Home Resales, Prices Decline, Inventories Rise

WSJ | May 23, 2008

No surprise here folks…just remember to keep perspective when you hear the absurd and illogical remarks from analysts, economists, and of course real estate professionals ( and I use that term loosely) that “the market has hit bottom, things aren’t that bad, the media is overhyping the downturn, we are not in a housing recession, blah, blah, etc”

Existing-home sales fell a second month in a row during April, while inventories surged and prices dropped sharply from a year earlier.

Home resales fell to a 4.89 million annual rate, a 1.0% decrease from March’s revised 4.94 million annual pace, the National Association of Realtors said Friday. Originally, the NAR estimated sales fell 2.0% to 4.93 million in March.

The median home price was $202,300 in April, down 8.0% from $219,900 in April 2007. The median price in March this year was $200,100. High inventories have exerted downward pressure on prices. The decline has kept would-be buyers from signing off on property as they wait for still-lower price tags.

Lenders have tightened their standards on home loans, contributing to the credit crunch that is restraining the U.S. economy. Those tighter standards have priced marginal buyers out of the market and made purchasing more difficult and costly for prime borrowers. The latest U.S. Federal Reserve study showed tighter standards on mortgage loans in early 2008. About 60% of banks indicated tightening standards on prime mortgages, the Fed’s April senior loan officer survey said. That was a larger fraction than in the previous, January survey by the Fed.

Aside from tighter loan standards and prices falling under the weight of bloated inventories, a weakening job market hasn’t helped the housing market. The key nonfarm payrolls number in the government monthly report on employment has gone down four times in a row. In April, nonfarm payrolls receded by 20,000 jobs, the latest Labor Department data showed.

The April resales level of 4.89 million reported Friday by NAR was slightly above Wall Street expectations of a 4.86 million sales rate for previously owned homes. The average 30-year mortgage rate was 5.92% in April, down from 5.97% in March, according to Freddie Mac. Inventories of homes increased 10.5% at the end of April to 4.55 million available for sale, which represented an 11.2-month supply at the current sales pace. There was a 10.0-month supply at the end of March, revised from a previously estimated 9.9 months.

Regionally, existing-home sales in April fell 6.0% in the Midwest and 4.4% in the Northeast. Demand rose 6.4% in the West. Sales were unchanged in the South.

Let’s keep in mind, that the nar has revised their numbers every month, and while today’s report states a 1% decline, it is probably more like 1.5% to 1.9% which is a big difference when we are speaking about millions in volume and hundreds of thousands in price. The nar’s data is less than reliable and always suspect, but unfortunately, for existing housing data, they are the official source - at least for the moment.

Subprime Losses Top $379 Billion on Balance-Sheet

Bloomberg | May 19, 2008

The following table shows the $379 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 100 of the world’s biggest banks and securities firms.

The writedown column now includes asset-value reductions that some banks list on their balance sheets rather than booking the losses against earnings. Regulatory filings show $35 billion of such balance-sheet writedowns at 20 banks.

All the charges stem from the collapse of the U.S. subprime- mortgage market. The figures, from company statements and filings, also reflect some credit losses or writedowns of mortgage assets that aren’t subprime, as well as charges taken on leveraged-loan commitments.

