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FNCE 5533 Real Estate Capital Markets Fall 2010

FNCE 5533 Real Estate Capital Markets Fall 2010. “Cirque de Real Estate”. Aggregate Economy. Financial System. Housing Market. “The Houses That Saved The World” The Economist. Who Made This Big Mess?. Origins of the Financial Crisis. Tech Bubble, 9/11, Recession Fears

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FNCE 5533 Real Estate Capital Markets Fall 2010

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  1. FNCE 5533 Real Estate Capital Markets Fall 2010

  2. “Cirque de Real Estate” Aggregate Economy Financial System Housing Market

  3. “The Houses That Saved The World” The Economist

  4. Who Made This Big Mess?

  5. Origins of the Financial Crisis • Tech Bubble, 9/11, Recession Fears • Fed lowers interest rates to stimulate growth

  6. Trade Balance & Other Factors Generate High Demand for Fixed Income Securities

  7. Investment Banks & Others Seek to Meet the New Demand • Mortgage Lending - Historically Safe • Homeownership Benefits • Build Wealth; Foster Community Stability; Other Benefits - including school performance • Government Encourages Homeownership • Tax Benefits • Special Mortgage Lenders/Programs • Pressure on Lenders to help make homeownership available to lower income households • Focus on Homeownership Rate

  8. Presidents Clinton and Bush Both Promote Low-Income Homeownership “… Today, I am requesting that you lead an effort to dramaticallyincrease homeownership in our nation over the next six years. … Your program should include strategies to ensure that families currently underrepresented among homeowners - particularly minority families, young families, and low-income families - can partake of the American Dream.” President Clinton, November 1994 “… The problem is we have what we call a homeownership gap in America.Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.” President Bush, June 2002 10

  9. Homeownership Rate 1900-2000

  10. Homeownership Rates Peak 2004-2006 Homeownership rates peak U.S. > 69.0% – a historic high! White 76.0 African American 48.6 Hispanic 49.7 1968-2010 Homeownership rates http://www.census.gov/hhes/www/housing/hvs/qtr210/files/q210press.pdf 14

  11. Investment Banks & Others Seek to Meet the New Demand for Investments • Easy to create new mortgage debt securities • Relax underwriting • 2004-2006: Sharp increase in willingness to lend … lend … and … lend … • Low and even zero down payment mortgages • Low-documentation mortgages • Deeply discounted initial loan rates … that jump up after a few years • “Flexible” or “Option” payment mortgages • Create pools of mortgages • Sell securities to meet growing demand for fixed income investments • Originators get paid for creating mortgages and have no risk from subsequent default • Create “Synthetic” mortgage securities • Payments on synthetic bonds mirror payments on actual bonds

  12. We thought the fun times would last forever

  13. Five Year House Price Appreciation 2001-2006

  14. But we was wrong!

  15. 1997-2006: House prices shoot up in select “hot” markets like California, Florida, DC, Boston, Las Vegas, Phoenix 2007 … House prices in formerly hot markets CRASH! House Price Bubble Bursts! 20

  16. Mortgage Defaults Households default on their mortgage when They owe the bank more than their home is worth – negative net equity – AND … They have some reason to move … e.g. Can’t afford mortgage payment; Divorce; Job Change … 2007-2008: First Wave of Defaults & Foreclosures “SubPrime” mortgage borrowers Borrowed in 2005-2006 with expectation of refinancing in 2 years Assuming House Prices would continue to rise Adjustable Rate Borrowers Facing Loan Resets Also Expected to refi Piggy-Bank Borrowers who had borrowed to the limit in 05-06 2009-2010 Second Wave “Prime” mortgage borrowers who need to move & find house < loan Strategic Defaulters who chose to default because house < loan 26

  17. National Delinquency Survey 2010 Q1

  18. July 2010 Foreclosure Rate Heat Map 1 in every 397housing units received a foreclosure filing in July 2010 Source: Realty Trac

  19. Securitization Fans the Crisis! 30

  20. Where Are We Now? And More Importantly, where are we going?

  21. Is the Glass…?

  22. Existing Home Sales New Home Sales 80% Decline Peak (10/05) to summer’10 33% Decline Peak (9/05) to summer ‘09 Both Existing and New Home Sales peaked in the fall of 2005 Existing Sales have recovered modestly, but New Home Sales Have not.

  23. Housing Market Cycles Home Prices tend to increase at a rate just slightly above the CPI. But, gains and losses relative to inflation tend to cluster into boom/bust periods of roughly equal “area”. If this pattern were to continue, we have a bit more correction coming.

  24. Current Market Outlook (s) • Market Forecasts from Major Players call for: • Low Mortgage Rates • Some Pickup in Home Sales in 2011 • Mortgage Originations Very Low • More Cash Transactions, Fewer Cash Out Refis • Refi Activity strog through 2010 • Purchase loans pickup in 2011. • Most Predict Some House Price Growth in 2011 • MBA remain pessimistic for even 2011 Real Estate Finance

  25. Historically, House Prices Have Grown Just Slightly Faster than Inflation

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