The past few weeks have yielded a mix of confusing articles, with about as many positive as negative positions on the future of the real estate market and economy.  I see this as a confirmation that we’re still looking at more of the same snail-paced recovery we’ve been experiencing the last year or two. 

I was a bit more optimistic in my previous post - perhaps too much so.  My instinctive glass-half-full perspective on life can affect my judgment at times.   Still, I don’t want to put my sunglasses too far out of reach.  The optimist in me is still looking forward to that “future so bright I’ve gotta wear shades.”  It’ll come, I’m sure of it.  I just don’t know how soon.

So here are my picks of the best / most relevant & interesting articles from the last three weeks:  I have grouped them in 3 ways: (1) the articles for the optimist in you, (2) the articles for the pessimist in you, and (3) the articles for those that are undecided.

ARTICLES FOR THE OPTIMIST IN YOU:

• No More Fear and Loathing of CRE Lending for Banks – CoStar  Five Years After the Onset of the Great Recession, Banks Are Ready To Venture Back in to Commercial Real Estate.  As bankers see it, they have worked through most of the troubles tied to real estate over the last few years, and now view that segment as one that represents a great amount of potential for earning's growth.
• List of Improving Housing Markets Expands to Nearly 100 – N.A.H.B.  "The number of improving housing markets has risen for six consecutive months, and 36 states now have at least one metropolitan area on the list….This indicates that despite the many challenges that continue to drag on a housing recovery…improving conditions are slowly but surely spreading from one housing market to the next."  (As you see on the map, no Arizona markets are included in the list yet.)
• Commercial Mortgage Bankers Are Doing Deals As the Real Estate Market Breathes New Signs of Life – Huffington Post  "Values have probably bottomed out, or very close, on the commercial (properties) side….Deals are being done, but with increased equity injections." In other words, to do a deal in today's environment investors and developers have to bring lots of cash to the table.
• Back in Business: CRE Sales Volumes Make Strong Comeback – CoStar  The dollar volume of commercial real estate sales vaulted back to long-term historical levels in 2011. CoStar Group has confirmed $291.6 billion in CRE sales in 2011, a 32% increase over the sales volume in 2010. 
• Apartment, Office Properties Record Strongest CRE Pricing Recovery In 2011 – CoStar  The National Composite Index ended 2011 up a flat 0.2% from year-ago levels, but 5.5% above its low point in March 2011, thanks to a mid-year surge. CoStar’s Multifamily Index continued to lead all property sectors, with prices rising by 6.8% in the fourth quarter and increasing a total of 15.3% in 2011

ARTICLES FOR THE PESSIMIST IN YOU:

• Phoenix home values expected to fall another 10% – Phoenix Business Journal  According to the most recent Fiserve Case-Shiller survey, by the third quarter of 2012, prices are expected to drop another 9.6 percent. By the third quarter of 2013, expect a further decline of 3.4 percent.
• Don't Expect Rise in National Home Prices Until 2013: Fiserv – DS News  Fiserv is forecasting average U.S. home prices to fall by another 2.7 percent through the third quarter of 2012, before rising 3.8 percent by the third quarter of 2013.
• No Hope For Recovery As Housing Falls Deeper Down The Rabbit Hole – Forbes  Don’t expect housing to contribute to the so-called economic recovery any time soon.  With housing still deeply depressed, it seems a little farfetched to be optimistic about the economic outlook, even if other indicators suggest improvement.
• Slower Than Expected Job Growth Could Be the Norm Thru 2020 – CoStar  While the 243,000 jobs added in January was certainly good news, the projections of slower population growth and a decreasing overall labor force are expected to lead to slower civilian labor force growth through 2020, according to the U.S. Bureau of Labor Statistics (BLS). Slower job growth means slower real estate space demand.
• After Two-Year Lull, Delinquencies Rise for Second Straight Quarter – DS News  The national mortgage delinquency rate rose during the fourth quarter of 2011.  Between the third and fourth quarters of 2011, all but 13 states experienced increases in their mortgage delinquency rates.  The highest mortgage delinquency rates during the fourth quarter were found in Florida (14.27%), Nevada (12.08%), New Jersey (8.32%), and Arizona (7.50%).
• Foreclosures on the Rise Again – CNBC  "We expect the pattern of increasing foreclosures to continue in the coming months, especially given the finalized mortgage and foreclosure settlement reached in early February between 49 state attorneys general and five of the nation's largest lenders," Until banks work through the enormous backlog of foreclosures, which number in the millions, home prices will not hit a firm bottom, especially in the most troubled local real estate markets.

