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Pasadena Buyer Agent Real Estate Thoughts
April Los Angeles Real Estate Update
Posted at 5:32 PM, Apr. 6, 2008
April Update
Employment is falling and the spillover into the greater economy is no longer a question of if but how much and for how long.
Commercial real estate is being impacted
In the January 17, 2008 - January 23, 2008 edition of Commercial Real Estate Direct as reported by Loopnet the current price declines may portend even worse activity and price levels.
"Commercial property prices declined in October and November, according to a pair of national property indices. Prices gauged by the Moody's/Real Commercial Property Price Indices and S&P/GRA Commercial Real Estate Indices reported that prices have dropped 20 basis points. The price fluctuations have been a byproduct of the credit crunch, which has reduced the availability of debt financing and created uncertainty about how to price properties. The Moody's/Real index recorded about 250 closed transactions during November, the lowest monthly volume since turmoil in the credit market began impacting the commercial property sector last summer. "
Additionally, Allen Matkins with the UCLA Anderson Forecast California Commercial Real Estate Survey reveals that the Southern California office space market "will generally continue to weaken through 2010" as reported on Business Wire via Yahoo! Finance on Thu, 24 Jan 2008.
Lending standards are tight and getting tighter
Nothing has happened in the last month to indicated that the market has firmed. If anything, there is a preponderance of evidence that the credit markets are still unable to regain their footing and function correctly. It is expected that while Freddie Mac and Fannie Mae will be able to buy loans with higher limits they will be tightening their lending standards. Very soon I expect that the normal loan will once again be 20% down plus closing costs with a 30 year conventional mortgage.
That means for a $500,000 home you will have to have $125,000 or so in cash to cover the down payment, closing costs, moving expenses, and pre-move in improvements. This will materially limit the number of buyers. While credit continues to tighten, demand with be damped, and prices will continue to be under severe pressure. Additionally, with the tighter lending standards, many who need to refinance will not be able to do so. This means defaults and foreclosures are likely to increase through at least the the end fo the year.
Impact of Employment
One significant factor that I often try to keep in mind is that as long as employment stays relatively high then the market should at least stabilize by the end of the year. If large number start to lose their jobs then defaults and foreclosures will continue unabated. Thus, downward pressure on home prices will remain strong.
Home prices are under continued pressure
Posted at 12:33 PM, Jan. 6, 2008
Home prices are under continued pressure
Job creation in CA and nationally is slowing. If this leads job losses then expect the pressure on home prices to deepen.
Wall Street is now pricing in slower growth. Whether this is a mild recession or a large one will in large part depend on the availability and terms of credit and on the willingness of borrower's to take on risk. If credit goes through another round of tightening or if borrower's become more risk adverse then ecomonic conditions will additionally pressure home prices.
A bottom will not form until home sales and home starts stop falling and foreclosure activity stops increasing.
The charts reference above are from Mish's Global Economic Trend Analysis who got it from a friend who goes by the name "BC".
It is unlikely that foreclosure activity will slow until at least the end of spring 2008 when most of the ARM reset are completed.
Thus, the bumping ride continues.
Home prices will be effected by a Screenwriters Guild strike
Posted at 7:35 PM, Nov. 4, 2007
Home prices will be effected by a Screenwriters Guild strike
More than any other group the unemployed tend to loss their homes. Thus, the impact of a strike by Writers Guild of America effecting the entertainment industry, a major source of income for those in Los Angeles county, is very noteworthy.
The impact of a strike is likely to be widespread. First effecting those directly employed by those in the industry and other business used in the day to business of producing entertainment, such as caters and security. A strike of 2 months or more will effect places business further down the spending chain such as art galleries and coffee shops.
The areas likely effected by a strike will be areas not seriously effected by the sub prime woes. Hollywood, West Hollywood and most of the west side are likely to be the hardest hit. If a prolonged strikes occurs, foreclosures will put significant pressure on prices.
I think it is interesting that the last strike preceded the last major slow down in housing. I am not suggesting that there is a cause an effect relationship between the two. However, I do not think that a strike effecting a significant economic segment in an economic environment of housing weakness can lead to anything positive in home prices.
Housing woes weigh on entire economy
Posted at 8:09 PM, Sep. 9, 2007
Housing woes
weigh on entire economy
In my previous entries, I have indicated how commercial real
estate and the broader economy could be effected by the slump that
began in residential real estate. It is now evident that they are
being effected.
