The 2016 Finance Market: Understanding the Challenges Ahead

With improvements in the economy and mortgage rates, how has the housing industry
been affected?

By Richard Hill Adams

The Federal Reserve Bank Chairwoman Janet Yellen and the Federal Reserve Board increased the Federal Funds rate by a quarter of one percent; the sky did not fall and interest rates did not rocket to the moon. What you see when we look at the interest rates is that they are sliding downward from last December when the 10-year Treasury Bills were at 2.27 percent; today the 10-year Treasury is at 1.71 percent. Interest rates are incredibly important in the housing industry; the construction loans typically float over The WSJ Prime Rate, which at its zenith was 21.5 percent in December 1980, and decreased to 3.5% today. The last time our economy saw the Prime Interest Rate at 3.5 percent was in April 1958 when Eisenhower was President of the United States. The economy around the world is soft and that will help hold interest rates in the lower ranges for some time to come.

The housing market, which is so dependent upon interest rates, has been blessed with the opportunity of seeing 30-year financing today as low as 3.62 percent and 15-year fixed rates as low as 2.77 percent; the market has also seen real loans, fixed rates and stable (not teaser rates) loans funded by lenders for a fully amortized payout.

Today we are in the seventh year of an expansion; however, that expansion is not returning housing to the peak existing home prices of yesterday in many metro areas. Some locations in the country have done well such as Austin, Denver, Dallas, Philadelphia, and Houston have all seen steady increases in the value of the real estate; however, places like Las Vegas, Phoenix, Orlando, and Sacramento, while still in recovery, have not fared as well. Approximately 30 percent of the market has recovered in terms of current price to peak and the balance of the market is still recovering.

In my opinion, we will continue to see a slow but steadily improving economy with affordable home prices, which will be aided by the lowest mortgage rates in decades, coupled with pent-up demand will help drive the housing market forward through 2016 and beyond. The economy, federal regulators, the Dodd Frank legislation, and Basil lll create obstacles to improvement in the housing market. All of these have led to the banks tightening their commercial real estate lending operations. The latest Fed survey on bank lending practices in the U.S. say that the banks have tightened commercial real estate lending in the first quarter of 2016.

Additionally, bank capital will not be as plentiful in the housing market because of the shaky CMBS market of 2016. There is a huge tidal wave of commercial refinancing, which is over $211 billion, according to Trepp, LLC. The old CMBS loans in the commercial market funded between 2006 and 2007 will now require refinancing by the banks, life insurance companies, and other lenders as well as a modest degree of CMBS re-financing in today’s market. According to Commercial Mortgage Alert, the U.S. CMBS issuance has totaled $19 billion since the beginning of 2016, which is a 30 percent decrease from issuance volumes reported for the same period in 2015. The re-reregulation of lending affects all of the lenders across the spectrum; regulations now require CMBS lenders to hold a percentage of the loan for five years to have “some skin in the game.” This will definitely slow down the CMBS market, take more capital out of the banking market, and impede the ability of this huge tidal wave of property in its goal of being been refinanced.

Housing demand remains strong while low mortgage rates have helped to keep the cost of ownership in check despite steady appreciation in value. The continued pace of hiring over the last six years with modest but consistent wage growth has helped prospective homeowners as they go forward in the housing market.

Builders boosted their pace of construction by 14 percent as of March 2016. This puts the builders on track to complete 1.1 million annualized units of housing in 2016. Single-family housing starts rose by 23 percent as builders sought to leverage positive consumer outlooks and improving mortgage availability.

Purchases of previously owned single-family residences have risen approximately 3 percent over the last 12 months ending in March; the median price advanced 6 percent to $232,000 on a national basis, putting it on par with pre-recession peak pricing at the national level. Mortgage applications for purchase loans also continue to rise, signaling higher sales volume in the coming months. New home sales, meanwhile, jumped 5.5 percent year-over-year, and inventory remains tight across the board. A significant area of constraint in new homes sales is in the entry-level category. As a result, the limited supply of available homes has sharply curtailed for first-time homebuyers in particular. With today’s interest rates at all-time lows, this would be a perfect opportunity for the Millennials and other first-time buyers to get into the housing market, if the supply was available.

Richard Hill Adams is the Chairman and Chief Executive Officer of American Realty Capital Advisors. He may be reached at RHADAMS@arca-money.com.

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