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Signs Of The Time, Part 25

From the Chicago Tribune’s Art Barnum last week:

A DeKalb lawyer was suspended for 15 months Thursday for arranging to have a female client perform nude dances for him in exchange for credit on her legal fees, a state commission said.

Scott Robert Erwin, a lawyer since 1980, will begin his suspension Oct. 7, according to the Illinois Attorney Registration and Disciplinary Commission, a branch of the state Supreme Court that conducts investigations into attorney misconduct…

The relationship began in 2001 at Heartbreakers, a Compton, Ill., strip club where, after Erwin talked to an exotic dancer, both realized they had talked to each other over the telephone about some pending legal matters, according to the commission’s report of the allegations.

Erwin agreed to represent her on several legal matters, and they mutually agreed that she perform nude dances for him in his office as a way to cut down on the legal fees, according to the report…

The woman, who is no longer an exotic dancer, is married with three children and is a real estate agent, according to the report.

Ladies, start being suspicious when your man starts pushing you to buy one of her listings…

“Michael, stop drooling on my circuits”
“Knight Rider Stripper”
YouTube Video Link

Source:

“Stripper’s private dancing lands DeKalb lawyer in hot water”
Art Barnum
Chicago Tribune, September 19, 2008

Realtors Getting Kicked When They’re Down

These days, I may not be so happy, after all
After all that I have gained
I still feel sad when I’m all alone
I may have felt that path? Decay?
I may not be so swift, after all
All the chances you have given me
I just let you go

-The Rentals, “These Days” (1995)

As if the times weren’t tough enough already for Realtors, I came across the following by Mick Weinstein on Yahoo! Finance:

Realtors, Kiss Your 6% Goodbye!

This week, the Justice Department and the National Association of Realtors reached a settlement in the antitrust case against the NAR’s monopolistic hold on home listing information. It’s a victory for Internet-based and discount listing services and another stake in the back of traditional brokers attempting to recover from this downturn.

And then it got ugly. Weinstein added:

Media expert Jeff Jarvis says this means good riddance to real estate agents’ familiar 6% commissions: “The only reason… that Realtors could hold onto their high commission for such little value and work is that they kept information away from the marketplace, making it inefficient. This new economy can now come to real estate sales as information become freer. Oh, it’s not fully freed yet. But I do believe that the combination of this settlement and what it does to empower discount players and the depressed real estate market will combine to finally shove dynamite up Realtors’ rears.”

It’s interesting to note that, according to Mary Umberger of the Chicago Tribune, the national median income for a member of the National Association of Realtors was $42,000 in 2007, down about 11% from 2006. Umberger noted:

For newbies, the numbers were worse: NAR members with two or fewer years of experience earned a median of $10,500 last year.

Tough times indeed…

Sources:

“Housing: A Train Wreck in Slow Motion”
Mick Weinstein
Yahoo! Finance, May 30, 2008

“Assessing the wages of a downturn”
Mary Umberger
Chicago Tribune, June 1, 2008

When Juries Actually Work

Ever serve on a jury? I have, and didn’t enjoy one particular experience that took place in 1996. That year, I was picked to serve on a traffic court jury for Cook County, Illinois. The case was about a man who was arrested for drunk driving when he was stopped at a Chicago Police Department roadblock. According to witnesses, police officers at the roadblock motioned for the man to come forward with his car. Seeing that there was no response, one of the officers walked up to the vehicle and discovered the defendant incapacitated, his car wreaking of alcohol, and a nice, big bottle of booze by the man’s side. Police officers turned the vehicle off for the driver, helped him out of his car, and informed him of his arrest. However, the arresting officers turned their back on the man for one moment (big mistake), at which point he declared, “Well, if I’m going to jail, I might as well have another drink.” The motorist then proceeded to grab his bottle and down the remaining contents. After hearing the case, my fellow jury members decided to ignore the breathalyzer results, as the procedure was administered shortly after he chugged the bottle. And the rest of case? Open and shut, right? Wrong. A number of jury members started to feel “sorry” for the man, and argued that he wasn’t really drunk, he was just “scared” of the big, bad, policemen (which, they rationalized, would explain why he didn’t pull forward at the roadblock when he was instructed to). Never mind that he was a pile of crap at the roadblock, his car stunk of alcohol, and the smoking gun was on the seat right next to him. To make a long story short, the trial ended up in a hung jury, and a mistrial declared.

I often wonder if someone lost their life down the road because jury members felt “sorry” for this individual.

