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Housing Market Insight – July 12th Edition

by Ryan Hinricher on July 12, 2010 · 5 comments

  

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 2nd 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.

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{ 5 comments… read them below or add one }

Steve July 12, 2010 at 2:38 pm

I’m pretty nervous with the market right now. Retail buyers have basically decided they are not interested anymore. Investors are still paying too much (but I doubt that will ever change).

Good article.

Reply

Ryan Hinricher July 13, 2010 at 5:39 am

Thanks for the feedback, Steve. Owner occupant interest has fallen off a cliff. What will it take to get people buying again? I think the only answer is; jobs. Let’s hope we can create some.

Reply

Paul July 15, 2010 at 2:03 pm

I wonder if the commercial real estate market is going to suffer big time with the moving trend of people working remotely from home. As an Internet Marketer I’m hearing more and more people moving away from an office and into a virtual office running from home.

-Paul

Reply

Trent Dyrsmid July 18, 2010 at 8:50 pm

I beg to differ with you on the trend of unemployment. It is still increasing.

If you look at the last labor report, it shows 65 new construction jobs and somewhere around 180 new hospitality jobs in the last two months.

REALLY?? In the face of a dismal real estate market, I cannot see 65,000 new jobs. As well, family vacation plans are at an all-time low since the data has been recorded.

So what gives? Its the BLS’ birth/death rate for small business. They use a survey to find out how many businesses have been created and how many have gone out of business, and that data then tells the BLS’s to adjust employment numbers in their model(s). In the long-term, it all averages out, however, in the short term, it can be way off, as it was last month.

Consider that in the last two months, after taking into account downward revisions, only around 116,000 new jobs have been created, and that is in an environment where population growth is 125000 per month.

Conclusion: the jobless recovery continues to be just that.

Reply

Ryan Hinricher July 19, 2010 at 7:41 am

Trent,

I’m simply using the existing unemployment numbers. Unfortunately a lot of people simply stopped looking for employment and this impacts the number in a positive way too.

People generally are optimistic when they see the BLS under 6%. The economy is 65-70% consumption (driven by confidence). Any signal of the number decreasing (whether 100% accurate or not) is an improvement to the average consumer who is making decisions whether to purchase goods and services, go on vacation, or take the family out for an extra meal. Confidence breeds consumption in this case. The article is emphasizing this. Jobless recovery it is.

Reply

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