Displaying items by tag: real estate

(New York)

Those looking for signs of what will happen to the US economy would be wise to keep an eye on mortgage issuance. While the supply of homes is notoriously tight, many are worried that higher rates might doom the mortgage market. Well, despite several hikes in 2017, the year ended up being a very strong one for commercial mortgage issuance. Total commercial mortgage debt rose by $200 bn in the year to hit $3.18 tn total. It was the strongest year of mortgage debt growth since 2007.

FINSUM: This is one of the stats where you are not sure whether to be nervous or hopeful. On the one hand, it is good that issuance wasn’t dented by rate hikes, but on the other, the stats seem almost worryingly positive.

(Washington)

In what seems a status quo that has been in place for eons, the way credit is measured in the mortgage market appears poised to change. For many years, Fair Isaac Corp’s FICO score has been by far the dominant credit score used when determining mortgage issuance. Now Congress is trying to shake things up with a bank deregulation bill that would require Fannie Mae and Freddie Mac to consider credit scores beyond FICO. If the move happens, it is expected that more mortgages would be approved.

FINSUM: This would be a huge shakeup with big implications for the market. If more mortgages get approved, it seems like credit-worthiness would fall in aggregate, with a commensurate rise in rates.

(New York)

While some see the housing market as being in the middle of a long push upward, some see a lot of risks on the horizon as rates rise. In particular, mortgage rates look set to move strongly higher as the Fed keeps hiking rates. 30-year mortgage rates just hit a four-year high and are already hurting refinancings. Not only will the rates hurt new buyers, but they also keep people from moving, which could create bottlenecks in the system. The rise in rates is also challenging because home prices have risen sharply.

FINSUM: So the big point which counteracts all this negativity is that Millennials are entering their home-buying years, so there is a large pool of demand to support prices. The higher end of the market may be where things are weakest.

(New York)

With rates looking likely to rise there are increasing concerns that the US housing market might be in for a rough patch. Rising rates mean more expensive mortgages, and combined with the lowering of the interest deduction threshold in the new tax package, real estate could be in for a rough ride. However, the opposite may be the case. The reality is there is low inventory and little new construction, leaving many buyers chasing a shortage of homes. Prices have risen steadily since the Crisis, but with the exception of a few coastal markets, have not surged, meaning pricing still looks reasonable. “Housing is in the third or fourth inning of a nine-inning game”, says one portfolio manager.

FINSUM: All the risk is in mortgage rates. If the Fed hikes very aggressively then it will hurt the market, but if things keep moving at this leisurely pace, housing will likely do just fine.

(New York)

Well the market may have been very chaotic in recent weeks, but at least one sector is sending an unequivocal buy signal. That sector is REITs, and the context for the call is that the sector has performed terribly over the last year. REITS were down 5% in 2017 versus an S&P 500 gain of 25%. This year, they are off 10%. Those losses mean REITs are yielding almost 5%. The sector looks fundamentally healthy and will benefit if the economy continues to expand. Big fears over rates rising, which affect REITs, seem to already be priced in.

FINSUM: A simple return to the mean-based investment hypothesis would dictate that REITs should rise, but with so many worries over rates right now, it might take some time for that to play out.