Central Florida Real Estate Price Changes and Challenges

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Central Florida Real Estate Price Changes and
Challenges

• Stanley D. Smith
• UCF Professor of Finance
• March 12, 2008
• Mortgage Bankers Association of Central Florida

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Common Real Estate Indexes

• Local, State, or National Realtors Associations
  monthly median sales prices with no control for
  property location or characteristics
• OFHEO quarterly single-family repeated-sales
  index on conforming (lt417,000) loans by FNMA
  and FHLMC
• SP/Case-Shiller repeated sales indexes in 20
  MSAs that include non-conforming and riskier
  loans includes Miami and Tampa but not Central
  Florida

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OFHEO vs. Case-Shiller

• OFHEO Tampa 2007 appreciation -4.57
  while CS -12.4
• OFHEO Miami 2007 appreciation 0.27 while CS
  -17.5

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2002-2007 5-Year Appreciation Rates

• Orlando MSA (Orange, Seminole, Lake, and Osceola
  Counties) 82
• Brevard 71
• Volusia 80
• Florida 78
• National 41

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2007 Appreciation Rates

• Orlando MSA -2.95
• Brevard -11.36 (NASA?)
• Volusia -6.43
• Florida -4.69

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CHALLENGES

• High Inventory of New and Existing Homes
• Foreclosures
• Realtors Selling Sellers Instead of Buyers
• Substitutability of Condos, Existing
  Single-Family Homes, New Single-Family Homes?
• Does your home have a bomb on the property?

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C2

• RE Principles Course 1970 If you cannot finance
  it (Real Estate), you cannot sell it!
• Mortgage Banking Principles 2008 If investors
  will not buy it (the mortgage), you cannot
  finance it! Poor bond ratings and no liquidity.
• Repricing of credit and liquidity risk
• Is subprime market alive and will it survive?

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C3 Repricing of Credit Risk

• January 2008 Senior Loan Officer Opinion Survey
  on Bank Lending Practices (56 domestic and 23
  foreign banks)
• Commercial Real Estate Lending - About 80 of
  domestic banks reported tightening their lending
  standards on commercial real estate loans over
  the past three months highest since question was
  introduced in 1990

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C4 - Tighter Commercial RE Standards

• Higher debt service coverage ratios
• Lower loan-to-value ratios
• Reduced the maximum loan sizes that they were
  willing to grant
• Raising loan rate spreads over their cost of
  funds
• Foreign banks indicated a reduced liquidity of
  the securities collateralized by these types of
  loans was an important factor.

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C5 - Lending to Households

• About 55 percent of domestic respondents
  indicated that they had tightened their lending
  standards on prime mortgages, up from about 40
  percent in the October survey.
• About 85 percent reported a tightening of their
  lending standards on non-traditional loans over
  the past three months, compared with about 60
  percent in the October survey.
• Five of the seven banks (out of 56) that
  originated subprime mortgage loans noted that
  they had tightened their lending standards on
  such loans, a proportion similar to that in the
  October survey
• Demand weaker for all types

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C5A- Net Charge-Offs at CBs

• Quarter Residential Commercial
• 20071 0.16 0.09
• 20072 0.20 0.14
• 20073 0.27 0.17
• 20074 0.44 0.35

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C5B- Delinquencies (gt 30 days) at Commercial
Banks/MBA

• Quarter Residential Commercial
• 20071 2.05 1.42
• 20072 2.32 1.65
• 20073 2.75/5.59 1.98
• 20074 3.09/5.82 2.71

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2008 Commercial RE Prospects

• About 75 percent and 85 percent of domestic and
  foreign banks expect a deterioration in the
  quality of their CI and commercial real estate
  loan portfolios.
• About 15 percent of domestic and 20 percent of
  foreign respondents expect a substantial
  deterioration in the quality of their commercial
  real estate portfolios.

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2008 Residential Loan Prospects

• About 70 percent and 80 percent of domestic and
  foreign respondents expect the quality of their
  prime, nontraditional, and subprime residential
  mortgage loans, as well as of their revolving
  home equity loans, to deteriorate in 2008.
• About 70 percent of domestic respondents expect a
  deterioration in the quality of both credit card
  and other consumer loans.

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Fixed Mortgage Rates vs. 10-Year Treasury Yields
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Fixed Mortgage Rates vs. 10-Year Treasury Yields
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Term Securities Lending Facility

• Announced 3/11/08 by FED
• Expansion of its securities lending program
  weekly auctions start 3/27/08
• Will lend up to 200 billion of Treasury
  securities to primary dealers secured for a term
  of 28 days (rather than overnight, as in the
  existing program) by a pledge of other
  securities, including federal agency debt,
  federal agency residential-mortgage-backed
  securities (MBS), and non-agency AAA/Aaa-rated
  private-label residential MBS. 

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Use of Mortgage Brokers?

• Is percent of closings done by mortgage brokers
  declining?
• Employment in real estate finance is declining
• Better control of underwriting standards by
  internal staff
• Natural ability to quickly reduce costs as
  revenues decline

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Risks of New Homes to Buyers

• If a well-liked family member was buying a home,
  what percent of build out would you recommend on
  a subdivision before they buy? 50, 60, 70,
  80, 90
• Will developer survive? Who will carry
  developers responsibilities for undeveloped lots
  and amenities?

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Who is to blame?

• Buyer/Borrower stupid or deceived?
• Mortgage Broker greed or performance standards
• Mortgage Banker/Lender greed or standards
• Investment Banker/Securitizer greed or
  standards
• Rating Agencies did not understand risks very
  well but wanted business (greed?)
• Investor - trusted rating but did not verify risk
• Federal Reserve Bank did not regulate away bad
  outcomes or fast enough

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What Are Possible Remedies?

• Freeze foreclosures
• Deny the possibility of loans with
  non-traditional terms, e.g., no or
  low-documentation of income or ability to pay,
  negative amortization, low teaser rates,
  prepayment penalties
• Restructuring current loans when good for
  investor/lender
• Investor/lender reduces principal of loan
• Government bailout buy bad loans and refinance
  at lower rate
• Allow market to work so the market will learn to
  discipline itself

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Your Forecast

• If you had money to buy a home that you would
  occupy for at least three years would you invest
  __________
• NOW?
• 6 MONTHS?
• 12 MONTHS?
• 2 YEARS?