Firm                   Writedown     Credit Loss(b)    Total

Citigroup                 37.3            5.6           42.9

UBS                       38.2                          38.2

Merrill Lynch             37                            37

HSBC                       6.9           12.6           19.5

IKB Deutsche              16                            16

Royal Bank of Scotland    15.2                          15.2

Bank of America            9.2            5.7           14.9

Morgan Stanley            12.6                          12.6

JPMorgan Chase             5.5            4.2            9.7

Credit Suisse              9.5                           9.5

Washington Mutual          1.1            8              9.1

Credit Agricole            8.3                           8.3

Deutsche Bank              7.7                           7.7

Wachovia                   4.6            2.4            7

HBOS                       6.9                           6.9

Bayerische Landesbank      6.7                           6.7

Fortis                     6.6                           6.6

Societe Generale           6.3                           6.3

Mizuho Financial Group     6.2                           6.2

ING Groep                  6                             6

Barclays                   5.2                           5.2

WestLB                     4.8                           4.8

Canadian Imperial (CIBC)   4.2                           4.2

LB Baden-Wuerttemberg      4                             4

E*Trade                    2.5            0.9            3.4

Dresdner                   3.4                           3.4

Natixis                    3.4                           3.4

Wells Fargo                0.6            2.7            3.3

Lehman Brothers            3.3                           3.3

Bear Stearns               3.2                           3.2

National City              0.5            2.6            3.1

Goldman Sachs              3                             3

BNP Paribas                2.1            0.6            2.7

Lloyds TSB                 2.7                           2.7

Nomura Holdings            2.5                           2.5

HSH Nordbank               2.5                           2.5

ABN Amro                   2.4                           2.4

Bank of China              2                             2

Commerzbank                1.9                           1.9

Royal Bank of Canada       1.7                           1.7

UniCredit                  1.6                           1.6

DZ Bank                    1.5                           1.5

Alliance & Leicester       1.4                           1.4

Dexia                      1.1            0.2            1.3

Caisse d'Epargne           1.2                           1.2

Hypo Real Estate           1                             1

Gulf International         1                             1

European banks not         9.2                           9.2

listed above (a)

Asian banks not            7.5            0.3            7.8

listed above (b)

North American banks       3              1.1            4.1

not listed above (c)

TOTALS*                  332.3           46.9 (d)      379.2

 

Full story: 

http://www.bloomberg.com/apps/news?pid=20601110&sid=aK4Z6C2kXs3A

Central New Jersey Office Market Still Strong

RealtyEconomics | May 18, 2008

While the national real estate market, both residential and commercial have drastically slowed, New Jersey is one of a few states that have bucked the trend of major declines and a severe fall off of demand. Yes, the Garden State has seen a slight slow-down in the residential and commercial markets, but many pockets of the state have actually been thriving and continues to grow, albeit slowly into 2008. Somerset County in particular on both sides, commercial and residential have remained fairly strong. On the residential side, Somerset has only slid approximately 2.0% from 2007. In stark contrast to the rest of the country, New Jersey was one of only three states where the volume of existing home sales actually rose in the first quarter compared with the previous year.

Over in the central commercial office market sector Class-A office space is in demand, specifically the I-78/Somerset sub-market. The Somerset/I-78 office submarket has a total of 262 Class A and B buildings with a total of 24.8 million square feet of space. This submarket includes the area surrounding the intersection of I-287 and I-78. The majority of the space is located in Basking Ridge, Bridgewater and Murray Hill. This submarket has 16.4 million square feet of Class A space and is home to major corporations such as at&t, Avaya, Chubb Group, Verizon, Pharmacia, Sanofi-Aventis, Merck, Alcatel-Lucent and Johnson & Johnson.

The vacancy rate for Class A and B space showed signs of improvement through the first three quarters of 2007. Starting the year at 12.4%, the rate dropped 2.2% to 10.2% by the third quarter. However, the vacancy rate rose in the fourth quarter, ending the year at 11.9%. The vacancy rate for Class A space was 14.6% in the fourth quarter of 2007. This rate also trended downward the first three quarters of the year before rising in the final quarter of 2007. In the first quarter of 2007 the Class A vacancy rate was approximately 15.7% and finally dropped to 12.6% in the third quarter.

Despite the recent uptick in the vacancy rate, the mean asking leasing rate for Class A and B properties increased in the fourth quarter of 2007. The rate has been inching up steadily since the first quarter of 2006 when the lease rate stood at $27.01 per square foot. The rate began 2007 at $27.57 and ended the year at $27.91. The average asking lease rate for Class A space was $28.65 per square foot in the fourth quarter of 2007. This rate has also been increasing steadily since the start of 2006 when the leasing rate was $27.87. The analysis and data just reinforces the current demand, and desirability of the area, which appears like it will continue well into 2008.

National Economic and Real Estate Report

RealtyEconomics | May 16, 2008

Our in-house report and snapshot of the
U.S. economy and real estate market.

Read the latest NERE Report here: NERE Report 05/16

Watershed

RealtyEconomics | May 13

By now, some of the country has already received their federal stimulus rebate checks, with delivery to everyone eligable hopefully completed by July. The federal government is hoping that consumers spend the bulk of those checks mostly on discretionary retail items and not so much on the daily staples of food and gas- what they are hoping for in essence, is a Watershed - a turning point in the economy.

