Real Estate Crash thread

[Bart T]

even if the graph will eventually show price/wage levels in line with historical averages, that doesn't necessarily mean prices will go down. after all, prices and wages were rising fairly steadily during the period covered by the graph. one of the main reasons for buying, assuming you got a fixed rate, was to hedge against inflation.

Wages have been stagnant for a decade or so now, but I don't expect that trend to continue, not with a WH and Fed scared shitless about deflation and acting accordingly. Maybe one of the finance types can post some bond option numbers .... I'd be willing to bet that the market is priced as if inflation and higher interest rates are likely within 3 years or so.

[uglymoney]

Lawrence Summers is a blithering idiot. There's ton's of people that wash rented cars, particularly American renters in third world countries. What a myopic view of the world, just one more example of the creme de la creme Obama surrounds himself with.

I'm guilty of this. Something about being taught by my dad at a young age to treat other peoples stuff as if it's your own. Plus it's like $2 to sparkle.

[GoEhuge]

For those that haven't seen the story already... this is pretty telling of how commercial values are plummetting. Man, this market is going to get rough.


http://www.boston.com/business/artic...in_60_seconds/

NEW YORK - The bidding for Boston's tallest building, the John Hancock Tower, was over as soon as it began.

Shortly after 10 a.m. in the Manhattan offices of powerhouse law firm Skadden Arps, a young man with jet black hair stepped behind a lectern and called for offers from a crowd of stone-faced lawyers and real estate investors.

From the front row, Jeffrey Gronning, an executive with Normandy Real Estate Partners, quickly raised a paddle in the air, bidding $20.1 million with a flick of the wrist.

The auctioneer began darting glances and pointing fingers. "I have $20 million, 100,000. Do I hear 20.2?"

The crowd was silent and still. The auctioneer followed with the familiar call, going once, twice, "fair warning?" Again, nothing.

In less than 60 seconds, Boston's most storied office building was sold, for $20.1 million plus $640.5 million in preexisting debt, putting the total value of the building at $660.6 million.

It was an abrupt passing, but the event was among the first of what real estate specialists predict will be many such auctions or forced sales of distressed properties in coming months. The Hancock auction was prompted by the failure of the now-former owner, Broadway Partners, which bought it in late 2006 for $1.3 billion, to make its debt payments on the property.

The winning bidder was a joint venture of Normandy Real Estate Partners and Five Mile Capital Partners, which began buying pieces of Broadway Partners' debt on the building last summer as part of a loan-to-own strategy. The firms initiated foreclosure in January after Broadway Partners defaulted on some loans.

Executives of the new owner said Normandy will manage the Hancock and make significant improvements to help attract new tenants to the building, which is struggling with rising office vacancies. The two firms also bought 10 Universal City, an office tower in Burbank, Calif., yesterday.

"Normandy and Five Mile believe these two buildings are each one of the top properties in their respective markets," the partnership said in a statement.

The auction was the first in a wave of such proceedings expected to hit commercial properties in coming years, as the recession takes its toll on real estate firms unable to make debt payments.

"It's certainly going to bring truth to the market," said David Fitzgerald of CB Richard Ellis, a commercial real estate firm. "The recession is starting to hit the commercial market, and the auctioning of the Hancock is the real proof of that."

Normandy and Five Mile initially bought a $75 million slice of debt on the Hancock, hoping to emerge from a pool of lenders in control if Broadway defaulted. By yesterday, Normandy and Five Mile had persuaded several other lenders to sell their interests to them for less than 40 cents on the dollar, according to executives involved in the matter.

While several other potential bidders attended the auction, Normandy and Five Mile were considered to be in the best position because the form of the auction favored existing investors. Arms-length buyers in such foreclosures are required to buy out other lenders, a time-consuming and potentially costly endeavor that proved to be in Normandy and Five Mile's favor.

Many of the lawyers, bankers, and real estate investors who packed the Skadden Arps conference room said they were there to get a sense of how similar auctions will unfold in coming months.

The auctioneer called for bids on Universal City Plaza and then on the Hancock. In both cases, Normandy and Five Mile made the first - and only - bids.

The event ended before many of the executives had taken off their suit jackets.

[Hugh Conway]

Lawrence Summers is a blithering idiot. There's ton's of people that wash rented cars, particularly American renters in third world countries. What a myopic view of the world, just one more example of the creme de la creme Obama surrounds himself with.

you made Summer's point, actually.

[LeeLau]

Worth noting that the senior bank debt on the Hancock building was made whole. The Mezz loans basically lost everything. But to inject reality, the Hancock Building is fully leased and one of the better Boston buildings no? Looked like the entire Commercial RE market breathed a sigh of relief when that news came out - but i think that is unjustified.

