Housing starts down

Smart Real Estate News & Commentary by Chris McLaughlin July 20, 2010 

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Housing starts down

The Commerce Department says housing starts dropped 5.0% to a seasonally adjusted annual rate of 549,000 units, the lowest level since October.  It was the second straight month of decline in activity and was well below market expectations for a 580,000-unit rate.  May’s housing starts were previously reported as a 10.0% drop, but are now revised down to show a 14.9% decline.  Compared to June last year, starts were down 5.8%, the biggest decline since November.  Driving the June decline was a more than 20% drop in the volatile condominium and apartment market. Construction of single-family homes, the biggest part of the market, was down slightly by 0.7%.  The only positive sign in the report was an unexpected 2.1% rise in applications for building permits to a 586,000-unit pace in June. 

That followed a 5.9% drop in May and compared to analysts’ expectations for a slip to 570,000 units.  Still, the slumping job market and competition from foreclosed properties have forced builders to limit construction, especially after tax credits that spurred sales expired at the end of April.  “Despite record low mortgage rates, housing is at risk of a double dip unless job growth strengthens soon,” said Sal Guatieri, senior economist at BMO Capital Markets.  Economists had had predicted that construction would fall to a rate of 580,000 and had projected that building permits would sink to a rate of 570,000, according to Thomson Reuters.  In a typical economic recovery, the construction sector provides much of the fuel. But not this time. While developers have cut back on construction and the number of new homes on the market has fallen dramatically, they still must compete against foreclosed homes selling at deep discounts. 

Consumers will pay for new rules

Up until recently, bankers have remained mum on particular reform measures, saying that regulators will first need to write specific rules.  But Bank of America broke ranks on Friday, detailing the impact of several provisions, including the so-called Durbin amendment, named after sponsor Sen. Richard Durbin, D-Ill., which will limit the fees banks collect from debit card swipes.  Bank of America executives said the new rule would reduce fees earned from debit cards anywhere between 60% and 80% starting in the second half of 2011. This year, the company said it expects to produce $2.9 billion in revenue from that business.  “We now fear that the Durbin bill could have a great negative impact on bank revenue than we had originally estimated,” BMO analyst Lana Chan wrote in a note to clients Monday. 

Even though BoA is hit hard, , the biggest hit was expected to fall on major regional players such as Regions Financial, KeyBank and Fifth Third. Each institution generated over 3% of their overall revenue from interchange fees last year, compared to Bank of America’s 2%, according to Chan.  Analysts suggested that perhaps the company most exposed to the new measure was the Minnesota-based lender TCF Financial.  In 2009, more than 10% of its revenue came from interchange. FBR’s Paul Miller projected Monday that TCF’s earnings could fall by as much as 40 cents a share as a result.  Banks have not been sitting idly by. A number of major financial institutions have reportedly started to eliminate free checking accounts, as well as imposing new or higher fees, ultimately putting the cost of the forthcoming new laws on the consumer.  “That is probably what is going to happen here,” said TCF Financial CEO Bill Cooper said during a conference call with investors last week.  The bad news is that the Durbin rule is just one small piece of an ongoing effort to rewrite the rules of the road for the financial services by this administration and congress.

Olick – Jumbo loans are back

“After several years of stagnation in high-end housing, thanks to the disappearance of the jumbo market, things are moving yet again.  A quick check on Bankrate.com shows the 30-year fixed jumbo at around 5.50%, and Citibank last week reported applications for jumbos up 30% just over the last 60 days.  “It is the overall weak economy driving the 10 year lower, which is the proxy for most mortgage loans,” says FBR’s Paul Miller. “This is still probably the best of the best getting loans at these low rates, but Jumbo activity is still very, very low.” Miller says it’s good for the market, but only “marginally better,” as banks are desperate to find good loans to put on their books.  But how long will it last? Probably only as long as investors remain nervous about the economy.  “Preliminary signs of life in the secondary market are a good indication that the narrower spread between jumbo and conforming loans will stick around,” says Bankrate.com’s Greg McBride. “However, the level of mortgage rates will hinge more than anything on the demand for Treasuries.”  Bank of America tells me that applications and fundings for jumbo loans rose over 10% from May to June. They say they’ve always been the leader in jumbos, which could be why Citi is getting more aggressive.”