Although by most indications, the bulk of those checks will be spent on the daily staples - thanks in part to out-of-control inflation ala manipulated food and fuel prices. With the national average at $3.67 for a gallon of gasoline, $3 for a regular dozen eggs and $4+ a gallon for milk, how can most of the country not spend it on food and fuel or credit card debt?

In light of the unfortunate economic reality most of the country is experiencing, RealtyEconomics conducted an informal survey of consumers through email and webpolls regarding the federal government stimulus rebate check. 139 respondents from 11 different states provided feedback to our question of “How do you intend to spend your rebate check”

Participants from TX, NC, CA, FL, VA, OR, NY, DE, AZ, PA, and NJ provided us with the following planned spending statistics:

33.0% on Bills/Debt
25.9% on Food/Fuel
18.5% on Mortgage/Rent 
11.1% on Discretionary/Big Ticket Items
3.95% on Vacation Purposes and
7.55% will put in Savings/Bank Account.

Though this was a small scope of sampling, it reveals that most of the money will be spent on bills, debt, food and fuel - exactly what the government doesn’t want the consuming public to spend it on! Nearly 78% of our survey suggests that the money will go to some form of debt and everyday staples while only approximately 15% will be spent on discretionary good and services - exactly how that will ’stimulate’ the economy is no mystery, because it probably won’t. From our perspective, it seems that the federal government is up to old tricks - wasting time and money for basically nothing in the end.

The millions it cost to propose, vote, pass and print the rebate plan just adds to the enormous mounting debt, and with most folks spending the money on staples and debt/bills, the end result appears that it will not have much of an effect on the recessionary and weak economy. So, is another stimulus rebate check in the works? Let’s hope not. We are already living on borrowed funds, doling out these ‘welfare’ checks just throws another shovel full of dirt into the hole. RealtyEconomics advises the consumer to save what little you can, because it’s tough times ahead.

Benchmarking-Real Estate Deflation

RealtyEconomics | May 9, 2008

Where are we now - with regard to home prices and values from the peak of the housing market bubble. This is the burning question of the moment. Economists, Analysts, Federal personnel, and well everyone in general wants to know - how much have we declined and how much further have we to go. Well, it is difficult to know exactly how much house prices have dropped.

There are several housing indices that measure price and sales volume, and yet each tells a different tale. Mostly known, but the least useful are the sometimes suspect monthly figures of median and mean home prices published by the National Association of Realtors (NAR data has and can be off as much 5% to 10%). NAR data shows median prices are down some 13% from their peak, but these averages do not adjust for the mix of same home transaction exchanges which fluctuates from month to month, and as a result are grossly distorted.

OFHEO - Contrast the NAR data with figures from the Office of Federal Housing Enterprise Oversight. OFHEO statistics have a wide geographic reach and track repeat sales of the same house - unlike the maligned NAR reports. The OFHEO national index suggests mean prices have fallen only about 3% from April 2007. But OFHEO’s data includes only houses which are financed by mortgages backed by the government sponsored  agencies Fannie Mae and Freddie Mac. The problem is they only track SF conforming loans from Fannie and Freddie now up to $417,000, but just previously only $359,650 and they also exclude the bottom of the market. These two price points rose the quickest during the bubble and where the mortgage debacle was most fraught. The conclusion is that OFHEO’s data understates the scope of the housing plight.

S&P/Case-Shiller indices, developed by Robert Shiller and Karl Case and produced by Standard & Poor’s includes all types of homes and shows house prices were rising faster during the boom and subsequently declining much quicker now. Although the Case-Shiller data is less than perfect as the index excludes many rural areas as they reveal less of a price decline than the big metro areas do. But none the less, the Case-Shiller index - out of the two previously mentioned indices comes the closest to reflecting the true climate and direction of the market.

Supply - Demand shifts

Currently there is about a 11 month supply of existing homes, and an 12 month supply of new homes on the market, and some estimates even put supply at a 15 month level. The delta between supply and demand suggests that prices should fall significantly more, and by historical standards there is a glut of unsold homes currently on the market. The homeowner-vacancy rate has climbed to record levels of 2.9% as there are some 1.1million more houses for sale compared with the average between 1985 and 2005. While the inventory of new homes is falling slightly as builders have scaled back production, the overall supply is being fueled higher by all-time record level foreclosures.

