Housing Market Insight - July 12th Edition

This week the housing market saw important data on rising New Loan Delinquencies and other emerging trends such as “Extend and Pretend”(commercial sector). Further we’ll take a look at interest rates, mortgage purchase applications, and the best news we’ve seen in 3 years in the multi-family sector.

First the bad news;

New Loan Delinquencies on the Rise Again

The LPS Mortgage Monitor Report revealed an increase in new loan delinquencies and a decline in the number of delinquent loans being brought current. While Fannie Mae delinquencies are declining, an overall positive trend has yet to be found after seeing the data from LPS. The total US loan delinquency rate (as of May 2010) now stands at 9.2%, up 2.3% from April. Also important to note was the average number of days for a 30-day delinquent loan to reach foreclosure stood 449 days allowing the shadow inventory to grow.

Outlook: Many of the new delinquency rises can be attributed to home values being stagnant, leaving consumers less confident about a turnaround and resulting in defaults. This number should stabilize as foreclosures are nearing peak and other reports (such as Fannie Mae) showing delinquency is near peak.

Extend and Pretend, the Commercial Trend

The Wall Street Journal reported banks utilizing an “extend and pretend” strategy for dealing with commercial borrowers that are having trouble repaying their debts in the current environment. Banks are using this strategy to avoid having to foreclose in an attempt to allow market conditions to improve. Skeptics say it’s masking the true nature of the commercial environment and of bank’s balance sheets. The number of commercial loans delinquent rose to 9.1% (and trending up). Worse an estimated 2/3 of all commercial loans coming up for maturity in 2014 are estimated to be under water.

Outlook: This trend of “extend and pretend” on the surface seems unhealthy. However, these loans are in the bank’s portfolios, they have the flexibility to do this much easier than the failed attempts to modify loans in the residential market. This strategy for the bank could prove troublesome though as a substantial recovery seems far away. Banks will need to figure out who really has a chance of repaying in order to avoid inevitable foreclosures.

Mortgage Rates: (Broken) Record Low

Again mortgage rates fell to a record low, falling slightly lower this week to 4.57% from 4.58% last week. Freddie Mac stated the effective mortgage rate of all loans outstanding was just below 6% in the first quarter of 2010, the lowest since the index began in 1977.

Outlook: Investing in real estate has never been so cheap. But cheap doesn’t mean inexpensive. The opportunity exists to be high-quality homes at a low long-term cost. Another caveat? The 15-year rate is 4.07%. Locking in 15 years today is as affordable as 30 year loans just a few years ago. Maximize your the quality of your investments.

Purchase Applications Off 34% in Last Year

Despite these incredible low interest rates the buyers are seemingly nowhere to be found. The Mortgage Bankers Association reported another decline in mortgage purchase applications with the index down 2% over last week. That makes 8 out of the last 9 weeks showing a decline in purchases. Refinances soared 9.2% meaning consumers are freeing up cash to put back into the economy.

Outlook: With traditional buyers out of the marketplace, investors have the benefit of less competition and better interest rates than they did during the first quarter of 2010. Could rates below 4% be enough to convince buyers that homeownership is a viable option?

Apartment Vacancy Rates Decline for First Time in 3 Years

It’s hard to argue that improvements in the real estate market aren’t happening. REIS reported that apartment vacancies dropped in the 2^nd quarter, declining from 8% to 7.8%. The report shows that the trend of consumers doubling up or moving in with family is starting to reverse. The 30-year high in vacancies at 8% may have been the lowest point in the health of the multi-family sector.

Outlook: With major markets like New York, San Jose, Boston, Seattle, and DC leading the decline in vacancies, the recovery seems credible. These cities have (exception being DC, which has one of the strongest labor markets) technology related job creation happening. Look for markets with job creation and population growth to fuel improved rents.

A Stabilizing Market

As usual, I start with the bad news and move on to the good. Fortunately there’s plenty to discuss. We’re seeing a slow recovery. The signals that apartment vacancy has potentially peaked are a signal of some confidence returning. This is in line with recent numbers that the unemployment rate has dropped nationally to 9.5%. While I’ve said the recovery is going to take significant time, real estate investors on the fence should be able to see clear signals that the worst is behind us.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.