Case Shiller And Housing Markets

Its A Mixed Bag

There is an across the board improvement in home prices if you look at 2009 compared to 2008. But as you drill down, the latest Case Shiller reports show only five markets saw price increases in November vs October and four markets, Charlotte, Vegas, Seattle and Tampa posted new four year lows. Standard & Poors notes that any gains they might have seen in recent months have been erased.

Conclusion
To add more mixed signals, we are in a seasonally weak period for home prices, so the seasonally-adjusted data are generally more positive, with 14 of the markets and both composites showing improved prices in November. On balance, home prices are far more stable than they were a year ago but its not yet a sustainable, broad-based recovery.

Whats Holding Us Back
The Usual Suspects

Banks
Barry Sternlicht, chairman and CEO of U.S.-based Starwood Capital noted that no net new debt has been created by banks in real estate. Instead, banks are merely rolling over existing debt and buying debt from other failed banks in transactions where they had some exposure as participants. Banks are not lending; if they say they are lending, it's not true. The capital environment is different, and worse, he added, noting that much of the current investment activity is being powered by government spending and not private money. (Via Knowledge @ The Wharton School of Business)

Unemployement
The worst year of job losses since the Great Depression ended with a loss 85,000 jobs. The unemployment rate stood at 10%, but actually might be higher because it doesnt count workers that quit trying to find work and dropped out of the labor force. There are promising signs though. In the first quarter of last year, we were losing an average of 691,000 jobs a month. That number has fallen dramatically in the fourth quarter.

Commercial Real Estate
According to REIS Media, we have close to $3.5 trillion of loans outstanding and at least 12 to 24 more months of rent declines, I expect to see more commercial properties defaulting on loans. One very big reason, banks are not taking on any new risks unless they have to.

Last week, Tishman Speyer BlackRock, one of the largest commercial property owners sent their $5.3 billion investment in 11,000 apartments in New York back to their bankers. Both Stuyvesant Town and Peter Cooper Village on Manhattans lower east side were solid middle class properties. The key driver was loans made to developers between 2005 and 2007 assumed ever rising rents and low vacancy rates. Speculators acted on rosy projections will drive many properties back to the bank as the better business decision.

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Freddie Mac Weekly Mortgage Update: Mortgage Rates Flat This Week

30-year fixed-rate mortgage: Averaged 4.98 percent with an average 0.6 point for the week ending January 28, 2010, down slightly from last week when it averaged 4.99 percent. Last year at this time, the 30-year FRM averaged 5.10 percent.

The 15-year fixed-rate mortgage: Averaged 4.39 percent with an average 0.6 point , down slightly from last week when it averaged 4.40 percent. A year ago at this time, the 15-year FRM averaged 4.80 percent.

Five-year indexed hybrid adjustable-rate mortgages ARMs: Averaged 4.25 percent this week, with an average 0.6 point, down from last week when it averaged 4.27 percent. A year ago, the 5-year ARM averaged 5.27 percent.

One-year Treasury-indexed ARMs: Averaged 4.29 percent this week with an average 0.5 point, down from last week when it averaged 4.32 percent. At this time last year, the 1-year ARM averaged 4.90 percent.

Freddie Sayz

Mortgage rates held steady this week ahead of the Federal Reserve's (Fed) policy committee meetings ,said Frank Nothaft, Freddie Mac vice president and chief economist. The Fed announced on January 27th that economic activity has continued to strengthen. It also noted that with substantial resource slack continuing to restrain cost pressures and with longer term inflation expectations stable, inflation is likely to be subdued for some time. Last year was rough on the housing market. The number of new one family housing starts hit a historical low of just under 1/2 million units since records began in 1959. Similarly, new home sales were under 400,000 homes, an all-time record since data compilation began in 1963. Total existing home sales, however, rose to almost 5 million houses, which was the first annual increase in four years.

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Mortgage Bankers Weekly Update : Mortgage Applications Decrease

Mortgage Bankers Association for the week of 1/27/2010

Market Composite Index: (loan application volume) decreased 10.9 percent on a seasonally adjusted basis from one week earlier.

