5 Reasons We Are NOT Heading Into A Housing Meltdown

When it comes to investing in the stock market, you may lose your shirt, but you probably won’t lose your home. In fact, when the equity market gets rough, real estate tends to be a life raft for investors seeking safety. 

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“Real estate is Americans’ preferred investment for money that they won’t need for at least 10 years and that hasn’t changed,” said Greg McBride, chief financial analyst with New York-based Bankrate.com. “Nervous investors always look to real estate rather than shy away from it in times of volatility.”

While stocks around the globe are off to a rough start in 2016, it doesn’t necessarily mean déjà vu all over again, at least when it comes to a repeat of the real estate tumble that began in 2007 but accelerated sharply following the 2008 rout of the equities market, when home prices in late 2011 were down more than 20% from their peak in spring of 2007.

Here’s why you shouldn’t be panicking if you’re looking to buy or sell a home:

Interest rates should stay low

With the latest bout of declining equities, the pace of further Federal Reserve rate increases is likely to slow, according to Kevin Finkel, senior vice president of Resource America Inc. REXI, +0.33%  , a real-estate investment trust in Philadelphia. “It would take a lot more than the volatility we’re seeing now for them to get knocked off the current course of raising rates, but will they slow down [coming rate hikes]? Probably.”

The Federal Reserve raised interest rates a quarter point last month, the first time since 2006, but minutes from the Dec. 15 to Dec. 16 meeting showed that not all of the bankers were completely on board with the initial rate hike, despite the unanimous vote, because of concerns over inflation being less than expected.

The Fed isn’t “chomping to follow up last month’s rate hike as early as this month, or possibly even in March unless the economy, and possibly inflation, shows more spunk than shown recently,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

shutterstock_136265849While the refinancing boom has slowed, that’s only because the majority of Americans who could refinance to a fixed rate have already done so, so the impact of “rate-shock” when short-term adjustable rate mortgages (ARMs) readjust will be minor compared with what happened between 2007 and 2012, when many Americans could no longer afford their new housing payments and defaulted.

Currently, despite an increase in bank repossessions rising almost 60% in November 2015 compared with a year earlier, the percentage of loans in foreclosure nationally is the lowest level since 2007, according to the Mortgage Bankers Association. Foreclosures reached a peak of 4.6% in 2011 at the height of the real estate bust.

“The recent rise in bank repossessions represents banks flushing out old distress rather than new distress being pushed into the pipeline,” said Daren Blomquist, vice president of Irvine, Calif.- based RealtyTrac, a real-estate research company.

There’s less risk of a new mortgage bubble

Unlike the 2005 to 2012 mortgage meltdown, when so-called liar loans and exploding ARMs flooded the market, the subsequent pullback in credit may have been overly tight, but it does mean in 2016 there are fewer real estate bubbles waiting to pop. While it’s true there are markets that have seen incredibly inflated real-estate values such as San Francisco and New York, it’s not fueled by unsustainably loose credit standards.

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“The changes that have taken place over the past five to seven years have built a more stable foundation” in the mortgage industry, said Michael McPartland, a managing director and head of investment finance for North America at Citigroup’s C, -0.01%   private bank. “There just aren’t a lot of the exotic products like interest-only [loans] and super-high loan-to-value [mortgages],” he said. “If things slow down, there will be a contraction, but not a pop.”

McPartland says it may be harder for borrowers to afford a 20% down payment and monthly interest payments that are principal and interest, instead of just interest-only, but the flip side is increased home equity (the national average is 30% equity), so home buyers are less likely to leave the keys on the counter and walk away if things go bad. Foreclosure starts in July of just over 45,000 were the lowest level since November 2005, nearly a 10-year low, according to RealtyTrac.

Foreclosure starts in November 2015 of just over 36,000 were the lowest level since December of 2005, near a 10-year low, according to a Dec. 10 report from real estate data firm RealtyTrac. “What we can expect is for foreclosures to continue falling as banks clear through their backlog of inventory,” Matthew Gardner, chief economist at Windermere Real Estate in Seattle, told RealtyTrac last month.

Help for first-time home buyers

Last year, the Federal Housing Administration began reducing mortgage insurance premiums on loans by an average of $900 a year, in an effort to nudge first-time home buyers and millennial borrowers who might not have much cash for a down payment to finally enter the housing market. The effort appears to have worked, with FHA loans jumping to 23% of all financed purchases in the second quarter of 2015, up from 19% a year earlier, according to RealtyTrac data. The FHA and other federal moves to increase credit, along with a strengthening economy, may just help boost the market for new mortgages in 2016 as much as 10% over last year despite the increase in interest rates, Mike Fratantoni, the chief economist for the Mortgage Bankers Association, said in December.

shutterstock_248104621Those other federal moves include Fannie Mae and Freddie Mac making lower down payment loan options available to more borrowers. In 2014, the agencies began to buy loans with just a 3% down payment, or 97% loan-to-value ratio. Fannie Mae also announced in 2015 that it would allow income from a non-borrower household members to be considered as part of a loan applicant’s debt-to-income ratio. That could help some borrowers, who might have family members on Social Security or disability living with them, or a renter in a basement apartment, to boost their income levels and help them qualify for a loan.

Lower oil prices

At the end of 2008, gasoline prices, which had risen to a record $4 a gallon nationwide that summer, had crashed to under $2 a gallon. In that case, the cheap gas (and diesel) wasn’t a good thing, as the worldwide economy was shuddering to a halt.

