Analysis: Mortgage Survey Report

Yesterday the Rent Guidelines Board held their first public meeting of the year, starting the process to determine the rent adjustment for rent stabilized, SRO, loft and hotel stabilized tenants with leases expiring between October 1^st, 2013 and September 1^st, 2014.

It was a familiar scene. The RGB meets in a Landmarks Preservation Committee meeting room on the 9^th floor of the municipal building at 1 Centre Street. The public can observe the meetings, but we have no participatory role. Experts from the RGB staff and various city and state agencies present testimonies, and the Board reviews the data and questions the presenters.

The first presentation came from RGB Research Associate Brian Hoberman, who presented this year’s Mortgage Survey Report. This is the first of several research documents produced by board staff, each of which relates to different economic factors impacting rents. One of these factors, as defined in the Rent Stabilization Law, is the “costs and availability of financing (including effective rates of interest).” The RGB staff gathers the data from both a cross-sectional analysis of mortgage lenders, and a longitudinal analysis of select lenders over time.

The full report is online, but here are some highlights:

• Growth in landlord income outpaces growth in expenses:
• Rents rose at a much higher rate than operating expenses. While operating expenses for these lenders’ portfolios rose 8.4%, average rents went up 12.5%.



Operations to rent figures

• The cost-to-rent ratio therefore dropped about 2% from last year, falling to 51.52%. In short, rents paid amount to almost twice the actual cost of operating a rent stabilized building. (Capital costs are separate, but many of those are paid for by J-51 tax breaks and MCI rent increases.)
• A much more expansive (and, arguably, accurate) look at this phenomenon will be released later in the form of the RGB’s Income and Expense Study.

• Borrowing conditions remain favorable:
• Average interest rates for new multifamily mortgages dropped to 4.37%, following a four year downward trend. Rates today the lowest they have been since the RGB started tracking in 1981.
• Refinancing interest rates dropped to an average of 4.44%, a 5% decline from last year.
• Service fees- the costs charged by lenders to landlords- for both new and refinanced loans fell once again. This year, lenders charged just 0.59 points for new loans and 0.4 points for refinanced loans. Two more lenders than last year charged no points whatsoever.
• The proportion of non-performing loans and foreclosure has fallen as well. Just a third of lenders reported having non-performing loans in their portfolio; that’s a 45% decline from last year. The percentage reporting foreclosures dropped from 17% in 2011 to 15% in 2012.

Historically low interest rates for borrowers

• The market for rent stabilized buildings is growing, despite the ongoing national housing crisis.
• Rent Stabilized building sales rose, both in terms of volume and average sales prices. Last year, owners sold 1,135 rent stabilized buildings, more than 60% than last year.
• Sales volume rose in every borough:

• This is significant recovery from the 2009 low point, when only about 500 stabilized buildings were sold.

The report comes out of a survey with a relatively small sample size. But it is useful in gauging trends, and right now those trends are looking quite good for building owners and bankers. This once again begs the question: do they actually need another rent increase in 2013?