A report from the Wall Street Journal. “In mid-November, bond investors got an unwelcome surprise from one of the main ratings firms in a hot corner of the bond market: About 25% of the bonds that it had rated were likely to be downgraded. Several days later, after calls poured in from confused investors, ratings firm DBRS Morningstar Inc. backtracked and said it had made an error. It was instead likely to upgrade about 25% of the bonds and downgrade only about 3%. Morningstar, known for its mutual-fund ratings, has hit a rough patch in its quest to become a big player in the bond-rating business. In its biggest-ever acquisition, Morningstar bought rival DBRS Inc. from two private-equity firms for $669 million in July, catapulting itself into the No. 4 spot globally behind longtime industry leaders Moody’s Corp., S&P Global Inc. and Fitch Ratings.”
“Morningstar’s error, which occurred while it was integrating its ratings system with that of DBRS, also came around the time that it was working to win ratings assignments on hotel deals by potentially applying new assumptions more favorable to bond issuers. The ratings in question are in a segment of the $1.2 trillion market for commercial mortgage-backed securities, which are bonds tied to loans on malls, office buildings, hotels and the like. The affected securities are backed by only one property or borrower and are known as single-asset, single-borrower deals.”
“Morningstar initially expanded its ratings business in 2010 by acquiring Realpoint LLC. That small firm was paid by bond investors rather than by the companies issuing the bonds, potentially eliminating the conflict of interest created by allowing issuers to pay for the ratings. Morningstar ultimately changed Realpoint’s business model to the one followed by the big ratings firms. Rob Dobilas, who founded Realpoint, sees the same problems with bond ratings as before the financial crisis. ‘The industry itself is designed to fail,’ he said.”
From Market Watch. “The timeline for a U.S. recession has been pushed out, but don’t get too excited. The investing gurus at bond-fund giant Pimco say synchronized monetary policy easing by global central banks, a vital force for stabilizing international economic growth rates this year, has already made use of policymakers’ tools available for fighting the next recession. These cautionary words are part of the fund manager’s annual macroeconomic outlook penned by its economic adviser Joachim Fels and its global fixed income chief investment officer Andrew Balls.”
“Investors should stay clear of the riskier corners in the corporate debt market. Bonds issued by highly indebted businesses were vulnerable to a sudden dip in the economic cycle and may struggle to find support from banks who may want to ration out their lending during a downturn. ‘With speculative grade lending currently around 35% of GDP, stress across these sectors would be more than enough to contribute to a recession,’ they said.”
From Bisnow on Georgia. “The owner of a long-planned luxury condominium tower in Midtown Atlanta is trying to sell part of its property as a loan on the project is soon to come due. Olympia Heights Management has tapped Cushman & Wakefield in Atlanta to market over half of its 4-acre parcel for an undisclosed price. Several announced dates for an official groundbreaking have come and gone. Throughout the years, trucks have appeared on the site at different points, moving dirt around in an effort to show as if construction is imminent. The developers continue to refinance the land with short-term loans, and the construction firm working on the site told Bisnow this past summer that there are no plans to go vertical anytime soon.”
“Many in the Atlanta residential real estate community previously expressed skepticism that Olympia Heights would ever build the project. ‘We’re going for construction,’ Olympia Heights’ development director, Roni Avraham said when reached by phone Tuesday evening. ‘Soon, very, very soon. I’m sorry. I cannot tell you more.’”
From Curbed New York. “It could take more than six years to clear all of Manhattan’s unsold condos at the pace of contracts in 2019, a report by Halstead Development Marketing shows. The borough has 7,050 unsold, newly constructed units; the majority of those, almost 6,000, have not been formally listed for sale, creating a ‘shadow inventory,’ according to the report.”
“This hidden inventory, the report says, is currently the largest in a swath of Lower Manhattan that includes the Financial District. There, 967 of these shadow condos exist on top of the 96 that are actively being marketed in the area.”
The Orange County Register in California. “It was a tough year for Southern California homebuilders. As 2019 started, builders found themselves stuck with the largest inventory of unsold residences since the Great Recession. Rising interest rates and economic anxieties cooled house hunting, making the builders’ big bets on higher-priced homes a poor choice. So for much of the year, builders were forced to discount slow-selling homes while retooling plans to create lower-priced product.”