While China’s economy is still contracting, the U.S. economy isn’t, so the lowest gas prices since 2009, with the national average now under $2 a gallon, are likely to help the housing market.

“The continuing drop in gas prices is freeing up valuable disposable income,” says Resource America’s Finkel, which can help Americans absorb higher rent payments, or move up to a more expensive property.

Job growth

While jobs typically are a lagging indicator of an economic downturn, the U.S. has had a slow but steady rate of job creation for the past five years. Even with weakness seen during the summer, job gains in 2015 will top 2.5 million, making it the second-best calendar year for U.S. job growth in this millennium, after last year’s 3.1 million. The last time more jobs were created in a two-year period was at the height of the dot-com boom, in 1998-1999.

shutterstock_124303804“The economy continues to create jobs, and the quality of jobs being created has improved as the economic recovery has progressed, with professional and business services leading the way,” said Bankrate’s McBride. “This is indicative of an economic recovery that is sustainable.” And while in this economy, wages have been slow to recover, and it’s been a challenge to get long-term unemployed Americans who no longer count in the official jobless statistics to return to the job market, the job growth has been good enough to boost the housing sector and lure millennial borrowers off the fence.

“If wage growth materializes in a broader way, this will be the catalyst for many existing homeowners to put their homes on the market and finally look for the move-up buy, boosting housing and alleviating the inventory shortage,” McBride said.

(https://www.marketwatch.com/story/5-reasons-a-2009-style-real-estate-meltdown-is-unlikely-now-2015-08-25)

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The Fed Move Doesn’t Matter To Mortgage Rates (Here’s why….)

Mortgage rates follow the yields on mortgage-backed securities. These bonds track the yield on the U.S. 10-year Treasury. The bond market is still sorting itself out right now, and yields could end up higher or lower by the end of the week.

 

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The Federal Reserve did it — raised the target federal funds rate a quarter point, its first boost in nearly a decade. That does not, however, mean that the average rate on the 30-year fixed mortgage will be a quarter point higher when we all wake up on Thursday. That's not how mortgage rates work.

Mortgage rates follow the yields on mortgage-backed securities. These bonds track the yield on the U.S. 10-year Treasury. The bond market is still sorting itself out right now, and yields could end up higher or lower by the end of the week.

The bigger deal for mortgage rates is not the Fed's headline move, but five paragraphs lower in its statement:

“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.”

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When U.S. financial markets crashed in 2008, the Federal Reserve began buying billions of dollars worth of agency mortgage-backed securities (loans backed by Fannie Mae, Freddie Mac and Ginnie Mae). As part of the so-called “taper” in 2013, it gradually stopped using new money to buy MBS but continued to reinvest money it made from the bonds it had into more, newer bonds.

“In other words, all the income they receive from all that MBS they bought is going right back into buying more MBS,” wrote Matthew Graham, chief operating officer of Mortgage News Daily. “Over the past few cycles, that's been $24-$26 billion a month — a staggering amount that accounts for nearly every newly originated MBS.”

At some point, the Fed will have to stop that and let the private market back into mortgage land, but so far that hasn't happened. Mortgage finance reform is basically on the back-burner until we get a new president and a new Congress. As long as the Fed is the mortgage market's sugar daddy, rates won't move much higher.

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Blackstone Is Officially The Largest Owner Of Real Estate In The World

The biggest private equity firm on Wall Street has seen amazing growth in its real estate division, which has expanded from a $17.7 billion business when Steve Schwarzman took his company public to one that today manages nearly $100 billion worth of property. 

 

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Steve Schwarzman is America's landlord, and he's not afraid to acknowledge it.

 

“We’re now, we believe, the largest owner of real estate in the world,” he told Business Insider in an interview at his company's Park Avenue headquarters in midtown Manhattan.

“We have a performance record that is… pretty much in a league of our own, we’ve compounded [returns of] around 18% after fees. We’ve had almost no losses of any type.”

‘League of our own'

Time and again, Blackstone has taken on real estate deals — even in down markets — and turned them into winners. Since 2009, according to Blackstone's website, the firm has put more than $50 billion to use and earlier this year closed a real estate fund worth nearly $16 billion. That fund is separate to the firm's private equity investing.

After undertaking one of the biggest private equity deals ever, a buyout of Sam Zell's Equity Office Properties, Blackstone has today sold off most of the assets from the $36 billion deal. It is also in the process of exiting Hilton Worldwide Holdings, the high-end hotel chain Blackstone bought in 2007 at the height of the real estate bubble and salvaged during the financial crisis.

It wasn't always this way.

Stephen A. Schwarzman, Chairman and Chief Executive Officer of The Blackstone Group, looks on during an interview with Maria Bartiromo, on her Fox Business Network show;

Thomson ReutersSchwarzman, Chairman and CEO of The Blackstone Group, looks on during an interview with Bartiromo, on her Fox Business Network show; “Opening Bell with Maria Bartiromo” in New York

“We started [Blackstone] in 1985,” Schwarzman pointed out speaking with Business Insider. “We made our first real estate investment in 1992; we raised our first fund in 1993. That was eight years after the firm started. Eight years is an endless amount of time when you start a business from nothing.”

More recent transactions include its $6 billion buy of Strategic Hotels, Blackstone's investment in the building formerly known as the Sears Tower and a $3 billion deal to buy property funds from CalPERS, the largest US pension.

As Blackstone continues its push to expand — with goals to double the size of its assets under management — expect the property business to be a cornerstone of Schwarzman's legacy.

https://www.businessinsider.com/blackstone-is-largest-owner-of-real-estate-2015-11

 

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