Banner Week for Housing Data:

We had several high-level housing reports that showed surprising gains.  We started with Existing Home Sales which shot up 10%.  This is the second straight month of big gains in this report, last month it moved up 7.6%.  Also, the report showed that the supply of homes listed for sale has edged downward and is another positive sign for housing.

Next up was the national home price index calculated the Federal Housing Finance Agency.  They reported that home prices increased 0.4 percent during the month which was double what analysts were expecting.

We rounded out the housing data with New Home Sales.  The Commerce Department reported that sales of newly constructed single-family homes rose 6.6 percent.  Even more encouraging is that they reported that the amount of inventory on the market is at its lowest levels in 42 years.

Despite all of the “doom and gloom” news reports, the data speaks for itself. Housing is making a comeback.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -31 basis points last week causing 30 year fixed rates to increase from the previous week.  We started the week on a downward trend for MBS as the market lost -106 basis points from Monday’s open to Wednesday’s close which pressured mortgage rates upward.  This was primarily due to stronger than expected economic data and weaker than expected 2 year and 5 year Treasury auctions.  We rebounded to make back some of our loses by Friday on the strength of the 7 year Treasury auction and very weak GDP report.

Hot Commercial Investor Products!

–Agency Loans-FNMA and Freddie and FHA-

– Positive-These products have the lowest rates-since there is a fluid market for them and they are directly or indirectly backed by the government or perceived to be.  Fixed terms can be as long as 40 years on the FHA loan and rates on this product are in the 4’s right now.  They are also-NON-RECOURSE.  And for apartment construction, nothing beats the FHA program-10% equity into the project, 35 year fixed rates in the 4’s and NO Recourse-SWEET!

-Negative-The loans are government loans which means lots of paperwork and extremely slow closing times.  Construction lending on Assisted Living Facilities (FHA) can take a year, construction on apartments can take 6-8 months and just a normal loan will often take 4 months to close on this product. Agency product is not available for retail, industrial, etc.

NOTE: USDA loans can be done for investor and they can do other property types like office and retail HOWEVER, the turn times are atrocious.  I have a movie theater loan that is a $7 Million dollar construction loan being done on the USDA.  Going on 8 months now to get that one closed and we are still not cleared yet.  They take a long time BUT they are doable and sometimes, it is the only way to get it done.  This is for rural areas only.

–Life Company Loans–

These are loans from life insurance companies.  These loans may or may not have recourse depending on the deal but usually have some measure of recourse.  The key to life company loans is that each life company has different hot spots.  Some like NNN credit tenant, some like Multi-tenant deals, some like to buy discounted notes.  Each one has a strategy so unless you have access to multiple life companies, you won’t have the full range of investor products.  Rates are higher than agency-5’s generally but the turn times are quicker.  They also do all the four main food groups-retail, office, industrial AND apartments.  We have access to many different life insurance companies across the country.  Life companies look for good areas, major metros, and states with good growth.  They are very cautious in rural areas or depressed states.

-Conduit loans

These are readily available above $10 Million, moderately available above $5 Million and tough to get below $5 million in loan size.  So this is for your bigger deals.  They can do the four food groups, the loans are non-recourse, and rates will usually be 10 year fixed in the 5’s.  This is for your large office and retail deals.  Grocery anchored retail is very hot for this group as well as apartments.  Generally just major metros.

-Hedge Fund loans

There is a lot of diversity amongst the hedge funds as to what they look for and what types of properties.  They may be open to special use properties like Hotels but the deals have to be very strong.  Rates can be fantastic and they are almost always full recourse.  For example, I have one fund out of NY that will go to 80% on apartments, even cash-out and will give a rate of 5.25% fixed for 10 years with a 25 year amortization.  They will go to 75% on the other main food groups.  They can close fast-30-45 days but with excellent rates.

-Credit Unions-

Credit Unions are aggressive again.  They will consider the broadest range of deals-generally, the deal has to make sense.  In isolated situations, they can even entertain construction.  Deal has to cash flow, buyer has to be strong, but you can run good investor deals by them and they can get it funded.  Most can go to $3 million without participating, after that, they need to bring in other credit unions but they can do it and do some pretty large deals.  We have access to good credit unions throughout the country.  You can get a lot of deals done with this group where they do not fit in any of the above categories.  Rates are a little higher-generally above 6% but again, you can get deals done there.

