12 Aug Real estate quagmire: Where is the bottom? We’re not there yet
CHICAGO – When it comes to real estate, are we at the bottom yet? That seems to be the question many people are still asking. The short answer is no.
In the turbulent economic times we’re in today, something you should understand is that many (if not all) of the TV economists and business reporters on the cable business channels aren’t the experts their commercials make them out to be. Both the residential and commercial real estate markets have sustained a downward spiral longer than what most of the experts ever predicted.
Larry Goldberg – a branch manager of Home Savings of America and a longtime mortgage broker – tells me: “We’re nowhere.” Despite the cheerleading of some of the real estate market makers today, the overall market is still very questionable. Goldberg says people applying for mortgages are mostly buying foreclosures or short sales and no one is paying full price.
There is a smaller universe of qualified buyers today because loan criteria are higher. They are more discriminating than buyers were a couple years ago. Don’t think you’re going to get top buck if you haven’t put a dime into your house for 10 or 15 years.
Residential Housing Isn’t the Only Quagmire
Remember when the business and economic experts said not to worry about the sub-prime mortgage crisis because it was only affecting 1 percent of the market? Foreclosures were on the rise. I saw this back in Dec. 2006 before many even knew it was a rising problem.
Here’s something I just received in a residential real estate broker’s newsletter where he is trying to show the market is starting to recover:
Utilizing Standard & Poor’s Case-Shiller Index, which is a tool that’s used to analyze sales activity, economists can report a 0.5 percent increase in home sales across the U.S. Experts alike agree that the change in momentum is rather significant.
It provides additional data that illustrates an increase in new home sales of an additional 11 percent in June.
While distressed homes recently accounted for more than 50 percent of the home sales, they have now decreased to a more satisfying 33 percent. With improved builder sentiment and an increase in investor energy, buyers and sellers alike are on the look out for these incredible opportunities.
This sounds pretty encouraging. Still, you really have to temper this with what Deutsche Bank just announced last week. Their forecast says 50 percent of houses will be under water (their values being less than the mortgage owed on them) before it’s all over.
So much for the business experts on TV who said not to worry about the sub-prime mortgage market tanking the entire industry. We have gone from one house in 10 being under water, to two in 10 and now predicting five out of 10. That means there’s a 50 percent chance your house will not be worth as much as what you owe on it.
This is further exemplified by a friend who is trying to sell a condo in Gurnee, Ill. He paid $137,000 for a condo two years ago and the exact type has just been sold for $65,000. That foreclosure sale becomes part of the comps his is compared to. If you think your house or condo isn’t affected by surrounding foreclosures, you are sadly mistaken.
If someone owes more than what the house is worth, it will be difficult for them to buy the next house. Where will they get the down payment they need? That is on the residential side. Retail and commercial space are also suffering not only in New York but in other markets as well. In the last six months in New York, retail rents have plummeted 20 percent to 30 percent.
We’re not seeing the light at the end of the tunnel just yet.
Not with a major, 597-unit condo conversion in New York City on West 57th Avenue selling for a nickel on the dollar. Yes, a $418 million condo conversion just sold for $20 million. Do you still have faith in all those who crowed about the sub-prime mortgage crisis only affecting a very small amount of people? Stop listening to some of the Sham-Wow economists on CNBC, PBS and other networks.
At This Point, There Are No Experts
At this point, do you really trust the cheerleaders on some of the business channels? Watch them for a good laugh as they try to “call the market” about when this downslide will end and turn around. Don’t bet on anything, though.
How do you really measure the economy? What are the everyday barometers that you look at to indicate whether or not we are headed in the right direction? While some may say I look at odd stuff, my observations and analyses have been a lot more accurate than those shuffling the latest charts and graphs who haven’t stepped outside of their offices.
My approach is more of a parallel to MBWA (management by walking around). Walking around the lakefront and seeing that half the boat slips are empty tells me that many middle-class people have tightened up their spending. They are getting rid of lifestyle amenities that they can no longer afford.
They actually canceled this year’s boat show in Racine, Wis. That speaks volumes to me. This compounds unemployment as many U.S. boat manufacturers have gone out of business in the last two years. Between the jump in gas prices and more layoffs in the middle class, the demand for boats has evaporated.
Driving around and looking at other businesses, many have super sales and many empty stores are for lease. When was the last time you saw landscaping stores having everything at 50 percent off? I can believe this after Labor Day, but I have seen many such sales in July. This tells me many people who used to buy a lot of plants and trees to put in their gardens have cut back.
Even the discount stores have reduced prices on their landscaping inventory. Having good jobs that pay well is the key stabilizing factor on all these economic issues from shoring up real estate to buying high-ticket items like cars, RVs and boats.
Carlinism: The consumer is not going to “spend” us out of this recession. This is especially true for the ones who are now underemployed.
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Follow daily Carlini-isms at www.TWITTER.com/JAMESCARLINI.
James Carlini is an adjunct professor at Northwestern University, and is president of Carlini & Associates. He can be reached at firstname.lastname@example.org or 773-370-1888. Check out his blog at carliniscomments.com.
James Carlini has been asked to speak at the upcoming Department of Homeland Security’s Workshop on Aging Infrastructure in New York City later this month.
This column previously appeared in MidwestBusiness.com, and was reprinted with its permission.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC.