MLKlein

Property Values Set to Fall from Bubble Peak to Long-Run Average

I would suggest taking a look at the cost of ownership in relation to incomes over the extended time frame as well as availability of and cost of mortgages. As we witnessed in the bubble years, cheap and easy money resulted in accelerating prices to the point where very few people could actually afford, by conventional measurements, a home.

The chart shows that post WWII the value of homes was higher than prior to the war (ex depression). I believe that this is a result of having a deep market of good (and rational) financing options available to homeowners. So as a suggestion, I would overlay a graph depicting mortgage payment as a percentage of median income. For the payment calculation it would seem to make sense to use a 30 year fixed rate loan at the best available rate in the period. This may give additional clarity on the valuation process as most home buyers and underwriters relate their purchase and loan decision to the amount of monthly payment in relation to income (assuming we are not in a bubble).

Good luck. Thanks for the analysis.

Three Sides to the Housing Story

More to think about. In the Los Angeles and Ventura County markets only about one in five foreclosures are going to auction. That means about 800 of the 1000 or so homes that go to auction each day are finding their way back to an investor's balance sheet or remains in some form of protracted work out. That translates into a fair amount of non-earning or impaired assets.

On the commercial real estate side, values are down about 40% from peak. Some product types and markets are somewhat worse and some are somewhat less impacted. But 40% is quite a Tsunami to overcome. So far banks in our markets, unless forced by their regulators, have not recognized this loss (A loan originated at 75% LTV would have a 20% loss if 40% of the value is deducted). More impaired assets.

It is my belief that until the banks realize their losses and move them off their balance sheets (which will result in a probable loss of 20% or more of the banks), a true recovery is unlikely because lending capacity will remain impaired because human and capital resources will be fully absorbed fighting the lost battle of working against the massive Tsunami of deleveraging.