[GoEhuge]

Worth noting that the senior bank debt on the Hancock building was made whole. The Mezz loans basically lost everything. But to inject reality, the Hancock Building is fully leased and one of the better Boston buildings no? Looked like the entire Commercial RE market breathed a sigh of relief when that news came out - but i think that is unjustified.

Hancock building is the best building in Boston.... not fully leased though.

There are a number of sublets happening, as one would expect right now. I'm actually headed over there next week to talk with a tenant about trying to dump half of their space. Regardless, the building still has around 300,000sf of vacancy.

But no, the commercial market is not releived. This is the first real big example here in Boston of how bad values are going to drop.

[LeeLau]

tx for that gH. I guess the bank lenders will be relieved. Wasn;t there some sense in the commercial re crowd that the Hancock Bldg purchase price was ridiculous?

[bean]

It wasn't just subprime, although that fed the late acceleration. It's been easy credit since Raygun, fueling our entire economy. Check this chart out:

That chart needs to be converted to a logarithmic scale.

[coreshot-tourettes]

We're not done by a long shot. Asset deflation will not stop until unemployment stops increasing. In CA we're looking at a false bottom with prime areas looking to fall 50% by 2012. The houses going now are all foreclosures, with most retail properties being taken off the market until prices stabilize - which they won't until those people capitulate and sell their house at a big loss. Buying real estate now is a giant mistake.

If you bought your house past about 1995 and want to sell anytime in the next 10 years, you're going to have to sell it at a loss. Prime defaults haven't even hit yet, and commercial real estate prices are looking to decline NINETY PERCENT. That's right, 10 cents on the dollar for commercial buildings.

We're not even completely in the
tunnel yet, to say nothing of seeing the light at the end of it.

[woodstocksez]

If you bought your house past about 1995 and want to sell anytime in the next 10 years, you're going to have to sell it at a loss.

I'd take that bet. I bought in 1992 and have less than zero worry about prices getting anywhere near that level (my house is, as best I can determine based on recent sales activity, still worth more than twice what I paid). What's magic about 1995 (prices started going up in 1997, by the way)?

I'm with Cramer in thinking prices are at, or near, the bottom in some areas (his, in particular). Time will tell, of course, but I disagree that buying real estate now is a big mistake. I also don't think you'd be sorry to wait to buy any time during at least the next several years (and probably longer).

[Hugh Conway]

I'd take that bet. I bought in 1992 and have less than zero worry about prices getting anywhere near that level (my house is, as best I can determine based on recent sales activity, still worth more than twice what I paid). What's magic about 1995 (prices started going up in 1997, by the way)?

The Bay Area is the definition of overvalued real estate market. Who, exactly, is going to buy this house? A Startup worker who just struck it rich?

[mock vomit]

We're not done by a long shot. Asset deflation will not stop until unemployment stops increasing. In CA we're looking at a false bottom with prime areas looking to fall 50% by 2012. The houses going now are all foreclosures, with most retail properties being taken off the market until prices stabilize - which they won't until those people capitulate and sell their house at a big loss. Buying real estate now is a giant mistake.

If you bought your house past about 1995 and want to sell anytime in the next 10 years, you're going to have to sell it at a loss. Prime defaults haven't even hit yet, and commercial real estate prices are looking to decline NINETY PERCENT. That's right, 10 cents on the dollar for commercial buildings.

We're not even completely in the
tunnel yet, to say nothing of seeing the light at the end of it.

At least you've got a positive attitude and outlook on this...

Curious where your knowledge/experience on the 10% remaining value in commercial is coming from? Also, when you suggest a 50% drop in prime residential areas, are you saying you think that's from todays already lowered values, or from the paper high back a couple years ago? I know the fringe areas have probably already hit that half off point, but where do you see the current drop in these "prime" areas so far?

[Hutch]

That's some serious wreckage you're forecasting there, Monsieur Tourettes. Hope you're wrong.

[JimmyCarter]

Hancock building is the best building in Boston.... not fully leased though.

There are a number of sublets happening, as one would expect right now. I'm actually headed over there next week to talk with a tenant about trying to dump half of their space. Regardless, the building still has around 300,000sf of vacancy.

But no, the commercial market is not releived. This is the first real big example here in Boston of how bad values are going to drop.

The foot traffic in and out of that building is at a crawl now compared to when I started working across the street. I know a number of the tenants are dumping/have dumped space over there, interesting to see what happens in the next year under the new owners.

I'm still trying to figure out how far the residential market will drop here. A coworker just lost a bid in Melrose offering $15K above ask. I'm looking to buy in the next few months, but still cautious because it doesn't seem like it's dropped as much as it should have yet.

