Goldman's Hatzius: How Much Risk to Homebuilding?

Summary: Housing starts will be a key component to economic growth over the mid-term.

--(CalculatedRiskBlog)--

Goldman Sach chief economist Jan Hatzius wrote today (research note): How Much Risk to Homebuilding? A few excerpts:

The housing news has deteriorated recently across a broad set of indicators, and the FOMC accordingly downgraded its assessment of the housing market in Wednesday's post-meeting statement. How much should we worry about our forecast that residential investment will continue to grow 10-15% and directly contribute 1/2 percentage point to real GDP growth next year?

The risks to our housing forecast are on the downside in the near term, but there are three reasons why we still take a positive view beyond the next 1-2 quarters. First, there is a clearly identifiable reason for the recent weakness, namely the sharp increase in mortgage rates. Some of this increase has reversed recently, and barring another shock the impact should be mostly complete by early 2014.

Second, the fundamental supply-demand picture for housing still looks positive. If the population grows at the rates projected by the Census Bureau and the size of the average household trends sideways to slightly lower--in line with historical trends--we estimate that household formation should climb to 1-1.3 million and steady-state housing demand to 1.3-1.6 million. This implies significant upside for housing starts from the current 900,000 level once the remaining excess supply has been eliminated

Third, while home sales and starts have disappointed recently, house prices have continued to rise at double-digit rates, with few signs of deceleration. This suggests that the supply/demand balance in the housing market still looks favorable. That said, we continue to expect that home price appreciation will slow over the next year.

Clearly housing has slowed recently. This has shown up in housing starts and new home sales, and the slowdown is also evident in home builder reports. However I think this slowdown is temporary, and I expect the housing recovery to continue in 2014.

This graph shows single and total housing starts through August (the September and October reports will be both released on November 26th).

There has been a dip in housing starts recently, but I think starts are still closer to the bottom than the next cycle top. I agree with Hatzius that starts will continue to increase over the next several years - and this will be a key driver for economic growth.

Deloitte Forecasts Moderating Growth in 2014 Real Estate Market

Summary:  Commercial real estate prices are expected to grow at a slower pace next year, according to Deloitte.  While rents are low, so is development across property types, and fundamentals in multifamily properties are beginning to peak.  Regulation, says Deloitte, will also stifle growth, referring to the Dodd-Frank Act and the Terrorism Risk Insurance Act.




Protracted economic growth, combined with uncertainty regarding pending regulations and fiscal policy issues, will likely moderate the pace of recovery in the commercial real estate industry in the near future, according to a report on the 2014 industry outlook from consulting firm Deloitte.

The anticipated moderation in 2014 would follow a year in which asset prices, transactions and capital availability all saw a continued recovery. So far in 2013, asset prices have moved close to their 2007 peaks in major metropolitan markets and transaction activity has improved in secondary markets, the Deloitte report stated.

“We expect that the recovery will continue, we just expect that the pace of it will slow down in 2014,” said Bob O’Brien, U.S. real estate services leader at Deloitte.

Private equity and international investors have shown increased interest in U.S. commercial real estate, according to the outlook. The region is considered to be the most stable globally and to offer the best returns relative to risk, Deloitte said.

Rents and occupancy levels have strengthened since the downturn across property types, the report noted. However, in historical terms, rents and occupancies are trending below their averages in most sectors, excluding multifamily and hotels, according to Deloitte. Furthermore, the report speculated that fundamentals in the multifamily sector are beginning to peak.

Development activity, meanwhile, remains subdued for most property types, Deloitte observed, again with the exception of multifamily and hotels. Lending standards for construction loans also remain stringent.

Turning to regulatory developments, Deloitte is forecasting that the uncertainty associated with measures such as the financial reforms of the Dodd-Frank Act and the Terrorism Risk Insurance Act (TRIA) will likely promote caution in the real estate industry. Deloitte noted, for example, that the “effects of a looming expiration would be felt long before TRIA’s actual demise.”

Meanwhile, the Deloitte report also highlighted that the commercial real estate industry is undergoing fundamental changes in business practices, including redesigning existing space to suit new tenant demands and the growing use of automation. Deloitte warned management teams and boards to factor in the influence of these new developments in order to achieve above-average growth and position themselves for the long term.

“We think real estate owners and investors would be well served to focus on operations and profitability and to look at making the necessary investments in their properties to respond to changes in the way tenants are using properties,” O’Brien said.

http://www.reit.com/Articles/Deloitte-Forecasts-Moderating-Growth-in-2014-Commercial-Real-Estate-Market.aspx

No Taper

Summary:  FOMC will not taper their current quantitative easing measures.



New York --(Federal Reserve Press Release)--
Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. 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. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

http://www.federalreserve.gov/newsevents/press/monetary/20131030a.htm

Rep. Frank: Revamped Mortgage Rules a ‘Grave Error”

Summary:  The Federal Reserve and the Federal Deposit Insurance Corp. are against a new rule in the Dodd-Frank law requiring those underwriting mortgage securities to retain 5% of the credit risk on their books.  Barney Frank, an author of the bill, believes this to be an error.

Washington, D.C.  --(WSJ Developments)--
An architect of the 2010 Dodd-Frank law is accusing federal regulators of watering down new mortgage rules in the face of opposition from the housing industry.

