Monday, April 19, 2010

Real estate prices still appear to have bottomed

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.


alstry said...

If you loaned a bunch of money to homeless people in the worst slums of Detroit, you would see stabization in housing and probably rising commercial real estate pricing in those neighborhoods.

We now know that the banks we just bailed out had no problem manufaturing and selling our retirement system worthless toxic CDOs, and taking the citizens hard earned retirement cash. As they were doing it, real estate prices were soaring.

Last year, government and Wall Street borrowed about $4 trillion dollars, primarily from our retirement and investment accounts and exchanged a bunch of debt we will have to wait and see if the instruments they replaced our cash with will perform in a manner similar to the CDO they sold us a few years earlier?

Benjamin Cole said...

Happily enough, it seem slike the bottom was passed, and we are recovering. There is a lot of distressed real estate capital moving into position.
This decline in propeorty values is powerfully deflationary.
The cost of operating a business is down. The cost of hiring employees (who can buy cheap houses or rent more cheaply) is down.
This powerful downdraft in costs is aided by continuing increases in worker productivity.
Oh, there is bad news--health care for one. Maybe taxes.
But overall, prices should be limp for a long time.

Unknown said...

These look like typical bear flags.
Bounces are much too weak. If I were to trade them, I would look for a proper short entry.

John said...


What, specificly, would you short?

John said...


I would also be interested to know if your inclination to sell short is short, intermediate, or long term. Nothing wrong with your idea. I'm just curious.

An aside, the Bank of Canada has revised its growth forcasts upward this morning and the Loonie is up. My Canadian friends are pleased, I'm sure.

Scott Grannis said...

Christian: I would say that your observation is perfectly reasonable if the subject were equities. But in the world of housing and construction, you have a physical inventory problem that must be dealt with (more homes than households) and that requires time in addition to lower prices. Current construction rates are way below the rate of new household formation, so we are approaching a situation where there will be such a shortage of homes that prices could find some very solid support.

Paul said...

What happens next month when the homebuyer's credit expires?

John said...


IMO there may be a brief falloff in demand but the demand for shelter is relentless. As Scott said, housing construction is running well below new family formation. The inventory is slowly being absorbed.

In any event, investors in Lowes (LOW) and Home Depot (HD) are NOT worried about it. Both stocks are making new highs this morning.

Disclosure: I am long small positions in both LOW and HD.

Scott Grannis said...

Paul: as a contrarian I am very sensitive to the prevailing mood of the market, and my sense is that the market, like you, is full of worries about what might go wrong tomorrow. I hear almost no one asking questions like "what happens if the homebuyer's credit expires and banks increase foreclosure sales and yet home prices keep rising?"