Housing News Blog

Commercial real estate

2007-06-06T16:29:00.000-04:00

For those of you who have not seen it, I suggest checking out http://realestaterisk.blogspot.com.

commercial mortgage back bond spreads continue to widen

2007-05-04T09:20:00.000-04:00

From realpoint, a CMBS tracking company under CapMark:

May 03, 2007
The turmoil in the CMBS market has filtered down to deals' B-pieces, which have seen their yields climb sharply in recent weeks.

Spreads on bonds rated BB+ down to B- are now some 100 basis points wider than they were several weeks ago, before the massive spread widening hit deals' more senior classes. And the yield that B-piece investors are demanding for deals' unrated tranches have spiked by 10-20 percent to roughly 22-24 percent.

Not only are area yields up, but B-piece buyers are said to now have more leeway in the volume of loans they kick out of potential securitizations.

The result is that lenders have widened the spreads on their mortgages by 5-10 bp.

...
Unrated tranches were said to have been trading for up to 1,500 bp over Treasurys, which would have placed a yield of 19.5 percent on them. Their yield is now at or near 24 percent.

...
But the spread widening has been welcomed by many bond investors who long have fretted that credit standards had weakened substantially.

...
"This is a good sign," [an investor added], saying that it could save the industry from ultimately facing a major meltdown.

Toll Brothers sued by shareholder

2007-05-01T09:40:00.000-04:00

A shareholder has filed a lawsuit against Toll Brothers Inc., claiming the luxury homebuilder inflated its stock prices by misleading investors about the strength of the company's position in the housing market.

The suit states that while executives for the Horsham-based company were telling investors the luxury home market was “tremendous” and the company was on track to grow 20 percent in a year, demand for its homes was actually shrinking, and it didn't have enough inventory to achieve that promised growth.

“Nothing was more important to them than convincing the public marketplace that they were continuing to open new selling communities, maintaining high levels of traffic in Toll Brothers' existing communities, continuing home price appreciation to generate "inventory profits,' and continuing to grow at the 20 percent rate, because their jobs and millions of dollars in salaries, bonuses, stock option profits and other benefits depended on their doing so,” the lawsuit states.

FHA: Remove 3% minimum downpayment?

2007-04-24T09:13:00.000-04:00

http://rockland.villagesoup.com/Business/story.cfm?storyID=91230

If this goes through there may be a small boost in below median priced houses for sale:

KNOX COUNTY (April 23): In testimony Thursday before a U.S. House Financial Services Subcommittee, the NATIONAL ASSOCIATION OF REALTORS® stressed the need for the Federal Housing Administration to make changes that satisfy today’s consumer demands.

Among those changes: The FHA should provide borrowers with a safer alternative to riskier mortgage products that are on the market today, NAR says. The association also supports legislation that would boost loan limits, eliminate the 3 percent minimum cash down payment, and give the FHA flexibility to provide risk-based pricing.

“As subprime loans reset and real estate markets have cooled, a reformed FHA would be perfectly positioned to offer borrowers a safer mortgage alternative and help bring stability to local markets and local economies,” said Iona Harrison, a REALTOR® from Maryland who spoke on behalf of NAR.

New Century Files for Bankruptcy

2007-04-02T11:49:00.000-04:00

This has been looming for a while... while most are not surprised, I still consider it big news:

New Century Financial Corp., once a highflying home lender, filed for
bankruptcy-court protection Monday as expected, becoming the biggest casualty from the cratering of the U.S. market for high-risk residential mortgages. In its Chapter 11 filing in Delaware bankruptcy court, the Irvine, Calif., lender listed over $100 million in assets and more than $100 million in debts. Numbers were vague because the official bankruptcy form only had boxes to check off that had a range of values. "More than $100 million" is the largest value range given.
In connection with the Chapter 11 filing, New Century said it will reduce its work force by about 3,200, or 54%, to cut costs and resize certain businesses in preparation for a possible sale, effective immediately.

Zooming in a bit on Los Angeles

2007-03-30T17:03:00.000-04:00

A previous post showed a large drop in housing starts in Los Angeles at the start of a large downturn in the housing market. Here is a look at what single family sales did (both new construction and existing) as reported by NAR:

The data is fairly rough looking, but I think it is reasonable to conclude the drop in sales from 1989-1991 was roughly a 2 year warning before median prices started tanking in 1992-1993.
Here are single family housing sales today:

If this 2 year pricing lag is accurate today, then 2007 should not see median price declines.

