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Weakness In Real Estate
"At the end of 2008, a record 19 million U.S. homes stood empty and homeownership sank to an eight-year low as banks seized homes faster than they could sell them, the U.S. Census Bureau said this week. Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said the same day."
Bloomberg
"I'll tell you what worries me. We saw house prices overshoot by 60% relative to costs of building and relative to rents. And I worry about the possibility that they will keep falling; they will spiral downwards. In the same way that they went much too high, they could go much too low. And if that happens, then we are going to see individuals feeling a lot poorer, cutting back on their spending, defaulting on mortgages, and we're going to see the holders of those mortgages see their assets, their capital being cut and therefore their ability to make loans being cut."
Martin Feldstein, Presidentof the National Bureau of Economic Research, which officially dates U.S. recessions - May 2008
Housing values may decline a further 15.5 percent in 2009, based on December 2009 contracts tied to the RPX residential real estate index. The RPX, developed by New York-based Radar Logic Inc., measures the average price per square foot of residential sales in 25 U.S. markets. (Source: Bloomberg)
After Credit Crisis: Opportunities Long-Term In Asia
While it may be prudent to heavily underweight all real estate holdings for a time, the sector does offer attractive long-term opportunities in Asia. In the wake of the housing slowdown, private equity managers are looking for yield and appreciation opportunities in global (including the U.S.) commercial real estate. In periods of economic contraction or during a recession, commercial real estate offers an investor access to income producing opportunities and real diversification vs. traditional "stock & bond" only portfolios. Well managed college endowments and pension funds have used real estate effectively for years with positive results.
According to recent Bloomberg articles:
Marc Faber stated, "As an asset class, real estate in Asia presents tremendous opportunities as urbanization gets under way." (see March 2007 article here)
"Marc Faber, who told investors to bail out of U.S. stocks a week before the 1987 Black Monday crash and began recommending commodities at the end of 2001, forecasts property prices in Asia will rise."
"Faber, author of a monthly newsletter called The Gloom, Boom & Doom Report, said in an interview that migration of people in the region from the countryside will boost the value of land and homes in Asian cities."
According to Faber, 'When you look at asset classes, given the demographics in Asia and urbanization in the long run, I'm quite sure property prices will rise." Faber, 59, is the founder of Hong Kong- based Marc Faber Ltd., which manages about $150 million."
U.S. Real Estate Market May Continue To Cool Off
"When you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."
Warren Buffet
The Economist magazine published a special report on "The Global Housing Boom". Some portions of the article concerning the U.S. market are below:
- "The global boom in house prices has been driven by two common factors: historically low interest rates have encouraged home buyers to borrow more money; and households have lost faith in equities after stockmarkets plunged, making property look attractive. Will prices now fall, or simply flatten off? And in either case, what will be the consequences for economies around the globe? The likely answers to all these questions are not comforting."
- "In American history, with real gains more than three times bigger than in previous housing booms in the 1970s or the 1980s. The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents. The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier."
- "Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries."
- "America's ratio of prices to rents is 35% above its average level during 1975-2000 To bring the ratio of prices to rents back to some sort of fair value, either rents must rise sharply or prices must fall. After many previous house-price booms most of the adjustment came through inflation pushing up rents and incomes, while home prices stayed broadly flat. But today, with inflation much lower, a similar process would take years. For example, if rents rise by an annual 2.5%, house prices would need to remain flat for 12 years to bring America's ratio of house prices to rents back to its long-term norm."
- "The rapid house-price inflation of recent years is clearly unsustainable. Indeed, a drop in nominal prices is today more likely than after previous booms for three reasons: homes are more overvalued; inflation is much lower; and many more people have been buying houses as an investment. If house prices stop rising or start to fall, owner-occupiers will largely stay put, but over-exposed investors are more likely to sell, especially if rents do not cover their interest payments. House prices will not collapse overnight like stockmarkets; a slow puncture is more likely. But over the next five years, several countries are likely to experience price falls of 20% or more."
More Material on Global Real Estate
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