Tuesday, December 27, 2011

Real estate update

This is a slow week with not much happening, so I'm just going to post some updated charts and brief commentary.

The October Case Shiller home price index was a bit weaker than expected, and it has hit a new post-recession low. The Radar Logic home price index continues to track the Case Shiller index pretty tightly, and it confirms that housing prices on average are at a new post-recession low. Prices have been drifting slowly lower since mid-2010.

On a longer time scale, using prices only from the top 10 metropolitan areas and adjusting for inflation, the downward drift in prices in recent years is a bit more pronounced, but it's nothing at all like a free fall.

This chart compares the prices of residential properties to commercial real estate property values. Commercial real estate has fallen by more than residential real estate from its highs (-42% vs. -33%) and faster, but perhaps because of its more significant correction, commercial real estate now shows more signs of having stabilized. Prices are down significantly just about everywhere, and financing costs are at historical lows. The combination of the two makes for a gigantic effective price adjustment, and that's what it has taken to clear the property markets. Whether we need a significant further adjustment is the question on everyone's mind. If the heavy lifting is over (i.e., no more major downward price adjustments), then now would be a good time to start getting back into the real estate market.


Benjamin Cole said...

Buy real estate---you certainly are not buying at the top, and you are probably buying at the bottom.

Interesting that the commercial property market, sans Freddie and Fannie, cratered worse than the residential markets.

I guess commercial property lenders didn't get the sage advice of Newt Gingrich.

Seriously, if Fannie and Freddie caused the residential meltdown, then what caused the commercial meltdown? Somehow we have to blame Obama or Clinton and not let facts get in the way.

Since both markets collapsed, we should look for something that impacted both markets---think the Fed. They were "fighting inflation" in 2008. Great timing.

Well, the Fed was successful in flighting inflation, and we deflated for three years after that, and property markets remain cratered.

The Fed was very successful in fighting inflation.

Donny Baseball said...

Commercial and residential real estate correlate more tightly than you'd think. Residential brought commercial along for the ride (although not as high) largely because of the money flowing in and the rating agencies getting the CLOs, CDOs wrong on that side of it too.

As for the crash, there was a massive post-crash effort on the part of policy makers - both through policy and intimidation, and aided by lawsuits - to "keep people in their homes." No such effort was undertaken to keep commercial tenants in their offices, thus the commercial market cleared more readily and more violently and will recover more quickly.

Ed R said...

Why is a major decline in the price of anything a "correction"??

What is the problem higher price that it should be "corrected"?

Benjamin Cole said...


There may be correlation, but they are completely different markets, with many institutional or high net worth buyers in commercial real estate, and a different set of lenders.

There was and is a CMBS market, and you are right, the credit-rating agencies, (hired by issuers) failed miserably.

But commercial markets are largely free debt and equity markets, and residential markets are largely not free markets.

Both cratered.

Ergo, look for a cause.

That said, I think it well past time to phase out Fannie and Freddie, and even the home mortgage interest tax deduction. All other housing interventions, Sec. 8, senior stuff, all of it.

But no one, GOP or Dem, is calling for true free markets in housing.

Yeah, imagine Romney calling for the limitation of the home mortgage interest tax deduction.

Typically, Dems might call for a cap on the home mortgage tax deduction (penalizing the wealthy), and GOP will call for gutting Fannie and Freddie (penalizing the non-wealthy).

Unknown said...

We still have a year or two to go for a residential real estate bottom in nominal terms and probably 5-10 years afterwards in real terms.

The unabsorbed pool of housing supply, dragging levels of consumer confidence, high unemployment and negative equity will continue to put downward pressure on the housing market through 2012 and 2013.

CoreLogic estimates there is a shadow inventory of 1.6 million homes, which is the biggest drag on prices. There is still waaaaay to much supply out there.

There is no reason to jump in - even if the bottom is now (its not), there will be no meaningful increase in prices for years. Many of those who thought the bottom was last year at this time are already well underwater.

I believe there is 10-20% to go in Southern California, but at least some areas (Las Vegas, Phoenix, Miami) are much closer to the bottom.

Anonymous said...

Withholding tax receipts took a nice turn upward this past week after being flat or down for the previous few weeks. Might get a decent jobs report after all.

Benjamin Cole said...


You may be right, but if you wait until all is safe and clear and it is obviously a bottom---you will have missed the bottom.

Besides, interest rates have never been this low before, and housing affordability has never been so high.

You could get a rapid rebirth of residential markets....

Unknown said...

Benj - I really don't think there is a risk of a rapid rebound in residential real estate. There is just too much overhang and too much pressure down. When it does bottom, it will bounce along for a number of years. Sales are still too anemic and the drop in pricing is accelerating right now not flattening out.
This is not the bottom.

McKibbinUSA said...

As I have said before, the expanding Main Street depression is creating fantastic buying opportunities for real estate investors -- stick with rent-paying properties with a fifteen year horizon, and do not speculate on flips -- unfortunately, cash is required to acquire the best properties at the lowest prices, so non-accredited investors will be left out -- however, for those with cash, bid low on an array of properties that meet your investment needs.

John said...

I'm up for phasing out Freddie and Fannie. Wall Street used them as a place to dump their worst bonds.