ARTICLES FOR THE UNDECIDED:

• U.S. Economy Picks Up Steam - Wall Street Journal Fourth-Quarter Growth Rate of 2.8% is Fastest in 18 Months, but Doesn't Appear Sustainable.
• Less Building Now, Higher Office Rents Later – Wall Street Journal  In the U.S. last year, developers broke ground on office buildings at the lowest level since at least 1960.  This means higher rents may be on the horizon in some cities. The past few cycles show rents in some areas are prone to big jumps a few years after low levels of construction, as vacancy rates fall quickly.
• Retail Outlook: Cautious Optimism as Tipping Point In Shopping Center Rents Expected In 2012 – CoStar  Retail property rents are expected to begin to rise later this year as demand for store space in shopping centers and malls slowly soaks up available space.  "Our retail outlook is guarded. We’ve seen a decent recovery to date, but not as great as everyone would like."

Wow, those are confusing!  Five optimistic articles, six pessimistic articles and three more or less neutral.  One thing I did glean from the different articles is it appears that the Arizona Residential R.E. market is better than the country overall.  It also appears that the Commercial R.E. market is expected to continue its slow recovery.  If a lot more foreclosures come on the market then that will keep the residential market values low, or even lower, over the next year or two (however long the foreclosures continue at their elevated levels).

Did you learn anything of value?  Anything here you can use?  I’d love to hear from you.

It sure is refreshing to see a week of good economic news!  It may be a little early to bust out the sunglasses and my CD of Timbuk3’s one hit wonder "the Future’s so Bright I Gotta Wear Shades,” but I’m thinking about it!

Housing Crisis to End in 2012 as Banks Loosen Credit Standards  dsnews.com  Capital Economics expects the housing crisis to end this year, according to a report released Tuesday. One of the reasons: loosening credit. Banks are also loosening loan-to-value ratios (LTV), which Capital Economics denotes "the clearest sign yet of an improvement in mortgage credit conditions."

CRE Price Index Rises for Seventh Consecutive Month  costar.com  The CoStar National Composite Index of commercial real estate pricing rose for the seventh straight month since last spring as investment-grade sales made solid pricing gains in November 2011, and the level of distressed sale transactions continued to decline during the month.

Rise in Home Sales Signifies Strengthening Market: Economists  dsnews.com - The long-awaited housing recovery is beginning to blossom, according to industry experts taking a look at recent existing-home sales. While admitting home sales are still very low, Paul Dales, chief economist at Capital...

Is Industrial Property's Turn Next? Manufacturing Momentum Shifting to the U.S.  costar.com  First Investors Clamored for Hotels, Then CBD Office and Next Apartments. This Year, Trends Such as 'Homesourcing' Could Boost CRE Space Demand for Industrial Property.  After decades of watching American companies move jobs overseas, manufacturing is beginning to make a comeback of sorts here in the U.S. -- and sooner than some expected.

Vistage CEO Study Shows Surge in Economic Optimism  vistage.com  The results for the Vistage Q4 2011 CEO Confidence Index, a survey in which Vistage CEOs and other executives weigh in about the current business climate, showed a marked increase in economic optimism amongst small business CEOs. Executives were overwhelmingly positive on hiring and foresee increased profitability for 2012.

At the Urban Land Institute (ULI Arizona)’s annual Arizona Trends Day conference, Dr. Dennis Hoffman, economics professor at Arizona State University, shared some very enlightening charts that compared the current “Great Recession” with the prior 10 recessions since WWII. The slides are not posted on the ULI website yet, so I Googled “recession comparison charts” and found a great resource at the Federal Reserve Bank of Minneapolis’s website. 

The charts on this site are awesome!  Because it’s a interactive site, you can select which recessions you want to see and compare to the others.  I have pasted some screen shots of the charts I thought were most insightful.  I encourage you to go to the site yourself and play with the charts yourself.