Commercial real estate is slowing. Loopnet recently reported that
net demand for commercial space has fallen this year. As reported
in the LABJ, CB Richard Ellis' stock was effected by a stock
analyst's call for the commercial real estate market to weaken.
Pete Kendall's Blog carried a
report by Hui-yong Yu and David M. Levitt who quoted various
sources who felt weakness in commercial real estate.
It now appears that employment is, also, effected. Recent
economic reports indicate that jobs fell for the first time in four
years, there were downward revision in the previous months data,
and a significant fall in the labor participation rate.
Also, please remember, the employed typically do not lose owner
occupied residences. Thus, the bleak employment report indicates
that foreclosures and pressure on home price will likely remain or
worsen in the months ahead.
The last remaining indicator is consumer spending. Thus far it
has not materially slowed. If it does, then a serious economic
slowdown will be difficult to prevent. This will of course deepen
that pressure on home prices. Nouriel Roubini, a professional economist,
writes about this in his September 7, 2007 blog entry. He says "And
if consumption slows down the build-up of inventories of unsold
goods will force firms to slow down production, employment and
capital spending. Such investment spending by the corporate sector
was already weak in the last few quarters in spite of the high
corporate profitability. Now you can expect further weakening of
such real investment because of expected lower consumption demand,
higher credit spreads for the corporate sector, uncertainty about
the future given the volatility in the markets. The sharp
re-pricing of risk that took place in the summer – with higher
credit spreads for a broad variety of instruments – implies much
higher borrowing costs for consumers, buyers of homes, corporations
and financial institutions. Thus, the slowdown of private
consumption and capital spending in residential, non-residential
and corporate investment will get more severe."
We are a long way from a bottom. A bottom is at least 12 months
if not 24 months away as most of the ARM resets will occur in the
spring of next year and it will take the market at least a quarter
to digest them.
Uncertainly reigns
Posted at 7:24 PM, Aug. 19, 2007
Uncertainly reigns but perspective is needed.
This week Countrywide draw down its credit line to finance operations, the US Federal reserve accepted mortgage backed securities as collateral in its repo agreements rather that just treasuries, and probably the most important event for the average homeowner is that Countrywide will not longer accept applications for or fund jumbo loans. Jumbo loans are loans that cannot be sold to Freddie or Fannie. Most single family homes in the Los Angeles area are over that limit. This effectively removes a huge portions of liquidity from the market.
Those with fixed rate loans, high income or reserves, or lots of equity can ride this market out just like many people did back in the early 90's. However, there are enough people with adjustable rate mortgages that are facing resets in the next year that home prices are likely to remain under pressure for another year or so.
Not a repeat of the 90's
In returning to a theme I wrote about quite a bit last year, as long as employment stays at low then most people will not lose their homes and we will not see a repeat of the 90's. There will be isolated bargains as some will be forced to sell in this market. Most mortgages over the last 5 years are not adjustable rate mortgages, most people will stay employed, and most people will not lose their homes. Even during the Great Depression 75% of people were employed.
The severe tightening of the credit markets are making it hard on companies to finance operations and expansions. This is causing great uncertainty about the stability of employment. This uncertainty is a significant reason for the increase in stock volatility.
Real people have had real loses. If this becomes a bear equity market and inflation is not brought down, consumer spending will likely decrease. This could lead to a downward spiral where reduced consumer consumption then leads to more unemployment.
This scenario is just one of many that may occur in the months ahead. Thus far the world's central bankers have acted quickly to address the severe credit tightening . However, the probabilty of a recession has gone from unlikely to possible and that has introduced considerably uncertainty into the market. While everyone is hoping for a good outcome, a bad outcome is now more clear than previously.
It will likely be April of 2008 before all the uncertainly clears. This is due to the schedule of resets on adjustable rate mortgages.
What should you do?
What should the average buyer do? Save, Save, Save! Narrow the location you are interested down to a short list. Monitor the market in case a bargain becomes available. Talk with at least 2 lenders. If that can't pass up home becomes available you want to be able to act quickly. Real bargains do not stay on the market long in any market. Of course, if you have the funds to buy now, know the location you want to live, and can get financing you are comfortable with, then buy. As long as you are buying wisely and plan on living in the home for years then it is extremely unlikely that you are making a bad move.
What should the average seller do? Price your home to sell or don't list it all. Visit all the homes for sale within 1 mile of your home that are similar. Know your competition. If you don't need to sell, don't.
At http://money.cnn.com/galleries/2007/fortune/0708/gallery.crisiscounsel.fortune/13.html you will find several views and perspectives. What Ben Stein says about the long term prospects for equity can be applied to real property as well.
