REIT stocks are attractive to investors who have been searching for yield in this continuing low-interest rate environment. They have been very attractive to global investors especially, as Japan sits in recession, Europe flirts with it, while the U.S. economy accelerates. REITs are up nearly 7 percent just year to date.
By sector, residential REITs were the top performers in 2014 with apartment REITs delivering total returns just shy of 40 percent amid still high demand and rising rents. Health care came in second, but all sectors were winners.
“If you look at real estate fundamentals: Office, retail, multifamily, industrial, in almost every case fundamentals are accelerating, and that’s very exciting,” said David Toti, a REIT analyst with Cantor Fitzgerald. “You have a world that’s thirsty for yield. Everything is perfect for the REITs right now.”
Perfect, perhaps, in the fundamentals, but sky-high valuations are starting to concern Toti, whose firm has a neutral rating on REITs. If interest rates start to rise, REITs suddenly become less attractive, despite their solid fundamentals.
“We could see a repeat in May of 2013 when bond market fell apart,” said Toti, noting that REITs are now hitting their historical peaks from 2007. “We are watching interest rates. There is more risk than there is upside.”
On the flip side, REIT fundamentals are so strong, some argue they could withstand a rise in interest rates.
“Yes, it’s an interest rate play, but it works because property income is rising,” said Dr. Sam Chandan, professor of economics at the Wharton School of the University of Pennsylvania. “Imagine rates are rising, but we still have support from rising incomes. There will be some offset but not a crash.”
Investors will, however, have to be more discriminating about specific REIT sectors, as some are seeing better income than others. Apartment gains are likely to moderate, as much more supply comes to major markets. Office, however, could see more gains.
“The REIT’s capacity to sustain income growth becomes significantly more important,” added Chandan.
Office space in New York, San Francisco and Washington, D.C., has been strong, but it’s also gotten pricey to buy into. So where can employers and investors go for the next opportunity?
Real estate investment management firm JLL says look to NERDS for the answer: Nashville, East Bay, Raleigh-Durham, Denver and Salt Lake City have expanding metros and lower prices than the U.S. average.
Companies looking for office space can get rental rates that are on average 35 percent lower than the average U.S. rate.
For investors in office REITs, these cities offer a higher return with so-called cap rates, or income returns, between 5.5 and 7.5 percent. REITs such as Brandywine, Mack-Cali, First Potomac and Parkway Properties could look to these cities for growth. “These markets are going to become attractive as these other markets continue to get hot, driven by millennials which are going for quality of life,” said Stephen Collins, who leads the America Capital Markets business of JLL.
The country music capital isn’t just about the music industry, but rather is anchored by jobs in education and health care, which account for 15.5 percent of jobs. Vanderbilt University is attracting young people who are willing to stay, helping revive the downtown area. On Wednesday, Bridgestone America broke ground on a 30-story, $200 million headquarters in downtown, which will bring in 1,700 workers.
Office employment: 208,100 or 25 percent of total employment
Vacancy rate: 8.6 percent
Mortgage bankers praised the decision. “It couldn’t come at a better time,” said David Stevens, CEO of the Mortgage Bankers Association. “February is the beginning of the spring market. I think it will have a definitive impact particularly in the first-time homebuyer market.”
For the typical FHA applicant, the reduction in premiums means a savings of about $80 on their monthly payment, according to CoreLogic’s chief economist, Sam Khater.
“So it’s positive news from a consumer welfare perspective, especially for first-time homebuyers, which account for the majority of FHA’s business,” he said, adding, “However, I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc. Changes in affordability only impact how much home they can buy.”
The FHA had been the only low down payment product available, with a minimum 3.5 percent down, but recently Fannie Mae and Freddie Mac announced a new 3 percent down payment product that would require private mortgage insurance. The product would compete directly with the FHA and could have offered some borrowers a cheaper option if they had a good credit score.
“We believe the cut is strategic. Our view is that FHA was at risk of losing enough market share—especially of higher-quality borrowers—to the GSE 97 percent down mortgage that it could have put at risk the ability of the FHA fund to reach its 200 basis point reserve requirement this year as it had forecast. By cutting the premium, FHA would increase its share of the market and should be back on track to meeting the reserve requirement despite the cut in revenue,” wrote Jaret Seiberg, an analyst at Guggenheim Partners.
The reduction will likely come under scrutiny by some on Capitol Hill, as the FHA is still building its capital reserves and is not yet above the mandatory 2 percent minimum. It is back in the black, after having bled cash for two years.
The FHA’s volume had soared at the beginning of the housing crash, making up for the lack of credit in the private market, but that came at a price. In order to rebuild its fund, it more than doubled its annual insurance premium and raised average credit scores. That made it harder for borrowers today to afford an FHA loan.
Lowering the premium will bring volume back to the FHA, but it will also bring back risk.
“That is clearly the tension with any lending program that encourages low down payment,” said Stevens. “But we are in a different position. We are clearly in an environment where home prices are very stable with steady growth. You don’t have the dynamics to create any type of housing bubble.”
Mortgage volume has been lagging, even with interest rates falling to near record lows. The Obama administration is clearly looking for new ways to boost homeownership, as investor activity wanes and the market is left to mortgage-dependent buyers.
“Now that we’ve made it harder for reckless buyers to buy homes that they can’t afford, let’s make it a little bit easier for qualified buyers to buy the homes that they can afford,” said Obama in an August 2013 speech, also in Phoenix. At the time he did not make mention of the FHA, which was still in the red, but instead touted refinance programs and less red tape for lenders.
