• You may be buying, selling, or holding a primary residence or vacation home.

• You probably have a mortgage, and maybe a home equity loan.

• And you’re probably concerned about the broader economy, which the housing and mortgage markets significantly impact.

So where do we stand now?

Well, the stabilization and very mild recovery I first told you was coming back in the spring, continues apace. Sales have generally been picking up. The supply of homes for sale has generally been falling. And prices, while still weak and falling, are not falling as quickly.

The real question is: What happens when the mammoth support that the government is throwing at the market ends?

Used Home Market
Finding Its Footing

In September, existing homes sales hit a level not seen in over two years.

I’ll start with the existing home figures, since that’s the most important part of the market. Most of us own “used” homes and sales of such homes account for around 75 percent to 85 percent of overall transactions in any given month. The latest:

* Sales surged 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from 5.09 million in August. That was twice the gain that was expected, and it left sales running at the highest level since July 2007.

* Single-family sales gained 9.4 percent, while condo and cooperative sales rose 9.7 percent. By region, sales climbed across the board, with the Northeast bringing up the rear at +4.4 percent and the West leading at +13 percent.

* Better yet, the raw number of homes for sale dropped 7.5 percent to 3.63 million units from 3.92 million in August. Supply was down 15 percent from a year earlier. That helped push the “month’s supply at current sales pace” indicator of inventory down to 7.8 from 9.3. That’s still higher than the 5-6 month range that’s considered “normal.” But it’s a significant improvement from the double-digit readings we were seeing.

* Pricing is still weak, with the median price of an existing home down 8.5 percent year-over-year to $174,900. But as any good housing analyst will tell you: Pricing lags sales and supply.

Indeed, if you recall what I said in my May 8, Money and Markets column:  

“I still believe home prices have further downside. That’s because we remain oversupplied, with approximately 1 million excess housing units for sale in this country. More foreclosure inventory will likely hit the markets in the coming months, too. Reason: Many of the filing moratoriums put in place at the state and industry levels have expired.

“But the sharpest declines in residential real estate are, for now, mostly behind us. I expect to see sales volumes gradually stabilize on a nationwide basis over the coming year, with total inventory for sale (new plus used) gradually coming down. By mid-to-late 2010, we should see pricing stabilize and gradually turn higher, with the improvement coming in stages depending on location.”

Buying New?
Not Lately …

So what about the new home market? It’s taking a bit of a breather. An index put out by the National Association of Home Builders dropped to 18 in October from 19 in September. Builders said present sales, expectations about future sales, and prospective buyer traffic have all declined.

The new home market has slowed down a bit.

Meanwhile, actual sales have missed expectations for two months in a row. They dropped 3.6 percent in September to a seasonally adjusted annual rate of 402,000. Economists were expecting an increase to 440,000 units. Pricing remains weak, with the median price of a new home off more than 9 percent from a year ago to $204,800.

But here’s the thing: The supply picture in the new housing market has dramatically improved!

At the peak of the bubble, builders had 572,000 homes up for sale. That was the highest in U.S. history.

The dramatic cutback in production, combined with a general uptick in sales, has driven that number all the way down to 251,000. We haven’t had this few homes on the market since November 1982, almost 27 years ago.

Surprise, Surprise:
Government Policy Is
Distorting the Market …

Why are we seeing a divergence between the new and existing markets? Like it is in so many other parts of the economy, government policy is distorting things.

You see, the $8,000 first-time home buyer tax credit is set to expire on November 30. It applies to all transactions CLOSED by that date. The typical closing of an existing home takes about 30-60 days. So contracts signed as late as, say, July, August and even early September, are probably okay.

But when you sign a contract to buy a NEW home, unless it’s a “spec” property, you’re buying a plot of land. This means you’re looking at several months to build the house and close. So we got the tax-credit-fueled surge in the new home market EARLIER than the existing home market (June sales rose 7.6 percent, while May sales climbed 7.5 percent).

Since then, some buyers have gotten more reluctant to jump in because they fear they won’t be able to close in time to get their government handout … er … credit.

An extension in the tax credit should keep the housing recovery on track.

But — and this is important — Congress is now talking about extending the credit into 2010. The latest scuttlebutt is that the credit would now apply to all contracts signed through April 30 of next year, with an additional 60 days granted to close the transaction.

Not only that, but it may be expanded so that richer buyers could qualify! If that happens, couples making up to $225,000 would qualify, compared with $150,000 now. Plus it would no longer apply to only first-time buyers. If you’ve lived in your current home for at least five years, you would qualify for a credit of up to $6,500.

Bottom line is that the government’s massive housing and mortgage market support measures show no sign of letting up. In fact,

• The Federal Reserve is still buying $1.25 trillion of mortgage securities to keep rates low.

• The FHA is now backing the same kinds of high-risk loans that blew up private, high-risk lenders, allowing it to capture the largest share of the mortgage market in years.

• The “temporary” increases in the size of mortgages that FHA, Fannie Mae, and Freddie Mac can insure have essentially become permanent.

• And now, just as I forecast, the tax credit/handout is almost sure to be extended well into the future.

You don’t have to like it. Frankly, I don’t. But you do have to appreciate the reality of the situation and understand that it likely will keep the housing recovery on track.

It won’t be a linear process, though. Instead, I foresee more of a “three steps forward, two steps back” scenario.

Until next time,

Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Today’s analysis comes courtesy my friends at STRATFOR, a global intelligence company. They provide unique and on-the-money analysis and forecasts on all things global, essential for any alternative investment strategy. They’ve got a free newsletter as well, for which I encourage you to sign up by clicking here – so you’re not limited to my caprice.

John Mauldin
Editor, Outside the Box

The China Files (Special Project): Real Estate

October 13, 2009 | 1149 GMT

Summary

The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese – once encouraged to invest in home ownership by the central government – become less and less able to buy.

Editor’s Note: This analysis is part of a series that explores China’s industry, finance and statistics.

Analysis

Related Special Topic Page

The China Files (Special Project)

PDF Version: Click here to download a PDF of this report

On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed.

The purchase created China’s newest "land king," a term for the real estate developer who pays the highest price for a piece of real estate during a land auction. And 7.006 billion yuan was the highest price ever paid for a piece of Chinese real estate for any purpose – residential or commercial. The milestone is a result of an increasingly intense competition for land in major cities that began early in the year, when Beijing began distributing stimulus money to various industries – including the real estate sector – to sustain the economy. As a result, land prices have soared throughout China. And with increasing speculative investment in residential real estate, the market faces a surging bubble that jeopardizes the country’s long-term economic development.

Since 1998, real estate investment in China has accounted for more than 10 percent of the country’s gross domestic product (GDP), compared to only 3 percent to 5 percent in the United States. Such investment is also closely associated with many other industries, such as construction and finance, and it provides an abundance of jobs. Therefore, it is seen as a critical pillar of China’s economy and enjoys favorable policies from the government and state-owned banks (more than 70 percent of real estate investment in China comes from bank loans). At the same time, real estate developers, local government officials and investors have escalated housing prices across the country by acquiring massive land holdings, limiting the supply and inflating prices, creating a real estate bubble that is not sustainable in the long run.

The bubble has grown mainly on the residential side of the market, where there is more demand and higher profits to be made. However, while fewer developers and investors have been chasing nonresidential projects, Beijing’s 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercial real estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.

Origins of the Bubble

Since 1978, China’s pace of urbanization has increased dramatically, with the number of middle-size and large cities (those having nonagricultural populations of more than 200,000) growing rapidly. Beginning in 1985, economic reforms implemented in urban areas to make China’s planned economy more market-oriented added even more momentum to the real estate boom, with real estate investment increasing by 71 percent by 1987. The government’s macroeconomic policy of monetary belt-tightening helped cool this overheated market, which was further tempered by the government’s continuing to provide housing for state employees (fu li fen fang, or "welfare housing").

However, when the state significantly cut back on its welfare housing program in 1998, the Chinese perception of personal property changed, and this would have an important impact on the real estate sector. The government began this privatization process by making a private dwelling a "commodity" and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment.

Thus, the residential real estate market would boom in almost every urban area in China – and particularly in the "first-tier" and "second-tier" cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year).

A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank’s suggested affordability ratio of 5:1 and the United Nations’ 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.

The Recovery Bubble

Following a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing’s stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution – limiting the flow of cash and credit – could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

As housing prices continue to rise, a parallel trend is manifesting itself – rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for "commodity housing" (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing – pressure that continues to drive up the prices.

This closed loop in the Chinese real estate market is facilitated by the country’s political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council’s Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments’ extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments’ incentive to expand their real estate investments without much concern for cost or impact on public services.

Economic performance also is the prime prerequisite for bureaucratic advancement, which gives local officials the incentive to generate as much revenue as possible through land auctions. And this generally involves a level of collusion – and corruption – among government officials, real estate developers and investors.

One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.

Another factor that enters the equation is a cultural one. The Chinese people generally prefer to buy new houses, as opposed to renting homes or buying secondary houses in which people have already lived. Indeed, in urban areas, marriage proposals often include a promise to buy a new commodity house. As a result, the secondary housing market remains very small in comparison (due also to fewer available bank loans for lived-in houses and the complicated process involved in transferring ownership).

All of these factors contribute to the burgeoning real estate bubble – and make it difficult to predict when that bubble will burst. With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China’s first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.

But in China’s real estate, as in most sectors of this vast and complex land, implementing and enforcing prudent regulation has never been an easy task

John F. Mauldin
johnmauldin@investorsinsight.com

__________________________________

Note: John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Plexus Asset Management; Fynn Capital; and Nicola Wealth Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor’s services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

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“It’s time to signal another important shift in my thoughts on the housing market. Namely, that the nexus of the real estate downturn is shifting and that the residential market is poised to stabilize in the coming quarters.”

I went on to say the market wouldn’t turn on a dime. My forecast: Home prices would continue to fall, but at a more gradual pace, while sales would gradually stabilize and inventory for sale would gradually come down.

So where do things stand? Do I deserve a passing grade?

Sales … Starts … Home Builder Sentiment?
It’s All Telling the Same Story …

Here’s a brief recap:

• New home sales rose 9.6 percent in July to a seasonally adjusted annual rate (SAAR) of 433,000. There were gains in three out of four regions in the country. Meanwhile, the raw number of homes for sale dropped to 271,000 — the lowest level going all the way back to 1993. And yet, median home prices were STILL down 11.5 percent year-over-year.

• What about the existing, or “used,” home market? Sales gained 7.2 percent to a 5.24 million SAAR. That was the highest since August 2007. The number of homes on the market is still way too high, but it did fall almost 11 percent from a year ago. Prices were off 15.1 percent.

Construction of single-family homes is trending upwards.

• S&P/Case-Shiller home price index? Prices are down 15.4 percent from a year earlier in June. But that was an improvement from the 19 percent rate of decline seen a few months ago.

• Housing construction? Everybody flipped over the fact that “headline” housing starts missed expectations in July. But the weakness was all in the multifamily (apartment, condo, etc.) segment. Construction of “core” single-family homes rose for the fifth month in a row, while permit activity shot up by almost 6 percent.

• Home builder sentiment? Another good number. The National Association of Home Builders index rose another point to 18 in August, the highest since June 2008. We saw gains in three out of four regions of the country.

I’d call that a pretty decent fit with my May 8 forecast. Most importantly, for investors like you, I said you simply had to get out of the way if you were “short” the sector. The easy money, as they say, had been made.

The Philadelphia Housing Index (HGX), which consists of 19 home builders, construction suppliers, and mortgage-services firms, closed at 93.97 the day my piece was published. It’s up about 16 percent since then.

That’s all history. But it leads naturally to the NEXT question …

Where Do We Go From Here?

I think in the short term, a lot of the good news has been priced into the housing sector. So I wouldn’t be surprised to see industry stocks stall. We may even be in for another bout of weakness.

Why? Near-term home sales have been “juiced” by the $8,000 first-time buyer tax credit. That credit is set to expire November 30, unless Congress extends it.

Buyers have been running ahead of it and snapping up more homes than they otherwise would. It’s just like what we saw with auto sales as a result of the popular “Cash for Clunkers” program. We’ll likely see a “hangover” effect once the government-fueled sugar high fades.

As for the underlying market itself, I expect to see continued pressure on home prices — though again, the declines will be more gradual than we had in the past. The most important factor is still distressed inventory. We still have too much of it, and we’re going to get even more because borrowers are falling behind on their loans at record rates.

