Market Sees First Movement of New Buyers

Over the course of 2009, economist Christopher Thornberg predicts that unemployment will continue to rise, labor markets will remain weak and GDP will be negative for most of the year. But there is good news, too, he says. As bad as things are right now, in 2010, the big drivers of the underlying economy, which have caused the most problems, will begin to work their way out of the system.

The national housing market has seen an enormous surge in delinquencies as 4.5% of all mortgages on the national level are now 60-90 days behind, says Mr. Thornberg. The co-founder of Beacon Economics recently shared his economic forecast at the REOMAC Spring Conference in Palm Desert, Calif., where nearly 2,700 real estate professionals were in attendance.

“And while there has been a brief slowdown in the pace of new foreclosures, this is largely a mirage due to the fact that banks have simply not been keeping up with the load that they need to deal with,” he said. “They just don’t have the ability to keep up with much more in the way of REO stock. We can expect that while things may have slowed down a slight amount, overall the market is going to continue to see excessive levels of foreclosures literally for years.”

While public opinion appears to be tipping into hysterics, there appears to be some areas of the economy that are starting to balance out. “Take for example, real estate. Yes, foreclosures are still going up. Yes, prices are still falling. But if you look at some of the worst-hit markets in the U.S., including California, Florida, Arizona and Nevada, what you’re seeing is a circumstance where prices have actually gotten back to levels, which we might call realistic — that is to say in-line with historic norms relative to incomes in these various places.”

As a result of affordability increasing, Mr. Thornberg said the market is starting to see the first movement of new buyers into the market.

“Home sales in California are on their way up. In Arizona, home sales are on their way up. Again, there’s not going to be any fast recovery. Prices are going to continue to fall for some time, but with people starting to move into the market, we know liquidity leads overall stability and pricing. Liquidity leads construction. That lead-time can be one year, two years, two-and-a-half years, but nonetheless with people starting to move back into the market, this is a good sign for rebalancing.”

On the consumer side, the big problem has been the incredibly low private savings rates, which had been 7% or 8% in the mid-1990s and had fallen to 0% in 2004. People have been spending beyond their means, racking up a considerable amount of debt, he described.

“The good news now is the savings rates are already up close to 5% as a result of consumers rebalancing their accounts. The consumer is not going to recover any time in the near future, but you can at least expect stability on the consumer side of the account.”

These are the repercussions of the fundamental drivers of the downturn, he adds. “When we pull out of this next year, we’ll get up and running again at a nice solid pace. As bad as things are right now, realistically, looking at the drivers of the underlying economy, the big problems are working their way out of the system, which is what happens in order for things to heal.” Shelley Kaye Peter Monroe, a member of REOMAC, recently named co-chair of the group’s commercial real estate committee, said the organization has expanded its reach to focus more on the commercial market thanks to the direction of president Shelley Kaye. While the industry is predominantly focused on the residential side of the business, REOMAC realizes the commercial market is not far behind the current wave of foreclosures. As such, the group is looking to get the mortgage default industry ready to handle commercial properties when they go into default and foreclosure and wind up on the REO side. The newly formed committee is focusing on receivership, valuations and how to deal with nuances of commercial properties.

“I want to thank Shelley for moving REOMAC, which has historically been focused on single-family detached housing primarily, into the whole area of commercial,” Mr. Monroe said in a conference call prior to the conference.

“She saw there was a tsunami of half a trillion dollars of commercial mortgages just in the banks alone, forgetting about the conduits, that were coming up for financing over the next three years. She realized that of half of the loans that are now in the banks, 50% of those, there’s $250 billion, have loan-to-value ratios equal to or in excess of 90%, whereas the typical refinancing scenario is usually about a 65% loan-to-value. She wanted to find how her organization could contribute to solutions in this area. So, she decided to with the board to create a commercial committee.”

The commercial session at the conference was expected to provide a first opportunity for members to all get together to select experts for the committee that deal with retail, industrial, apartments, hotels and some utility infielders who can handle mobile home parks.

“The concept is to provide significant information to as what is happening in these areas. Secondly, the hope is to provide training and education for the folks who may want to get into this growing storm,” said Mr. Monroe. “I frankly think the recent program, the Public-Private Investment Fund, is one vehicle that may make a difference. At least it’s a concept with a somewhat clearly defined goal. I’m hoping that may be part of the fix, which is fixing the banking industry.”

One of the huge problems that is occurring is banks are walking away from their REO properties. They are saying that they are going to foreclose, borrowers leave the home, the banks don’t foreclose and the property is damaged.