Download - 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