Center for Real Estate Entrepreneurship Research
Presented by Gerald Hanweck, Sr., Professor of Finance, George Mason School of Mananagement (February 4, 2011)
U.S. Housing Starts Rise for First Time Since August
Housing starts rose to a 555,000 annual rate, up 3.9 percent from October's 534,000 pace that was higher than initially estimated, according to the Commerce Department. On the other hand, building permits fell.
MBA Mortgage Refinance Index Decreases
The Refinance Index decreased 0.7 percent from the previous week. This is the fifth straight weekly decline for the Refinance Index. The seasonally adjusted Purchase Index decreased 5.0 percent from one week earlier. The average mortgage rate for 30-year fixed-rate mortgages increased to 4.84 percent from 4.66 percent, with points increasing to 1.34 from 0.94 (including the origination fee) for 80% LTV loans.
There were high profits on low volume last quarter and that prevented a refi wave. Q4 will see lower margins as the primary/secondary spread is compressing into the downtrade. Volumes will fall as rates have risen over 100bp. Expect house price to fall 6 to 8% due to the interest rate increase.
Office Market Expected to Improve by the End of 2012
The U.S. office market vacancy rate is expected to slowly decline over the next two years, falling to 16.4% by the end of 2011 and to 15.3% by the end of 2012, according to new analysis from CBRE Econometric Advisors (CBRE-EA). CBRE-EA forecasts that the office vacancy rate will peak in 2Q2011 at 16.8%, up from the 16.6% level at 3Q2010.
Euro Bond Futures Plunge
Euro Bond Futures are falling like a rock. This drop is in spite of the bailout fund and the U.S. government's annnounced support for it. Could it be that the Euro is going down the tubes? It certainly looks like it.
MBA Purchase Application Index Up Slightly
The MBA Purchase Applications Index rose slightly. Given low mortgage rates and the decline in housing prices, we should expect some action in the housing market—even in the dreaded winter months. Bear in mind that the Elite Areas of the country (San Diego, Los Angeles, San Francisco, Boston, New York and Washington, D.C.) are experiencing above average house price growth. So, the myth that the housing market is dead is wrong. It is the Non-Elite Areas where the housing market is dead, particularly in the Sand States of Arizona, Nevada, California's Inland Empire and Florida.
S&P Case-Shiller Housing Index Slips 2%
The S&P Case-Shiller Housing Index fell 2% for the third quarter after posting a positive quarterly return in the 2nd quarter. Once again, the tax credit shifted sales from the summmer/fall back to spring/summer and we are left with a weakened housing market. We enter December with low interest rates, but the prospect of dramatically higher taxes in 2011 (if Congress fails to act), so they outlook for housing for 2011 is less than stellar. Throw in the growth in shadow inventories from foreclosures that are now proceeding, and renting looks like the better bet for a few years.
Fannie Mae, Freddie Mac give the 'go-ahead' to resume sales of foreclosed homes
According to the Palm Beach Post, Fannie Mae and Freddie Mac gave the go-ahead this week to restart sales of their foreclosed properties, which had been on hold since September when it was contended that flawed or fraudulent court documents may have been used to repossess homes.
Does this indicate that Fannie Mae and Freddie Mac do not believe that the much maligned foreclosure process is, in fact, managable after all?
Spain, Portugal and Belgium set to follow Ireland Towards Economic Collapse
New fears have been raised about the future of the euro with the domino effect of faltering economies spreading today.
The latest nation to get sucked into the crisis is Belgium after market traders pushed the cost of insuring the country's debt to record levels.
New Home Sales Fall
Sales of new homes dropped in October, indicating that historically low borrowing costs are failing to stimulate the home building industry.
Sales of new homes in the U.S. unexpectedly decreased 8.1 percent in October to a 283,000 annual rate, indicating near record-low borrowing costs are failing to revive new home construction.
October Median New House Prices Fall - Quite a Bit!
The October median new home price of $194,000 was the lowest recorded by the Census Bureau since December 2007. Then again, we are entering the Winter months.
UK Does the Opposite of the USA - it requires HIGHER downpayments
The chart below shows the impact of 1980s liberalization on leverage in the housing market in the UK. Who is correct?
Commercial Real Estate Shows Large Gain
Moody's reported today that the Moody's/REAL All Property Type Aggregate Index increased 4.3% in September. While this is good news for investors, the troubles facing the commercial real estate market are still present, such as limited funds available for borrowing.
