D.C. Office Market Posts Strong Q1 As Coworking Demand Counteracts Law Firm Consolidation As Mall Vacancies Skyrocket

The topsy turvy world of commercial real estate!

First, vacancy rates are rising fast in US shopping malls. Not surprising given the consumer trend towards on-line shopping.

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Second, coworking demand is leading to a changing face of office spaces. Take Washington DC, for example.

The continued expansion of coworking companies drove strong absorption in D.C.’s office market in the first quarter, counteracting negative forces such as consolidation of law firm footprints and a slowdown in federal government leasing.

Of course, San Francisco leads the US is most coworking spaces, followed by Miami, Atlanta and Washington DC.

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Speaking of commercial real estate and CMBS. the five largest loan losses in the CMBS space were reported by Trepp. Not surprising, the leader in March 2019 is a shopping center.

The REO Independence Mall asset accounted for 66% of the total realized losses for the month with a write-off of $149.7 million. That loss ate into 74.9% of the $200 million face amount tied to the asset, and is the largest loss ever incurred by a retail CMBS loan. Located in suburban Kansas City, Missouri, Independence Center is a 1 million-square-foot superregional mall and 398,000 square feet of that space served as collateral. The mall was sold to California-based International Growth Properties for $63.3 million last month, which marked a significant discount from its most recent valuation of $104.5 million. Following a maturity default in May 2017, special servicer commentary revealed that increased competition and economic challenges made it difficult for tenants to increase sales at the property. The loan represented 52.4% of the remaining collateral behind the WBCMT 2007-C33 deal. That deal has now lost 11.5% of its original balance to disposals.

Whoomp. There it is!

Fintech Alert! Zillow Moves Into Mortgage With Launch Of New Home Loan Arm (Will Quicken Loans Up The Ante?)

The space for cellphone house search apps just got more crowded. Zillow just jumped in with one stop shopping for a home – finding a home and FINANCING the purchase!

Forbes – Need to buy, sell or finance a home? Zillow can now help with all of it.

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Earlier this week, the company officially launched its Zillow Home Loans arm, solidifying Zillow’s place at virtually every touchpoint in the home buying and selling process.

Buyers can use its property listings—as well as those on partner sites Trulia and StreetEasy—to find homes, condos and co-ops for purchase. Then, when they’re ready to buy, Zillow Home Loans can help with mortgage financing. Finally, when the homeowner is ready to sell, Zillow Offers can give them an instant way to offload the home without the hassles of the open market.

Erin Lantz, vice president and general manager of mortgages for Zillow Group, said the move into mortgage loans is the company’s way of easing “the hardest, most complicated part of buying a home.”

The announcement isn’t completely out of the blue. Zillow Group acquired Mortgage Lenders of America last fall. The company had approximately 300 employees at the time and logged $54 million in revenues in 2017.

Let’s see if Quicken Loans ups the ante and purchases a home buying app like Huvvit to build on their Rocket Mortgage success.

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Live agent? As opposed to a dead agent?

Refi Inferno? Residential Mortgage Refinancing Applications Jump 38.50% WoW As Mortgage Rate Decline To 4.06%

According to the Mortgage Bankers Association, residential mortgage refinancings shot up 38.50% from the previous week.

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Here is the chart of mortgage refinancing applications with the mortgage rate drop to 4.06%.

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Mortgage purchase applications were more modest at +4.06% WoW despite the rapid decline in mortgage rates.

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30-year mortgage rates have been falling thanks to deterorating conditions in the EU.

Is this a refi inferno? Or is it just a slight increase? Call it a relative inferno!

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Mortgage Investors Cool on Swaps as Rush for Duration Ends

Investors in mortgage-backed securities are cooling on swaps used to hedge against falling interest rates, signaling confidence that yields may have found their bottom.

The 10-year swap spread has backed off from the tightest level since October 2017, reached last week. The U.S. Treasury 10-year yield had touched a 15-month low of 2.37 percent on March 27.

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A U.S. homeowner may prepay their mortgage at will, and the duration of a mortgage-backed security can drop dramatically during periods of falling yields due to the potential for faster prepayments. This means MBS investors need to add duration, referred to as “convexity hedging,” as interest rates drop.

A popular method to add duration is by using swaps and “the 10-year is still the most liquid swap for mortgage hedgers,” said Walt Schmidt, head of mortgage strategies at FTN Financial. Now that the 10-year yield has risen again to the 2.50 percent area, swap spreads are back close to where they lay previous to the rally and “the wave of convexity hedging is likely over for now,” he said.

Duration: the weighted average maturity of the security’s cash flows, where the present values of the cash flow serve as the weights. The greater the duration of a security, the greater its percentage price volatility.

The Overnight Indexed Swap (OIS) looks like an ARCTANGENT function.

Slippin’ Jimmy took this photo of Fed Chair Jerome Powell’s chair.

