This will put the brakes on refinancing and any broader real estate recovery. As our friends at the Stansberry & Associates Investment Research noted on Thursday:

Yesterday [Wednesday], the rate of 30-year fixed-rate mortgages hit 5.79%, up from 5% two weeks ago, and lending activity has already fallen off a cliff. Advisory firm FTN Financial says the jump in rates will cut the number of borrowers with an incentive to refinance (generally rates 1.5% to 2% below your current rate constitutes “incentive”) in half. JPMorgan, the third-largest mortgage originator this year, said refinance activity is already “really down” since rates started rising, and noted 4.75% “seemed to be the switch” that spurred activity.The Mortgage Bankers Association (MBA) says refinancing activity is at its lowest level since last November.

Accounting for the two-week increase in mortgage rates, the average homebuyer will pay $100 more per month, about $36,000 over the 30-year life of the mortgage, on a $200,000 loan. Mortgage loan application volume is already down 7.2% from a week earlier.

Meanwhile, a tsunami of losses is gaining strength in the commercial real estate sector. We’ve been banging the drum about the coming catastrophe in commercial real estate. It’s only a matter of time before this becomes reality.

One big problem is the $179 billion in so-called partial-interest only loans that were written between 2005 and 2007 and packaged into bonds. These allowed owners to delay paying principal for the first several years of the loan. Now these principals are coming due. This from Bloomberg:

With soaring vacancies and falling rents, some cash-strapped borrowers will fail to cover the higher costs, said Andy Day, a commercial mortgage-backed securities analyst at Morgan Stanley in New York. About 87 percent of mortgages sold as securities in 2007 allowed owners to put off paying principal for several years or until maturity, compared with 48 percent in 2004, Morgan Stanley data show.

“The worst is yet to come,” MetLife Inc. Chief Investment Officer Steven Kandarian said yesterday in a Bloomberg Television interview. “Typically there’s a lag between when the economy softens and when the defaults actually occur.”

“Investors have already seen prices on top-rated senior debt drop below 70 cents on the dollar from 95 cents a year ago,” according to Aaron Bryson, a commercial mortgage-backed securities analyst at Barclays Capital in New York.

Beijing said the new stimulus package will benefit 7.5 million low-income urban families and 2.4 million households located in the more remote countryside.

China pumped $387.5 billion into real estate development over the first 11 months of the year, up 22.7% from the same period in 2007. However, residential sales fell 18.8% year-over-year, despite the investment.

Beijing is now trying to reignite the once red-hot real estate sector by implementing the following reforms:

• Owners who have owned their home for two or more years can now sell it without paying business taxes.
• Owners previously had to wait five years before selling their home tax-free.
• Owners who have owned their home for less than two years will now only be required pay taxes on their profit, not the total sales price. The tax rate of 5% remains the same.
• People with “smaller-than-average” apartments can now buy a second apartment under more favorable loan terms, with size limits being set on a region-by-region basis.

Financial institutions are also being encouraged by Beijing to make more funds available for mergers and acquisitions among property developers.

The new regulations are temporary, valid for only one year, and their effects aren’t likely to be seen until the second half of 2009.  Still, they are expected to work in concert with other measures to stabilize the real estate market and help maintain a high level of broad economic growth.

Previous measures earlier this year included cutting mortgage rates, taxes, and down payments for first-time home buyers.

“Recent measures taken by the nation to boost domestic consumption and revive economic growth have had a positive impact on the real estate market as transaction volumes have rebounded,” the State Council said in a statement. “We need to take more forceful measures to ensure investment in real estate and its healthy development.”Sales volumes increased in November from the previous month in cities including Beijing, Shanghai and Shenzhen.

The government also recently unveiled a $585 billion (4 trillion yuan) stimulus package that to boost investment in infrastructure projects, such as water and energy projects, airports, disaster relief, and $ new railroads over the next two years.

