Monday, January 25, 2010

Real estate bottoming?

This chart compares the Case Shiller index of residential home prices to Moody's Commercial Property Price Index. Both are elaborate indices, and the Moody's series uses methodology developed at MIT. Both use data on repeat sales for a relatively large sampling of properties.

Note that the rise in commercial real estate lagged the rise in residential. CRE rose a bit less than residential during the heydays, but it has declined by much more. The commercial real estate market has been crushed. Both indices now are showing signs of having bottomed. It's too early to call a bottom in CRE, but taken in the context of the sheer magnitude of the decline (-43% from the Oct. '07 high), the November uptick in the Moody's index does provide some tentative support for a bottoming hypothesis. A bottom in real estate is not an unrealistic expectation, in any event, given the many signs of improving economic fundamentals, rising commodity prices, very low interest rates, and the significant rise in the prices of commercial real estate-backed securities.

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