Sometimes a random crawl though the ‘Net, with a focus on a specific topic, can provide insight into the current state of that particular topic. Here are the results of a random stroll through the net this afternoon with an eye on data relative to real estate development news.
COMMERCIAL REAL ESTATE (CRE)
PricewaterhouseCoopers' Korpacz Real Estate Investor Survey® states that cap rates (i.e., first year’s net operating income divided by capital invested) are drifting downward because most current purchases involve Core assets – well constructed, well located (c.f., gateway cities), class A properties with high occupancy rates and credit worthy tenants on long-term leases.
While this represents a flight to quality, which is not uncommon in these sort of uncertain financial times, it’s good to remember that aren’t that many sales from which to draw conclusions. This is because many properties remain overpriced in relation to their income production and leasing situations. Also, interest rates remain low, so money is still cheap which drives bond returns lower, and this affects most other investment returns.
In addition, investors continue to wait to take advantage of the underwater CRE properties, most of which have not hit the market because lenders are slow to force the issue with foreclosures. This particular behavior pattern may be driven to some extent by deflationary expectations.
Although CoStar Group reports that foreign investment in the U.S. real estate has nearly doubled in the first half of 2010 over the dismal numbers from one year ago, the overall activity remains muted by the slowly recovering economy and a lack of high-quality property available in large U.S. metro markets.
RESIDENTIAL REAL ESTATE:
PMI Mortgage Insurance Company's economic analysts forecast sales to reach an annualized rate of 5.6 million in the third quarter, and 5.75 million in the fourth. This still is very low in comparison to the years leading to the orgy in residential development and sales.
Rick Newman, writing online for the Thach Real Estate Group notes that: “Home prices have been falling since 2006, and in many areas they still haven’t hit bottom. With foreclosures and short sales still on the rise, prices will probably keep falling into next year. Once prices stop falling for good, homeowners will adjust to their new, lower net worth, and potential buyers will stop worrying about investing in an asset that’s falling in value. But a significant pickup in sales depends largely on the job market, since buyers need to feel confident about their job security before committing to such a large purchase. Since housing varies greatly by region, some areas will recover sooner than others. When it might happen: Second half of 2011.”
Alejandro Lazo, writing for the Los Angeles Times cites a recent RealtyTrac report to the effect that “The continued convergence of the two trends — fewer notices of default filed on homes but more properties sold at courthouse steps — indicates that major lenders are meting out foreclosures in a systematic way so as not to flood the housing market with a wave of steeply discounted properties.” This suggests that the foreclosure/short sale dilemma will continue for some time. In fact, Lender Processing Services Inc. finds more delinquent loans entering the foreclosure process "first look" at August month-end mortgage performance statistics derived from its loan-level database of nearly 40 million mortgage loans.
On the other hand, CoreLogic reports that “distressed sales - real estate owned (REO) and short sale transactions - are at a seven-month low. It attributs the low levels primarily to tax-credit-induced sales increases. With the expiration of the tax credit, the share of distressed sales is expected to rise in the fall”.
Finally, the Wall Street Journal’s online news offers this: “Allure of Home Ownership Dims: The number of people who say they consider housing a safe investment continues to decline, falling to 67% in July from 70% in January and 83% in 2003, according to a new Fannie Mae survey.
The WSJ also notes: “Home sellers continued cutting prices in August, real-estate website Trulia.com reports. As of Sept. 1, 26% of homes on the market saw their prices cut–accounting for more than $29 billion in reductions. Price cuts on average were about 10%, or about $34,000.”
CONCLUSION:
Things remain slow in the CRE and residential markets, and probably will continue to be so for awhile. Recovery in the employment market and ultimate disposition of the mortgage dilemmas encumbering both CRE and residential markets remain necessities.
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