Total existing home sales declined by 2.6 percent to 7.16 million (seasonally adjusted annualized units) from an upwardly-revised pace of 7.35 million in June. Both single-family and condo sales declined, but condo sales, which had been running ahead of single-family homes through most of this year, softened by more than single-family sales (a 4.9-percent decline versus a 2.4-percent decline). Total sales slipped in every region except the South where they were flat; the decline was the most pronounced in the West.

Home price gains have remained outsized, with the median price in total existing home sales rising by 14.1 percent from a year ago. (Home prices are not seasonally adjusted and thus gains reported here are from a year ago.) For the first time since March 2001, condo prices increased more slowly than single-family home prices, up by a still-strong 11.3 percent versus 14.6 percent for single-family homes.

The inventory/sales ratio or the months supply rose as the sales pace slowed while the number of listings surged. While the months supply remains historically low at 4.6 (not seasonally adjusted), it was the highest level since November 2003. Condo supply has been building up significantly over the past year, with the months supply rising to 5.3 from 3.5 in July 2004. 

In the first seven months of the year, total existing home sales were 6.1 percent ahead of those in the first seven months of last year. Sales should continue to remain elevated in the coming months, as suggested by a leading indicator of housing demand. The purchase application index from the Mortgage Bankers Association survey surged to a record monthly average in July and has remained at very high levels so far in August. 

The decline in home sales should be more pronounced in the fourth quarter as mortgage rates continue to rise and housing affordability worsens. Given the very strong pace of year-to-date sales and positive near-term indicators, sales are poised to set the fifth consecutive record this year. 

The yield on 10-year Treasury notes edged down to 4.18 percent by mid-Tuesday afternoon from 4.21 percent on Monday. The yield had been higher than 4.20 percent since July 29.

(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.)
(Back To Top)

The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.78 percent from 5.79 percent, with points decreasing to 1.20 from 1.22 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.41 percent from 5.40 percent one week earlier, with points decreasing to 1.19 from 1.25 (including the origination fee) for 80 percent LTV loans. The average contract interest rate for one-year adjustable-rate mortgages (ARMs) decreased to 4.84 percent from 4.85 percent one week earlier, with points increasing to 1.05 from 1.01 (including the origination fee) for 80 percent LTV loans. 

The Market Composite Index stood at 756.2, a decrease of 0.7 percent on a seasonally adjusted basis from 761.3 one week earlier. On an unadjusted basis, the Index decreased by 1.8 percent compared with the previous week but was up 17.2 percent compared with the same week one year earlier. The four-week moving average for the seasonally-adjusted Market Index is up by 0.1 percent to 753.7 from 753.2.

The seasonally-adjusted Purchase Index decreased by 2.2 percent to 488.4 from 499.3 the previous week. The four-week moving average for the Purchase Index is up by 0.2 percent to 495.3 from 494.4.

The seasonally adjusted Refinance Index increased by 1.2 percent to 2313.9 from 2285.5 one week earlier. The four-week moving average for the Refinance Index is down by 0.1 percent to 2256.6 from 2258.2. The refinance share of mortgage activity increased to 43.7 percent of total applications from 42.4 percent the previous week. 

The ARM share of activity decreased to 28.1 percent of total applications from 28.9 percent the previous week. The ARM share is down from a 2005 high of 36.6 percent during the week of March 25.

Other seasonally adjusted index activity includes the Conventional Index, which decreased by 0.6 percent to 1139.7 from 1146.9 the previous week, and the Government Index, which decreased by 1.5 percent to 116.1 from 117.9 the previous week. 

The survey covers 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. 
(Back To Top)

By most measures, retail real estate has performed spectacularly well for nearly five years due to rising rents and improving occupancies. The tremendous flow of capital into the real estate industry together with a major consolidation move by large retail property owners has driven retail valuations sky high.

Investment returns on retail properties in the NCREIF Index and returns for retail real estate investment trusts (REITs) have far outpaced returns on other property types for several years. The question now is whether retail properties and companies have peaked in terms of price appreciation and retail property fundamentals.

• We think that cash flow for most retail real estate properties should continue to increase over the next 12 to 24 months, though at a slower rate than in recent years.
 
• Investors should lower their expectations for future price appreciation on retail properties given the gains achieved over the past five years. We expect that prices should flatten out in the second half of 2005 and may stay flat or possibly decline in 2006 based on economic conditions and rising cap rates
.
• Consumers will continue to spend on necessary items, though higher prices for energy, healthcare and housing will slow the rate of growth in discretionary spending.
 
• Property market fundamentals should remain sound in the higher-rent markets on the Atlantic and Pacific coasts, where employment growth is strongest and disposable income is plentiful.

Retail real estate has been extremely profitable for property owners, investors and tenants for the last several years. Consumer wealth and spending habits have been fueling this success, making it possible for tenants to pay increasingly higher rents and still make a reasonable profit. In turn, landlords have been able to command rents which have made ownership of retail property a highly profitable enterprise. Even during the largely business-based recession in 2001 to 2002, consumers spent enough to keep the economy from going into a deeper or longer-lasting recession.

