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Is The Real Estate Market Turning Around?
From The Daily Capitalist
Interesting things have been happening in the real estate markets.
Residential
The home sales index spike from the home buyer tax credit has almost run out. If you didn't have a deal in escrow by April 30, you didn't get the credit. The time to close a deal was extended to September 30. The predictions were that we'd see a fall in July activity which is exactly what is occurring.
The reports that are currently coming in don't yet reflect July sales which will show a drop in sales. For example, the Case-Shiller report came in today for May, 2010, but that report is a three-month average of prices. The report said prices were up 1.2% MoM, and 5.4% YoY. That was the peak of housing credit driven sales. According to S&P which publishes the index:
"While May's report on its own looks somewhat positive, a broader look at home price levels over the past year" doesn't show that the housing market "is in any form of sustained recovery," said David M. Blitzer, chairman of S&P's index committee. "Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level."
Last week the National Association of Realtors reported that June sales of existing homes declined 5.1% from May but up 9.8% YoY. Sales declined 9.3% in the west. Inventory rose in June:
The supply of homes available for sale in 27 major metropolitan areas at the end of June was up 3.7% from one month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif.
Ivy Zelman of Zelman Associates says for the past 27 years inventories have declined in June by 0.5%.
I showed this chart last week:
Yesterday the FHA reported that the level of its insured mortgages more than 90 days overdue or in foreclosure jumped 35% YoY. But,
According to the FHA June single-family operations report, the total volume of mortgage in-force increased more than 24% to 6.4m in June compared to the same month one year ago. The total value of unpaid FHA mortgages was $865.5bn in June, up 30.3% from $663.8bn one year ago and up 3.3% from $837.8bn in May. ... But with that increase came a rise in serious delinquencies, 7.6% last year, compared to 8.3% in June. ...
Based on applications received, the FHA said the seasonally adjusted annual rate of applications was nearly 1.9m, down 13% from the previous month's rate and the lowest since January's rate of 1.69m.
What this means is that most home loans are being financed with government guarantees from the FHA, Freddie and Fannie. I had thought the FHA had run out of money, but apparently their limits have been extended. The last numbers I saw said that 90% of loans are government backed.
According to Bloomberg today, in an article about a surge in people renting apartments:
Finances for homeowners didn’t improve fast enough to prevent more than 1.65 million foreclosure filings in the first half, an increase of 8 percent from the same period in 2009, RealtyTrac Inc., a data company in Irvine, California, said July 15. A record 269,962 U.S. homes were seized from delinquent owners in the second quarter as lenders set a pace to claim more than 1 million properties by the end of 2010.
But here is probably the most significant statistic: home ownership rates have fallen to 66.9 from a high of 69.2% in 2004. In my Megatrends article, I expected this to happen as home ownership rates revert to the statistical historic averages. This does not bode well for housing prices unless we see substantial increase in either population or inflation.
The sad fact is that the first time home buyer credit has substantially distorted the housing market and has hampered recovery. One could say that such meddling has set back recovery for nine months, or since last Fall when the tax credit began to artificially stimulate sales. Home prices will now stay under pressure as foreclosures continue to rise which will cause inventory to rise.
Commercial
Last week Fitch reported that defaults of commercial real estate backed mortgages (CMBS -- the CRE equivalent of residential mortgage backed securities) are increasing. They pointed to 8 properties held in CMBS portfolios are likely to default in August, each more than $20 million. They are interest only loans that were refinanced five years ago and now cannot get the financing to take out their existing lenders.
In August, Fitch expects 115 loans worth $1.3bn in balances to fall into special servicing and more to come through the rest of 2010, peaking in October at 181 loans at $2.1bn and totaling more than 772 loans worth $7.8bn. ...
With more commercial mortgage-backed securities (CMBS) loans on the verge of default this Fall, special servicers are being forced to accelerate them through the REO process to avoid building a shadow inventory similar to the one in residential.
Also Deutsche Bank reported:
... that the number of new transfers into special servicing will continue to outpace commercial loan workouts. But once properties are ready for liquidation, valuations on commercial real estate are missing the mark, according to Deutsche Bank. ...