Change in Unemployment

This chart shows how the current recession (the bright red line) has had much deeper unemployment and for a much longer period of time than any of the other 10 preceding recessions.  Notice how every other recession had fully recovered employment levels within between 1.5 and 4 years.  We are at 4 years now and we are still down where unemployment is still 4.5% lower than at the start of the recession. 

 Change in Employment after 4 years

This chart shows the percentage change in employment four years after the beginning of all 11 post-WWII recessions. As you see, the current recession is the only one that still had a decrease in total employment after four years. This is clearly no ordinary recession.

 Change in GDP (Economic Output)

This chart shows how the current recession (the bright red line) has had a much deeper drop in GDP than all other recessions.  Also, as you see, it has taken 4 years to return to the same level of GDP we were at before the recession.  All previous recessions recovered their pre-recession GDP levels in less than two years except for the 1980 recession which took three years.  The good news is that GDP has at least recovered and appears to be heading into positive territory.

 Change in Output/GDP after 15 quarters (3.75 years)

This chart shows the percentage change in U.S. output (GDP) 15 quarters (3 years 9 mos.) after the beginning of every post-WWII recession.  As you see, every other recession had increased GDP by 7 to 10% within this time period, while the current recession has just “broken even” with zero change. 

 ARIZONA Change in Employment

This chart shows the percentage change in ARIZONA employment 3.5 years after the beginning of every post-WWII recession. As you see, Arizona employment had increased between 10 and 30 percent for almost every other recession, whereas the current recession still has –10% employment after 3.5 years.  Fortunately, it does appear to have begun a slow ascent in the right direction.

 Map of Employment Change by State

This chart shows the percentage change each state has had in employment since the beginning of the current recession. The scale in the bottom right shows the percentage change with the colors.  The darker the blue the bigger the decrease in employment has been.

You can go to the Federal Reserve Bank of Minneapolis’s website and click on any state you wish and you can see the details of the last 11 recessions for that state.  The site is also regularly updated so you may want to bookmark it so you can return to it again later.

My Conclusions

Clearly the current “Great Recession” is unlike any other post-WWII recession.  I recognize that according to the government’s definition of a recession, the 2007 recession technically ended in 2009.  Nevertheless, it is my personal non-professional interpretation that a recession is not over until GDP returns to the level it was at at the beginning of a recession.  And according to the charts above, that finally just occurred in Q3 of 2011. 

Employment is still at record low levels even after 4 years and it isn’t increasing very quickly.  This shows us that the recovery from this recession will be much slower coming than all of the prior ten recessions.  Certainly this is a deeper and longer drawn out recession than any other since the Great Depression making it worthy of the name “The Great Recession.”  The positive perspective, however, is that it appears on all accounts that, barring any major economic disruptor, we have the worst behind us and we are on the path of correcting and returning to expansion.  The light at the end of the tunnel is taking longer to get to than it has in the last 75+ years, but we are heading the right direction and I am confident we will get there.  Just keep on keepin’ on and remember, there is opportunity in every situation for those who work diligently to create it.

Today I attended the Urban Land Institute (ULI Arizona)’s annual Arizona Trends Day conference.  It was 8 hours of economists and real estate professionals sharing their knowledge and perspective on the current state of the Arizona and national economy and real estate market.  Here are some of the highlights from my notes: 

The following figures are from the presentation of Rick Waddell, CEO of Northern Trust:

• $436 Billion of loans were written off by banks from 2008 – Q1 2011.
• In 2009 5% of all bank loans were non-performing, which equaled 50% of total bank capital.
  • My commentary:  This is hard for me to imagine.  Let’s do the math.  If 5% of their loans equals 50% of their capital, then they had $10 in loans for every $1 in capital.  No wonder so many banks failed or needed bailed out.  That is crazy high leverage. 
• The Dodd-Frank Act will have at least 3 seriously negative effects on the economy: 1) It will reduce bank earnings, 2) It will decrease the availability of credit (loans), and 3) it will increase interest rates on loans.
• Rick also shared some interesting figures.  If you and I had the same financial situation as the U.S. Government, here’s what our finances would look like:
  • $207,000 of annual family income
  • $372,000 spending budget
  • $165,000 of our spending must be put on credit cards
  • $1,400,000 is our total credit card debt
  • $3,850 is the amount we are going to reduce our credit card debt from our efforts to reduce our deficit spending.
  • After seeing how the U.S. government’s finances look like, our finances look pretty good!