Well, I recently read something in the North County Times that helped restore my faith in juries… a little. You may have heard of Marty and Vernon Ummel, who sued their real estate agent because, they argued, the $1.2 million they paid for their Carlsbad home in 2005 could not be justified when other houses on the street were selling for much less at the time. The Ummels claimed their agent failed them and thus owed the couple $150,000, the amount they felt they overspent.

Well, on April 10 it took a jury less than two hours to unanimously clear the real estate agent, Mike Little. According to the North County Times’ Teri Figueroa:

After about a week of testimony at the Vista courthouse, the panel of 10 women and two men rejected Marty and Vernon Ummels’ arguments that they overpaid $150,000 for their home near the Four Seasons Resort Aviara…

“Mr. Little did what he was supposed to do,” jury forewoman Wendi Brick said. “The bottom line is that you (as a buyer) are responsible when you sign a contract and purchase something.”

Now, if only those who are pushing for a mortgage bailout could grasp this simple concept…

Source:

“CARLSBAD: Jury clears real estate agent”
Teri Figueroa
North County Times, April 10, 2008

Housing Spindoctors

This morning I came across an interesting post on the New Jersey Real Estate Report blog (hat tip The Mess That Greenspan Made). In “Tracking Realtor Spin,” a chart depicting existing homes sales is paired with comments made by the National Association of Realtors. From reading these, you’d think it’s always a great time to buy a home. Some notable sales pitches, I mean, comments include:

Summer 2005- “We’ve been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream.” - David Lereah, NAR Chief Economist
Spring 2006- “Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels.” - David Lereah, NAR Chief Economist
“After five years of booming sales, we are now experiencing normal market conditions across most of the country… most owners can expect steadier gains in home values for the foreseeable future.” - Thomas M. Stevens, NAR President
Fall 2006- “…the worst is behind us as far as a market correction — this is likely the trough for sales. When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market” - David Lereah, NAR Chief Economist
Spring 2007- “Buyers who’ve been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won’t be as good as they are now.” - Pat V. Combs, NAR President
Spring 2008- Existing-Home Sales to Stablize Before Upturn in Second Half of 2008 - NAR

Dead or Alive, “You Spin Me Round (Like a Record)” (1984)
YouTube Video Link

Source:

“Tracking Realtor Spin”
New Jersey Real Estate Report, April 9, 2008

Economists Predict 6% Jobless Rate, 2 Million Lost Jobs

Earlier today I read an interesting article that discussed the U.S. employment outlook and which jobs may or may not be good bets in a deteriorating economy. Martin Crutsinger of the Associated Press wrote:

While the downturn is expected to be short and mild, economists are still forecasting the unemployment rate, which jumped to 5.1 percent in March, will climb much higher before the nation’s job engine sputters back to life.

Economists are forecasting a jobless rate that will peak at around 6 percent, but probably not until early next year, several months after the recession is expected to end. Analysts said as many as 2 million people could lose their jobs in the current downturn.

Mark Zandi, chief economist at Moody’s Economy.com, said:

All the indicators suggest that we will see even larger job declines in coming months. Businesses are getting nervous and pulling back.

“Safe” Jobs:

• Healthcare
• Education
• Farming
• Some manufacturing (airplanes, heavy machinery)
• Government

“Unsafe” Jobs:

• Other manufacturing (automakers, housing-related like appliances, furniture)
• Construction
• Housing-related industries (real estate agents, mortgage brokers)
• Wall Street firms
• Discretionary services (tourism-related)

Source:

“Job winners and losers in hard times”
Martin Crutsinger
Associated Press, April 7, 2008

Tide Turning On Manhattan Real Estate?

Until recently, Manhattan, an island borough of New York City and the most densely-populated county in the United States, appeared to have weathered the housing bust sweeping across the United States. In the fourth quarter, the average price of a Manhattan apartment soared 17.6% from a year earlier to $1.44 million, according to Prudential Douglas Elliman, New York’s largest real estate services company. The addition of two high-end condominiums (The Plaza and 15 Central Park West) to the Manhattan market contributed to this price rise. The median apartment price rose 6.4% to $850,000, while the average price per square foot rose 18.2% to $1,180. Prudential Douglas Elliman added that the number of apartments for sale fell 13.5% to 5,133.