Refinance Index: decreased 15.1 percent from the previous week and the seasonally adjusted Purchase Index decreased 3.3 percent from one week earlier.

Purchase Index: The four week moving average is up 1.3 percent

Refinance Share of Mortgage Activity: decreased to 67.6 percent of total applications from 71.7 percent the previous week.

Arm Share: increased to 4.7 percent from 4.1 percent of total applications from the previous week.

MBA outlook: (Excerpted from mbaa.org)

Fourth quarter GDP growth of roughly 4-1/2% seems likely. A larger increase in inventory investment is the main reason for stronger fourth quarter growth. I nventory investment is inherently a temporary source of stimulus to economic growth, but is not yet close to running its course.

The impact of the stimulus program on federal consumption and investment will run its course by about midyear, and constraints on state and local budgets will probably mean moderate declines in their purchases of goods and services for the next year and perhaps longer. It is the pace of private domestic final sales—consumer spending, capital expenditure, and housing, that will principally determine the economys growth in the year ahead.

While inventories of unsold homes have come down significantly, the shadow inventory represented by homes in foreclosure remains large and growing. Another down leg in home prices cannot, therefore, be ruled out. Builders are still deeply pessimistic: A dramatic increase in home building does not seem to be in the cards. Consumer confidence, though rebounding since the first quarter of last year, remains as low as it was in the deep recession of 1981-82

In other words, we are out of a terrible recession, but left so weak that it we will be in repair mode for quite a while.

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NAR Monthly Report: Sales Up In 2009 And Then Dip

NAR Monthly Report

NAR reports that December saw a monthly decrease in sales, but prices and sales rose in 2009 compared to 2008. We had a surge in home sales and prices from September all the way through November, due to the tax stimulus ans seasonal sales.

Sales of existing homes, condos and co-ops fell 16.7% abut are above the 08 December numbers by 15%. Given that this is the first annual gain, by NARs numbers, its encouraging. NAR goes on to note that the extended tax credit and seasonal strength will no doubt see us through another increase and perhaps a positive year.

Expanded and Extended Tax Credit

Some Pointers

1. First Time Home buyers: A tax credit of up to $8,000 is available for first-time home buyers purchasing on or after January 1, 2009 and on or before April 30, 2010.

2. Repeat Home buyers: A tax credit of up to $6,500 is available for repeat home buyers who have owned a home for five consecutive years out of the prior eight years. The repeat home buyer tax credit applies to houses sold after November 6, 2009 and on or before April 30, 2010.

3. Income limits: for sales occurring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for individual taxpayers and $150,000 for married couples filing jointly.

4. Home Price Limits Imposed: Homes priced above $800,000 are not eligible for either the first-time home buyer tax credit or the repeat home buyer tax credit.

5. Family Relatives: Home purchases from relatives of the taxpayer or the taxpayer’s spouse do not qualify for the tax credit.

6. Married couples: are not eligible to claim the first-time home buyer tax credit if either spouse has previously owned a home.

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FHA Financing Now Available For REO Properties

FHA Press release

In an effort to stabilize home values, HUD Secretary Donovan announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties.

HUD will allow FHA financing for buyers of REO property. This is a temporary waiver of policy, good for one year. The hope is that it will help soak up supply and stabilize the markets. The waiver takes effect February 1, 2010 for one year.

To avoid speculation or flipping of property, HUD has set down some stringent rules. They are certainly not looking to reignite the kind of speculation that was partly responsible for the collapse.

No Speculators Allowed

1. The transactions must be at arms-length.
2. No entity of interest between the buyer and seller
3. If the sales price of the property is 20% or more above the sellers acquisition cost, the waiver will only apply if the lender meets certain requirements.
4. The waiver only applies to forward mortgages but not to the Home Equity Conversion Mortgages.
5. FHA currently does not insure a seller owned mortgage, owned less than 90 days. The waiver may give offer borrowers access to FHA temporarily.

