Drops reported in sales, building permits, and housing starts suggest that struggles in the housing sector are not yet over and that builders are still cutting back on supply, according to the latest release from Hanley Wood Market Intelligence.

Building permits in July declined 2.8 percent to a seasonally adjusted 1.373 million units, which is the lowest since October 1996. Single-family permit issuance decreased slightly in July, dropping 2 percent from the level seen in June to a seasonally adjusted level of 1,003,000 permits issued. The number of single-family issuances in July was 24 percent lower than that in July 2006 and 42 percent lower than the same month two years ago. The number of multifamily permits fell 8.2 percent in July from June to 314,000, which is also a 15 percent decline from the same year-ago period.

New and existing home sales moved in opposite directions last month. July data for new homes showed signs of stabilizing while the existing home market continued to falter. New home sales increased 2.8 percent in July to a seasonally adjusted 870,000 homes, up from a revised June figure of 846,000. At the current sales pace, there are 7.5 months of new homes supply on the market. The median price for a new home rebounded in July as prices increased 3.9 percent from June levels to $239,500.

Seasonally adjusted sales of existing homes fell 0.2 percent in July to 5.75 million units. That is the lowest sales pace recorded since November 2002 and the fifth straight month that sales have declined. Sales of existing homes are down 9.0 percent from the 6.32 million units in July 2006. Median existing home prices declined a slight 0.13 percent from June levels to $228,900; the median price is down 0.56 percent from the same year-ago period. Inventory of existing homes jumped to 9.6 months’ supply at the current sales pace, while the number of existing homes for sale increased 5.1 percent to 4.592 million units. This is the most months of supply of existing homes since September 1991.

National average mortgage rates declined to 6.52 percent in Freddie Mac’s August 23 Primary Mortgage Market Survey. This is the lowest rates have been since the end of May. Average rates are now 4 basis points higher than they were this time last year.

In the week ending August 17, the MBA’s seasonally adjusted Purchase Index declined 4 percent to 424.0 from 441.5 in the previous week. The latest figure reflects a decrease from earlier in the month but a 15.52 percent increase from the same time last year.

For more market-level data and analysis from Hanley Wood, visit www.hanleywood.com/hwmi/. 



New RERC Report Shows Investor Return Expectations Down for Major Property Types

Although institutional real estate investors continue to rank commercial real estate higher on a relative basis compared to stocks, bonds or cash, they have lowered their investment conditions ratings for the major property types, according to the summer 2007 RERC Real Estate Report Shifting Gears for the Road Ahead. In addition, required pre-tax yield and capitalization rate expectations have declined for all property types, reflecting that in the first half of 2007, investors were still playing catch-up to a robust commercial real estate investment market.

The property type with the best outlook for future returns is the apartment sector, followed by the suburban office sector. The CBD office and industrial warehouse sectors continue to have relatively high ratings, but declined overall from last quarter.

“This relative strong sentiment for commercial real estate owes a lot of its current success to the unease and volatility exhibited throughout the entire investment environment and especially in the world’s credit markets,” explained Kenneth Riggs, Jr., MAI, president and CEO of RERC. “Returns on commercial real estate are relatively strong, and in the first half of 2007, we are still seeing some of the highest prices ever paid for high-quality properties. However, we are also seeing reduced pricing power and credit for average and lower-tier properties, resulting in downward pricing pressure on lower quality assets in more marginal locations.”

According to the RERC Real Estate Report, second quarter 2007 required capitalization rate expectations declined an average of 20 to 40 basis points from first quarter. The greatest reduction was in the hotel sector, with a 60-basis point decline and the required going-in capitalization rate average falling to 7.4 percent and the required terminal capitalization rate average falling to 8.2 percent from the previous quarter’s rates. The second largest reduction occurred in the CBD office sector, which declined 50 basis points for both the required going-in and terminal capitalization rates, falling to 6.0 and 6.8 percent, respectively.

RERC has published the RERC Real Estate Report for more than 30 years, offering independent investment criteria for 10 property types in the institutional and regional markets, as well as for 48 major metropolitan markets. With the summer 2007 issue of this report, RERC has added coverage of the Milwaukee, New Orleans/Baton Rouge, Norfolk, Oklahoma City, Raleigh, Sacramento, Toledo, and Tucson markets to its list of metros survey, analyzed, and reported on each quarter.

