Grant's Interest Rate Observer

Redux reflux

You can’t go home again. Today’s release of August new home sales at a seasonally adjusted annual rate (SAAR) of 560,000 came in light of the 585,000 consensus, was down from July’s 580,000 and marked the lowest print of 2017 so far.  The soft data point comes with a few qualifications:  The recent hurricanes may have played a role, while year-on-year gains in the metric for 2017 in total still stand at a robust 7.5%.  On an absolute basis, the 450,000-600,000 SAAR monthly range seen in the past three years pales in comparison to the regular 1 million-plus SAAR logged in the teeth of the mid-aughts housing bubble.
 
New home sales, then and now.  Source:  The Bloomberg

Other indicators imply more similarities to those bygone glory days of a decade ago.  Fannie Mae’s Mortgage Lender Sentiment Survey, released yesterday, found that the proportion of lenders easing credit standards in the prior fiscal quarter reached its highest level since the survey began in March 2014 while intense competition among creditors kept aggregate profit margins negative for the fourth consecutive quarter. Doug Duncan, senior vice president and chief economist at the government-sponsored enterprise (GSE), commented further:

Both the net share of lenders reporting easing on GSE-eligible loans in the prior three months and the share expecting to ease standards on those loans over the next three months increased to survey highs. Lenders’ comments suggest that competitive pressure and more favorable guidelines for GSE loans have helped to bring about more easing of underwriting standards for those loans.

That intensely competitive environment is also evident on the commercial side and is manifesting itself in the country’s largest market. On Sept. 6, Bloomberg News reported on increasingly clever/desperate (pick your adjective) measures undertaken by New York City landlords confronted by weaker then expected demand: Cash out refis. Transactions in office towers, apartment buildings, hotels and shopping centers in the first half of the year sank to $15.4 billion, down 50% year-over-year and the weakest for that period since 2012, according to Real Capital Analytics, Inc.

EZ credit to the rescue:

Investors of all stripes – from banks and insurance companies to hedge funds and private equity firms – are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out. ‘Sellers have a number in mind, and the market is not there right now,’ said Aaron Appel, a managing director at brokerage Jones Lang LaSalle, Inc. who arranges commercial real estate debt. ‘Owners are pulling out capital’ by refinancing loans instead of finding buyers, he said.

Freely available credit can only take you so far.  Just as the Federal Reserve’s longstanding zero-interest rate policy had fomented the creation of excess supply throughout the economy, the boom-times in real estate have led to a dramatic and plainly visible expansion in Manhattan apartment supply that is counteracting solid rental demand.  From a September 14 Bloomberg dispatch:

[Manhattan] renters signed 7,061 new leases in August, the most for any month in data going back to January 2008, according to a report Thursday by appraiser Miller Samuel, Inc. and brokerage Douglas Elliman Real Estate. Despite all those deals, vacancies climbed to 2.27% from 2.14% a year earlier, the first annual increase since January.

Nationwide, property sales are taking longer to move. Analysis of sales data by CBRE (née C.B Richard Ellis), relayed via this week’s Real Estate Alert, shows that the overall average days on the market for the first half of the year rose to 119 from 113 days in the same period last year,  with the median cap rate ticking to 6.5% from 6.39% in that timeframe. CBRE president Brian McAuliffe commented: “There’s currently more caution, or price discovery occurring, than in 2016.”

As for price discovery, we are all for it.