2007 Summer - Latest News Affecting the Oklahoma City Real Estate Market

It would appear that the Oklahoma City Real Estate Market is in transition.

On one hand, the Oklahoma City Residential real estate market has been relatively stable over the past three years with Home Closings averaging just over 1,700 per month on an annualized basis. The monthly rate of homes closed for 2007 closely matches the rate for 2005.

Supply Side

On the supply side, single family building permits have remained relatively constant over the past several years. During this time, the population increased at a rate of 1.49% per year and households increased by 1.7% per year. Multifamily vacancies are just over 10% and single family vacancies are around 8.6% (See section on Oklahoma City Demographics for more information).

Single family listings (home that are on the market for purchase) have been increasing on a relatively regular basis, and are currently on track to surpass the high levels reached in 2006.

Demand Side

On the demand side, for the past few years the population in the metro area has increased at 1.49% per year. The US Census predicts the the growth rate in the next five years to be 1.3% per year.

However, a midyear economic update by OSU economist Mark Snead suggests that in the Oklahoma City metro area, job gains for the first 1/2 of 2007 approached 3%, and the revised full year 2007 forecast to increase 2.4% over the previous year.

Historically, interest rates are very low. However there is reason to expect both interest rates to increase and credit to tighten in the near term (see section Farewell Cheap Debt for a further explanation.)

Currently, 58.2% of the housing stock being owner occupied (as apposed to 57.8% in 2000.) With the anticipated increase in interest rates and the tightening of credit, the percentage of owner occupied housing would be expected to decrease. As a result, there should be an increase in demand for apartments.

On Balance

Days on Market combined with trend in Average Home Sales Price provide a relatively good measure of the balance between supply and demand.

Conclusion

The Oklahoma City Metro housing market, on balance, is in better shape that the national average. We have not experienced the boom seen on the east and west coasts, therefore we will also not see the degree of a bust the east and west coasts are currently experiencing.

This is not to say that the Metro market is immune from national influences. The anticipated increase in interest rates and, tightening of credit (especially in Jumbo sized loans) will lessen demand for single family housing while at the same time increase demand for apartments. However, the expected increase in population growth rate will offset the negative impact on single family housing.

We would therefore expect an increase in demand for both single and multi-family housing, and as the higher than average listing inventory is reduced, there will be increased demand for new construction.

Gloomy: America's Economic Mood

Americans are not happy with the economy, the war in Iraq, and those who are in charge of establishing government policies. More that 2/3 of Americans believe the economy is now (or will be next year) in recession according to a new Wall Street Journal/NBC News poll. This feeling of gloom is present despite the fact that the economy has sustained growth, low inflation, low unemployment and higher stock values than were found early in President Bush's first term.

According to the poll, there is a lack of confidence in both President Bush and Congress with over 2/3 of Americans disapproving of the way they are doing their jobs. Even with these low approval ratings for President Bush, he is fairing better than other groups. The War in Iraq and other public scandals seem to be souring the public mood. The poll found the following approval ratings:

Local Government 34% National News Media 18%

Public Schools 32% Energy Industry 18%

President Bush 31% Pharmaceuticals 17%

Health-Care System 31% Finance Industry 16%

Religious Leaders 27% Federal Government 16%

War in Iraq 19% Health-Insurance 10%

The pole was conducted by Republican pollster Neil Newhouse and Democratic pollster Peter Hart. According to Mr. Hart, "There's a combination of anxiety and loathing... There's a sense that every single one of these institutions is totally out for their own betterment, versus the public they serve."

How these sentiments will play out in the 2008 elections is an open question, but just 19% of Americans think that the nation is heading in the right direction, vs. 67% that say the country is on the wrong track.

Poll based on telephone poll of 1,005 adults between July 27-30; with a margin of error of +/- 3.1 percentage points.

Source: Wall Street Journal, 8/2/2007, A4, John Jarwood

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Higher Deductibles for Homeowners

A growing number of homeowners have existing homeowners insurance policies that are being modified to change the way deductibles are calculated. Traditionally, deductibles were a set amount, say $1,000. However, a growing number of insurance companies, including State Farm Insurance Cos., Allstate Corp., Nationwide Mutual Insurance, and Travelers Cos., are upon insurance renewal, defining a deductible based on a percentage of the insured value -- typically between 1% and 5%.

When insurers change the formula to calculate deductibles, they usually explain them on the "declarations page" of the policy, but may also be found in a separate notice page. The typical homeowner often never reads the document sent provided when their insurance is renewed, and therefore are surprised to find their deductibles increased, often by a factor of over 10.

Additionally, many insurance policies are being renewed with separate and higher deductibles (or no coverage at all) for natural disasters such as windstorms, tornado, hail, or hurricane. Changes in hail deductibles are of particular concern for Oklahoma residents, who may experience an average of six or more hail storms per year.

Source: Wall Street Journal, 8/2/07, D1, MP McQueen

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Farewell Cheap Debt

The recent troubles of several of sub-prime residential lenders is impacting both the availability of credit as well as interest rates. Through June 19, residential mortgage REITs posted a total return of
-15.9%, compared to a +14.75% return for 2006. This drop is partly due to the trouble in the sub-prime market.

Part of the problem with sub-prime loans is the high default rate. There is about a 7% default rate for regular loans and a 14% to 20% default rate for sub-prime loans.

American Home Mortgage Investment Corp. reported on July 30 that it might need to liquidate its loan holdings because it could not meet its obligations. Residential mortgage REITs posted significant losses in share price the same day.