The analysts projected an 18% delinquency rate on CMBS. Since the beginning of 2010, the balance of loans at least 90-days delinquent has increased every single month.
“The implications for special servicers are potentially dire,” according to the Deutsche Bank report. “If they wait too long to foreclose or restructure loans, the number of loans in their portfolios will continue to build, so even when they finally resolve an asset it might not even make a dent.”
Based on my own anecdotal evidence and a review of earnings reports of regional and local banks, it appears that lenders are starting to deal with bad CRE loans rather than just "extend and pretend":
Many community and regional banks have aggressively charged off loans, mostly in commercial and construction financing. Despite signs of stability in delinquencies, banks still have to reappraise properties that serve as collateral. And when appraisals come in lower, the bank has to write it down, whether or not the loan is delinquent which in turn, hurts capital.
Wells Fargo in its recent earnings release said:
Losses in the commercial portfolio continued to improve from the higher levels experienced last year, including a 10 percent linked quarter reduction in commercial real estate losses.
Reports from people I know who are active in CRE in the L.A. area also lead me to believe that lenders are starting to do deals on REO properties. While two years ago no deals were being made, today there is more opportunity and activity. Further there appears to be less "extend and pretend" as banks are less willing to accommodate defaulting borrowers; lending standards have tightened rather than loosened. They have about $500 billion in CRE loans maturing in the next couple years.
In my view, it is CRE that is critical to a recovery. We will need to see more positive signs, such as an increase in business loans, more CRE foreclosures, and a reduction in bank excess reserves, before we can say there is some kind of trend, but it could be that the CRE logjam is starting to break up. I do not expect any recovery of the CRE market any time soon because of the volume of debt maturing, but I am beginning to think that more defaults will be pushed into special servicing resulting in foreclosures. The result will be further downward pressure on CRE prices (they have already declined 24% since the peak in Fall 2007).
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As NAR has been promoting and we all know ALL real estate is local. So we may very well see recoveries in different places at different times. We have been seeing sales in the price range below $400,000 significantly up over the last few months since the credit was made available. This is our starter home price maximum for just outside Philadelphia. But little or no move up in the market with only a small number of sales in the highest price brackets although these also seem to have picked up a little.
The biggest problem I think for many right now is confidence that the market will at least remain stable. Buyers who are not taking advantage of the low rates may regret not taking the step to home ownership. with the threat of inflation ahead rates may very well rise and a window of opportunity may have closed to save a large amount of money on interest payments over the length of the loan.
Natasha Breckenridge real estate agent
I remember the time that bald fucker was pumping NYC RE 8 months after the crash. Real estate in NYC will be sliding for 5 years. They should do a 3 Stooges remake and he can star as Moe, Curly and Shemp.
Regarding Commercial RE there is a large shadow inventory not counted in vacancies due to underutilization of existing tenants....example in a 20 office space only 12 offices are being used by the tenant. If you factor this in, vacancy rates nationwide are somewhere between 40 and 50 percent.
CRE is all about rents.
Rents for new leases tend to be lower than those written five or ten years ago, particularly as leases used to be written with escalation clauses, meaning rents increased say 3% per year.
So at a shopping center I own my rent schedule would increase every year - except that every year one or two tenants leave or beg or demand a rent reduction. My tenants are in effect my business partners, no-one pays me when a store is vacant so no reasonable proposal is refused.
I also own a couple of single tenant NNN retail properties, meaning that the tenant pays all operating expenses and just sends me a check every month. If the tenant fails to pay me I will have a major problem because I would have trouble renting the building for half what he pays now.
In today's marketplace shadow rents (market rents if you like) tend to be lower than both rent schedule and rent collections, due to the inertia of long term leases.
Hey Dud,
The residential resale market is going down the shitter! If you think another bubble is on the way, you need to take another hit of "Orange Sunshine". All the data is overwhelming, w/ the easiest being the Case Shiller plots. U ain't seen noth'in yet baby. rr
Three comments:
1. My point is that the deleveraging process, which is necessary for recovery, has been thwarted by various federal policies. Now, some of those policies are either terminating or, in the case of CRE, banks seem to be taking the initiative to write down loans. In fact I suggest this will put more negative pressure on real estate. Until banks clear out the dead wood in their balance sheets, the economy will continue to stagnate.
