Mortgage rates ended the week slightly higher as housing market data released last week reflected overall improvement in the sector. Existing Home Sales jumped 9.2% in September from the month prior to the highest level since July 2007. Inventories of unsold existing homes dropped to a 7.8-month supply, marking the lowest inventory levels in over two years. September Housing Starts and Building Permits both came in below expectations, which removes pressure on future inventory levels. Much of the housing activity has been a result of low mortgage rates and first time homebuyer tax credits, and the future for both is uncertain. The Fed is scaling back its purchase of mortgage-backed securities and law makers are debating the extension and possible expansion of the tax credits. Currently, the 30 Year Fixed sits at 4.750% (4.929% APR) and the 15 Year Fixed is at 4.250% (4.557% APR). This week ahead is busy with economic data, including Gross Domestic Product, New Home Sales and Consumer Confidence.
As we move past the worst of the residential real estate mess, conversations are increasing about the commercial real estate cloud that is looming on the horizon. According to last week’s Federal Reserve’s Beige Book report (a survey of economic conditions across the US), the weakest sector of the economy was commercial real estate, with conditions described as either weak or deteriorating across all 12 Districts.
High vacancy rates were noted as a key concern especially for landlords who were not offering concessions. Some estimates suggest 30% of offices and storefronts in California are currently available for rent or sale. In the Silicon Valley, an area spanning from Palo Alto to San Jose to Fremont, 19.1% of office space was vacant at the end of the third quarter, reported by commercial real estate firm Grubb & Ellis. The average effective rents, which includes concessions such as periods of free rent and substantial tenant improvement allowances, have declined 36%. The sub-lease market is also helping to drive down rents with down-sized businesses offering commercial space for as little as 35% to 40% of 2005 lease rates, much like the effect bank-owned properties are having on residential real estate markets.
For businesses that wanted to purchase or build space, an inability to obtain credit was often cited as a problem. According to the Bureau of Labor Statistics, non-residential construction costs have declined by almost 8% over the past 12 months, and the average price of a development site has plunged by nearly 60% since 2007. But the problem remains, banks hold approximately 45% of all commercial loans, and are putting more money into reserves, leaving less money for new commercial lending.
So, where does this all end? With commercial loans portfolios continuing to deteriorate, and commercial real estate values down about 35% from their peak in October 2007, and lack of available credit… starting to sound familiar?
Central Coast Lending, Inc.