The mortgage backed securities market is currently avoiding residential jumbo loans (those greater in value that is insured by FHA, VA, etc.) This means that jumbo loans are only being made by mortgage lenders (as apposed to mortgage brokers) with the resources to fund their own loans.

From a commercial standpoint, we have probably seen the lowest commercial mortgage rates in 40 years, with average prime mortgage rates approaching 7% with a decreasing loan-to-value ratio. These higher borrowing costs and a flattening sales volume of non-institutional grade properties will probably force CAP rates to widen during the rest of the year.

Available loan terms are tightening. For example, at the beginning of the year, an investor could finance 85% to 90% of a small retail strip center with a 10 year, interest only loan. Today one is probably looking at an 70% to 80% LTV ratio, principal and interest loan. Additionally, less than break-even debt-service coverage ratios are now almost non-existent.

The climate changed for the commercial market on April 11 when Moody's Investors Service declared that less than optimum underwriting on Commercial Mortgage-Backed Securities loans had increased investor's risk, and they lowered their ratings on subsequent offerings.

Source: National Real Estate Investor; July, 2007;
23-39; Matt Hudgins & 93-96; GM Filisko

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National Economic Prediction for Year-End 2007

Economist
Position
GDP (%) CPI Inflation (%) Monthly Job Growth 10-Year Treasury Yield (%) Crude Oil ($/barrel)

Rajeev Dhwan Georga State Univ.
1.9

2.2

72,000

4.75

$58

Dana Johnson Comercia Bank
2.25

2.2

130,000

5.25

$60

Hessam Nadji Marcus & Millichap
2.3

2.2

75,000

4.75

$60

Josh Scoville Property & Portfolio Research
2.5

2.3

100,000

5.1

$55

James Smith Parsec Financial Management
0.5

1.1

196,000

4.14

$31.75

Diane Swonk Mesirow Financial
3.0

2.0

140,000

5.1

$63

Craig Thomas Torto Wheaton Research
3.0

2.9

129,200

5.17

$60

Jamie Woodwell Mortgage Bankers Association
2.2

2.3

120,000

5.0

$69

Source: National Real Estate Investor; July, 2007; 24

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Oklahoma City Metro Demographics

Population

The population of the Oklahoma City SMA is over 1.2 million with an annual growth rate since 2000 was 1.49% annually. The US Census estimates the growth rate for the next five years to be 1.3% annually. The population is currently 49% male and 51% female.

It would seem that the strength of the energy sector has helped the metro area overcome last years closings of Dayton Tire and General Motors plants (although 300 workers are still on GM full time payroll until September.)

Households

The household count in the area in 2000 was just under 368,000 in 2000 and just under 409,000 this year, representing a 1.7% annual increase. The US Census estimates that households will increase at a rate of 1.41% per year for the next five years. The average household size is currently 2.43 compared to 2.45 in the year 2000.

Currently 58.2% of the housing units are owner occupied, 33.2% are renter occupied and 8.6% are vacant. The percentage of owner occupied housing has increased from a 2000 value of 57.8%. The US Census reports a median home value in the metro for $114,770, compared to a median home value of $181,127 for the US.

Home Foreclosures

Home foreclosures are currently at a national rate of one foreclosure filing for every 131 households. However, partly because the Oklahoma housing market did not overheat as it did in other parts of the country, Oklahoma's foreclosure rate is one filing for every 233 households. The state foreclosure rate is 21% lower than the same period last year.

Income Measures

Current median household income is $47,461 in the market area, compared to $51,546 for all U.S. households. Median household income is projected to be $55,887 in five years. In 2000, median household income was $37,554, compared to $27,562 in 1990.
Current average household income is $63,161 in this market area, compared to $71,092 for all U.S. households. Average household income is projected to be $76,046 in five years. In 2000, average household income was $49,479, compared to $35,076 in 1990.
Current per capita income is $25,697 in the market area, compared to the U.S. per capita income of $27,084. The per capita income is projected to be $31,059 in five years. In 2000, the per capita income was $19,915, compared to $13,771 in 1990.

In the current year, the occupational distribution of the employed population is:

62.3% in white collar jobs (compared to 60.5% of U.S. employment)
15.9% in service jobs (compared to 16.4% of U.S. employment)
21.8% in blue collar jobs (compared to 23.1% of U.S. employment)

In general, the citizens of the Oklahoma City Metro area are more highly educated that the average American. In 2000, the educational attainment of the population aged 25 years or older in the market area was distributed as follows:

15.5% had not earned a high school diploma (19.6% in the U.S.)
26.2% were high school graduates only (28.6% in the U.S.)
5.5% had completed an Associate degree (6.3% in the U.S.)
17.1% had a Bachelor's degree (15.5% in the U.S.)
9.0% had earned a Master's/Professional/Doctorate Degree (8.9% in the U.S.)

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Latest News Affecting the Oklahoma City Real Estate Market is published 4 times a year, in February, May, August, and November. Editor/Publisher: Bart Binning, Ed.D. The periodical is distributed over the Internet by e-mail using software provided by Prudential Real Estate Brokerage Services. Subscription information and past issues are archived at www.bartbinning.com/newsletter.

Dr. Binning is a licensed realtor in the state of Oklahoma and employed by Prudential Alliance Realty, Neither Prudential Real Estate Brokerage Services nor its franchisee Prudential Alliance Realty or Detrich Realty or any of their affiliates are responsible for the content of this periodical.

Comments received on this issue are posted on the newsletter archived at www.bartbinning.com/newsletter.