ver rafting trip I went on. The trip went from smooth water to different grades of rapids from 1 to 5. Being a veteran of real estate cycles I believed I had experienced the toughest cycles over the last 30 years. This was clearly not the case when it comes to current residential property values in California, Florida and most of the Southwest. Like the river, we are flowing downhill and at an alarmingly increasing speed. We are in a level 5 rapid and I still don’t see the calm water ahead. The question is whether there is a bend in the river, with calm smooth waters, or are we heading into a waterfall?
The experts are telling us many different versions of where we are in this downturn. UCLA forecasts we are not in a recession, Buffet indicates we are. Bush does not want to call it a recession but acknowledges we may be in one. Other economists are lining up with either conclusion. The reality is that everyone agrees things are very bad and will probably be getting worse. The conclusion is that housing is in a deep slide and will be very slow to recover.
There have been several high-profile articles, among them the Wall Street Journal features, that are starting to paint the picture of a bottom in the market. In addition there are the government backed organizations that are stepping in, along with FHA, to make it attractive for new buyers to step in. This all is very important to the psychology of building up demand for purchases.
Personally, we have witnessed increased activity on the residential side now that values have hit the current levels. Builders and brokers I speak with have indicated that there is activity in many markets that were hardest hit like Stockton, Sacramento and the some of the San Bernardino sub-markets. This does give a ray of hope if we are trying to define a low point in values. The concern remains that there is a continuous stream of foreclosures that show no sign of decreasing. I for one, am not ready to concede we are at a bottom, and expect further deterioration in values before we hit bottom.
Investors and users should be preparing to step in over the next 6-12 months when they find the right property, in the right location, at bargain pricing. There should be an extended period of flat values until we see some appreciation so there is no rush to buy.
On the commercial side of the business, It is clear that we have not seen values decline in a significant amount. There is a serious absence of securitization for lenders which will translate to credit tightening and much lower loan to value amounts. The lenders we have met with are consistently telling us that they will not do loans that were clearly in their guidelines just a couple of months ago. This reluctance to lend will perpetuate a more serious decline in commercial investment properties. I would expect CAP rates to increase by 1-2 points in the near term.
The outcome of the river ride is unclear at this time. The FED is taking actions to be aggressively boosting confidence, in the hope of avoiding further erosion. This can only be successful if there is concurrent credit relaxing by all lenders and an influx of liquidity. Just today we hear that the senate has passed the housing rescue bill authorizing $300 Billion in loan guarantees for at risk borrowers refinancing. This kind of support by legislation is critical in bringing liquidity into the market.
At Peak Capital Group, we are being conservative in our underwriting with both residential and commercial loan requests. However, as portfolio lenders we remain ready and willing to lend to borrowers that can benefit from quick access to capital and still have sufficient equity and the ability to assure repayment. We have also expanded our interest in REO pools as buyers and lenders.
We are in the raft with our oars ready to ride it out.
Until next time.
Gil Priel
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