Monday, April 19, 2010
The March value of Moody's Commercial Property Index fell, but in the great scheme of things I don't see this as significant. As this chart shows, prices of residential and commercial real estate have already experienced huge declines (29% and 42% respectively) in recent years. The market has been working very hard for the past four years to reduce the inventory overhang of homes and commercial space by slashing prices and slowing the pace of new construction. It appears to be working.
Commercial real estate has been lagging the moves in residential real estate, and residential prices bottom over a year ago, so it's reasonable to assume that commercial property prices are now in a bottoming process.
As evidence of a bottom in real estate prices accumulates, this paints a very optimistic picture for the economy and financial markets going forward. Since real estate figures importantly as collateral behind all sorts of debt obligations, reducing the likelihood of future price declines adds significantly to the value of collateralized debt. And this, in turn, provides substantial support to the value of all institutions that carry significant real-estate-backed assets on their balance sheets.
As I've been noting for quite some time, the prices of securities backed by homes and commercial real estate loans have risen significant in the past 6-9 months. There are just too many signs of a bottom here to ignore.
Posted by Scott Grannis at 1:46 PM