According to the Mortgage Bankers Association …

The overall mortgage delinquency rate jumped to 9.24 percent in the second quarter of this year from 6.41 percent in the same period of 2008. That’s the highest delinquency rate ever recorded (the MBA data goes back to 1972).

More than one in four subprime borrowers is now at least 30 days behind on payments. But it’s not just the crummy mortgages that are going bad. More than 6.4 percent of prime borrowers are also falling into delinquency.

Another 4.3 percent of U.S. mortgages were in some stage of foreclosure. In plain English, that means more than 13 percent of U.S. loans are in some stage of distress (either being paid late or already defaulted on). That’s the worst this country has ever seen!

There was something else noteworthy in the MBA numbers. In its … er … infinite wisdom, the government has NOT tightened the screws on Federal Housing Administration, or FHA, lending standards. You can still sneak into a home with weaker credit and a down payment of just 3.5 percent using FHA, even as private lenders have abandoned such generous terms. That’s driving FHA’s share of the mortgage market through the roof.

FHA delinquencies continue to rise. So will Washington force taxpayers to dip into their wallets again?

Unfortunately, it appears that FHA delinquencies are now starting to rise. The delinquency rate jumped to 14.4 percent in the second quarter from 12.6 percent a year earlier. Are we as taxpayers going to be asked to cough up even MORE money to bail out the FHA insurance program a year, two, or three down the road? I suppose only time will tell. But I’m not exactly brimming with confidence.

Bottom line: The housing market appears to have put in a longer-term bottom when it comes to sales and a longer-term top when it comes to inventory. Prices? Not so much, at least not yet.

As for any recovery, don’t expect a rip-roaring rebound. This is going to be more of a gradual process that will take a long time, kind of like turning a battleship.

Until next time,

Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

The 1990s were an ideal period to have timber as an investment:

• Housing was doing well, and growth was beginning to take off in major cities.
• The world was still pre-digital, and business still relied heavily on shuffling paper.
• Electronic news was still a novelty; magazines and newspapers were still going strong.

What a difference a decade makes…

• Housing is in the dumper, with no clear sign of a resurgence on the horizon.
• Business has embraced the smartphone and has gone digital, shunning paper.
• The world is increasingly getting its news in electronic form, as evidenced by the number of newspapers that are no more.

This shift away from stuff that comes from trees has resulted in an almost complete lack of demand for wood or wood pulp. As a result, prices for paper and lumber have hit multi-year lows. Lacking any catalyst for change, it’s the perfect setup for an extremely overvalued scenario in the timber industry.

Timber REITs… Look Out Below

Whereas timberland prices hovered in the $1,500 to $2,000 per acre range in the mid 1990s, a more realistic valuation today is less than half that. And therein lies the problem: Many of the timber REITs haven’t devalued their land.

If it sounds a little like the looming overvalued commercial real estate mess we’re in right now (a story we broke long before anyone else did), it’s no accident. The biggest problem? REITs are managed by human beings.

Just like they’ve been doing in the commercial real estate market, timber REIT managers have adopted a “wait it out” strategy, in the hope that timber values – and by extension the land it’s growing on – will suddenly reverse. Don’t bet on it.

Unfortunately for the REITs and their shareholders, hoping and praying for a resurgence in the housing market isn’t going to work.

It’s going to get even worse: Timber prices could drop another 50% in the next few years, as an anemic housing market – the only possible timber demand catalyst – isn’t looking at a recovery for as long as five years.

Most timber REITS, however, haven’t taken a big hit to their balance sheets. Not yet anyway. But that’s all about to change.

As a result of the aforementioned head-in-the-sand mentality, Plum Creek Timber (NYSE: PCL), Potlatch (NYSE: PCH) and Weyerhaeuser (NYSE: WY) are all on the verge of imploding. Weyerhaeuser isn’t a REIT, but it suffers from the same issues.

At a minimum, all are going to have to significantly cut their dividends, which aren’t based on anything remotely resembling ongoing operations. Nearly all of their 2009 income – and I use that term loosely – will come from land sales.

That’s a problem, too, and not just because of depressed prices for timber. Much of the hopes of the REIT management are that they will be able to sell land to real estate developers to generate cash. Huh?

You’ve got to be kidding: With the current depressed state of the housing market, developers aren’t exactly chomping at the bit to buy more land. After all, many of them are still writing down the value of land they already own.

Timber REITs Taking A Big Hit Before The Dust Settles

While it’s clear that timber REITs are going to take a big hit to their balance sheets before all the dust settles, there are others that will likely be the biggest losers of all.

You see, over the past few decades, university endowments, pension funds and Timber Investment Management Organizations (TIMOs as they’re referred to) plowed an estimated $40 billion into timberland.

TIMOs are privately run organizations that hold and manage timber on behalf of institutional investors. Here’s the big problem: The funds that the TIMOs manage have predetermined liquidation dates, and many are coming due in the next several years.

When that happens, timber industry land prices could fall even further.

One notable exception to the REITs woes is Rayonier (NYSE: RYN). It has a much more diversified stable of holdings; namely its performance fibers division, which are used by customers around the world to make certain kinds of plastics, LCD screens, pharmaceuticals, food products and more.

The bottom line is that investors who own any of the timber REITs – with the exception of Rayonier – may want to consider lightening their position or eliminating it all together. Investors could also consider establishing a short position in Plum Creek, Potlatch, or Weyerhaeuser, the three stocks most likely to fall the hardest over the next 12 to 18 months.

Good investing,

David Fessler
Investment U

That’s right. Contractors and developers are wrapping mothballed building projects in plastic, literally – from single-family homes to 25,000 square foot commercial properties.

The beneficiary? Privately-held Fast Wrap – a leader in shrink-wrap protection and weatherization. Traditionally its products are used to protect lawn furniture, cars, boats, motor homes or industrial vehicles from the elements. But now, the bulk of its new business comes from the real estate industry…

In recent months, the company has inked deals to shrink-wrap 240 homes in the Northeast, prompting management to double its sales expectations on the surging demand.

Sorry folks. If “shrink-wrapping” homes to preserve them for future use is suddenly a worthwhile idea, then there’s no end in sight to the demand destruction. It’s akin to airlines “grounding” aircraft during tough operating conditions… or oil drillers “cold-stacking” rigs when exploration plummets.

So if you’re thinking of diving into the real estate market to capitalize on the “unbelievable bargains” – via the stock market or your local neighborhood – think again. The outlook for the U.S. housing market remains grim. And the bargains will only get more compelling.

First, let me prove it. Then I’ll reveal a few ways to play the enduring housing market downturn…

Housing Market Showing Signs of Stability? Puh-lease!

The mainstream press would have us to believe a real estate market rebound is imminent. They keep glomming onto any data that shows the slightest sign of stability.

• For instance, Bloomberg jumped all over the July 1 report from the National Association of Realtors that showed pending sales for previously owned homes rose for the fourth consecutive month.
• Other outlets had a field day with the news out of the Mortgage Bankers Association that refinancings hit a three-month high in early July.
• And ditto for the news that foreclosures dropped 11% in the second quarter.

But these “signs of stabilization” are bogus. Or to beg, borrow and steal from value-investing legend, Whitney Tilson, they are the “mother of all head fakes.”

Fact is, these short-term improvements were fabricated. They materialized because of temporary factors like the $8,000 first time homebuyer tax credit (set to expire November 30), artificially low interest rates (remember the Fed’s been buying Treasuries, en masse, since March to suppress rates) and government and bank moratoriums on foreclosures.

In the end, all this massive intervention is doing is propping up short-term results and prolonging the inevitable. Furthermore, to turn a blind eye to all this government meddling and pretend it’s not artificially influencing demand and prolonging foreclosures, would be irresponsible.

Don’t get me wrong. I’m happy to see an improvement in the market from bad to less bad. But overall, the numbers are still crap.

Three Obstacles to a Housing Market Rebound

Over half of the homeowners who took advantage of loan modification programs, are delinquent again. They weren’t paying before they got interest rate and/or principal reductions. And go figure? They’re not paying now. Great idea Washington!

On top of that, housing prices are still too high to attract buyers yet too low for sellers who are underwater on their mortgages. Such out-of-whack supply/demand dynamics will only foster more uncertainty.

In my opinion, before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…

• Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built this decade are sitting vacant, compared to a historical average of 2.2%. In total, we’re sitting on almost 10 months worth of inventory versus a historical average of four months. If we factor in the “shadow inventory” – the roughly 600,000 homes that banks are withholding from the market – the problem worsens. Excess supply always erodes prices.
• Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013. So we’ve still got time, but the early stats hardly instill confidence.

  More than 20% of Alt-A loans are already 60-plus days late, up from an average of about 3% for the last decade. If interest rates creep up even modestly in the next two years – a near cinch given the likelihood of inflation – payments will increase notably. In turn, so too will default rates.

  Bottom line, another wave of massive writedowns looms on the horizon.

• Rebound Obstacle #3: Foreclosures. One in four homeowners are now underwater. If we break it out by loan type the picture gets worse – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are severely underwater. Add in the 6.5 million Americans out of work since the recession began and it doesn’t take an Einstein to predict where foreclosures are heading. Credit Suisse estimates that we’re in store for a total of 6.5 million by 2012.

  Even the Mortgage Bankers Association (MBA) concedes the obvious in its first quarter update, saying, “Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.” Since the rosiest prediction doesn’t expect unemployment to peak until early 2010, as the MBA acknowledges, “…It is unlikely we will see much of an improvement [in foreclosure rates] until after that.”

  The fact that the social stigma attached with “walking away” has been severely (and sadly) diminished over the past decade only adds to the foreclosure heap. And more foreclosures will inevitably push prices lower.

The Housing Market’s Reality Bites… But We Can Still Profit

As I’ve said, a simple supply and demand equation underpins the housing market. Right now, there’s way too much supply. Thus, prices can only go lower. And in my opinion, they’ll go significantly lower.

Since the peak, home prices have dropped 34%, based on the Case Shiller Index. However, prices still rest roughly 10% above the long-term trend line.

But given the supply imbalance is so dramatic, and the fact that markets consistently overshoot resistance and support levels, I’m convinced that prices will crash right through the trend line, falling another 20% to 30% before we see a legitimate turnaround in 2011.

I’m not alone, either. Mortgage insurer PMI Group estimates that a 75% chance exists that the majority of our metropolitan areas will experience price declines through the first quarter of 2011. And if we experience a double-dip recession, all bets are off on how low prices will go.

The brave at heart can look to profit from the decline by shorting any of the major homebuilders like:

• Pulte Homes (NYSE: PHM)
• KB Home (NYSE: KBH)
• DR Horton (NYSE: DHI)
• Toll Brothers (NYSE: TOL)
• Or Lennar (NYSE: LEN)

Be warned, though. The ride will be volatile.

Otherwise, the newly launched MacroShares Major Metro Down ETF (NYSE: DMM) is an option. The exchange traded fund is benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index and features three times (300%) leverage. For every 1% decline in the index (i.e. real estate prices), the ETF should increase in value by 3%.

For the truly conservative investor, I recommend the “nothing ventured, nothing lost” approach. In other words, wait to go long when buying real estate because we’re nowhere close to a bottom. At the very least, wait for the prevailing shrink-wrap frenzy to end.

Good investing,

Louis Basenese
Investment U

Frustrated at not being able to sell his $1.6 million New York mansion after three-and-a-half months on the market, Geithner has yanked down the “For Sale” sign. And that’s after he and his wife lowered the price to below what they paid for it in 2004. Having taken out a $1.25 million mortgage at the time, they’re now apparently renting the home at a loss.

Doesn’t Tim read the papers? He didn’t seriously expect to sell Fort Geithner in such a short time in a market like this, did he? It’s tough out there, mate. First, you have to persuade buyers that it’s worth shelling out $1 million-plus for a house. Then you have to convince them that it’s not made of cards – you know, like some of his economic theory.

But wait… haven’t we just seen some positive data for the real estate market? Yes, that’s true. But the foundation isn’t exactly rock-solid…

Do You Want The Real Story Or Just The Jazzy Headline?

Last week, my colleague Marc Lichtenfeld and I took a collective pop at some lazy journalists and other media cheerleaders. Their crime? Whipping the investment community into false optimism through misleading headlines regarding earnings announcements.

