Tag Archives: TWR

Mixed Signs in the Tea Leaves: Residential Sales Up, Median Prices Down, Lower Home Supply, and Commercial Real Estate Stronger than Feared

Every day we read the tea leaves (in the form of news and the financial reports) looking for indications of where the real estate market is heading.

Our conclusion for today: mixed signals.

We are sceptical about the report today from the National Association of Realtors (NAR) of a 2.9 percent rise in exisiting home sales in Febuary 2008 over last month.

NAR’s chief economist Lawrence Yun sees the data as “encouraging” and a sign that the housing market is “stabilizing.”

Yun said: “We’re not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing. Buyers taking advantage of higher loan limits for both FHA and conventional mortgages will unleash some pent-up demand. As inventories are drawn down, prices in many markets should go positive later this year.”

We’d like to believe it, but we note that NAR and its affiliates have a terrible track record in forecasting the real estate market and have often been forced to revise their figures to be less optimistic than originally stated.

For example, the California Association of Realtors now projects that 332,100 homes will sell this year, revised downward by over 2,000 sales from it’s prediction in October and that the median price of a single-family house in the state will drop 9% this year, as opposed to a 6% drop they expected in October.

We note, too, that the 2.9 percent growth in existing home sales claimed by NAR pales in comparison to the 23.8 percent drop since February 2007.

In addition, even accepting NAR’s report as indicating a positive blip on the radar, median home price figures remain gloomy overall, even according to NAR. NAR’s report today acknowledged that “The national median existing-home price for all housing types was $195,900 in February, down 8.2 percent from a year earlier when the median was $213,500.” And in California, the median single-family house price is expected to drop to $505,100 this year, compared to a 2007 median house price of $558,100.

Orange County Register columnist Jon Lansner quoted a report finding that home supply in Orange County was at an 11 month low.  According to the report, at the current pace of home buying it would take 7.5 months for buyers to take all of the current listings off the market.  It was at 6.09 months a year ago.

A more reliable report of good news comes from CBRE Torto Wheaton Research (TWR) regarding commercial real estate, stating that future commercial mortgage defaults and losses could be overestimated threefold.

According to the TWR report, “While prices have been slow to change in the commercial real estate equity market, the commercial real estate debt markets have been driven by increasing spreads, and decreased availability of mortgage capital.” In recent weeks, prices of the CMBX — a set of derivatives that provide insurance against default — and prices in the commercial mortgage-backed securities (CMBS) market are “out of line with what any likely future income stream of the underlying mortgages would suggest.”

The National Real Estate Investor observes that the TWR report shows that “Despite an expected incremental rise in vacancies across all major property types over the next few years, vacancies are still expected to remain lower than 2002/2003 peak levels, and the 2008/2009 period is projected to see rents to continue moving upward into positive territory. Currently, according to the report, CMBS and CMBX markets have priced in losses tied to doomsday estimates, more in line with 1992, at which point commercial banks lost 160 basis points.”

“One of the big differentiators between today’s ailing economy and that of 1992, is that there is currently an equilibrium with supply and demand in commercial real estate, which should weather the storm even as the economy is running out of steam. And, one of the biggest feared financial stressors — the collapse of a major investment bank — might still not bump the economy too far off its tracks.”

“As all eyes are trained on the JP Morgan buyout of Bear Stearns, which includes some $16 billion in CMBS, that is not likely to be the event that finally sets the price of CMBS. Dumping the bonds onto the market would likely make little sense given the Fed’s pledge to take in hand $30 billion of the ailing investment bank’s most illiquid assets, including both residential and mortgage-backed securities.”

We have some confidence in the TWR report and believe that overall the financial indicators for commercial real estate are much stronger than that for residential real estate.

One caveat is that if, as TWR asserts, the danger in the commercial real estate is mostly psychology of panic, another collapse of a major financial institution may make mass hysteria inevitable. Should another major credit institution do a Bear Stearns, the reprecussions could overwhelm the commercial real estate market as well as the residential market.

Regarding the drop in home supply reported by Jon Lansner, we take it with a grain of salt.  The numbers are small, and the report was confined to a small and perhaps non-representative area of the country.  We also don’t believe that over-supply of homes is a major culprit in the residential real estate crisis, and therefore don’t think that a slight decrease in the current supply will have much effect on prices.

We are not convinced by the NAR report that the residential real estate market is close to stabilizing. We think that NAR’s anouncement of stabilization in the residential real estate market is, at very best, premature, and more of the wishful projecting that has destroyed NAR’s credibility.  

The best that can be hoped for right now in the residential real estate market is volatility.

We hope too that NAR’s new chief economist, Lawrence Yun, who has worked at NAR as an analyst and forecaster since 2000, can somehow recover for NAR the credibility it lost when his predecessor and former boss David Lereah predicted an endless residential real estate boom and refused to face the facts even long after the bubble burst.

We will continue to read the tea leaves…


For an update on commercial real estate, click here.