Real estate

A reader wrote me complaining about the nonsensical bubble blowing in multi-family properties before the last bubble was even finished bursting. I feel his pain. Let’s run through a quick pictorial of how I see the macro climate for real estate as of right now…Everybody is getting squeezed, businesses, consumers, homeowners… Everybody!

A regular commentator on BoomBustBlog has been attempting to make the case for a housing recovery based upon rising employment metrics. One of his primary arguments was rising hourly earnings. I thought I would take this time to point out that average hourly earnings can rise due to the fact that less people are working. The aggregate employment in the US has literally fell off of a cliff. Since you know that I love pictures, let’s do this graphically…

Following leaked (and confirmed) news that in March Chinese inflation came at 5.4%, the PBoC has once again decided to intervene, enacting its fourth Reserve Requirement Ratio hike of 2011. From Bloomberg: "Reserve ratios will increase a half point from April 21, the People’s Bank of China said on its website today. The move, taking the requirement to 20.5 percent for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates. “Tightening will continue until there are signs that inflation has been effectively brought under control,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said before today’s announcement. A surge in foreign-exchange reserves to $3 trillion last month and rebounding lending and money-supply growth have highlighted overheating risks in the fastest-growing major economy. Gross domestic product rose 9.7 percent in the first quarter from a year earlier and inflation accelerated to 5.4 percent, the most since July 2008, the statistics bureau said April 15.  Inflation has exceeded the government’s 2011 target of 4 percent each month so far this year. The increase in reserve requirements was the fourth this year." Naturally, this also means that the plunge in real estate ASPs, confirmed everywhere, but most pronounced in the capital, is set to continue. This, according to JPM's Jing Ulrich, means that with real estate no longer an attractive asset bubble, the "mass affluent" Chinese will be forced to invest in gold and alternative property investments. From Dow Jones: This group "has seen its investment options sharply affected by restrictive housing measures" such as property taxes, increases in down-payment requirements, and raised interest rates, "since these households possess sufficient capital to purchase
investment property, but do not have the same degree of access to
investment vehicles such as private equity funds and retail property" as
the super-rich, she says, adding that equities, gold and alternative
property investments are therefore the key beneficiaries."

Two days ago we indicated that something quite material could be happening in the Chinese real estate market. Quoting from Market News, we reported that "Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission." And while many dismissed these news as merely a property specific ASP rotation, what followed was a downgrade of the Chinese property sector by Moody's citing an expectation of "credit conditions to worsen in next 12-18 months for developers" at which point we decided to dig in deeper. It appears not all is as good as the apologists would like to claim. Because while the average selling price in Beijing plunged by 34%, and that in Hangzhou by 26%, the drop was very substantial and rather pervasive pretty much everywhere else as well. From Citi's Oscar Choi: "ASP- down 7% MoM in March, biggest monthly drop in the past five years. In January and February, ASP in most key cities still maintained an upward trend. But entering March, ASP achieved in 18 key cities dropped by 7% MoM, and Beijing’s and Hangzhou’s ASP achieved were down 34% MoM, Hangzhou down 26% MoM." Well, it took about a year for the unbelievers (and infinite for Ben Bernanke) to realize that contrary to expectations, subprime was not contained. It will probably take the China apologists the same amount of time to agree that the biggest drop in real estate prices in 5 Years and a 7% countrywide plunge is the beginning of the end for the bubble. And while it is not so much the question of what properties make up the average ASP, or what the high-low priced composition is, the question is what happens next now that highly leveraged speculators are unable to flip properties on a monthly basis, and as a result have to create other bubbles elsewhere.

Could the Chinese monetary tightening be working? The Chinese National Bureau of Statistics has released its latest food price update for the period April 1-10, which shows that while most foods continue to rise modestly, several food products have plunged particularly cucumbers and rapes, both falling 8.8%, and kidney beans down 6.3%. Yet this is nothing compared to what is happening to Chinese real estate: it appears Chanos' long anticipated property bubble may have popped... but the supersonic boom is so loud that nobody has heard it yet.

