Are Interest Rates Caught in a Catch 22?

Are interest rates caught in a Catch-22? What if the Fed is waiting to raise rates until the economy is growing stronger but the economy won’t grow stronger until rates go up?

10 year Treasury Rates June 2014 - May 2015

For three years everyone has ‘known’ that interest rates were going up but other than during the Taper Tantrum of June 2013 which affected loan rates more than Treasuries, the T10 only moved up to the 2.75% area which was just picking itself off the floor of 1.66 where it got down to in May that year.

The Fed would like to raise rates, if for no other reason than to prove they aren’t turning Japanese by leaving rates low for two and a half ‘Lost Decades’. They’d also like to have room to lower them again if the economy dips back into recession (Note Q1 GDP was just revised down to -.7% that’s Continue reading Are Interest Rates Caught in a Catch 22?

Analysis on Tapering QE3 by Bill McBride- Not until December but #Multifamily rates jumped 45bp anyway

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:

US inflation measures 1990 to May 2013
Click on image to go to Calculated Risk article with chart.

Of course none of the Fed’s comments were interpreted this way by bond traders, what they heard was: It’s the end of the Continue reading Analysis on Tapering QE3 by Bill McBride- Not until December but #Multifamily rates jumped 45bp anyway

The Point of Maximum Pessimism and Apartment Building Investments via Alhambra Investment Partners

Very nice piece from Joseph Y. Calhoun over at Alhambra Investment Partners covering some of the unexpected good things that could happen to our economy entitled Looking For Silver Linings. He includes this nugget with its implication of a good apartment building investment climate continuing:

In the ten years prior to the recession, household formation averaged 1.5 million per year. From 2007 to 2010 that rate was cut by 2/3. Household formation recovered to a bit over 1 million in 2011 and probably rose more this year. Still there is a gap of about 2.5 million households between the number formed in that period and what would be expected based on demographic trends. There is pent up demand for housing (although probably primarily rental housing) that only awaits some job growth to be realized. [Emphasis mine]

Household Formation Recovery Good for Apartment Building Investment

Even if Continue reading The Point of Maximum Pessimism and Apartment Building Investments via Alhambra Investment Partners

The State of US Commercial Real Estate, Single Family and Apartment Building Investment Markets. By Tom Barrack, Colony Capital

Tom Barrack of Colony Capital on what’s really happening in US real estate from an investor’s perspective. The clearest, most cogent look at the state of commercial, multifamily and single family markets today and where the opportunities are. The first five and a half minutes is about Europe and the bottom line there is don’t but after that it is all gold. If Tom wanted to be one of those real estate ‘gurus’ he could package this video with a big notebook and some advertising and sell it for $10,000- and it would be better than any of the other stuff out there. And you get it for free. I’ve watched three times and get an extra little nugget each time.

The state of real estate in the US, commercial, single family and apartment building investment
Click on the image to view the Bloomberg video.

The big takeaway for me is that (temporarily at least) Continue reading The State of US Commercial Real Estate, Single Family and Apartment Building Investment Markets. By Tom Barrack, Colony Capital

PIMCO calls bottom in housing, but likes REOs-to-Rentals over apartment building investments?

In a piece called Positioning for a Housing Recovery PIMCO says that the risks to housing have been overstated and while prices may continue to fall there are opportunities in the mispricing of that risk. They believe that the risk of the 11 million underwater home loans all becoming delinquent and going into foreclosure is much lower than most think. They also point out that the record low interest rates have created housing demand from large institutions (Like PIMCO, and individual investors too) searching for positive returns.

Shrinking shadow supply but still more renters

One of the opportunities they list is in apartment building investment, either through equity (owning) or debt (loaning). However they pass over multifamily in favor of REOs-to-rentals and distressed housing debt. It’s ironic that they would favor buying large numbers of single family homes to rent because the logistical nightmare of the scattered homes is what drives most real estate investors to apartments and other commercial real estate. The convenience of having 10, 20, even 200 units or more at one location on a single property on top of the economies of scale available make owning multifamily a much better investment.