-Bridge Money

No quick review of investor product would be complete without discussing bridge money.  Bridge money is VERY useful when you need to close quick and don’t have time to waste on expansive underwriting and turn times.  A lot of people will take out bridge money while the wait for their FHA loan to close for example.   Ideal situations are where occupancy is not high enough to qualify for the groups above(need 85% occupancy generally for the good rates) and the client has experience and reserves and can renovate and/or get the occupancy up to refinance into more conventioanal rates.  Rates are usually 10-14% however, for large deals over $10 Million, we have one bridge loan product that is 2-3 years fixed and priced between 6 and 8% interest only! Very hot. These are quick closings-usually 3-4 weeks and short term in nature but they can get the deal closed and are a valuable arrow in your quiver so to speak.

I hope this little review was helpful! We have access to all the above products and more and can really help you close commercial transactions. For more info, or to run a possible scenario by me, just give me a call today at 888.650.9966 Ext.100 or e-mail me at MM@McDevitt.CO . Have a blessed week!

Mike

Construction Activity Index Jumps:

A widely followed indicator of U.S. construction activity rose last month to its highest level since January 2008. This report suggests that the recovery in the construction sector may have momentum, according to an architects trade group.

The September Architectures Billings Index was up 2.2 points to 50.4 – marking the fourth consecutive month of increases, the American Institute of Architects said.

The score reflects a rise in demand for design services, as any score above 50 indicates an increase in billings.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +35 basis points last week causing 30 year fixed rates to decrease from the previous week. While week-over-week pricing did improve, last week did end on a down note. We had our best pricing on Wednesday afternoon and then sharply lost -43 basis points by Friday’s close. The change in momentum was largely due to better than expected Initial Jobless Claims, the Leading Economic Indicators, and the Philly Fed Manufacturing Index.

Retail Sales Jump:

The Commerce Department reported that Retail Sales jumped 0.6%.  This was a much stronger reading that what analysts expected and was the best reading since December 2009.

This is important to the housing market because home demand is strongly tied to how the consumer feels about the economy.  While there are numerous studies and surveys that attempt to monitor consumer sentiment,  nothing give us a clearer picture than their actual spending at retail stores.  This pick up in consumer demand along with exceptionally low mortgage rates are both positives for the housing market.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -57 basis points last week causing 30 year fixed rates to increase from the previous week.  We actually lost -104 basis points from last Friday’s all-time highs to this Friday’s close.  We had an action-packed and holiday-shortened week.  MBS pricing eroded (causing mortgage rates to go up) on the very strong Retail Sales and relatively weak demand for the ten year and thirty year Treasury auctions.

Investor Loans Are Opening Up!

In what I see as a very positive development for the economy, investor loans are beginning to open up again.  I was speaking to a contact at CIBC World Markets and he was telling me that they are opening up conduit lending in a few weeks.  That is big.  As the Capital markets open up to lending, it will flow through to every phase of this economy.

Some conduit lending is already available.  And the rates at this time are unbelievable.  For apartment complexes it gets even better.  Non-recourse apartment loans are now available with 10 year rates in the low to mid 4% range.  This is the agency paper, meaning FNMA and Freddie and FHA. Loan sizes about $1 Million and up.  Non-agency is once again available in major markets with NO Recourse!  Loan sizes really need to be $2 Million and up for that product but the rates are in the low to mid 5’s fixed for 10 years!  NNN office space, grocery anchored retail and class A office may also qualify for non-recourse loans at these same great rates.  The important thing is that these loans are becoming available again.  For a while, they were all but gone.  With rates this low, it is an awesome time to buy investor commercial property and I have seen a big pick up in apartment deals in Atlanta and throughout the country.  The larger deals are happening again!

And this past week, I created a relationship with an incredible private hedge fund out of NY that is focusing on the investor market as well.  They will go beyond the major metros to any area that is a growing market.  If the economy and property values are still tanking in your area, this fund will not be an option but for all major metro areas and sub-markets that are growing like many parts of Texas, North Carolina, etc. this is an incredible loan product.  They will go down as low as $500,000 in loan size, rates start at 5.25% for a 10-year fixed, with a 25-year amortization.  They will go to 80% LTV on apartment complexes and 75% on retail / office / industrial.  And here is the kicker, they do NOT delineate as far as refinancing or purchasing when they look at LTV.  So you can take cash-out on a deal possibly up to 75% LTV on retail/office or 80% on apartments. And rates in the low to mid 5’s!  WOW!