2. The market will put a floor under CRE, but at what point? In my personal experience I have found that there are huge pools of capital in every part of the country waiting to "jump in." They are all looking for opportunities. When they perceive they can get cash flow from a property, they'll buy. Some already have but it depends on the local market, the lender, and lots of other factors.
3. It is easy to be negative, harder to spot opportunity. And there is always opportunity.
(1) I couldn't agree with you more on the CRE. "When they perceive they can cash flow". This is the key. This could take 20 years plus (Japan) if the banks don't come to grips with what they really have on their books. I haven't noticed the write downs you mention.
(2) As far as opportunity....This environment is ripe with opportunity for some of us. I purchased a single family home some 3 months ago in an A+ location at a price that was FAR less that I ever imagined I would pay. Cash will be King for sometime to come.
(3) There will always be uncertainty in business. Uncertainty is inherent in all business in good or bad times. The current opportunities that we face come with a higher degree of uncertainty than is usually seen in most times. My point is that America (as a whole, not just me) would begin to heal far quicker if the current regime better understood how their political decisions are impacting the uncertainty within the market place.
If anything, Americans should see clearly that this regime does not put the American peoples interest and well being first. Instead they have elected to put political philosophy first. The great thing is that we do live in AMERICA. America the GREAT and we will continue to be GREAT when the people of America choose to hand over America to Americans who will put Americans first, not a political belief, which I feel is in the makings.
From Dallas /FT Worth, Texas area: Straight from a builder:
Up to $300,000.00: Was good through April 2010. Sales have fallen off a cliff since April in the first time buyer market. My wife is with a VERY reputable builder doing approx. 200 closings/year. They are currently buttoning down the hatches. They actually grew over the last few years.
$300,000.00 to $750,000.00: We saw a spike in business through June. I sold and closed my last spec ($600,000.00) in May for a fair price. I'm not however seeing a lot of new sales beyond showing up in MLS.
$750,000.00 to $2,000,000.00: I would hate to have a home sitting on the ground at this price. They did however see a spike in the first half of the year as well.
I'm seeing prices in MLS continue to come down. Keep in mind that a lot of the sellers that are dropping their prices have a "challenged" property to begin with. It either is in a bad location or in need of a lot of repairs. Prices for A and A+ properties ($450,000.00 - $800,000.00) in good locations that have a lot of updates or that have been "nicely" remodeled are actually doing ok. Not GREAT, but OK considering.
Most people, like me, aren't expecting home sales to get back to their peak levels. All we need to happen is for "Washington" to tone things down and send out the word that this regime is not out to Socialize our system anymore than it already is and that it is in fact pro business. Something tells me that this won't happen.
This Obama regime needs to go folks. Tell everyone you know and especially everyone you don't know to get out and vote this year. Vote this regime out of power! This will not immediately fix the structural defects our Nation is facing, but it will be a GREAT starting point.
And, not that Obama is any great shakes, but I'm curious: who do you propose to replace him?
Ned that's a GREAT question. Maybe it's wishful thinking, but I really think that a more center, citizen minded leader will emerge prior to the next Presidential election. It's already happening in the lower ranks. I think politically speaking that the next few federal elections (and probably local & State elections as well) will go down in history as the "great firing".
Americans fell asleep at the wheel. We all thought everything was GREAT and the good old days would never end. All the while we were getting fleeced (and still are) by our very own leaders. I get the feeling Americans have woken up now that the shit has hit the fan.
So, who will it be?? I don't know. I also don't think it has to be a Republican.
Here's the skinny on what is going on:
The Government runs all banks and controls all commercial real estate. If deals are going through, it is because the Government has decided, on a case by case basis, that those deals--whether they be foreclosures, restructurings, whatever--will NOT reveal the true extent of decline in value, and so will not scare institutional investors.
As anyone knows who works, or knows someone who works, in a bank of any says, Federal agents are there all the time now, constantly monitoring and running everything.
Conclusion: statist economy, pure and simple.
What are they waiting for? The middle class to realize that the economy is dead.
No.