While they do acknowledge the challenge of REOs-to-Rentals:

However, investors must be mindful of the operational complexity and illiquidity of a single-family rental portfolio. Managing a nationally diversified portfolio of rental properties presents unique challenges of surveillance and scaling, and procedures for maintenance and leasing must be designed to help protect earnings.

… Somehow that doesn’t lead them to picking multifamily investment. Are you a real estate investor who started out in single family properties and moved on to apartment buildings? We would love to hear your story-

Hat tip: The Big Picture blog

Zombie homeowners are 50% of the single family move up market and they can’t buy. Good for Apartment Building Investment?

Mark Hanson of MHanson Advisors, researchers and strategists focused on North American and Australian real estate and finance markets, has a very good piece out questioning the recent calls of a housing bottom. His research shows that 20-30 million current homeowners (half the market) either cannot sell and net enough for a downpayment on another house or could not qualify for a new mortgage if they did have a downpayment.

He also charts that out in relation to the over all supply:

Zombie housing supply creates opportunities for apartment building investment
Source: MHanson Advisors

Here’s Mark’s breakout of the zombies:

1)  “Effective” Negative Equity – 25 million borrowers / houses.  These borrowers are dead to the housing market, as they don’t have the equity to pay a Realtor 6% to sell and put 20% down on a new house.  They were once the most active participants, the repeat buyers. Now they are “zombie homeowners”.

2)  Impaired Credit – 28 million borrowers.  These are borrowers with Continue reading Zombie homeowners are 50% of the single family move up market and they can’t buy. Good for Apartment Building Investment?

Apartment rents rising at inflation rate- Freddie Mac video report

In their June 2012 Economic Update, Freddie Mac says: “Over the year ending March 2012, an additional 1.5 million households moved into rental housing. That’s a 4 percent increase in renter-occupied dwellings in a single year.”

The increase in apartment demand has helped to enhance property values, on average up about 25 percent during the past two years from their trough during the first quarter of 2010…

See the whole report here: Rental Markets: A Sign of Strength




Is now a good time to make Apartment Building Investments?

MHN Online has an interview with Dean Henry, president of Legacy Partners Residential, one of the big apartment building investment trusts (REITs). What I like is that he speaks in bullet points, just the way I think! Here’s my exec sum (in bullet points) of his bullet points:

Now is the time for Apartment Building Investment

“There are several important reasons why now is a great time to acquire existing multifamily assets. Let’s start with demand and supply:

Apartment building owners benefit from prime renter group ‘unbundling’, driving rents and occupancy.

The recovery from the ‘Great Recession’ has been anything but slow for apartment building investment. During the recession many of the prime renters (age 20 t0 34) were hit hard by unemployment and m0ved back in with their parents. Others ‘bundled up’ by moving in with their friends.

“Sometime between 2010 and 2011 the number of doubled-up households started to decrease. This reversal released a great deal of pent-up demand for apartments. A greater number of people sharing multi-bedroom apartment units, as well as a greater number of young adults living at home, were able to move out and rent their own units. Moreover, these young adults largely did not purchase homes.”

After being hit hard by the recession, younger workers have benefited more than others from the recovery in hiring. Since the bottom  in late 2009/10,  the prime age cohort for rental apartments (ages of 20 and 34) has a net gain of more than 1.5 million jobs. This has enabled many of these young workers to move into their own apartments.

But will it continue?

“The 2010 decennial census estimates that roughly Continue reading Apartment building owners benefit from prime renter group ‘unbundling’, driving rents and occupancy.

This recovery is “basically normal if not a bit better than expected” historically speaking says Hassam Nadji in

“History reminds us that a recovery from the simultaneous shocks of a financial crisis and a major recession require significantly more time and stimulus than a cyclical contraction, a process that could extend five to eight years compared to the more typical two- to three-year span following a cyclical recession. The pattern observed thus far since the recovery began is basically normal if not a bit better than expected.”

Remember that 2.5 million of the jobs lost were in construction and financial services (including mortgage origination mills and RMBS/CDO/CDS manufacture) so that returning to the same level of employment in those sectors would imply another bubble formation.

Now on the other handif job creation continues to fall off… See the whole GlobeSt. piece here: Weak Jobs Report Another Bump in Road to Recovery