Hathaway Duke

"We wanted to make tougher to be in this business, and it’s working,"
                            ~ MN Commerce Department spokesman Bill Walsh

Word.

Minnesota’s tougher mortgage industry regulation, passed into law last year, seems to be having the desired effect: Brokers are forfeiting licenses, and there is a fairly broad consolidation move afoot as smaller brokers and their employees are being absorbed by larger, more established local and national outfits.  From the Star-tribune:

The state’s 1,319 active originators last week were down from more than 4,000 last year at this time. Many of them surrendered their licenses after new state laws aimed at making it tougher to be in the mortgage business were implemented last year.

On thing to keep in mind here is that less originator licenses don’t necessarily mean less people in the business.  Assuredly, many marginal loan originators have simply left the business, particularly in the sub-prime and Alt-a space, but many of these folks simply have merged or consolidated with other lenders, or banks, and no longer needed a separate, stand alone license.

Last Week:
Inflationary fears triggered a rise in Mortgage rates last week, and whats more, we may now be in for even higher rates after mortgage bonds fell through a key technical threshold (the 200 day moving average.) Though we did see some slightly better news on inflation last week - oil slipped in price, and the Personal Consumption Expenditure showed inflation holding at 2.1%, we are not out of the woods yet, and an inflationary trend punctuated with poor-but-not horrible economic data is not a recipe that results in lower rates very often.
This Week:
In order for mortgage bond pricing to improve (recall that the price of mortgage bonds is where your mortgage rate is derived) we need some negative news out of the economic calendar this week.  Monday Brings the ISM index - a measure of manufacturing activity, and Friday we have the May employment report.  Mid week is mostly second tier data, though Ben Bernanke will deliver some potentially market moving words in a couple of scheduled speeches. 

Finance and Commerce reports on the status of Downtown Minneapolis' North Loop Condo Pipeline (Pipeline = industry-speak for planned and in-process projects):

The new, under-construction Twins stadium has been touted as a catalyst for new development. But so far, new development has been slow to take off in North Loop.

The previous wave of residential condo development has largely ground to a halt. And amid the bumpy economy, there isn’t much fresh development in the current pipeline around the ballpark, slated to open in the spring of 2010.

From the perspective of a developer, this not only bad news, but a sign of the times. It is simply too costly, too risky, or both, to launch any new projects right now.

And after the onset of the credit crunch last summer, just as for individual homeowners, financing new projects got tough:

right after late August [or] Labor Day, it was literally like a switch had been flipped and that market evaporated,” Minn said.

lenders making loans backed by commercial mortgage-backed securities (CMBS) loans drove much of commercial real estate financing in recent years, until the credit crunch hit last fall.

For the individual homeowners - mostly condo dwellers - in North Loop, this can be taken as a positive sign.  Though there is still some inventory overhang from completed projects with unsold units, and financing a condo has gotten markedly tougher, new supply will soon be limited to re-sales only, and should provide some pricing support and enhance their prospects for appreciation, even if a few years away.

No surprise here, as the S&P/Case Schiller Home Price Index shows the continuing unwind of our local real estate market.  Median sales prices for March (year-over-year) were down 14.1%, in near lock-step with the reported national average of 14.4%.

Bloomberg reports the most useful summary, which can be applied to our market, and nearly all others:

"There is excess supply, weakening demand, prices are falling and will continue to fall,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. "Housing sales are still trending lower.''

We'd only add that demand in many quarters is not so much weakening as it is being curtailed by tighter lending standards and those that can't sell their current home (at a loss) to enter the market as buyers.

Last Week:
Mortgage bond prices softened last week, causing mortgage rates to post a small rise ahead of the holiday weekend.  Inflation fears, stoked in large part by $130 oil, continue to weigh on both the stock and Bond Markets.
This Week:
A short week, with an active agenda on the economic calendar, could mean continued volatility.  Consumer confidence and new home sales are first off on Tuesday, followed by a passel of second tier data mid-week.  The high impact reports PCE (personal consumption Expenditures - a key measure ojf inflation at the consumer leve) and the Chicago Purchasing Managers Index (a proxy for manufacturing industry outlook and health) hit the tape Friday.  Inflationary indicators may push rates up, while a poor Purchasing Managers Index may help rates ease down.

We're talking about foreclosures and short-sales folks, or, as a new report from the Minneapolis Area Association of Realtors terms it: Lender-Mediated Sales.

Jeff Allen, research director at the MAAR and Aaron Dickinson, Edina Realty agent (and blogger) are responsible for this tight little report, entitled "Foreclosures and Short Sales in the Twin Cities Market" which gets to the heart of some questions that have been on a lot of minds lately. 

Chief among them: Just how much of the current market activity is foreclosure/short sale related, and what are the broader impacts?

The report itself confirms a fact that many of us tracking the issue anecdotally have suspected: Almost 30% of closed sales (Q1 2008 - see graphic above) are/were in some stage of foreclosure or other "lender-mediated" status, such as a short sale.

One surprising data point gleaned by Jeff and Aaron was the fact that there is a fairly stark dichotomy between lender-mediated and traditional real estate activity in our market.  Check out this graphic:

The key takeaway from this is that Median sales prices outside the universe of lender-mediated properties have only deteriorated by 3.9% over the last year.  One possible conclusion to be drawn from this is that the rising tide of foreclosures and short sales lender-mediated listings and sales are not putting as much downward pressure on prices of traditionally marketed properties as we would have imagined, and has been reported.

This obvious good news is also seasoned by this fact, from the report:

The actual number of traditional seller new listings has fallen by 27.4 percent over the last two years...So clearly, homeowners are holding steady in their current residences with greater frequency and home builders are producing far less new inventory.

In other words, many sellers, sensing a bear of a market, are simply opting out, while those that are selling, aren't taking nearly the bath that one would expect.

Though it is still early on, and we have a lot of ground to cover before the real estate contraction is over, this report presents a far more optimistic view of the state of our housing market than we, and many others, would have expected. 

Yes, prices are falling dramatically in the aggregate, but the bulk of the carnage is occuring in the lender-mediated market, and the traditional market is holding up rather well, all things considered.

Anyway, go read the report - too much good stuff to list it all here - and kudos to Jeff and Aaron for putting this together.