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Real estate

Real Estate Values Hit New Lows

According the National Association of Realtors, the housing market is turning the corner. Not everyone shares the same view. Sales numbers are encouraging but the tale of the tape poses serious issues for homeowners and commercial real estate developers.

On Wednesday, 93% of 120 chief executives of major U.S. commercial real estate entities said commercial real estate values were lower than a year ago. 82% indicated that values would fall still lower in the next 12 months. Some executives reported that commercial values have already declined by as much as 50%.

Foreclosure Home For Sale Sign and House with dramatic sky background.

Much like the residential mortgage market, lenders are in precarious positions as foreclosures continue to mount and mortgage values exceed real property values. This “underwater” crisis has led both commercial and residential lenders to seek government assistance.

The bottom line is that supply far outweighs demand. While the National Association of Realtors continues to indicate an upward trend in housing, the mortgage holders tell a different story.

The commercial mortgage industry projects that 41% of the prime performing loans will be underwater by the first quarter of 2011. 46% of prime jumbo mortgages will follow suit in 2011. This trend marks a 29% increase in year-over-year calculations. Prime jumbo mortgages comprise 13% of the total mortgage market.  As vacancy rates continue to escalate, the failure rate of commercial mortgages will expand.

In a recent report, the Deutsche Bank surveyed 100 U.S. metropolitan areas.  The report states that home prices would fall another 14% by the first quarter of 2011. This translates to a 41% drop in home values since the market peaked in 2006. The numbers bear a striking resemblance to the plight of 401k’s.

Home Not Sweet – Office Woes    

For homebuyers between 2005 and 2006, the home sweet home mentality has changed to a bitter dose of reality.  Long the pillar of the homeowner’s credit worthiness, homeowners find now themselves burdened with equity loans and mortgages that exceed appraised home values. There is panic on Main Street.

As negative equity increases, individuals are packing their bags and relocating.  This is no longer a question of downsizing, it is a question of destroyed credit, negative balance sheets, rising unemployment and abandoned homes that lenders barely maintain. These vacant homes decrease the value of surrounding homes.  The cycle is vicious, recurring and unending.

A startling 69% of subprime mortgages will be underwater in 2011.  This marks a 50% increase since March 2009. In the option-adjustable mortgage market, the exposure is mind-boggling. These loans offered reduced payments in exchange for increased principal balances.  89% of these loans will be underwater by 2011.

Commercial real estate may be a lagging market, but the recent commercial real estate roundtable suggests an even more treacherous decline is ahead. Foreclosures are on the rise and values are falling through the floor. Additionally, billions of dollars of commercial mortgages are non-performing. Abnormally patient lenders are out of time and out of options.

The states with the biggest value declines are: California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts, and West Virginia. In certain areas in Florida and California and in Las Vegas, 90% of homes will be underwater by 2011.

What’s Ahead?

Shaken homeowners are not buying the NAR sales reports. In fact, they are not buying anything. The old real estate pitch “why rent when you can buy” has become “why buy when you can rent.”

Distressed commercial buildings, houses and apartment building provide a wealth of supply and value. With property owners yielding innovative concessions, prospective buyers are banking their cash and waiting for the bottom.

The overall real estate sentiment index now stands at 49%. This is the lowest confidence level since the index was initiated 30 years ago. Colin Dyer, CEO of Jones Lange LaSalle, one of the world’s largest real estate service companies, has said that the current value of U.S. real estate assets is 50% below 2006 levels.

Why buy, when you can rent?


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