As a result of all this, volume is picking up again.  In fact, we are slammed with deals.  And that activity will filter to other parts of the economy.  Are all the problems fixed?  Not by a long shot.  There are still a ton of properties that are upside down and struggling and it will take years to get through all the bad paper.  But with the bank’s willingness to sell and discount the notes, with rates this low and investors beginning to buy again, and the big capital markets opening up, the seeds of recovery are in place.  For more information, or to discuss a property that you are buying or need to refinance, just give me a call.  I can usually tell very quickly whether I can help you or not and with just some basic information, can get you an approval in writing in 48 hours.  We are fast, we are nationwide and we are closing loans.  Give me a call today at 888-650-9966 Ext.100

Have a great week,

Michael McDevitt

P.S.  Remember, I have 10-year fixed interest rates starting at 5.25% from $500,000 to $20 Million on apartments, retail, office and industrial properties.  Underwriting is a bit more lenient as well on debt coverage ratios and I can do refinances up to 75% or even 80% LTV on Apartment Complexes!  To get more info or to run a purchase or refinance scenario by me, just call 888-650-9966 Ext.100.  These rates are fantastic and probably won’t get much lower; the time to act is NOW.  Call me today!

Pending Homes Sales Rise:

On the heels of the prior week’s surprise monthly gain of 7.6% in Existing Home Sales, The National Association of Realtors reported last week that Pending Home Sales also increased.

The number of people who signed contracts to buy homes rose 4.3% in August, it was the second straight month of increases. Typically it could take up to 2 months for those newly signed contracts to turn into closed deals.  The unexpected increase was driven mainly by big gains in the South (up 7%), the West (up 6%), and in the Midwest (up 2%).  Pending Home Sales fell 3% in the Northeast.

While this data is low by longer-term historical standards, this report along with other recent  housing reports are showing some pickup in housing demand over the last two months.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +62 basis points last week causing 30 year fixed rates to decrease from the previous week.  We actually reached a new record low for thirty year fixed rates on Friday but then pulled back from those levels.  MBS shot up to record levels on Friday just after the Unemployment report was released.  While the Unemployment rate remained unchanged at 9.6%, the market was very disappointed with the very small gain in the Non-Farm Private Sector area.  Investors feel that this weakness will spur the Federal Reserve to begin another round of quantitative easing which would temporarily lower rates. At this point it is purely speculation as the Federal Reserve has not definitively stated what they are willing to do and in what increments.

Weak Jobs Data Helps Mortgage Rates

Weak Employment data and increased expectations for Fed monetary easing were favorable for mortgage rates this week. Investors have priced in a high likelihood of additional Treasury security purchases by the Fed, which would increase demand for mortgage-backed securities (MBS). As a result, mortgage rates declined to a new record low.

While the private sector performed relatively well, Friday’s Employment data revealed net job losses and stagnant wage growth in September. Against a consensus forecast for a loss of 5K jobs, the economy lost 95K jobs. The weakness was seen mostly in the government sector, as state and local governments continued to shed jobs. The private sector actually added 64K, which was close to expectations. The Unemployment Rate remained at 9.6%. A broader measure, which also includes the underemployed, rose from 16.7% in August to 17.1%, matching the high reached in April. Average Hourly Earnings, a proxy for wage growth, was unchanged from August.

The Fed’s recent announcement that it may purchase additional Treasury securities (quantitative easing) to stimulate the economy has magnified the importance of economic news and increased daily volatility. Investors now evaluate each fresh piece of data in terms of its expected impact on Fed policy, and mortgage rates receive an extra benefit from weaker than expected data. In general, weaker economic growth leads to lower future inflation, which is favorable for mortgage rates. In addition, investors now expect higher levels of bond purchases by the Fed after weak data, and the increased demand also would be positive for mortgage rates. Of course, stronger than expected economic news will have the opposite effect and will push rates higher more quickly than usual.

 

Congress Extends Higher Loan Limits:

Congress has extended a policy that was due to expire that allows for higher loan limits.  The maximum size of loans guaranteed by Fannie Mae, Freddie Mac and the Federal Housing Administration will now run through the end of 2011.

The higher loan limits of nearly $730,000 are designed to continue to drive growth in the more expensive, or higher cost areas like New York and San Francisco.  The vast majority of homes do not fall into one of the designated “high cost” areas, loan limits for those homes will remain at $417,000.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +6 basis points last week causing 30 year fixed rates to decrease from the previous week.  We had a very volatile week with price swings of 53 basis points on some days. In the end, we closed out the week very close to where we started.  The MBS market reacted favorably to some U.S. Treasury auctions which enjoyed some very strong demand.  The market also moved upward on weaker than expected ISM Manufacturing data.

Mortgage Rates Little Changed

Although daily volatility was high this week, mortgage rates ended the week nearly unchanged. A steady stream of economic news was roughly neutral for mortgage rates, as stronger than expected economic data was offset by solid demand for the week’s Treasury auctions.

During the week, a series of Fed officials shared differing viewpoints on the possibility of additional Fed purchases of Treasury securities. While the officials are divided about both the need and the effectiveness of buying bonds to stimulate the economy, the majority view appears to be that the Fed should undertake this action unless the pace of the economic recovery improves soon. A flexible program to purchase smaller quantities of Treasury securities has emerged as an appealing middle ground for Fed officials.

Overall, a new Treasury purchase program would be favorable for mortgage rates. Increased Fed demand for Treasury securities would also increase demand for similar investments including mortgage-backed securities (MBS), which would push mortgage rates lower. Investors have already priced in the likelihood that more purchases will take place. There may be a downside, though. In contrast to the recent MBS purchase program, which involved a relatively steady, well defined level of weekly buying, the new program may be geared to allow the Fed to adjust its purchases based on changing economic conditions. By its nature, a program that is more flexible will be less predictable. The uncertainty will likely lead to increased volatility for mortgage rates, as investors amplify their reaction to each piece of economic news.

Also Notable:

• The July Core PCE inflation index increased at a low 1.4% annual rate
• Effective October 4, FHA monthly MIP increases
• Congress extended the current higher loan limits through Sept. 30, 2011
• The Dow stock index rose 10% during the third quarter

Week Ahead

The biggest economic event next week will be the important Employment report on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Early estimates are for a decrease of about 15K jobs in September. Before the employment data, Pending Home Sales, a leading indicator for the housing market, will be released on Monday. Factory Orders also will be released on Monday. ISM Services will come out on Tuesday.

Home Picture Brightens:

The constant “doom and gloom” news reports might make you feel as if everyone is in foreclosure and that no one is buying any homes.  Of course, that is the farthest thing from the truth.  In fact, there are some bright spots in the housing market.

The National Association of Realtors reported that sales of existing (previously owned) homes shot up 7.6% in August to a seasonally adjusted annual rate of 4.13 million units.  Another sign of strength is that the median sales prices actually increased, which shows that homes are not being moved due to lower prices.  The median sales price rose 0.8% to $178,600.

Sales grew in every region of the country.  They rose by 14% in the West, 8% in the Northeast and 5% in the Midwest and South.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +34 basis points last week causing 30 year fixed rates to decrease from the previous week.  However, once we reached our best pricing on Tuesday, we pulled back -47BPS by Friday.  The reversal from Tuesday’s highs was in reaction to very strong Existing Home Sales, Business Inventories, and Durable Goods Orders.

Fed Statement Positive for Mortgage Rates

The chance for additional Treasury purchases by the Fed helped mortgage rates improve early this week. Stronger than expected economic growth data trimmed the gains later in the week. The net result was that mortgage rates ended the week a little lower.

As expected, the Fed made no change in the fed funds rate at Tuesday’s meeting. Its statement was very similar to the last one, but investors focused on one important difference. Fed officials stated that they are “prepared to provide additional accommodation if needed to support the economic recovery.” Investors interpreted this to mean that additional bond purchases by the Fed could take place in coming months. While the Fed is expected to purchase Treasury securities rather than mortgage-backed securities (MBS), increased demand for Treasuries would be favorable mortgage rates. As usual, investors immediately priced in this information, and mortgage rates improved. Of course, if this action by the Fed never becomes necessary, then mortgage rates could give back this week’s gains.

The housing data released during the week generally matched expectations. While there are differences in regional performance, overall the housing market is holding steady above the lows reached during the recent financial crisis or improving modestly. August Existing Home Sales rose 8% from July. Inventories of unsold existing homes declined 1% to an 11.6-month supply. August New Home Sales were unchanged from July. August Housing Starts rose 11%, and Building Permits, a leading indicator, rose 2%. The September NAHB home builder confidence index was unchanged from August.

	Average 30 yr fixed rate: Last week: -0.03% This week: -0.05%
	Stocks (weekly): Dow: 10,850 +250 NASDAQ: 2,375 +75

Week Ahead

Next week, Consumer Confidence will be released on Tuesday. The final revision to second quarter GDP will come out on Thursday, along with the Chicago PMI national manufacturing index. GDP is the broadest measure of economic activity. Friday will be the big day with Personal Income, PCE inflation, Construction Spending, ISM manufacturing, and Consumer Sentiment. There will be Treasury auctions on Monday, Tuesday, and Wednesday.