They’re at it again.

This time, the flashy headline writers grabbed onto the latest report from the National Association of Realtors, which stated that existing home sales climbed for the third straight month, and at a faster pace than economists expected.

And they were out in force again when the Commerce Department said new U.S. home sales saw an 11% bounce in June. On an annualized basis, that equated to 384,000 homes – 9% higher than estimates.

Collectively, new and existing home sales hit the highest level in eight months in June.

Sweet! Hand me some champagne and the fancy canapés.

Hang on a sec… here’s the problem with that headline news…

The Reality Behind The Sales Numbers

While an 11% rise in new home sales certainly makes for good reading, it doesn’t mean much when it’s not put into perspective.

And the reality is that for a start, year-over-year sales are still down 21%. In addition, while it may well be a good time to grab a bargain, the government wants to hammer the point home by offering puffy buying incentives and tax credits.

But perhaps the most notable reason for the sales rises is the home foreclosure situation. Foreclosures hit a record over the first half of 2009, swamping the market with homes and pushing down prices.

And as the National Association of Realtors notes, the percentage of homes sold as foreclosures totaled 31% in June. Although the rate is declining (down from 50% earlier this year), it’s still a hefty amount.

Here’s another dose of reality, ripped from yesterday’s housing headlines…

Putting Perspective On The Price Figures

Tuesday morning saw the release of the latest S&P/Case-Shiller Home Price Index – a closely watched gauge that monitors home prices in 20 major U.S. metropolitan areas.

Naturally, many outlets led with the news that the index registered a 0.5% rise in home prices in May, compared with April – its first monthly increase since July 2006.

In addition, May marked the fourth straight month that the annualized rate of decline has slowed, with 17 of the 20 cities notching improved prices.

Good news, for sure. But let’s put it in context. The market hasn’t magically rebounded with a vengeance. In April, the year-over-year decline was 18.1%. May’s year-over-year figure rolled in with a 17.1% drop.

So while prices did rise month-to-month, the truth is that the market isn’t exactly growing, nor are prices appreciating. It’s just stabilizing and beginning to undo some of the brutal damage from the past few years. Prices are still falling over the longer-term, albeit at a slower pace.

As S&P index chairman David Blitzer says: “On a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”

And speaking of that, government figures show that the median sale price of a new home in June was $206,200, down 5.8% from May and 12% lower than June 2008.

What Will It Take For The Real Estate Market To Grow?

You might say I sound more bearish than a Rocky Mountain grizzly, but it’s important to inject some perspective into the story, rather than just blindly absorbing the media reports.

As I’ve noted here before, for the housing market to truly start growing again, it’s going to require a few key things.

First, we need to see a reduction in the bloated number of homes available on the market. In that respect, it’s good to see the huge foreclosure rate declining, but those homes still need to be sold and prices still need to rise. And when you’re talking about a meaningful upswing, that brings me to another crucial requirement…

As Tim Geithner just discovered, this is not an easy climate in which to sell a house. Buyers are strapped for cash and able to call more shots in a depressed market. Sellers are frustrated and forced to lower their asking prices to market value (and even that is often hard to gauge with the number of “distressed” sales – i.e. short sales or foreclosures).

Buyers and sellers alike will need to see U.S. job market growth in order to restore some confidence, not to mention wealth. Ironically, the precipitous plunge in the housing market has played a huge part in eroding both. For example, home prices declines were partially responsible for a $13.9 trillion drop in U.S. household net worth during the first quarter, according to the Federal Reserve. And ominously, both the Fed and many economists believe the unemployment rate will top 10% by 2010.

There are other factors, of course. But these are two of the most critical ones that absolutely need to be part of the equation. And while the latest batch of more positive housing data is certainly good news, a real recovery will take time. Meantime, if you’re looking for a bargain in the New York area, give Tim Geithner a call.

Martin Denholm
Smart Profits Report

For years, home ownership has been seen as the surest path of rising into the middle class and the most significant source of savings for many families. So how could it be that buying a single-family home has made so many people in this country worse off?

The answer is simple, according to John Wasik, author of a recently released book that examines the housing crisis, "The Cul-De-Sac Syndrome: Turning Around the Unsustainable American Dream."

"The whole premise of the ‘Cul-De-Sac Syndrome’ is we hit a dead end," he said. "We hit a wall of unaffordability. I want to convey the idea that we are building, selling and developing communities that are not sustainable."

Families who believed that they were getting the deal of a lifetime courtesy of low mortgage rates became victims of the syndrome: They borrowed more than they could afford, moved farther out from central cities and gambled on home appreciation.

(snip)

"Sprawling urban areas with no public transit or connection to a central city … will become ghost towns if high energy prices return and persist," he writes, adding that both scenarios are likely in a healthy economy.

My comment: As people lose jobs they lose their houses which exacerbates the already falling housing market creating a negative feedback loop. The comment about higher energy prices turning these suburbs into ghost towns is something I have been anticipating for a few years in light of peak oil. It may be that the recent economic downturn just temporarily delayed the inevitable

John Polomny
The Real Deal

In a nutshell, we’ve gone from housing Armageddon to a market marked by some stability. Not a big improvement. Not a huge recovery. Just some stability. But if I’m right about the future, it’s going to be a LONG time until we see a real rebound in housing prices … thanks to several forces that will temper the magnitude of any recovery.

So where do we stand right now?

New Homes:
Much Less Supply,
But Demand Still Ice-Cold

Here’s the latest data from May …

New home sales dipped 0.6 percent to a seasonally adjusted annual rate of 342,000 from 344,000 in April. The numbers were a disappointment, considering that economists were expecting sales of 360,000. Results for the past few months were also downwardly revised by 32,000 units.

Overall, new home sales in May were a disappointment.

Regionally, sales jumped 28.6 percent in the Northeast and 18.6 percent in the Midwest. They inched up 1.3 percent in the West, but fell 8.5 percent in the South, which is the nation’s largest new home market (184,000 units sold at a seasonally adjusted annual rate vs. 80,000 in the West … 51,000 in the Midwest … and 27,000 in the Northeast)

The raw number of homes for sale continued to decline, falling to 292,000 from 299,000 in April. That’s the lowest reading going back to March 2001. The “months’ supply at current sales pace” indicator of inventory dipped to 10.2 from 10.4.

The median price of a new home rose 4.2 percent last month to $221,600 from $212,600 in April. But on a year-over-year basis, prices were down 3.4 percent.

How do I interpret the numbers?

Yes, sales rose in three out of four regions of the country. But they declined sharply in the South, the country’s biggest new home market. So I’d say that overall, sales were a disappointment. At the same time, for-sale inventory continues to decline — a definite plus. And the year-over-year rate of home price depreciation eased.

The story in new homes remains similar to what we’ve had the past few months: Conditions are gradually stabilizing, yet showing no sign whatsoever of a vigorous rebound. And the supply of new homes for sale is back in line with the long-term historical average.

Going forward, the biggest issues remain unemployment and interest rates. Because if potential buyers are losing their jobs, and financing costs are going up, builders are going to have a tough time moving product.

Existing Homes:
Foreclosures Keeping Supply Elevated,
Mortgage Rates Remain a Real Threat

Existing homes make up the lion’s share of any given month’s sales, and that’s the market in which many of us transact. So what’s going on there is incredibly important to you, me, and all of your neighbors.

The median price of an existing home rose to $173,000 from $166,600 in April.

In May …

Existing home sales gained 2.4 percent to a seasonally adjusted annual rate of 4.77 million units from April. That was slightly below economists’ forecasts for a reading of 4.82 million and down 3.6 percent from the same month a year earlier.

Single-family sales climbed 1.9 percent, while condo and cooperative sales rose 6.1 percent. Regionally, sales were mixed. They rose 3.9 percent in the Northeast and 9 percent in the Midwest. But transaction volume was unchanged in the South and down 0.9 percent in the West.

The raw number of homes for sale fell 3.5 percent to 3.798 million units from April. That was also down 15.3 percent from a year earlier. The “months’ supply at current sales pace” indicator of inventory dropped to 9.6 from 10.1, with single family inventory falling to 9 from 9.5 and condo inventory slipping to 15 from 15.4.

The median price of an existing home rose 3.8 percent to $173,000 from $166,600 in April. But prices were still down 16.8 percent from $207,900 in the year-ago period.

Here’s my interpretation of the figures: We saw another month of modest improvement in the existing home sector in May. Sales rose, led by the Midwest region. And the supply of homes on the market dipped, although we’re still probably oversupplied to the tune of about 1 million units.

However, the real threat going forward is foreclosure inventory …

You see, many of the loan modification programs out there are failing to curb the influx of new distressed inventory. The reason: They’re designed to combat foreclosures caused by the structure of the mortgages in question, NOT broader economic trends such as rising unemployment and falling home prices.

Rising unemployment and falling home prices could push foreclosure inventory higher.

Another thing to keep an eye on: Mortgage rates. They didn’t begin to rise significantly until late May. So the figures I recapped above wouldn’t have captured the impact of those higher financing costs. If long-term rates continue to rise … and I believe they will … we’ll see downward pressure on housing demand.

What else is brewing in the existing home market? Well, the biggest fly in the ointment continues to be pricing. It remains weak, with yet another double-digit decline from year-earlier levels showing up in the May data.

The Bottom Line?

It’s clear that the housing sector is no longer in freefall. But neither is it rebounding strongly. We’re seeing modest declines in inventory, modest improvement in sales, and some tentative signs of stabilization in pricing in some areas.

And that should come as no surprise. We just experienced the longest, largest housing bubble in U.S. history. As a result, the recovery process will be a long, drawn-out affair.

Until next time,

by Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

That’s according to Gail Cunningham of the National Foundation for Credit Counseling, quoted in Barron’s this week.

Given that home ownership is a cornerstone in almost every wealth-building plan, this is astonishing. Even if the days of selling a house for an enormous profit are over, building equity in a home beats the pants off paying rent.

Of course, home ownership is not always better than renting, but in most cases, it still is. And even if home prices are flat, building a little bit of equity makes it worth the cost of ownership, especially when you add in the tax breaks associated with owning a home.

Home Ownership Statistics Are Disconcerting

Trouble is, some of the statistics about home ownership are frightening:

• One-third of those surveyed don’t believe they’ll ever be able to afford a home.

• 42% of those who once purchased a home, but no longer own it, don’t think they’ll ever be able to afford to buy another one.

In Tuesday’s column, Karim Rahemtulla detailed the problem that the large number of short-sales are causing in the housing market.

Today, I’m going to give a couple of tips to both house-hunters looking for bargains and investors looking to “buy on fear.”

Real Estate – Buying When There’s Blood in The Streets

There’s an old Wall Street axiom that says you should “buy when there’s blood in the streets.” And throughout the real estate market, there is clearly blood in the streets.

In some markets like in Oakland, California, where prices have dropped 32% in the past year and 75% of first quarter home sales were distressed sales, there’s not only blood in the streets, there’s a virtual river of the stuff flowing down Broadway & 17th St.

But if you’re considering buying a property – either as a primary residence, investment property, or vacation home – now is probably a good time to start looking. Desirable vacation and retirement spots such as Southern California, Miami and Naples, Florida, Phoenix, Arizona, and Las Vegas, Nevada have suffered a particularly bad beating and likely contain many desperate sellers and foreclosed properties.

And even in markets that have held up relatively well compared with the rest of the nation, you can likely find some bargains…

Home Ownership: Use Desperation To Your Advantage

Take Asheville, North Carolina, for example…

The average sales price of a home there is only off by about 15% from the peak, but homes are now sitting on the market for an average of 144 days, up from 94 days. The number of houses sold in 2009 is down by one-third from last year.

Even Austin, Texas, which has weathered the real estate storm better than most, has seen the average price of a single-family home decline by just 3% from a year ago, but volume has slipped 25%.

As Karim suggested on Tuesday, the best strategy may be to find a desperate seller who is forced to compete with short-sales and the foreclosures. Plus, you’re likely to get the deal wrapped up in a much more timely fashion than if you’re dealing with the banks’ lawyers. Sure, you may find bargains on foreclosed properties and short-sales, but the process will take much longer.