Former Rep. Barney Frank (D., Mass.) slammed federal regulators for their decision to dial back a proposal to impose new rules on the mortgage-securities market–a key piece of the Dodd-Frank law that bears Mr. Frank’s name.

“This is a grave error, and contrary to the assertion that it would best carry out the statutory intent, significantly repudiates it,” Mr. Frank wrote in a comment letter being sent to regulators Tuesday.

At issue is a proposal from August by six regulators — including the Federal Reserve and Federal Deposit Insurance Corp. — to revamp proposed rules requiring issuers of mortgage securities to retain 5% of the credit risk on their books. Supporters of this requirement, including Mr. Frank, argue it will force Wall Street to be more cautious when packaging assets such as mortgages into securities.

The regulators’ original proposal from 2011 contained a narrow exemption focusing on only high-quality loans, where the borrower brings a 20% down payment and meets other stringent criteria. But a proposal released in August for the so-called “qualified residential mortgage” exemption is much broader and covers most loans being made today.

Mr. Frank castigated the regulators, saying they are heeding a fierce lobbying campaign from the real-estate industry. Mortgage lenders, real-estate agents, home builders, civil-rights groups and consumer advocates formed a group, called the Coalition for Sensible Housing Policy, that lobbied heavily against the original proposal for tighter rules.

“If all of these people were correct in their collective judgment, we would not have had the crisis that we had,” Mr. Frank wrote. “More importantly, what their arguments reflect, and what I believe unfortunately is carried over in proposal, is the view that things must always be exactly as they are today.”

Lawmakers have offered competing interpretations about what they intended in drafting this piece of Dodd-Frank. Several Senators, including Sen. Johnny Isakson (R., Ga.) and Kay Hagan (D., N.C.) have argued the law calls for a broad exemption and were key players in a push to eliminate a 20% down-payment requirement from the original proposal.

Speaking on the Senate floor this month, Mr. Isakson said banking regulators “did a great job” in revamping the rule.

The new proposal largely adopts a separate mortgage definition put forward earlier this year by the Consumer Financial Protection Bureau that outlines steps banks must take to demonstrate that a borrower has the ability to repay a mortgage. Regulators also asked for comment on an alternative definition that would add a 30% down payment to the exemption requirement.

Some regulators also have been critical of the new proposal. Daniel Gallagher, a Republican member of the Securities and Exchange Commission, issued a 3,000-word dissent to his agency’s August vote, saying the proposed exemption was “unrealistic and dangerously broad.”

Mr. Frank argues regulators are ignoring the essential purpose of Dodd-Frank — to force changes in the financial market.

“I understand that since risk retention is a new concept, people in various phases of the business of housing are unused to it, and do not like the changes it will force in their operation,” he wrote, “But the very purpose of the statute was in fact to bring about changes in a number of areas in our financial life, residential mortgages foremost among them.”

Shares of Blackstone-Backed Real Estate Trust Rise in Debut

Summary:  Blackstone owned REIT, Brixmor Property Group, oversold in its IPO.

New York --(New York Times DealBook)--

Stock market investors continue to show an appetite for real estate.

The Brixmor Property Group, a real estate investment trust owned by the Blackstone Group, sold more shares than it had expected in its initial public offering on Tuesday evening, reflecting strong demand from investors. The shares were priced at $20 each, the middle of an expected range, raising $825 million and giving the company a market value of about $5.9 billion.

The stock rose on Wednesday in the company’s trading debut on the New York Stock Exchange. After opening at $20.65, shares of Brixmor were up as much as 4 percent during the day before closing at $20.40.

“Our story really resonated with investors, and that led to more demand that allowed us to upsize,” Michael A. Carroll, the chief executive of Brixmor, said in an interview.

Investors are looking to gain exposure to the strengthening commercial real estate market in the United States. Vacancy rates are expected to decline for commercial properties and rents are expected to grow modestly, the National Association of Realtors said in a forecast released in August.

In October, the Empire State Realty Trust raised $929.5 million in an initial public offering. Its shares, through Tuesday, have risen 9 percent from the I.P.O. price.

Investors are betting that Brixmor, which has 522 shopping centers across the country, is poised to benefit from the improving property market. The company says it has the nation’s largest wholly owned portfolio of shopping centers anchored by grocery stores.

The company, formerly known as the Centro Properties Group, was in need of capital before Blackstone bought it in 2011. Since then, Brixmor has invested $339 million to improve its assets, the company said in a regulatory filing.

Brixmor said it planned to use the proceeds from the offering to reduce its debt. As of June 30, its total debt was about $6.7 billion, according to the filing.

The company sold 41.3 million shares in the offering, more than the 37.5 million shares it had expected to sell. The deal’s underwriters have the option to purchase an additional 6.2 million shares.

Blackstone will remain the majority owner, with about 73 percent of the company’s shares, according to a filing.

The offering was led by Bank of America Merrill Lynch, Citigroup, JPMorgan Chase and Wells Fargo Securities.

http://dealbook.nytimes.com/2013/10/30/shares-of-blackstone-backed-real-estate-trust-rise-in-debut/?_r=0