Downtown Miami overbuilding still going on

2007-03-30T15:23:00.000-04:00

This picture was taken this week by a friend. Welcome to Miami:

Unbelievable.

Boulder, CO and Los Angeles housing prices vs starts

2007-03-29T14:41:00.000-04:00

These 2 cities were requested. I also added color coded labels for the 2 data series. The giant fall in starts in 1989/1990 Los Angeles is curious. Was there some major legislation change then or something?

Commercial realty is next to feel the pain

2007-03-29T11:37:00.000-04:00

The subprime mortgage crisis is hitting the once-comfortable confines of
commercial real estate. To be sure, commercial real estate defaults are low, with a rush of capital into the market in the past five years. Still, even the largest portfolios are financing most of their deals through traditional and new debt instruments, making many nervous about such leverage at a time when mortgage debt is in trouble. The leverage has fueled profits, but also could place future returns in jeopardy.
“The pain will not be easy for those using a lot of leverage,” Jacques Gordon, global strategist for LaSalle Investment Management Inc., Chicago, a real estate investment management firm. “Investors have to be careful in a frothy market. What happens when liquidity dries up or when lenders start tightening their criteria?” Mr. Gordon said. There are already small warning signals. Capital from institutional investors might slow this year as pension plans, endowments and foundations have already invested much of their increased allocations.
...
Some investment managers are becoming concerned with the increased spreads between secured real estate instruments (such as CMBS and CDOs) and Treasury bonds. “CMBS, the below-investment-grade piece, is the worst place to be today,” Mr. Coyle said. “Five years ago, it was a great place to be.”
The next two years will be significant for CMBS, said Larry Kay, director in structured finance at rating agency Standard & Poor’s, New York. A large number of the loans used in CMBS — about $40 billion— will be coming due, and the question is whether they will be paid off or go into default, he said. “We have to wait and see.”
CDOs carry the most risk because unlike CMBS, they are not regulated by the Internal Revenue Service, Mr. Kay said. They are not fixed vehicles, meaning the collateral can be sold off during the course of the loan to pay off any underperforming portions of the debt instrument. Some investors see them as bundled junk bonds sold off as higher-grade debt, and they’ve become very popular with private equity and hedge fund buyers for extra financing on deals above what a bank would lend, especially in the past year.

New home sales vs NAHB index

2007-03-14T17:25:00.000-04:00

A reader suggested showing this comparison.

Housing market price changes and starts changes

2007-03-14T15:44:00.000-04:00

If anyone would like to see the data for anywhere else let me know (I have 350 MSA's to choose from).

The left axis is inflation adjusted median housing price as reported by NAR, and the right axis is the number of housing starts from census.gov. Time is 1982 Q4 - 2006 Q4.

My goal in making these is to see the change over time - Places like Phoenix have had very strange changes.

Some possible good news for housing this summer

2007-03-01T10:54:00.000-05:00

Tuesday's stock market crash, along with the recent durable goods report has caused some major pricing changes in the Fed Funds Futures market. For those who don't know, this market is based on placing bets as to what the Fed Funds rate will be some time in the future (the rate is currently 5.25%). This rate effects investors as it is considered a sort of risk free rate. Residential mortgage rates dropped a lot in the 2002-2005 range because the Fed Funds rate dropped from about 6% to 1%.

Over the last couple months, the futures market has predicted about a 15% chance of a rate decrease by June 2007. Very recently however, this changed to 40% likely. If this happened, more buyers would (in theory) be able to get financing at a lower rate. Here is the Fed Futures probability chart for June 2007:

Supply and Demand of Housing

2007-02-16T14:38:00.000-05:00

The most common way to measure supply and demand of housing is by looking at the number of months it would take for the current supply to be sold given the current rate of purchases. This number is typically about 5 months in an average environment, 4 months in a "sellers market", and 6 months in a "buyers market".

While I think this is probably the best metric, I see a couple of limitations. One is that it is always backwards looking and at least 2 or 3 months behind what current conditions are (granted typically 2 or 3 months doesn't matter very much). Another factor adding to this lag effect is new construction as large neighborhoods may be getting pre sold many months before actually coming onto the market.

