March 21, 2012
The housing industry, like Lazarus, appears to be rising from the dead. True, the National Association of Realtors said Wednesday that sales of existing homes unexpectedly fell 0.9 percent last month, but the pace of sales represented the strongest February in five years.
Tuesday’s Commerce Department report on new housing construction also showed signs of improvement in the housing market. Housing starts slid 1.1 percent in February over January levels, with starts on single-family homes falling even more, 9.9 percent. But what struck most observers as being far more important was that newly issued building permits jumped 5.1 percent to reach the highest level seen since the financial crisis gripped markets in October 2008.
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It isn’t just the warmer weather that is causing all the action, Stuart Hoffman, chief economist at PNC, argued in a letter to clients yesterday. Indeed, Hoffman is one of a growing group of economists and other pundits who are taking a distinctly more bullish view of the real estate and housing markets. In his letter to clients, he said PNC expects single-family housing starts to hit 500,000 this year, up 15 percent from 2011, and to climb to 530,000 in 2013, thanks to better job growth, higher levels of consumer confidence and better access to mortgage financing. “Improved homebuilding will lead to construction job gains and will finally contribute to the economic expansion in 2012, for the first time since 2007,” Hoffman believes.
The economists aren’t the only folks preparing for a recovery in homebuilding and mortgage finance. Over at PrinceRidge Group, a fixed-income oriented financial services firm founded by former UBS investment banker John Costas in the wake of the financial crisis, Barry Berkeley is part-way into the process of hiring several dozen traders and sales people for a new group that will trade and make markets in residential mortgage-backed securities. Those are the pooled debt obligations that are created when issuers buy and bundle home mortgages from their originating lenders. The securities help keep the lending pipeline flowing by keeping lenders flush with cash, but they also played a role in exacerbating the financial crisis as mortgage delinquencies soared and the market for securities backed by risky subprime loans seized up.
Part of the rationale for PrinceRidge undertaking this kind of venture now, Berkeley explains frankly, is to take advantage of a “brain drain” that is underway from the Wall Street behemoths who are feeling underpaid and underappreciated. Under more regulatory oversight – and more public scrutiny – traders and others toiling on bond desks have seen their bonuses slashed to the bone, even when they have outperformed the target set for them. That’s one problem; job insecurity is another, as firms across the Street cut back on staffing levels to try to boost their profits.
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Then there is the housing market recovery, however tentative. “What is more important than where the market has been is where it’s going,” Berkeley says. “Yes, it’s a slower recovery than it should have been. But the mortgage market is intact and there will always be a need to securitize the underlying mortgages.” The market for collateralized mortgage obligations (CMOs) shrank from $469 billion in 2010 to $357 billion last year, Berkeley says. In 2012, he notes, the market has already processed some $49 billion to $50 billion of new CMOs, made up of mortgage paper guaranteed by agencies such as Fannie Mae.
Going forward, Berkeley says he expects the market to be heavily focused on different kinds of mortgages, as bankers push their clients in the direction of shorter-term loans that put a higher emphasis on the borrower’s ability to build equity in their residence, rather than simply on making that home ultra-affordable in the short term. When it comes to trading, Berkeley says his business will be client focused, rather than structured in order to structure arbitrage positions. “We’ll be building a distribution-based model,” he explains, “although we will absolutely be carrying hundreds of millions of dollars’ of inventory to do that.”
That – and building a new 50-person team to run the business – is a big investment these days on Wall Street, but Berkeley says the new housing data simply confirms that PrinceRidge is on the right track.