It is premature to conclude from the one-month pickup in the core producer price index that inflationary pressures are again building at the wholesale level. A sharp increase in auto prices accounted for much of the gain in core prices, and there is no evidence of broad-based price increases.

The energy price indices should post a large increase again in August, likely pulling up the overall price indices. It remains to be seen, however, if higher energy prices will feed into core consumer inflation. So far in the first seven months of the year, core consumer inflation has remained contained in the face of rising energy prices.

Other data last week suggested that the economy should continue to grow at a robust pace in the second half of the year. Although industrial production and the Index of Leading Indicators both showed only a small gain in July, regional Federal Reserve Banks’ manufacturing surveys for August pointed to a pick up in activity.  In addition, the price components in these surveys indicated that price pressures remain in check.

Long-term bond yields were quite volatile last week, with yields declining on the news of tame core consumer price inflation and weak industrial production. Following the producer price index report last Wednesday, the yield on 10-year Treasuries rose to 4.28 percent—the peak of the week—and declined to around 4.21 percent by the end of the week. The yield has remained below 4.3 percent since August 12th; it had risen to as high as 4.42 percent earlier this month.

The economic calendar is relatively light this week. The financial markets will pay close attention to July durable goods orders (Wednesday) for evidence of a ramp-up in production and shipment in the third quarter, following the inventory drawdown in the second quarter. Of interest to the housing sector are July existing home sales (Tuesday) and new home sales (Wednesday). 

Leading indicators of home sales, including the Mortgage Bankers Association’s Purchase Application Index, the National Association of Realtors' Pending Home Sales Index and the National Association of Home Builders' Housing Market Index, all pointed to a firm home sales pace in July. Speeches by Fed officials (Chicago Fed's Michael Moskow on Wednesday and Chairman Alan Greenspan on Friday) could have some impact on the bond market.

(Orawin Velz is director of economic forecasting in the Mortgage Bankers Association’s economics and research department. She provides commentary and analysis on key monthly economic indicators. She can be reached at ovelz@mortgagebankers.org.)
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Richard DeKaser, chief economist of National City, conducted the study, which examines historical comparisons for the last 20 years and reflects 80 percent of the U.S. single-family housing market. According to DeKaser, markets with valuation premiums above 30 percent were deemed at risk for price corrections based on the typical degree of over-valuation that preceded the 63 known local market price declines observed since 1985. For the study, price-to-income ratios are statistically explained by household population density, mortgage interest rates, relative income levels and characteristics unique to each metro area.

"If home prices are overvalued, then, by definition, the risk of a price correction is high. To the extent that economic growth remains strong, however, these risks will be greatly reduced," DeKaser said. "Given the obvious importance of this issue to the nation's economy, and the absence of any consensus regarding the question of housing market valuation, this report describes our efforts—and findings—along those lines."

Of the metropolitan areas, Santa Barbara, Calif., is the country's most overheated market at 69 percent above the norm, while College Station, Texas , is ranked the most undervalued at 19 percent below the norm.

Following Santa Barbara, Sacramento, Calif.; Miami, Atlantic City, N.J.; and Panama City, Fla., came in the top five overheated markets. Likewise, the most undervalued areas were Warner Robins, Ga., Macon, Ga.; Indianapolis; and Bismarck, N.D .

According to the Mortgage Bankers Association, home price appreciation is expected to moderate this year, with median existing home prices increasing by 6.8 percent during 2005 and 5.5 percent for new homes, compared with 9.3 percent and 13.3 percent in 2004, respectively. Price gains in 2006 and 2007 are expected to slow further to a more sustainable pace of 4 to 5 percent. Residential mortgage originations for purchase loans will increase to $1.62 trillion in 2005, edging up to $1.64 trillion in 2006 and $1.68 trillion in 2007. Residential refinance loans will decline to $1.12 trillion in 2005, $863 billion in 2006 and $791 billion in 2007. Total residential mortgage production in 2005 will be $2.74 trillion, the third-highest level ever.

“Local housing price declines have always been the result of a trigger such as significant job loss or an out-migration of population, as seen in oil patch states in the mid-1980s and Southern California in the early 1990s with significant defense expenditure cutbacks,” said MBA Chief Economist Doug Duncan. “With roughly $9.6 trillion in equity in homes in the United States, the average homeowner has a healthy cushion if housing prices decline. Thus, while we may see bubbles in some local markets, we don't expect a national bubble.”
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Pacific Security Capital favors the Mid-Atlantic and Southeast Regions as the strongest markets right now in retail and office property, Myatt said.

“Most secondary markets in the southeast are all good quality of life,” said Phillip Shumny, vice president at Divaris Real Estate, Atlanta. “Populations are growing decade over decade.”

Myatt noted that cap rate compression and capital chasing upper tier markets provides greater opportunity in the secondary market. “I think there is a lot of pop in those deals,” he said. “There is so much competition for stabilized operating properties in the tier one markets that it is very hard to buy rights.”

Shumny said closings of Winn-Dixie markets and the BiLo and Bruno’s local supermarket chains could allow independent grocery markets to come up behind them. “There is opportunity,” Shumny said.

Donald Burns, principal at Real Estate Research Corp. in Alpharetta, Ga., also said there is opportunity for rehabilitation and re-leasing in retail in second tier markets. “If it is in a second tier market, it needs a good location,” Burns said. “A small retail without much of a draw, since there is a lot of competition, there may be an issue there.”

