Market update 2/2/2010

Feb 3, 2010

Demand for home loans rose to a six-week high on a mini refinance wave, with borrowers pushing to lock in rates before they climb later this year, the Mortgage Bankers Association (MBA) said today. Applications to buy homes and refinance loans jumped last week to mid-December levels as average 30-year mortgage rates held near 5%. The industry group's mortgage index jumped 21% last week, fueled by a 26.3% leap in demand for refinancing as purchase loan requests increased 10.3%. The 30-year mortgage rate dipped 0.01%age point to 5.01%.

But this borrowing cost was 0.40%age point above the record low set last March and seen headed higher throughout the year. "Rates continue to hover around 5%, quite low by historical standards, but are well above the record lows seen in 2009 and hence are not generating substantial refi volume," said Michael Fratantoni, MBA's vice president of research and economics. Affordability remains high with mortgage rates still historically low and average home prices plunging about 30% from 2006 peaks before stabilizing since last summer.

The government's bonus to first-time and move-up buyers via a tax credit remains in place for several more months, luring buyers who have been sitting on the sidelines waiting for some signs of stability. "I do think the housing recovery in the U.S. still has legs and is firmly in tact," said Ian Pollick, economics strategist at TD Securities in Toronto. "There's a lot of pent up demand in the system right now, there are a lot of really really good deals."Jobs reports mixedAccording to payroll-processing firm Automatic Data Processing (ADP), private-sector employers cut 22,000 jobs in January, marking the smallest decline since February of 2008.

The number of cuts in December was revised down to 61,000 from the previously reported 84,000. Economists surveyed by had forecast a loss of 30,000 jobs in January. The service sector reported an increase of 38,000 jobs in January, marking the second consecutive month of job growth for that sector following a 21-month decline. The figure was offset by a loss of 60,000 in the goods-producing sector and a drop of 25,000 manufacturing jobs, which marked its lowest level since January, 2008.

In a separate report Wednesday, outplacement firm Challenger, Gray Christmas Inc, said planned job cuts had accelerated in January. Challenger said employers announced 71,482 layoffs in January, reversing what had been a steady decline in layoff announcements. January's figure is up 59% from Decembe r 2009, when layoffs fell to a 24-month low of 45,094. But it was a sharp decline from the 241,749 cuts announced a year ago. The retail and telecom sectors were the hardest hit in January, with 16,737 and 14,010 job cuts, respectively.

The unemployment rate is expected to remain unchanged at 10%.MBA - Commercial and Multifamily Mortgages Increased in 4th Quarter According to the Mortgage Bankers Associations (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, fourth quarter 2009 commercial and multifamily mortgage loan originations were 12% higher than during the same period last year and 15% higher than during the third quarter of 2009. The 12% overall increase in commercial/multifamily lending activity during the fourth quarter was driven by increases in originations for all property types except multifamily.

When compared to the fourth quarter of 2008, the increase included a 105% increase in loans for hotel properties, a 101% increase in loans for retail properties, a 59% increase in loans for industrial properties, a four% increase in loans for office properties, a one% increase in health care property loans, and an eight percent decrease in multifamily property loans. Fourth quarter 2009 mortgage originations were 15% higher than originations in the third quarter 2009. Among investor types, lo ans for commercial bank portfolios saw an increase in loan volume of 39% compared to the third quarter 2009, loans for life insurance companies saw an increase in loan volume of 35% compared to the third quarter 2009, conduits for CMBS decreased by 50% during the same time span, and originations for GSEs decreased 15% from the third quarter to the fourth quarter 2009.

