SPECIAL REPORT: MBA Economist Sees 200BP-Range Spreads Holding Through 2008

By Keat Foong, Executive EditorOrlando, Fla.—Mortgage Bankers Association (MBA) economists discussed the economy, the capital and commercial real estate financing markets, as well as the multifamily sector at MBA’s recent annual conference held here this week. Real GDP growth in the U.S. will be less than 1 percent in the first half and 2 to 2.5 percent in the second half, forecasted Douglas Duncan [pictured, left], MBA senior vice president and chief economist, research and business development.  Duncan said that the downturn in the single family housing market is the biggest driver of the slowdown in the overall economy. He said there is still a huge supply of property, and that at best the housing doldrums will come to an end only in the third quarter of 2008. “We are still far from the end of the downturn,” he said. Duncan, and Jamie Woodwell [pictured, right], MBA senior director, commercial/multifamily research, spoke at the economic forecast general session and a press conference during MBA’s annual Commercial Real Estate Finance/Multifamily Housing Convention and Expo held here this week.  Woodwell said that NOI growth has been strong across property types in recent years. However, there are signs of some slowdown in price appreciation. The multifamily rental industry has benefited in one way from the housing downturn. Not one additional household created between 1995 and 2005 became a renter household. But the third quarter was the first time there was a net decrease in the number of owner household and a dramatic increase in the number of renter household, said Woodwell.  Underscoring the pullback of conduits from the financing market, Woodwell said that while conduit origination in the second half of last year was 70 percent higher than in the same period in 2006, it fell 30 percent compared to origination levels in the same period in 2006. Commercial bank originations also declined last year, by 15 and 12 percent in the first and second halves respectively, compared to the same periods in 2006. According to Duncan, in the early 1990s, spreads were about 135 basis points. They shot up to about 185 basis points after the 1998 financial crisis, and stayed at that level for the next five years. But 2004 and 2007 once again saw lower spreads, of 140 to 150 basis points. Spreads have now increased again to about 190 to 200 basis points. The questions is “how long these spreads will stay wide?” said Duncan. The industry, he said, is “at last a year off” before it sees spreads narrowing again. Indeed, spreads may not narrow until the inventory of unsold mortgage securities is sold off and mortgage bond prices recover. Many speakers at the conference place that date to at least the middle of this year. In terms of the economy, “Clearly, economic growth is very weak and will be weak for the next first half,” said Duncan.