October 2009

HIGH UNEMPLOYMENT DAMPENS
COMMERCIAL REAL ESTATE OUTLOOK

As unemployment lines grow, commercial real estate reports look gloomier. Such was the case when the Mortgage Bankers Association (MBA) issued its commercial real estate "data book" for the second quarter of this year. MBA research indicated that vacancy rates across the country were at 17.6% in the second quarter, almost 6% higher than they were in the second quarter of 2008.

Meanwhile, the U.S. Bureau of Labor Statistics reported that the unemployment rate rose to 9.8% in September, the highest it has been in 26 years.

"Shopping malls and strip centers are driven by consumer spending," said Jane Woodwell, vice president of commercial real estate research at MBA. "Manufacturing and industrial space is driven by the degree to which manufacturing is going on and goods are being transported from one place to another."

Anirban Basu, CEO of the Sage Policy Group, a Baltimore economic and policy-consulting firm, agreed with the MBA assessment of the commercial real estate sector's plight.

"Our economy has lost over 7 million jobs and continues to lose jobs at a feverish rate," Mr. Basu said. "In a number of commercial real restate segments, there's simply a lack of demand for new space, and that demand will continue for years to come. There's simply too much office space, too many hotel rooms, too many restaurants and too many shops."

CONGRESS HEARS OF FHA BAILOUT POSSIBILITIES

Edward Pinto, who served as chief credit officer of Fannie Mae from 1987 until 1989, told a House subcommittee that the FHA will most likely be bailed out by the U.S. government within three years.

"I believe [the FHA] appears destined for a taxpayer bailout in the next 24 to 36 months," Pinto, who is now a real estate finance consultant, told the Housing and Community Opportunity Subcommittee on October 8. "FHA is an agency that is growing by leaps and bounds, with thousands of new lender and broker relationships, exposures to new risks, antiquated systems, high turnover, a history of fraud, escalating default rates and a rapidly declining capital level."

On October 13, FHA Commissioner David Stevens appeared before the same subcommittee and (conditionally) presented a more optimistic viewpoint.

"Based on current projections, absent any further catastrophic home-price decline, FHA will not ask Congress and the American taxpayer for assistance," Stevens told the subcommittee. "We're not going to need a taxpayer bailout. It's a fact."

APPRAISAL INSTITUTE CALLS FOR
WORLDWIDE VALUATION STANDARDS

Jim Amorin, president of the Appraisal Institute, told a gathering of the United Nations Economic Commission for Europe that transparency and accountability are sorely needed in real estate valuation throughout the world.

"Advancement of professionalism provides greater assurance that the complexity of the interconnected world economy will be better understood and served with knowledgeable and accountable valuation experts," Amorin said during the June meeting held in Rome. "Whether it is appraising a house in Rome, a home in Tokyo or a log cabin in Illinois, the fundamental principles of valuation should be recognized and universally applied."

INTENTIONAL DEFAULTS ARE INCREASING
FASTER THAN ANTICIPATED

A significant factor in the historically high number of foreclosures is the fact that more people are purposely walking away from their mortgages. A recently published study determined there were 558,000 strategic defaults in 2008, twice as many as had been the year before. It concluded that strategic defaults accounted for 18% of foreclosures.

The study, conducted by Experion, a national credit bureau, and Oliver Wyman, a consulting company, concluded that mortgage holders with high credit scores were 50% more likely to walk away from their homes than those with lower credit scores. Often, the report said, these strategic defaulters go directly from paying their mortgages on time every month to not paying them at all.

TOUGH TIMES MAY LIE AHEAD FOR HIGH-END HOUSING MARKET

Many analysts are pointing optimistically at events they interpret as a sign of upcoming improvement in the housing market. But signs of improvement in the market for more expensive homes are harder to discover.

"I think for wealthy homeowners it will get worse before it gets better," said Dennis Hedlund, who through his company, iEmergent, makes economic predictions for mortgage and real estate companies. "I don't think home prices have bottomed yet. Many people are stuck at the high end, as there aren't many buyers out there."

Economists blame the sluggish luxury-home market on the erosion of cash reserves and retirement savings as a result of last year's stock-market collapse, job loss among higher paid employees and tighter credit policies of mortgage lenders.

"During the boom, those with higher incomes felt they could save less and borrow more, but they've taken a huge hit since the peak," said Sam Khater, chief economist of First American CoreLogic.

CON MAN'S BEACH HOUSE SELLS ABOVE LIST PRICE

The beach house of infamous swindler Bernie Madoff sold for $9.41 million, $660,000 above the list price of $8.75 million. The proceeds will go into a fund to partially repay victims of the Ponzi scheme the imprisoned financier had been operating.

Madoff had purchased the Long Island beachfront property in the 1980s before building the four-bedroom, three bath house. U.S. seized the house after Madoff's conviction of fraud earlier this year. Prospective buyers were requested to turn in their offers via sealed bids.

"People recognized the value of the property, the home, the incomparable views and nice, easy access to the beach," said Joan Hegner, co-owner of the Corcoran Group, which handled the sale of the exclusive property.

Ralph Lauren and Robert DiNiro also own beachfront homes in this neighborhood in Montauk, N.Y.

Personal items, including furniture and appliances, from the house will be auctioned before the year is up. Madoff's penthouse in New York City, his waterfront property in Palm Beach, Florida, and three boats are currently in the hands of the U.S. Marshall Service and up for sale. Madoff's wife has already sold their French villa and an 85-foot yacht and is turning over the proceeds to the government. All this property will net a respectable amount, but a drop in the bucket compared to the $65 billion Madoff swindled from his investors.

ASK MARTITIA

QUESTION: Exactly what does the HVCC mean by "order an appraisal"?

MARTITIA: According to the Home Valuation Code of Conduct, the definition of "ordering an appraisal" is "engaging the appraiser's services to perform an appraisal of a specific property." The financial institution that orders the appraisal is listed in the lender-client field of the appraisal report.

QUESTION: Is the FHA adopting the HVCC? If so when will it take effect?

MARTITIA: The Federal Housing Administration is not adopting the Home Valuation Code of Conduct like Fannie Mae and Freddie Mac have. The FHA has, however, come out with its own set of appraisal guidelines, which go into effect on January 1 of next year.

Martitia Mortimer, Elliott’s executive vice president, answers appraisal questions on a regular basis in Elliott Real Estate News.

QUOTES

"Weekends are a bit like rainbows; they look good from a distance, but disappear when you get up close to them." — John Shirley

"A mediocre idea that guarantees enthusiasm will go further than a great idea that inspires no one." 
                                                                                                                                           —  Mary Kay Ash

"If your ship doesn't come in, swim out to it." — Jonathan Winters

"The problem of social organization is how to set up an arrangement under which greed will do the least harm. Capitalism is that kind of a system."  — Milton Friedman

"The pessimist sees only the tunnel; the optimist sees the light at the end of the tunnel; the realist sees the tunnel, the light and the next tunnel."  — Sydney Harris
 

Newsletter Editor: kevin@elliottco.com
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