CPN - September 2008 - (Page 7) What began as a mild recession in January 2008 might turn out worse. With spiking oil prices layering over the credit erosion in residential mortgages, consumer confidence is at deeprecession levels and job losses will accelerate as the broader economy contracts. Furthermore, more than three-quarters of the world’s central banks responded to higher oil prices by raising interest rates. This policy error all but ensures a sharp slowdown in global growth and a full-blown U.S. recession. Housing remains fundamentally weak. In June, housing and financial stocks again fell dramatically. Single-family construction starts are below 700,000 and will be only marginally higher in 2009, even while inventories are dropping. Sales of existing homes have stabilized at just under 5 million, but median prices continue to drop.The total price decrease from the by Kenneth Rosen and Freddie Mac, crucial to stabilizing the mortgage market. The FHA is even providing some credit for marginal borrowers, the reported vast majority of buyers for major home-building companies. Housing stocks face weak fundamentals and earnings, 2005 peak to the 2009 trough will be 19.7 percent. New-home prices have already declined 31 percent. Improved affordability normally helps home sales recover, but mortgage loans are scarcely available for firsttime home buyers and individuals with weak credit. The housing and mortgage market assistance bill is no panacea but can help. It includes a $7,500 tax credit for first-time home buyers and a $300 billion Federal Housing Administration plan designed to encourage voluntary mortgage restructurings, plus the Department of the Treasury’s backstop for Fannie Mae “More than three-quarters of the world’s central banks responded to higher oil prices by raising interest rates.” but government action could improve market psychology. Financial firms holding residential mortgages remain seriously challenged. The Mortgage Bankers Association reported that 17 percent of subprime adjustable-rate mortgages were in foreclosure in the first quarter of 2008, while foreclosures on prime mortgages are rising sharply. Mortgage problems will linger through the next 18 months as firms real- ize losses from foreclosures. In June, the MSCI US REIT Index declined 11 percent, which compares to the broader indexes. International REITs fell 12.7 percent and home builders dropped 17.5 percent. In July, REITs and home builders rebounded somewhat, but that will prove short lived. Equity REITs are 100 basis points rich to bonds and 20 percent overvalued versus stocks, and the recession will lower earnings guidances. Among the REIT sector’s second tier, however, are very attractive valuations. Meanwhile, although commercial real estate was generally not overbuilt, a weakening demand and the shortage of debt financing have pushed cap rates up by between 50 and 100 basis points, but some properties and companies are in better shape than others. Those with embedded rent growth and low leverage will weather the recession best. —Kenneth Rosen is chairman of Rosen Real Estate Securities L.L.C. r of: accomplishing your commercial real estate dreams need it.And there is no dealing with third party lenders – just Arbor. Growing Financial Partnerships Bloomfield Hills, MI • Boston, MA • Chicago, IL • Dallas, TX • Darien, CT • New York, NY • Uniondale, NY ECONOMIST’S OUTLOOK Long View on Recession http://www.arbor.com
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