February 1, 2010Kyle KazanComments 1
In the future employment will reach record levels, foreclosures will drop off as will vacancies and rents will rise. The Silicon Valley as it has for so many years will spawn entire new industries and it’s technological innovations are second to none. These visions will become a reality but not yet.
In the meantime, we have some difficult times in front of us. According to the National Association for Business Economics, 80% of the economists polled think the recession is over and recovery has begun. Data from MasterCard Advisors’ SpendingPulse showed that retail sales rose an estimated 3.6% this last holiday season. In the trenches of managing rental properties in the Western United States, this recovery has not yet become evident.
California is in store for another very difficult year ahead due in no small part to commercial real estate dragging on the economy. Construction employment as can be seen in Figure 1 is a huge source of jobs in the Golden State.
Roughly 5.5% of all employment in California comes from construction and that does not include finance, escrow, title or brokerage. Note that construction jobs were up almost nonstop from the early 1990’s until they fell off dramatically a couple of years ago. To date we’ve lost over 32% of jobs in construction in the state.
As you know from many of the past articles, I closely follow the single family house market because of its close link to multi-family housing and as a barometer of the economy. Data seems to indicate that housing has bottomed in most markets around the country. Much of the data quoted comes from the MLS (multiple listing service used by realtors).
For example the solid middle class city of Cerritos, California recently had 262 homes listed in distress (P= Pending foreclosure, A= Auction and B= Bank owned), see Figure 2. The MLS had only 70 homes listed and in the previous month, 23 home sales were recorded (on the MLS).
Using the MLS data, it would appear that there are only 3 months of inventory but when the distressed and non-listed properties are factored in, there are 14 months of inventory. A huge difference in perception and unfortunately reality!
Where are all of those distressed houses going if they are not being sold? It has been estimated that between 91 – 95% of all homes scheduled for auction in California get postponed. Many are being funneled into the US Government’s HAMP (Home Affordable Modification Program – www.makinghomeaffordable.gov) which offers government sponsored loan modifications. Early indications are that the majority of the modified loans don’t become permanent after their 3-5 month trial period and ultimately default. As this is still a new program, the results are not really in yet.
Some points of interest in the HAMP program:
After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of the borrower’s total pretax monthly income:
• First, reduce the interest rate to as low as 2%,
• Next, if necessary, extend the loan term to 40 years,
• Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive the interest on the deferred amount.
Extend and pretend will delay the inevitable. But California will have a bright future once the issues that surround this massive number of distress properties have been resolved.