Real Estate - Financial Markets - Lecture Slides, Slides of Marketing

Download Real Estate - Financial Markets - Lecture Slides and more Slides Marketing in PDF only on Docsity! Real Estate docsity.com Real Estate: an Important Asset Class • Until recent stock market boom, single family homes value in US approximated value of entire stock market. • Home mortgages 1999: $4.62 trillion Consumer credit is only 1.46 trillion. US National debt held by public is only $3 trillion (Source: FRB, Balance Sheets for US Economy) docsity.com Accredited Investors • Regulation D: Accredited investors include individuals with net worth in excess of $1 million or with income in excess of $200,000 ($300,000 joint income) in each of the last two years • National Association of Securities Dealers (NASD) requires suitability files and suitability tests for DPPs docsity.com REITs • Real Estate Investment Trusts (REITs) were created by US Congress in 1960 to allow small investors access to real estate investments. • Before 1960, public companies that owned real estate would be considered businesses, for which their earnings would be subject to corporate profits tax. So, until 1960, real estate was typically owned by partnerships, not suitable for small investors. • Today, institutions invest in REITs too. docsity.com Restrictions on REITs • 75% of assets must be in real estate or cash • 75% of income must be from real estate • 90% of their income must be from real estate, dividend, interest & capital gains • 95% of income must be paid out • No more than 30% of income from sale of properties held less than four years – These prevent regular businesses from being REITS docsity.com Kinds of Mortgages • Conventional, fixed rate mortgage • Adjustable rate mortgage (ARM) • Price level adjusted mortgage (PLAM) payment adjusted to inflation so constant in real terms • Dual rate mortgages (DRAMs) same as PLAM but interest rate floats • Shared appreciation mortgages (SAMs) • First mortgages: on purchase of home • Home equity loans docsity.com Conventional Mortgages • Homeowners’ fixed rate mortgage: an annuity whose present value equals the initial loan. • Traditionally, payments are monthly and compounding is monthly. With maturity m years and mortgage rate r we have: ( )      + −×= Mrrr 12)12/1(12/ 1 12/ 1paymentmonthly balance Mortgage docsity.com New Haven Savings Bank • Founded in 1838 as part of the “Savings Bank Movement” that began in UK at begin of 19th century. A major mortgage lender • Philanthropic mission to protect small savers. Charter requires conservative investments • No savings bank went bankrupt during great depression • Savings banks accumulate huge piles of assets, tempting takeover docsity.com NHSB Conversion Plan • As part of the Plan of Conversion, New Haven Savings Bank will conduct a subscription offering of common stock to eligible depositors, in accordance with applicable conversion rules. Pursuant to governing regulations, the common stock is being offered for sale in a subscription offering, in descending order of priority, to 1) New Haven Savings Bank account holders with a balance of at least $50 or more on June 30, 2002; 2) New Haven Savings Bank's tax qualified employee stock benefit plans, including the employee stock ownership plan; 3) account holders with $50 or more on deposit as of the quarter end before receiving approval; 4) New Haven Savings Bank Directors, officers and employees and 5) New Haven Savings Bank Corporators. docsity.com “NHSB Shares Likely to Soar” • NHSB sent prospectus to its depositors on Feb 19, 2004 • Price per share $10, maximum order $70,000 shares • Deadline to order shares March 11, 2004 • As many as 102.5 million shares may be sold • SNL Financial report Feb 20, 2004: “the stock price will most likely jump 40 percent to 50% on the day the company goes public” docsity.com Fannie Mae • Federal National Mortgage Association, created by Congress in 1938 to create a secondary market for FHA approved mortgages. Borrows money, buys & holds mortgages. • 1944 allowed to buy VA (Veteran Admin. Loans) • 1954 Congress makes Fannie Mae a “mixed ownership corp., with private owners • 1968 Pres. Johnson signs bill making Fannie a fully private corporation • 1976 Conventional loans outnumber FHA & VA • Still does not do jumbo loans (above $275000) docsity.com Private Mortgage Insurance (PMI) • Companies, such as MGIC, insure Fannie & Freddie against losses on their mortgages • Both Fannie & Freddie require that mortgagors buy mortgage insurance if down payment is less than 20%. • Controversy: with recent real estate price increases, LTV has declined below 80% for many homeowners still paying for mortgage insurance. The PMIs don’t notify them. • Impossibility of PMIs insuring GSEs in a major downturn is another issue. docsity.com Collateralized Mortgage Obligations (CMOs) • CMOs divide the cash flow of a mortgage pass-through security into a number of tranches in terms of prepayment risk. • Sequential-pay CMOs (first created 1983): First tranche receives first principal payments, after it is paid off the second tranche receives principal payments. docsity.com Behavior of Single Family Home Prices • Not a random walk, substantial inertia • Occasional booms and busts • Shared movements over wide regions of country, but not shared over entire country • Boom of late 1980s infected many of largest cities of world docsity.com Fears of Being Left Out “Housing prices are booming. Unless I buy now, I won’t be able to afford a house in the future.” Los Angeles Milwaukee 1988 2003 1988 2003 Agree 79.5% 48.8% 27.8% 36.4% Disagree 20.5% 51.2% 72.2% 63.6% docsity.com Perceptions of Excitement “There has been a good deal of excitement surrounding recent housing price changes. I Sometimes I think I may have been influenced by it.” Los Angeles Milwaukee 1988 2003 1988 2003 Yes 54.3% 46.1% 21.5% 34.8% No 45.7% 53.9% 78.5% 65.2% docsity.com Word-of-Mouth Communication “In conversations with friends and associates over the last few months, conditions in the housing market were discussed.” Los Angeles Milwaukee 1988 2003 1988 2003 Frequently 52.9% 32.9% 20.0% 27.6% docsity.com Effects of Real Estate Booms & Crashes on Financial Institutions • Default rate on mortgages is function of loan to value ratio, which declines as prices rise, rises as prices fall. • Mortgage insurance companies suffered massive losses in 1980s with decline of real estate prices in Texas. MGIC in great trouble then. docsity.com Real Estate Market Today • Late 1990s have shown solid price increases in many cities • San Francisco increased 28% 1999 III to 2000 III, fell 4.5% between 2001-I and 2001-IV . • More low downpayment loans today • Risk of stock market decline harming real estate market, thereby the PMIs, and mortgage lenders docsity.com