The Nexus of the Real Estate Crash is Shifting to Commercial Properties

By: Money_and_Markets

If you’ve been reading my stuff for the past few years, then you’ve been ahead of the real estate pack every step of the way.

I warned you well in advance that the housing market would implode … that the mortgage industry would collapse … and that virtually any stock exposed to building, construction, banking, or finance would suffer immense collateral damage.

More than three years ago, in fact, I published a special report called the “Great Real Estate Bust of 2006-2008″. It explained what the bust would look like, and named specific stocks that were toast — including, but not limited to, Beazer Homes (BZH), Countrywide Financial (CFC), New Century Financial (NEW), PMI Group (PMI), Bear Stearns (BSC), Lehman Brothers (LEH), and Washington Mutual (WM).

When housing demand dried up, some high-flying stocks bit the dust.

Today, you can’t even call up quotes on five of those companies because they’ve gone bust or been acquired in shotgun marriages. Other stocks named in that report … as well as in multiple columns in Safe Money Report and Money and Markets … are trading for mere pennies, nickels, and dimes.

Why do I bring this up? Because I think it shows I have some credibility when it comes to real estate — and because 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.

My Forecast For the Next 12-to-18 Months: A Gradual Easing of the Housing Crisis

Look around and you’ll see evidence pointing to a change in the residential real estate environment. Specifically, home prices have fallen so far, so fast … and sellers have gotten so desperate … that sales volumes are beginning to pick up in select markets.

Aggressively priced foreclosures, short sales, and regular homes are now finding buyers, both first-timers and investors. The outsized price declines have helped restore some semblance of normalcy to several ratios (price-to-rent, affordability, price-to-income, etc.).

This is a huge shift from the situation a few years ago, when all of these indicators were ridiculously out of whack! You can find more details in my July 2007 white paper “How Federal Regulators, Lenders, and Wall Street Created America’s Housing Crisis — Nine Proposals for a Long-Term Recovery.”

So how will this process play out?

Well, 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.

Now could be the time to buy your first home at a bargain basement price.

So for those playing the downside in the housing market by shorting residential real estate-related stocks, I’d suggest moving to the sidelines. I still wouldn’t advocate buying most of them for more than the occasional trade, simply because I believe they’ll be “dead money.” That’s what we saw with many Nasdaq stocks after the last mega-bubble-and-bust. And more than nine years later the whole Nasdaq Composite is still 66 percent below its bubble high!

Meanwhile, if you’re fed up with renting and waiting anxiously to buy a home, shop around. You may find some compelling values that are just too good to pass up. I’m talking about houses or condos you can buy for 50 percent or 60 percent off peak levels.

There’s still tons of inventory on the market to choose from, and you don’t need to rush things. So keep these three tips in mind:

1. Be sure you’re confident of your income, Purchase strictly what you can afford using a traditional mortgage,
2. And don’t get swept up in any bidding wars.

The Broader Credit Market Implications

Commercial real estate still has further to fall. So stay clear of REITs and other stocks exposed to commercial real estate.

Does this make me a credit market “bull?” Not really. This credit crisis stopped being just about residential mortgages long ago. The weakness has since spread to credit cards, auto loans, boat loans, commercial and industrial loans, and more.

Heck, the CFO of auto lender GMAC just said “We’re at the highest retail credit loss that the auto industry has seen in recorded time.” The firm lost $675 million in the first quarter.

Commercial real estate is a whole different ball game, too. I believe the downturn there is still in its earlier stages. Further price declines, further increases in vacancy rates, and further pressure on rents are likely to be seen in the coming quarters. That means you should continue to avoid REITs and other stocks exposed to commercial (rather than residential) real estate. And you should continue to focus on safe money investing, regardless of what you might hear from the Wall Street crowd.

Until next time,

Mike

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