Visible and Shadow Inventory of Housing Increases Slightly
CoreLogic released their estimate of total visible and invisible (shadow) housing inventory. Even though the visible inventory has declined slightly from the peak in 2007, the total inventory is at close to an all time high of 6.3 million units. Thus, it will be difficult to see large increases in housing prices as long as 6.3 million units of supply are in the market.
Critical Commercial Real Estate/Housing/Mortgage Announcements for this week
----- Monday, Nov 22nd -----
9:00 AM: CoreLogic Shadow Inventory Data for August 2010. This should increase.
Morning: Moody's/REAL Commercial Property Price Index (CPPI) for September. This should show some improvement, at least in Washington DC.
----- Tuesday, Nov 23rd -----
10:00 AM: Existing Home Sales for October from the National Association of Realtors (NAR). Prediction is same as last month or a slight drop.
----- Wednesday, Nov 24th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. No predicted rally.
10:00 AM: New Home Sales for October from the Census Bureau. Prediction: slight increase in sales to 314K (SAAR) in October from 307K in September.
10:00 AM: FHFA House Price Index for September. This is based on GSE repeat sales.
Fannie Mae lowers down payments to zero!
Fannie Mae has announced it is purchasing effectively zero down mortgages.
Effective December 13, 2010, Fannie Mae will allow buyers to use gifts and grants from nonprofit groups for the minimum 5 percent down payment. Since we already have the FHA as the low downpayment branch of the Federal government, why do we need Fannie Mae doing this as well?
The question, of course, is whether purchasing zero downpayment mortgages will help reinflate the housing market. Between tax credits, HAMP, QE2 and other market intrusions into the housing market, we have had little increase in housing prices.
Except in our major coastal cities, of course.
Architecture Billings Index has ALMOST returned to normal
While trying to find good news in the struggling commercial real estate market, here is one bit of data that is positive. The Arcitecture Billings Index has been steadily recovering from its collapse from the latter half of 2007 to early 2009. According to the Index, we are on the verge of expansion in the commercial (including multifamily) real estate markets. And as I have said before, the real estate markets essentially fell off the cliff in the second half of 2007 and the recovery has taken several years.
Treasury's HAMP Program - what happens to those borrowers that drop out?
Treasury's HAMP program has been unsuccessful in stemming the default/foreclosure tide. Congress loves to blame the servicing industry, but the housing bubble and crash is the result of misguided Federal housing polices and government chasing homeownership rates—off a cliff. [Even Raphael Bostic, the Asst. Secretary of HUD, has gone on record stating that maybe that was a bad idea.] In fact, the Federal government is ultimately responsible for the deluge of default and foreclosures that the servicing industry has been made to cope with.
Fannie Mae's new name — REO Speedwagon!
Who knows what will happen to Fannie Mae and Freddie Mac. But at a minimum, Fannie Mae should changes it name to REO Speedwagon. The amount of REO that the GSEs hold is frigthening and the trend is worstening. Hey, wasn't Treasury's HAMP program supposed to solve the problem? What the administration fails to ever recognize is that housing prices fell off a cliff in the latter half of 2007 as unemployment was increasing. Once this happened, it is almost impossible to undo.
Housing Starts - Still Dead
One of the problems with a massive housing bubble is that home building was shifted from the future (2010) to the present (say, 2006). So, it is not surprising that housing starts have effectively collapsed. When we consider the inventory of bank foreclosures, Fannie and Freddie REOs, and the foreclosure pipeline for 3 million loans, we will only see homebuilding in high growth areas like Washington, D.C., and Northern Virginia.
It's official - this is the worst unemployment recovery since WWII
Its official! This is the WORST unemployment recovery since World War II. Only the 2001 recession lasted as long as this employment recession. What does this mean? Its means that while there will be some recovery in retail and office markets in certain locations (like the Washington, D.C., metro area), prospects are generally poor for other areas of the country.
Foreclosure Filings (Residential) Fall for October 2010
Not surprisingly, foreclosure filings fell for October 2010. The states will the largest percentage drops are Nevada, California and Michigan. While this could be viewed as a positive sign for the housing market, I would argue that it is the results of pressure by State governments in those states to perform additional loan modifications.
The Washington, D.C., office market continues to recover
The Washington, D.C., area office market continues to recover in terms of price since the 2009 plunge. New York City had an even greater run-up in prices until 2007 and an even greater plunge in prices in 2009. Note that Washington, D.C.'s recovery is faster than New York City's recovery in recent quarters, owning to the rapid growth of Federal government and the desire for firms to be located near the center of power.