For this trend to continue, consumers will have to continue to spend freely enough to keep retailers profitable at current and even higher rent levels. There are increasing pressures coming to bear on American consumers in the form of rising energy prices, higher property taxes, rising interest rates and higher health care costs. These items have been increasing at rates far in excess of overall inflation.

We believe that the run of out-performance of retail investment returns has to come down to earth sometime soon. Pressure on consumers from higher expenses mentioned above will hamper the growth of available discretionary income. The flow of investor funds out of commercial real estate is inevitable at some point. At the very least, improving fundamentals in other commercial real estate sectors may draw some money away from the retail sector.

Office market fundamentals have been improving steadily since the beginning of 2004, and apartment demand may soon get a boost as high home prices combine with rising mortgage rates to keep some potential home buyers out of the purchase market.

(The views expressed here do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles can be sent to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)
(Back To Top)

"We are seeking assets that can be enhanced through focused or creative leasing, management or repositioning," said Russell Appel, president of The Praedium Group. "We've been successful because our strategy is designed to evolve with the markets. The situations that we pursue are largely dependent on our team's ability to identify opportunistic transactions and successfully execute value-added business plans, rather than being solely dependent on increasing market conditions."

The 36 institutional investors in Praedium 6, led by principals Russell Appel, Floyd Lattin, Frank Patafio and Christopher Hughes, include public, corporate and foreign pension funds, foundations, endowments and other financial institutions. Nearly 90 percent of investors from its last fund returned to invest in Praedium 6. The fund will invest in mid-cap assets throughout the U.S. and Canada in the $10 million to $70 million range, targeting multi-family, office, retail and industrial property types.

The Praedium Group sought $500 million when it began marketing the fund and exceeded its target because of its prior performance, a consistent strategy that focuses on the middle market. “We are seeing many opportunities that fit our strategy, a trend which we expect to continue over the life of Praedium 6," said Lattin.
(Back To Top)

The property was financed with a Freddie Mac interest-only loan for the entire 10-year loan term with an interest rate of 4.62 percent for AG-FCP Seasons I Owner LLC, an entity controlled by DC-based developer Federal Capital Partners and its partner, Angelo, Gordon and Co. 

“We were able to replace three loans with varying maturities and sizable pre-payment penalties with one loan that materially lowered our annual debt constant, simplified reporting, increased proceeds and markedly improved our financial flexibility,” the borrower said.
 
Phil Morse, vice president at Reilly Mortgage, originated the loan out of Reilly’s McLean office.

Reilly Mortgage partnered with Nomura Securities in April to provide both fixed and floating rate debt, at leverage levels, and up to 85 percent for most multifamily properties. The firm primarily finances through FHA and Fannie Mae, as well as Freddie Mac.
(Back To Top)

Pulitzer Prize-winning newspaper columnist George Will keynotes the annual Chairman’s Luncheon, which takes place on Monday, October 24. Will shares his insight of the political players in Washington, D.C., and sheds light on some of our nation's top news and sports stories. Will has been syndicated by The Washington Post since 1974 and is a regular contributing editor of Newsweek magazine.

Tickets for the Chairman’s Luncheon, sponsored by Citi, are $125 per person.

The annual Sports Luncheon, on Tuesday, October 25, features Pat Riley, president and former head coach of the National Basketball Association Miami Heat. Riley is professional basketball’s second most successful coach; his philosophy is based upon winning, leadership, mastery, change and personal growth, as well as understanding and controlling the shifting dynamics of a team—any team, whether it is a small company, a giant corporation, a city or a group of athletes. His books “Showtime” and “The Winner Within” have appeared on the New York Times bestsellers list.

Tickets to the Sports Luncheon, sponsored by Bank of America, are $125 per person.

Club MBA, on Tuesday, October 25, features a ‘70s revival night with KC and The Sunshine Band, featuring hits such as Get Down Tonight, That's the Way (I Like It) and Shake Your Booty. Joined by The Sunshine Band, KC's unique fusion of R&B and funk has a hint of a Latin percussion groove.

KC’s last album, "I'll Be There for You," came out in the fall of 2001 and proceeds from the title song, released as a single, were donated to the Sept. 11 relief effort. His work includes sales of 100 million records, nine Grammy nominations, three Grammy Awards and an American Music Award.

Tickets for Club MBA, sponsored by Washington Mutual Home Loans, are $199 per person.

For more information about the ticketed events, go to http://events.mortgagebankers.org/92nd_annual/ticketed_events/. The MBA Annual Convention & Expo Web site is http://events.mortgagebankers.org/92nd_Annual/default.html. Keynote speakers for the Annual Convention include Gen. Colin Powell (Ret.); former President Jimmy Carter and HUD Secretary Alphonso Jackson.
(Back To Top)

The MBA White Paper, released yesterday, provides a detailed analysis of the housing and mortgage markets examining issues such as the potential for a house price “bubble” and the growing use of non-traditional mortgage products. 

“We continue to believe that consumers are not well-served by the term ‘bubble,’ but with other factors that contribute to the home buying experience,” said MBA Chief Economist Doug Duncan. “We’ve never really brought these discussions into this format with empirical data. We believe this white paper does that.”

