Negative Interest Rate Policy – Paid to Borrow & Charged to Save?

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Negative Interest Rate Policy – Paid to Borrow & Charged to Save?

Ever hear of a monetary policy by which companies and households get paid to borrow and charged to save money?  Seemingly crazy, this negative interest rate policy (“NIRP”) continues to spread around the globe much like a virus, having already infected central banks in Europe, Japan and other countries accounting for 25% of the global economy. (Thus far, Federal Reserve Chair Yellen has indicated no plans to implement a NIRP in the USA.)

A negative interest rate means the central bank, and possibly private banks, will charge negative interest (i.e., below zero percent), so that instead of receiving interest on deposits, depositors must pay to keep their money with the bank. The policy aims to incentivize banks to lend money more freely, and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.  Unfortunately, scant evidence exists to support this outlandish policy – suggesting it could just as easily boomerang. While encouraging lending in theory, negative interest rates squeeze bank profit margins, making them less willing to extend loans. If, conversely, banks try passing on negative rates to depositors, those companies and households may simply withdraw their money, stuffing it under the proverbial mattress and denying banks a crucial funding source.

Negative Interest rate image

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2016 Third Quarter Review for San Diego CRE

  • Interest rates and cap rates remain low
  • Inflation and unemployment remain low at about 2% and 5%, respectively
  • New tech jobs are coming as Google and Bizness Apps locate facilities in San Diego

Despite low interest rates, low vacancy rates, and rising rents – record high prices, low cap rates and fears of a potential downturn have begun to hamper CRE investment. We still see promising (and less risky) opportunity in certain sectors though, such as industrial and residential.

quarterly report

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Chinese Investment in U.S. Real Estate Wanes

U.S. real-estate sales to Chinese buyers fell for the first time since 2011, to $27.3 billion. U.S. realtors say China’s capital controls and currency depreciation, resulting in a cheaper Yuan, have curbed potential buyers. Still, the National Association of Realtors reports the average price Chinese investors paid for homes in the U.S. rose by more than 12% between 2015 and 2016.  California receives about one-third of this foreign investment (compared to New York’s 10%), and California also caters to the lower priced homes of the Chinese market, making it the most vulnerable state to declining Chinese investment.

Chinese

 

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REVERSE MORTGAGES – Still a Wolf in Sheep’s Clothing

Home equity represents the wealth of most middle-class Americans. Ideally, that wealth may be transferred to the next generation upon the death of a homeowner. However, reverse mortgages provide yet another financial instrument to confiscate the wealth and stunt the growth of the middle class by encouraging homeowners to extract decades of accumulated home equity in order to supplement their retirement. In part because the federal government now regulates reverse mortgages, the upfront costs may be exorbitantly high. These costs, including points, servicing fees, and mortgage insurance premiums, amount to free cash for the bank and mortgage insurance companies — which have zero risks and provide no actual services. In effect, a reverse mortgage simply transfers wealth from the middle class to the aristocracy. When the “owner” of the home dies, the government pays the bank any difference between the loan balance (principal and interest) and the sale price of the home. If the heirs want to keep the home, they must repay the loan in full. If the amount owed is more than the value of the home, the heirs must pay 95% of the loan balance to the bank, with the government paying the remaining balance. The bank serves no purpose in the transaction other than to profit, without any risk, by extracting cash from the government and the homeowner. (It should also be noted that a reverse mortgage may render the homeowner ineligible to participate in other government programs or to receive other benefits.)