Back on February 19, Pamela Liebman, chief executive of the Corcoran Group, a New York City real estate company, told Reuters’ Jonathan Stempel that a lack of supply and significant demand by foreign buyers taking advantage of a weak U.S. dollar has meant that Manhattan and New York City has “absolutely stood alone” in avoiding declining home prices. Liebman said demand remained “very healthy,” especially for the largest, multimillion dollar apartments, but realized the situation could change. She said:

If Wall Street has a terrible year, and the press is really talking negative
about the economy and the election, I think things could really slow down at the end of the year. I don’t see New York City crashing or coming to any kind of a standstill, because the product is too good and there’s too much belief in the city. What will stall this market is a negative economy, nervousness and skittishness about job security, consumer spending, layoffs, and sellers with unrealistic prices.

Unfortunately, it now appears New York City no longer “stands alone” in avoiding falling home prices. Yesterday, data released by Standard & Poor’s for its S&P/Case-Shiller® Home Price Indices showed that prices of existing single family homes in New York City declined 1.3% in the fourth quarter from the previous one, and fell 5.6% over a one-year period prior to December 2007.

Speaking about the Manhattan market, Jonathan Miller, director of research at Radar Logic (a data and analytics business that produces a daily “spot” price for residential real estate in major U.S. metropolitan areas), told Reuters on February 19 that the Manhattan housing market was “definitely going to see weakness” within a year or two. Yet, Patrick McGeehan of the New York Times wrote on February 3 that:

But lately, more cracks in the housing market have begun to show, and the trend is reminding some analysts of the severe downturn in the region during the recession that followed the boom years of the late 1980s.

Even in Manhattan, signs of weakness have appeared beneath the headlines about ever-rising average sale prices of condominiums and co-ops.

A report last week found that rents in Manhattan declined in January, by more than 7 percent in some neighborhoods, according to the Real Estate Group New York.

The latest set of numbers “reinforces our sentiment that the market has, in fact, turned,” Daniel Baum, the chief operating officer of the company, said in the report.

As for the significant demand by foreign buyers that Ms. Liebman referred to earlier, that situation may have changed as well. On January 30, Emily Friedlander of the Wall Street Journal wrote:

For months, observers of the Manhattan real estate market have been crediting foreign buyers for Gotham’s strong market. But that may be changing. New York Magazine is reporting that foreign interest in Manhattan real estate is finally waning.

“We’ve had nine clients we’d been working with since October, and they’ve stepped back,” says one broker quoted in the article. “I have one prominent family from Singapore who were about to make an offer, and they decided no.” The magazine cites turmoil in the global markets, as well as tightened lending standards as factors. Another broker quoted in the piece says his buyer walked because a bank told him he had to put 40 percent down.

Flashback: NYC, 1994
YouTube Video Link

No Signs Of Housing Recovery

The National Association of Realtors released their latest housing numbers this morning. More bad news. Home prices are likely to decline in 2008 for the second straight year. According to CNN Money, the Realtors, in their monthly economic and sales outlook, are forecasting a 1.2% decline in the prices of existing homes sold in 2008. Only a month ago they were still forecasting that prices would be flat this year and housing would rebound in the second half of 2008. Last year was the first on record that the NAR recorded a full-year decline in existing home prices, as the median price fell 1.4% from 2006.

Regarding existing home sales, the Realtors are predicting a 4.8% drop in the number of houses sold in 2008. Last month they were still forecasting a 0.9% pickup in sales. The NAR predicts 5.38 million units will be sold in 2008, down from their January estimate of 5.7 million. Existing home sales plunged 12.8% in 2007, according to the trade group’s data.

The NAR sees even greater weakness in new home sales for 2008, with median prices declining 4.3% and the number of sales falling 17.7% from 774,00 units to 637,000 in 2008.

In addition, the National Association of Realtors’ index of signed purchase agreements decreased 1.5% to 85.9. the group said today. The measure was down 24.2% from this time last year. The pending home sales index is more forward looking than the Realtors’ more widely-followed reading on existing home sales, which tracks closings.

According to Reuters, NAR chief economist Lawrence Yun predicted home sales activity will remain soft through the first half of the year despite a generational low in mortgage interest rates.

Before the release of today’s numbers, Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, told Bloomberg:

The housing outlook has deteriorated significantly and I don’t see a bottom on sales and starts until the middle of the year at the earliest. And our outlook on home prices has gotten worse.

