More Housing

Yesterday, the National Association of Realtors (NAR) revised down its benchmark sales and inventory figures for 2007 to 2010, reducing total homes sold by 710,000.  This downward revision means that the housing crisis was actually worse than thought (and I thought it horrible).  Going forward, it also means that future sales numbers will be benchmarked against a smaller number, making housing market comparative sales figures look better than they would have been without the revision. 

Housing Bull

I am bullish on housing.  I say this as someone who was a housing bear through much of the early 2000s.  My bullishness is based on a couple of simple premises, mainly that low new housing stock, falling existing housing supply, and improved employment will boost housing demand and home prices.  The last four years have had the lowest number of housing units added in any years since 1990 (which is as far back as the data I saw went).  Before 2009 there had never been less than 1 million units added annually.  Only 425,000 new units will be added to existing housing stock in 2011, which is the lowest of any of the last twenty years.  I encourage you to look at this post from Calculated Risk, and I have copied the table below: 

Housing Units added to Stock (000s)
	1 to 4 Units	5+ Units	Manufactured Homes	Sub-Total	Demolitions / Scrappage	Total added to Stock
1990	1010.8	297.3	188.3	1496.4	200	1296.4
1991	874.4	216.6	170.9	1261.9	200	1061.9
1992	999.7	158	210.5	1368.2	200	1168.2
1993	1065.7	127.1	254.3	1447.1	200	1247.1
1994	1192.1	154.9	303.9	1650.9	200	1450.9
1995	1100.2	212.4	339.9	1652.5	200	1452.5
1996	1161.6	251.3	363.3	1776.2	200	1576.2
1997	1153.4	247.1	353.7	1754.2	200	1554.2
1998	1200.3	273.9	373.1	1847.3	200	1647.3
1999	1305.6	299.3	348.1	1953	200	1753
2000	1269.1	304.7	250.4	1824.2	200	1624.2
2001	1289.8	281	193.1	1763.9	200	1563.9
2002	1360.1	288.2	168.5	1816.8	200	1616.8
2003	1417.8	260.8	130.8	1809.4	200	1609.4
2004	1555	286.9	130.7	1972.6	200	1772.6
2005	1673.4	258	146.8	2078.2	200	1878.2
2006	1695.3	284.2	117.3	2096.8	200	1896.8
2007	1249.8	253	95.7	1598.5	200	1398.5
2008	842.5	277.2	81.9	1201.6	200	1001.6
2009	534.6	259.8	49.8	844.2	150	694.2
2010	505.2	146.5	50	701.7	150	551.7
2011 (est)	430	126	46	602	150	452

Over the past four years the number of multifamily units made up a larger percentage of the total number of housing units than in previous years, which means that an even fewer number of single family homes were built than in the early- and mid-2000s.

I know there was large increase in housing units since 1990, but the drop from the 2006 peak has been precipitous.  Demand from population growth, new family creation, and people who moved home or in with roommates over the past few years and now are able to move back on their own will reduce exisitng supply.  Supply is at 7.5 months, the lowest level since mid-2005.

National employment figures have been improving monthly.  The housing market will not fully recover until employment improves.  Due to the lack of new units and low supply of exisitng homes, a continued improvement in employment will be felt quickly in the housing market.   If you throw in near historic low mortgage rates (3.77% for a thirty-year mortgage), the housing bull story gets even stronger.

Stating the Obvious

The five-year mortgages issued in 2007 are coming due in 2012.  Who'd have thunk it?  Here is a gloomy Bloomberg article discussing the depressing prospects for these mortgages.  There are plenty of good statistics in the article, like late payments on "loans packaged into bonds" being at 9.13%, or $55 billion of loans in bonds mature in 2012, or that there has been $28 billion of new CMBS in 2011, up from $11.5 billion last year.  (At the start of the year, I remember reading that analysts were estimating CMBS issuance of $30 billion to $40 billion in 2011.  Financial uncertainty in the third quarter slowed the CMBS origination market.)

These paragraphs make sense but are not new information:

Loans underwritten during the peak five years ago will be challenged by tighter lending conditions, limited borrower equity in the buildings and the large size of loans relative to current property values, S&P said. Property values have tumbled 42 percent since 2007. 

Lenders are willing to write a mortgage for a maximum of 70 percent of a building’s value, meaning about 63 percent of loans taken out at the height of the property market bubble will be hard to refinance unless the borrower injects additional cash, S&P said.

There is always "extend and pretend," which is not discussed, and is the probable reality for most of these loans. 

Random Fact to Start the Week

Grubb & Ellis Company stock has dropped approximately 63% since early November when Grubb & Ellis Healthcare REIT II announced it was moving its advisor from Grubb & Ellis. 

Battle Brewing

The battle between the remnants of Lehman Brothers and Sam Zell's Equity Residential for Archstone apartments has been simmering for a few weeks but broke open over the past few days.  Both Lehman and Equity Residential are trying to buy lenders' ownership position in Archstone, one of largest multifamily owners in the county.  The deal is complicated because of multiple lenders and that bankrupt Lehman already owns a portion of Archstone, which it purchased in 2007.   If you don't remember:

Archstone was acquired by Lehman in a $22 billion leveraged buyout with Tishman Speyer Properties LP in October 2007 as commercial real estate prices peaked. Lehman, saddled with debt, filed for the biggest bankruptcy in U.S. history in September 2008, as credit markets froze worldwide.