August 2007 Southern CA Residential and Commerical Update
Posted at 7:56 PM, Aug. 12, 2007
What next for residential and commerical real estate markets in Southern CA?
In one sentence - Down we go! Caveat is that very long term things still looks good due to demographics.
It should be clear to all now that the lending problems in the subprime market have not stayed within the confines of that market. Foreign agencies in Germany have bailed out at least one of their smaller banks that uses commercial paper to fund the purchase of US CDO's. One the other side of the Ocean the US Federal Reserve added liquidity to the credit markets by buying bonds that banks were holding.
The economic fallout from reduced spending by those involved (agents, brokers, escrow offices, loan officers, painters, tile workers, ect.) with the housing market should soon begin to show up in the aggregate numbers. In Saturday's, LA Times, Christopher Thornberg, former UCLA economists now with Beacon Economics, indicated that "people are hurting."
Consumer spending will likely be effect by the downturn in housing as the slump continues this year and next. Additionally, as commercial real estate activity slows, as it will due to lack of available affordable financing, job growth will at least slow and possibly stall. That will also likely reduce consumer spending.
One significant unknown is how deeply consumer spending will be effected. As consumer spending becomes more deeply effected the more likely a recession becomes.
The recent drop in the demand for oil is not a good sign. The demand for oil, the price of oil, and global growth are directly related. Is the drop in oil a sign the global growth is stalling?
And what does this all mean to the price of your home? It means that there is almost nothing in the environment that will support price and that the price of most homes will fall in the months ahead. The slump will not end before most of the adjustable rate mortgage have reset. It may not end there but it will not end before that time.
Is this a time to buy? Not for most people. Is this a time to try an sell? Not for most people.
However, any home priced well will sell within 90 days. The key is correct pricing. Most are unwilling to market there home at a price that will sell. It will mean taking a loss when compared to 1 or 2 years ago. Of course, if you bought your home 5 years or more ago, you have still made a good deal of money.
Markets slow as credit tightens across the board
Posted at 6:43 AM, Jul. 30, 2007
Expect further slowing in the real estate markets - residential and commercial
Commercial and residential real state markets are buoyed by the ability of bankers to securitize and sell loans. This provides more funds to make still more loans. Bankers ability to securitize is being changed and buyers of the securities demand higher lending standards and greater return.
Over the last several weeks, the market for sub prime residential mortgages as all but disappeared, the market for prime residential mortgages has been characterized with much tighter lending standards, and the market for leverage financing commonly used in buyouts and by real estate investment trusts (REITS) has seen a huge decline in volume as buyers want more loan covenants and higher interest rates.
This is likely to lead to slow down in the commercial real estate market, as interest rates rise and lending standards tighten. This will also likely lead to further declines in residential real estate prices as more potential home buyers are unable to get financed and as more potential home buyers decided that the asset they are considering is not worth it to them.
Still there is little signs of reduced consumer spending. As long as corporate profits are maintained employment is likely to stay high and consumer spending likely to stay healthy. Thus, these changes are not likely to spread to the general economy and the changes in business conditions will remain limited. Nonetheless, a slowdown in the volume of deals and the rate of expansion is expected.
Risks has increased in the markets everywhere and the credit markets have reacted to that. This is not surprising or unexpected this late in the business cycle. The stock market is also reacting to the changes in the credit markets and to the increasing perception of risk. While the world is not ending, life may go back to how it was before massive amounts of credit were available, cicera 1999.
July 2007 Market Update
Posted at 1:19 PM, Jul. 22, 2007
July 2007 Market Update
On Wednesday, July 18, 2007 the California Association Of Realtors reported that "builder confidence continues to erode and U.S housing permits, starts fall in June."
Jonathan R. Laing reported recently in Barron's that "far greater troubles await the subprime market in the next two years". This points to continuing tightening of credit, which will reduce demand for homes, and keep downward pressure on home prices. In a separate article, Ian Shepherdson reported in the same edition of Barron's that for historic norms to be reach home prices will have to fall at least another 25%.
Borrowing to buy an asset the may depreciate is enough to keep many people out of the market, according it Ian.
That is my experience as well. Since home ownership is most always a discretionary purchase, there has to be a strong incentive to buy. Otherwise, most potential first time buyers or move up buyers find in easier, financially and emotionally, to rent.