Debunking A Housing Myth

One myth consistently heard during the recently-deceased housing boom was that “home prices always go up.” Utter nonsense. Earlier today, the National Association of Realtors reported that the median price of an existing single-family home fell 1.8% for all of 2007, the first time in the 40-year history of the survey. MarketWatch added, “Although no hard data are available, most economists believe home prices hadn’t fallen since the Great Depression of the 1930s.” Bloomberg reported that the median sales price fell 6% to $208,400 from December 2006. Nigel Gault, director of U.S. research at Massachusetts-based forecasting firm Insight Inc., told Bloomberg that:

We are not at the bottom in the housing market. The Fed is trying to battle against the fundamentals which say housing is not going to recover until we have a substantial decline in prices.

Economist Ellen Zentner of the Bank of Tokyo-Mitsubishi UFJ Ltd. in New York warned even before today’s report that it was unlikely fence-sitters would re-enter the housing market anytime soon. Zentner told Bloomberg:

Would-be homeowners are not going to jump into the market to buy new homes no matter how much prices have dropped until they get a solid feeling that prices have bottomed.

“Not just yet…”
Photo by Adrian Boca

And according to a Merrill Lynch report Wednesday, the worst housing crisis in
decades is only going to get worse. CNN Money said that Merrill Lynch is forecasting a 15% decline in U.S. home prices in 2008, an additional 10% drop in 2009, and the possibility of even more depreciation in 2010. In their report, the investment bank argued that housing prices still remain comparatively high, especially when compared to other measures such as rent or GDP. Merrill analysts said:

By our calculations, it will take about a 20 to 30 percent decline in home prices to correct this imbalance.

You can view the Merrill Lynch report here.

Will Tax Credits For Home Buyers Stimulate The U.S. Economy?

Las Vegas, March 2003. I’m in from Chicago for a bachelor party and notice two of the guys I’m with are upset at each other. One of them, Jim, tells me that Bob is angry at him because he’s not gambling enough at the hotel/casino we’re staying at. Jim, who has a wife and kid and is stretched for cash at the moment, explains that Bob’s family are VIP’s of the hotel/casino and made arrangements for our accommodations. I’m also told that Bob’s family is receiving “comps,” or freebies that the casino gives you in return for spending money playing the games at their casinos. These could be food and beverage comps, like a free breakfast buffet, to free rooms for a future stay. So, the more money the members of our party spend, the more comps Bob’s family receives. Hence, Bob’s displeasure with Jim. And later on, me (guilty as charged!).

I appreciate Bob and his family for taking care of the Vegas arrangements (although I never asked them to). But, why would I spend more money than I originally intended to for the benefit of someone else?

Photo by Bob Townsend

In a press release dated January 10, James M. Weichert, president of Weichert, Realtors, a national brokerage, proposed that the U.S. government should offer a tax credit to people who buy homes as a way to “stimulate” the slowing U.S. economy. According to the Chicago Tribune this morning, Weichert has been meeting with officials of the National Association of Realtors to discuss a congressional strategy for the proposed tax credit. He said:

For years, economists have drawn a correlation between the real estate market, the largest segment of the gross domestic product, and the overall economy. When the housing market is flourishing it drives the economy. After the housing sector stalled, we began seeing a negative ripple effect. To me, the fastest and most logical way to economic recovery would be to provide an incentive in the form of a tax credit to home buyers to re-energize the housing market and in turn other sectors of the economy.

According to Steve Alessandrini, a spokesman for the New Jersey-based company, that’s about the extent of the plan’s details. “Obviously, that press release is a little vague,” he told the Tribune. Alessandrini added:

There are a lot of proposals out there, a lot of them focused on mortgages and providing relief to the at-risk market. But that’s not going to stimulate the housing economy. If you create an incentive for buyers, [a tax credit] would help out in reducing the surplus inventory [of homes for sale]. It’s also going to put more money into the economy.

There are mortgages out there for qualified buyers, but a lot of them remain on the market sidelines. These people need a push, and this plan would create that.

I’ve yet to see any evidence showing that the United States is anywhere near a bottom in the housing slump. A few “experts” have gone out on a limb and called a bottom, only to get burned (the ball’s still in play for White House chief economist Edward Lazear, who announced a housing bottom by June 2008). In this market, I’d have to think that a significant number of potential homebuyers will continue to remain on the sidelines for quite some time. Why? Because they don’t want to buy a home, thinking they got a bargain, only to see its value depreciate more. The prevailing psychology is, why buy now (tax credit or not), when homes are probably going to be tens of thousands of dollars cheaper in the near future? I know, it’s been said you shouldn’t try to time the housing market. Yet, it appears the housing downturn still has a ways to go.