As an example of a reverse mortgage, assume a 67-year-old woman with a $370,000 home who withdraws a lump sum of nearly $200,000 (at a 5.65 percent fixed rate). The initial costs at closing could easily reach $16,563, according to ReverseVision, a reverse mortgage software company. (In addition, another $5,518 in servicing fees — to cover those $35 monthly fees over the estimated life of the loan — would be set aside.) Over time, interest and other costs continue to accrue on the mortgage. If the borrower dies at age 80, and her home is worth $720,700 at that time, her heirs would be left with just $100,000. And the bank will have pocketed about $364,000 in interest.

wolf

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CRE Investors Should Exercise Caution As Prices Peak

As commercial real estate (“CRE”) prices hit an historical peak for retail, industrial, office and multi-family investment properties, the earnings yields on other assets like stocks bonds have declined significantly, making steep CRE prices still seem more reasonable from an asset pricing perspective. However, CRE investors would be wise not to over-leverage with cheap debt, such that a future bump up in interest rates, slowing of growth, decline in rents and/or increase vacancies jeopardizes the investment. Remember what happened between 2007-2010, and be smart and realistically conservative when underwriting any CRE investment.

CRE-vs-Residential (1)

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Mortgage Rates Fall – Average 30-Year Fixed Rate at 3.61%

Long-term U.S. mortgage rates fell this first week of May 2016, following the Federal Reserve’s decision not to raise its benchmark interest rate. The decline put long-term mortgage rates near their low levels for the year, offering an inducement to prospective home buyers during the spring buying season. Mortgage buyer Freddie Mac stated the average 30-year fixed-rate mortgage declined to 3.61% from 3.66% last week — far below its level a year ago of 3.80%. The average rate on 15-year fixed-rate mortgages slipped to 2.86% from 2.89% last week. Rates on adjustable five-year mortgages averaged 2.80% this week, down from 2.86% last week. These averages don’t include extra fees (points), which most borrowers pay to get the lowest rates. The average fee for these mortgage loans approximates 1/2 of 1% of the loan amount.
Mortgage Rates

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San Diego Home Sales & Prices Rise

The San Diego region’s real estate market posted significant gains in March of 2016.  According to the San Diego Association of Realtors, 1,885 single-family homes changed hands in March, up 33% over February.  Condo and townhouse sales were up 26% over February, with 998 sold in March.  The median sales price of houses last month jumped 5% to $551,000, and 7% over March 2015. The median sales price of condos climbed 3% over February to $360,000, and 4% over March 2015.  One of the most expensive condominiums in San Diego County history sold last month — a 3-bedroom, 4,400-square-foot penthouse on Harbor Drive downtown — for $6,275,000.  The most expensive single-family home sold in March was a 3-bedroom, 4-bath, 1,840-square-foot home in Del Mar for $10,800,000.

Home-Prices

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New Regal Properties Listing in Downtown San Diego

1240 India St. #509, San Diego, CA 92101

1 bed 2 baths 921 sq.ft. in beautiful Treo BuildingCondo 1 Condo 2 Condo 3 Condo 4

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San Diego Millennials Struggle to Buy Homes

San Diego has the second largest millennial population in the U.S.  However, San Diego’s exceptionally high millennial unemployment rate, combined with its exceptionally high average mortgage amounts of $365,000, results in these millennials being among the least likely in the country to purchase homes.  The online lender, Lending Tree, analyzed mortgage requests over the past year and found only 36.9% of requests came from those under 35, the fifth-lowest out of the largest 59 cities in the country.for-later

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Regal Properties Starts 2016 with a Bang!

As of the beginning of February, Regal Properties has already sold 3 commercial real estate projects, each in a different sector and state. The first, a retail center in Columbus, Indiana, included Starbucks and AnyTime Fitness tenants, with a selling price of $2,325,000. The second, an office property in Poway, California, included medical, chiropractic and optometrist tenants, with a closing price of $2,300,000.  The third, an industrial property, in Conroe, Texas, leased by a manufacturing company, sold for $1,250,000.  Additionally, Regal Properties has opened escrows on 2 retail properties in Oceanside, California and Tucson, Arizona, with combined pricing of approximately $11,000,000. Not a bad start for RP’s commercial real estate division and for the charities it sponsors by donating 10% of its commissions and fees.

horton plaza fountain

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