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Housing: The Best Leading Indicator for the Economy

Feb 24, 2010 | No Comments | Sean Mills

Of course this is contrary to what the National Association of Realtors is saying, but you make the decision.-Sean
Historically the best leading indicator for the economy (and employment) has been housing. I’ve been writing about this for years. For a great summary paper, see Professor Leamer’s presentation from the 2007 Jackson Hole Symposium: Housing and [...]

Of course this is contrary to what the National Association of Realtors is saying, but you make the decision.-Sean

Historically the best leading indicator for the economy (and employment) has been housing. I’ve been writing about this for years. For a great summary paper, see Professor Leamer’s presentation from the 2007 Jackson Hole Symposium: Housing and the Business Cycle

For housing as a leading indicator, I use Residential Investment (quarterly from the BEA’s GDP report), and monthly data on Housing Starts and New Home sales from the Census Bureau, and builder confidence from the NAHB.

Read More » »

Interview With A Commercial Real Estate Developer

Dec 13, 2009 | No Comments | Sean Mills

Earlier this week I received an email from Ilene at Phil’s Stock World about her interview with a Commercial Real Estate Developer.
Ilene writes “Hi Mish, I thought you might find this interesting, and perhaps want to use some or all of it. I know my interviewee well, and his thoughts in this area have been [...]

Earlier this week I received an email from Ilene at Phil’s Stock World about her interview with a Commercial Real Estate Developer.

Ilene writes “Hi Mish, I thought you might find this interesting, and perhaps want to use some or all of it. I know my interviewee well, and his thoughts in this area have been consistently correct.

With that backdrop here are a few excerpts from Interview with a Commercial Real Estate Developer about the CRE Industry.

Mr. Solomon (name changed) is a CRE veteran with 40 years of experience developing commercial real estate in 15 states and has kindly agreed to be interviewed about the current conditions in the CRE market.

Ilene: What are you seeing in the CRE market now?
Mr. Solomon: CRE is undergoing deleveraging with the rest of the economy, debts are being reduced or going into default. Large numbers of projects are not cash flowing and will have to be liquidated, or ownership will have to be transferred. Concurrently, there’s an oversupply caused by the same ill advised financing that led to the overbuilding.

Read More » »

Distressed Asset Update

Dec 7, 2009 | No Comments | Sean Mills

Two years ago, almost everyone was discussing, and looking forward to, a tsunami of distressed assets which would be coming to market based upon the sub-prime mortgage crisis and the stresses it would exert on the credit markets in general. In September of 2008, when Lehman failed and Wall Street as we knew it was [...]

Two years ago, almost everyone was discussing, and looking forward to, a tsunami of distressed assets which would be coming to market based upon the sub-prime mortgage crisis and the stresses it would exert on the credit markets in general. In September of 2008, when Lehman failed and Wall Street as we knew it was structurally transformed from an investment banking platform to one of bank holding companies, the “almost everyone” mentioned above was changed to “everyone”. But the tsunami has not arrived, not even close.

The fact that only a few distressed assets have been put in play is not because they aren’t out there. The pipeline is chock full of them.

Let’s use the New York City marketplace as an example. In the 2005-2007 period, there were $109 billion of investment sales in New York City. Based upon reductions in revenue (rent levels) across all product types including residential, office, retail and industrial and cap rate expansion, values have declined by 32%, on average, year to date. If we eliminate multifamily properties from this analysis, values have fallen from peak levels approximately 48%. Based upon these reductions, we estimate that, of the $109 billion spent on investment properties, $80 billion of that was spent on properties which now are in a negative equity position. This relates to about 6,000 properties.

If we include properties which were refinanced during the 2005-2007 period, the number of properties having negative equity jumps to 15,000. We estimate that there is about $165 billion in debt on these properties and, based upon today’s underwriting standards, there should only be about $65 billion in debt on them. This means that in order to have a conservatively leveraged marketplace, we would need to extract $100 billion in debt.