For those of you not looking to buy a house but still like the idea of buying fear, consider this option…

Go Contrarian On Commercial Real Estate

Many experts believe commercial real estate will be the next big shoe to drop. And my colleague at Investment U, Dave Fessler, recently published some alarming statistics about the upcoming commercial real estate fallout. Take a look:

• During the first quarter, businesses vacated 8.7 million square feet of retail space. Not only was that a 10-year high, it compares with 8.6 million square feet vacated for all of 2008.

• Vacancy rates at regional malls, strip malls, and neighborhood centers are increasing at the highest rate in 30 years.

But if you’re looking for an uber-contrarian way to play this commercial real estate trend, consider REITs (Real Estate Investment Trusts) that specialize in commercial property.

Take a look at Kilroy Realty Corp. (NYSE: KRC). Founded in 1947, it develops and manages office and commercial property in Southern California – one of the hardest hit markets in the country.

The firm just cut its dividend to $1.40 per year, but that still equates to a beefy 6.9% yield. It’s cash flow positive and has a healthy return-on-equity.

Currently trading around $21 per share, it’s down considerably from its high of $88 back in February 2007.

And while it’s not always easy to buy when everyone else is selling, history has proven time and again that it is precisely those who are able to buy in scary times are the ones who make that make the most money.

Hoping your longs go up and your shorts go down.

Marc Lichtenfeld
Smart Profits Report

It was a column I wrote almost three years ago, warning about the impending U.S. real estate crisis and projecting that home prices were set to tumble by as much as 40%.

Turns out I actually under-estimated the scale of the bust. Prices have fallen much more than that in some areas – and may fall even further.

The are obvious reasons for this. The economic recession. The evaporation of available credit. A huge increase in unemployment. And, of course, the mere fact that the housing market had simply risen to bubble-like proportions and needed to correct.

But there’s a bigger problem – and it’s the main reason why home prices will continue to stay depressed…

The Short Sale Is Selling Everyone Short

The U.S. has an excess supply of housing. What’s more, it shows no sign of decreasing. And in this case, the culprit isn’t just overextended homeowners, but the banks, too.

Case in point: I’ve spent the past two weeks shopping for a house that I can use for investment purposes. What I’ve found is that while there are many bargains available, few will actually materialize.

The problem is that true sellers – those unencumbered by losses and not just intent to ditch the property at almost any cost – cannot sell their homes because they face competition that they simply can’t beat.

That competition is coming from distressed sellers – those who are advertising “short sales.”

A short sale is a way of getting out of a mortgage without enduring the pain of going into foreclosure. So the seller basically agrees to sell the property at a lower price than the mortgage – i.e. at a loss. But the sale can’t proceed without consent from the lender. It’s then a matter of negotiating with the lender to figure out how much responsibility the seller has for the loss.

The trouble is, short-sellers are making an already bad situation even worse for the rest of us because they’re under the impression that they can simply walk away from a property as long as they’ve found a buyer. So they list their properties at often ridiculously low asking prices, thus depressing the market around them.

But, wait… that’s good for buyers, isn’t it? Not so fast…

The Short-Sale Saga

Once a short-seller set a price and gets offers, he takes them to the bank, which then decides if it wants to eat the difference between the loan amount and the amount offered by the buyer.

In most cases, the banks come back with a different, higher amount – and then the circus begins.

The seller naturally balks at the higher price because he wanted less burden – i.e., a free lunch).

The buyer balks because the price is much higher than the listing price – which was a joke to begin with.

By the time the process churns through, three to four months have passed because the bank is obviously in no hurry to take the hit on its books. Moreover, it’s in no rush because the government is subsiding its operations and providing cheap money to lend.

And who’s the fall guy from this fiasco? The real sellers.

A Three-Year, $225,000 Price Depreciation

As a result of short-sellers squashing their market, true sellers have to lower their asking prices to reflect what shows up on the Multiple Listing Service as the average price for the area.

And you guessed it… these average prices include grossly mispriced short sales. Sales that aren’t based on the true value of the market, but the whims and wishes of a seller who got in over his head.

For example, one place I looked at was listed at $300,000 just three years ago. Today’s price: $75,000.

Not only that, the carrying costs are high because it’s a condo that comes with high monthly homeowners fees and property taxes, which were based on higher assessments.

A similar property sold a few weeks earlier. It was a “short-sale,” listed at $75,000. The bank had returned with a counter-offer to the buyer of $150,000. The home eventually closed for $135,000. The seller was lucky. The buyer must really have wanted the place. But it still took three months for the process to close.

And don’t expect any help from the realtors listing the property either. Sure, they’re doing it in hopes of making sale, but they won’t spend much time on it – and sometimes won’t even respond to a short sale.

Why? Because the prices are low… they’re artificial prices that don’t reflect the home’s real value… and the short sale can take months to consummate. Not only that, it will often result in a lower commission because the bank will ask all parties for concessions.

And if the short-seller has moved out and is renting the place, tenants rights can interfere with the sale, with many paying below-market prices and not compelled to keep the place in showable condition, or be available for a showing.

Here’s the deal…

The Bargains Are Out There… But You’ve Got To Work For Them

A low selling price means absolutely nothing in this market if the home is in pre-foreclosure.

The better deals are available on “bank-approved prices,” which means the properties are already in foreclosure and the bank has already agreed on a price.

And of course, the best possible price will come from a non-short-seller who is forced to compete with short-sale prices – i.e. artificial competition.

And remember, while there are bargains available, there’s no such thing as a free lunch. Getting what you want requires more work than the media lets on.

And as for U.S. housing prices… they’re going to stay low until the real selling prices are determined. And that’s not happening yet.

Karim Rahemtulla
Smart Profits Report

As it turns out, my estimates of the coming devastation – which seemed outlandish to some at the time – have actually turned out to be too conservative.

The problem is far worse than anything that’s been reported so far, particularly when it comes to our icon of consumerism: the shopping mall.

With retail losses continuing to accelerate and vacancy rates skyrocketing, malls are going to be one of the biggest losers from the consumer spending slowdown…

Here’s why our shopping malls, and by extension the commercial real estate market, aren’t going to be moving anywhere but down over the next few months – and what you can do about it in the meantime.

Don’t Be Fooled By Housing Starts Recent Uptick…

Much has been made of the recent uptick in housing starts in May, but don’t be fooled – this is simply seasonal. In the northern half of the country, foundations can’t be dug during the winter months, so there is always a “spring surge” in housing starts.

The Obama administration predicted that without the recovery plan, unemployment would peak around 9% in 2010. With the plan in place, the estimate was 8%, and that we’d hit it this year…

• The official Bureau of Labor Statistics number is at 9.4%. But even though unemployment rates are easing slightly, the overall number of unemployed is still rising.
• And it gets even worse when you throw in the 2.2 million additional people that are so discouraged they’ve quit looking for work, and today’s number jumps to 10.8%. These individuals haven’t even shown up on the rolls yet.
• With few companies announcing even minimal hiring plans, it’s highly likely that the ranks of the unemployed will continue to swell to 11% to 12% sometime in 2010.

What does this have to do with commercial real estate and shopping malls? Plenty. As I’ve said before, it all starts with the consumer.

• In America, the consumer’s long-term contribution to our Gross Domestic Product (GDP) is around 65%.
• But for the last five years or so, it’s been over 70%.
• That is, until the fourth quarter of 2008, when it dropped off a cliff.

And therein lies the problem: Fewer employed workers means less discretionary spending, fewer homes being built, bought and sold, fewer trips (or none) to the local mall, fewer warehouses needed, less manufacturing, less transportation… all resulting in a big pullback in GDP.

Consumers are spending less, not more. When they do spend, it’s on staples: food, gas and clothing.

The normally big-spending teenage segment is currently experiencing a 22.7% unemployment rate. So instead of going to their former favorite hangouts – the shopping malls – they’re hanging out at each other’s houses. (I know this to be true, as my son is entertaining a group of friends at our house as I write this.)

Are Fears of Commercial Real Estate Fallouts Overblown?

Many so-called “experts” in the commercial real estate field have said the fear of commercial real estate fallouts and failures are overblown… that it won’t be as nearly as bad as people like myself are predicting.

They’re dead wrong.

They’re ignoring the fact that there’s always a lag between when the economy heads south and when commercial real estate does. Let’s face it: Some stores can coast for a few months – or even a year – while they wait for a pickup in business. But that pickup isn’t coming anytime soon.

The reality is that many mall-based stores haven’t renewed their leases – their lack of income is forcing their hand. Many others are underwater financially, and only months away from closing.

When national chain Ritz Camera filed for Chapter 11 bankruptcy protection, 300 stores in malls all across the country immediately closed. The result isn’t hard to picture.

• A report from the New York-based research firm Ries, Inc. indicates that retail tenants vacated a 10-year high 8.7 million square feet of retail space in just the first quarter of 2009.
• That compares to 8.6 million square feet… for all of 2008.
• Kyle McLaughlin, an analyst at Ries, says that vacancy rates at strip malls, neighborhood centers and regional malls are increasing at rates not seen in 30 years. “We’ve never really seen deterioration of this order in occupied space since 1980. We don’t see much in expectations for improvement throughout the rest of this year and next year.”

Reis indicated that their forecast assumes positive job growth and an increase in consumer spending starting in 2010.

Say what?

Here’s the problem with that assessment: It’s ignoring what’s really going on outside their offices – unemployment is still rising, and that means fewer consumers spending less money.

Don’t look to the emerging markets to bail us out, either. The Chinese, Brazilians, Russians and Indians can’t just run down to our local malls to shop.

The problem is made worse by vacant storefronts, which hurt the few remaining stores. When the stores on either side of a remaining store closes, less traffic comes by and, well, you get the picture.

All this puts shopping mall owners and landlords in a big financial squeeze play: They’re forced to drop rents at a time when less money is coming in due to rising vacancies.

Commercial Real Estate Loans Mature - Bigger Problems Arise

The problem is about to get very, very big: Between now and 2011, as much as $814 billion in commercial real estate loans will mature – and need to be refinanced. The problem is that the credit markets are still too tight for most commercial projects.

Most banks have tightened their lending standards, reduced the amount they are willing to lend and significantly reduced the value of the collateral (malls). This leaves many owners with little choice but to turn to the Feds.

Back in May – and with much fanfare – the Federal government announced it would soon be expanding its Term Asset-Backed Securities Loan Facility (TALF). It now plans to include existing securities backed by loans for apartment buildings, office complexes, shopping centers and other commercial property.

But these programs aren’t an industry panacea. If you read the fine print, they provide backing only if the securities are rated AAA by major rating agencies. This excludes just about all the needy real estate – and the REITs that own it – from participating in the program.

How to Play the Commercial Real Estate Fallout

So, how do we play the commercial real estate fallout? The bottom-line is this: Many shopping malls in this country are simply going to disappear. Supply and demand will ultimately determine how many. All this bodes well for really big operators like Kimco Realty (NYSE: KIM) and Simon Property Group (NYSE: SPG), long-term plays that are large enough to weather the lengthy storm.

But for short-term investors looking to pick up some companies on the bottom, beware of going long just yet: While the market has already baked in a lot of bad news, uncertainties surrounding any additional big chain bankruptcies persist.

That means many REITs still have further to fall.

If you’re looking for an investment option that plays this angle, a dropping real estate market bodes well for ProShares UltraShort Real Estate (NYSE: SRS). It seeks investment results equal to twice the inverse of the daily performance of the Dow Jones U.S. Real Estate Index.

In the coming weeks, I’ll take a look at the office and industrial property side of commercial real estate that, unfortunately, isn’t much better off than the malls.

Good investing,

David Fessler
Investment U

The Mortgage Banker’s Association yesterday (Wednesday) said that its seasonally adjusted index of applications fell 16% in the week ended May 29.  The industry group reported its gauge, which includes both purchases and refinancings, dropped to 658.7 last week from 786 the week before.

The report clearly showed a slowdown in refinancing, as the number of homeowners revising their existing mortgages plummeted 24%, while new loan originations actually increased 4.3%.

Analysts said the biggest jump in interest rates since October slowed demand, as the average rate on a 30-year fixed-rate loan rose last week to 5.25%, from 4.81% the week prior.

“Up until the past week and a half, the Federal Reserve had been successful at bringing interest rates on mortgages down,” Tom Marano, chief executive of mortgage operations at GMAC LLC (NYSE: GKM) told Reuters in an exclusive interview.  He noted that home loan volume at the lender had plummeted about 75% from March, when mortgage rates had fallen as low as 4.61%.

