country as a whole is that while first time home buyers, the number of first time home buyers declined we really can’t put all the blame in millennium as it is the popular notion. So I don’t really have firm numbers on Florida per say. But what we can say is that the ability of people to buy houses is going to be function of the jobs and so as we see as said earlier the job market seems to be turning around in Florida just back over its pre-recession peak and has a stronger run rate year over year than the country as a whole. So jobs will foster household formation will require the housing staff to be expanded either through single-family household housing or multi-family housing.
Eric Odum: It’s a good lead because essentially that first time buyer is a lagging indicator, after jobs and jobs is really the driver for first time buyer entering the market but also there’s first time buyers coming in to the market either have to come from immigration. Or they have to come from someplace else and it usually coming from the apartment market. I know you’ve done some work on keeping track of the multi-family market in Florida so what’s happening there, we’re hopefully starting to see some first time buyers move in to the housing market, so what’s going on with the apartment market?
Carl Hudson: Well, yeah, before we jump in to that, just one thing about the jobs is that jobs in Florida given the predominance of retirees in Florida and the older population, one of the jobs as I said earlier is towards servicing the needs of the retirees. So if you look at Florida versus the rest of the country, there’s just a proportionate share of relatively low skilled jobs in Florida so when we talked about job growth, I don’t have the finer numbers with me, we have to look at the quality of the job growth. If all this jobs that are being created relatively low skilled then we may not have quite the income growth that we would hope.
Eric Odum: Understood.
Carl Hudson: However, if you have the population growing from retirees, well they not going to work anyway but they’re going to help stimulate the economy. And they will be buying houses or as popular with retirees also they are getting in to the rental market. So back to your question with the multi-family, it you look at them the major markets of Miami, Orlando, Lauderdale, Tampa, the West, Jacksonville, the trend has been positive in terms of new construction activity. But I will say that the Miami market is the one that the construction figures are intriguing to me. If you look at July of 2012, there were about 4,200 units under construction which was in West Orlando that time which was around 5000 units and in Waterdale 4800 units under constructions.
Eric Odum: That was in 2012.
Carl Hudson: That was in 2012. Fast forward that was in July of 2012. Fast forward to June 2015, there are over 20,000 units under construction in Miami. About 9,500 in Orlando and just under 7,000 in Ft Lauderdale.
Eric Odum: When was the last time that we saw that? It’s like a sequel to a movie that I remember.
Carl Hudson: It’s quite a striking in growth rate.
Steven Silverman: Well what make it even more astounding is I remember during recession where people were looking at the Miami market and saying there was a 30 years supply of apartments out there .
Carl Hudson: That amount of supply is an interesting number since you’re looking at what number of units are out there relatively current sales levels. And if sales dry up because of the recession, let’s just say it approaches zero and the amount supply number can really explode. What I would typically try to do is look at how many units are out there versus what’s been the longer term average. You probably would not have as much of a supply as you thought.
Eric Odum: So you thought the press exaggerated, wow, imagine that.
Carl Hudson: Well I don’t think press just exaggerated it. A lot of, you know, industry analyst too. I think you got to look at more that’s a normal level of activity, if you’re just looking at the current level, that’s very volatile.
Eric Odum: Yeah, it’s very interesting, particularly in Florida seems to move in manic cycles. And the people react to it in a manic fashion. You know in 2005, “Oh my God, this is never going to end. So this is new economy. This is going to go on forever” And then by 2009, and they were saying “Oh it’s the end. Florida is dying. It’s never coming back. Take all your money out of State.” It’s just the manic reaction to the market series really. For someone who is not accustomed to and I grow up in this market so I’ve kind of used to the exaggerated hyperbolic terms that are use to describe the Florida market. It’s pretty stunning there when you are looking from the outsiders’ perspective, how people talk about the Florida market.