I am looking at commercial R/E deals around the country on behalf of potential investors, and I can guarantee you the real estate market is still weakening as of July 2010, due to a considerable oversupply and non-existent demand.
Still headed downward toward an eventual bottom...because tenancy/occupancy is also dropping across the country.
IYR up today. SPG w/in a few points of 52-weeks highs and within reasonable distance from pre-crisis stock levels - even after a round (or 2?) of secondary dilution.
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But here is probably the most significant statistic: home ownership rates have fallen to 66.9 from a high of 69.2% in 2004.
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Mitigating factor: NINJNA loans (no income, no job, no assets) allowed people who would normally rent to buy a house. This 'demographic' (to be polite) had a very high default rate. In 2007, over 50% of mortgages were granted to people with sub-prime credit ratings.
According to a Reuters' story [1], “S&P now projects defaults on subprime loans issued in 2005, 2006 and 2007 at 11 percent, 30 percent and 49 percent, respectively.” These losses represent a good fraction of the $4.7 trillion lent under the CRA.
[1] link: Reuters, S&P raises loss expectations for risky US mortgages, July 6, 2009,
Link: http://www.reuters.com/article/idUSN0626699620090706
mortgage IRs have come down enuf to spur a mini round of "no Cost" refis. the $250k or $500k tax free home sale is gonna be one of the best after-tax investments out there at some point. If you can value real estate, buying, creating some value and selling after a few years of living in the home is gonna work at some point. We are not there yet IMO.
I live in Austin, TX (a supposed strong economic part of the US). Looking around town there are empty offices and industrial parks everywhere. Seeing this and the high unemployment rate (folks 8 % just isn't that bad, we swear) in the Lone Star state tells me that these buildings are going to remain empty for a LONG time. Most of these buildings were built within the last 3 years during the height of prices. Some bank is going to eat it, how are they not?
The extend and pretend can go on for a lot longer than you think. Look for example, at the 78701 and 78703 zip codes. Pricing pressure has barely grazed those areas in either RRE or CRE over the past 3-4 years, compared to outlying areas like Lakeway. There are a lot of factors that favor continued inflated real estate values in Austin's central core (not sure about the outlying areas) for the forseeable future:
Put all these factors (and then some) together, and I don't see a real correction in Austin real estate valuations unless an astonishing number of failures in different types of credit markets simultaneously black swan the picture.
Easy. Sell the loan to the Government and let the taxpayers eat it.
Yes, that is exactly what will happen.
Be long the companies that make the dollar bill printing
presses. R/E is fucked long term generally. Especially,
the way states, cities will tax to keep services running.
There are many places property taxes can't be raised without a vote. The tax base has grown on assessed value appreciation combined with additional units added.
So they remain fucked.
CRE is not recovering. You can not have a recovery with declining net wages and income adjusted for inflation and high unemployment which leads to slowing retail sales. There is also a vast amount of industrial space idle, condominium space (Counted as CRE until owner-ocucpied/sold), hotels, and office space which is not moving nor being leased out. The banks are looking to offload these lemons as they get them but there is no bid. Add in the difficulty of rolling over the 2 year and 5 year packages hitting this year through next and we're talking about a whole lot of square feet hitting the market in the weeks and months ahead. If you're in a region with an vacancy rate on office/industrial/warehousing of less than 20%, you're in a 'strong' part of the country economically. Those are few and far between now.
Correct; only those coastal, big money cities will fare reasonably well. The CRE storm is coming with lots of money to be wiped out. But we're talking hundreds of billions, not trillions.
Residential real estate just found a new bottom, and it won't be long before you hear noise about the tax credit again.
"In my view, it is CRE that is critical to a recovery."
A rise in CRE will be an indicator of recovery.
Notice to the Regime: "Artificial stimulation of CRE will do nothing at all to create or even stimulate a recovery.
Without leverage it's done. No CMBS buyers,
No recovery.
Jim Cramer, your illustrious advertiser, has called the bottom in Real Estate about 7 times in the past 2 years. Call me in 2 or 3 more years.
Mr. Booyah must have ignored the charts on SoCal residential. Ground zero for housing price implosion....with the worst yet to come in still-bubbled high end areas.