The Los Angeles Times recently reported that in the Inland Empire, rents are falling, due to the supply of rental homes on the market. This is unusual. One would expect an increasing number of renters to put upward pressure on rents. However, supply is increasing faster than demand for rentals even in a market with tighter credit that is forcing many first time buyers out of the market. This is not yet happening in Los Angeles as supply is still tight especially on the west side. Still, it is an unwelcome development in the California market.
Lastly, the Los Angeles Business Journal once again reported that volume is falling in Los Angeles County. This is troubling because portends deterioration in home prices.
All of this points to a market that will continue to slowly correct itself during at least the next year.
On a positive note, commercial real estate is still booming locally and nationally. While there are some signs that consumer spending is slowing down, the most likely cause is higher energy and food costs. If these prices do not abate then a full recovery in housing may take longer than it otherwise would. However, at this point it does not look like the housing market slowdown is spreading to the rest of the economy.
Long term rates headed higher - June 2007
Posted at 2:51 PM, Jun. 17, 2007
Long term rates headed higher
Recent action in the bond market strongly suggests that interest rates for most mortgages will be going up. This will put further pressure on demand as less and less families are able to obtain mortgages. Price will eventually have to come down for any seller who must sell. The demand is simply not there.
Homeowners who are able to continue to make their mortgage payments and ride out this market are likely to do fine in the long term. Those who lose their homes or are forced to sell will not do as well. This has happened before. Those who bought in 1989 or 1990, before the last downturn, and where able to ride it out did quite well.
When may it end?
If history is any indication, not for a while. The basic drivers of demand are income and for most that means employment. Until employment and income heats up significantly demand is not likely to be sufficient to create an upturn. An artificial driver of demand is exotic mortgages. It would seem that the days of those loans are over until at least the well into the next up cycle.
Higher bond prices are not good for the rest of the economy either. It cost companies more to finance their operations and thus they will slow expansion. Whether this will lead to higher unemployment is anyone's guess at this point. It may mean just a slower economy for a while.
As the cost of capital increase, demand for it will decrease and this in turn means that less will be spent on what capital buys. The typical uses of capital include labor and equipment. Thus, capital spending excluding government spending, may be a good indicator to watch for clues as to a trend change in the housing marketing.
Housing prices can fall with high employment
Posted at 5:42 PM, May. 16, 2007
General sentiment is negative
Last month I spoke personally to over 50 potential home buyers and for a great majority the attitude was similar "housing is too expensive." That is, they are not willing to borrower to obtain an asset at its current price. While reading an article authored by Steve Roach and recently published by John Maudlin, I began to think more deeply about the relationship of buyer psychology to asset prices. While the article's focus was not the housing market the article did cause me to think that buyer psychology could in itself cause home prices to fall.
Liquidity is moving out of housing
To see if this thought had any merit to the Southern California market I researched more completely the cause of the increase in home price appreciation. It is now generally believed that the home price appreciation was caused by unprecedented world wide expansion of liquidity. Increasing liquidity causes inflation. The inflation can be in consumer prices or in asset prices.
Why liquidity matters
This inflating has been going on for decades beginning with the Japanese real estate and stock markets. As that market collapsed the liquidity then moved. Some of it was lost, some of it was withdrawn from the systems by central bankers and some of it went on to fuel the US stock market. The reactions to that boom turned bust was an increase in liquidity by central bankers that fueled a real estate boom in major cities worldwide and also fueled a worldwide commodity price boom. Now there is evidence that the liquidity is causing general price inflation. Liquidity looks for a return on investment that is at a minimum greater than inflation. So if liquidity leaves one market, as it is leaving the mortgage market, it must go somewhere else. Thus, it is not likely that decreasing mortgage liquidity will help the Southern California real estate market.
With reduced by still available liquidity buyers still won't necessarily buy
The real estate market is traditionally driven by incomes. Your income has to be such that a lender believes that repayment can and will be made through your income. Additionally, a borrower has to believe that the assets being purchase will go up over time, because even at zero percent interest it makes no sense to buy an asset that will decline in value.
Little upside potential and an opportunity of some
There is so much pressure on prices that I have difficulty seeing the upside potential in most homes now. However, there are some homes and some situations where it makes sense to buy. It almost always makes more sense to own rather than rent if you and your lender are comfortable with the deal, you have a sizable down payment and/or ample cash reserves, and you are going to occupy the property or one of the units. Much of the reason that this is so has to do the tax advantage of home ownership. This is way the very affluent will always own and purchase real estate.
Prices must fall if these views are held or come to be held by most buyers, regardless if there is ample liquidity and high employment.
For very honest conversations about current market conditions and what they mean to your situation contact me. I can be reached at 626.205.8142 or by email.
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