The policy allows buyers buyers access to FHA-insured financing to buy HUD-owned properties, bank-owned properties, or properties resold through private sales.

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REITs: The Other Big Lenders

What Are They

When we think of credit or lenders we often think of banks, now that mortgage companies no longer exist, at least independently.

Its clear that banks may6 not be willing or in a strong position to lend money to buyers in a meaningful way. We often forget there is such a thing as private equity.

Private Equity
REITS

Simply but not entirely accurate, a Real Estate Investment Trust is a stock market vehicle much like a mutual fund. When you buy shares of REIT, you are buying a share of a real estate or mortgage portfolio, rather than a portfolio of stocks.


These industry behemoths have more than raised $40 billion dollars of new money in 2009 and so are in a better position to refinance as credit markets thaw. They will be a solid option for owners, as the banks still hold back until their balance sheets are stronger. They have little appetite for risk, especially real estate related risk.

The ability to access capital is a critical advantage in a market in which bank lending remains tight and the CMBS market still is essentially dysfunctional, said NAREIT President and CEO Steven A. Wechsler

The REITS are now cash heavy and have superior, specialized real estate management skills. In other words they are ready to refi property and to buy property in what will become a generational opportunity, as cash strapped owners and developers are forced to walk away from bad deals.

REIT Reality
A view from the stock market

Steve Sterrett, a REIT CEO notes: People are more comfortable with their business models and while the first half of 2010 will look a lot like 2009, the second half will be better. The chart speaks for itself. Professional investors are trying to look past the problem that commercial real estate is experiencing and are betting that cash heavy investors will benefit when owners that cant carry walk or sell at bargain basement prices.

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Freddie Mac Weekly Updates

Fixed-Rates Down Slightly While ARMs Are Mixed

30-year fixed-rate mortgage: Averaged 5.06 percent with an average 0.7 point for the week ending January 14, 2010, down from last week when it averaged 5.09 percent. Last year at this time, the 30-year FRM averaged 4.96 percent.

The 15-year fixed-rate mortgage: Averaged 4.45 percent with an average 0.6 point , down from last week when it averaged 4.50 percent. A year ago at this time, the 15-year FRM averaged 4.65 percent.

Five-year indexed hybrid adjustable-rate mortgages ARMs: Averaged 4.32 percent this week, with an average 0.6 point, down from last week when it averaged 4.44 percent. A year ago, the 5-year ARM averaged 5.25 percent.

One-year Treasury-indexed ARMs: Averaged 4.39 percent this week with an average 0.5 point, up from last week when it averaged 4.31 percent. At this time last year, the 1-year ARM averaged 4.89 percent.

Freddie Sayz

Interest rates for fixed rate mortgages eased a little further this week, while ARM rates were mixed, said Frank Nothaft, Freddie Mac vice president and chief economist. With fixed mortgage rates staying near a record low, many homeowners are taking the opportunity to refinance. For instance, over the past three-and-a-half months, on average more than 75 percent of conventional mortgage applications were for refinance transactions, according to the Mortgage Bankers Association.

The Federal Reserve recently reported positive news in both the housing market and the overall state of the economy in its January 13th regional economic report, which spanned the last few months of 2009. Economic activity improved in 10 of its 12 districts. Home sales, especially for lower-priced homes, increased due in part to the homebuyer tax credit and house prices appeared to have changed little since its last report

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Mortgage Bankers Weekly Update

Mortgage Bankers Association for the week of 1/13/2010

Market Composite Index: (loan application volume) increased 14.3 percent on a seasonally adjusted basis from one week earlier

Refinance Index: increased 21.8 percent from last week’s holiday adjusted index and increased 73.9 percent from last week’s unadjusted index

Purchase Index: increased 0.8 percent from one week earlier.

Refinance Share of Mortgage Activity: increased to 71.5 percent of total applications from 68.2 percent the previous week
unchanged at 4.0 percent of total applications from the previous week.
Arm Share:

MBA outlook: (Excerpted from mbaa.org)

The December jobs report was indicates a slow recovery. 85,000 jobs lost and an unemployment holding at 10 percent.

