NEW YORK, NY - What began as a bad year for real estate turned into one of the worst on record, driven by an unprecedented drop in home prices, a tide of foreclosures and a credit crisis whose magnitude few anticipated. "I thought it would be a bad year," said Mark Zandi, chief economist at Moody's Economy.com. "I didn't think it was going to be a complete washout."
And as bad as 2008 was, few are ready to say the worst is over. The troubles in the residential sector are expected to continue, while problems are just beginning for the other side of the real-estate market - office buildings, hotels, shopping malls and other commercial properties, as the recession starts to have an effect. "The question on everyone's mind is, 'How is the government going to try to solve this?' " said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
On the residential side, many are urging the Obama administration to push for broad programs to limit foreclosures, stimulate demand for homes, and stop the slide in prices. The Treasury Department is considering a plan that would push down rates on home mortgages to 4.5-percent.
One of the government's highest-profile efforts so far, Hope for Homeowners, lets banks move borrowers into government-insured loans if lenders agree to write down a portion of the principal. But very little of the $300 billion pledged by the Department of Housing and Urban Development has been put to use so far, in part because investors who hold those loans would incur big losses. Commercial developers are also hoping for a lifeline from Washington, perhaps guaranteeing chunks of new commercial mortgages.
House prices fell 23-percent from their July 2006 peak to October 2008, the latest data available, based on the S-P/Case-Shiller Home Price index, which tracks home values in 20 cities. Mr. Zandi expects an additional 10-percent drop to a bottom late this year. One in 10 homeowners with a mortgage is either in foreclosure or delinquent on payments, the Mortgage Bankers Association said last month.
Banks have tried loan-modification programs to stem the crisis but with limited success. More than half the mortgage loans that were modified were more than 30 days late six months later, according to a government report last month.
Regions that had been booming were hit especially hard by the bursting of the real-estate bubble. In the Southwest and Florida, homes lie vacant along the winding streets and cul-de-sacs of brand-new subdivisions. In Phoenix, home values have fallen 41-percent from their peak in June 2006. "Boomers who we counted on coming down here when they retire can't sell their homes in Chicago or Michigan or other places, so they're not coming," said Betsy Kurasch, a local real-estate agent with ReMax Achievers.
Wall Street is feeling the effects as well as Main Street. Securitization, the packaging of loans into investment products, had allowed new mortgages to be issued at huge volumes and helped to inflate the housing bubble. It essentially disappeared as credit markets seized up amid problems with subprime loans, with some of the biggest financial institutions in the country taking a hit. Residential-mortgage originations fell to $300 billion in the third quarter , a 50-percent drop from a year earlier, according to Inside Mortgage Finance, a trade publication.
For commercial real estate, the troubles that lie ahead could hurt pension funds and college endowments that moved money into real estate in recent years as the market was booming, as well as real-estate magnates. The commercial market "is going to be ugly for the next 12 to 24 months," said Michael Restuccia, chairman of the San Joaquin County (Calif.) Employees' Retirement Association. "Not just bad, but ugly."
A preview of the ugliness, as well as opportunities for investors with cash to spend, came last spring, when loans coming due forced New York property titan Harry Macklowe to sell some of his prized office towers. It's hard to know how far commercial-property prices have fallen because the lack of credit has made it hard to buy big buildings. In the office market, for instance, only $1 billion of deals on fewer than 50 properties closed across the U.S. in November, according to research firm Real Capital Analytics. That's a 90-percent drop from November 2007.
The stock market provides clues to how investors are pricing commercial real estate, and the picture isn't pretty. The Dow Jones Equity All REIT Index, which tracks many public real-estate company stocks, fell 40-percent in the last three months of 2008. The poster child so far: Retail landlord General Growth Properties Inc., which received an extension last month on an overdue loan as it struggled to pay down its $27 billion debt load. The share price of the Chicago-based owner of more than 200 U.S. malls plunged to $1.29 from $41.18 over the course of the year.
Investors are especially concerned about sectors of the market most exposed to cutbacks in spending by consumers and corporations: shopping malls, warehouses, office buildings, and most of all, hotels, which are suffering as consumers and businesses cut spending on travel. Companies involved in health-care facilities and senior housing are considered somewhat safer, in part because of the coming wave of retiring baby boomers.
There are questions facing commercial real estate this year: How much further will real-estate stocks fall? Will property owners with debt coming due find ways to refinance? And will the investors who committed billions to commercial property in the past few years be willing and able to make good on those commitments? "For economists now to make forecasts is a pretty difficult thing," said Ray Torto, chief global economist at real-estate firm CB Richard Ellis. "All of our models are outside the territory in which they've been built."
Source: WSJ.com