10 year apartment building loan rates had been in a range the last few weeks until Ben Bernanke ‘failed to taper’ last Wednesday causing the bellwether 10 Year Treasury to fall about a dozen basis points to today’s quote of 2.72%. This is good news for apartment building investors, home buyers and builders, stock market speculators, just about everyone except savers, retirees and the people running retirement plans. The upside is that loan rates may head lower but the downside is the economy and particularly employment haven’t improved enough to ease off the money printing pedal.
Here’s the latest chart showing the T10, the 10 year fixed apartment rate we track and the spread between the two:
This week’s quote for a 10 year fixed rate, 30 year amortization apartment loan is 5.131%. (See below for more detail on this loan). The other thing noticeable on the chart is that the spread between the rates has been below the yearly average consistently since the beginning of July. In fact the average spread has fallen to 2.602 from 2.661 over that period. Partly because 4.5% was about as low apartment rates were going to go no matter how far down Treasuries went but also I think that lenders are getting more aggressive, especially in the multifamily sector.
Only twice in the last forty five years has the level gotten this high without a recession following soon after. The chart is usually updated only once a month but I check it every week, especially since it had risen. When I checked this week I got quite a shock because the high levels I had seen earlier had disappeared:
We all know that jobs are a critical driver of the apartment building investment cycle and so we dutifully follow along with the talking heads when the unemployment number is estimated, released and then its potent debated. But Mike Scott over at Dupre+Scott points out in a piece posted Friday that apartment building investors should be following employment, not unemployment. Specifically he recommends measuring how many jobs it takes to create demand for one apartment unit. Currently in King County (where Seattle is the county seat and where Dupre+Scott is located) it takes about 8 jobs to do that:
The formula is simple: Net new jobs / apartment units absorbed. And if you’re an multifamily investor in the tri-county area (King, Pierce and Snohomish in WA State) that Dupre+Scott provides apartment investment research for, they’d be happy to supply you this information http://www.duprescott.com.
Back on June 24th I wrote a post Analysis on Tapering QE3 talking about how traders fears about the end of the Fed’s money printing spree made the interest rate on the 10 year Treasury jump. And as I mentioned in a follow up post Update on the 10yr Treasury rate we care about the 10yr Treasury (or T10) because it’s the benchmark most lenders base long term loan rates on. But there is one more component of apartment loan rates (and lending rates in general) that I want to draw your attention to. First an updated chart:
I’ve updated the chart with the latest rates and also added the rate for an apartment loan with a fixed rate for 10 years from one of our lenders (details on the loan terms below). The other thing I added was the spread, or difference, between the two rates (on the Right Hand Scale). So far in 2013 the spread has averaged 2.65% or 265 basis points (bp) but it’s not a fixed amount that the lender adds to the T10. You can see that back in the beginning of May when the Treasury rate got as low as 1.66% the spread widened to 280bp because the loan rate was left at 4.5%. Then the spread narrowed back towards the average even while interest rates went up from there.
Then the Fed meeting notes came out in the middle of June and the T10 shot up but we got a double dose because the spread jumped up too. The Treasury went from 2.19% on the 17th to 2.57% on the 24th, and the spread jumped from 262pb to 283. It makes sense that in the uncertainty of a sudden rise in rates that lenders would widen their spreads to create a little breathing room but since then things have gotten quite interesting… in a good way. The good news is that since then the spread has Continue reading Apartment Building Loan Rates Fall as Spreads Narrow
Back in March I posted a FRED chart that Bill McBride over at Calculated Risk shared tracking a set of data that pretty reliably coincides with recessions. Even better is that in almost fifty years of data there have been only two false positives which brings us to a very interesting point. First, here’s the chart as it appeared when I posted back in March:
Next let’s look in more detail at those false positives:
In the Analysis on Tapering QE3 post Tuesday I included a chart of the US 10 year Treasury rates and you could see them going vertical in the days since the Fed announcement and Bernanke’s press conference last week. We’re in the middle of negotiations on an apartment acquisition with a client and so what interest rates do over the next few days and weeks is extremely important to us. So here’s the updated chart:
Bill McBride over at Calculated Risk stares at this stuff all day and has a pretty good track record reading the Fed’s tea leaves. He believes that actual ‘tapering’ of QE3 purchases most likely won’t start before December although there is a slight possibility that it could happen in September if…..
3rd Qtr. GDP rose enough to make 2013 growth look like it will hit the low to mid 2% range.
Unemployment would have to dip enough to make it likely to get down to 7.2%-ish by year end.
Inflation has to be increasing. Currently the trend is in the wrong direction and Q1 produced only .3% which is well below the 2% annual the Fed Wants.
See Bill’s analysis here: Analysis on Tapering QE3 I highly recommend following Bill’s blog and this is just one of several posts in the last week on Fed comments around the end of tapering. Here’s the inflation chart he posted last week showing four different measures of inflation, note the trend since the beginning of the year:
The NAHB (National Association of Home Builders) Eye on Housing out late last week included a chart of 5+ unit apartment building construction and absorption in the US. Built with the latest data from the Census Bureau’s SOMA (Survey of Market Absorption of Apartments, xls available here) is shows that absorption is holding in around 65% even while construction of new units is picking up:
According to the ASU W.P. Carey School of Business’ Phoenix Housing Market Explained presentation, PHX will have to add housing equal to the current size of the Denver metro area over the next two or three decades to hold all the people who will move there. This presentation was done in March of this year but the demographics are powerful and still operating. Watch minutes 5 to 25 for the market demographics, after that they dive into the specifics of the single family sector recovery.
Interesting report from CBRE Econometric Advisors on the revised employment numbers just out from the Bureau of Labor Statistics’ (BLS). The BLS updates their employment numbers every year to reduce the error rate from their regular surveys and the revisions were up:
It is important to understand that the employment data produced by the BLS are based on a survey and therefore are subject to sampling error. As part of its survey methodology, the BLS completes a re-benchmarking of its payroll employment data annually, to account for any job gains or losses that were missed over the course of the past year. The payroll survey consists of a sample of 145,000 businesses and government agencies covering 557,000 worksites throughout the U.S. The BLS uses a birth-death model to account for changes not directly reported in its sample due to business openings and closings.
In order to adjust for missing information that could cause the birth-death model to miss its mark, the BLS annually benches its estimates to unemployment compensation records, to allow for a reconciliation of total payroll employment. Although the largest changes are always seen in the most recent year or two, estimates as far back as five years may be measurably altered, which can have a significant effect on how the labor market is seen to have affected commercial real estate demand. The process is first done at the national level, and then at the state and local levels.