Bloomberg noted this morning that:

Falling property values and tougher borrowing rules will lead to more foreclosures and keep the real-estate market in recession for most of this year, economists said.

Regarding property values, in a December 30 post I talked about how Robert Shiller, Professor of Economics at Yale University and co-founder of the S&P Case/Shiller house-price index, warned of more declines in U.S. home values. Shiller said:

American real estate values have already lost around $1 trillion. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses…

The last available data for the quarterly S&P/Case-Shiller U.S. National Home Price Index (which covers all nine U.S. census divisions) showed U.S. home values were down 1.7% from Q2 2007. Year-over-year, national home prices declined 4.5%.

But all real estate is local, right? Talking about the nation’s housing woes, Paul Kasriel, chief economist at Northern Trust Co., told the Chicago Tribune back on January 13 that Chicagoland’s problems “illustrate just how serious this housing bust is. Geographically, it’s all over.” The paper noted that Kasriel, like most forecasters, “expects the residential market overall to worsen through much of 2008.” He explained that real estate is “a chain-reaction market,” and the chain is broken. “Without that first-time buyer, there’s no chain reaction,” said Kasriel, recipient of the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

Weichert and Alessandrini emphasize the importance of the qualified buyer for their “stimulus” plan. A post by CNBC real estate reporter Diana Olick Friday afternoon makes me wonder if they overestimate the number of qualified buyers this time around. Olick wrote:

We’re talking today about what will get buyers back into the market, especially when all the so-called experts we put on the air say that prices are going to continue to fall through the rest of 2008 in the bulk of the nation’s housing markets.

Interest rates are low, affordability is improving, inventory is sky-high, and sellers are well aware of the difficult market. What’s better than all that for a buyer?

Well there’s the catch-the-falling knife issue with prices, and then there’s the mortgage issue. Whether it’s new or refi, the issues are the same. A mortgage broker I know writes:

“We’re undergoing a min refi boom right now with 30-yr conforming fixed rates not far off record lows. The difference this time around is the limited amount of people that qualify…”

So, will a tax credit for buying homes “stimulate” the U.S. economy? Doubtful. In Las Vegas, knowing the odds is important to one’s success on the casino floor. Odds are, the housing slump will continue on for the foreseeable future. Odds are, home prices will continue to fall. Which leads me to ask, why would someone gamble on buying a home in this market just to get a tax credit, the equivalent of a Vegas comp? Also, is it me, or is the real estate industry hoping to make out like Bob’s family in this situation?

You know what? What happens in Vegas should stay in Vegas.

Housing Recovery? Don’t Hold Your Breath

Fannie Mae CEO Daniel Mudd told CNBC this morning that he did not expect the U.S. residential real estate market to fully recover until 2010. According to Mudd:

I would say right now we’re still in a period of dislocation, prices moving up and down. We should start to settle out next year and through ‘09. We should see some improvement toward the end of that period.

CNBC said that the Fannie Mae CEO predicted “home prices would slip about 12 percent total by next year,” keying a full market correction and recovery:

Prices inflated too fast and now we’re in a process where prices are coming down to the level of supply and demand, which is still growing. It’s going to take a couple of years to make that adjustment… The underlying basis, housing in America, is still solid.

This forecast is a lot less rosy than the latest from the National Association of Realtors (NAR). In their press release Monday, the Realtors’ chief economist, Lawrence Yun, said:

Home price growth in the vast affordable midsection of America will help raise the national median existing-home price slightly in 2008. I then expect price appreciation to return to more normal patterns in 2009, perhaps rising one or two percentage points above the rate of inflation.

The NAR is saying existing-home prices will decline only 1.9% to a median of $217,600 for all of 2007, then rise 0.3% to $218,300 in 2008, according to the release. The median new-home price is projected to drop 3.0% to $239,100 for 2007, and then decline only another 0.2% to $236,600 in 2008.

When it comes to homes prices getting back to their inflation-adjusted peaks, homeowners are well-advised to not hold their breaths. BusinessWeek did an analysis of housing booms and busts back on December 26, 2006, and reported the following:

Housing booms are short and exciting. Housing busts, on the other hand, are long and painful. So don’t put much faith in those oft-heard assertions that the worst is already over. Prices are likely to fall further in many markets in 2007. In some others, prices may rise, but at less than the rate of inflation. A BusinessWeek analysis of the past three decades shows that if history repeats itself, it’s likely to take 15 years or more for many parts of the country to get back to their inflation-adjusted peaks.