I apologize I can’t give proper credit to the authors of the following quotes since I did not write in my notes who said them. If you were there and you know any of the authors, please add a comment.

• “Stabilized real estate is an oxymoron in this market.”
• “We are 2/3 to 3/4 through the problem” (meaning the real estate correction)
• The Phoenix Arizona market has outperformed the rest of the nation in the past and it will even more so in the future now that we have such affordable housing.
• We have gone through a trial by fire (with this real estate market crash).  Fire can either consume or refine.
• This “Great Recession” was not just another cyclical recession, but rather a “structural recession”.
• The Rabbit Hole Recession Analogy: 
  • Recessions are like falling into a rabbit hole.  In every other recession since WWII we fell a little bit, hit the bottom, and bounced right back up and out of the rabbit hole – and the world around us looked pretty much the same as it did before we fell.
  • In this Great Recession, however, we have fallen in a much deeper rabbit hole, somewhat like Alice in Wonderland.  This time when we hit the bottom we did not bounce back up and out of the hole.  Instead we’re stuck at the bottom of the rabbit hole and we have to figure out how to get out of it by innovating.
• Dr. Dennis Hoffman, economics professor at Arizona State University, shared some very interesting and enlightening charts that compared the current “Great Recession” with the prior 10 recessions since WWII.  The slides are not posted on the ULI website yet, so I Googled “recession comparison charts” and found a great resource at the Federal Reserve Bank of Minneapolis’s website.  I will make a separate post to share those.

Bottom line, big picture take-aways: 

• The residential market has improved tremendously over the last year.  They said the statistics too fast for me to write them down, but I will make another post citing stats from ROI Property’s ‘Real State of the Phoenix Arizona Residential Real Estate Market.”
• The commercial market has apparently bottomed out and is expected to bounce along the bottom for perhaps 2 or 3 more years before showing much improvement.
• The Phoenix market will rebound very well when the economy improves and jobs return.

Happy reading!

» Turning foreclosures into rentals  - Federal regulators and the Obama administration are getting ready to roll out a program that would sell foreclosures to investors as rentals. The first transactions could take place in early 2012.

» Home Prices Down in 2011, but Market Stability Forecast for 2012  - While year-over-year home price measurements notched down in 2011, prices are expected to see a slight uptick in 2012, according to Clear Capital. Should the valuation company’s predictions ring true, it would be the first time...

» Market Trend: Phoenix's Office Vacancy Decreases to 20.7%  - The Phoenix Office market ended the fourth quarter 2011 with a vacancy rate of 20.7%. The vacancy rate was down over the previous quarter… This trend is compared to the U.S. national office vacancy rate, which decreased to 12.3% from the previous quarter….

» 2011 real estate data show potential for Phoenix recovery  - Fletcher Wilcox, a real estate analyst for Grand Canyon Title Agency Inc., provides some interesting data crunching based on information gleaned from the Arizona Regional Multiple Listing Service.

» Apartment rents march higher   - Nationally, rents rose 4.7% in 2011, according to a report from MPF Research… Rents are up 7% since hitting a low point in late 2009. The national occupancy rate ended the year at 94.6%, up from 93.5% a year ago.

» As home prices fall, more borrowers walk away - Strategic defaults…are on the rise. A survey last year by two Chicago-area finance professors…found that roughly three out of 10 mortgage defaults in 2010 were by homeowners who could afford to make their payments.  Economists at Goldman Sachs recently forecast that after bottoming in 2013 house prices won't recover their 2006 peak until 2023. (No, that's not a typo.)

» Unemployment Scars Likely to Last for Years  - Long-term unemployment may be a bigger problem than high unemployment.  Some 5.6 million Americans have been out of work at least six months, 3.9 million of them for a year or more. Research shows that the longer people are unemployed, the less likely they are to find jobs.

If there were any news articles this last week that I have not included that you believe should have been, please feel free to add a comment including a link to them.