Wednesday, November 18, 2009

Housing Starts, More on Fannie and Freddie

Housing starts fell 10.6% in October to a seasonally adjusted 529,000 annual rate. Building permits also declined. Those ever-accurate economists were forecasting a 1.7% increase in starts so this number was disappointing to say the least. It seems as if builders are reluctant to break ground on new projects with inventories and vacancies on existing properties sitting at record highs. With both the expiration of the housing tax credits and the end of Fed's aggressive purchases of MBS looming on the horizon, it's not surprising that builders are hesitant. It seems like their time and money is better spent coming up with new programs to lobby the government for, rather than building houses.

Good article in the WSJ about Fannie and Freddie's involvement in the apartment market. If you thought that Fannie and Freddie were just doing their civic duty to prop up the residential mortgage market, you're wrong. The housing behemoths are also huge lenders to multifamily projects. How huge? They did 84% of all multifamily lending in 2008. The 2008 numbers don't scare me quite so much since at least underwriting was tightened up a bit by then and nobody else was lending. What does scare me is the 43% of market share the combined companies had in 2007 and 34% in 2006, back when banks like Lehman brothers were still around doing moronic deals. For example, Fannie and Freddie helped finance the massive and overpriced Archstone Smith apartment LBO by lending $9 billion to the deal. Or my vote for the dumbest real estate transaction of the bubble, Tishman's $5.4 billion purchase of Stuyvesant Town, where Fannie and Freddie purchased $1.5 billion in CMBS from that deal. I'm not sure I understand exactly how financing bloated leveraged buyouts became part of their mission statement, but it was a bubble and fortunately taxpayers are here to clean up the mess. The good news is that Fannie and Freddie's apartment building loans only add up to around $300 billion, which is a mere drop in the bucket compared to the $5 trillion of single-family loans that they back. It always helps to put these things in perspective, doesn't it?

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