Real estate

An amusing article in the WSJ today discusses the newfound sweeping hope across the REIT space. The hope, by the way, has to do with the recent stock offerings by SPG, AMB and KIM (the last one Zero Hedge had quite a few things to say about). WSJ provides a good assessment of the situation:

Vacancies are still zooming up and property values are still crashing down.

As the world relishes in its self-reinforcing view that all is somehow well, there are some points that deserve to be pointed out:

Interesting report out of Deutsche Bank over the weekend, presenting hypothetical upcoming current-to-trough declines in real estate prices, based on DB's proprietary Home Price Appreciation (HPA) model outlook for the top 100 Metropolitan Statistical Areas (MSAs). While the full report should be read in its entirety, a good summary is the chart below which demonstrates (in the right most column) the worst-case modelled downside to home prices in the 20 worst U.S. MSAs.

Unlike the administration, which deals in hope and promises, Zero Hedge believes that facts and empirical evidence tend to have a more justifiable reflection in securities prices. As such, I present a snapshot of the factual deterioration across the entire securitized CRE landscape, and the sad conclusion that with each passing day the inherent cash generating capability of these "assets" is becoming worse and worse. I hope to make this into a recurring piece every week.

At first opportunity (but not for a few days) I will write an extended post on the cash flow dynamics of both CRE whole loans and CMBS. There seems to be too much confusion on the topic, which is at the heart of the "is the price fair/is it not fair" argument for the toxic asset bid/offer disconnect in the PPIP. Below is a good chart I tracked down which shows the most recent prices on sub-AAA CMBX tranches, and how this flows through in terms of spreads, loss rates, loss timings, average deal losses and a market-to-base case (flat loss assumption) ratio.

At first opportunity (but not for a few days) I will write an extended post on the cash flow dynamics of both CRE whole loans and CMBS. There seems to be too much confusion on the topic, which is at the heart of the "is the price fair/is it not fair" argument for the toxic asset bid/offer disconnect in the PPIP. Below is a good chart I tracked down which shows the most recent prices on sub-AAA CMBX tranches, and how this flows through in terms of spreads, loss rates, loss timings, average deal losses and a market-to-base case (flat loss assumption) ratio.

The Moody's/REAL Commercial Property Price Index posted a 5.5% decline from December, representing the largest drop in its history. Price are now down 19.1% from a year ago and 15.4% lower than two years ago.

New York, March 19, 2009 -- Commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices (CPPI) decreased in January by 5.5% from the previous month. The January decline was the largest in the history of the index, which has followed commercial real estate prices since December 2000.

Presented without comment

Thanks to FT Alphaville for catching these bad boy charts. The article discusses the formation of serial bubbles in housing and equities in most countries except in Japan, where the bubbles were synchronized. And based on a historical ratio of house prices to stock market levels, either real estate still has a long way to drop or markets are due for a significant rally; as to which is more likely, reference any day's headlines.