Thursday, August 26, 2010

CRE update

I included this chart in yesterday's post (20 bullish charts), only to discover today that I had neglected to update the chart for the June release of the commercial property index, which declined 4%. I don't think that changes the interpretation of the chart however. My eyeball says that commercial and residential property prices have been flat to slightly up for the past year, and that's encouraging. You need stabilization and consolidation, and that's what we are seeing.

This would be a good place to note that the prices of commercial real estate-backed securities (CMBS) have been trending higher for the past several months. This is happening because property prices have stabilized at a time when the market was expecting further declines. In other words, defaults have been lower than expected.


Benjamin Cole said...

It is interesting to ponder the bust in commercial property values. No Fannie, No Freddie, and it is still a bust. It is pretty much a free market.

I still think Fannie and Freddie should be phased out, along with home mortgage interest tax deduction.

Still, this chart suggests the free market can manufacture collapses on its own, w/o federal help. Heavily leveraged collapses.

Anyone watching money pour into B commercial properties in SoCal before the bust was dubious. So many institutional buyers were buying properties that would only pencil out after a rehab and much higher rents were assumed.

I suspect the property boom of the Bush years reflects the global abundance of capital. We may see more busts from tome to time, as capital pours into sectors that promise returns.

Leverage will exaggerate busts, and then possibly pose threats to our financial systems. That is precisely what happened in the last years of the Bush watch.

I am not sure what regs, if any, this calls for. You can be sure in any property boom investors will leverage to the max--real estate guys have confidence the way Saudi have sand and oil.

John said...

I listened to the Toll Bros (TOL) conference call this AM. One of the interesting things I heard was during the Q&A Bob Toll praised the analyst from Citi who had pointed out that the housing sales calculation is based on a sample of the building permit holders that excludes signed contracts for which permits have yet to be taken out. The Citi guy obviously sees it as an anomoly and Bob Toll (a very old head in the game) agrees. My takaway from it is that maybe the housing sales number was underestimated by the release.

One other takaway was that since Toll Bros is a high end builder (average sales price ~$565,000) their numbers were unaffected by the recently expired tax credit. Sales since May have been down but were not getting worse in July. Bob Toll says people are afraid and are deferring decisions. This will result in pent-up demand that will release as soon as the current malaise runs its course.

One last thing: Cancellations were 6.2%, which have been improving sequentially for five quarters and are now very much in line with normal times. This does not mean we are IN normal times, only that maybe things are slowly getting better, not worse.

John said...


Phasing out Fannie & Freddie as well as the mortgage interest deduction is a reasonable position. I'm sure it will be debated vigorously in the new Congress. I would not be surprised if big changes occur.

Benjamin Cole said...


Phase out the home mortgage interest tax deduction?

That'll be the day.

Listen, in this country, we believe in free enterprise and the home mortgage interest tax deduction.

That's bedrock.

In defense of those who want to retain the home mortgage interest tax deduction, we have had people who put their life savings into a house, and that was the ground rule--the mortgage payments were deductible. Now we change the ground rules?

Even luxe homebuilders might get whacked.

Goes to show the unintended consequences you get when you grant tax deductions of any kind.

brodero said...

For interesting data on housing...

American Housing Survey came out last week...this is done every two years....this data is for 2009
so it emcompasses recent prices...

Bill said...


Do you think with all the baby boomers starting to retire over the next seveal years stocks will necessarily be pressured lower since the mantra of most "financial planners" is "if you need the money over the next five years, don't put your money in stocks." I wonder if this is starting to happen now.

John said...

I would recommend to the readers of this blog an IBD article highlighting Paul Otellini (CEO Intel) at the Technology Policy Institute's Aspen forum.

My key takaway: Unless government policies change, and fast, 'the next big thing will not be invented here'.

Men like Otellini are among the brightest of the bright and see far. He unloads on the current government..."this group does not understand what it takes to create jobs.."

Access article via realclearmarkets

John said...


I think it is and has been going on for awhile. CNBC had a headline showing individual investor sentiment at credit crisis lows even though the economy and financial system is not nearly as stressed. Take a look at a price chart of Charles Schawb (SCHW). Its approaching the '09 lows. Zero returns in MM funds and the abandonment of the market by individual investors is the perfect storm for a once high flying company.

My question for these folks approaching retirement is where are they going to get income? The end-of-the-world crowd (and boy is it a crowd) have taken away yields in treasuries, high grade bonds, and even low grade bond yields are disappearing.

My answer? Very very high quality common stocks with long histories of paying and raising dividends. Examples of possibilities, Verizon (VZ) yield 6% plus. Chevron (CHV) yield 4%. Pepsi and Coke fit as well. Also there are ETFs that comprise large cap stocks with divvys. IMO this is the cheapest remaining asset class with income. It won't stay that way.

Benjamin Cole said...


On "invented here."

Well, this one gets my gander up. First, Americans invent things like crazy, and we have an incredible establishment now of venture capital firms.

We will invent and commercialize, you betcha. A Bush or an Obama administration is not going to change that. No pundit sniveling about Obama is going to change a well-established and smart set of VC funds. The idea of that fries my fanny.

However, the world is getting educated too, and market reforms are penetrating Europe and China. They will invent too.

Good, I say.

No, the monopoly days are over. The world is catching up.

The good news is that will mean higher incomes for everybody.

Benjamin Cole said...


Some high yield stocks and commentary:

Investment adviser Geoff Considine of Boulder, Colo.-based Quantext, for instance, recently wrote about a high-yield portfolio consisting of nine stocks and one bond fund. He called it "The Ultimate Income Portfolio." Its holdings were five electric utility companies, two telephone companies, two pharmaceutical companies and one high-yield bond fund. The average yield for the portfolio was a healthy 6.1 percent - a yield that would cover required minimum distributions from retirement accounts up to age 83.
He also found that while returns from the portfolio were essentially unrelated to interest rate changes, the volatility risk was about the same as the risk in long- maturity government bonds. In other words, the portfolio provided half again as much yield as the 4 percent of long-term bonds for about the same level of risk.
The stocks in his high-yield portfolio are the electric utilities Con Ed (ED, 5.1 percent yield), Dominion (D, 4.4 percent yield), Duke (DUK, 5.7 percent yield), Pinnacle West (PNW, 5.5 percent yield) and Xcel (XEL, 4.5 percent yield); telecommunications companies AT&T (T, 6.5 percent yield) and Verizon (VZ, 6.6 percent yield); and pharmaceutical companies Glaxo (GSK, 5.2 percent yield) and Bristol Myers (BMY, 5.1 percent yield). The high-yield bond fund is a closed-end fund, BlackRock High Yield Bond Fund (COY, 8.9 percent yield).

Interesting, in that it appears you can get greater yield for less risk than in bonds...and maybe those yields will climb in years ahead.

Get paid to wait, as I say.

Public Library said...


As for Toll Brothers, when your only tool is a hammer, every problem looks like a nail.

Re-retirement. Baby boomer's will need to liquidate stocks and sell their homes to afford retirement at this point.

And as everyone knows, social security/medicare/medicaid reform (that means cuts) are in the pipeline.

The next decade will not be a good one for retirees...