The overall economy and the residential real estate market have started to gain their footing with government help, but the commercial real estate market is still struggling and recovery will be sluggish, according to most experts. Programs such as the establishment of the First Time Home Buyer Tax Credit ("FTHBTC"), where a federal tax credit covers up to $8,000 or 10 percent of the home price for first-time buyers has been extremely successful. Incentives such as the State of Kentucky's New Home $5,000 tax credit provided to qualified buyers through July 2010 have been positive news in an economy where recession, foreclosure and deficits are household words. These programs have proven to be a winner for the residential sector. But some lawmakers are balking at the cost, which may hit an estimated $15 billion - more than double the amount projected in February's economic stimulus bill. The National Association of Realtors and the National Association of Home Builders have launched marketing campaigns touting the credit and have pushed Congress to keep it going. Data from the Treasury Department states that 4,105 Kentuckians have already taken advantage of the FTHBTC program. The FTHBTC is due to expire on Dec 1, 2009.
"The tax credit will draw about 400,000 buyers into the market this year," said Mark Zandi, chief economist for Moody's Economy.com, who supports extending the tax credit into at least the middle of next year. "It's too early for policy makers to step away from the market," Zandi said. "The risks are too high."
Together with low mortgage rates and falling home prices, the credits are helping ease the worst housing recession in a generation. Prices are stabilizing and some markets are even seeing a gradual increase in sales coupled with a decrease in existing inventory.
In comparison, the commercial sector is rebounding at a much slower pace. As a result, leasing activity has slowed and, much like the residential sector, sales prices have fallen over the last 12 months. Investment sales are also down to due to tenant instability and lack of financing options. With lackluster consumer spending, and a severe credit crunch, it appears that commercial real estate development will remain weak. Plans by the U.S. Federal Reserve not to raise interest rates in the near term and improve the flow of capital into commercial lending will be necessary to improve market conditions.
Not as well known as FTHBTC, a program in the commercial sector that has been crucial to increasing the availability of funds is known as Term Asset Backed Securities Loan Facility ("TALF"). It was created by the U.S. Federal Reserve in November 2008, launched in March 2009, and has already been extended well beyond the end of the year. The program is part of an effort to unfreeze these critical parts of the credit market and get lenders lending again.
Outlined by the U.S. Federal Reserve and the Department of the Treasury, TALF supports the issuance of Asset Backed Securities ("ABS") collateralized by auto loans, student loans, credit cards and loans guaranteed by the Small Business Administration ("SBA"). Under TALF, The Federal Reserve Bank of New York will lend up to $1 trillion on a non recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. Because TALF money does not originate from the U.S. Treasury the program does not require congressional approval to disburse funds. Since most commercial loans are short term, locating readily available financing is essential to the commercial deal. TALF is designed to reopen the ABS, which has declined significantly as investors have withheld from backing banks that issue credit and loans, reducing the amount of money available to lend. ABS acts as investment vehicle where investors buy up the loan balance that is issued to a consumer by a bank or other credit issuer.
NAR chief economist Lawrence Yun says, "The reduction in commercial real estate activity is expected at least through the first quarter of 2010. Any meaningful recovery is not likely to occur before the second half of next year. With the economic recession likely coming to an end within six months, a recovery in commercial real estate may soon follow."
Lexington is fortunate that its employment sector is diversified, and has not experienced the overbuilding affecting other cities. However, unemployment is at 11 percent for the state of Kentucky, according to the Bureau of Labor Statistics, with the Lexington-Fayette metropolitan area hovering at 9.1 percent.
Hopefully, Lexington will defy expert projections and benefit from a quicker recovery in 2010. Taking advantage of these federal programs to meet the borrowing needs of consumers and small businesses will be necessary to facilitate and help stimulate the broader economy.
Jennifer Mossotti, CCIM, is a Realtor with Prudential de Movellan Real Estate, and former LFUCG Councilmember.