The Problems are the Path: Recession!
Recession: " ...a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarter", from a 17th century definition it is, "...a temporary suspension of work or activity". The Present Day standard needs measuring devices or formulas, the 17th century is simply put and to know that there has been a decline in business is easy to experience without a Economist declaration.
I have found that the best place to see the beginning of a recession is the reduction of spending by the "Nouveau riche". There is no better place to determine a recession other than to look at Bordeaux Future Sales. The premise on Future Sales is from the en primers of the Bordeaux region who sell futures in spring after a harvest. They get cash up front to finance the next crop and the consumers get a discount on wines that will be bottled two years later. China was booming the World was booming and then the Pandemic, Then President Xi became Chairman Xi and the demand collapsed. Futures prices were higher than the bottled wine from years 2022, 2021, 2020, 2018, 2017. I imagine you can add Ukraine, Iran and its subordinate groups to the problems the issues of evolving nations in Africa battling Islamic groups. 2023 futures are down 12%-49% depending on which of the chateaux you favor.
In real estate the evacuation of office buildings from the Pandemic was followed with open apartments from the movement of employees who could work from home to more enjoyable and less expensive locations. This in turn created growth in areas once affordable and out of the way: within our state South Lake Tahoe became an ideal location to ski and enjoy the lake but still be able to commute when absolutely necessary to the Bay Area. Texas, Florida, Utah, North Carolina, Arizona, Nevada and even the shores of a island in the State of Hawaii became destination points for the new economy.
New economies have their price. For lease signs became more prevalent in the Bay Area. Newly built apartment complexes in the Bay Area were offering free months rent, their benefits included pools, exercise room, conference rooms, patios with grills and picnic tables, wifi and satellite communication to mention a few.
CVS and Walgreens, along with some discount stores began to shutter up. Banks closed branches and consolidated. With the closure of the former small business closed from the lack of patrons: restaurants and family stores were among them. Bank of America has announced plans to close numerous branches nationwide in 2024 as part of its ongoing efforts to consolidate its physical locations due to the rise of online banking. In 2024, Citibank plans to close approximately 60 branches across the United States, with the majority of these closures occurring in California. This is part of Citigroup's broader strategy to consolidate its physical footprint due to shifts in customer behavior towards digital banking and declining foot traffic at physical locations. JPMorgan Chase has closed several branches in California recently. Following the acquisition of First Republic Bank, Chase closed 14 First Republic branches in September 2023. Additionally, Chase announced further closures of 22 First Republic branches, mostly in the Bay Area, in late 2023 and early 2024. Overall, Chase has been reducing its branch network in response to changes in customer behavior and the rise of digital banking. This trend is not unique to Chase, as other major banks, including Bank of America and Wells Fargo, have also been closing branches nationwide.
While economist point to the inverted yield curve as an indicator of a portending recession, they fail to look beyond the books to the streets of the city or town they are in. We are in a recession, a rolling recession.
This type of recession will be harder to view from a text book analysis. It is a common man analysis. The stock market chugs on to new highs, bond have done very well. Underneath those indicators we have problems that will lead to the path of recovery.
The commercial Real Estate market is the best measure. A recent sale of an office building in Silicon Valley for $17 million was compared to the cost not more than 3 years ago of $37 million.
The smaller commercial market of offices and malls, banks and restaurant buildings, CVS and Walgreen buildings, Bargain Centers are overwhelming the inventory of smaller commercial properties for sale, nationwide. An inventory that the common man does not see. No MLS.
The residential housing market continues to evolve higher in price as Baby Boomers and those fortunate enough to refinance their home when mortgage rates were in the 3% level will not sell. The question is, are home overvalued? Greg Ip of the Wall Street Journal, Friday June 28, 2024 puts that same question to the reader.
- Homes are as overvalued as they were near the peak of the 2000's bubble, according to a variety of metrics, including the Federal Reserve model
- Homes are assets, and overvaluation is a predictor of stagnant, even negative, real returns in coming years, a headwind to anyone counting on real estate as a source of wealth.
- Valuations are stretched by S&P CoreLogic Case-Shiller U.S. National home price index. Up 51% since the end of 2019.
- The stream(s) of income generated from an asset are: living there which can be measured by the cost of rent of a similar property home. Since the end of 2019 rent is is up 24%. That is a lot but far from the increase in home prices and the cost of the monthly mortgage payment which is up 114%.
- Since 2019, 10 year interest rates have moved from 2% to 4% a factor in the higher cost of mortgage payments.
John Burns Research and consulting says relative to history over valuation is from 24% in Northern California to 37% in Southern Florida.
Over valuation in Homes are the same as stocks. Over valuation can continue for some time more than when first discovered or commented by writers like Mr. Ip.
Demand exceeds supply by 2.1 million units today. In 2009 demand exceed supply by 1.9 million units.
Burns Research goes on to state 74% of Metropolitan markets are high risk for investors right now.
High Stock Prices can be justified by earnings, home prices are justified by rents. If rent growth stops or stabilizes; home prices like stock and earnings will be subject to adjustment.
DON'T EXPECT REAL ESTATE PRICES TO COLLAPSE AS THEY DID FROM 2009-2011. Since then income and appraisal standards have become more stringent, credit scores are higher, especially at the bottom end. Foreclosure prevention is more effective. 90% of mortgage backed securities are Federally Insured. Leslie Goodan a housing finance scholar at the Urban Institute has stated, "You will not have the big price declines because you've taken out the contagion effect that caused them"
To substantiate that thought Goldman Sach, Blackstone and similar monied organizations have created and solicited multi-billion dollar funds to lend to those owner's of real estate who need help and are financially stressed due to old loan due with cash flow from vacancies.
We are not in a crisis market as we once were. Opportunity will present itself to investors who are willing to search and investigate. Buyers of residential properties will find opportunity by working diligently under new Buyer Broker Agreements and Retainers with experienced career agents. For every listing either commercial or residential that sell, there at least 3-4 others that are overpriced and will find price cuts. The rest will sit and wait until they too either cut or run of market. In the Bay Area Price Cuts have averaged double digits in the 20% level with the greatest cut of +40% in Woodside!
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