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REAL ESTATE QUAGMIRE: WHERE IS THE BOTTOM?

“When it comes to real estate, are we at the bottom yet? That seems to be the question that many are still asking. The short answer is no.

In the turbulent economic times that we are in today, something that you should understand is that many, if not all, of the TV economists and business reporters on the cable business channels are not the experts their commercials make them out to be.  Both the residential and commercial real estate markets have sustained a downward spiral longer than what most of the experts ever predicted or commented on.
 
Larry Goldberg, branch manager of Home Savings of America and long-time mortgage broker tells me, “We’re nowhere.” Despite the cheerleading of some of the real estate market makers today, the overall market is still very questionable.
 
According to Goldberg, people applying for mortgages are mostly buying foreclosures or short sales and no one is paying full price. There is a smaller universe of qualified buyers today because loan criteria are higher and they are more discriminating than buyers were a couple of years ago. Don’t think you are going to get top buck, if you haven’t put a dime into your house for ten or fifteen years.
 
RESIDENTIAL HOUSING IS NOT THE ONLY QUAGMIRE
Remember when the business and economic experts said not to worry about the sub-prime mortgage crisis because it was only affecting one percent of the market?  Foreclosures were on the rise. I saw this back in December 2006 before many even knew it was a rising problem. (http://www.midwestbusiness.com/news/viewnews.asp?newsletterID=16186 )
 
Here is something I just received in a residential real estate broker’s newsletter where he is trying to show the market is starting to recover:
 
Utilizing Standard & Poor's Case-Shiller Index, a tool that is used to analyze sales activity, economists can report a .5% (one half percent) increase in home sales across the U.S. Experts alike agree that the change in momentum is rather significant, providing additional data which illustrates new home sales up an additional 11% in June. While distressed homes recently accounted for over 50% of the home sales, they have now decreased to a more satisfying 33%*. With improved builder sentiment, and an increase in investor energy, buyers and sellers alike are on the lookout for these incredible opportunities.
 
This sounds pretty encouraging, but you really have to temper this with what Deutsche Bank just announced last week with their forecast that says 50% of houses will be underwater (their values being less than what the mortgage owed on them) before it is all over.
 
So much for the business experts on TV, who said not to worry about the subprime mortgage market tanking the entire industry. We have gone from one-house-in-ten being underwater, to two-in-ten to now predicting five-out-of-ten. That means there is a 50/50 chance that your house will not be worth as much as what you owe on it. Even if you’re paying the mortgage.
 
This is further exemplified by a friend who is trying to sell a condo in Gurnee, Illinois. He paid $137,000 for a condo two years ago and the exact type has just been sold for $65,000. That foreclosure sale becomes part of the comps that his is compared to. If you think your house or condo is not affected by surrounding foreclosures, you are sadly mistaken.
 
If someone owes more than what the house is worth, it will be difficult for them to buy the next house. Where will they get the down payment that they need?
 
That is on the residential side. Retail and commercial space are also suffering, not only in New York, but other markets as well. In the last six months in New York, retail rents have plummeted 20-30%.
 
We are not seeing the light at the end of the tunnel. Not just yet. Not with a major 597-unit condo conversion in New York City on West 57th Avenue selling for a nickel on the dollar. (http://www.crainsnewyork.com/article/20090806/FREE/908069975 ) That’s right, a $418,000,000 condo conversion just sold for $20,000,000.
 
Now do you still have faith in all those who crowed about the subprime mortgage crisis only affecting a very small amount of people? Stop listening to some of the Sham-Wow economists on CNBC, PBS and others.
 
AT THIS POINT, THERE ARE NO EXPERTS
 
At this point, do you really trust the cheerleaders on some of the business channels? Watch them for a good laugh as they try to “call the market” as to when this downslide will end and turn around but don’t bet on anything.
 
How do you really measure the economy? What are the everyday barometers that you look at to indicate whether or not we are headed in the right direction? Some may say that I look at odd stuff, yet my observations and analyses have been a lot more accurate than those shuffling the latest charts and graphs who have not stepped outside of their offices.
 
I guess my approach is more of a parallel to MBWA(Management By Walking Around). Walking around the lakefront and seeing half the boat slips are empty tells me that many middle-class people have tightened up their spending. They are getting rid of lifestyle amenities that they can no longer afford.  In Racine, Wisconsin, they actually cancelled this year’s boat show. To me, that speaks volumes.
 
This compounds unemployment as many U.S. boat manufacturers have gone out of business in the last two years. Between the jump in gas prices and more layoffs of middle-class jobs, demand for boats has evaporated.
 
Driving around and looking at other businesses, many have super sales and many empty stores are for lease. When was the last time you saw landscaping stores having everything at 50% off? After Labor Day sure, but I have seen many 50% off sales in July, which tells me that many people who used to buy a lot of plants and trees to put in their gardens have cut back. Even the discount stores have reduced prices on their landscaping inventory.
 
Having good jobs that pay well is the key stabilizing factor on all these economic issues from shoring up real estate to buying high ticket items like cars, RVs and boats. 
 
CARLINI-ISM :  The consumer is not going to “spend” us out of this recession. Especially the ones who are now underemployed.
 
From: www.carliniscomments.com

Executive Advisor, Infrastructure Strategist and Expert Witness in Civil & Federal Court, Keynote Speaker.