“Two new rankings of the nation’s fastest-selling ‘master-planned communities’ — neighborhoods carved from large parcels of undeveloped land — provide a glimpse into how tough it was for local developers. These scorecards, from John Burns Real Estate and RCLCO, having slight differing results but show a common theme. Four Southern California projects were on both national lists of top sellers. Reviewing the past two year’s rankings, Burns shows sales at the four local communities were down 12% in 2019 vs. a 10% gain among the top 50 sellers nationwide. RCLCO shows local sales were down 19% vs. a 9% gain elsewhere.”
“This isn’t the only sign of weakness in new-home sales. Sales of all newly constructed residences in the four counties covered by the Southern California News Group were 15,716 in the year ended in November. That’s down 12% from the sales pace of the previous two years. Lennar Corp. says a sales drop forced it to cut average prices by 6% for its homes in the western United States, including California. ‘California has really fallen off … perhaps more than any other part of the country,’ Lennar President Jonathan Jaffe told Reuters.”
The World Property Journal. “According to a new U.S. housing report from Redfin, just 9% of offers written by Redfin agents on behalf of their homebuying customers faced a bidding war nationwide in December 2019, down from 12% a year earlier and setting another new 10-year low. As in November, San Francisco was the only market even moderately competitive in December. The bidding war rate there in December was 26%, down from 35% a year earlier and down from 28% in November.”
“‘Last month we saw more buyers than usual out looking for a ‘steal’ and bidding on homes, which led to multiple offer situations on some homes where all of the buyers came in below list price, rather than above,’ said Redfin San Francisco Market Manager Saleem Buqeileh.”
“Competition was still rare everywhere else in the country in December, with no other market experiencing a bidding war rate higher than 17%. The bidding war rate fell to zero in Raleigh and Dallas, and hit its lowest point in at least five years in Los Angeles. Aside from the zero rates in Raleigh and Dallas, Atlanta had the third-lowest bidding war rate in December at 4%.”
From Mother Jones. “Redlining is widely seen as the source of the vast disparities in housing and homeownership between white and Black Americans. Denied access to government-backed mortgages, Black people were consigned to areas of low investment in city centers during boom times in suburbia. It would stand to reason, then, that the end of government-sanctioned redlining, with the 1968 passage of the Fair Housing Act and the Housing and Urban Development Act, would have begun to reverse housing segregation and inequality. But in fact, writes Keeanga-Yamahtta Taylor in her new book Race for Profit, that was when things started to get worse.”
“There were two problems with the new government effort to insure mortgage loans to low-income African Americans in inner cities. First, the existing conditions—the resistance of exclusive white suburbs to any influx of African Americans, the wealth gap—made it just about impossible for the urban poor to move to areas of greater opportunity. And second, the government, less than fully committed to actually fair housing, all but abdicated responsibility for the program to the private sector. That meant that national housing policy was shaped in large part by unscrupulous lenders who saw profit in making risk-free loans to Black buyers for overpriced, dilapidated homes with serious undisclosed damage.”
“Q: Elizabeth Warren and Kamala Harris both proposed something similar to what you describe in the book: giving mortgage assistance to residents of formerly redlined areas. Would this cause the same problems as in the late 60s?”
“A: Well, it reinforces a central problem, which is segregation. There are two issues. One is that some of these historically redlined neighborhoods are actually gentrifying. So because there’s no race-specific language in these sorts of legislation, it’s not clear who would actually be benefiting from these low-interest mortgages.”
“The second problem is, in areas where they’re not gentrified, where they remain low-income segregated neighborhoods, what does it mean to guarantee someone the right to buy a house in an area where it won’t appreciate in value? That’s the whole issue in homeownership: It’s supposed to be an asset that accrues in value over time, that through its equity allows you to finance your children’s college education, that allows you to weather an unforeseen economic crisis, that allows for a comfortable retirement. So if a house is not in an area where it can develop equity over time and instead becomes a debt burden, then I’m not sure what the benefit is.”