The two GSEs are vehicles for socializing private debt. Why didn't Bush and the Repubs shut them down when they had Congress and the White House? They never will. Freddie and Fannie are cash cows for the private financial sector.

The housing bubble was largely the result of the originate and sell model. If banks had to keep loans they made, things would have been a lot different.

Bob said...

Fannie, Freddie, Wall Street, Banks, blah, blah, blah.

The CAUSE of the financial crisis was simply the involvement of government interests in the private sector. Largely Democrats, but also Republicans desire to increase the number of Americans, ostensibly minorities, who owned their own homes is THE cause of the housing bubble and subsequent financial crisis. The legislation used to initiate and propagate this agenda was the Community Reinvestment Act.

It was NOT an altruistic endeavor, bur rather an aggressive vote getting agenda.

All of the conditions, agencies, banks, financial firms, ratings agencies, and individuals that followed were just the effects of a system that had been manipulated to that end.

Corruption is inherent in a freemarket economy. Democracy is messy. Set up the right conditions and you will get a corrupt and messy situation.

Don't blame fire for burning. That's what it does. Look for who struck the match.

That would be those in the government who were looking for ways to solidify their powerbase and secure their place in the government.

You can figure who that was,


This involvement is being passed off

brodero said...

By my calculations using wages ( not
even adjusting for the substantially lower mortgage rates)
housing is currently 3% undervalued
on a national basis. The trajectory
I have 7 years from now is for
housing to be 25 to 30% higher from
today's prices.

John said...

The CRA myth has been thoroughly dbunked.

An example by Barry Ritholtz

"Why was there no credit/housing meltdown from 1977 to 2005? Why did 30 other countries, none of which have are covered by the CRA, have a remarkably similar housing boom and bust to the USA?"

Bob said...


Ritholz did nothing to explain away the CRA, IMO. His article is a series of illogical connections. i.e. "The enormous overbuilding of Condos, and not CRA, is to blame. These weren’t inner city loans to minorities, as Dan Gross pointed out, they were “WCI Communities — builder of highly amenitized condos in Florida (no subprime purchasers welcome there)”

The overbuilding of condo's, whether financed by subprime or not is a consequence of government, using legislation (CRA), to create the environment that became the housing bubble and by extension the fiscal calamity that followed. But the CRA did not operate in a vacuum. There was plenty of help from the Meastro (Greenspand and the Fed)


Benjamin Cole said...

If the CRA caused both the commercial and residential crashes (and globally too), then I guess we also have to credit the CRA with reviving urban cores all across America.

America's cities and downtown's have not looked this good since the 1950s.

In truth, I doubt the CRA did much, either way.

It was the free market that seized urban opportunities, usually after local governments had nearly ruined downtowns with "redevelopment" plans.

Bob said...

I've copied and pasted this from a response in the WSJ editorial page. It says precisely what I am saying concerning government meddling in the private sector.

"The real story started years ago. In 1977, Jimmy Carter signed the Community Reinvestment Act (CRA) into law. But this law had no teeth, no way to require lenders to lower their standards and to make subprime loans. Enter Bill Clinton. In 1994, President Clinton directed 10 agencies to issue an ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. This ultimatum was signed by HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other agencies. Mr. Clinton also ordered Fannie and Freddie to buy these mortgages from the banks.

The ultimatum was then codified into a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994. You can Google this if you're interested in reading it. Among other things, the policy says "HUD is authorized to direct Fannie Mae and Freddie Mac to undertake various remedial actions, including suspension, probation, reprimand or settlement, against lenders found to have engaged in discriminatory lending practices" and "Applying different lending standards to applicants who are members of a protected class is permissible" and "in addition, providing different treatment to applicants to address past discrimination would be permissible."

To make sure banks complied, the policy was (and still is) enforced by bank auditors who kept close tabs on how many subprime loans banks were making and constantly threatened them if they weren't making enough. The policy and the enforcement was meant to intimidate lenders to make the very subprime loans they had previously refused to make. The American Bankers Association issued a "fair lending tool kit" to its members. Today, banks have employees whose job titles are "Community Reinvestment Act Analyst" and whose job is to ensure that the banks are in compliance with the CRA. The Obama administration is being even more aggressive in enforcing compliance.

When George W. Bush took office, members of his administration and GOP members of Congress continually tried to get the Democratic members of Congress to order Fannie and Freddie to cut back on their subprime portfolio, but the response was that the GOP was trying to fix something that wasn't broken. For a full story on this issue and the names of all the members of Congress who refused to act, see "Why the Mortgage Crisis Happened" at American Thinker.com.

As soon as the financial crisis occurred, the politicians largely responsible for it, (Barney Frank, Chris Dodd, Harry Reid, etc.) started blaming George Bush, banks and Wall Street, seeking to deflect blame from themselves. Since they receive a lot of media attention, they have been able to sell this line to the public. This is not to say that Mr. Bush, banks and Wall Street should not share any of the blame, but if you want to point a finger at those most responsible, point it at Bill Clinton and the Democrat members of Congress. Today, Barack Obama is continuing the same policy."

Everything that followed has been a result of these actions.


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