Because of these things I've been trying to think of ways to find a more forward looking metric. What I have come up with is very simple, more forward looking, but unfortunately probably lacks much precision. It certainly will not be replacing the days on the market metric anytime soon. When I say simple, I mean it:

Supply: Instead of the number of houses for sale, I think a more forward looking supply metric is the number of housing starts released monthly by Censushttp://www.census.gov/indicator/www/newresconst.pdf By calling starts the supply, I am implying that builders are basing decisions to build houses on sale prices and construction costs (and ignoring inventory of used homes for sale).

Demand: Instead of looking at houses sold, I believe a demand proxy can be the home builders confidence index. This index is simply the specuation of future home buyers, and I believe it is fairly accurate.

Below is a graph of these 2 series, with the scales set to keep them generally matched up. Any comments on this method is appreciated.

fourth quarter NAR data released today

2007-02-15T11:24:00.000-05:00

slump in housing deepened in the final three months of last year with sales falling in 40 states and median home prices declining in nearly half of the metropolitan areas surveyed, a real estate trade group reported Thursday.

The National Association of Realtors report showed that the biggest declines were in former boom areas.

The chief economist of NAR, David Lereah says the bottom may be over:

David Lereah, chief economist for the Realtors, said he believed the data shows that housing, which had enjoyed a five-year boom, was bottoming out in the final three months of last year.

"This information confirms 2006 was the year of contraction and hopefully the fourth quarter was the bottom," Lereah said. "When we get the figures for this spring, I expect to see a discernible improvement in both sales and prices."

Case Shiller composite index

2007-01-31T10:26:00.000-05:00

The Standard & Poor's/Case Shiller composite 10-city index of single-family home prices advanced in November by 1.3 percent for its slowest rate in more than 10 years, while growth of 1.7 percent in its 20-city composite index was the smallest increase since it was introduced in 2001. "Countrywide, home price declines appear to show no signs of slowing down," commented MacroMarkets chief economist Robert Shiller. The latest housing index comes at a time when some data is starting to suggest that the worst of the market slump may be over. The Federal Reserve, which remains concerned about the impact of the residential property market downturn on the overall economy and wants to guard against a recession, is expected to leave its benchmark interest rate at 5.25 percent as policymakers meet this week.

Housing units sold

2007-01-26T15:54:00.000-05:00

Year-over-year growth for homes sales in the fourth quarter was down 10.8%. Despite the annualized drop, sales for new homes increased 4.8% from November to December.

Centex, KB Home Will Write Off $800 Million for Land

2007-01-16T09:50:00.000-05:00

Centex Corp. and KB Home, two of the largest U.S. homebuilders, said quarterly earnings were depressed by $800 million in costs to write off the value of land and abandon options to buy more property.

Centex, the third-largest U.S. homebuilder, booked $510 million in charges for land write downs and will cancel options on 37,000 lots. KB Home, the fifth-largest, will have a $255 million expense to reflect the reduced value of land and another $88 million charge to walk away from land-option contracts.

Home construction companies are canceling contracts and taking impairment expenses for their property holdings after facing the worst housing market in 15 years. Sales of new houses tumbled 18 percent in 2006 to 1.05 million, the biggest contraction since 1990.

``We are navigating through one of the most challenging housing environments in the past 25 years,'' Centex Chief Executive Officer Tim Eller said in the statement.

Centex said it will either cancel options to buy 37,000 sites or allow them to lapse, triggering costs of $150 million. Land valuation write downs will cost $300 million, while the company also set aside a $60 million provision to cover liabilities for a federal tax audit.

Los Angeles-based KB Home said in a U.S. Securities and Exchange Commission filing its charges will affect earnings for the fiscal fourth quarter ended Nov. 30.

Housing price changes from 2005 Q3 to the present

2006-12-19T11:00:00.000-05:00

I have been unable to get the Case Shiller index at the MSA level but am still working on it. This is too bad since it is likely the most reliable. These numbers are not inflation adjusted:

For sale: 833 currently leased Condominium units, located within the Hudson Capital Developments in Orlando, Miami, Jacksonville and Schaumburg, IL

2006-12-18T09:21:00.000-05:00

Assured Leaseback Program, we guarantee your rental income for the two first years of ownership, converting these Condominium units to a one-of-a-kind offering in the Continental USA. In addition, the developer covers the Home Owners Association fees for 2 years.