But the refinancing slowdown may only be temporary.

As Money Morning reported Monday, prices and sales appear to be rising in certain housing markets.  And on Tuesday, a report from the National Association of Realtors said that Americans signed more contracts to purchase previously owned U.S. homes in April than they had in seven and a half years.

That was the fourth increase in five months and may indicate the housing market is making a bottom.

“Based on what we just heard, we are now formally calling for the end of the housing depression and that we increasingly think that the housing market is beginning to turn up. All signs are pointing to a bottoming out now of the housing market” Bernard Baumohl, Chief Global Economist at the Princeton-New Jersey based Economic Outlook Group, told Reuters.

But foreclosures may have an impact on the pending sales figures down the road.

Because stressed properties are subject to a lengthy lending and approval process they take longer to close.  And some pending contracts actually fall through before the transaction is finalized, Lawrence Yun the Realtor group’s chief economist told Bloomberg News.

That means it may take longer for the housing market to recover and boost bank earnings – especially those who rely on mortgage lending for the majority of their profits.

“Business could be a whole lot better,” James Gillespie, chief executive officer of Coldwell Banker Real Estate LLC told Bloomberg.

While business is brisk for first-time buyers taking advantage of lower prices driven by foreclosures, the market is still weak for move-up buyers trying to sell their existing home before buying a more expensive property, he said.

And while government policies are helping to stabilize the housing market, don’t expect a full-blown rebound this year or even the first half of 2010, Celia Chen, senior director of housing economics at Moody’s Economy.com in West Chester, Pennsylvania, told Reuters.

“Prices will continue falling because of foreclosures,” she said. “Without policy, conditions would be even worse.”

By Don Miller
Money Morning

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Here are just a few statistics in the news lately from respected market mavens like the S&P/Case-Shiller Indices and the National Association of Realtors:

• The “average” price of homes in the U.S. is down almost 35% from the record highs of 2006.

• “Median” housing prices are down 19% in 90% of the major markets in the United States.

• Building permits were up 4% in April from last year, and homebuilder confidence increased from 16 to 18.

So what do these numbers mean to you?

Probably nothing.

“It’s like a weatherman who combines conditions in Nome, Alaska and Clearwater, Florida and issues an “average” national forecast of 45 degrees,” according to Andrew Waite, a former institutional investor who is now the publisher of a magazine focusing on real estate investing.
“Real estate markets are by their very nature ‘hyperlocal. Averages simply don’t apply.”

Waite is the publisher of thePersonal Real Estate Investor, a glossy magazine that focuses on investors who buy houses or condos to manage for income or to fix up and sell for a profit, and he wastes no time in dismissing most of the "indicators" in use as useless and irrelevant.

As a onetime Wall Street venture-capitalist who subsequently joined Silicon Valley’s Sand Hill Road private equity crowd, Waite also understands how the Wall Street investment game is played – and, in the case of the U.S. housing market, the missteps many overly-anxious analysts make as they attempt to create a “one-size-fits-all” picture of the nation’s housing market.

And he would like you to know that all those gloom-and-doomers are overshadowing a real estate rebound that is already underway.

The Fractionalized Housing Market

The housing market is too fractionalized to put a finger on an “average” price, Waite says.  Real estate is segmented by individual neighborhoods, and is further subdivided by price points and such price-influencing factors as condition, cash flows – and even cap rates on rental properties.

To find the facts about housing prices for his investors, Waite compiles and verifies data directly from records kept by local Multiple Listing Services.  From sales records, Waite determines the inventory supply in months for major markets. That gives him the “hyperlocal” data that reveals an accurate picture of individual markets.

“The formula’s pretty simple,” he says. “As housing inventories shrink in real estate markets around the country, demand and prices go up.”

After examining the statistics for March, Waite thinks he sees a clear bottoming pattern, at least in some markets. If he’s right, the Western United States is already making a comeback and the ripples of resurgence will soon make their way to the Midwest and then to the East Coast markets.

What’s more, the improvement from year to year indicates the bottoming sequence will soon have prices on the rise.

Housing Markets in Western U.S. Have Already Bottomed

Remarkably, Waite’s research reveals the downtrodden Las Vegas housing market has already bottomed and is currently “balanced” between buyers and sellers.  Housing markets in Seattle, Los Angeles, Phoenix and Denver are on the move too: 

• Phoenix’s MLS housing inventory is 7.33 months, down from 19.1 months last year.
• Denver’s current inventory is 5.59 months, down 35% from a year ago.
• San Diego’s inventory stands at a paltry 4.19 months, down 58% from a year ago.
• And Las Vegas’ inventory stands at just 6.25 months, down a whopping 64% from an inventory of 17.5 months in 2008.

In fact, Waite sees the trend on the West Coast as a leading indicator that the worst is behind us. In short, if you’re in one of those depressed markets where prices are still dropping, relief may well be on the way.

Here’s the “market-bottoming” sequence as he sees it:

The chart depicts the market for houses in the Western United States.  It follows the natural sequence of a housing market recovery through its progressive phases:  As the supply of homes drop, demand picks up. And as that demand picks up, prices first stabilize and then begin to rise.

Based on this research the housing cycle on the West Coast has already bottomed and prices will start to swing upward in the fall.  Eventually the trend will move from West to East and prices will move up broadly.

But the recovery will be painfully slow getting to certain markets where cities are still being hit with swelling inventories, which is likely to continue to put downward pressure on prices. 

Housing supplies in Baltimore, for example, have increased 11% from March 2008, to 15.9 months this year.  Similarly, listings grew from eight months to about nine and a half  months in Houston, and from eight and a half months to 10 months in Charlotte.

But some of the hardest hit markets are clearly on the upswing.  Miami has slashed inventories from a staggering 52 months to 31 months, a decrease of 40%.  Rochester, New York and Boston have each dropped housing supplies by about 13% in the last 12 months.

Some realtors in Boston are even reporting that sellers are receiving multiple competing offers to buy homes for more than their asking price and buyers are entering counteroffers.

Fewer New Homes Stoke Demand

And it’s not just pre-existing home sales driving a rebound in the sector.  In October 2007, new home permit applications stood at roughly 800,000 nationwide.  A year later, in October of 2008, that number had dropped to about 480,000.

Since it takes about 12 months for buildout to progress from permit to finish — and with many builders halting construction altogether — Waite estimates only about 450,000 of those permits will actually translate into new homes that will hit the market in 2009.  And with new home inventories drying up, demand will start climbing as well.

In fact, declining new home inventories are already beginning to stabilize prices in hard-hit southern California, an area where prices were hammered by waves of foreclosures.

KB Home (NYSE: KBH) Chief Executive Officer Jeffrey Mezger said on May 4 home prices in Southern California have begun to stabilize, making his company’s new houses competitive with existing homes, including foreclosures.

“If you go to Southern Cal, as an example, we’re seeing a floor on pricing,” Mezger said recently in a conference call with analysts organized by J.P. Morgan Securities Inc., Bloomberg News reported. “We don’t see prices going down right now, which is a good thing, because then you can set a baseline.”

In March, Los Angeles-based KB Home, reported a narrower first-quarter loss as orders increased for the first time in three years.

And there are other positive signals. 

• The median price paid for a home in six Southern California counties was $250,000 in March, the same amount as in January and February, according to San Diego-based research company MDA DataQuick. 

• The National Association of Realtors says a total of 3.7 million homes were listed for sale nationwide at the end of March, down 10% from a year earlier.

• The supply of homes for sale in 29 major metropolitan areas at the end of April was down 3.6% from a month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif.

That last figure defies normal trends — listings typically increase in April as for-sale signs bloom heralding the spring home-shopping season.  Since 1982, the average increase in April from the prior month has been 4.8%, according to Zelman & Associates, a research firm.

Tom Lawler, a housing economist based in Leesburg, Va., says the decline in listings "suggests that the bottom in home prices is much closer than many pundits believe.”  

Still Looming: Foreclosures, Credit Crisis, And Unemployment

But Lawler says the future remains unclear because no one really knows how many homes in the foreclosure process will eventually land on the open market.  Estimates are that some of the nation’s largest banks currently are listing only about 60% of foreclosed homes.

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), are the biggest owners of foreclosed homes, but they have only about 35% to 50% of those homes listed for sale at any given time, according to industry estimates.

And some foreclosed homes aren’t listed because they’re on the rental market, are undergoing repairs or are subject to legal action or other delays. 

Barclays Capital PLC (NYSE: BCS) estimates that banks and investors owned 765,500 foreclosed homes as of April 1, up from 629,100 a year earlier. Barclays forecasts that this inventory will peak at around 1.3 million homes in mid- to late-2010, The Wall Street Journal reported.

The credit markets pose another obstacle to recovery. 

There’s no doubt that banks have made it more difficult to borrow money.  And mortgages are far more expensive than they appear, especially for people borrowing large amounts or trying to refinance. 

As previously reported in Money Morning, buyers can only get those rock bottom 4.75% interest rates you’ve been hearing about if they put 20% down, borrow $417,000 or less, and boast a high credit score (730 to 750). 

And the days of “stated income” loans where you don’t have to document your earnings, and option adjustable-rate mortgages, where you could choose to pay less than the interest due, are long gone.

But while that’s true, it’s also true that mortgage lending is still one of the banks most important sources of revenue.  

“Tight lending standards and the credit lockup is absolutely the limiting factor on how soon prices will recover nationwide,” Waite says. “But eventually, banks will loosen their purse strings if for no other reason than it’s their most efficient way to earn profits.”

But the cold reality is that skyrocketing unemployment remains a major threat to the recovery of the U.S. housing market.  The unemployment rate soared to 8.9% in April, leaving more than 5 million workers without jobs. Economists predict the national jobless rate will probably hit 10% by year-end even if an economic recovery kicks off before then. 

Consumers who are unemployed cannot buy homes, much less pay for the homes they’re already living in. And even consumers who are afraid that they might be joining the jobless ranks are loath to take on the added risk – making them unlikely candidates to buy a new home either.

Bottom Line: Prices Don’t Matter if You’re Not Selling

But while the current news is full of talking heads espousing the latest “average” numbers about the downward spiral in housing prices, the basic truth is the vast majority of homeowners won’t be selling this year or next.

The typical house is owned for five to seven years, and only about 5% of U.S. housing stock turns over in a single year, meaning only 1 in 20 homeowners plan to sell this year.

And, as Waite points out, houses aren’t a tradeable commodity so there’s no reason why you should consider marking your home “to market” as the Wall Street bankers are being forced to do with  those derivatives they’ve been trying to dump.

In fact, if you’re not in a hurry to sell, chances are good your home will recover at least most of its pricing power in the next few years.

“Unless you have to sell now, you’re pretty much insulated.  If you sell in five years, chances are what’s happening now won’t have any effect on your selling price at all,” Waite said.

By Don Miller
Money Morning

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According to the Mortgage Bankers Association (MBA), the U.S. delinquency rate increased to a seasonally adjusted 9.12%. Meanwhile, the share of loans entering foreclosure rose to 1.37%. Both are the highest figures on record going back to 1972, Bloomberg reported.

The numbers are especially grim when taking account the U.S. Federal Reserve’s gradual and extraordinary measures to prop up the housing market. Since September 2007, Fed policymakers have cut the benchmark Fed Funds target rate 10 times – taking it from its starting point at 5.25% to the current rate range of 0.00% to 0.25%, hoping to encourage bank-to-bank lending, as well as bank-to-consumer lending.

But low interest rates won’t help as long as job losses mount and consumers stay out of the housing market. According to government figures, the unemployment rate rose to 8.1% in the first quarter, the highest level in 26 years.

“If people don’t have a paycheck they can’t support a mortgage,” Jay Brinkmann, the MBA’s chief economist, told Bloomberg. “The longer the recession lasts, the more people run through their savings reserves, leading to higher delinquencies and higher foreclosures.”

Also alarming, the biggest share of new foreclosures came from fixed-rate mortgages, which are given to the most credit-worthy borrowers. Fixed-rate mortgages accounted for 29% of new foreclosures, as opposed to adjustable-rate mortgages, given to people of poorer credit, which accounted for 24% of new foreclosures.

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A National Association for Business Economics (NABE) survey released Wednesday)  showed the recession will likely end in the third quarter, but the rebound associated with the turnaround will be a tempered one. The report also downgraded growth forecast for the next few quarters – with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

April Home Sales

One glimmer of hope for the housing and mortgage market lay in April home sales figures.

New home sales rose 0.3% and prices rose 3.7% in April. The modest gains are far outweighed by the 34% sales decline from last year, but have been cautiously cheered by economists nonetheless.

“The one good piece of news is that the average sales pace for the past five months is just about where the April number came in.  That tells me that demand, while still bouncing around, has pretty much hit bottom,” Joel Naroff, president of Naroff Economic Advisors, wrote in a note to clients.

But the housing market will rebound from the bottom up, with first-time homebuyers scooping discounted homes from those looking for new or bigger houses. That means April’s new home sales, while positive, won’t bulldoze forward until demand for them picks up significantly.

“With confidence rising, mortgage rates low and affordability high, I expect to see that happening over the next few months.  Even so, don’t expect any major jump in construction soon,” Naroff said. “Of course, given how much the residential sector has subtracted from (gross domestic product) over the past year, I will take stability.”

By Mike Caggeso
Money Morning

A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn’t expected to crest until the end of next year, the Mortgage Bankers Association said Thursday.

The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.

At the same time, almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure.

My comment: All of Obamas horses and all of Obamas men couldn’t put the housing bubble back together again. Quite a few of these people should not even have been given mortgages. The market is now liquidating these malinvestments. Of course the politicians are meddling and trying to subvert this process. This will inevitably lead to more pain for more people. Those green shoots are wilting in the sun.

John Polomny
The Real Deal

He calls buying real estate “the investment of the century.” I think it’s more likely to be “the disappointment of the decade.”

He thinks housing prices are about to rebound. I say rebounds (in the price of anything) only come off a genuine bottom. And, despite the precipitous drop in some areas, we still haven’t seen a bottom in home prices.

This week the media reported that the S&P/Case-Shiller National Home Price index fell 19.1% in the first quarter.

Bear in mind, that is not the fall from “the top” but just in the first quarter from a year ago. Moreover, the plunge is picking up speed. It was the biggest drop in the 21-year history of the index…

The Housing Market – One of the Greatest Financial Bubbles of All Time

As I’ve been warning for five years now, we’re witnessing the unwinding of one of the greatest financial bubbles of all time – the housing market.

Yet home prices will not simply “pop” like Internet stocks. It’s going to be a prolonged, gradual deflation.

I’ll explain why – but let me start with my standard disclaimer:

Yes, all real estate is local. Yes, some areas of the country will hold up better than others. Yes, outstanding properties in primo locations will hold up best of all.

With that out of the way, let’s also note that virtually no market is experiencing appreciation right now. Even homes in the New York area – a former bastion of strength – plunged 11.9% in the first quarter.

Trust me, this is not just a result of a weak economy.

Housing Market Prices Peaked At Ridiculous…

Prices at the housing market peak were ridiculous. Ask yourself why home values tripled in many areas from 1995-2005.

• Was it population growth? No.
• Was it inflation? No.
• Was it the cost of building? No.
• Was it sky-high rental income? No.
• Was it a huge leap in discretionary income? No.

It was three things:

• Rock bottom interest rates,
• E-Z credit,
• And an unshakeable conviction that real estate “always goes up.”

It doesn’t. And now everybody knows it.

When Will The Housing Market Reach Equilibrium?

The reason it will take years for the housing market to reach equilibrium – where buyers and sellers can easily meet – is that the market for newer homes is clogged with three types of sellers:

• The first is those who bought in the past few years and owe more on their house than what it’s worth. (No seller relishes the idea of showing up at the closing and writing a big check.)
• The second group is those who bought before prices peaked but pulled the equity out of their homes. Like the first group, they’re stuck.
• The last group comprises unmotivated sellers who can’t get out of their minds what their house was worth a few years ago and – seeing similar homes listed at sky-high prices – won’t reduce their asking price in a meaningful way.

Moreover, banks and mortgage companies – stung by their own lax policies – are now requiring bigger down payments and better credit ratings from borrowers. This further diminishes demand.

The Housing Market – It’s Not As Broad-Based As We Thought…

So, if the housing market is not a broad-based buyers market as transaction-starved realtors keep telling us, then how come average home prices are down so much?

• In many markets, up to half of all sales are foreclosures.
• Short sales – transactions where the lender allows a distressed seller to unload for less than the mortgage balance – often make up another 20%.
• If you attend a foreclosure auction – or can get a bank to accept a short sale – you can indeed find bargains in today’s market.
• But if you have a realtor driving you around showing you a bunch of new listings, get ready for disappointment. They will tell you it’s a buyer’s market. You’ll keep asking “where?”

In some places, of course, it is. Miami, Detroit, Orlando, Las Vegas, Phoenix and Sacramento are a few good examples. Average home prices in these distressed areas are down 45% or more from the peak.

But, in other areas, homes aren’t down nearly as much as they will be in a few months – or a few years.

How can we know this? Because the inventory just keeps piling up. The Associated Press reported this week that the backlog of unsold single-family homes just rose to the highest level in more than two decades.

I’m not gloating about this, incidentally. I own two homes myself and am fully aware that we won’t see a genuine recovery in the economy or the banking system until the housing market stabilizes.

Alas, that day is not here yet.

And – are you’re listening Dr. Skousen? – It won’t be here tomorrow either.

Alexander Green
Investment U

All 20 metro areas measured by the S&P/Case-Shiller Home Price Index showed annual declines. Seventeen of them posted record monthly declines. Nine of them posted record annual declines.

“On a positive note, nine (metro areas) are reporting a relative improvement in year-over-year returns and nine of the 20 metro areas saw an improvement in their monthly returns compared to February. Furthermore, this is the second month since October 2007 where the 10- and 20-City Composites did not post a record annual decline,” David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s, said in a statement. “Based on the March data, however, we see no evidence that that a recovery in home prices has begun.”

The combined 20-city index fell 2.2% in March from February. Minneapolis led all areas with a 6.1% monthly decline in March, its steepest monthly drop ever and nearly double its 3.2% decline from January to February.

Detroit and New York also reported record monthly declines of 4.9% and 2.5%, respectively. S&P says these cities represent of the extremes of the national housing boom and bust.

Since January 2000, home prices in New York are still up 73.4%. In that span, however, prices in Detroit are down 29.0%. In fact, Detroit home prices are back to their mid-1995 levels.

The biggest annual drops came in Phoenix (-36.0%), Las Vegas (-31.2%) and San Francisco (-30.1%). Denver, Dallas and Boston saw their home prices fall the least in the past year, -5.5%, -5.6% and -8.0%.

Economists blame the continued price declines on tighter lending standards, the glut of unsold homes and record foreclosures.

And many of those with enough money to buy a new or used house are staying on the sidelines waiting for prices to bottom and a clearer idea of an overall economic recovery.

“The housing market still has somewhat of a ways to go before it completely bottoms,” Celia Chen, an economist at Moody’s Corp. (NYSE: MCO) Economy.com, told Bloomberg. “Prices I think still will fall a little bit further.”

By Mike Caggeso
Money Morning

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Phillip F. Blumberg, chairman of Blumberg Capital Partners, thinks banks are really worried about the commercial real estate loans they issued during the orgasmic 2000s. That’s the reason, says Blumberg, banks are remaining conservative in their lending.

Credit cards may be bad but commercial real estate is worse.

"It’s absolutely frightening," says Blumberg, who adds that he sold most of his real estate holders before the bust.

And the most dangerous time for banks will be 2010 to 2013 when $1 trillion in commercial real estate loans will mature and — like homeowners before them — owners of commercial properties will need to refinance.

Blumberg estimates that $236 billion in commercial real estate loans that were turned into securities will need to be refinanced in this period and that $67 billion of that amount "will be lost."

"We are on the brink of one of the worst commercial real estate financing markets ever," he said.

My comment: This makes sense as retailers go out of business and abandon space and as business downsizes it needs less office space. These are more malinvestments that the FED fostered with its easy money policy of low interest rates. yet people still believe that the people who did not see the problem or even admit their actions caused the problem are the ones that are going to fix it. The idea is embarrassingly absurd yet people will believe anything when they are drowning.

John Polomny
The Real Deal

Starts for privately owned homes clocked in at a 458,000 annual rate, a 12.8% decline from March’s revised rate of 525,000 and a 54.2% dive from April 2008’s annual rate of 1,001,000 starts, according to a report from the U.S. Department of Commerce.

Meanwhile, building permits for privately owned housing units were applied for at a seasonally adjusted annual rate of 494,000, 3.3% below March’s revised rate of 511,000 and a 50.2% plummet from April 2008’s revised rate of 991,000.

The Commerce Department report also sheds light on the complexity of the housing market’s fallout and path to recovery.

Most strikingly, while starts in the West have dropped 52.9% from last year, they actually rose 42.5% from March 2009. The Northeast, Midwest and South all posted double-digit monthly declines and steeper annual losses.

Also, the drop in building permits isn’t necessarily a bad thing, says Peter Kenny, managing director at Knight Equity Markets. Like the retail sector’s recovery, the first step for the ailing housing market is getting rid of all the houses already on the market, he said.

“There is so much inventory on the market that the sooner we stop building and start eating into existing inventory the better off we’ll be,” Kenny told Reuters.

For the short term, April’s housing figures won’t help the country’s top home-repair retailers, The Home Depot Inc. (NYSE: HD) and Lowe’s Cos. Inc. (NYSE: LOW).

Each company posted quarterly earnings that beat analysts’ forecasts, but not because they’ve been blessed by a return of consumer demand.

Rather, the retailers discounted items and cut costs across the board.

Earlier this year, Home Depot announced plans to cut 7,000 jobs, freeze officers’ salaries and close some specialty outlets – moves that shed 16.4% from operating costs, Reuters reported.

In April alone, building-material and garden-supply stores, shed 7,500 jobs, according to the U.S. Department of Labor.

The moves have clearly been effective, but also entwined with a bitter irony.

And as long as unemployment continues climbing, there won’t be a consumer base for every element for the housing market, including the merchandise on their shelves.

By Mike Caggeso
Money Morning

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In a speech before the National Association of Realtors last Tuesday, Sir Alan “the-bubble-blower” Greenspan claimed that his low-interest-rate policies in the early and middle years of this decade had no effect on mortgage rates or real estate prices. As a result, he claims no responsibility for the subprime mortgage crisis. But even current Treasury Secretary Timothy F. Geithner – who shared interest-rate-policy responsibility as governor of the New York Fed during the Greenspan regime – recently admitted that overly accommodative policy helped inflate the bubble. So what does Greenspan know that everyone else doesn’t?

Greenspan’s primary defense is that mortgage rates were a function of long-term interest rates that were simply not responding to the movement in short-term rates, which he did control. While it is true that the flow of capital from foreign creditors with excess dollars did keep long rates low despite rising short rates, this “conundrum” was not the leading factor in the housing bubble. Although rates on 30-year-fixed-rate mortgages are based on long-term bonds, by 2005 such loans had become an endangered species. The housing bubble was all about adjustable-rate mortgages (ARMs) with teaser rates of one to seven years – which are primarily based on the benchmark Fed Funds.

The rock-bottom teaser rates, permitted by the 1.0% Fed Funds rate, were the primary reason that many homebuyers were able to qualify for mortgages they couldn’t otherwise afford – which, in turn, enabled them to bid U.S. home prices up to “bubble” levels. By pushing down the cost of short-term money, the U.S. central bank enabled homebuyers to make big bets on rising real estate prices. Without the Fed’s help, few borrowers would have “qualified” for these risky mortgages and real estate prices never would have been bid up so high.

Greenspan expresses exasperation now, as he did then, that his careful nudging of interest rates higher by quarter-point increments did not translate into corresponding increases in long-term rates. Unfortunately, according to Greenspan, the markets would not cooperate with his wise guidance, and to his dismay, mortgage rates fell despite his best efforts.

As they say in Texas, that dog just won’t hunt. If the “measured pace” of his quarter-point rate hikes were too slow to produce the desired effect, why didn’t Greenspan jack up the pressure? With interest rates far below the official inflation rate for so many years during the bubble, he certainly had plenty of room to maneuver. The claim that he was unhappy with the ultimate results of his rate hikes – despite his having done nothing to adjust that policy – is ridiculous.