Thinner! San Francisco Home Price Futures Indicate Further Price Declines (But Futures Volume Is Razor THIN)

When the US housing bubble was in full steam, I was working with a major insurance company on a way to hedge home price risk in major metropolitan areas. Their risk committee thought housing was too risky (hence the reason for trying to hedge the risk). But to no avail.

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The problem with housing futures is … there is very thin volume in trading. Exactly one contract trade on March 12, 2019 at. 261.2.

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Aggregate open interest is a minuscule 20.

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This contracts with the SOFR futures with substantially larger open interest.

Based on thin depth of trading, the trend line for San Francisco futures is downward sloping. And LAGGING the Case-Shiller home price index.

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If we look at the CFTC CBOE, CME futures activity, home price indices are so thin that don’t show up.

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Home price futures are thinner than other futures contracts, hence one must be careful.

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Low (Rate) Rider! New Home Sales Increase As Mortgage Rates Drop To 4.06% (Core Inflation Drops To 1.4% YoY As Well)

The 30-year mortgage rate is dropping fast and the housing data is low riding on the rate decline.

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And with the drop, both new home sales and existing home sales are enjoying a revival.

The Core PCE and Core PCE deflator YoY (aka, core inflation) are both declining. The deflator is actually down to 1.4% YoY.

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Slowing! US Pending Home Sales Fall 5% YoY In February As Inventory Remains Low (Fed Rate CUT At 72% In 2019)

The US housing market is slowing and The Federal Reserve is likely to CUT interest rates in 2019 (at least the market is betting on it).

(Bloomberg) — Contract signings to purchase previously owned U.S. homes fell more than estimated in February, suggesting that the prior month’s surge resulted from pent-up demand and that a sustainable recovery may take more time.

The index of pending home sales fell 1 percent from the prior month, after a downwardly revised 4.3 percent increase in January, according to data released Thursday from the National Association of Realtors in Washington. The gauge fell 5 percent from a year earlier following a 3.3 percent annual decline.

And pending home sales fell 5% YoY in February,

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Not only are pending home sales YoY slowing, but so is home price growth.

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Existing home sales inventory is down considerably from 2007.

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At least interest rates are likely to be cut by The Fed in 2019.

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Trump Announces Fannie And Freddie “Cap And Release” Plan

Fannie Mae and Freddie Mac’s stay in regulatory purgatory may be coming to an end.

President Trump announced his plan to recapitalize the GSEs Fannie Mae and Freddie Mac and release them into the wild.

The memorandum is short, both in length and details.

The President is directing the Secretary of the Treasury and the Secretary of Housing and Urban Development to craft administrative and legislative options for housing finance reform.

Treasury will prepare a reform plan for Fannie Mae and Freddie Mac
HUD will prepare a reform plan for the housing finance agencies it oversees.

What is left out of the memo is … whether Fannie and Freddie will carry a Federal guarantee or not. And where their capital will come from.

So, rather than shutting them down, Trump is “catching and releasing” like undersized lobsters. But these are not undersized (or “chicken” lobsters, but extremely large financial institutions.

For example, Fannie Mae has a loan book of 3.26 trillion …

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while Freddie Mac’s loan book is $1.93 trillion.

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This compares with Bank of America’s loan book of almost a trillion dollars.

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Wells Fargo has a similar loan book to BofA.

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So, how much capital will Fannie and Freddie have to raise to get released given their YUGE book of loans, given their interest rate exposure?

Its almost Supernatural that Fannie and Freddie are escaping purgatory.

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US 1-Unit Housing Starts Fall 17% In February (Apartment Starts Rise 23.5%) As Lenders Tighten Credit

Yes, I know it was February. But 1-unit housing starts falling 17% is not a good sign. At least apartment (5+ unit) starts are booming (+23.5%).

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While lenders tightening credit is no where near where it was in the past, it is still important to look at.

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On a year-over-year basis, 1-unit starts fell 10.6%.

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Federal Reserve board nominee Stephen Moore (great public speaker!) was touting the wage growth under President Trump. Turns out the his tout was true! The yellow line is wage growth YoY, compared to the cooling Case-Shiller (my auto correct tried to spell it Case-Swiller) house price index.

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In terms of house price growth (as of January), Washington DC loses its crown as the slowest growth top 20 metro area. San Diego and San Francisco are now the slowest growing (sub 2%). Los Angeles is growing slower than DC. The fastest is Las Vegas at 10.5% YoY.

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Dazed And Confused! Existing Home Sales Rise 11.5%, Highest Since 2015 As Interest Rates Decline

As the US yield curve starts smelling like recession,

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February existing home sales rose 11.8% MoM in February. As rates decline because of recession fears in the US and Europe, the outlook for US housing improves … in the short run.

The housing market is dazed and confused by Fed policies.

Talk about dazed and confused, President Trump is thinking of nominating Stephen Moore for the Federal Reserve Board of Governors. How about a serious economist like Stanford’s John Taylor of The Taylor Rule fame?

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