Real Estate Woes

[steadyeddy]

In the residential market:
1. Current owners are "rate-locked" with their current mortgages - can't upscale/downscale due to higher mortgage rates & higher RE prices
2. Prospective owners are being priced out of the market due to higher home prices & higher mortgage rates
3. New construction has slowed drastically due to uncertain economic outlook

In the commercial market:
1. Occupancy trends point lower
2. Unlike the typical 30 yr/15 yr residential mortgages, commercial landlords borrow for much shorter terms. So, refinancing at higher rates is straight ahead for them
3. Some banks are beginning to sell their commercial mortgage portfolios at a loss, which could turn into a trend

This time is different from this perspective.

What are your thoughts? How could this play out? Does Fed have any tools in their toolkit?

[yogibearbull]

Let us hope that the Fed has learned from the recent regional banking crisis. The Fed had too much focus on capital levels, and too little on liquidity situation and balance sheet quality (obscured by "legal" HTM accounting). As a bank regulator, the Fed was asleep at the switch.

Estimates vary widely on the underwater real estate loans and assets on regional bank balance sheets. That may be another show to drop. Some real estate properties are so much underwater that their institutional owners have just walked away let the lenders/banks foreclose (well, that a big headache for banks who aren't really setup to run huge properties).

New Fed stress test results are coming on this Wednesday and would include all banks with $100 billion in assets - so, several large regionals would be included. From now on, banks with over $250 billion in assets will have annual stress tests, and those with $100-250 billion in assets will have stress tests in alternate years.

[steadyeddy]

Thanks yogibearbull.

I think the Fed has to bring down 10 Yr Treasury rates while maintaining the ST rates high to fight inflation. Otherwise I see no relief for either residential market or commercial market.

Do you also see it that way?

[retiredat48]

Jun 22, 2023 13:34:05 GMT steadyeddy said:

In the residential market:
1. Current owners are "rate-locked" with their current mortgages - can't upscale/downscale due to higher mortgage rates & higher RE prices  R48 replies in bold.  YES.  Of course.  Good for current homeowners.

2. Prospective owners are being priced out of the market due to higher home prices & higher mortgage rates.  "SOME" prospective homeowners.  NY/NJ folks sell their home, come to FL and pay cash for a home, and pocket the extra cash!.  Also, DEMAND for new homes by the younger generations has not diminished...we are not building as many as needed over next decade.  Kids getting tired of living with parents!


3. New construction has slowed drastically due to uncertain economic outlook...Not "drastically."  Annual run-rate still good.

In the commercial market:
1. Occupancy trends point lower.   Simple fact.  A trend here for next decade at least.


2. Unlike the typical 30 yr/15 yr residential mortgages, commercial landlords borrow for much shorter terms. So, refinancing at higher rates is straight ahead for them.  Indeed.  See final comment.

3. Some banks are beginning to sell their commercial mortgage portfolios at a loss, which could turn into a trend...Selling selected properties...not necessarily "portfolios".  But yes, banks will be impacted.  But their refinancing of same will be at much, much higher rates!

This time is different from this perspective.  YES.

What are your thoughts? How could this play out? Does Fed have any tools in their toolkit?

R48 IN BOLD:  ECCHO Sam Zell (82), the GOAT of commercial real estate investing, who recently died.  In his last tv interview, stated Commercial RE not a good investment now.  That Comm RE has a valuation of what the buyer can borrow.  At 0%+ rates, was a large amount; at 5+% base rates, will be much lower valuations.  So expect comm. property values to decline.  Further, Comm prop has NOT yet been marked-to-market, to reflect realities of higher rates, low occupancy, 3 day in house work rates.  Loans needing refinancing in next two years is coming due big-time.  Of extreme interest, Zell stated he has NOT BOUGHT a commercial property in 7 years; rather he SOLD ABOUT 200 properties (and has no regrets), reinvesting in other things such as Energy.
Hmmm.  No REITs for me at this time.

R48

[steadyeddy]

Jun 24, 2023 15:48:37 GMT retiredat48 said:

Jun 22, 2023 13:34:05 GMT steadyeddy said:

In the residential market:
1. Current owners are "rate-locked" with their current mortgages - can't upscale/downscale due to higher mortgage rates & higher RE prices  R48 replies in bold.  YES.  Of course.  Good for current homeowners.

2. Prospective owners are being priced out of the market due to higher home prices & higher mortgage rates.  "SOME" prospective homeowners.  NY/NJ folks sell their home, come to FL and pay cash for a home, and pocket the extra cash!.  Also, DEMAND for new homes by the younger generations has not diminished...we are not building as many as needed over next decade.  Kids getting tired of living with parents!


3. New construction has slowed drastically due to uncertain economic outlook...Not "drastically."  Annual run-rate still good.

In the commercial market:
1. Occupancy trends point lower.   Simple fact.  A trend here for next decade at least.


2. Unlike the typical 30 yr/15 yr residential mortgages, commercial landlords borrow for much shorter terms. So, refinancing at higher rates is straight ahead for them.  Indeed.  See final comment.

3. Some banks are beginning to sell their commercial mortgage portfolios at a loss, which could turn into a trend...Selling selected properties...not necessarily "portfolios".  But yes, banks will be impacted.  But their refinancing of same will be at much, much higher rates!

This time is different from this perspective.  YES.

What are your thoughts? How could this play out? Does Fed have any tools in their toolkit?

R48 IN BOLD:  ECCHO Sam Zell (82), the GOAT of commercial real estate investing, who recently died.  In his last tv interview, stated Commercial RE not a good investment now.  That Comm RE has a valuation of what the buyer can borrow.  At 0%+ rates, was a large amount; at 5+% base rates, will be much lower valuations.  So expect comm. property values to decline.  Further, Comm prop has NOT yet been marked-to-market, to reflect realities of higher rates, low occupancy, 3 day in house work rates.  Loans needing refinancing in next two years is coming due big-time.  Of extreme interest, Zell stated he has NOT BOUGHT a commercial property in 7 years; rather he SOLD ABOUT 200 properties (and has no regrets), reinvesting in other things such as Energy.
Hmmm.  No REITs for me at this time.

R48

retiredat48, thanks for the perspective from Sam Zell. It adds value to this thread.

[Chahta]

Jun 22, 2023 13:34:05 GMT steadyeddy said:

In the residential market:
1. Current owners are "rate-locked" with their current mortgages - can't upscale/downscale due to higher mortgage rates & higher RE prices
2. Prospective owners are being priced out of the market due to higher home prices & higher mortgage rates
3. New construction has slowed drastically due to uncertain economic outlook

In the commercial market:
1. Occupancy trends point lower
2. Unlike the typical 30 yr/15 yr residential mortgages, commercial landlords borrow for much shorter terms. So, refinancing at higher rates is straight ahead for them
3. Some banks are beginning to sell their commercial mortgage portfolios at a loss, which could turn into a trend

This time is different from this perspective.

What are your thoughts? How could this play out? Does Fed have any tools in their toolkit?

That’s what raising interest rates is about, to kill inflation and bring recession.

With fewer workers and more remote work it was bound to happen to commercial RE. The residential side will work itself out. Sellers will have to settle for lower prices or stay put. Same with prospective buyers unless they can negotiate a better cash price. Where I am located it is mostly retirees or pre retirees. Some want to downsize the 5000 SF and others want a last new house. But I see prices dropping and houses not getting offers. But new construction is still booming for folks moving in with their piles of cash from out of state.