Commercial and multifamily mortgage originations picked up in the fourth quarter, but remain at a low level in absolute terms, said Jamie Woodwell, Vice President of Commercial Real Estate Research at the MBA. The trend shows stability coming back to the market, but the pick-up in volumes really indicates just how low origination levels had fallen.Obama's budget in a nutshellPresident Obama's proposed 2011 budget calls on Congress to make a number of tax changes for individuals.
These include: Letting tax cuts expire - the 2001 and 2003 Bush tax cuts are scheduled to expire by 2011 - the 33% bracket would become 36% and the 35% bracket would rise to 39.6%. The long-term capital gains tax rate would increase to 20%, up from 15%; limit itemized deductions - to cap at 28% the rate at which high-income households can itemize their deductions. Currently the value of a deduction is equal to the deductible amount multiplied by one's top income tax rate, which can range well above 28%; keep the estate tax - assumes the estate tax will be made permanent at a $3.5 million exemption level per person and a top rate of 45% on taxable estates.

That's more generous than current law, which calls for a $1 million exemption level and a 55% top rate starting in 2011; raise taxes on investment fund manager profits - tax the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as a capital gain, subjecting it to much higher tax rates than the 15% capital gains rate currently imposed; eliminate capital gains tax on small business stock - eliminate the capital gains tax altogether on stock in small businesses held for at least five years; make tax cuts permanent on lower and middle income - tax cuts will be made permanent for everyone making less than $200,000 ($250,000 for couples); permanently protect the middle class from the "wealth" tax; extend the Make Work Pay credit - one-year extension of the stimulus-created tax credit; permanently expand a low-income tax credit - families making less than $85,000 would be able to claim nearly double the child and dependent car e tax credit for which they currently qualify; permanently extend the American

Opportunity Tax Credit - expanding the existing Hope Scholarship tax credit and making it partially refundable. So much for deficit - Banks not tightening credit any moreAccording to a new report from the Federal Reserve, most large banks have stopped tightening standards on a number of loan types. However, just because it's not getting tighter doesn't mean it's getting easier. Still, it might be seen as a hopeful sign for a financing world thats been strained since 2007 hopeful for pretty much every sector except commercial real estate, that is.

Thats one of the only loan types where the majority of banks said theyd continued to tighten credit criteria. Banks policies on commercial real estate lending were an exception, as large net fractions of respondents further tightened their credit standards during the final quarter of last year, the report said. In addition, banks reported that they had tightened terms on commercial real estate loans substantially over the past year.

The Fed said only a small net fraction of banks tightened standards on prime residential real estate loans in the fourth quarter. A som ewhat larger percentage of banks but still fewer than in previous quarters tightened standards on nontraditional residential real estate loans. Likewise, just a small net fraction of banks reported more stringent lending standards for revolving home equity lines of credit. Banks reported weaker demand across the board for commercial property loans, prime residential real estate loans, nontraditional mortgages, and home equity loans, alike.
The Federal Reserves survey results are based on responses from 55 domestic banks and 23 U.S. branches and agencies of foreign banks.Vacancy rate unchanged According to the US Department of Commerce, the national vacancy rate for homeowner housing units remained at 2.7% in Q409, unchanged from Q109. The rate only slightly wavered from 2.9% at the end of 2008 and 2.6% in Q309. The highest the rate has ever climbed since 1996 was to 2.9% in Q108 and again in Q408. For rental housing, the vacancy rate dropped to 10.7% in Q409 from 11.1% in the previous quarter but increased from 10.1% in the last quarter of 2008. For Q409, more vacancies appeared in principal cities, 3.1%, compared to 2.5% in the surrounding suburbs, according to the report. The rate within the city dropped from 3.5% in the fourth quarter of 2008.

More vacancies appeared in the South, 2.9%, edging 2.8% in the Midwest and 2.7% in the West. The Northeast region had a 1.9% vacancy rate. The South also had the highest rental vacancy rate of 13.7% in Q409. The Midwest had a 11.2% rental vacancy rate, followed by the West, 8.9%, and the Northeast, at 7.2%.

To combat vacancies, the US Department of Housing and Urban Development (HUD) recently announced that it would provide financing for owner-occupants looking to purchase real-estate owned (REO) property.

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