Billionaire Warren Buffett said the U.S. residential real estate slump will end by about 2011, predicting that’s how long it will take demand for homes to catch up with the supply.
“Within a year or so, residential housing problems should largely be behind us,” Buffett wrote Feb. 27 in his annual letter to shareholders of his Berkshire Hathaway Inc. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits.”
The worst housing decline since the Great Depression has left one in five U.S. mortgage holders owing more than their houses are worth. Record foreclosures last year flooded a real estate market already glutted with unsold property, causing new construction to fall to the lowest in at least 50 years. The fall in homebuilding is the only fix unless the U.S. decides to “blow up a lot of houses,” Buffett joked.
“People thought it was good news a few years back when housing starts — the supply side of the picture — were running about two million annually,” said Buffett, the chairman and chief executive officer of Omaha, Nebraska-based Berkshire. “But household formations — the demand side –only amounted to about 1.2 million.”
Berkshire, which owns a real-estate brokerage, a business that constructs pre-fabricated houses and units that make products used in homebuilding, has suffered amid the slump. Profit at Clayton Homes, the pre-fab housing business, fell about 9 percent to $187 million before taxes, while earnings at carpet manufacturer Shaw Industries fell 30 percent.
David Fletcher, writing in Realty Times, has an article on the expected losses that will occur in the commercial real estate market.
Continue reading “Losses on Commercial Property Could Reach $1 Trillion”
The American Spectator published an article written by James Srodes titled, “The Great Recession of 2011-2012”
Mr. Srodes hits the nail on the head. He explains why, despite the rosy projections you read in the morning newspaper, we are headed for worse times in the next couple of years. I don’t want to be a doomsayer, or create a sense of pessimism. I just think the old adage that to be forewarned is to be forearmed is a good one.
I am not going to summarize the article here. It is a very well-written and logically presented. It is important to read it in its entirety. I suggest you go here and do just that. And then arrange your finances so that you will still be standing when we hit 2013.
While he writes about all the reasons 2011 and 2012 will be very difficult years financially for most Americans, he doesn’t mention one other factor that will contribute to the downturn. There are billions of dollars of commercial mortgages that will mature in the next 18 months. The borrowers will not be able to refinance those loans without contributing substantial cash equity. As a hypothetical example, a borrower who borrowed $21 Million (70%) on a shopping center that was valued at $30 Million in 2006, will likely now find that he can only refinance 60% of a revalued asset now worth $25 Million. That means he will only be able to get a new loan of $15 million to pay off a $21 Million loan. He will either have to come up with $6 Million in additional equity, or run the risk of losing his property. That bubble is still ahead of us and will make the bursting of the home mortgage bubble seem like a minor glitch.
All the signs are there. You just have to read them.
Go to the American Spectator and read the whole article.
CB Richard Ellis (CBRE) has published its Industrial Leading Indicator Report for the first quarter of 2010 which has a favorable outlook for the industrial real estate market in the US.
To summarize briefly: The sector was not hit with the problems of the office and retail markets. Demand for space has continued and they expect the vacancies to peak at 15% and then drop to around 10%. Another reason is that industrial property owners tend not to leverage as much as owners in the other sectors. They expect that the industrial market will start to recover as we come out of the recession in 2012 and that the next three years will be years of high demand for industrial space as businesses gear up again.
With increasing consumer spending, firms will begin hiring again in 2010 and continue to rebuild their inventories. The demand for industrial space will rebound, it is expected to turn slightly positive by year-end 2010 but the average quarterly pace of demand will be lower than that seen during the housing boom with quarterly net absorption averaging only 30 million square feet through the end of 2011. Over the following three years however as consumers and firms make up for consumption deferred throughout the downturn, demand for industrial space will match the pace set in the boom period from 2004 through 2007 before settling into a more stable pattern in the years beyond 2015.
The report does not appear to be online, so I can’t link to it. If you are interested in the report, send an email to gaminoff at aminoff dot com and I will forward a copy of the report to you.