Monday, October 24, 2011

Real estate update


Moody's today reported that their August index of commercial property prices rose 2.5% from July. As the chart above shows, that means commercial property prices have been flat for the past two years.


Bloomberg's index of home builders' stocks shows that the fears coming out of Europe scared the bejeesus out of the real estate and construction market, driving prices down to the lowest levels since March 2009. Markets were braced for some really awful news on the U.S. economy which has failed to materialize. Instead of collapsing real estate prices, we see flat prices.

Once again, I emphasize that the recent increases in the prices of risky assets are not being driven by optimism, but rather by a decline in pessimism.

UPDATE: I've replaced the first chart with an updated version to include the latest Case Shiller home price data (through August). The net result is substantially the same: prices are flat.

8 comments:

Benjamin said...

Excellent insights and wrap-up by Scott Grannis.

BTW---if you subscribe to the "Fannie and Freddie did it" theory of our recent financial collapse, how to explain the nearly identical (except worse) collapse in commercial real estate, which is pretty much a free market, much of it controlled by institutions?

In fact, the across-the-board collapse of real estate values, and concurrent sudden and dramatic contraction in overall economic activity, speaks of a general negative force---almost certainly, a too-rapid contraction of the money supply engineered by a Fed fixated on fighting inflation,, instead of stewarding growth.

As usual, partisan fevers and ideological blinders prevent most people from seeing this obvious case (commodities collapsed at the same time, btw).

The solution is not deficit spending, but an aggressive, sustained, pro-growth monetary policy.

Japan tried deficit spending and zero interest rates. They have been trying that for 20 years, and all they have to show for it is deflation and gloom.

Dr William J McKibbin said...

The values of many commercial properties are increasing simply because their replacement value is increasing -- like it or not, the cost of "nailing up" a new building is rising across the country -- building supplies are expensive, as is labor and transportation of both -- the value of commerical real estate is closer to its intrinsic value (land + construction) than residential real estate -- I would call the value increases in commercial properties a sign of the times -- construction costs are going up...

Benjamin said...

Dr. McKibbin:

Maybe so, but downtown office towers in Los Angeles sell for one-half of what they sold for in the mid-1980s---in nominal dollars.

This is the strangest inflation I have ever seen, where many goods and services get cheaper, such as office rents, dental cleanings, $1 burgers etc.

Dr William J McKibbin said...

Hi Benjamin, I was referring to increases from the previous lows -- and yes, the cost of construction is actually increasing rather quickly -- buying basic building materials is not cheap these days -- the labor is costly as well -- I would agree that the inflated speculatived highs of previous years have hit commercial properties hard -- but, at some point we are at the floor and the price of commercial real estate will increase -- however, the increases I am seeing are not related to speculative bidding, but from new construction costs, which are enormous right now...

Haley McAdams said...

I am actually one of those 67% who still pays for rent but I am saving up to have a home of my own soon too. I definitely would agree that it would be one of the best long term investments out there. Although cars are more fun, I'd still like to have a house of my own first.

Haley
New York Real Estate CE

Dave Velasco said...

Well not all people on the real estate course can actually straight ahead on getting their own homes. Having rent houses can surely be a first good step to do than buying right away.

jane said...

It was strangely bizarre to be there at the scene of such an incident, with it also being your neighbourhood and local hang-out. It was ultimately a story with a not-so-great ending but it did make me sit back and appreciate the important things in life, no matter how big or small. Hope the story wasn't too depressing to read on this blog, it just seemed important to post about it.
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Marcus said...

Updates of real estate market provide essential information to people who are involved in this business either directly or indirectly.In order to save their money from loss.