Beige Book: Financing Tightens as Activity Slows
MBA (7/25/2008 ) Murray, Michael
Commercial real estate activity was constrained in a number of Federal Reserve districts as financing continued tightening, according to the Federal Reserve’s Beige Book.
Commercial lending activity in the Richmond district was generally stable—loan demand ranged from steady to slightly up across Virginia and the Carolinas—but activity weakened somewhat in the Washington, D.C. and Charleston, W.Va. markets, the Beige Book said.
Contacts in Washington, D.C., Charlottesville, Va. and Charlotte, N.C. reported further credit tightening, especially for projects in real estate-related industries. Credit quality showed signs of deterioration in Washington, D.C., Virginia and the Carolinas, where lenders reported an uptick in client bankruptcies and weaker financial statements.
The availability of financing continued to tighten for new commercial projects in the Chicago district, and an industry contact in the New York district said new hotel development has “virtually ground to a halt.” The pipeline of existing development is “larger than ever”—close to 15,000 rooms, the contact said, but a number of the projects are having trouble getting adequate financing.
Sentiment in the Boston district was “decidedly morose” among commercial real estate contacts this cycle, with the exception of a small mutual bank that continued with robust demand for its small-scale commercial property loans, the Beige Book said.
However, despite enjoying brisk business and high commercial mortgage interest rates, a small Boston mutual bank reported that it could run up against lending capacity constraints before year’s end, and lending officers at the bank were instructed to adopt a “more selective” stance.
“Compared with the last report, contacts [in Boston] are less optimistic that market conditions will improve by year’s end,” the Beige Book said. “One commercial broker is cautioning his clients to be prepared for a long period of stagnation in commercial property values and leasing demand.”
Contacts in the Philadelphia district anticipated that markets would continue softening while economic conditions remain unsettled. One contact said “there’s too much uncertainty, tenants adopt the do-nothing strategy” and negotiate short-term lease extensions rather than look for new or expanded space.
Commercial contractors in the Atlanta district also anticipated further softening through the remainder of the year with a weak 2009. Contractors in the Cleveland district do not foresee any dramatic downturn in business, but several contractors said lending standards are becoming tighter despite available financing.
Most developers in the Kansas City district expect declines in current prices and rental rates to continue into the near future. Several contacts in the district reported sluggish new construction due to increasing costs and scarce financing options, and some expect the sluggishness to continue or worsen in the near term.
Commercial real estate respondents in the Dallas district noted a continued decline in investment deals getting done, particularly for larger projects. There were reports of a general drying up of liquidity in the market and a flight of capital out of real estate, the Beige Book reported.
On the upside, however, higher quality assets did not see a major deterioration in value in the Dallas district.
Contacts in the San Francisco district noted a steep reduction in the total value of commercial construction permits in San Diego and an ongoing reduction in rental demand for commercial real estate in San Francisco.
Existing Home Sales Drop
MBA (7/25/2008 ) Velz, Orawin
Total existing home sales fell 2.6 percent in June to a seasonally-adjusted annualized rate of 4.86 million, as the 3.2 percent drop in single-family home sales outweighed the 1.7 percent increase in condo sales.
This marked the slowest pace of total existing home sales since the inception of the series in January 1999. Single-family existing home sales posted the lowest level since January 1998.
Sales of single-family homes during the first half of this year were down 17.6 percent from those during the same period last year. The decline in condo sales have been more pronounced, with year-to-date condo sales 25.5 percent lower than those last year.
Existing home sales decreased in three regions: 6.6 percent in the Northeast; 3.5 percent in the Midwest; and 3.1 percent in the Northeast. The West posted an increase of 1.0 percent, the fourth consecutive monthly increase. Foreclosure or distressed sales, which accounted for nearly a third of the national market, according to the National Association of Realtors, helped support sales in the West over the past several months.
The share varied significantly by state. For example, according to a report by DataQuick released on July 16, foreclosure sales accounted for 41.1 percent of Southern California existing home sales in June. The share was only 7.3 percent in June 2007.
The West has experienced the highest foreclosure rate and suffered the largest price decline in the nation, as foreclosed homes are usually sold at a deep discount. While the median price for total existing homes for the nation fell 6.1 percent in June from a year ago, the decline was 17.2 percent in the West. Since February, the region has posted double-digit year-over-year home price declines, which helped lure buyers back into the market.
The number of total homes available for sale was little changed in June from May and was up 2.8 percent from June 2007. (The data are not seasonally adjusted.) A slower sales pace and a flat inventory pushed up the months’ supply of total existing homes to 11.1 months in June from 10.8 months in May and from 9.1 months a year ago.
A separate report showed that housing inventory remained a big problem. In the second quarter, the homeowner vacancy rate—the share of units typically occupied by owners that are for sale and vacant—edged down to 2.8 percent from a record 2.9 percent in the first quarter. High homeowner vacancy rates put downward pressure on home prices because sellers of vacant homes (who may be paying another mortgage elsewhere or who may be trying to sell foreclosed homes) are more likely to slash price to make a sale than sellers who still live in their homes.
The Treasury markets rallied and yields moved lower as investors sought safe havens from stock markets. Stocks tumbled in response to downbeat earnings and home sales data. The yield on the 10-year Treasury note stayed around 4.04 percent by mid-Thursday afternoon, 13 basis points lower than the rate on Wednesday.
State Shuts Loan Firm for Alleged Fraud
Chicago Tribune (07/25/08)
Illinois authorities have closed down First Chicago Mortgage Co., a loan business that allegedly issued more than $6.6 million in mortgages to home buyers based on false job and income data. Gov. Rod Blagojevich convened a mortgage fraud task force earlier in the year after receiving numerous complaints from people who had taken out mortgages via First Chicago. The Illinois Department of Financial and Professional Regulation examined the firm’s files and found that 14 loan applications falsely listed borrowers as working for Advanced Auto Repair and getting paid a substantial salary. A half-dozen other loans also contained serious misrepresentations and even forgeries.
Three Mortgage Lenders Under Federal Investigation
St. Louis Post-Dispatch (07/25/08); Schmitt, Richard B.
A federal grand jury in Los Angeles has started investigating Countrywide Financial Corp., IndyMac Bancorp Inc. and New Century Financial Corp.–three of the country’s biggest subprime mortgage lenders–seeking everything from bank records to past e-mail correspondence. The subpoenas follow interviews that federal investigators conducted with employees and others knowledgeable about the lending operations of the California institutions, all three of which crumbled after making a long string of bad loans. The probes are part of a Justice Department campaign that until now has centered on smaller operators that defrauded homeowners and mortgage lenders. The subpoenas are proof that the U.S. government is beginning to scrutinize the nation’s larger lenders to determine whether they were complicit in the billions of dollars that have been lost in the mortgage boom going bust.
State Program Preventing Foreclosures
Deseret Morning News (UT) (07/25/08); Thalman, James
Utah Housing Corp. reports that foreclosures among participants in its first-time buyer assistance program declined by 52 percent in the fiscal year that ended June 30. Foreclosures were up 141 percent statewide during the same period, according to Utah Housing. The agency has helped about 10,000 moderate-income Utahns become homeowners. Although participants benefit from the program’s below-market interest-rate loans, administrators tout their efforts to lend responsibly and allow borrowers buy only what they can actually afford.