Everyone wants to know where the bottom is for the U.S. real estate market. And I’ve argued that the U.S. economy cannot get out of its hole or grow until the U.S. real estate market heals and home prices start rising.
Inside the U.S. real estate market, however, there is the office market and retail space segment. They really reflect the health of the American business.
The Fitch Rating Agency has created an index that tracks delinquencies in mortgage-backed securities of the office and retail U.S. real estate markets. For January of 2012, delinquencies have hit a fresh high in both these areas of commercial mortgage-backed securities.
Worse, in office and retail spaces/complexes worth at least $100 million, there were four delinquencies in December 2008, but that number jumped to 25 in January of 2012! The number of large properties falling behind on their payments is steadily rising, presenting a very disturbing trend for commercial mortgage-backed securities.
For an office or retail property to be considered delinquent (behind on its payments), payments had to not have been made for at least 60 days. For the office U.S. real estate market, the December 2011 Fitch Delinquency Index came in at 6.84%, but January’s number stands at a record 7.30%. Concerning the retail U.S. real estate market segment, the delinquency index was at 6.89% in December 2011, but it jumped in January to 7.21%.
Typically, many office and retail office leases and loans are done on five-year contracts. Therefore, the contracts initiated in 2007, right before the crisis hit, are going to come due now in 2012 for the U.S. real estate market.
For this reason, Fitch forecasts their delinquency index probably hitting a high of 12% in 2012, as retailers close and office spaces become empty or are significantly downgraded.
Moody’s has its own delinquency tracker, and it confirms Fitch’s findings. Moody’s notes that its delinquency ratio for the office U.S. real estate market has remained stubbornly high: over the nine-percent level for the last 12 months.
Moody’s also highlighted that, within the office U.S. real estate market, the industrial sector recorded its largest increase in delinquencies in years. Remember, dear reader, the industrial sector is part of the plan to increase manufacturing jobs in the U.S. Now, one month does not a trend make, but it is worth keeping an eye on this segment of the U.S. real estate market.
Other surveys are saying that the commercial U.S. real estate market is on the mend and will begin recovering in 2012 (heard that one before). However, the numbers above are pointing to trouble ahead. Especially as the five-year leases and loans come due.
It seems, dear reader, that not only are home prices in the U.S. real estate market looking for a bottom, but so are the office and retail segments of the U.S. real estate market. If rising inflation tempers long-term interest rates, both the residential and commercial real estate markets will deteriorate further. (Also see: Our Annual Forecast: How Much Home Prices Will Fall This Year.)
Where the Market Stands; Where it’s Headed:
It’s extremely interesting to note this morning that the number of bullish stock advisors is now near a 10-month high. Meanwhile, the number of bearish stock advisors is near a six-month low.
Why is this important? The stock market usually does the opposite of what is expected of it. I put major credence into consensus of stock advisors, because, as a group, they are usually wrong. We are getting close to a top for the market, but were not quite there yet.
What He Said:
“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.