Bloated inventories of unsold homes, buoyed by continued inflows of foreclosed properties, will keep a lid on home prices for some time. We do not expect more typical rates of home price appreciation until 2012. The Federal Reserve is unlikely to raise rates in 2010, but they will meet their commitment to purchase $1.25 trillion in agency MBS by the end of the first quarter.

The MBAA anticipates that mortgage rates will rise by about a percentage point through the year, to end at 6.1 percent. Eye-popping federal budget deficits and positive economic growth will put upward pressure on Treasuries. Yields on mortgage securities will need to increase to get private investors back into the market once the Fed stops its purchases.

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Banks 2010: The Regulatory Angle

The lending industry is crucial to a strong housing recovery. Regardless of demand and price, any housing recovery will have to depend on lenders providing credit to buyers.

Where Are The lenders

The banking industry has cut back lending for the past 15 months. They have reduced access to more than $3 trillion of credit. Home buyers, dependent on credit, cant rely on the banks yet.

Just As Profits Drop Regulation Increases

Bank lending delinked from good business judgment and so caused the worst crises in modern economic history. In response to hugely irresponsible lending practices, Congress has been busy creating a range of new regulations, taking effect in 2010.

Overdraft fees and credit card predatory practices will squeeze billions of dollars from penalty income.

Marketwatch notes that that bank profitability may actually fall to where it was in the 1960s or '70s. After twenty years of deregulation, bankers will now face tougher rules.

Pressure is building in Congress

Congress and the administration want the banks to write down the principle on mortgage. To share the pain with their partners, the home buyers and property developers. Without some bank acknowledgement that they agreed to bad deals we will see even more foreclosures.

Obama proposes a tax on corporations to big to fail. This will hit all banks with more than 50 billion in assets. Looking at smaller profits for years to come, we will see a new conservatism in the way banks do business.

A New Capitalism

We are moving towards a more highly regulated, moderated Capitalism. The view of markets as a mechanism that naturally seeks equilibrium seems laughable now.

Pimcos Bill Gross puts it this way: Diminished growth, deleveraging, and increased government involvement will temper profits. As banks, auto companies and other corporate models become more regulated and therefore more like utilities and less like Boardwalk and Park Place, they will return less. companies are going to move toward a utility model.

Whats It Mean For Housing

The banks will diversify away from property as collateral. I think we will see less lending and that alone will moderate price. Pending sales index fell a 16 percent in November, suggesting weaker months ahead.

Stricter Fannie and Freddie qualifications will place more restrictions on loans and squeeze speculation even further.

A phase out of the Fed secondary market supports will also put pressure on interest rates. Long term interest rates are up almost a half-percent and mortgage rates cant be far behind.

Major regulatory changes, coupled with a weak consumer means a protracted recovery for the real estate markets, as the banks continue to keep a low profile.

On a more positive note, James F. O’Sullivan, chief economist for MF Global, said. But we’re at the point where strength is feeding on itself, and you’ll see more strength in six months time than you’ll see now (via cbsmarketwatch).

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Banks in 2010:

The Commercial Real Estate Angle

The Atlanta Fed notes that a recovery is under way, and shifting from government support to private sector activity.

Housing Now

1.End of 2009: home sales increased in every district but San Francisco, where activity was steady and Kansas City, which declined
2. Lower priced homes typically purchased by first-time homebuyers outpaced sales of higher priced homes
3. Prices have remained at their low levels. Boston, Philadelphia, and Cleveland experienced price declines while Dallas reporting some firming
4. Residential construction activity is at low levels in most districts, except Chicago and Minneapolis
5. Rising vacancy rates and falling rents reflect the weakness in commercial real estate

Commercial Real Estate is the Big Question For Banks

The risk associated with commercial real estate is linked to banks, small business credit and jobs.

