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Real estate

Page history last edited by Brian D Butler 11 years, 11 months ago

see also: USA macro data


Real estate


One key issue in the real estate market is liquidity, which you can think of as the time it takes to sell your home.  As far as liquidity goes, a condominium in a large metropolitan area is generally quite liquid, and might sell within days or weeks of being put on the market.  But a family home in the suburbs is generally less liquid, and might take months to sell.  


Table of Contents





US data: "Housing STARTS"


As of May 2009, Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate (SAAR) peak of January 2006 all the way to the 458 thousand SAAR of April 2009 (the last data point available) – a dip of 80%. In the single family housing segment, annualized starts fell by 80% between January 2006 and January 2009. Single family starts seem to have stabilized since the January 2009 low of 357 thousand SAAR.


Commercial Real Estate - USA


"One quick chart to further highlight the problem that banks are facing. I have been writing for several years that commercial real estate loans will be the next shoe to drop. Moody's calculates that commercial real estate prices have dropped 30%. Over a trillion dollars in commercial real estate loans are coming due in the next few years. Banks are going to continue to reduce their loan portfolios in order to deal with the massive write-offs they are going to have to make. And my bet is they put those reserves they are not lending into government debt.




source:  John Mauldin Newsletter, October 16, 2009




Western Europe - housing troubles 2009:

The European housing cycle lags the U.S. cycle by about 2 years but the extent of house price increases, as well as the extent of over-construction, exceeds the U.S. experience in many countries. Starting from the mid-1990s, house prices in the UK, Spain, Ireland, Scandinavia and France exceeded the price increase in the U.S. whereas construction as a percent of GDP expanded to unsustainable levels, especially in Spain and Ireland. This severe construction overhang in the latter countries will take several years to unwind thus retarding a return to balanced growth as suggested by the strong housing-consumption correlation in these countries. Recent research by Citigroup foresees price drops of 10% to 15% by 2010 and 20% to 30% over the next 4 to 5 years. See The State of Housing Markets Around the World: Not Bottoming Yet?.

Will the housing downturn in Europe prove as disruptive as in the U.S.? Daniel Gros from the Center of European Policy Studies (CEPS) last year pointed out that the EU banking sector is less exposed to a housing downturn than its U.S. counterpart due to a set of particular features. First, in the U.S. most mortgages are ‘non-recourse’: If the value of the house is lower than the mortgage on it, the borrower can just walk away and simply send the keys to the bank (“jingle mail”). By contrast, in Europe borrowers remain liable for any difference between the value of the property and the amount of the loan. Second, the mortgage-backed covered bonds in EU are subject to legal quality standards and stay on banks' balance sheet as opposed to bankruptcy-remote RMBS which should provide an incentive for adequate lending standards. The disruption of the covered bond market during the credit crisis however has shown that this distinction is not a sufficient safeguard against stress in the mortgage market. See Transatlantic Differences in Real Estate: Covered Bonds and Recourse Loans.

Distress is particularly clear at the national level. For instance, house building accounts for 14% of the Irish economy and Allied Irish Bank calculated that for every 10,000 fewer homes built, almost 1% is shaved off the Irish growth rate. So far, house prices have fallen over 10% year-over-year. See: Celtic Tiger No More: Ireland Enters Depression Territory.

Spanish housing prices fell on a yearly basis for the first time in Q4 2008 and analysts at BNP Paribas estimate that a comparison with the long-term price to rent ratio shows that as of Q4 2008, home prices are still overvalued by about 40% and prices are expected to fall by 20% in 2009 alone. See: Spain's Housing Bust Gathers Pace: Builder and Developer Loans Most At Risk.

In France, the housing bubble did not translate into a construction bubble. This has raised hopes that any adjustment will occur primarily through prices rather than through a painful retrenchment of economic activity. See: France After The Housing Bubble: No Construction Overhang.