Troubled banks in Virginia reaches 11
Troubled banks in Virginia were few prior to 2010, with 2 in 2009 and 1 each in 2008 and 2007. But the list grew in 2010 to 11. The majority of the banks are in rural Virginia with only a few in the metropolitan areas. Hopefully, with commercial price stabilization the number of troubled banks will fall in 2011.
Why Bernanke's QE2 will not work as hoped
What Bernanke and the Fed hopes is that a decline in long-term rates brought by QE2 (printing of over $600 billion) will both cause investors to be more aggressive and support the housing market. The problem is that lack of investor aggressiveness isn't the problem. The economy is suffering high levels of risk aversion because there is a tremendous amount of uncertainty - uncertainty largely due to government intervention and policies. Reducing long-term Treasury rates won't make firms and investors more comfortable about the future. People sleep more soundly when they know their front door is securely locked.
U.S. two-year swap spreads widened to their highest levels in four months on Friday, showing rising stress in the financial system and the fears about QE2, Irish debt default Irish debt default and the unwillingness of Federal government to reign in spending. No wonder investors are scared.
PIIGS Credit Default Swaps are REALLY widening
We need the late, great Robert Preston from "The Music Man" to sing "Trouble in River City." The credit default swaps for Portugal, Ireland, Iceland, Greece and Spain (PIIGS) are REALLY widening. This is bad news for the capital markets, particularly since Europe is one of our biggest trading partners. This signals a slowdown for Europe and may trickle down to China and the USA. The worry is that Bernanke will respond in the near future with another round of ... quantitative easing (pinting billions/trillions of currency).
Municipal Bond Problems
We are all aware that out of control spending at the Federal level and a number of State governments (e.g., California and Illinois) had led to a debt crisis. But little has been mentioned about municipalties. While stories about municipal defaults have made national news (mostly in California), most do not realize that the problem in national in scope. A review of the Nuveen Barclays Municpal Bond index reveals a big price drop. The admission by Bernanke (by doing QE2) that the economy is weak coupled with stagnant house prices and reduced muni tax receipts is bad news. If house prices turn around, that would be blessed news for muni bonds.
Inflation in Construction Material Costs
Another side effect of the Fed's easy money policies (including print of over $600 billion of currency) has been the dramatic rise in construction material costs, particularly copper. Other costs are rising as well (such as lumber), although the government reports inflation is near zero. The increase in prices has been particularly large since March 2009. In addition to currency devaluation, China has been aggressively purchasing raw materials like copper as their economy expands at breakneck speed—at least until they have a massive bubble burst. Watch for China to raise interest rates. This is getting fun!
Bernanke's QE2 and Borrowing Costs
Bernanke's quantitative easing (QE2) had variety of purposes, including U.S. exports such as automobiles less expensive overseas (while increasing the cost of imports such as...automobiles). But he also would like to see housing and commercial real estate prices inflate in price as well. But look at the impact on the U.S. Treasury yield curve. Just since last month, the long-end of the Treasury curve has risen 50 basis points in just over a month (while the short-end remains near zero). Stated differently, borrowing costs have actually INCREASED for longer-term debt. What this means for real estate borrowers is that borrowing costs are going to have to rise in the near future.
Residential Investment following recessions
Residential investment has traditionally rocvered rapidly following recessions. However, this recession has seen no residential investment rally. Rather, it just keeps getting worse. This isn't your father's Oldsmobile—and it isn't your father's recession either.
MBA Refi Index
The Mortgage Bankers Association (MBA) released their Refinancing Index on October 20, 2010 as well. Unlike the MBA Purchase Applications Index, the MBA Refi Index is actually doing well. However, despite the decline in 30 year mortgage rates, the mortgage refi applications are not up to the levels of 2009. This could actually indicate that the number of households that will be refinancing in the future may be limited.
MBA Purchase Applications
The Mortgage Bankers Association (MBA) released their Purchase Application Index on October 20, 2010. Once again, it shows a decline in purchase applications of 6.6 percent from the previous week. Furthermore, it was down 29.4 percent than the same week one year ago. As the chart indicates, the declining mortgage rates have done little to spur the housing market. And as we begin to enter the historically slow Winter season for home purchases, look for purchase applications to erode further.