Banks are facing 900 billion dollars of bad or weak commercial paper, largely held by small or regional banks. Small business depend on small or regional banks for financing and they are not getting loans.

The concern now is a negative feedback loop, where banks wont loan money to small business so they cant hire. And without jobs, commercial property will see more vacancies, lower cash flows and lower evaluations, since that is dependent on strong economic activity. All this, just as they line up at the banks doors looking for strong asset evaluations and a bank ready refi

Its anybodys guess as to how this will play out, but the banks will need to sort this out before they take on new risks. Credit flow will remain MIA and that means a muted real estate recovery for now.

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2009 Ends With Mortgage Rates Just Over 5 Percent

30-year fixed-rate mortgage: Averaged 5.09 percent with an average 0.7 point for the week ending January 7, 2009, down from last week when it averaged 5.14 percent. Last year at this time, the 30-year FRM averaged 5.01 percent.

The 15-year fixed-rate mortgage: Averaged 4.50 percent with an average 0.7 point, down from last week when it averaged 4.54 percent. A year ago at this time, the 15-year FRM averaged 4.62 percent.

Five-year indexed hybrid adjustable-rate mortgages ARMs: Averaged 4.44 percent this week, with an average 0.6 point, unchanged from last week when it averaged 4.44 percent. A year ago, the 5-year ARM averaged 5.49 percent.

One-year Treasury-indexed ARMs: Averaged 4.31 percent this week with an average 0.6 point, down from last week when it averaged 4.33 percent. At this time last year, the 1-year ARM averaged 4.95 percent.

Freddie Sayz

Mortgage rates eased slightly this week after rising consecutively through December, said Frank Nothaft, Freddie Mac vice president and chief economist. Current interest rates for fixed rate mortgages are just about at their annual average for 2009, while ARM rates are considerably below their averages for last year. As the economy strengthens further and the Federal Reserve (Fed) decides to raise its overnight target rate, ARM rates will follow suit because they are typically tied to shorter-term interest rates. However, the federal funds futures market does not anticipate any Fed action until the second half of 2010

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Mortgage Bankers: Weekly Update Loan Apps Decline

Mortgage Bankers Association for the week of 1/6/2010

Market Composite Index: (loan application volume) decreased 22.8 percent on a seasonally adjusted basis from the prior week.

Refinance Index: decreased 30.5 percent from the previous week and the seasonally adjusted Purchase Index decreased 4.0 percent from one week earlier. The following week, the Refinance Index decreased 1.6 percent and the seasonally adjusted Purchase Index increased 3.6 percent.

Purchase Index: decreased 33.1 percent the week of Christmas and increased 5.0 percent the week following. This measure was 26.2 percent and 28.2 percent lower, respectively, than the same period a year ago.

Refinance Share of Mortgage Activity: mortgage activity for the week ending January 1, 2010 is 68.2 percent, a decrease from 69.6 percent for the week ending December 25, 2009.


MBA outlook: (Excerpted from mbaa.org)

In summary the MBAA sees another year of high employment, rising home sales and prices beginning to stabilize. But continued weakness in the job market and excess supply and shadow inventory will slow any recovery in the housing market.

The MBAA sees unemployment rate at about 10% at the end of 2010, and core inflation rates of below 2%. Fed rate is expected to remain at its current level throughout 2010.

But, property values will not recover until unsold inventory returns to normal levels. Affordability is at record levels, yet there is no strong indication that the demand recovering. People do not yet seem to trust the recovery and many do not have the necessary down payment or can clear tighter loan qualifications

The MBAA site economic report indicates a fragile recovery, but makes note that without credit the recovery remains tepid at best. The site makes note: Smaller businesses and consumers are heavily dependent on banks for obtaining credit, and there is little evidence that, as yet, banks have loosened the purse strings.

Bank loans to businesses and consumers are still falling with few signs of stopping or slowing down. Part of the decline is declining demand, but the fall is too large to be explained by weakness in demand alone. The banks are simply not yet stepping up to fill the vacuum.