Regardless of a few months of discrepancy of supply, this is one of the major hurdles in stabilizing the housing market - inventories are rising, while sales are declining. That is not to say that there aren’t willing  or eager buyers out there, but with credit standards much higher now, and inflationary pressures mounting on the average consumer - the availability of qualified buyers is diminished.

Using historical measures and data, home prices are still above the levels compared to the fundamentals. Using a model that correlates house prices to disposable incomes and long-term interest rates, analysts at Goldman Sachs forecast that the correction in national house prices is only approximately halfway through its cycle. The analysts expect perhaps another 18% to 20% correction or an additional 11% to 13% decline from the beginning of 2008. Interestingly,  their models suggest that six states - Florida,  Maryland, Arizona, California, Virginia and New Jersey might even see further declines of 25% or more.

 

Another way to measure the housing/price/value fundamentals is the relationship between house prices and rents. This is similar to a price/earnings ratio for the housing market. The price of a house reflects the discounted income/value of future ownership, either as rental income or as rent saved by an owner who occupiesthe home.

In a recent reported analysis done by Morris Davis of the University of Wisconsin-Madison, and Andreas Lehnert along with Robert Martin of the Federal Reserve, shows that the rent/price yield in the U.S. ranged between 5% and 5.5% from 1960 to 1995. Consequently that range dropped rather quickly thereafter-  reaching a historic low of just 3.5% at the height of the housing (sham) boom. Given the typical and normal pace of average rental growth, Mr Feroli believes that house prices (as measured by the Case-Shiller index) still need to fall by roughly 10% to upwards of 15% over the next 18 months in order for the rent-to-price yield to return to its historical and more importantly - normalized average.

Let’s keep in mind that over the previous six to seven years, national home prices have increased approximately 74% - while net income had only risen 15%. It does not take a genius to figure out and or understand that the huge disparity of those numbers can not, nor should not sustain the recent unjustified, and absurd increase in house values. A 4% to 5% year over year increase has been the average in the previous 40 years - mostly in-line with wages, rents, inflation and GDP as it should be. The markets and the consumer are learning tough lessons right now, and hopefully these realities will stay at the forethought - and not become a convenient short-memory - in lieu of a fast buck.

Pending Home Sales: Falling - Yet Again in March

RealtyEconomics | May 7, 2008

The NAR has reported pending monthly housing sales for March, and as expected the numbers are in negative territory once again.

The seasonally adjusted index of pending sales for existing homes fell to 83- from a downward revision in February of 83.8, which was the index’s previous low. By comparison, the index was at 103.9 in March 2007 - a significant decline of 20.9 or 20.19% from the previous year.

A month ago the NAR reported that the U.S. housing market had weakened in March, as resales of homes fell,  inventories climbed, and prices continued to drop. Resales of U.S. houses and condos declined another 2% to a seasonally adjusted annualized rate of 4.93 million from 5.03 million units in February of this year.

Expect sales and prices to continue to fall for the remainder of 2008 and perhaps beyond. Forget about the “spin” doctors and eternal hopefuls who don’t pay attention to hard economic data - instead, trying to divert attention away from fact towards fantasy. First and foremost is inventory, there is simply too much at this point and time, and the lending environment has become very restrictive as well. Factor in the consumer debt to savings ratio which is substantially lopsided - with debt far outweighing savings. Energy and food inflation is still rising and it seems that higher prices are here to stay, and foreclosures are at an all-time high with much more to come by all indications.

Do not be fooled by the rhetoric and false promises, there is no “bottom” in the near future. The housing slump has to run its course, and the process could take up to another year or two - depending upon - job growth, inflation, consumption, and debt factors. The Real Estate industry is mostly in denial mode as they have been for over the past year, refusing to believe the cold, hard facts of the unofficial recession the country is in. Contrast the propaganda to the very real $3.45 per gallon of gas at the pump, the tremendous increase in groceries(about 40%), and the factual loss of equity in most homes purchased over the last 7 years - and the reality is quite different from the picture some organizations and individuals attempt to paint.

U.S. Commercial Property Sales Fall

Bloomberg News | May 6, 2008

(Bloomberg) -Sales of U.S. offices, shopping centers and other commercial properties dropped by almost half in the first quarter as pension funds refused to lower asking prices to complete transactions, a real estate index showed.