In addition to his colossal errors on interest-rate policy, there were many other ways Greenspan blew air into the real estate bubble. One example was what the market called the “Greenspan put.” By creating the perception in word and deed (that has since proven accurate) that the Fed would backstop any major market or economic declines, lenders became more comfortable making risky loans.

In an often-quoted 2004 speech, Greenspan went so far as to actively encourage the use of adjustable-rate mortgages and praised home-equity extractions for their role in contributing to economic growth. In fact, rather than criticizing homeowners for treating their houses like ATM machines, he often praised the innovative ways in which such homeowners were “managing” their personal balance sheets.

In short, Greenspan was as much a proponent of leverage for homeowners on Main Street as he was for bankers on Wall Street.

The bottom line is that Greenspan fathered the housing bubble and now he refuses to acknowledge kinship with his wayward child. His denial of responsibility is an act of stunning bravado, and is a testament to his ability to turn even the simplest of situations into an impenetrable tangle of theories and statistics.

“The Maestro” easily trumps the private sector jokers who now hold top dishonors in our pack of economic villains. The fact that Greenspan still has any credibility shows just how little understanding the general public – including Wall Street and the media – actually has about this crisis.

By Peter D. Schiff
Guest Columnist, Money Morning

About 21.8% of all owners were underwater as of March 31, according to a report today (Wednesday) by Zillow.com, a Seattle-based real estate data service. That figure is up from 17.6% at the end of the fourth quarter of 2008, as prices of homes continued a downward slide from their 2006 peak.

Home values dropped by $2.4 trillion last year, First American CoreLogic said in a March 4 report. Roughly 8.3 million U.S. homeowners owe more than their properties are worth and an additional 2.2 million borrowers will be underwater if prices decline another 5%, the Santa Ana, Calif.-based seller of mortgage and economic data, said in the report.

"What’s going on here is that you don’t have any markets that have turned around and you have new markets, like Dallas, that have joined the ranks" of communities where home prices have fallen, Stan Humphries, a Zillow.com vice president told The Wall Street Journal.

The data paints a clear picture of the difficulties confronting U.S. Federal Reserve Chairman Ben S. Bernanke and the Obama administration as they labor to kick-start a housing recovery. Even though the Fed pushed 30-year fixed home loan rates to a record low by purchasing mortgage-backed securities last month, the unemployment rate surged to 8.9% in April from 8.5% in March, forcing many would-be buyers to the sidelines.

The drop in housing prices complicates matters for as many as five million homeowners who may be eligible to refinance mortgages held by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) under terms of a government program announced in February. That program limits assistance to mortgage holders of loans that are a maximum of 105% of the home’s value. As prices spiral downward fewer homeowners can meet that threshold.

That has government officials considering an increase in the limit.

"It’s a question that we’re looking at," James Lockhart, director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, told the Journal.

And the malaise is now spreading to the neighborhoods of the rich and famous including the ritzy beach towns of the Hamptons on Long Island, N.Y. As the jumbo loan market dries up wealthy homeowners are finding themselves in the same boat as subprime borrowers – unable to refinance or sell because of shrinking prices.

About 90 homes began the foreclosure process in the towns of East Hampton and Southampton in the first 10 weeks of 2009, according to the Real Estate Report in West Islip, New York, Bloomberg reported. That compares to 109 in the same period last year and 73 in the first 10 weeks of 2007.

Sales in the Hamptons fell 67% in the first quarter from 2008, the most since tracking began in 1982, Bloomberg said citing a report from Town & Country Real Estate of the East End LLC. The median sale price slid 28% from a year earlier.

“It’s the trickle-up effect,” David Adamo, chief executive officer of Luxury Mortgage Corp., a home-loan bank in Stamford, Conn., told Bloomberg News. “Just like homeowners in smaller homes, these homeowners anticipated being able to refinance mortgages to continue making payments and at a future date sell for a gain…that strategy backfired when the market for jumbo mortgages dried up.”

Fannie Mae and Freddie Mac won’t buy or guarantee most jumbo loans, imposing a limit of $417,000 in most areas. Jumbo lending slowed to $11 billion, or 4% of the mortgage market, in the fourth quarter, the lowest figure ever recorded since trade publication Inside Mortgage Finance started tracking the data in 1990.

In many cases, wealthy borrowers seem to be guilty of gaining access to excessive credit through the same low-documentation loan processes that led victims of the subprime mess to their demise.

“There was this unrealistic view that the crazy financing was limited to subprime when of course it was across the board,” said Andrew Laperriere, Washington-based managing director at research firm International Strategy & Investment Group. “A lot of jumbo mortgages were nothing down with high debt-to-income ratios.”

By Don Miller
Money Morning

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But in an example of how desperate we’ve become for it – particularly concerning the U.S. housing market – many have jumped on the fact that it was the first time in 16 months that U.S. home prices didn’t drop by a new record. 

Wow… where’s that champagne? 

According to the latest S&P/Case-Shiller Home Price Index, U.S. home prices fell an annualized 18.6% in February, compared with February 2008 – and a 0.4% improvement on the 19% drop in January. 

Some have speculated that this news means we’ve hit the bottom and the market will now begin to trend upwards again. 

Not so fast. Those folks must either be eternal optimists or very shortsighted. A 0.4% improvement is one of those “you have to start somewhere” pieces of good news, not a reason to celebrate. 

The truth is, average home prices are still down 30.7% from the mid-2006 peak and are running at levels last seen in Q3 2003. We’re still a very long way from a solid housing market. And given that the S&P/Case-Shiller index reports figures from the 20 largest U.S. cities, there’s no doubt that we need to see more than just one month’s worth of evidence before forming many conclusions here. 

Here’s what we can say, though…

Three Housing Market Headwinds 

If you’re wondering whether this housing news is the first sign of some long-awaited stability for the housing market, or just an anomaly, consider this… 

While nine of 20 cities in the index showed a price improvement in February and at least provided a glimmer of hope, remember that a prolonged decline often means the market requires a longer period of consolidation before it breaks higher over the long-term. Moreover, the market is fighting a fierce, triple-pronged headwind… 

• Unemployment: With U.S. companies continuing to lay off workers in a desperate cost-cutting bid, this is hardly the kind of fertile environment that will kickstart enough home sales to cut into the bloated excess supply, drive prices higher, and improve the market. Unemployed Americans won’t even be thinking about buying new houses, never mind the struggle they’d face to get a decent loan or mortgage rate. As the job market goes, so goes the housing market.
• Confidence: The current economic and real estate climate has eroded confidence among would-be homebuyers. According to the Conference Board, the number of people who said they plan to buy a home in the next six months sank to a 26-year low in March.
• Excess Supply Of Housing: With America in the grips of a recession, jumping into a beleaguered housing market is low on Americans’ priority list. Existing home sales dropped by 3% from February to March and the U.S. Census Bureau said this week that the number of vacant homes hit a record 19.1 million in the first quarter. Plus, mortgage defaults and foreclosure rates are rising. 

So expect to see home prices drift along rather aimlessly for now, while the punch-drunk market drags itself back together.

The Housing Market’s Silver Lining

Now for the housing market’s silver lining… 

• First, although the U.S. still has way more houses for sale than demand calls for, the inventory of new homes for sale is currently 311,000 (10.7 months of supply) – the lowest number since 2001. 
• Second, with the average 30-year fixed mortgage rate still holding steady at around 4.8%, it represents an attractive entry point for buyers. However, with the Fed having spent many of its bullets to drive the rate down already, it might not dip much lower. If Ben Bernanke and his fellow bankers make this point, it could tempt would-be homebuyers into the market, for fear of missing out on lower rates if they don’t. 
• And finally, there are some pockets of strength across the U.S. – in some of the hardest-hit areas, too. For example, Business Week reports that home sales on Florida’s Gulf Coast, Inland Empire in Los Angeles, and the Las Vegas area jumped around 80% in February, compared with February 2008. 

Moreover, the number of available homes in California tumbled from 15.3 months worth a year ago to 6.5 months in February is a good sign in terms of clearing the market and driving up prices. However, this may be the result of speculators or first-time buyers, who don’t put a home on the market in return. The sell-then-buy equation remains very tricky and a lengthy process in many areas. 

One measure that California has passed in order to boost its market is a $10,000 tax credit to anyone who buys a newly built home.

Finding The Light At The End Of America’s Long Real Estate Tunnel 

As Robert Shiller, economics professor and co-creator of the Case-Shiller index, states, “The market is still doing badly. But there’s always light at the end of the tunnel.” 

In other words, while depressed prices, record low mortgage rates, and government incentives worth $8,000 in tax credits for first-time buyers may spark some buying, the current recession, high unemployment, and tight lending conditions mean we’re probably still a long way from the end of that tunnel. 

However, when recovery does eventually take hold, it may be perennially popular areas that have suffered the most during the bust – like California, Florida, and Nevada – that will lead the way higher.  

By Martin Denholm
Smart Profits Report

I was on the phone with my friend Andrew. Andrew is 25 years old. He’s been trying to get a business off the ground. Recently, his phones started ringing… and they’re still ringing nonstop…

"A guy from Vegas called. He bought 35 houses with cash. Then a guy from Toronto called. He bought eight houses and a 186-unit apartment community. We just had another guy in from Toronto looking to buy 50 rental properties."

Someone else was speaking on a phone a few yards away. More phones rang in the background.

"We’re getting calls from all over the world," said Andrew. "Tons of Americans are calling in. It’s both. We’ve launched a website too… and we’re already getting a lot of hits. We now have 22 agents working for us, full time."

My friend’s city has the cheapest real estate in the world. But in the last six months, prices capitulated. A price capitulation is what happens in the final throes of a bear market. It’s the final death spasm that sends prices to ridiculously low levels for a moment before people regain their senses.

"They call up and they want to buy houses for $500," Andrew says.

Andrew showed me a house his firm bought for $750. They bought this house from a bank a couple months ago. It’s almost in rental condition. This house sold for $110,000 in 2005.

Then he showed me a house they paid $20,000 for two months ago. It’s a four-bedroom, three-bath, 1,900-square-foot house with a full basement. The bank mortgaged this house for $188,000 in 2006. It’s in a fantastic neighborhood of well-maintained lawns, where people take pride in where they live.

Andrew is accumulating as much of this property as he can. Apartment buildings in wealthy neighborhoods are his favorite investments. His city is in a depression, and people don’t want to own houses. So there’s strong demand from people who want to rent. He says he can make returns of 15% to 20% a year in these properties…

Here’s the thing: There’s always a price that’ll "clear" a market. When prices reach a certain level, buyers enter. This is one of the most important fundamental rules of speculation… and it never fails.

Andrew lives in Detroit. For years, there’s been no life in Detroit’s real estate market. This year, without explanation or fanfare, prices in Detroit property reached this level. Now sentiment has turned around. The phones in Andrew’s office have started ringing.

If the market for Detroit housing has found a bottom, maybe the property market in your hometown is close to making a bottom, too…

Good investing,

Tom Dyson
Daily Wealth

The Conference Board’s Consumer Confidence Index, an important measure of American consumer sentiment, soared in April to its biggest increase since 2005, while the Standard & Poor’s/Case-Shiller Home Price Indices showed a slowing in the decline of home prices in 20 major U.S. cities in February for the first time since 2007.

Consumer confidence has direct consequences for the battered U.S. housing market, which is critical to the U.S. economy because of its impact on a wide-range of industries, including construction materials and the sale of appliances and furniture.  Consumer spending accounts for 70% of U.S. gross domestic product (GDP).

The Conference Board’s sentiment index jumped to 39.2, the highest level since November, from 26.9 in March, the New York- based research group said today. The 12-point jump easily surpassed the 29.7 median estimate of 62 economists in a Bloomberg News survey.

Consumers pulled back spending and increased their savings rate as the recession pushed unemployment rates to 8.5% in recent months. The report indicates that efforts by U.S. Federal Reserve to lower borrowing costs and push banks to resume lending may be paying off. 

“Consumers believe the economy is nearing a bottom,” Lynn Franco, director of the Conference Board’s consumer research center, said in a statement, according to Bloomberg.  Still, the index “remains well below levels associated with strong economic growth.”

Meanwhile, the S&P/Case-Shiller index showed that the slide in home prices in 20 U.S. markets slowed in February for the first time since January 2007. Prices fell 18.6% in February year-over-year after dropping 19% the previous month. But for the first time in 16 months the fall did not set a new record, suggesting the housing market might be closer to a bottom.