Central and Eastern Europe

Like other parts of the world, property prices in most of Central and Eastern Europe (CEE) have taken a beating and further price falls are expected in 2009 and 2010. In addition to tight credit conditions and economic contractions across the region, collapsing demand from Western European buyers is also having a negative impact on prices. For example, demand from Spanish and Irish buyers, whose countries are in severe recessions, has accounted for around 80% of total foreign demand in Hungary’s property market, according to Global Property Guide. Notably, property prices are not tumbling in all CEE countries. The Czech Republic saw residential property prices rise almost 10% y/y in Q1 2009, according to the Knight Frank House Price Index. In contrast, Latvia saw the some of the sharpest housing price falls (-36% y/y) in the world in the same period.


for more information: see RGE Monitor



USA Real estate bubble burst:


see globotrends page on credit crisis of 2007



Going into the present crisis, the US economy was more exposed to real estate than ever before. In the run-up to the S&L crisis, the total stock of US residential property was worth around 104 percent of GDP, and mortgage debt financed a third of that property. In 2001, it was worth around 121 percent of GDP11 and more than 40 percent of it was financed by mortgages. At the end of 2007, Harvard’s Joint Center for Housing Studies estimates, the total stock of US residential property was worth $19 trillion, around 140 percent of US GDP, and more than half was financed by mortgages. If commercial mortgages are included, total mortgage debt was $14.4 trillion, more than 100 percent of GDP.



Losses 2008-09:




The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession...More than 2.3 million properties got a default or auction notice or were seized by lenders last year, according to RealtyTrac Inc., a seller of data on defaults.


About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said.


Values have dropped for eight straight quarters.


Upside down:   The number of homeowners with negative equity, or those who owed more on their homes than the property was worth, rose to 17.6 percent from 14.3 percent in the third quarter, Zillow said.







Housing index:


There are three indexes out there.  Only one is good.  See S&P Case-Shiller index


Be very careful of the REALATORS index....which is too optimistic, and also of the FEDERAL Reserve index, which is based on the data from Fannie May, Freddie Mac....because they dont include subprime lending, and are therefore too optimistic as well.  


The only good, best index is from Case/ shiller.


Case-Shiller U.S. National House Price Index



Other index:


SPCS20:IND ... 20 Home Price Index



source: Chart the Performance of SPCS20:IND


About the index: There are three composite S&P/Case-Shiller Home Price Indices, one comprised of price changes within all 20 metropolitan markets for which MacroMarkets LLC and S&P have launched an index (the S&P/Case-Shiller Composite-20 Home Price Index), and another comprised of price changes within the following subset of 10 metropolitan markets (the S&P/Case-Shiller Composite-10 Home Price Index):: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC. In addition to those 10 markets, the S&P/Case-Shiller Composite-20 Home Price Index reflects price changes for Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland, Seattle, and Tampa. Please see http://www.macromarkets.com/csi_housing/market_definitions.shtml for more info. On a quarterly basis the S&P/ Case-Shiller US National is also released. It is the broadest national measurement of home prices, with coverage going beyond the 20 MSAs that make up the composites.For more information on the S&P/Case-ShilIer Home Price Indexes, see www.homeprice.standardandpoors.com









Median Home Prices in USA:


In October '08: The median price for such homes plunged by 11.3% from a year earlier, the largest decline ever in the NAR’s survey, to $183,300.




see also



Real estate markets around the world


see our discussion about global real estate markets




Business sector

With the development of private property ownership, real estate has become a major area of business. Purchasing real estate requires a significant investment, and each parcel of land has unique characteristics, so the real estate industry has evolved into several distinct fields. Specialists are often called on to valuate real estate and facilitate transactions. Some kinds of real estate businesses include:

  • Appraisal - Professional valuation services
  • Brokerages - Assisting buyers and sellers in transactions
  • Development - Improving land for use by adding or replacing buildings
  • Property management - Managing a property for its owner(s)
  • Real Estate Marketing - Managing the sales side of the property business
  • Real Estate Investing - Managing the investment of real estate
  • Relocation services - Relocating people or business to a different country

Within each field, a business may specialize in a particular type of real estate, such as residential, commercial, or industrial property. In addition, almost all construction business effectively has a connection to real estate.




According to The Economist, "developed economies'" assets at the end of 2002 was

  • Residential property: $48 trillion
  • Commercial property: $14 trillion
  • Equities: $20 trillion
  • Government bonds: $20 trillion
  • Corporate bonds: $13 trillion
  • Total: $115 trillion

That makes real estate assets 54% and financial assets 46% of total stocks, bonds, and real estate assets. Assets not counted here are bank deposits, insurance "reserve" assets, and human assets




US Housing Industry


The U.S. housing market includes the construction, sale, and resale, of all residential properties across the country. Even though it's only focused on housing, conditions in the housing market are indicative of the state of the economy as a whole. Homes are durable goods, meaning that new home construction and sales are often highly correlated with economic cycles; people tend to buy new homes only when they are confident that they'll have enough income to pay for it, so economic downturns can depress the housing market considerably. In addition to the buildings themselves, homes require appliances, furniture, utility services, and any number of other secondary goods and services. When a new home is built and purchased, the financial impact of that sale continues on indefinitely, every time the owner buys a lightbulb or pays the electricity bill. As such, conditions in the housing market are monitored closely, given their widespread implications.