[coreshot-tourettes]

At least you've got a positive attitude and outlook on this...

Curious where your knowledge/experience on the 10% remaining value in commercial is coming from? Also, when you suggest a 50% drop in prime residential areas, are you saying you think that's from todays already lowered values, or from the paper high back a couple years ago? I know the fringe areas have probably already hit that half off point, but where do you see the current drop in these "prime" areas so far?

Houses have to hit 2.5x incomes in order to stabilize. Overshooting to the downside is a given. Nationally, we're at 5x incomes as of right now (Feb 2009). A 50% fall from current levels is what I'm targeting, and the last time we were at 2.5x present income was 1995. In my county, we went from 240 home sales in the month of Jan 2008 to NINE in Jan 2009. The upside is that RE recoveries are not L shaped, so you will have 7-10 years to pick the real estate bottom and buy. Rent for the next couple years. You'll know the bottom is in when "conventional wisdom" says that a house should no longer be considered an investment. Also expect to see bulldozing vacant housing developments to become mainstream "to increase residential RE prices", as simply decreasing interest rates isn't working (can't force people to take out a loan, so destroy the supply).

Commercial RE, of course, is worse. You've got some major players like GGP that are already zombies, and at vacancy rates of 18% and rising, owners aren't going to be able to service short term CRE loans of 5-7-10 year maturities and will go into default very quickly. Sqft inventories in major metros are huge, with years of supply in some places. CRE demand is elastic, so in order to deal with that giant inventory prices will have to drop precipitously, just to keep people in the building.

You'll know this bomb is starting to go off when you see churches renting spaces in malls and industrial parks (which is where that last 10% is going to come from).

Done? Har.

[Benny Profane]

The Bay Area is the definition of overvalued real estate market. Who, exactly, is going to buy this house? A Startup worker who just struck it rich?

Come on over to Westchester County and try to buy a house if you're a mere mortal without a trust fund. There was an article the other day about how young people were so overjoyed about finding a decent one bedroom in NYC for less than 2500. That will be changing soon, too.

[woodstocksez]

The Bay Area is the definition of overvalued real estate market.

I'd say Miami and Las Vegas (and some places in Arizona?) were better definitions of an overvalued real estate market. But, yeah, lots of parts of the Bay Area have declined significantly in value from the peak, some pretty dramatically (50% or more). Of course, a few haven't, based on the last data I remember seeing. Nice to own there, hunh? Save your pennies.

Who, exactly, is going to buy this house? A Startup worker who just struck it rich?

Co-workers of the people who just bought the house down the street. I'm sure you know them because you know everybody in the Bay Area. And I'm sure you knew that because you know everything about the Bay Area.

[Benny Profane]

A CPR 2002 prediction, for old times sake.

http://www.cepr.net/documents/public...ng_2002_08.pdf

[cramer]

I'd say Miami and Las Vegas (and some places in Arizona?) were better definitions of an overvalued real estate market. But, yeah, lots of parts of the Bay Area have declined significantly in value from the peak, some pretty dramatically (50% or more). Of course, a few haven't, based on the last data I remember seeing. Nice to own there, hunh? Save your pennies.



Co-workers of the people who just bought the house down the street. I'm sure you know them because you know everybody in the Bay Area. And I'm sure you knew that because you know everything about the Bay Area.

Only suburbia in bay area was grossly overvalued. I dont think its dropped much in price in places like the city, marin county, silicon valley area. Main reasons is all of those areas have Jobs. The other reason is there probably isnt a better place to live in the united states. The Ocean, mountains, gambling, beautiful city and did i mention its sunny 90% of the year. Theres a reason its expensive here. Its a great area to live and there are jobs. Layoffs are massive right now but biotech, tech and healthcare jobs are everywhere. The only buddies i have that are having problems getting jobs are management type and sales. Everyone i know at work that got laid off picked up a job rather quickly. Alot had to take a 10-20K paycut though. Great time for employers to lowball which they were due. we've been high balling them for years. But most said buddies refi'd there houses and can easily afford a 20K paycut.

[mock vomit]

A CPR 2002 prediction, for old times sake.

http://www.cepr.net/documents/public...ng_2002_08.pdf

Started reading it... but it's way too long. Please just tell me how it ends... was there a bubble?

[montanaskier]

my house is still for sale....rented right now. The market in the area is starting to thaw a bit. I have it leased until September, then maybe lease it again for 6 months, til spring next year and then try and sell it again. I dunno, just want it gone.

[enlosandes]

My house in Truckee is coming up on 2 years on the market and is a positive cash flow property.