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Housings Weak Recovery: Lets Follow The Money

Quarterly reports are out. NAR, Case Shiller, Consumer Confidence reports all indicate that the housing recovery is faltering to flat. Much of the Govt supports will be slowly exiting as the Fed tests the normal functions of an economy replace Federal aid.

Residential

Case Shiller and NAR reports show continued weakness and everyone is wondering whether the recovery is waning. Case Shiller notes that the rate of decline in home prices slowed in October from the previous month, and prices remain flat after the spring and summer gains. Home price Indices of its its 10-city and 20-city composite indices declined 6.4% and 7.3%, putting home prices at 2003 levels. A flat report is not as bad as much of the last two years, but some Govt programs are being phased out.

NAR site points out that on a month-to -month basis,only seven of the 20 cities showed improvement. NARs data for November showed prices down 4.3% year-over-year. Foreclosures continue to be the problem, making up 30% of the third quarter’s home purchase.

Moodys points out that there are 3 million more homes in the pipe and that another 3 million are 30-60 days late. These homes are in a foreclosure pattern. New Home Sales: The government reported that sales of new homes dropped a sharp 11.3 percent, an indication that supply is still greater than demand.

Apartments

The apartment market is showing signs of improvement, according to the National Multi Housing Council’s latest Quarterly Survey of Apartment Market Conditions. Although the survey still indicates higher vacancies and lower rents, we see increased sales activity and greater availability of debt and equity capital compared with three months ago. Apartments have long been considered the better investment, partly because there is financing available and they didnt participate in the building boom of single family homes

Follow The Money

The American Recovery and Investment Act of 2009

Will pump more economic stimulus money into federally subsidized apartment units, while HUD’s budget proposal for next year seeks another $1.8 billion for construction of rental housing.

Green

HUD and the U.S. Department of Energy are working together to offer more financial incentives for owners to retrofit properties for energy efficiency. Another economic stimulus plan enacted earlier this year provided funds for green retrofits. Larger property owners of commercial buildings including apartment complexes where
conservation of energy had the greatest impact. Hopefully, some of this money will trickle down to smaller owners.

Fannie and Freddie

Congress had placed a cap on spending of $200 billion dollars on each. On Christmas eve, Obama lifted the cap through 2012, giving the two quasi public institutions a blank check. I think this points very clearly to the next big wave of foreclosure that will stem from the Alt A and commercial mortgage recasts that will be coming due between now and 2012. A blank check (read big money problems) is whats next.

The Stock Market

REITS

The Dow Jones Equity All REIT Total Return Index is up 31% this year, reversing a 38% decline in 2008, beating the S&P 500 by 25%. Given all the flat to downright ugly news still coming out it seems counter intuitive that real estate funds would be doing so well.

They have been raising money issuing new shares and selling property whenever they can. In short, they have been raising money for whats expected to be a generational opportunity in good properties coming on the market at great prices. The ishares industrial/office and retail REITS are up 10.7% and 11.2% respectively in November/December alone. Even mortgage REITS are up 3.8% for the same period. Heres what they are looking at...

Real Estate Rubble

Bloomberg reports that commercial property prices have fallen by 30 percent to 50 percent wiping out the equity in most debt financed real estate deals since 2005. This equals as much as 54 percent of the $1.4 trillion in loans that will come due in four years, according to Randall Zisler, chief executive officer of Zisler Capital Partners LLC (via Bloomberg News).

Mr. Zisler goes on to say that much of the debt is likely worth about 50 percent of par. Many banks will end up insolvent as they reduce the value of their holdings, he wrote, adding that regional and community lenders are especially vulnerable.

Stock markets are forward looking mechanisms and the REITS are looking passed the problem to great future buying opportunities. If the banks are holding so much bad paper, then it will be taxpayer money (those blank checks) and private investment money (REITs) likely final owners of all this real estate rubble. I know that investors will cherry pick and to drive hard deals to profit. I wonder if that leaves us, the taxpayers, to buy whats left.... Its all in the oversight

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