Premature Enthusiasm: All We Have To Fear Is Hope Itself

Home builders and real estate investors seem to have a bad case of premature enthusiasm, sparked by the hope that everything is better now that we’ve avoided a global financial melt down.  Many economists and Wall Street analysts now believe we’re likely to see a significant downturn again later this year, and that the economy, real estate and banking all have a long, hard slog ahead.

According to Bloomberg News, Alec Phillips, head of Goldman’s Sachs Washington office, said in an Oct. 23rd note to clients, “The risk of renewed home price declines remains significant.  Our working assumption is a further 5 percent to 10 percent decline by mid- 2010.”  And, on October 23rd, Bloomberg quoted investor Jeremy Grantham as stating that, “ stocks will drop painfully from current level in the coming year amid disappointing economic data and shrinking profit margins.” Grantham is the chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., which oversees about $89 billion.

Why?  Well read on….

Housing Prices, BB’s and the Bottom of a Bucket

How long will it take before housing prices go up again? In reply to that question, I typically respond, “It will probably take a while longer than most people think and will look a lot like the bottom of a bucket.” When I’m asked why, I’ll usually ask them a question in return: “How long would it take to pick up two million BBs off the beach?” Whomever I’m speaking with usually gives me a puzzled and slightly annoyed look and says, “What’s that got to do with the bottom of a bucket, or, more importantly, when the real estate market will hit bottom or what the bottom will look like? And, for that matter, what’s the bottom of a bucket got to do with anything, anyway?”  Its been the best way I can think of to explain my view of the housing market.

CFD Infrastructure Bonds: Investors Are Buying and Foreclosing CFD Bonds to Acquire New Housing Subdivisions

So I’m sitting at lunch with some of the other speakers at a recent commercial loan workout conference (I was speaking on the use of receivers to complete and sell new housing projects), and someone mentions that vulture investors are buying, and in some cases foreclosing on, CFD and Mello Roos bonds to acquire distressed tract housing developments.

Where’s the Bottom? March of the Zombies

Several months ago I earnestly asked a friend of mine who is a land economist, “Where’s the bottom of this housing market?” and he promptly answered, “I don’t know.”  However, being persistent, I asked again. This time he answered, “Well if you could tell me how much zombie housing is out there, I could make an intelligent guess.”

Bid/Ask Pricing Gap Widened By Scarcity of Debt and High Cost of Capital

My friend and veteran land broker, Larry Lynch of Korek Land, emailed me recently to remind me that the scarcity of debt (the Wall Street folks call it deleveraging) and very high investor return expectations are also helping to drive prices of commercial real estate and land lower.

Low Sales Rates Produce Overvalued Appraisals

Lenders beware!  Your current mark-to-market housing appraisals may contain really low sales absorption rates, resulting in significantly overpriced housing units and overvalued housing projects. This means that your mark-to-market loan write downs on housing projects won’t yet be written down low enough to successfully reserve for, work out and/or sell housing units at current open market pricing.  At the very least, this means your appraisals may not be accurate tools for good decision making.