Clearly, this will not happen. Many investors have the ability to feed their properties and, based upon a desire to own them on a long-term basis, will do so. Other transactions will be worked out utilizing any of our favorite terms which have become commonplace in today’s vernacular including, “extend and pretend”, “delay and pray”, “a rolling loan gathers no loss” or “kicking the can down the road”. We do believe, however, that $30 to $40 billion will ultimately be extracted from the market in the form of losses.

So where are those distressed assets now? Some have not come to the market because they aren’t even in default yet due to mortgages which are still in interest only periods or are operating on an interest reserve set up by the lender when the loan was originated. Others have loans floating over 30-day LIBOR which closed on friday at 23 basis points (3-month LIBOR is only at 26 basis points). At 150 over LIBOR, the rate being paid on those loans would only be 1.73% and they can cash flow at those levels of debt service. While some properties are fundamentally under water, they are not yet in default, but likely will be when these advantageous terms expire.

Other distressed assets haven’t come to market because everything that has happened legislatively has allowed lenders to hide bad assets on their balance sheets. The FASB mark-to-market accounting rules have been modified to allow loss avoidance. Similarly, bank regulators will now allow lenders to hold a loan on their balance sheet at 100 even if they know that the underlying collateral for that loan is only worth 60. Additionally, modifications to the REMIC regulations have made it easier for CMBS loans to be kicked down the street.

Any of these delaying tactics will only be beneficial if appreciation is anticipated in the short-run. Given the massive deleveraging the market must experience and unemployment rates which are anticipated to remain elevated for at least another year to 18 months, we do not see support for the short-run appreciation argument.

We really don’t understand the reluctance of lenders to deal with these problem properties. Many of those that are in default are currently in the foreclosure process. This is a frustrating process, especially in New York, as it can take years to get through the process and obtain the title to the collateral. Many borrowers further complicate things by going into bankruptcy, which, based upon backlogs in the bankruptcy courts, adds additional time to the process.

It is very difficult to say this without sounding completely self-serving ( After all, I do sell buildings and notes for a living) but, if a lender wants out of a bad deal, selling a note today is likely to lead to a better recovery than waiting a year or two.

We believe this because the lack of product on the market toady has created a dynamic in which many investors are fighting over relatively few opportunities. Because of this, particularly on our income producing properties for sale, we are generally receiving 25 to 35 offers for each. Furthermore, on each note we have sold this year, we have received over 50 offers. This is due to the fact that buyers today would rather purchase from a lender than a private seller, believing they will get a better deal. “Believing” is the key word in the last sentence.

Due to the excessive demand for distressed assets, buyers are currently paying aggressive prices for anything banks are selling.  In many cases this year, we have obtained prices for notes that, we believe, are at or very near the value of the underlying collateral.

Some lenders are taking advantage of these dynamics to rid their balance sheets of underwater loans and are using the proceeds to make good loans today. Consider that two years ago, bank spreads, based upon all of the competition to put money out, were as low as 30 or 40 basis points. Those spreads can be 300-400 over corresponding treasuries today. Additionally, today’s loans have less risk associated with them as, rather than a loan to value ratio of 75%-85%, LTVs today are generally in the 60%-65% range. These loans are also significantly less on a price per square foot basis than they were two years ago.

If your business was 10 times as profitable as it used to be and there was much less risk involved, wouldn’t you be trying to do as much business as you could?

“Out with the bad, in with the good”, should be the mantra of lenders today. Until now, this has been slow to develop. To illustrate this, consider the following very telling statistics: Massey Knakal is asked by potential sellers to provide opinion of value reports and provide an explanation of our marketing program and we exclusively list about 31% of the properties that we are asked to analyze. It is just like a batting average in baseball, if we are hitting .300, we feel pretty good. With lenders and special servicers we are working with, we have completed just over 1,000 valuations and have exclusively listed just 12 properties/notes. That is a batting average of just .012. Many of these opportunities have simply not come to the market in any form. Perhaps the lender/servicer is waiting to see what the future will bring; perhaps they are simply making deals with the borrowers.

