Commercial real estate

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

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

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?

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

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

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

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



Unbelievable.

Boulder, CO and Los Angeles housing prices vs starts

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

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.