September 30, 2009

Case Shiller Real Estate Trends And More

This report released yesterday, confirms that the housing markets are in a firming process. Hardly a recovery at this point. We are still in the numbers are bad, but
not as bad stage. Typical of the early and therefore fragile stages of a housing recovery. Case Shiller reports that home prices have increased for the third month and that the decline in prices continues to shrink. No bottom yet and we can do this for quite a while before we see an end to this. Never the less, this is good news and the 20 MSA composite index shows improvement. The year over year change of home price has declined 13.3%, less that the 15.4% decline last year. We may be seeing the emergence of a trend towards higher home prices.

In any market as complex as real estate there are always trends and counter trends. As the economy continues to unfold, some of these trends will be strengthened and others weakened. Why Its never a straight line and so hard to predict direction.

In Our Favor
Prevailing Positive trends

We have an increasingly strong economy. As someone recently said, we have the turn
signal on but havent yet turned the corner.
  1. Real Estate: The real estate sector is looking better.
  2. The stock market is actually bullish. The Dow has gone from a annual low of to 6440 to over 9500 today
  3. Manufacturing: National figures show factory output has actually expanded. The ISM index is over 50 a positive number indicating manufacturing is growing and expanding.
  4. TARP: The Obama administration is about to put a lot of money to correct some of the excesses still holding the financial system back from functioning properly. The toxic asset program is launching one year after Congress approved the $700 billion financial rescue legislation for Troubled Assets Relief Program
  5. Treasury Department: Treasury has been working with private groups to build investment funds, combining public and private money to buy toxic paper still on the books. Ive read that Treasury is committing 2.5 billion is a dollar for dollar match for funds raised by private firms, eventually reaching 40 billion dollars in new investment money for bad paper.
  6. REITS are raising money as we approach a real bottom in the commercial and mortgage sectors. New stock issues have raised between 15-20 billion dollars. The REIT indexes are up handsomely, in anticipation of bargain prices when the dust settles on commercial property now feeling the pain of a great recession.
Prevailing Counter Trends
  1. Long Road Back: By historical standards this collapse is deep. The chart to the right compares the red bubble of today to the last bubble of the 1980-1990s . It took almost 97 months for home prices to turn positive and this collapse is much larger
  2. Homes Foreclosure: Reatlty Trac reports that there is still ample supply in the foreclosure pipeline. "record 138,224 properties entered the foreclosure process in August when they were subjected to notices of default or lis pendens, up 3 percent from July and a 16 percent increase from a year ago. The number of properties subjected to auction notices in August, 144,113, was also a new record, rising 4 percent from July and 53 percent from a year ago."
  3. Option ARMs: Option ARM mortgages will begin to readjust, slamming borrowers with higher monthly mortgage payments. Analysts say that could unleash the next big wave of foreclosures
  4. Commercial Property: All of those developers and owners of office buildings and big apartment complexes that have bought or built in the last five years, will be looking to refinance their loans. Some commercial indexes show property off 50% nationally. The banks will be hard pressed to refinance and many properties will be significantly underwater. Why the REITs have raised money is in expectation of foreclosures as owners and developers walk away from loans they know now will never recoup the initial investment
  5. Federal Tax Credit: The Federal tax credit and the phase out of treasury bond purchases will put some pressure on the housing markets.
  6. Tighter Loan Standards: FHA has joined the banks in tightening up their standards. This coupled with the expectation of higher interest rates because the Treasury will phase out bond purchases. Its a test to see if the bond markets are healthy enough to stand on their own.
Clearly its still a long road complete with speed bumps. I think the best take away
now is that its a mixed bag...we have good news to talk about too.

Thanks for Reading

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Commercial Real Estate: The REITS Will Mop It Up
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