Carl Hudson: And I think another thing to, you know, even we see these construction numbers that look very high. Especially the growth rate, this Florida markets the number of units under constructions are up over 40% year over year. One thing I’d like to look at the temper my reaction is look at the yield spreads on transactions on apartments that is if you look at cap rate on an apartment transaction versus the yield on treasury security. And we call the spread wide and narrows. If you look back in the second quarter of 2006, the spreads are extremely narrow especially in South Florida where Miami apartment yield spread is 32 basis points. And actually some apartment yields and Broward and home beach were negative, that is the cap rate was lower than the treasury rate. Also look at 6 major markets; New York, Washington, Boston, Chicago, LA and San Francisco at the same time period there’s a yield spread 25 basis points. That’s very low in decade, there’s not a whole lot of pricing for risks. Fast forward to today, the 6 major markets yield spread is 265 basis points. And Miami is 273, Broward 393 and Palm Beach 278. So the point is without getting into numbers it’s just that the yields, there’s a much wider gap between the yield and the treasury security and the cap rates in the apartments.
Eric Odum: So yeah, I’m going to cut you a little bit because you just said it before let’s talk about it from the historic stand point because we’re talking about the extremes now. Actually, we came up quite compress about the cap rate here recently. But historically, where are we? You’re saying that spread of Miami is 265 basis points which, you know, it’s 32 in 2005 did you say?
Carl Hudson: That was second quarter 2006.
Eric Odum: So 2006. So it’s a major difference but of course we’re still talking extremes. Where are we in terms of the norms, you have norm numbers of the spread?
Carl Hudson: If you go back to the early 2003, I like to look at that because it’s a little bit after the small recession that was post wide 2k. As for the big bubble stand so if you look at 2003, the 6 major markets spread was 350 basis points. Miami was 417. Palm Beach is 300. So we’re closer to 2003 numbers than we are in 2006 numbers.
Eric Odum: Got it. So that gives us a little bit better perspective 2003 is a little bit a norm market. The market was starting to firm at that point. But it gives us a historic perspective of 32 bps, 265 on the 265 basis points today. And what did you say it’s 350 in 2003.
Carl Hudson: So we’re down little bit but again we’re about the same level we are in 2001 about 235 basis points for the 6 major markets and 289 for Miami.
Eric Odum: Interesting!
Steven Silverman: Well, talking about Miami, it brings to mind the impact of foreign buyers in Florida Real Estate market. They seem to concentrate in Miami, what is going on with foreign buyers?
Eric Odum: And really I want to add to that question because not only the foreign buyers issue but we had an in issue in strengthening the dollar you could tie in the Steven questions about what’s going on with foreign buyers but also how is the dollar impact, the rise of the dollar affecting what’s happening in the market.
Carl Hudson: Well, I think it’s different to talk about Miami market without considering what’s going on with the foreign buyers. Now some of the status, is anecdotal, we have the total in this context Miami that we thought to find out what’s going on. And obviously the foreign investment is extremely important and it’s always the same group. There’s always next people from Canada, from the Caribbean, South America, Europe and of course as one country, prospect improves and they probably less interested investing in Miami. Another country situation changes where the money is more favorable. Now, the dollar makes the investment in Miami somewhat less attractive. However, if they are looking for yield they inhibit the investment but it’s not going to choke it off entirely. I think one of the interesting anecdotes that we heard is a way a lot of this new condos have been financed. Prior to the buzz, it was typical that these condos would require a deposit and the buyer could always walk away with all the money that they out as a deposit which might have been a smaller of $5,000 to $10,000. Where now, a lot of the condo units according to our contacts ,are being financed as pay as you go. So when the building is 20% complete you’re going to put up 20% of the funds, if the building is 75% complete, you are going to buy and put down more money as you go. Apparently, this is more prevalent in central South America and some of the other countries who are accustomed to this form of financing which is not typically how it’s done in the United States.
Eric Odum: I just going to ask, how are the US banks dealing with that on the buyer side? Are they playing that game or it’s just in the foreign side?