There are 141,000 homes distressed and 83,000 listed on the MLS. Almost 2 to 1 distressed are dead money sitting on bank balance sheets. Just waiting to move through the chute. A good chart on Doctor Bubble.
www.doctorhousingbubble.com
that asswipe called the end of the real estate slump in june 2009.
Being wrong is obviously not a criterion for being a celebrity on the telly.
The list of similar people is long and famous.
I wonder how much money he has lost for people who follow him?
As prices continue to collapse, this will eventually be an epic opportunity for businesses that use real estate, to reverse the cycle of divestiture, and towards acquisition, fully with cash.
By cutting out the needless middlemen (the banks, the management firms, the external investors), businesses stand to save many billions and improve their profitability commensurately, while building their balance sheets with assets on the cheap.
Does anyone honestly believe the orgy of corporate dishoarding of real estate over the past few decades was an accident? Of course not. They were selling into inflated valuations. Another 30-60% down, and shareholders of RE-using businesses will once again be king.
Everything works in cycles. The only time to buy real estate is at the bottom, which is coming to a piece of Earth near you, soon. The great global inflationary real estate bank fraud of 1984-2010 is just about finished. The deflationary phase will last as long as it takes to purge the funny money out and return to 1984 +/- values.
Nope, sorry......this is just another saturated, destroyed market that will never rebound, just like the NASDAQ. CRE will actually be worse off due to the decline in population we will experience when the 78 million baby boomers decide to kick it within the next 20 years.
Correct. And the mini-malls will be turned into flea markets and storage units.
More good stuff from Dr. Housing Bubble:
Banks cherry picking individual foreclosures that show up on the MLS in Culver City and Pasadena with proof: Southern California lenders pushing out properties in Culver City with an average price tag of $300,000. Median sale price for city is $600,000. Shadow inventory average price is $443,000 with loans at an average of $552,000. 141,000 homes in Southern California are distressed yet MLS only reflects 83,000 total properties.
Yes, demographics rule.
But... most businesses purchase properties for a reason, not just as investments. They have to have a reason, such as business expansion. Where is expansion going to come from?
I suppose that old horse traders we licking their lips as horse prices dropped during the dawn of the automobile. Great bargains to be had!
Don't need expansion. Businesses can purchase the properties they currently occupy and are leasing, when the lessors themselves go into bankruptcy, or are otherwise forced to unload properties.
Once this cycle is over, the word, "REIT" (or "CREIT") will not exist in the investment vocabulary, IMHO. And nobody will dream of actually owning real estate as a free-standing business.
Cars replaced horses - what replaces real estate?
Air rights.
I think OWNING real estate will be what goes. It will be rented/ leased instead of owning. Things are now too unstable for private home ownership & business can be more flexible if they don't own facilities.
But when everything is rented, who owns? It seems to me a form of feudalism beckoning. Perhaps our oligarchs like the idea, once they've cleaned out the money from those who were lured into buying something they could not afford. It wasn't too long ago that the notion was you could vote if you owned property - renters need not apply.
I think ownership will increase once this mess is all said and done. Eventually the entities that bought property to rent out will go bankrupt, on both the residential, and commercial sides of things. Everyone will needs to own property will own property because it will be so cheap.
Think of computers a few decades ago. They cost tens of thousands of dollars, and were generally leased or bought with financing. Today, nobody leases computers or buys them on financing, because they're so dirt cheap.
Are you saying then that more properties will be in fewer hands? Who will we be renting from? I mean, they still have to be owned by someone, even if that someone isn't john q public.
When Ardent Spirit's thoughts are widely shared and embraced by the masses, we will be near a real estate bottom.
Bingo. Demographics in the US confirm falling demand
to own homes.
On Commercial, the CMBS market is so
dead it would take at least 2 years of full recovery to
restore jobs and confidence to fill what we have.
Without banks buying CMBS, that will finally start the
wave of defaults we all knew was coming.
The same thing that replaces all those laid-off employees - nothing. That's the problem. No need for office/retail/manufacturing space if you have no need (for whatever reason - online business, harder working staff, longer hours, no retail sales, lean manufacturing and JIT warehousing) for people or stuff to fill it.