CHICAGO, IL—The Real Estate Capital Institute’s current Scoreboard shows that as the stock market hit news lows in the first week of this month, bond investors hardly fear the Federal budget discussions and impending downgrades, helping keep mortgage rates low.Instead, low treasury yields are driven by global financial market concerns and a double-dip recession. In the past month, treasuries moved down to previous lower levels of the nearly a year ago, while floating rate pricing remains nearly unchanged.
More recent concerns revolve around the fragile CMBS markets as any savings
in lower treasury costs are absorbed by higher swap spreads. Spreads widened more than 100 basis points as note buyers are nervous about the market recovery and quality of securitized mortgage instruments. Look for more volatility in this lending sector for the remainder of the year, as more mortgage bonds are issued based on stabilized pricing.
During the past year, income-property sales volume has increased by at least 25%, as investors step back into the buying arena. Institutional demand for trophy assets (mostly from REITS) in major markets skews pricing dynamics even as market conditions improve.
Such investors will even consider paying above replacement cost in select "fortress" markets as extremely high prices drive new construction. Greater profits await investors willing to consider non-downtown areas. Capitalization rates dive below 5% for CBD assets and are about 200 to 300 basis points wider in outlying areas. In search of more yield, private buyers now reign in secondary markets.
Multifamily rental increases go unabated with growth rates of 7% or more in
select supply-constrained markets. Population demographics with a larger
younger workforce, rising rental rates, falling vacancies, limited supply and low mortgage costs are the ideal conditions for continued profitability in this property sector - especially in stronger employment markets.
However, nothing lasts forever.Investors should take note of improving home ownership conditions, supply threats and other forces on the horizon. Low cost mortgage debt is fueling new apartment construction and de-conversion of existing condominium inventory.
Furthermore, unsold home inventory is about three times the normal levels, creating an extremely attractive ownership scenario not seen in years. Many housing markets are at rock-bottom prices and home ownership is now less costly than renting in numerous cities. Lastly, banks are starting to loosen consumer credit and mortgage pricing based on historically low interest rates, adding even more reasons to consider ownership vs. renting.
The Real Estate Capital Institute's Director, Jeanne Peck (top right photo), professes that "We're clearly at, or near, the bottom of the housing market and at the top of the rental market." She adds, "What goes up must come down, but the
prospects are still very strong for owning core apartment assets."
The Real Estate Capital Institute(r) is a volunteer-based research organization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries, bank prime and LIBOR.
Contact:
Jeanne Peck, Research Director
The Real Estate Capital Institute(r)
3517 West Arthington Street
Chicago, Illinois USA 60624
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