The composite index of 20 metropolitan areas fell 2.2% in February from January.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s, said in a statement.

The figures suggest steps to lower borrowing costs and unclog lending are finally moving buyers off the sidelines. The average rate on a 30-year fixed mortgage reached a record low of 4.78% in the week ended April 2, according to Freddie Mac (FRE).

About half of March existing-home sales were of distressed properties, 51% of sales were by first time buyers and prices rose from February, according to data from the National Association of Realtors. While foreclosures have driven prices down and spurred home re-sales, many potential homebuyers may have been waiting for a halt to the precipitous drop in prices before making a purchase.

“We’re probably getting close to an inflection point,” Michael Feroli, an economist at JPMorgan Chase & Co. (JPM) in New York, who correctly forecast the drop in the index, told Bloomberg.  Still, he said, “if we are indeed going to see a recovery in the second half” the double-digit price drops will need to abate in the next few months.

But at least one analyst feels the data simply confirm a bottom has already been reached and sales and prices have nowhere to go but up from here.
“None of this really comes as a surprise,” Andrew Waite, publisher of the Personal Real Estate Investor told Money Morning in an interview. “At this point the housing numbers no longer reflect as leading indicators, but rather represent a long-term trend.”

According to Waite, the housing market bottomed last year. But that bottoming takes place in stages. Housing values continue to decline, but values can’t bottom, solidify, and then head north until sales volumes increase, Waite said.

By Don Miller
Money Morning

Investment U Chairman Alex Green thinks so, what with foreclosures skyrocketing and prices in some places falling more than half from their peak. He says the market is “dead” for now.

But dead doesn’t mean unprofitable.

And as Baron Rothschild often said, “Buy when blood is running in the streets.”

Despite all the bad news making the front pages, real estate-related stocks and funds have been making a comeback; some are up more than 25%, suggesting light at the end of a very dark tunnel.

Equity Residential Properties, one of my favorite REITs, is up 20%. Toll Brothers – builder of high-end homes – has been volatile, but appears to be bottoming.

My basic argument for a turnaround is that the federal government has essentially put a floor under the current real estate market, buying up the bad mortgages, offering incredible incentives including tax credits, and with prices down sharply, the bargains are everywhere.

Buying Real Estate At Bargain Prices

I just completed a survey of property and real estate experts in the hardest hit markets in the country – California, Nevada, Arizona and Florida – and, surprisingly, most experts expressed cautious optimism about rental properties and bargain real estate opportunities.

None were bold enough to announce that the bottom had been reached in housing prices. Most predicted lower prices in the next six months. However, aggressive speculators are finding profitable investments.

I spoke with a vulture capitalist who has put together a syndicate to buy up foreclosed single-family homes in Southern California. Another one is involved in condo developments, which have been hard hit in the region.

His group is going to market with a condo project in North Hollywood:

“We have started to see some serious pickup in home and condo purchase activity all around us,” he told me. The tax credits for first time homebuyers and the dramatic drop in interest rates seem to have caused a positive reaction. His gut feeling is that prices are not going to be dropping further in the urban areas.

Prices of homes and rents are declining in Las Vegas – home values are down 40% to 50% from a year ago, and the majority of housing and condo sales are foreclosures. Real estate sales are picking up, but almost all below market prices.

In fact, some speculators are getting back to “flipping houses” – they buy way below the appraised value, add several thousand dollars in fixing up the house with new carpet and paint, and sell for $10,000 to $15,000 more – still below appraised value.

In Utah, a friend of mine is negotiating on a foreclosed house that has a $2.8 million defaulted loan. He expects to pay close to $500,000 for that property.

It’s the aftermath of the “Perfect Storm” of the real estate bubble:

• Super low prices
• A locked-in 4.75% fixed 30-year mortgage rate
• An $8,000 (refundable) tax credit that can be applied to a 2008 return and never needs to be repaid. (It applies to first time buyers or those who haven’t owned a home for three years.)

Buying Real Estate Around the Country

These events are all lining up for real estate investors interested in buying real estate around the country: .

• In Arizona, a friend is looking at a dozen homes in the Anthem Country Club near Scottsdale that used to sell for $400,000 or more two years ago. Now they are for sale or held by the bank for under $200,000 and one three-bedroom/two-bath home is going for $129,000.
• In Florida, longtime real estate expert and investor John Schaub has bought six rental houses in the last six months. According to John, he can get better than an 8% net cash flow even with today’s lower rents. These houses are typically bank owned. Not every bank will sell at a bargain price, but a number who are in trouble will – and today they are.

For example, he just bought a house that sold for $190,000 two years ago and had a $150,000 loan balance. John paid $62,000 and it will rent for $895 a month. The net rent after all expenses would be more than $6,000 a year, or nearly 10% on cash return.

To get a great price, Schaub pays in cash and takes properties in “as is” condition. Banks don’t want to warrant anything so a buyer must carefully inspect any purchase. “All cash” offers will often trump higher offers from buyers who require financing.

John has a great book called “Building Wealth Buying Foreclosures.” I’ve found it an invaluable resource.

He believes this super buying real estate opportunity will last through the next couple of quarters:

• New inventory is shrinking fast and many banks are now renegotiating existing loans, rather than foreclosing.
• Buyers are recognizing that we are near a bottom, and incentives like the tax credit are beginning to enter the market.
• We’re going to see rentals increasing as profitable and attractive investments. A wave of homebuyers who can’t qualify for loans or who’ve been foreclosed upon will begin to put pressure on the rental market by year’s end.
• Rising rents will be a further inducement for fence sitters to begin buying.

And in a few short years we may look back upon the incredibly beat up real estate sector and see it as one of the greatest buying opportunities of the century.

Good investing,

Dr. Mark Skousen
Investment U

But you wouldn’t know that by looking at the headlines…

Earlier this week, Goldman Sachs announced a huge upside surprise in earnings, a $5 billion share offering, and its intention to pay back federal TARP funds ASAP.

The average investor might view this as a sign that things are returning to normal in the banking sector, and be tempted to start shoveling money back into banking stocks.

Let me suggest you wait a while. “A fool and his money are soon parted,” as the old saying goes.

Put another way, if you think a one-month rally in the stock market can begin to erase a financial crisis that’s been going on for the better part of two years now, I’ve got some great Florida swampland for you.

Yesterday morning investors got a taste of what lies ahead as General Growth Properties filed the biggest real estate bankruptcy in U.S. history. The impact of a commercial real estate collapse will continue to ripple across the markets, and it’s why we need to take a closer look…

Commercial Real Estate: Sad State of Affairs & Getting Worse

It’s no surprise that the market for commercial office space has come to a crashing halt. Last year, commercial real estate sales fell off a cliff, plunging 73%, according to data from Real Capital Analytics.

But it’s going to get worse… much, much worse.

At the end of last year, the vacancy rate for commercial office buildings was 14.5%. This year it’s expected to hit 16.7%, as more and more companies and individuals file for bankruptcy. This chain reaction has led to an explosion of commercial property defaults.

According to Mark Scott – Senior Vice President of NorthMarq Capital LLC, a New Jersey commercial real estate brokerage and property management company – 2009 could be a banner year for commercial defaults:

“In the office market, you’re starting to see signs of mammoth job losses, and as people aren’t buying as many goods, they’re not shipping as many goods, so [now] we have stress in the industrial market.”

Namely, banks seized 464 commercial office properties worth $7 billion in March alone, nearly triple what was seized in December. And that leaves banks holding millions of square feet of space that’s plunging in value by the minute.

Part of the problem is certainly lack of demand, but part of the reason for the increasing default rate on commercial loans is the way they were structured in the first place. Many of them were based on a payment structure that included increases in future rental rates and revenues.

And as if exploding office vacancies and mortgage defaults on the properties weren’t bad enough, now there’s another problem area surfacing in the commercial real estate market: industrial properties.

Industrial Property – The Other Shoe

When it comes to industrial property, two-thirds of the space available consists of warehouse and distribution centers. Torto Wheaton Research – the commercial research unit of CB Richard Ellis – predicts vacant space will climb to 12.6% in 2009 from 11.4% in 2008.

But according to NAI Mertz Corporate Service’s Director Stephen L. Blau, the commercial market shows nary a sign of stabilization. In fact, he says we’re just now seeing the beginning of what he expects to be a huge wave of commercial mortgage foreclosures.

And Jeffrey DeBoer, President of the Real Estate Roundtable agrees, “This is a rolling problem that’s only going to get worse.” This year, DeBoer estimates $400 billion worth of commercial real estate mortgages will be due and payable.

Tougher, loan underwriting standards combined and declining property values will make it virtually impossible for some owners to refinance, setting off a chain of events that usually culminates in bankruptcy and foreclosure.

There are a number of ways we can profit from this “next” loan crisis…

Shorting Commercial Real Estate With ETFs : 3 Ways to Profit

You might think the best way to play this new problem for the big banks would be to short them directly, or to invest in one of a number of bank-shorting ETFs. But there are more direct ways. Here are three commercial real estate ETFs ripe for short plays and their losses for 2009:

• iShares FTSE Industrial/Office Index (NYSE: FIO) down 15.5%

• Vanguard REIT Index (NYSE: VNQ): down 22.2%

• Dow Jones Wilshire REIT (NYSE: RWR ): down 23.6%

Investors might also want to consider going long the ProShares UltraShort Real Estate (NYSE: SRS). This seeks investment results equal to twice the inverse of the daily performance of the Dow Jones U.S. Real Estate Index.

Commercial and industrial loan failure represents a risk that few have talked about, and even fewer know what to do about. The impacts from this fallout are only starting to be recognized, and it’s only going to get worse.

And going long banks with this shoe starting to drop? Not with my money…

Good Investing,

David Fessler
Investment U

General Growth filed for Chapter 11 seeking protection from creditors after it amassed $27 billion in debt accumulating over 200 shopping mall properties. The filing covers 158 of its U.S. malls, but excludes its joint-venture properties and third-party management business.

The Chicago-based company – the country’s second largest shopping mall owner – owns such valuable properties as Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston. It listed total assets of $29.56 billion and total debt of $27.29 billion.

“We intend to emerge as a leaner company,” General Growth President Thomas Nolan told Bloomberg News in an interview. “We want to come out as a less leveraged company. Our business model remains strong.”

In the eyes of many observers, the filing brings the U.S. real estate collapse full circle as commercial properties values are now plummeting in concert with the ailing residential housing market. Commercial real estate prices in the U.S. dropped 15% last year, according to Moody’s Investors Service (MCO).

Many commercial real estate companies have been squeezed out by the credit crunch as banks continue to curb lending.

Nolan said General Growth was a victim of “a broken capital market.” No one could have predicted the severity of “the credit markets shutting down,” he said.

Last November, General Growth warned it might have to seek protection from its creditors because it was unable to refinance maturing debt obligations. The company was trying to restructure bonds it floated to finance a $14.3 billion all-stock deal for Rouse Co., a high-end mall dealer it bought in 2004.
"It just tells you that this debt can’t get redone, especially for big properties," RBC Capital analyst Rich Moore told Reuters.

“General Group has long been the poster child of too much debt,” said Moore."General Growth has malls, and malls are some of the biggest assets out there."

Analysts said the bankruptcy might allow competitors to cherry-pick some of General Growth’s more desirable properties, giving Simon Property Group Inc. (SPG) the opportunity to bolster its position as the No. 1 mall operator. 

“I think Simon’s going to be able to pick up some of these assets on the cheap,” Dan Fasulo, managing director at real estate research firm Real Capital Analytics, told Bloomberg.

However, Fasulo also called General Growth’s filing “the beginning of the end,” which could lead other companies to fail.
“This bankruptcy will drive down the values of mall assets in the United States. It’s going to put, I believe, more supply on the market than can be absorbed by investors,” he said.

About $814 billion of commercial mortgage debt is expected to mature over the next two years, which will only serve to put more pressure on the market, according to real estate research firm Foresight Analysis.

Meanwhile, the residential market chimed in with its own bad news.  On the same day General Growth filed, the U.S. Department of Commerce said builders broke ground on 10.8% fewer homes in March and new permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures.

“Buyers seem to be more interested in picking up bargain- basement prices in the existing-home market than in the new-home market,” Robert Dye, a senior economist at PNC Financial Services Group Inc. (PNC), in Pittsburgh, told Bloomberg News.

By Don Miller
Money Morning

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