Currently, the housing market is somewhat shaky, due largely to the collapse of the subprime lending industry. The number of new homes sold in 2007 is projected to fall 19% from 2006 levels, according to the National Association of Realtors; existing home sales aren't faring well either, with a projected 6.8% drop over 2006 sales figures.


Global Real estate markets






What causes housing booms and slumps?

The housing market is very closely related with prevailing economic conditions. There isn't a perfectly clear cause-and-effect relationship between the two; conditions in one can impact the other, and vice versa. In general, the housing market reflects the state of the economy as a whole. There are times when the economy seems to be humming right along, but the demand for residential real estate falls nonetheless. In cases such as these, the slump is often a sign of economic weakness that just hasn't manifested itself in other areas of the economy. While the relationship between the housing market and the entire economy is somewhat complicated, there are some observable factors that can impact the demand for residential real estate.




U.S. Economic Cycles

Business cycles have a number of significant repercussions for the economy. The most notable of these is the fact that household disposable income rises during booms and falls during recessions. The average American's purchasing power, therefore, rises and falls in tune with these economic cycles. When disposable incomes decrease, spending decreases overall, but some goods and services are more sensitive to these changes than others. Food and gasoline are two goods that are relatively less affected by these cycles; people still need to eat and get around, even during hard times. Durable goods, or larger purchases that are generally meant to last a while, are very hard hit by recessions, however. For example, if a person's income is halved, their food consumption will probably not change that much; they will be more likely, however, to put off buying a new washing machine, car, or house. Since these goods are "durable", the ones they already have will probably last until their finances improve.

Because the demand for durable goods decreases during recessions, and a house is about as durable as a good gets, the residential real estate market is extremely sensitive to economic cycles. A recession can lead to lower demand for new home construction, appliances, furniture, and even cars.


Interest Rates

interest rates are another factor that can dramatically impact the housing market and new home construction. When interest rates either rise or fall, the economy as a whole is affected. The housing market, however, is particularly sensitive to these changes for a number of reasons.



Cost of Borrowing

As interest rates increase, it becomes more expensive to obtain a mortgage on a home. Given mortgages' generally long terms (usually 15 or 30 years), even small changes in interest rates can significantly impact monthly payments and the total cost of buying a new home. Higher interest rates are likely to cause a decrease in demand for housing due to these rising costs. Conversely, lower interest rates can make borrowing money cheaper and stimulate demand in the housing market.


Subprime mortgages (see subprime lending)



Increasing interest rates can also harm preexisting mortgages and result in higher foreclosure rates, increasing the supply of homes on the market just as it becomes more expensive to buy them. The reason for this is the adjustable-rate mortgage, or ARM. ARMs are different from fixed-rate mortgages in that the interest rate is variable, changing with current interest rates throughout the term of the mortgage. These ARMs became very popular in the early- to mid-2000s, when low introductory, or "teaser", rates caused many people to take out ARMs and buy houses. After the introductory period, however, the rates on these ARMs were reset to reflect current interest rates, resulting in much higher monthly payments. As a large percentage of these ARMs were made to  borrowers, many of whom could not afford the higher monthly payments, increasing numbers of homes began being repossessed. As many ARMs are still in their introductory periods, future waves of rate resets could further increase foreclosure rates. Interest rate increases could further exacerbate the problem, causing even more consumers to default on their mortgages. This increased number of foreclosures could lead to rising inventories of homes for sale, which would, in turn, depress real estate prices and decrease demand for construction.



Business Models in Real estate



Concepts to watch

external links


Comapny iconInterest Rates - This article describes the impact of interest rates. A related concept is the Yield Curve. An interest rate is the cost of borrowing money. Among the many industries affected... read more
Comapny iconNew Home Construction - New home construction is a surprisingly complicated process that affects many different companies and industries. As such, increases or decreases in the number of new... read more
Comapny iconTimber Prices - Timber, or trees cultivated and harvested for commercial purposes, is used in a wide range of industries. Timber's end products are among the most basic yet widely used goods... read more
Comapny iconU.S. Housing Market - The U.S. housing market includes the construction, sale, and resale, of all residential properties across the country. Even though it's only focused on housing,... read more




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