DEAN GRAZIOSI: DEAN GRAZIOSI REAL ESTATE – REAL ESTATE FEED BY DEAN GRAZIOSI

At the International Commercial Property Exposition in Munich Germany, some pretty surprising and very disappointing numbers were released.  Foreign investment in U.S. real estate fell a whopping 77% in year-over-year comparisons.  The $14 billion outside investment in U.S. real estate fell behind the $15 billion invested in Japan and ahead of the $11 billion invested in the United Kingdom.

Perhaps the most startling transaction was the sale of the Worldwide Plaza at 825 Eight Avenue in Manhattan.  When the building was fully occupied in 2007, investor Harry Macklowe purchased the property for $1.7 billion.  After Macklowe defaulted on $7 billion in debt, Deutsche Bank took over the Plaza and eventually sold it to a joint venture spearheaded by George Comfort & Sons.  The selling price was $605 million.

The building is only 60% occupied with an initial net yield of about 6.3%.  If the new owners improve the building’s occupancy rate, the net yields should increase to 12%.

Also in New York, SL Green has agreed in principle to sell 49.5% of its interest in 485 Lexington Avenue to a joint venture between Gilmore USA and Optibase Ltd., an Israeli-based technology company.  The joint venture is paying $21 million and assuming the $450 million of existing debt.  Once the property is closed, the joint venture expects to acquire another 49.4% interest from SL Green.

While the downturn in the first half of they year was dramatic, July and August have seen investment from Germany and Asia begin to come back to the market.  New York and San Francisco have become popular targets for on and closed-end German and Asian funds. 

In Washington D.C., the largest transaction of the year has taken place.  Public REIT Vornado sold 1999 K Street to German investor Deka, an open-end fund.  The sale price was $208 million or $830 per square foot.  At the same time, Credit Suisse purchased 1099 New York Avenue from Tishman Speyer for $90.5 million.  Big investor’s are wheeling and dealing in big markets and betting on their ability to fill unoccupied space.

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Fannie Mae’s recent report indicated that the portfolio balance remained stable at $779.4 billion in August 2009.  The August stabilization follows a July pullback of 18.2% and lowered the year-to-date decline to –1.5%.  Meanwhile, Freddie Mac reported a stunning decline of 30% in its August portfolio size as volume fell to $779.4 billion.  Year-to-date decreases at Freddie Mac have settled at –4.7%.

Congress has mandated that Fannie Mae and Freddie Mac trim their portfolios by 10% per year beginning in 2010.  Trimming is to continue until portfolios settle at $250 billion each.  Both funds have used the opportunity to elevate credit requirements to boost the quality of the two troubled portfolios.

Fannie Mae’s delinquency rate rose sharply by 23 basis points in August.  Fannie Mae loans that required mortgage insurance or the “credit enhanced” borrowers are incurring the greatest number of foreclosure actions.  “Credit enhanced” delinquencies rose to 10.83%.  Non-credit-enhanced delinquencies also increased to 2.47%. 

Delinquencies among non-credit enhanced borrowers are most troublesome as delinquencies are rising at a faster rate than the credit-enhanced failures.  Investors will note that delinquencies in multi-family loans are 400% above year-over-year figures.

The Obama Administration has countered these trends with aggressive loan modification programs for Freddie Mac and Fannie Mae borrowers.  New incentives have been added to the loan modification plans.  Lenders who process loan modifications for Freddie Mac and Fannie Mae loans receive $1,000 per year for three years while the homeowner who remains current with the new modification receives a $1,000 principal reduction for each of the first three years. 

While Fannie Mae and Freddie Mac have been pressured, the rise in Ginnie Mae activity is surprising.  Ginnie Mae’s fund has quadrupled in size as credit demands have eased and loan limits have increased beyond $729,000.

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The Mortgage Bankers Association released favorable data regarding August mortgage applications and applications for refinancing.  As interest rates fell to the lowest levels since May, consumers rushed to capitalize on the downturn.  In August,  the 30-year fixed interest rates hit their lowest point in three months.

Applications for refinancing climbed as did the number of applications for new mortgages.  As of September 4, 2009 the Mortgage Bankers Association (MBA) said its seasonally adjusted index of mortgage applications, which includes both new application and refinance applications, increased 17.0%, the biggest jump since may 2i9, 2009.

Many of the new applications are believed to be sparked by first homebuyers seeking to beat the November 30^th closing deadline fore the 2009 tax credit.  A spokesperson for the Charlotte, North Carolina, based Lending Tree, said that purchasers were not upsizing but were taking advantage of lower prices and lower interest rates to either refinance or purchase their first home.

It appears that the low end of the real estate market is busy.  It is believed that there is a substantial inventory of existing homes waiting to come on the market.  Some real estate experts project 12 months of housing inventory is waiting in the wings.

With interest rates at record lows and with excess supply, the conditions could not be more favorable for real estate investment.  Interest rates on 30-year fixed mortgages dipped 0.13 percent to 5.02%.  The all-time low was set in March at 4.61%.  Fixed 15-year interest rates averaged 4.45% down from the 4.57% rate the week before.

The four-week moving average of mortgage applications was up 7%.  With Congress reconvening this week, the National Association of Realtors and other real estate and mortgage groups will be asserting pressure for the passage of an expanded 2010 tax credit.  The industry is lobbying hard for passage of the bill, which will serve as a credit for all real estate acquisitions.

The climate is strong for the real estate investor.  Real estate agencies indicate a upswing in pending sales.  Prices have begun to stabilize and investors who want to stay ahead of the curve are buying now.  

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