Storm Brewing For U.S. Commercial Real Estate Sector?

A lot of media attention has been focused on the plight of the U.S. residential real estate market. But where is the U.S. commercial real estate sector headed? Will it follow housing’s lead down? By all appearances, commercial real estate has performed admirably. New York-based real estate research firm Real Capital Analytics noted commercial property sales hit $401 billion through October 18, outpacing last year’s $359 billion total. The U.S. Commerce Department said construction spending on office buildings, shopping centers, and other private, non-residential projects jumped 15.2% in August. The commercial sector has been immune to the residential mortgage mess because for the most part, buyers and sellers are more sophisticated, and they have more financial flexibility and resources to ride out credit market turmoil, experts told the Associated Press on October 22. Bernard Baumohl, managing director of New Jersey-based Economic Outlook Group, said, “It’s a different animal than the nonresidential construction business with the direct relationship between banks and business leaders, not banks and homeowners.” The National Association of Realtors’ chief economist Lawrence Yun spoke at this past weekend’s NAR convention in Las Vegas and said, “Despite some initial concerns, there have been no serious capital problems for institutional-grade properties, and most of the commercial market is performing well even though some private transactions have been cancelled or postponed.” Fundamentals remain strong with rising rents and occupancy levels expected to continue, especially in metropolitan areas. Yun said, “Vacancy rates should be gradually declining in the overall office, industrial, retail and multifamily sectors during 2008, reflecting the underlying demand for space in a growing economy. Areas with strong job growth will see the healthiest commercial markets.” Also, commercial markets are not in oversupply mode. “There’s plenty of excess capital that wants into real estate, especially in metro areas,” said Dan Fasulo, managing director of Real Capital Analytics. Finally, Yun noted that foreign investors, attracted by the weakened U.S. dollar, are pouring funds into the U.S. commercial sector. “Foreign investors are looking for good returns in a historically stable economy, and account for nearly 10 percent of total investment in U.S. commercial real estate sectors.”

Yet, some think the U.S. commercial real estate market is headed for a downturn. A report released Wednesday by the MIT Center for Real Estate suggests that the commercial sector may already be in transition. Prices in the third quarter were down 2.5%, the first drop in 4 years. MIT is suggesting that the new data signals not only the end of the 5-year boom for U.S. commercial real estate, but that weakness in the housing market is spilling over into commercial real estate as well. The center’s director, David Geltner, said in a prepared statement:

The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets.

A new report from McGraw-Hill Construction also points to a slowdown in the sector, with commercial construction spending forecast to fall 6% next year from 2007’s record level.

Then there is the issue of commercial mortgage-backed securities, or CMBS. On November 12, the Financial Times (UK) said yields on commercial mortgage-backed securities have soared to levels not seen since the late 1990s, “indicating that they are seen as riskier.” The Federal Reserve notes that CMBS makes up 27% of the $3 trillion in commercial and multifamily development mortgage loans still outstanding, up from 4% in 1990. As the Financial Times explained:

Securitisation has allowed riskier, more leveraged purchases because the lenders originating the loans did not have to carry them on their balance sheets. As lenders rushed to cash in on the boom in the US commercial real estate market in the six to 12 months before the credit squeeze hit in July, underwriting standards declined and upped the risk of defaults, people in the industry said… In the third quarter, the average loan was 118 per cent of the property value, according to Moody’s, which includes expectations of properties’ incomes over several years in their calculations.

Sally Gordon, Moody’s head of commercial property research, told the Financial Times that level of leverage is “really kind of creepy.” In addition, consider the following from Monday’s edition:

Recent loans often assumed that the real estate market would get stronger, and there were a growing proportion of floating rate loans being issued. Even since the squeeze, loan-to-value ratios have barely fallen, while interest-only loans have actually risen, according to Reis, a real estate data firm. Some have already suffered the effects of fears over the kind of loans they are securitising, and have struggled to sell the bonds they are issuing. Wachovia, the biggest issuer of commercial mortgage securities in the US, according to Commercial Mortgage Alert, was hit by a $488m loss in the last quarter in the value of commercial mortgage securities that it could not sell.

Regardless, the recent performance of the U.S. commercial real estate sector may stall anyway as the U.S. economy sputters. “Commercial typically follows the national economy,” said Lawrence Yun at the National Association of Realtors’ industry conference.