Obama is also expected to address the issue of putbacks at the FHA, which is when lenders are forced to buy back bad loans. The regulator of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency, has already sought to clarify these rules, which have created huge costs for lenders and consequently higher costs for borrowers.
UPDATE: This story was updated to include the White House confirmation of lower mortgage premiums and comments from HUD Secretary Julian Castro.
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See more homes for sale in Omaha.
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3. Teton County, Wyo.
- Affordability rate: 75.4 percent
- Historical average affordability: 84.3 percent
- Household median income: $69,020
- Population density: 5.4 per square mile
Only 22,268 residents live in Teton County year-round; however, the population swells during the summer months. Grand Teton National Park, for instance, hosts between three and four million visitors each year. Additionally, Jackson Hole, a high-end vacation town located in the area, experiences large surges in its population during the tourist seasons — 52,000 in the summer and 5,000 in the winter. It is likely that the disproportionately large number of vacationers compared to year-round residents has increased home prices. Residents spent more than 75 percent of their median annual income on mortgage payments on median-priced homes. Yet, Teton County is more affordable than in previous years. Since January 2000, residents spent an average of 84.3 percent of median income on payments for median-priced homes. As of May, residents had to spend 75 percent of median income to afford such payments.
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The Bayside Bungalow
Brittany Yunker’s 160-square-foot home, located on the shores of the Puget Sound in Olympia, Washington proves that you can live large in a little space. Brittany, who had no building experience prior to attending a Tumbleweed Tiny House Company workshop, built her tiny abode using Tumbleweed’s Cypress 18 Equator building plans, one of the company’s most popular designs.
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Foreclosure filings increased 2.09 percent nationally from June to July. Take a look at the top 10 states for foreclosure, and see if yours made the list.
Live in one of these 10 states? According to RealtyTrac, a California-based firm that tracks foreclosures, your state had one of the highest rates of foreclosure in July. Nationally, one in every 1,203 housing units received a foreclosure filing in July, up from one in 1,228 in June.
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If you are interested in the lowest possible mortgage rate for your refinance, consider refinancing into an adjustable rate mortgage (ARM). Because ARMs tend to have lower initial interest rates than their traditional, 30-year, fixed-rate counterparts, ARM refinances are especially popular when mortgage rates begin to rise and consumers need a lower-cost option.
3 reasons to refinance into an ARM
Here are three advantages to refinancing to an adjustable rate mortgage:
1. Lower mortgage rates: Interest rates on ARMs are often lower than 15-, 20- and 30-year fixed-rate mortgages.
2. Perfect product for soon-to-be home sellers: “If you know the end period when you will sell your home, pay off the loan in full or refinance, an ARM can be a good loan,” says Douglas Benner, a senior loan officer with Embrace Home Loans in Rockville, Maryland. “Some people know for certain they are retiring to another home within a few years, or they know they will come into some money or be transferred to another area. In that case, it makes sense to save the money in interest payments during the initial few years of the loan.”
3. Improve your financial standing: Keith Gumbinger, vice president of HSH.com, says another candidate for an ARM refinance is a homeowner who is waiting for the economy to recover or for their personal finances to improve. For this kind of homeowner, an adjustable rate mortgage provides valuable short-term stability.
“This can be a great product to tide you over for a few years as long as you save money while you are using an ARM,” says Gumbinger.
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Why are ARM mortgage rates lower?
“With short fixed-rate periods, lenders can take on far less interest-rate risk when making ARMs than when they write long-term fixed-rate mortgages,” says Gumbinger. “Although it depends upon the ARM as well as market conditions, ARMs tend to have lower interest rates than 30-year fixed-rate mortgages. Unlike most fixed-rate mortgages, which are sold to others, lenders also find ARMs to be desirable and profitable additions to their own portfolios of loans, so they may price these aggressively at times in order to capture business.”
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Should I refinance into an adjustable-rate mortgage?
Knowing how long you plan on staying in your current home is perhaps the most important factor when deciding whether or not to refinance into an ARM. After all, it’s a waste of money to pay all those refinance closing costs — typically equivalent to a couple percentage points of the new loan amount — if you aren’t going to live in the property long enough to recoup the cost of your refinance.
Here are three scenarios to help you decide if ARM refinancing is right for you:
- You’re staying in your home for just a few more years: If you only plan to stay in your home for another one to three years, refinancing probably isn’t in your best interest because it doesn’t give you enough time to realize the savings of your refinance.
- You’re moving somewhat soon: If you’re going to remain in your property for three to five years, refinancing into a new five- or seven-year ARM is probably your best move. You want to stay in your home long enough so that your new, lower interest rate allows you to recoup your closing costs. Plus you’ll have protection against rate increases.
- You plan on staying in your home for the long haul: If you plan on living in your home for an extended period, chances are you will stay in your home longer than the fixed-rate portion of the adjustable-rate mortgage. This opens you up to the possibility that the ARM will reset to a higher interest rate as the years go by, and you could end up with a rate even higher than the rates you would have gotten with a fixed-rate loan.
How are adjustable-rate mortgage rates determined?
ARMs start out with a fixed-rate period, often one, three, five, seven or 10 years. During this initial loan period, the ARM is essentially a short-term fixed-rate loan. ARMs with longer fixed-rate periods typically have slightly higher mortgage rates, says Gumbinger.