Home Builder Confidence Plummets

Builders have been feeling increasingly pessimistic of late. The National Association of Home Builders (NAHB) said yesterday that its monthly reading of builders’ sentiment about the housing market sank to 14 — the lowest level since March 2009. Readings below 50 indicate negative sentiment about the market.  “We continue to see a lull in home buying activity following the expiration of the federal home buyer tax credit program, as many of the sales that would have occurred this summer were likely pulled forward to meet that program’s deadline,” said NAHB chairman Bob Jones, a homebuilder in Bloomfield Hills, Mich., in a press statement. “In addition, builders are reporting continuing consumer hesitancy regarding home purchases due to uncertainty in the overall economy and job markets.” 

Paul Dales, a US economist at the Toronto-based Capitol Economics concurred that the tax credit’s expiration is impacting the housing market.  “It is becoming increasing clear that without the government’s artificial support, the US housing market is struggling to stand on its own two feet,” Dales wrote in commentary Monday. ” The fall in the NAHB housing index…shows that demand for new homes has weakened further.”  Specific factors contributing to the negative view include hesitation on the part of homebuyers, tight consumer credit and continuing competition from foreclosed and distressed properties, according to NAHB chief economist David Crowe.

Now for our real estate education section…

Mortgage Overhaul & What is Means for You

By the time you are reading this, the new 2300 page financial reform bill is likely to be making the headlines. The Senate has already approved the new bill and President Obama is expected to sign it into law this week ..despite the fact that many of the provision related to specific regulations have yet to even be written. If that sounds faintly disturbing, don’t worry…your concern is noted and shared by many experts through the nation. However, there are sweeping changes that are already apparent despite the lack of specific details.

Although broad in scope, home buyers and sellers are likely to be among the first impacted by the new provisions. They represent one of the most comprehensive – top to bottom  changes to the finance, valuation, types of mortgage products offered and how lenders are compensated to take place in decades. In fact, there are even new rules for investors that provide capital for the purchase of mortgages.

A few of the most important points likely to make immense impact to buyers, sellers and investors is the language dealing with any type of mortgage outside of the “traditional” or “plain vanilla” category. Unfortunately, regulators have yet to fully define what will constitute a “traditional” mortgage under the new plan but it is clear that the line will be drawn to reduce the number of sub-prime borrowers as well as offerings of owner finance and other alternative forms of finance. Experts predict an immediate severe impact on many minority and low income borrowers; many who have already been impacted by far less severe measures. For example, according to FHA, rejection rates for African American and Latino borrowers have substantially increased among non-FHA loans.

The new FDIC and other regulatory oversight standards contained in the bill are expected to provide safer mortgage(s) instruments but at a higher cost and more stringent requirements for both banks and individuals. It is estimated that only five banks currently control more than 65% of the current mortgage market; the new bill is expected to further consolidate this trend by favoring big banks over small. In part, this is due to the belief that big banks are easier to regulate. However, at the same time, new controls and rules regulating private investors are also expected to take another two to three years to fully define…leading many to believe the bulk of mortgages will still be backed by the United States government for the foreseeable future.

See you at the top!

Chris McLaughlin
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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

    * As the top Florida foreclosure and pre-
      foreclosure expert, he oversees more than
      100 short sale & REO closings each month
   * Long-time authority on real estate investing
      and rapid reselling of distressed homes.  Owns
      portfolio of nearly 100 high-value, high-profit
     properties
    * Owner of one of Florida’s largest Real Estate firms,
     running 4 different offices, supporting over
     400 agents, uniquely positioning him to help
     thousands of investors make money in the
     biggest market opportunity ever!
    * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
      in Real Estate Investing, Entrepreneurship, and
      Wealth Building
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