To purchase a copy of the summer 2007 RERC Real Estate Report or for more information about RERC, visit www.rerc.com or e-mail Barb Bush at bbush@rerc.com.

Appraisal Groups Urge Extending Appraiser Reform to Entire Tax Code

The major appraisal groups have called on the House Ways and Means Oversight Subcommittee to apply the Pension Protection Act’s appraiser competency and generally accepted appraisal standards requirements to all valuations required by the Tax Code, not just those involving noncash contributions.

In an August 6 letter, the Appraisal Institute, American Society of Appraisers, American Society of Farm Managers and Rural Appraisers and National Association of Independent Fee Appraisers commented on provisions in the Act relating to tax-exempt organizations.

Prior to the Pension Protection Act, IRS valuation policies permitted anyone to appraise the value of tangible and intangible property for tax purposes, whether or not they had any valuation education, skills or training; and allowed the use of any approaches to determine fair market value, whether or not they were generally accepted by valuation professionals. However, the new law’s most important appraisal reform provisions – requiring meaningful definitions of the terms “qualified appraiser” and “qualified appraisal” – are limited to valuations of noncash charitable contributions and do not apply to the many other Tax Code sections that require taxpayers to report the fair market value of property.

“We believe the provisions requiring appraiser competency and adherence to generally accepted valuation standards are the lynchpin of the Act’s remedies and should apply, as well, to all Tax Code valuations,” the groups wrote.

“Unless this imbalance is remedied, the otherwise excellent tax-related appraisal reforms established by Congress in the Pension Act will have the unintended effect of creating two separate and unequal systems for taxpayer valuations – a fully reformed system which applies only to … appraisals relating to charitable contributions; and a continuation of two of the most ineffective aspects of the old system, for all other tax purposes,” they said.

In an August 10 letter to the Internal Revenue Service, the major appraisal groups expressed their concern over recent guidance relating to penalties for Circular 230 violations, stating that the impact on the profession could be vast and should be explored before being implemented.

IRS Notice 2007-39 proposes guidance to practitioners, employers, firms and other entities that may be subject to Circular 230’s expanded monetary penalties authorized by the American Jobs Creation Act of 2004. That Act permits the imposition of monetary penalties on the employers of individuals who violate Circular 230 requirements when the employers knew or reasonably should have known that an employee engaged in prohibited conduct.

The Appraisal Institute, American Society of Appraisers, American Society of Farm Managers and Rural Appraisers and National Association of Independent Fee Appraisers explained that many appraisers who provide tax-related appraisal services are partners, principals or employees of firms that provide valuation services to taxpayers. Accordingly, the expanded penalty powers described and discussed in Notice 2007-39, if directed against firms offering tax-related valuation services, would have a substantial impact on the appraisal profession.

“Given the significance of the changes mandated by the Pension Protection Act of 2006 in how appraisers are impacted by Circular 230 ‘due diligence’ and ‘standards of practice’ requirements; and given the absence of Treasury and IRS guidance on how these changes are to be understood and implemented, we respectfully and strongly urge Treasury and IRS to withhold Circular 230 enforcement actions against appraisers (including any new requirements involving their employers stemming from Notice 2007-39) until appraiser-specific guidance has been proposed, exposed for stakeholder comment and adopted in final form,” the groups wrote.

As a general matter, Circular 230 governs the conduct of “those who may practice” before IRS (“practitioners”). Although appraisers are not currently included within the definition of “practitioners,” their conduct is nevertheless regulated, both directly and indirectly, by several provisions of the Circular. Prior to enactment of the PPA, the IRS’s ability to sanction appraisers directly under Circular 230’s rules of practice was much narrower than for practitioners. However, the PPA widened this scope, despite the fact that Circular 230 has not yet been modified by Treasury and IRS to reflect this.

“As a consequence – and until those modifications are proposed and adopted – appraisers do not and cannot know the circumstances and conditions under which they may or may not be subject to the full range of Circular 230 sanctions,” the groups wrote. “Accordingly, it would be inappropriate and, frankly, unfair for Treasury or IRS to undertake any sanctions actions against appraisers or their employers prior to the adoption of specific guidance by Treasury and the Service on how Circular 230, as amended by the Pension Protection Act, impacts the obligations of appraisers and their firms.”