The first sense we had that there would be real trouble in the housing market was back in 2006 when a friend in the financial business was liquidating some companies with significant holdings in condominiums and housing developments. He was surprised that in a multiple set of geographic regions residential real estate had suddenly gone soft, and whereas deals could have been made easily before, there was a sudden dearth of buyers... at any price north of sixty cents on the dollar.
If you liked the housing bubble bust so far, the commercial real estate market is probably almost as overbuilt and overpriced, but is just starting to show the tremors ahead of the rollover. It might get some momentum as the recession in the US deepens.
You can track the commercial real estate CMBX bond indices here at Markit.
As an alternative viewpoint on the recession in the United States, Mr. Larry Summers thinks the recession won't be deep or prolonged, as stated in The Financial Times today Feb 24:
"The American economic outlook remains highly uncertain. But macroeconomic policy is now properly aligned, as the economy will benefit over the next several quarters from fiscal and monetary stimulus. To the extent conditions warrant and inflation risks permit, monetary and fiscal policy are appropriately poised to provide further stimulus.
Policy towards America’s failing housing sector is in a far less satisfactory state. All honest analysts accept that policies adopted so far, such as the “teaser freezer” limits on resetting mortgage interest rates and increased federal support for mortgage lending, have had only a marginal impact on what may be the most serious crisis in housing finance since the Depression.It appears house prices are down by 5-10 per cent from their peak, with derivatives markets predicting further declines of about 20 per cent. Price falls of this magnitude are likely to mean more than 10m would have negative equity in their homes and more than 2m foreclosures would take place over the next two years."
What struck us most about this was that US Housing market takes a ten percent correction in a generational bull market, and the economists are ready to crank up the New Deal, and start nationalizing banks. Uh, aren't resilient markets supposed to be able to accept the occasional ten percent correction in stride as a normal mechanism in a free market? Or is it that when you have propped, papered, and bubbled a Potemkin economy for so many years, an ordinary correction shakes its flimsy structure to the near limit of collapse?Or is it that subrprime and CDOs are just the tip of the iceberg, a symptom of a much deeper problem. Perhaps they have taken a look at the dominos a little further downstream like the Credit Default Swaps multi trillion CDS derivatives at a ratio of 40+ to 1 against actual defaults covered, and trembled in despair.
Commercial property values in for steep drop, says loan liquidator
Banks starting to unload distressed real estate loans; some sellers taking 50 cents on the dollar
By Frank Byrt
February 22, 2008
In what may well be a sign of things to come, Mission Capital Advisors said it is accepting bids for a $131.2 million portfolio of non-performing loans secured by commercial mortgages foreclosed on by a Midwestern bank.
David Tobin, a principal at Mission Capital, which manages the sale of troubled mortgage loan portfolios and real estate assets for lenders, said that “with the market conditions as they are, we expect a significant increase in similar offerings throughout the year.”
“The pace of offerings has picked up dramatically over the past year,” which has been one of his firm’s busiest, he added. “We did $5 billion of debt sales last year, all of it seasoned performing, underperforming, or non-performing [loans].”
Mr. Tobin noted that “even the big investment banks are having trouble placing these [types of] loans, so we’re working twice as hard this year.”
More ominously, he predicted commercial property values are heading for a steep fall due to the rising tide of troubled portfolio sales by banks, as they move to get non-performing assets off their books.
It’s tough for banks to determine mark-to-market prices because commercial-loan backed packages being resold right now have to go through a price discovery process, Mr. Tobin said. Packages whose chief underlying assets are residential mortgages are getting bids of about 50 cents to 60 cents on the dollar, down from about 90 cents in late 2006 and early 2007.
The latest package of loans from the Midwestern bank, which Mission is putting up for bid in March, is secured by various commercial and residential real estate in Western Florida, including non-performing loans secured by various types of commercial mortgages and properties. Mission Capital is managing the sale in a sealed bid process, soliciting bids from prospective bidders for the purchase of individual loan pools, any combination of loan pools or the entire portfolio.
With bank lending drying up, commercial borrowers with older loans coming due are now also having trouble lining up refinancing. Some older loans are ending up being sold within the distressed packages. Eventually, Mr. Tobin believes the declines in the commercial real estate market could mimic those being registered in the residential market now.
“The delinquency trend is obviously increasing,” he said. “But when a loan out for 10 years can’t get refinanced, that tells you we’re giving back a lot of the gains of the past several years.”
