Magazine article Mortgage Banking

Today's Mortgage Market: An Owner's Perspective. (Executive Essay)

Magazine article Mortgage Banking

Today's Mortgage Market: An Owner's Perspective. (Executive Essay)

Article excerpt

AS AN INVESTOR IN MULTIFAMILY properties and an owner of numerous New York City apartment buildings, I'm always dealing with mortgage bankers. So I often need to look at the housing marketplace through the eyes of a mortgage banker. Now Mortgage Banking has allowed me to turn the tables a bit by letting readers see the industry through the eyes of an owner/operator.

The last two or three years have clearly been an active period for buying and selling homes. With interest rates at record lows, banks and mortgage brokers are doing some of the best business in years. As long as rates stay down, home sales will remain strong.

Investor disappointment in the stock market has boosted demand for home sales. Instead of stocks and traditional investments, people are investing in the purchase of their home and other investment properties. In some cases, demand from first-time investors has inflated prices to the point where owners couldn't resist the impulse to sell, even if they had no intention of doing so.

Meanwhile, wiser, experienced buyers wait on the sidelines. They know the price bubble will subside once the stock market recovers--a process that may have already begun.

Investment sales

But overall, the brisk business in home and apartment sales has not been matched in the investment sales marketplace.

First, low interest rates have discouraged sales by investment property owners. Instead of generating profits by selling, many owners are refinancing, which puts cash in their pockets while preserving some of their annual cash-flow distributions.

Second, even if owners of investment properties want to sell, buyers hesitate because of a psychological perception that prices today are at all-time highs.

And third, macroeconomic forces have impacted investment sales. A weak economy has helped send sales downward. With the loss of tens of thousands of jobs, fewer renters are demanding rental apartments. Reduced demand has sent rents down nationwide, further diminishing the attractiveness of multifamily properties.

By and large, practical forces--not market forces--are driving the only investment-sector sales in today's low-interest-rate environment.

For example, sales can happen when partnerships dissolve or when estates are executed. Sometimes sales occur when depreciation schedules expire on investment properties. If these assets aren't shed, owners and their partners start earning phantom income.

Further impacts of low rates

As an investor, I've found that low interest rates have significantly boosted the value of my assets through refinancing. By substantially reducing my costs, I've withstood the "triple whammy" hammering owners in New York and elsewhere around the country: rising insurance costs, rising energy prices and rising property taxes.

Fortunately, here in New York City, only a somewhat dampened demand exists for rental apartments. But nationwide, the record level of single family home-buying--abetted by record-low interest rates--has helped to reduce rent structures. Also, in today's post--Sept. 11 environment, I believe that the specter of urban terrorism has further lowered rental rates by accelerating urban flight.

With respect to individual homes and apartments, buying and selling levels can only be sustained if interest rates stay the same. Most agree rates can't go much lower.

Recovery scenario

When interest rates and the stock market rise again, we'll initially observe a negative effect on the purchase of single-family homes and apartments. …

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