Over two years ago, when discussing the absolutely top ticked purchase of one 666 Fifth Avenue by under-30 real estate mogul extraordinaire, NY Observer owner and now Donald Trump son in law, Jared Kushner, we said: "Looks like the commercial mortgage apocalypse is about to claim its next victim, this time in the form of the appropriately numbered 666 Fifth Avenue building, home to such previously flourishing tenants as Citi Private Wealth Management...the building's DSCR has fallen to an abysmal 0.69. Even when taking into account the $98 million (or much less) reserve fund the building has set aside to cover rent shortfalls, one can assume it won't be long before the 666 insignia again prominently graces the roof, especially since it would have to replace a laughable Citi sign." Ah, the good old days of 2009, when news mattered, data actually flowed through models, hedge funds traded on constant inside information, markets actually dipped, POMO was a clown, and central planning was merely a drop of unrecycled ink in Ben Shalom Mugabe's toner cartridge. But we digress. As usual Zero Hedge may have been just a little bit ahead of the curve, though still better late in our prediction than never. With little surprise we read in the WSJ, that after an artificial delay of over 2 years, the inevitable is about to catch up with reality, confirming that no amount of Vissarionovichian market manipulation can make up for the complete absence of cash flows. "As of March, the aluminum-panel-clad skyscraper was about $3.5 million-a-month short on debt service, say people familiar with the matter. Only $10 million remained in a reserve fund used to service the property's $1.22 billion mortgage, which is tied to the office portion of the building. Its revenues are only one-fourth the amount forecast in 2007." Next steps: technical and/or full blown default.

Today the Fed released its quarterly Flow of Funds report which is traditionally used to keep track of household net worth and general leverage. While the far more important use of this data, namely tracking shadow banking data is never in the headlines (we will present an updated version later today), the media is more than happy to present any simplistic information without much thought. To be sure, based on nothing but a jump in the stock market, household net worth increased by $2.1 trillion to $56.8 trillion. This increase was due entirely to a change in the value of Corporate Stocks held by the public ($7.6 trillion to $8.5 trillion), Pension Funds ($12.3 trillion to $13 trillion) and Mutual Funds ($4.4 trillion to $4.7 trillion), for a total change of $2 trillion. What did not go up were tangible assets such as housing, which after reversing its plunge from an all time high of $25 trillion in Q4 2006, and hitting a low of $18.5 trillion in Q1 2009, has now officially double dipped, dropping to $18.2 trillion in Q4 2010: the lowest in over 6 years. In other words, the wealth effect is working, but only as long as the Fed can continue to keep the market high. Other real assets are losing value fast. And while consumers continue to deleverage, and non-financial businesses are just barely adding new debt ($11.1 trillion in Q4 2010, a $100 billion increase Q/Q), the government, both federal and state and local, continue to binge like a drunken sailor on debt, which combined for the two increased to an all time record of $11.9 trillion. So while USA Today may rejoice at its simplistic interpretation that we are all getting richer even as real assets decline in value, UBS' Andy Lees thinks that the household leverage trends will ultimately result in stagflation.

Until the mass of overbuilt homes and commercial properties are liquidated, credit will remain tight and unemployment will remain high. What you thought you knew about the credit situation is wrong.

The Truth! The Truth! YOU CAN'T HANDLE THE TRUTH!!!

Oh, I just love that scene. Doesn't Jack Nicholson deliver?

A significant extension to my 3 minute Q&A on CNBC's Fast Money show yesterday that, in my opinion, provides irrefutable evidence that commercial real estate is about to enter a cyclical bear market. Then again, what do I know...

What!!!???? You didn't get the memo?

I'm putting together what I see as solutions for the many pricing and valuation problems that I see coming down the pike. If you think real asset markets are a little soft now, wait until rates are controlled more by market forces than by concerted central planning cartels.

We have already seen Chinese ghost cities, rickety buildings, and a construction spree that makes our own unionized labor force seem positive antiquated. Time to add empty malls to the list. The latest confirmed sighting of Chanos' "treadmill to hell" China real estate bubble thesis comes from Bloomberg's Paul Allen who reports from Dongguan, China on the New South China Mall, which has remained mostly vacant since it opened in 2005. Allen tours the South China Mall, originally conceived as the world's largest mall, and finds retail space that has been largely vacant since 2005.  Allen reports, "The reality at South China Mall is somewhat different: shuttered shops, unfinished, never occupied by a single tenant. The few retailers that are here have favorable leases, but little profit."  Allen also states that despite obvious problems, the mall’s owners plan to expand to more than one million square meters of retail and residential space will be available.