We have, however, seen this freeze thawing slightly as 2009 comes to a close. We expect to be coming to market with several distressed notes from lenders and special servicers right after the holidays and remain optimistic that we will be able to continue to achieve pricing at levels where the recovery versus collateral value is significant. There are also some foreclosures which should be concluding shortly which will lead to some REO which should be placed on the market shortly thereafter.

Let’s hope that 2010 sees a significant rise in these opportunities coming to market. It appears that the year will, at least, start out that way.

Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,000 properties in his career.


Possibly related posts: (automatically generated)

Source Article www.globest.com

 

  • The Incline Village Foreclosure & Distressed Property Update
  • Don’t Buy a House Yet

    Dec 7, 2009 | No Comments | Sean Mills

    When housing prices hit bottom, they will languish near those low levels for years to come. So don’t be in a rush to buy.
    Mortgage interest rates are at a 50-year low. Last month, Congress extended a tax credit for home buyers through April. The economy is beginning to crawl out of what by some measures [...]

    When housing prices hit bottom, they will languish near those low levels for years to come. So don’t be in a rush to buy.

    Mortgage interest rates are at a 50-year low. Last month, Congress extended a tax credit for home buyers through April. The economy is beginning to crawl out of what by some measures is the deepest recession since the 1930s. One survey already shows house prices beginning to rise.

    So isn’t it time to buy a home? Kiplinger’s certainly thinks so. But if I were in the market for a new home, I would wait. Housing prices typically don’t rebound quickly after a bust; instead, they level out and stay near that low base line for years.

    Read More » »

    As Vacancies increase, Landlords are offering more incentives

    Nov 11, 2009 | No Comments | Sean Mills

    This is the growing trend among landlords to retain their existing tenants.  Just like any business venture, it is cheaper to retain your customers than to acquire new ones.  This is common sense yet so many landlords do not get it nor do the majority of smaller PM companies.-Sean
    Amid the jobless recovery, some landlords are [...]

    This is the growing trend among landlords to retain their existing tenants.  Just like any business venture, it is cheaper to retain your customers than to acquire new ones.  This is common sense yet so many landlords do not get it nor do the majority of smaller PM companies.-Sean

    Amid the jobless recovery, some landlords are showering flat-screen TVs, cash, rent cuts and other incentives on tenants to encourage them to renew their apartment leases and thus avoid the expense of filling empty units.

    UDRThe poor apartment-rental market has slowed new construction. Above, The Residences at Stadium Village in Surprise, Ariz., developed by UDR.

    Read More » »

    Foreclosures Continue to Put a Damper on Home Prices

    Nov 11, 2009 | No Comments | Sean Mills

    Funny thing is there is still a massive log jam of NOD/auction homes not making it to the market nor are they going back to the lenders.  The % of postponed auction properties ranges from 91-95% depending on the city and county here in most southern California markets.  How it will loosen up or when [...]

    Funny thing is there is still a massive log jam of NOD/auction homes not making it to the market nor are they going back to the lenders.  The % of postponed auction properties ranges from 91-95% depending on the city and county here in most southern California markets.  How it will loosen up or when it will loosen up is anyone’s guess.  There is a lot of speculation with individual and group investors buying to flip which makes me think “hey is that how we got here in the first place?”  Unemployment at record levels, job loss still topping the daily news stories, national healthcare plan proposed..hey it is a great time to speculate.-Sean

    Home prices continued to decline across the nation as sales of heavily discounted foreclosed properties weighed down the market.

    Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier, according to the National Association of Realtors. The national median price was $177,900, down 11.2% from the third quarter of 2008.

    Read More » »

    Fannie to Rent to Owners in Foreclosure

    Nov 10, 2009 | No Comments | Sean Mills

    Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government’s latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.

    Fannie Mae plans to allow homeowners facing foreclosure to stay in their homes and [...]

    Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government’s latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.

    Fannie Mae plans to allow homeowners facing foreclosure to stay in their homes and rent them. WSJ’s Constance Mitchell Ford breaks down whether this will really help troubled borrowers, in the News Hub.

    Read More » »

    FHA Digging Out After Loans Sour

    Nov 10, 2009 | No Comments | Sean Mills

    Last fall, as the financial system was teetering and the biggest banks were tightening credit, Karen DeForte couldn’t find a lender to refinance the two mortgages on her New York home, until she received a phone call from Lend America.
    Most banks rejected Ms. DeForte because her debt level was too high and her credit score [...]

    Last fall, as the financial system was teetering and the biggest banks were tightening credit, Karen DeForte couldn’t find a lender to refinance the two mortgages on her New York home, until she received a phone call from Lend America.

    Most banks rejected Ms. DeForte because her debt level was too high and her credit score too low. But Lend America put Ms. DeForte into a $402,000 loan backed by the Federal Housing Administration, a New Deal-era agency that Washington and Wall Street were relying upon to pick up the slack in the mortgage market as private lenders pulled back. Ms. DeForte fell behind on payments six months later and is seeking a loan modification. Taking the loan was “a stupid mistake,” the 46-year-old office manager said.

    Source Article

    Read More » »

    Tax Refunds, Relief for Builders

    Nov 10, 2009 | No Comments | Sean Mills

    The new tax break for businesses signed into law on Friday will result in a windfall valued at hundreds of millions of dollars for the biggest home builders, boosting the cash hoard the companies are tapping as they limp toward recovery.
    The tax break would give companies big refunds to help make up for recent losses. [...]

    The new tax break for businesses signed into law on Friday will result in a windfall valued at hundreds of millions of dollars for the biggest home builders, boosting the cash hoard the companies are tapping as they limp toward recovery.

    The tax break would give companies big refunds to help make up for recent losses. Specifically, it would let large firms claim cash refunds on taxes they paid going back five years, to offset current losses. Previously, the carry-back period for large firms was two years.

    Read More » »

    The new faces of day labor

    Nov 10, 2009 | No Comments | Sean Mills

    The new faces of day labor
    U.S. citizens are joining immigrants in store parking lots

    It sounds like a George Lopez joke.
    “Times are so bad that I saw an Anglo day laborer standing outside Home Depot the other day.”
    Except it’s true.
    In the latest sign of the Las Vegas Valley’s economic free fall, U.S. citizens are starting to show up [...]

    The new faces of day labor

    U.S. citizens are joining immigrants in store parking lots

    Image

    It sounds like a George Lopez joke.

    “Times are so bad that I saw an Anglo day laborer standing outside Home Depot the other day.”

    Except it’s true.

    In the latest sign of the Las Vegas Valley’s economic free fall, U.S. citizens are starting to show up in the early mornings outside home improvement stores and plant nurseries across the Las Vegas Valley, jostling with illegal immigrants for a shot at a few hours of work.

    Experts say the slow-starting but seemingly inexorable trend is occurring nationwide.

    “It’s the equivalent of selling apples in the Great Depression,” said Harley Shaiken, chairman of the Center for Latin American studies at the University of California, Berkeley.

    But it is not only a sign of the times, they add. If the numbers of citizens among the day laborers in cities across the country continue to grow, it’s likely to increase the ire of followers of TV host Lou Dobbs and others who will see illegal immigrants as stealing food off the tables of the nation’s native-born or naturalized poor.

    Or, it may flip certain canards upside down in the immigration debate, easing tensions in some communities.

    In the Las Vegas Valley, where the most recent unemployment rate was 13.9 percent, one face of this phenomenon is Ken Buchanan. The 50-year-old describes himself as a “food and beverage” guy, most recently working for four years at Renata’s Sunset Lanes casino and, before that, 30 years in a string of restaurants, hotels and casinos here and in his birthplace, Chicago.