[ass-to-mouth]

From yesterdays WSJ.

http://online.wsj.com/article/SB123853857749575441.html

Home Prices: Low, But Still No Bargain
Forget low mortgage rates and the buyer's market. Real-estate prices still have a long way to fall.
By BRETT ARENDS

Homeowners are watching anxiously for any signs of housing market stabilization. So, too, are all those who believe the market may hold the key to the economy.

And yet the most recent data makes for more gloomy reading.

The closely watched Case-Shiller index, which tracks prices across twenty major cities, shows that through January the crash was getting worse, not better.

And yet, even after these declines, homes overall still may not be that cheap relative to wages. More on that later.

The headline numbers are grim enough. January's Case-Shiller index showed a 19% slump from a year earlier. The usual suspects fared very badly: Phoenix was down a remarkable 35%. Las Vegas fell 32% and Miami 29%.

The crash has really spread, too. Minneapolis is down 20% and Chicago 16%. San Francisco, which had held up pretty well, has now turned in spectacular fashion. Prices there have fallen 32% in the past year, worse even than San Diego or Los Angeles.

San Francisco prices fell 11% in the last three months alone, according to Case-Shiller.

New York is down 10% over the last year, including a 4% decline in the last three months. That is still better than the average. Whether the market can withstand the crisis on Wall Street and widespread layoffs there remains to be seen.

How much further will prices fall across the country? Nobody knows, of course. But history says the bigger the bubble, the bigger the crash.

Those "professionals" in the market continue to be wrong-footed. Early last year I wrote that even though prices in Florida and California had collapsed, those markets were still overvalued. Naturally I was on the receiving end of lots of angry emails from real estate brokers who told me I was an idiot (or worse). Events since then have borne out my analysis.

(Incidentally: During the bubble, did a single broker ever complain to a media outlet that reporters were being "too optimistic" about house prices, or were "talking the market up" during a dangerous mania?)

House prices nationwide have now fallen about 30% from their 2006 peak. At these levels the contrarian, inevitably, starts to wonder if they have fallen far enough.

Certainly there are great deals out there. It is a buyer's market. The aggressive and opportunistic can probably find the worthwhile bargains.

But for the market overall the picture isn't as hopeful as you'd like.

Even today, prices overall have only reverted to levels seen in late 2003. Yet by that stage the bubble was already well inflated. You would expect a crash of this scale to retrace its steps much further. To find pre-bubble prices you have to go back to about 2000 – when values overall were about a third lower than they are today.

It's true that mortgage rates, now at 4.5% to 5%, are currently very low. But relying just on that is far too simplistic. Rates were also low from 2003 through 2005 – as many pointed out, disastrously, at the time.

Is there a bullish scenario for house prices? Sure. If all the government spending to turn around the economy reignites inflation in a year or two—as some predict—house prices could begin climbing again. But if the current price deflation continues, look for house prices to keep dropping.

Over the long term, average home prices have tended to track average earnings. And by this measure the market may have much further to fall.

I looked at Case-Shiller's index back to 1987 and compared it to federal data on average earnings. The result, rebased to 100 in January 1987, can be seen here. And it's alarming. By this (admittedly very simple) measure, today's home prices are actually more expensive, in relation to average earnings, than at the peak of the 1989 property bubble.

Equally noteworthy is that when the last property bubble burst, it took about eight years before the market showed really strong signs of revival. This bubble was far, far bigger.

[coreshot-tourettes]

ATM, absolutely correct. Buying now is a terrible financial decision if you want to sell anytime in the next 10 years - to say nothing of "investment" properties. Given that the current thesis is asset deflation, staple inflation (houses fall 50-60%, bread doubles), if you're a landlord how are you going to keep up your property when market rents fall 50% but copper pipe and drywall double? Think about that now.

Don't forget that they're going to correct down to 2.5x gross income, which *right now* means a drop of 50% in residential RE, but because incomes are likely to decline MORE due to people getting laid off, we might see a 60% or more drop from current house prices. Not even kidding. If you haven't factored this in, best do so now because it's coming. If you need to sell and are waiting for "home prices to recover", sell now for what you can - or wait 10 years to get your money back.

And if through all of this you've not even considered having 20lb of rice, 20lb of beans, 20 lb of lentils, 5lb of peanut butter, medical supplies, 1 month of cash, and 15 gal water (1 tsp bleach per 10 gallons) stored away in sealed containers, you're well behind the curve and need to start on that *now*. Not kidding. Go spend $60 at Costco. I'll sleep better.

[H0G]

Go spend $60 at Costco..

Just curious, what is your background?

edit - where did you get the 2.5x earnings?