The White Paper’s highlights include:

• Continued low mortgage rates, combined with strong employment growth rates and an expanding economy, can explain much of the recent increase in house prices and much of the differentials in appreciation rates across the country.

• Investor activity has increased in certain U.S. housing markets, especially in the coastal areas. “Lenders need to prudently monitor the level of speculative activity in such markets,” Duncan said;

• Innovative mortgage products enable consumers to become homeowners. “Mortgage lenders have provided a wealth of new products to meet the affordability requirements, cash flow needs, and risk tolerances of a range of borrowers,” Duncan said. “This range of choices is a clear benefit to consumers. Mortgage borrowers are more educated about the lending process. Since they stay on average in their home only 5-7 years, many mortgage products are geared toward that stay;” 

• Borrowers increase their risk exposure by choosing a product with low initial payments, but greater variability in payments over time. “Borrowers need to carefully evaluate and monitor the incremental additional risk that these innovative new products represent,” Duncan said. “If you look at all U.S. homeowners, 35 percent own their house outright, with no mortgage. About 50 percent of homeowners have fixed-rate debt only, with no sensitivity to interest rates and payment strain. That leaves about 15 percent, of which about 8 percent are jumbo loans or those who have previously used higher-risk tools. There is about 7 percent whose risk is uncertain;”

• Regulators are doing their jobs by monitoring factors that may potentially be systemic risks, and by acting to alleviate such risks. However, it is important to recognize that the mortgage market is fundamentally working: lenders are innovatively creating mortgage products that meet the needs of borrowers, while taking appropriate measures to manage risk. “On the mortgage product side, the risks are aligned for both the borrower and the investor,” Duncan said. “The lender has to manage the potential delinquency, so that the investor gets the return they expect. Somewhat differently, a Realtor takes his/her compensation as a fixed cost, then walks away. That’s why we say the borrower should go to see a lender first;” and

• Policymakers and others should recognize that there are a number of factors that reduce risk to the housing and mortgage markets: a strong economy, growing household net worth, a strong banking sector, well-functioning and liquid financial markets, widespread securitization, alignment of incentives with respect to loan defaults, the widespread implementation of technology, and effective regulatory oversight all work to mitigate risk. 

The purpose of the study, Duncan said, is to put the flood of commentaries and analyses regarding housing markets and new mortgage products into proper perspective by assessing a broad array of market data, reviewing the risks and reaching some conclusions.

“We do not see gloom and doom; nor are we Pollyannaish about it,” Duncan said. “We expect that the market will balance itself. When homeowners see declines in the market, they generally react by not putting their house on the market. We’ve seen this happen only a couple of times over the past 45-50 years, so it is not likely that this will happen nationally.”

The White Paper outlines layered risks and risk mitigators that exist in the current marketplace.

Risks:

• For there to be a potential problem, there must be a market where there is a high rate of sustained price inflation and volatility;

• A decline in employment or instability in employment—for example, a large employer that closes or has substantial layoffs, which creates market instability. As an example, the paper cites California, which was hit hard in the early 1990s by cutbacks in the defense sector, which led to a recession, out-migration and substantial drops in house prices. A similar pattern occurred in Connecticut in the early 1990s, where a drop in house prices was accompanied by a recession and out-migration

• Significant share of investor activity fueled by speculative investment—second home purchases vs. non-homeowner occupied.

• Significant share of condo sales in proportion to total sales. In today’s existing home sales numbers, for example, condo sales have declined by 5 percent, compared to non-condo sales that have declined by just 2.5 percent, Duncan said. Similarly, over the past nine months, the inventory supply of homes on the market rose to 2.6 months, but condos are up to 5.3 months.

• Unusually large number of option arms, interest-only and other loans that expose borrowers to potential payment shock.

• An unusually large proportion of stated income or other Alt-A products in which the object is to maximize purchasing power..

Mitigating factors:

• A healthy economy—low interest rates, strong growth, etc.

• Growing household net worth, which has been growing at a steady pace. “While consumers have been taking on debt, their equity has been growing faster,” Duncan said;

• Strong banking sector;

• Dispersion of risk through greater number of players, both domestically and internationally;

• Alignment of incentives—“everyone loses when a homeowner defaults,” Duncan said;

• Improvements in technology, which improves market efficiency; and

• Effective regulatory oversight.

“There is no suggestion that we live in a brave new world immune from risk or the possibility of a downturn,” the report said. “There are a number of risk factors that have been needed to be monitored continually. It is important that policymakers and others recognize the fundamentals that are driving the housing market, the benefits that can be derived from innovations in the mortgage market, and the mitigating factors that are present in today’s mortgage and financial markets that would prevent a regional downturn or other localized decline from creating a more significant problem.”

The report’s primary author is Michael Fratantoni, MBA's senior director of single-family research and economics; contributing authors include Duncan; Jay Brinkmann, vice president of research and economics; Orawin Velz, director of economic forecasting, research and business development; and James Woodwell, senior director of research and business development.
(Back To Top)