As you can tell by the transaction date, Lehman's acquisition was very late in the real estate / credit  boom, which sealed this deal's fate.

Lehman is trying to buy the portion of Archstone it does not own so it can turnaround and sell it.  Lehman is doing the transaction as part of its bankruptcy and wind-down.  The bids for Archstone represent an $800 million (13%) discount to Archstone's estimated $6 billion value, or at least that's what I could figure out from this Bloomberg article.  (Why does an $800 million discount sound so much bigger than a 13% discount?) 

One More Thing To Keep Me Up At Night

From Calculated Risk, a must-read post on prime brokers re-pledging (rehypothecation) client collateral for their own trading.  A legal, but scary practice.  This high-wire tactic may be behind the missing MF Global money.

Hotel CMBS

Here is a good, long article from Bloomberg on why Commercial Mortgage Backed Securities (CMBS) special servicers try to avoid foreclosures on hotel properties.  Here are a couple of key quotes from the article:

Special servicers, who negotiate with landlords on behalf of investors in commercial mortgage-backed securities, typically install a receiver or hire a broker to sell an office, apartment or industrial building with multiyear leases. Hotel rooms, on the other hand, rent by the night, and contracts with such operators as Marriott International Inc. may be terminated if a property is repossessed, making it harder to run or market.

Hotels are “operating assets where income goes up and down overnight,” said Rick Kirkbride, chairman of the resort, restaurant and recreation practice group at law firm Paul, Hastings, Janofsky & Walker LLP in Los Angeles. “Servicers do drag their feet with them a lot more because they aren’t sure what to do.”

And:

The 53 percent workout rate for hotels compares with 45 percent for apartments, 37 percent for retail properties and 29 percent for industrial, according to Real Capital. The remaining hotels either have been taken over by lenders or their owners continue to negotiate with servicers.

“We work long and hard to not take title to hospitality assets because it’s not an easy solution to operate,” Tom Nealon, vice chairman of LNR Asset Services, the special- servicing unit of LNR Property Corp., said in October at an Urban Land Institute conference in Los Angeles. With “office and other properties that are not as labor-intensive, the marketability is better,” he said.

In addition to the operational aspect, it also helps when a borrower has a large amount of debt outstanding spread over multiple properties.  Examples of loans that were extended and reworked were several hundred million dollars or more.   The article states that in the last two months of 2011 there are $5.5 billion of hotel CMBS loans maturing and in 2012 there are $9.1 billion of CMBS loans maturing.

Behringer Harvard Multifamily REIT I News

Behringer Harvard Multifamily REIT I filed an 8-K on December 1, 2011, announcing that it sold joint venture interests of up to 45% in six of its properties to a Korean firm, Milky Way Partners.  The total price was $178.6 million.   The six properties are 7166 at Belmar; Acacia on Santa Rosa Creek; Argenta; Cyan/PDX; The Gallery at NoHo Commons; and The Lofts at Park Crest.  The REIT is selling 15% to 45% in each property.

In conjunction with and a contingency to the REIT's sale, is that the REIT’s current joint venture partner, a European pension fund, is selling its interest in twelve properties it owns with the REIT through a joint venture to Milky Way Partners, including three that are part of the transaction above.   The 8-K states that upon the completion of the two transactions, Behringer Harvard Multifamily REIT I will own 55% of each of the fifteen properties included in the two transactions.  There is no disclosure on the REIT’s basis in the properties or what value the transaction put on all the properties included in the two transactions.  The 8-K did not specify what Behringer Harvard Multifamily REIT I has planned for the sale proceeds.  

Brass Balls

Love them or hate them, one thing you can't say about the executives at American Realty Capital is that they lack guts and chutzpah.  American Realty Capital Healthcare REIT, which has raised approximately $45 million in investor equity, has made an unsolicited offer for Grubb & Ellis Healthcare REIT II, which has raised approximately $425 million in investor equity.  Grubb & Ellis Healthcare REIT II's board rejected American Realty Capital Healthcare's $9.01 per share offer for all outstanding shares ($6 in cash and $3.01 in American Realty Capital Healthcare shares).  (Where did the $.01 come from?)  I would not be surprised if the American Realty Capital Healthcare's offer becomes a hostile takeover fight.  There are many questions raised by this announcement, deal financing being at the top of the list.  One thing I do know is that this will be fun to watch, kind of like a National Geographic show where a snake eats and digests a much bigger animal.  (The picture below is a python that exploded after trying to eat an alligator twice its size.)

Disaster Stat

I just read on Yahoo! Finance that the RIM's Playbook tablet sold 150,000 units in the third quarter.  This is a tiny fraction of the more than 11 million units of Apple's iPad that were sold over the same period.  Ouch.