    But in 2006 Renata’s closed for remodeling. When the casino reopened as Wildfire, the management did not rehire Buchanan, he said.

    In the months that followed, Buchanan discovered the difficulty of seeking work in his fifth decade, eventually winding up at Green Valley Car Wash, where he stayed for about two years, he said.

    The banks foreclosed on the house he was renting. In the attempt to grab his things two steps ahead of the constable, he wound up missing work. He lost his job. He became homeless.

    A Hispanic man Buchanan met in Renata’s sports book told him he had picked up work standing outside the Home Depot on Pecos Road at Patrick Lane. One July day, Buchanan gave it a try. At first, he got nothing but sunburn. But then he started to get work. Now he’s at the Home Depot six days most weeks.

    Pablo Alvarado, executive director of the Los Angeles-based National Day Laborer Organizing Network, said he has been seeing the same thing elsewhere. “It’s happening, though still not in massive numbers,” Alvarado said. In the past six months or so, he has heard of “americanos” on the street corners and parking lots of Silver Spring, Md., Long Island, N.Y., and Southern California locations.

    “It’s just beginning,” he said. “But I think it’s only going to increase.”

    A recent morning’s swing through the valley produced reports of the same phenomenon. At Star Nursery on Cheyenne Road west of Tenaya Way, Nicolas stood shivering under a hooded sweatshirt, hoping a car or pickup would stop. The Mexican immigrant said he had seen a couple of “white guys” showing up recently, though not on the blustery cold days last week.

    At Home Depot on Decatur Boulevard north of Tropicana Avenue, Jose said the same thing, adding that “it’s never more than three or four, but they’re coming out.”

    Farther south, in front of Moon Valley Nursery on Eastern Avenue, Israel said a couple of “americanos” — white and black, he added — have come out for work in recent months. “But they tend to stay only a few days.”

    As a salesman at Moon Valley, Mike Fugitt’s job includes making sure the laborers don’t come into the nursery’s parking lot, because their presence draws complaints from some customers. In the past three months or so, he said, more of those laborers have been telling him, “But I’m an American.” That includes some Hispanics, he added. “But I treat them all the same; they can’t be trespassing,” he said.

    Workers at all the sites said the presence of the americanos hasn’t made work scarcer or produced any conflict. Some suggested that people hiring day laborers prefer Hispanics anyway, because of their reputation as hard workers.

    Shaiken said shaking up the mix at day labor sites may eventually produce conflict in the greater society. “It essentially shreds the argument that Americans don’t want certain jobs,” he said.

    In the current economy, he added, “we’re almost sure to see die-hard opponents of illegal immigrants seize on the fact that we have legal workers in day labor markets,” heating an already-inflamed debate.

    In the longer term, it may also lead to a more rigorous analysis of future labor markets, including revised estimates of how many immigrants would be needed under a guest worker program, as proposed in recent congressional bills.

    At the same time, Shaiken said, the issue won’t become central to the debate before Congress over what is known as comprehensive reform, including a pathway for legalizing millions of workers. “The point is, do we really want a labor market with day labor work as a career path? It’s more a commentary on the economy right now,” he said.

    Although Alvarado allowed that the change in day labor sites was an undeniable sign of the withering economy, he also sees a “beautiful irony” in U.S. citizens seeking work as day laborers.

    That’s because his organization has defended the free-speech rights of day laborers in at least 10 court cases over more than a decade. Up to now, courts have ruled in favor of the laborers.

    “We always knew (these cases) would be useful not only for immigrants, but also for U.S. citizens,” Alvarado said. “We knew there would be a time when the economy would reach this point, and they also would be looking for work this way.”

    Buchanan likes to wear a Cubs or White Sox cap as a sign of his Chicago heritage when he stands with one or two Hispanic laborers about 20 yards south of a larger crowd. He said he has gone through an education of sorts in the past four months. He has always worked around Hispanics in restaurants, hotels and casinos, but now he understands the issue of immigration from up close.

    Read More » »

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