Commercial Mortgage Securitied Market

2006-12-14T17:30:00.000-05:00

The commercial debt market has been following housing in many ways. nreionline.com reports on a recent Fitch (rating agency) report:

With 10 business days to go, CMBS issuance is on track to top $200 billion in 2006, a new record. But Fitch Ratings warns a worrisome amount of the loans that were securitized this year are concentrated in volatile property types or are interest-only obligations.

“As issuance volume grows, recent vintages have become more volatile,” Fitch Ratings Senior Director Patty Bach said during a conference call with reporters and analysts on Dec. 13. Bach pointed to a surge in hotel lending, which is regarded as riskier than property types that get their cash flow through long-term leases, not overnight visits.

Hotel loans accounted for 16.3% of all commercial mortgage-backed securities issued in 2006, according to Bach, and for the first time surpassed the multi-family assets in CMBS. The share of hotel properties has been on the rise in CMBS since hitting a post 9/11 low of 2.3%.

Interest-only loans are another red flag, because borrowers who use such instruments may be exceedingly vulnerable to economic downturns. Bach says that Fitch has seen the percentage of interest-only loans in multi-borrower deals rise in 2006 and predicts that the number will rise in 2007, too, although the company does not have precise data on the issue.

Fitch contends riskier lending practices are the result of rising competition among loan originators seeking product and profitability. “Fitch also expects Vintage 2007 to be more volatile than earlier vintages,” Bach says.

PMI Mortgage Insurance Co. Heralds Congressional Passage of Tax Deductibility of Mortgage Insurance Premiums

2006-12-11T10:57:00.000-05:00

WALNUT CREEK, Calif., Dec. 11 /PRNewswire-FirstCall/ -- New congressional
legislation allowing homebuyers to deduct the cost of mortgage insurance
premiums on their federal income tax returns is a welcome development for
homebuyers, Steve Smith, Chief Executive Officer of The PMI Group, Inc. and
PMI
Mortgage Insurance Co., commented today.
"We congratulate Congress
for
helping low- and moderate-income Americans overcome barriers to
homeownership,"
Smith said. "By making mortgage insurance tax deductible,
Congress is addressing
the key issue of housing affordability for many
homebuyers."

This should help housing over the next couple of years as it is priced in.

Rent Increases May Ease As Condo Market Softens

2006-12-06T10:59:00.000-05:00

From the WSJ:

Look out, apartment landlords: Many rental buildings that were converted to
condos are returning to the rental market amid slowing condo sales -- and that
could put a dent in the healthy rent increases many landlords are hoping for
next year. Apartment inventories have crept up since this summer for the
first time in two years due to the failure of condo conversions in a slowing
housing market, says Reis Inc., a real-estate research firm in New York.
While the increase is still small, it does signify a change in direction.
Nationwide, the number of apartments increased by 8,900 units in the third
quarter, out of a total of 9.1 million, by Reis's measure, which includes
complexes of over 40 units.

Construction Posts Big Decline

2006-12-04T11:45:00.000-05:00

The slowing of the housing market is a key reason why construction outlays fell 1 percent in October to an annualized pace of $1.178 trillion. There was a 1.9-percent drop in spending on residential projects during the month, following a 1.4-percent decrease in September. Total construction expenditures in September had been revised to -0.8 percent from -0.3 percent. The overall decline in construction spending in October, which was worse than market observers had anticipated, proved to be the steepest drop since September 2001.

Dead projects running rampent in Miami

2006-12-01T12:09:00.000-05:00

I was in Miami this week, and sights such as the image above are common (click to view full). I took the picture on the second to last day of November, so unless they built the entire project from scratch yesterday I don't think they made the November 2006 goal.

Shares of Home Depot, Fannie Mae and home builders are rising faster than the broader stock market

2006-11-27T17:34:00.000-05:00

NEW YORK: Shares of Home Depot, Fannie Mae and home builders are rising faster than the broader stock market on speculation that the worst of the housing slump is over. Government reports this week may show whether the rally is premature.

The Standard & Poor's 500-stock index of home construction stocks has gained 24 percent since falling to its low of the year July 18. The S&P 500 advanced 13 percent in the same period.

Housing shares have gained after government and industry reports showed that construction, sales and prices were falling, while the inventory of unsold homes was rising to a record level. Data this week are expected to show that previously owned homes are selling at the slowest pace in almost three years and economic growth is staying near the lowest level since 2003, according to a Bloomberg surveys of economists.

Not sure if this will be true or not... but it is worth noting the sentiment implied by the stock market.