Source: China Unveils Plan to Bolster Real Estate, Ensure Growth

On November 19, bonds and stocks backed by commercial real estate loans plummeted on investors’ fears the struggling U.S. economy might lead to a wave of defaults.

Big real estate companies suffered big losses: shares of Simon Property Group, the top U.S. mall operator, declined 13%; Boston Properties Inc., owner of skyscrapers and office buildings in key U.S. markets, fell 12.1%.

General Growth Properties Inc., which owns more than 200 mall properties throughout the United States, is teetering on the brink of annihilation. If the flailing company can’t come up with the $958 million of its debt that is now due, and the $3.07 billion due next year, it will have to file for bankruptcy protection.

“Ghost malls” may become a common sight around the country, with major mall developers and big-name retail chains like Linens ‘n Things and Circuit City going broke and others, such as Starbucks, closing hundreds of stores nationwide. Small businesses are even worse off as shoppers tighten their belts.

A recent Newsweek article quipped that it would “take some kind of sorcery to keep the current mix of store closings, skeletal inventories, hard-to-find sales staff and anxious consumers from turning the yuletide shopping season of 2008 into a seriously cranky Christmas. Even Santas have been getting pink-slipped.”

None of what’s happening surprises Andy Miller, a consummate real estate entrepreneur and friend of Doug Casey’s, who presented his outlook on the commercial real estate market in the September edition of The Casey Report.

Miller on Retail Shopping Centers:
“Retail  are the most exposed product type. For example, we have a grocery-anchored shopping center in Phoenix that’s about 94% occupied. We’ve been trying to sell it for the last nine months. We’ve had it under contract probably four times. Each time, it’s fallen through because the buyers were unable to find a lender. The lack of liquidity is particularly acute in the commercial markets.

“Most commercial mortgages that were written over the last 10 years for most product types, except apartments, were done by conduits, and they were done by asset-backed finance securitizations, CDOs, etc. The overwhelming number of those conduits are now either out of the market or shut down. There’s going to be a tremendous upheaval in the commercial market relative to the fact that there’s almost no conduit money available anymore.”

Miller on Office Space:
“The office market, of course, is eroding. While I expect the central business districts around the 20 top cities in the country to probably be relatively stable in terms of office occupancy, I think the suburban markets are going to get creamed.”

Miller on Warehouses:
“Warehouses are bad. They’re very flat. Users are consolidating; they’re not expanding.”

Miller on Hotels:
“I’d also be wary of hotels. The hotel business is proliferating right now, in a way that I’ve never seen. There are so many new hotels being built right now nationally that there’s no way, even in good times, that I think they could sustain occupancy. A lot of these hotels now have created new flags and they’re putting them in multiple locations in most big cities. So there’s been a tremendous proliferation of hotels and, with high air fares and high gas costs, there’s no question that that’s going to be a bad place to be.”

Miller on the Real Estate Bubble:
“There is no historical comparison to the situation today. Not even the Great Depression was like this. I believe we’ve just lived through the greatest expansion of capital in the history of planet Earth, in the history of mankind.

“And this happened really all over about 12 or 13 years, this gigantic, dynamic expansion of money. There is no precedent for this. One truth about cycles is that the downward part of the cycle is usually quicker and more painful than the upward swing. We didn’t get into this thing overnight. It took many years, and we are not going to get out of it overnight. It’s going to take many years to unwind.”

Waiting for the other shoe to drop is an uncomfortable position to be in. Thankfully, there are a number of lifelines we as investors can grab on to, to avoid getting sucked into the whirlpool of declining asset values and a declining dollar… and we should take every chance we get to use them.

How well you do in the unfolding crisis will depend on how well informed you are. “Making the trend your friend” is now more critical than ever to financially survive the onslaught of tidal waves rocking the U.S. economy. The Casey Report diligently analyzes major economic trends and provides actionable advice on how to profit from the  “market riptides” – with the goal of preserving and multiplying your assets while others capsize in the stormy seas. Learn more here.

Olivier Garret, Casey Research

Source: Commercial Real Estate – the Next Show to Drop