Homes vs. Offices

I mentioned the duality of this era the other day, and it carries right into today's discussion.

On the one hand, Pending Home Sales Index dropped 3.5% in May to a 6-year low:

"Pending sales of existing homes dropped to their lowest level in almost six years, a real estate trade group said Tuesday, demonstrating the persistence of the housing slump.

The 3.5 percent decline in May, compared with the previous month, follows a drop of 3.4 percent in April and a 4.5 percent dip in March. It leaves the National Association of Realtors' index at its lowest point since September 2001. . .

The association's index of pending home sales fell to 97.7 in May, from a downwardly revised figure of 101.2 in April. The May figure is 13.3 percent lower than the May 2006 reading of 112.7. The index stood at 89.8 in September 2001. An index reading of 100 is equal to the average level of contract activity in 2001."

It is not unrelated that inventory levels of one-family homes for sale continue to rise :

"In another sign of weakness for the housing market, the National Association of Realtors reported this week that its index of pending home sales in May declined 3.5% from a month earlier to stand at 97.7. The index, which is down 13% from a year earlier, equates the 2001 level of activity to 100. The group considers a sale pending when a contract has been signed but the transaction hasn't been completed."

So much for Hank Paulson's bottom.

Yet on the opposite side of town, Office rents are "Soaring" and space remains tight:

"Office rents are skyrocketing across the nation, driving up costs for businesses large and small, thanks to a dearth of space in some major markets and a new breed of deep-pocketed landlords who can afford to hold out for premium tenants.

Nationwide, effective rents on office properties -- the amount tenants pay after concessions -- jumped an average of 3.1% during this year's second quarter, up from gains of 2.8% in the first quarter and 2.1% in the year-earlier period, according to a report scheduled for release today by real-estate research firm Reis Inc.

That was the sharpest quarterly increase since the third quarter of 2000, before the combined effects of the technology-stock bust and the Sept. 11, 2001, terrorist attacks caused office vacancies to rise and rental rates to fall."

I can tell you from personal experience in Manhattan that mid-town space is hard to come by (downtown is no problem -- cheaper, more choices, more negotiable). 

The solution to this problem is obvious: We need to get these two groups together! All the flippers and speculators need to come together to form suburban office parks of unsold homes, and offer them to businesses to alleviate the office space crunch . . .

Problem solved!

>

Sources:
Number of Unsold Homes Increases   
JAMES R. HAGERTY
WSJ, July 5, 2007; Page B8
http://online.wsj.com/article/SB118358467443957330.html

Pending Home Sales Near a 6-Year Low
U.S. Pending Home Sales Index Drops 3.5 Percent in May to a Near 6-Year Low
Christopher S. Rugaber
AP, Tuesday July 3, 11:39 am ET
http://biz.yahoo.com/ap/070703/pending_home_sales.html?.v=9.

Soaring Rents Pinch Businesses Across the U.S.
Second-Quarter Jump Is Sharpest Since 2000;
JENNIFER S. FORSYTH
WSJ, July 5, 2007; Page A1
http://online.wsj.com/article/SB118359576367757639.html

Comments

[phdinsuntan...:]

hey genius! when the tsunami is coming your option is not staying in a house or an office but running to a high place, in any recession office market takes longer time in adjust...but they do, my respects, I like your analysis but dont forget macroeconomics.

2007 Jul 05 01:29 PM

[brynaw:]

@carlos,

I think Barry was being tongue-in-cheek here.

2007 Jul 05 01:43 PM

[k_denninger:]

Yep.

In every housing-led downturn on record, commercial R/E lags. What happens is that the "deep pocket" landlords (so they claim) push and push and push. But they're really not deep pockets - they're levered to the gills - and they're pushing because they <b>have to.</b>

Unfortunately when you do that it hits a businesses P&amp;L directly (higher rent goes right to the bottom line in the red way) and that ultimately causes margin - and then market multiple - <b>contraction.&...

We know what comes next, right?

Why would anyone believe that the pattern will be different this time?

tickerforum.org

2007 Jul 05 01:56 PM

[deano:]

Sure, your tongue-in-cheek solution might work until the residential dwellers surrounding those homes-to-businesses got wind of it and then the "not in my neighborhood" syndrom would take over.

2007 Jul 06 10:06 AM

[wixeywaxy:]

The housing real estate market is in a slump but much of it is a counter balancing of what was an overheated market. If levels are now similar to 2001 that probably isn't as serious a downturn as many want to make it. The population of the U.S. isn't growing if you take out immigration so you can't expect housing to show significant gains year after year. The people coming in from Mexico are not permanent residents for the most part as so many believe. They come here to help their families left at home and most of them return. While here they live in cheap appartments. On the other hand the level of business property activity is a healthy sign and it remains to be seen if it will take a significant downturn as a late reaction. A modest reaction could be expected anytime a market runs hot. The subprime mortgage problem which is something else was built into the expansion as an infection certain to make the patient sick. I don't think it's good reasoning to make a big case for a weak economy based on this fiasco which would never have occurred absent the recklesss lending encouraging irresponsible borrowing. Vic

2007 Jul 06 10:17 AM

[Johnny Bitc...:]

Barry -

This era has more than 2 alities, but what you said sounds really, really smart.

If you want to talk about duality, how about this one:

On the one hand, Ritholtz chatters on and on for years and years about how dangerous, fragile and fraudulent the economy is.

On the other hand, it keeps chugging along with values rising across most industries.

How do you deal with the re-ality that your perspective, while smart sounding at times, has been so counterproductive ? I presume your clients have underperformed the past 5 years, though I doubt you'd admit it - that wouldn't be good for the business of bamboozling, would it ?

Yeah, I am sure you have every reason that you've been right all along, and the next 10% drop will bring out your phony bravado, as though you knew something all along.......all while patient investors would have been much better off just buying stocks, holding them for the long term, and chuckling at your prolific chatter.

Right ?

John.

2007 Jul 06 06:46 PM

[Serviced Of...:]

Well in London, offices prices haven't moved up or down. They are still going steady and there has been an increase in some places. On the other hand home prices have fallen, but I don't think they will fall any more.

Apr 07 05:26 AM