Circuit City Failure Wounds Landlords

Call it the domino effect. As Retailer Daily reports, it's going to be a Blue Christmas for retail landlords.

Retailer Daily: Circuit City Bankruptcy Sends Landlords Reeling

The market reacted harshly to the news: Shares of Developers Diversified Realty, which has 50 Circuit City stores and derives 1.7% of its annual revenue from them, fell 24.6% on Monday. Real estate investment trusts (REIT) Kimco Realty and General Growth Properties also declined 9.6% and 34% respectively. (General Growth dropped another 68% in Tuesday trading.)Among the other REITs that lost value are Simon Property Group and Vornado Realty Corp.

Don't forget that REIT and other property stocks have already been clobbered this past year, so it's not as if there was oodles of market cap that could be erased and shrugged off with impunity.

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Housing prices in western Canada keep trending skywards

Two pieces on the cover of Yahoo.ca this morning.

Yahoo!: Resale house prices forecast to top $300,000
Canada's resale housing market gained "astounding" momentum in the second quarter with the national average house price expected to increase by 9.5 per cent this year, the Royal LePage Real Estate Service said on Thursday.
Royal LePage estimates the average house price will exceed the $300,000 mark for the first time to hit $303,300. An estimated 522,306 home sales transactions - an increase of eight per cent - are projected by the end of the year.
"As we move into the second half of the year, we continue to expect areas of aggressive price appreciation in the west, and modest, mid-single digit price increases in Central and Atlantic Canada," said Phil Soper, president and chief executive officer of Royal LePage Real Estate Services.
Analysts say the market could cool if the Bank of Canada decides to raise interest rates again. The bank is slated to meet next week.

Yahoo!: Fleeing Calgary for Saskatchewan helps push housing figures to record levels

An exodus of people escaping the traffic, construction gridlock and dizzying home prices of boomtown Calgary helped push home prices in Saskatchewan to record levels - a trend expected to continue through the end of 2007.
"The same reason they flee Toronto for London or Kitchener, they're fleeing Calgary for Saskatoon," Phil Soper, CEO of Royal LePage Real Estate Services (TSX:RSF.UN) said Thursday after releasing a report forecasting the national average house price to rise 9.5 per cent to $303,300, passing $300,000 for the first time.
"Things like traffic and pollution are driving them nuts."
Saskatoon recorded Canada's largest property jumps in the second quarter: with bungalows costing an average $281,250 - more than $100,000 over the same period in 2006. Two-storey homes were even more expensive, going from $196,500 to $305,000. Regina bungalows sold for $204,000 over $143,250 a year earlier.
Still, the runaway prices that have characterized Edmonton and Calgary for the last 18 months have begun to ease. That's not to say real estate is cheap - the average price of a single family home in Calgary is approaching a half-millon dollars: $496,000 in June and $465,678 in the second quarter of 2007. In Edmonton, the average house was $397,857 over the last three months.

It's ludicrous, and for those of us who are safely ensconced in our homes, ultimately meaningless. Great, my home can now sell for double what I paid for it 3 years ago. So, where would I move to? Downsize to a 2-bedroom condo? I don't think so. Refinance to the new assessed value and spend the money on bling and pointless consumer goods? That's an even dumber idea.

Here's a better idea, hunker down, live my life, and be grateful if and when a big shock comes to the energy sector that I'm not one of those jokers sitting on a half-million dollar (or more!) mortgage when the gravy train rolls to a stop. I feel bad-in-advance for the neauveax-riches twenty somthings, flush with cash who haven't been around long enough to really understand that the energy sector is very, very cyclical.

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Alberta real estate turning the corner

As a special treat for all of you, I asked my good friend and favorite realtor Wayne Paradis from RE/MAX River City to give Lee Distad's Professional Opinion an update on the state of the Edmonton and Alberta real estate markets. Wayne's been around a long time, and seen a lot, and here's where he sees the market going:

After almost 18 months of low inventory and fierce competition between buyers making offers well above asking prices the market appears to be in the beginning of a leveling off stage. Each day we are bringing more listings to market as sellers try to cash in on what has been some incredible appreciation in home prices, With increases of 54% last year and another 25% this year, a $200,000 two years ago house can fetch $400,000+ and that new found wealth has people thinking it might be time to sell. For a condo owner who bought in the spring of 2006, that new found equity is a perfect opportunity to move up into a single family home as the latest wave of first time home buyers are forced to settle for condo living because house prices are simply out of reach. Banks have been creative in keeping monthly payments lower by increasing amortization periods between 30-40 years. A 25 year mortgage is a rarity for the buyer entering the market for the first time.

