Commentary on the Real Estate Market as of January 1, 2009
by Peter L. Zachary, MAI, MRICS
The December 2, 2008 issue of the New York Times has a front page story entitled "Recession Began Last December". The article states "The United States economy officially sank into a recession last December, which means that the downturn is already longer than the average for all recessions since World War II, according to the committee of economists responsible for dating the nation's business cycles, the National Bureau of Economic Research". The article states that "this downturn was likely to get a new post war record for length and is likely to be more painful than any recession since 1980 and 1981". The article continues "in declaring the recession began in December 2007, the National Bureau of Economic Research paid little heed to the fact that the nation's gross domestic product actually expanded slightly in the first and second quarters of 2008. The article states that average recession in the past lasted 10.5 months and that the longest recessions were 16 months, which were in the 1973-1974 and 1980-1981 period". In my opinion, the recession did not start in earnest until the 3rd quarter, most notably September 2008 when the government let Lehman Brothers collapse, the credit freeze started and oil hit an all time high. This coincides with the massive decline in consumer spending in the 3rd quarter. The recession started when people stopped spending money due to the high price of gasoline. When they stopped driving, they also stopped spending. This was further exasperated by the government's $700 bailout of the banking industry, which caused people to become more afraid to spend their precious dollars. If this was the beginning of the recession, it will continue through full year 2009 and won't start to improve until 2010.
The same December 2, 2008 issue of the New York Times had its lead story in the Business Day section entitled "Bailout Monitor Sees Lack of Coherent Plan". The article states "The head of the new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the trillions it has already spent in that effort". Elizabeth Warren, the chairwomen of the oversight panel, said in an interview on Monday, December 2, 2008, that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan. "You can't just say "Credit isn't moving through the system", she said in her first public comment. "You have to ask why?" "If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months", she continued. But if the answer is that their potential borrowers are getting less credit worthy with each passing day, pouring money into banks isn't going to fix that problem. Ms. Warren is a Harvard law school professor and a consumer bankruptcy expert and is co-author of the book "The Two-Income Trap: Why Middle Class Mothers And Fathers Are Going Broke". Her meetings with Treasury officials have so far have made her question whether they understand that "Household financial health is profoundly tied to the economic health of the nation", she said. "You cannot repair the economy if you can't repair those families and I'm not sure the people directing the bailout see that as their jobs". In her opinion, the government should be trying to create more reliable customers for banks to lend to. She continues: "Any effective policy has to start with the households. Years of flat wages, low savings and high debt have left American households extremely vulnerable. The article continues that the panel's main source of influence is that it will have the ear of lawmakers who can tighten the bailout purse strings or re-write its character. I believe this woman is in touch with reality.
On December 5, 2008, the headline in the New York Times Business Day Section was "Washington's New Tack: Helping Home Buyers". The article stated that under a plan that two Treasury officials are considering, the Treasury Department would underwrite tens of billions of dollars of 30 year, fixed rate mortgages at a 4.5% rate (lower than most Americans have ever seen). But the cheap mortgages would be available only for people buying houses, not the roughly 50 million families that already have mortgages and would want to refinance at a lower rate. As a result, the plan offers no direct relief to the millions of people who face foreclosure because they took out exotic mortgages that they could not afford. Nor would the plan offer any help to people who are current on their mortgages. Existing homeowners paying 6% would see their new neighbors pay 4.5%.
Since December 5, 2008 I have not heard a word about this plan. I guess the headlines regarding Caroline Kennedy and Bernard Madoff have caused the housing crisis to get less attention.
To recap some headlines:
New York Times - December 17, 2008: "Fed Cuts Key Rate Almost to 0%"
New York Times - December 18, 2008: "Madoff Scandal Shaking Real Estate Industry"
New York Times - December 20, 2008: "Bush Aids Detroit* with $13.4 Billion"
New York Times - December 21, 2008: "In Need of Cash More Companies Cut 401(K) Match"
New York Times - December 21, 2008: "Obama Expands Recovery Plans as Outlook Dims"
New York Times - December 23, 2008: "Car Slump Jolts Toyota, Halting 70 years of Gain"
The New York Times Business Day section on 12/31/08 headlined "October Report Shows Home Prices Down 18% from Last Year". The article states, "According to the Standard and Poors/Case Sheller Home Price Index, all 20 cities surveyed reported one-year price declines in October. Prices in 14 of the 20 cities fell at a record rate. The article reports: "After increasing steadily through the first part of the decade, home prices have fallen every month since January 2007, their slide accelerating as troubles in the housing market infected the broader economy and brought down financial firms".
Now, as buyers sit on the sideline and a glut of unsold homes clog the market, economists say that home prices might continue to slide through 2009. The article states that cities that had the greatest gains in home prices are experiencing the largest declines.
Prices in Las Vegas and Phoenix fell by approximately 33% and Miami fell by approximately 29%. The article reports, "Realtors said that foreclosure sales and distressed sales dominate the market, forcing other sellers to lower their prices or take their homes off the market and wait. The good news for New York is that home prices are down only 7.5%. "If a house doesn't have a foreclosure price on it, even if the owner's aren't in foreclosure, buyers aren't even looking", said Katherine Buterakus, a real estate agent in Grand Blanc, Michigan. "It's the worst I ever seen". I can personally say that many brokers who I have spoken to have said the same thing and as an appraiser, the last several months have been dismal.
And the same applies to the office market in Manhattan. The December 31, 2008 issue of the New York Times has an article in its Business Day section entitled "A Renter's Market for Manhattan Offices". Mitchell S. Stein, Chief Executive of Studley, a National brokerage firm said, "We have fallen further faster than any other time in the last 20 years." According to Studley, asking rents have declined 4.4% from the 3rd quarter to the 4th quarter, with the decrease in Midtown even more pronounced, 8.3%, the steepest decline since 2001". "The market is frozen", said Richard Warshauer, a senior managing director at Williams Real Estate, a First Service Company. "The velocity has slowed to a virtual standstill."
I think that sums it up "The market is frozen". This is not good for house prices or real estate prices in general and certainly not for the entire United States of America's economy.
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