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The recession is far from over.  The biggest indicator of our economic health is how many people are unemployed.

Unemployment

 In September 2009, 211,529 Oregonians were unemployed which means roughly 90,000 more people than last year. Oregon’s unemployment rate was 6.8 percent in September 2008; in September of 2009 it is running at 11.5%.  Crook County has the highest unemployment rate at 19.7%, with Gilliam County the lowest at 6.2%.

Unemployment is expected to continue to rise through the second half of 2010.

Increased Foreclosure rates

There is a direct correlation between unemployment and the ability of home owners to pay their mortgages.  According to RealtyTrac, an online seller of foreclosed-property listings, Oregon had the 11th-highest home foreclosure rate in the nation from July to September (the third quarter).

There were 76.6 percent more foreclosures in Oregon during the third quarter than a year earlier, during the third quarter of 2008.   This pattern will continue until the economy bottoms out.

In the apartment marketplace, we will also see an increase in the foreclosure rate as some owners struggle with higher vacancy rates, lowered rental rates, and concessions.  The Average apartment investor is going to face a loss of one month’s revenues, as a result of rental concessions they have to give to attract tenants.  In suburban areas rents are dropping up to 10% while expenses for utilities and property taxes are creeping up.  This has created a cash flow crunch for those owners who are highly leveraged.

Bad news (why we have fewer tenants)

In addition to apartment dwellers not being able to afford rents because there are no jobs, or they have lost their jobs, we are seeing more roommates moving in together to reduce the rental costs until they can move from part time jobs to full time jobs. 

The federal first time homebuyer credit of $8000, coupled with low interest rates, have enabled many tenants to exit the rental market. These tenants are now moving into new homes, thereby increasing apartment vacancy rates.

In the Portland market place there are approximately 2500 condominiums unsold.  The developers of these properties will have to make their payments to avoid foreclosure.  To generate cash many are renting them. Depending on upcoming FHA rules condominium sales financing might be hard to find.  If this occurs, some portion of the condominium market place will stay rentals for at least the next 36 months.  This also pulls tenants out of the standard rental pool.

Finally, investors are purchasing foreclosed homes and converting them to rentals. Homeowners who have not been able to sell their homes are turning them into rentals to generate cash until the marketplace right’s itself. This is affecting the rental market resulting in reduction in number of apartment renters.

Good news

The good news is further off. In 2009 we expect the lowest rate of apartment construction since before the 1980’s.  The forecast is for 900 apartment permits to be pulled in the Portland Metro area, compared to highs of 5000 permits a year in 2006.

Low construction rates will continue as bank financing for new construction will be hard to find.

This means that over the next 24 months the apartment marketplace will tighten. We expect rents to increase significantly at the end of 2011 and 2012 as demand will outstrip supply.

As the Federal tax credits for homebuyers evaporate, buyers will need higher down payments to purchase homes.  Since it takes time to save for the higher down payments, we expect apartment tenants to stay tenants for an extended period of time.

Increased demand will be generated by increased Population.  Statistics show average increase in population in Oregon of 17,000 a year from now through 2015. Of this number we expect 32% per year to become tenants, because they are between 25 and 45 (typically a high rental group).

Eighty percent (80%) of the jobs nationally are in urban areas. This indicates that more people will move to cities rather than rural areas, and create apartment demand.

Summary

In summary, apartment owners will need to brave a downturn for the next 24 months, to get to the light at the end of the tunnel in 2012.   This will motivate landlords to innovate to attract tenants and reduce operating cost. Our advice in the short term is not to leave that crash helmet out of sight.

 Gary S. Burroughs, CPA LLC
Gary Burroughs, CPA
4949 SW Meadows Rd., Suite 475
Lake Oswego OR 97035
(503) 643-6955ex: x211
(877) 643-6955
GaryB@trustedCPA.com
www.trustedCPA.com

Understanding Individual 401(k) Plans

If you're self-employed or own a small business, you've probably considered establishing a retirement plan. If you've done your homework, you likely know about simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE) IRA plans. These plans typically appeal to small business owners because they're relatively straightforward and inexpensive to administer. What you may not know is that in many cases an individual 401(k) plan (which is also known by other names such as a solo 401(k) plan, an employer-only 401(k) plan, a single participant 401(k) plan, or a mini 401(k) plan) may offer a better combination of benefits. An individual 401(k) plan is worth considering if you're looking to set up your first retirement plan or want to switch to a different plan.

What is an individual 401(k) plan?

An individual 401(k) plan is a regular 401(k) plan combined with a profit-sharing plan. However, unlike a regular 401(k) plan, an individual 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees (an exception applies if your full-time employee is your spouse). If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up, so adopting an individual 401(k) plan will not be a viable option.

Note: An individual 401(k) plan isn't really a different kind of 401(k) plan. Rather, it simply takes advantage of the fact that relaxed rules apply when the only individuals who participate in the plan are the owner and the owner's spouse.

What makes an individual 401(k) plan attractive?

One feature that makes an individual 401(k) plan an attractive retirement savings vehicle is that in most cases your allowable contribution to an individual 401(k) plan will be as large or larger than you could make under another type of retirement plan.

With an individual 401(k) plan you can elect to defer up to $16,500 of your compensation to the plan for 2009 ($22,000 if you are age 50 or older by the end of the calendar year), just as you could with any 401(k) plan. In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25 percent of your compensation (slightly less than that if you are a sole proprietor or unincorporated).

Because the amount of compensation deferred as part of a 401(k) plan does not count toward the 25 percent limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25 percent of total compensation to the profit-sharing plan on your own behalf. Total plan contributions for 2009 cannot, however, exceed the lesser of $49,000 or 100 percent of your compensation (plus any catch-up contributions if you're 50 or older).

In an effort to continue pushing the nation’s economy along the road to recovery, President Obama recently signed a bill that extends the first-time home buyer tax credit and expands the credit to include more buyers.

First-time buyers who have not owned a home in the past three years are eligible for up to an $8,000 tax credit.

·         Tax credit does not require repayment.

·         Credit is available to couples with gross income of less than $225,000 and individuals making less than $125,000.

·         Buyers must secure a binding contract by April 30, allowing 60 days to close.

Qualified homeowners who have lived in their current home for at least five of the past eight years are eligible for up to a $6,500 tax credit to buy a home.

·         Tax credit does not require repayment.

·         Credit is available to couples with gross income of less than $225,000 and individuals making less than $125,000.

·         Credit is limited to homes priced $800,000 or less.

·         Buyers must secure a binding contract by April 30, allowing 60 days to close.