April 02, 2013Daily Rates & Viewpoints From the Officers & Staff of TIB.

Spring Housing Fever

Spring has arrived and the weather is starting to heat up. Likewise, from recent articles I’ve read, the housing market is also showing signs of heating up for 2013 in many metropolitan statistical areas (MSAs). Leading the recovery is the robust multifamily market, followed by positive signs that bear watching in the single-family sector.

First, the multifamily sector remains strong nationally and in most large MSAs. After the housing bust, many people were forced into the rental market. Therefore, multi-family vacancies have been declining and are stabilizing at low pre-recessionary levels in many markets. Asking and effective rents are trending upward with the continuous strong demand. As it has become a landlord’s market, many developers have flocked to multifamily projects in the past 12-18 months. While new units are under construction and will be introduced to the marketplace in 2013 and 2014, many MSAs have sufficient demand to absorb these planned units. The trend for remodeling of older complexes has also been strong. Moreover, we may be seeing the beginning of a new trend of recent college graduates and those entry-level workers living with parents begin moving into multi-family projects if the economy continues to recover. However, the positive signs in the single-family market may slowdown the “hotness” of the multi-family sector.
We may also be seeing a new trend of purchasing over renting. Trulia published an article in March (http://trends.truliablog.com/2013/03/rent-vs-buy-winter-2013/) stating that despite the recent increase in home prices, buying a home is 44% cheaper on average than renting in 100 large metro markets. The assumption is that the loan mortgage rates are keeping homeownership less expensive than renting.  Among other things, Truilia’s analysis assumes homebuyers will be able to supply 20% equity, qualify for a 30-year mortgage at a fixed rate of 3.5%, and stay in their home for seven years. Under these assumptions, there could be many renters that would not choose to buy due to factors like being unable to produce a significant down payment, not having established credit to qualify, or do not plan to stay in a home for an extended period of time.
Moreover, we may also be seeing existing homeowners encouraged to move up now while interest rates are low. According to the REDFIN Blog (http://blog.redfin.com/blog/2013/03/move-up-analysis.html), homeowners wanting to move up should do so now rather than waiting for the value of their existing home to rise because the price of the nicer move-up home will also increase, and mortgage rates are expected to increase over the next 12 months to 4.4% and eventually, settle to historical norms above 5%. By moving now, the homeowner can lower his monthly payment, given the low interest rate environment, more so than if the homeowner moved in five years.
Finally, new housing starts are up and slightly higher than expected. However, for new home inventory, homebuilders are faced paying more for a limited supply of “A” lots. According to Metrostudyreport (http://www.metrostudyreport.com/national-housing-market/the-%e2%80%9ca%e2%80%9d-lot-shortage-and-the-buying-frenzy-intensify-what%e2%80%99s-a-builder-to-do), “The challenge for builders is to decide whether it is better to pay to play in the “A” location, or pay a much more modest sum for lots in the B and C areas, all the while accepting the fact that prices and absorption will be lower. “ Higher lot prices will also create higher new home prices for those potential homebuyers previously mentioned.  Therefore, the homebuilder’s land acquisition strategies today are critical to their success tomorrow.
So if you’ve caught the “Spring Housing Fever”, here are some brief lending thoughts: 
1.       If your bank is focused on multi-family lending, be sure to monitor your concentration levels and your market trends. Be aware of the new inventory and units under construction and your local market absorption. Understand that vacancy levels and rents will be stabilizing in the next few years, and as the local housing market improves, renters may shift to the single-family market. Watch the trends in your local housing market and mortgage rates.
2.       If your bank is focused on residential mortgage lending, you may begin experiencing a high volume of applications from first time homebuyers and move-up homebuyers in the next 12 months. Do you have the staff to handle the additional volume and deal with increased regulations?
3.       If your bank is focused on financing homebuilders, continue to monitor concentration levels and market trends, set limitations on speculative construction, and understand your homebuilder’s lot acquisition strategies. When available, subscribe to local market data on lot inventories, housing starts, closings, number of under construction homes and number finished vacant homes, by submarkets and subdivision levels.  Continue to diligently underwrite these credits.

Jennifer Crymes
First VP/Credit Officer

Market Levels @ 7:17 AM CDT

TIB Fed Funds & MMDA Rates - Previous Day
Agent 0.20% Prin 0.05% MMDA 0.30%
STAR Prin 0.10% STAR MMDA 0.35%
Key Indices/Commodities
1 - Month LIBOR 0.20% Dow Jones 14572.85
3 - Month LIBOR 0.28% NASDAQ 100 3239.17
1-Yr LIBOR 0.72% S&P 500 1563.20
1-Yr CMT 0.14% Spot Gold 1596.80
Prime 3.25% Spot Silver 27.95
3-yr LIBOR Swap/Offer 0.52% Spot Crude Oil 97.19
5-yr LIBOR Swap/Offer 0.94% CRB Index 294.61
3 Mo - Fed Fund Futures 0.13% 6 Mo - Fed Fund Futures 0.14%
US Treasury Yields US Non-Callable Agency Yields
Yield Maturity Yield Spread
0.00% 90 - Days    
0.00% 180 - Days    
0.19% 2 - Year 0.27% 8bp
0.31% 3 - Year 0.38% 7bp
0.73% 5 - Year 0.85% 12bp
1.82% 10 - Year 2.08% 26bp
3.05% 30 - Year    
163 BPs Yield Curve(2's-10's)
Sample 1x Callable Agency Issues
Description Call Date YTC YTM
FHLB 0.5 4/25/2018 4/14 0.50% 0.50%
Select MBS Levels
Description Coupon Yield Spread/Duration*
15-Yr FNMA 3.00% 1.3% 85 / 3.33
30-Yr GNMA 3.50% 2.01% 105 / 5.20
*Duration @ 12 month Historical CPR
Morning Commentary: Blake Scharlach

There isn’t any major economic data this morning, except for US Factory Orders, which were up 3% in February.  After January’s revised -1.0% number, it was a welcome positive change.  Motor vehicles, commercial aircraft, and other durable goods led the way – up 5.6%.  Capital goods excluding aircraft and military equipment, however, fell 3.2%.Shipments of goods was up 1.9% overall.  Across the pond, the Cyprus Finance Minister resigned today – just a couple weeks after finalizing the bailout of banks in his country.  The Cypriot government didn’t appear happy that he was stepping down, but it should come as no surprise, since his day-job is as the chairman of Cyprus Popular Bank, which was closed as part of the bailout.  A committee has been set up to investigate the reason for the banking collapse – and it’s likely his bank will be a heavy target in the investigation.  The markets like the goings-on of the day – the Dow is up 85 in the first hour of trading and the 10 year Treasury is up to 1.86% after spending yesterday in the lower 1.80%’s. 

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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