Retail Sales Improve:

The U.S. Census Bureau reported that Retail Sales (excluding food items) rose 0.6%.  This was a much larger increase than what traders expected and put Retail Sales at its highest level since emerging from the recession.

This is very important as home sales are largely based upon consumer confidence or their willingness to spend money.  While various consumer confidence surveys and gauges have had mixed results, it is clear that consumers are showing their true confidence levels by spending more. If this trend continues, it will be very favorable for housing demand.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -34 basis points last week causing 30 year fixed rates to increase to their highest levels since July.  After a short-lived rally on Tuesday, they pulled back -59 basis points.  The markets were reacting to some stronger than expected Retail Sales, Business Inventories and Initial Jobless Claims.  The relatively positive economic data helped to temporarily curb fears of a double-dip recession which reduced a “safety” premium in MBS.

Low Inflation Helps Mortgage Rates

After rising for two weeks, mortgage rates moved a little lower this week. Slower than average economic growth and low inflation persuaded investors to purchase bonds, including mortgage-backed securities. Following three months of declines, mortgage rates appear to be settling into a range so far in September.

The most significant economic data released during the week was the monthly inflation reports. Rising inflation erodes the value of bonds and pushes mortgage rates higher. In the current economic environment, higher inflation is not a concern, and some investors are more worried about the risk of inflation falling too low. The Fed is generally most comfortable when core inflation is rising at an annual rate between 1.0% and 2.0%. In August, the core Consumer Price Index (CPI) increased at a low 0.9% annual rate. While this level is probably not low enough to prompt new action from the Fed, investors will be closely watching what the Fed has to say about inflation rates at next Tuesday’s meeting.

Hearings began this week on the role of government in the housing market, including the future of Fannie Mae and Freddie Mac. The debate is expected to be lengthy, and the Obama administration has stated that it will produce a proposal in January. There is general agreement that government involvement has created a more liquid market for mortgages, which has resulted in lower mortgage rates. The early consensus is that there is an appropriate role for government in the housing market, but that proper safeguards must be established to reduce the future risk to taxpayers. In any case, changes are expected to be phased in gradually over a period of years.

Week Ahead

The biggest story next week will be Tuesday’s Fed meeting. No change in the fed funds rate is expected, but any surprises in the Fed’s statement could have a large impact on mortgage rates. Also on Tuesday, Housing Starts will be released. Existing Home Sales will come out on Thursday, along with Leading Indicators. Durable Orders, an important indicator of economic activity, and New Home Sales will be released on Friday.

Jobless Claims Drop:

Nothing impacts demand for housing more than employment levels.  Quite simply, if someone is out of work or is concerned that they could lose their job, they are not going to make a major purchase such as a home.  So, it is good news that for the second week in a row that the Initial Jobless Claims have decreased.

Initial Weekly Jobless claims dropped by 27,000 which was much larger than expectations.  Continuing Claims also dropped slightly.  The stock market rallied on this positive economic news.

What Happened to Rates Last Week:

We started our holiday-shortened week with with a nice rally as traders returned from the long weekend on Tuesday but then pulled back a huge -93 basis points causing 30 year fixed mortgage rates to reach their highest levels since August 18th.

Mortgage backed securities (MBS) pulled back (causing mortgage rates to increase) due to a much stronger than expected Initial Jobless Claims and Wholesale Inventories reports.

Pending Homes Sales Soar:

Pending sales of previously owned U.S. Homes rose unexpectedly in July, according to the National Association of Realtors.  This index which is based upon contracts signed in July but not yet closed, increased 5.2 percent after the previous month saw a decline of -1.6%.  The market was expecting another decline in the -1.5% range considering that the home buyer tax credit does not apply to any of these new purchase contracts.

While the housing market is far from being fully recovered, this is a very strong reading and is indicative of a market where we enjoy the lowest 30 year fixed rates that we have ever seen and a pool of very good inventory to select from.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) reached another new record on Tuesday which caused conventional mortgage rates to fall to their lowest levels in history.  However, before the market was aware of the great new pricing, we lost it as we pulled back -81 basis points from our best levels.

The reason for the pull back?  After several weeks of very weak economic news, we finally had some economic data that beat market expectations.  These positive reports included very strong ISM Manufacturing, Initial Jobless Claims, Pending Home Sales and Unemployment levels.