Myatt said institutions are not “fishing” as much in the secondary markets and that creates opportunity in the purchase of a retail property. With some vacancies, a buyer might “de-mall” and reposition or re-let retail property at a better price after it goes dark. “Wherever a [buyer] can create value like that in a less competitive environment, I think there is just a lot more pop. That is particularly true with retail in the secondary markets.”

Shumny said “de-malling” can lower the upkeep or, in some cases, a large big box store or anchor tenant will take over the land after the mall is gone. “It is not a given that you will be better off by ‘de-malling,’” he said. “I think you take a lot of risk when you de-mall.”

A savvy investor, meanwhile, would not want to pay for dark space any more than necessary, based on lack of cash flow. “When they are dark, that cash [flow] is not there. Most of those savvy investors out there are trying to buy as low as possible and not pay for the dark space. Some sellers will go along with that and some will not. It depends on the condition of the seller,” Shumny said.

Myatt also likes the office market in Atlanta, an area ready to hit bottom, if not already there, and it appears on the verge of a bounce back. “Many people moved out of the Atlanta CBD into some of the submarkets. It created vacancy in downtown CBD space,” Myatt said. “Frankly, I think it has hit bottom and it is bouncing. I think now is the time to get into [the Atlanta] market.”

But analysts said traffic congestion in Atlanta and more building makes Atlanta less attractive, particularly for office. While real estate offices can move out to suburbs, federal buildings, courthouses and banks exist in the downtown area.

The Atlanta CBD consists of Downtown, Buckhead and Midtown, Burns said, and despite recent improvement in the Atlanta CBD office market, it has struggled.

“Getting to and from work is a factor,” Shumny said. “For some companies, there just needs to be enough room for them…that might mean they end up in Midtown because that would be where they find the available space. Buckhead has a pretty high vacancy rate right now and they are planning to build a 17-story office high rise.”

 “There has been a lot of move out of tenants out of the downtown area over the years either in the Buckhead, Midtown or the suburbs, yet they continue to build some new buildings downtown,” Burns said. “If I was going to be in office in Atlanta, I do not think the CBD is where I would want to be.” 

Myatt noted that “presales,” finding a local sponsor, providing them with capital to develop a project and negotiating the purchase up front, is also an attractive strategy. The developer, in effect, becomes a merchant builder but takes the risk out of the equation at the same time. “[The developer] has a predefined access,” Myatt said. “We would then lock in its price point 12 to 18 months in advance and everybody wins.”

Myatt also finds the Chicago market good for similar reasons to the Atlanta market. “It’s the right time,” he said.

As for multifamily property, he believes “people have drunk the condo kool-aid. With all the [condo] conversions and the prices of housing, I think it has created pent-up demand on the ‘for rent’ product.” As interest rates increase, Myatt said that multifamily should get stronger with underlying fundamentals.
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The borrower, 12044 Hoffman LLC, received a rate of one percent above prime and 1.25 points for 21 months. The property is one of a number of new condominium developments popping up all over Studio City. At $500 per square foot, condominium residences in Studio City are approaching property values of Beverly Hills and most area condominiums west of Los Angeles.

The most notable part of this construction loan is the value of the land and property in Studio City. The area was considered relatively affordable whereas now real estate values skyrocketed and it has now become a popular residential market.

“The real estate market in Studio City has really come alive with new multifamily and condominium developments, in part due to its upscale restaurants and stores and proximity to the movie studios,” said Warren Griess, vice president in the Los Angeles office of Love Funding. “Studio City is also the closest commute from the San Fernando Valley to downtown Los Angeles.”

The land appraised at $240,000 per unit and nearly $500,000 per unit in San Fernando Valley. 12044 Hoffman LLC obtained permits and plans to move forward with construction. It is also completing a 31-unit condominium in the same area.

Meanwhile, Christopher Fenton, first vice president and director of senior housing based in Love Funding Corp.’s Lenox, Mass. office, secured a refinance loan for Country Side Lakes Assisted Living in Port Orange, Fla. The loan refinanced the 141-unit senior housing facility for $8 million with terms including a five-year loan, 25-year amortization schedule and an interest rate of 7.05 percent.

The loan refinanced an existing conduit loan which allows the borrower, Patrick Lane, to pull out built-up equity. The equity cash-out will contribute to the construction of a new 100-unit CountrySide Lakes facility located in New Symrna Beach, Fla.

Love Funding Corp. will finance the construction of the new facility through the HUD 232 program.
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The Workshop features valuable sessions, such as "Innovative Membership Strategies," "Legislative and Regulatory Highlights" and "Non-Dues Revenue Solutions." All aim to provide new ways to remedy old challenges. New to the program is a session, "Building for the Future," which addresses changing industry demographics and the need to stay relevant through diversification of members and employees. Also, MBA's public affairs staff presents "Managing Media Relations," using Home Mortgage Disclosure Act (HMDA) data and resulting reports as a test case. 

On October 21, working group breakouts are followed by an integrated recap session. On October 22, executives and managers have the opportunity to interact with their peers and hear from Doug Duncan, MBA's chief economist, who offers an economic forecast and a discussion on trends and their impact on the industry.

Renew acquaintances or make new contacts at the Welcoming Reception, and enjoy the Chairman-Elect Luncheon featuring Regina Lowrie, CMB, the first woman to chair MBA.

Click here to register online. If you have any questions contact Lisa Hazell at lhazell@mortgagebankers.org or (202) 557-2761.
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