The volume of completed transactions in the first quarter fell 47 percent from the previous quarter, according to an index produced by the Massachusetts Institute of Technology Center for Real Estate. Prices for completed deals rose 2.1 percent, ending two quarters of declines. Property owners raised asking prices and investors dropped their offer prices, creating the widest gap between buyers and sellers since 1991, the center said.

The supply and demand sides of the market are “diverging from each other,” Henry Pollakowski, co-director of the center’s Commercial Real Estate Data Laboratory, said in an interview. “There are a lot of folks out there who don’t feel a need to sell, so they’re hanging in there. They’re holding out. You don’t see the transactions.”

Tightening credit availability, which started in the residential mortgage market and spread to commercial real estate, has slashed sales of office buildings, retail properties and other commercial real estate.

A demand-side index maintained by the MIT Center of Real Estate dropped 4.6 percent in the first quarter, its third- straight quarterly decline, showing a gap between the prices potential buyers want to pay and those sellers will accept.

Income, Occupancies

Commercial properties in the U.S. are generating high income as occupancies remain strong, David Geltner, the center’s director, said today in a statement. The market has experienced low mortgage delinquencies and large amounts of equity capital have been allocated for property purchases, he said.

The center’s index tracks property sales by pension funds such as the California Public Employees’ Retirement System, the New York State Teachers’ Retirement System, and other institutional investors.

Pollakowski said sellers may start to accept lower prices at some stage over the next six months. The situation is similar to the residential market when sales first began falling and some sellers were unwilling to drop their asking prices.

“The seller is in no hurry, but eventually he’ll probably come down,” Pollakowski said. “It’s the same sort of thing.”

Stimulus Rebate Check

How do you plan to spend that - soon to arrive Rebate Check…

Take the Rebate Check Survey! 

U.S. Thrift Regulator Calls Cuomo’s Appraisal Pact `Flawed’

Bloomberg | May 1 2008

New York Attorney General Andrew Cuomo’s agreement with the two largest mortgage buyers to change the way lenders hire appraisers is “flawed” and should be reconsidered, the Office of Thrift Supervision said in a letter today.

Cuomo announced a deal March 3 in which Fannie Mae and Freddie Mac agreed to stop buying mortgages from lenders who used in-house appraisers or let mortgage brokers pick the appraisers. In most cases lenders would also be barred from using appraisal management firms they own or control.

“Imposing a requirement that all lenders must outsource appraisals will not ensure appraiser independence and may make regulatory enforcement more difficult,” OTS Deputy Director Timothy Ward wrote to Freddie Mac.

Cuomo, who started investigating mortgage industry practices last year as foreclosures rose, sued First American Corp.’s appraisal unit Nov. 1, accusing it of inflating home values under pressure from Washington Mutual Inc., the biggest U.S. savings and loan. He didn’t take action against the thrift, which is regulated by the OTS.

Cuomo said his probe of the mortgage industry, which includes subpoenas of appraisers, credit rating companies and investment banks that profited from lending to homeowners and repackaging the debt into securities, uncovered conflicts of interest that are addressed in his planned changes.

Process is `Broken’

“Our comprehensive investigation of the mortgage industry demonstrated that the appraisal process for home loans is broken,” Cuomo said in a statement yesterday. “So it is not surprising that current industry participants, many of whom have significant economic interests of their own at stake, have differing perspectives about the various provisions in the agreements.”

The changes to industry practice are unnecessary and expensive, the OTS’s Ward said.“The costs associated with such actions could be significant,” Ward said.

Yesterday, U.S. home appraisers that had previously praised Cuomo’s pact with Fannie Mae and Freddie Mac joined mortgage bankers in criticizing it.

The appraisers “have serious concerns about certain aspects of the agreement that could be harmful to the delivery of residential appraisal services and, possibly, to the mortgage underwriting process itself,” they wrote in a letter to Fannie Mae and Freddie Mac.

The appraisers’ letter was signed by the Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers and the National Association of Independent Fee Appraisers. The groups represent about 30,000 appraisers.

Full article:http://www.bloomberg.com/apps/news?pid=20601206&sid=ajrBQM959Ng0&refer=realestate