Carl Hudson: This is on the foreign side.
Steven Silverman: Yes, although I don’t think it’s so abnormal you know, it’s very similar to construction draws that they do in other market segments. When they draw down, they progress along construction so maybe it’s not that for Fitch, I think it make sense.
Carl Hudson: Well it makes a lot of sense. Because it’s more difficult to recreate one of the problems in 2007 and in 2008 is, when people can walk away to the contract on the condo. And the builders left without a buyer and have no means to repay the construction loan. So I think the financing is very differently in these condos project than it was prior to the bubble.
Eric Odum: Dr. Hudson appreciate much, shifting gears again here, if you wouldn’t mind, can you talk about the overall growth trends for various Florida market? What’s working and what’s not?
Carl Hudson: The growth trends for the various markets. Well, in Jacksonville, one thing that I look in to the various markets especially, not in Orlando, but the ones that has port; Jacksonville, Miami, Tampa, there’s always a discussion on what’s going to happen when Panama Canal is reopen to the post-Panamex Era. So they are all interested in getting their port up speed where they can handle the larger ships. Jacksonville has an interesting case; they also have a significant naval presence. And again there’s a good news and bad news. The good news is that there’s supposed to be more ships stationed there shortly, but the bad news is the threat is that there are always possible shifts in terms of the military. But otherwise Jacksonville’s employment growth has been pretty good, it’s definitely bounce back a little bit over 2 percent, the most recent number I have. Once you get down the market, we can have like a national data but the finer you get the data, the finer you cut the data, the more log there will be for release.
Eric Odum: Have you done some research; are you guys up to speed in terms of the Panama ships and where they are going? Because my understanding is the Jacksonville of Miami and maybe for Lauderdale but I don’t think anybody else will participate in Panamex port. Is that accurate?
Carl Hudson: Well I know that Savannah and Charleston is not Florida but the other ports north are very interested and they see that they got a chance to get significant volume if they can get their drudging done in time.
Eric Odum: Ok
Steven Silverman: And also the Carribean, is there are some places over there that they are trying to keep in some market.
Eric Odum: It’s a big dollar. Let face it, I mean you’re having a major shift in how cargo freight is going to move around the world and the Panama ships are already in place. But you know, you got deep water port throughout the world certainly in the United States. There are a lot of adjustments that will happen. Those will be the winners. So there’s going to be winners or losers in this game. From what I am reading, it’s not going to be a win-win or maybe I am wrong here.
Carl Hudson: Well I think another question again, this is something new that haven’t heard. There’s going to be an interest in a lot of Asians, people who export to us or we import from Asia, whatever you want to put it. They typically go to California, and we know last year, one of the things that help the first quarter performs so poorly was the Long Sherman’s strike in California. And given there’s a backlog; they are looking to diversify where they send that cargo and I think some of them will be using this Panama Canal. So it could be not only these bigger ships coming in and we have winner and losers, we may have the East Coast gain over the West Coast if there this fear of future strikes in the Long Beach port.
Steve Silverman: You know Dr Hudson just our listeners to understand, the reason the Panama Canal is so important is because there’s a 4 billion dollar expansion to accommodate wide ships and they’ll be opening it soon and those large container ships in the post to the West Coast and the freight has been track to cross the country. And now, in the first time with the ships being able to put through the Panama Canal, they would be able to come to the East Coast and that’s why there’s so much conversation about Florida and Panama Canal.
Carl Hudson: Definitely. In the past if they did not land in California, you wanted to land in the US, you have to go the old way all the way around South America because Panama Canal was not design through the ships that we have today.
Steve Silverman: Well Dr. Hudson, Thank you very much. WE learned so much and if people want to learn more where can we get more information from the Federal Reserve about what’s going on?
Carl Hudson: Our web page www.frbatlanta.org and on the lower part, there’s a big button for Center for Real Estate Analytics.