Increased listing activity has come from a number of sources, with the largest component coming from the recent condo conversion craze. Hundreds upon hundreds of former apartments have hit the market and I predict that will have a sobering impact on those retail investors who may be on the market just a little too late as there are no shortage of choices in those areas. The “converters” have made the big money, now we will see if there was anything left on the table for the retail investor as they realize that rental rates won’t cover the mortgage.

In addition, we have seen listing activity in the moving up sector as well as those who think the Alberta advantage is lost and are looking outside the province where it is cheaper, and a noticeable increase in divorce situations which illustrates that boom doesn’t mean boom for everyone. Affordability will be the key factor in keeping strength in the marketplace and with increases in wages of approximately 2% and mortgage rates creeping up puts tremendous pressure on the buyer ability to service debt. If they can’t service the debt, they don’t buy or they settle for second best and that will effect what a seller can ask and be successful at selling.

Migration to the province continues so there may be strong levels of activity but I think we are at the point where you won’t be seeing $10-20,000 increases per month on the average home. Let’s hope so, there is still a generation or two behind us that will need homes and I can’t imagine what they will have to pay in years to come. My parents bought their first home for around $15,000 in the early 70’s, I bought my first home in the low $80’s in 1985 and 22 years later my daughter is facing $400+ for a similar home that’s 40-45 years old. It will be interesting to see what develops in the coming year as they still haven’t started building the upgraders that have fuelled all this speculation and those workers aren’t here yet. I think we still face considerable increases in our population in the coming years if all that is planned breaks ground and gets built perhaps we return to normal growth of 5-7%, which isn’t a bad increase considering the benchmark has moved so far up the ladder.

Wayne is a stellar realtor, and an eminent expert in his field. He confirms what I had sensed, and I'm taking heed of his perspective.

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How big is the Real Estate bandwagon?

Just got this in my email from my friend Doug:

Hey Lee,

I know you have at least a passing interest in watching the going-on's in real estate. I thought you might find this story somewhat amusing (especially since real estate has excelled at providing entertainment in recent months).

I was talking to a couple I know, about three, four weeks ago. Since I work in the area of real estate investing, I have more than my share of real estate and\or investing conversations. They were excitedly telling me about how they were getting into flipping properties. A friend of theirs had successfully flipped a few properties in SoCal, two, three years ago (back when "any idiot" could make money doing it) and had quit her job (read: lost) to commit to it full-time. This friend has been "living off of her profits" for the last couple years (read: moved back home with mom and dad) and has been scouring the nation since, for the next area of opportunity.

She finally found the land of opportunity, a place where one can buy properties for a tenth of what you would pay in SoCal. A place known to many; Detroit. [sidebar: now you and I have a pretty good picture of the story with Detroit, what with so many of the posters on a particular weight-training board being residents of the area. But even without knowing anyone in the area, the news\internet offers quite a bit of information. The problems of the auto industry has burden the economy there and houses are staying on the market so long, some are just being abandoned.]. I recently recall seeing an article about RE in Detroit. One of the comments about the incredibly low price of a recent transaction was "...You can't buy a used car for that."

They offered to let me invest along side of them and their friend. I begrudgingly explained I was already tied up in a number of RE deals.

So do I think that all of the good RE deals are gone? No, I think there are still good deals out there, one just has to understand where to look. For instance, this couple tells me they're taking their remaining equity out of their place to invest. Their original loan was subprime, due to her working on commission only and he not having a job at the time. So they've decided to pile on top of that, hoping their Detroit investments can help them cover the loans on their place. I'll be keeping an eye on their place, in case it comes on the market.

Doug's friend is either an idiot or a visionary. Time will tell.

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Punctuating the silliness of our housing market

It's safe to say that Alberta's real estate market has shifted from absurd into grotesque.

Exhibit A is this: a 2-bedroom condo, that is the carbon copy of a rental unit that I lived in for three years before I bought my house. Crummy appliances, dirty carpets, and those marks on the walls must come standard. Asking price: $263,900.

For fun, I played with the mortgage calculator. With no down payment (of course), it would be $1603 a month. For reference sake, I was paying $750 a month in rent three years ago.

I thought that nothing could shock me anymore.

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Is real estate part of the Alberta Advantage, or a casualty thereof?

In the spirit of what WC Varones wrote the other day about what $349K buys you in the bay area (hint: not much), I took a look at MLS.com too see what's up with our market.

Do you want to know what a million bucks (to be accurate, $1,150,000) in Edmonton gets you?

How about a nicely appointed, but not exceptional, and in fact rather pedestrian-looking 2000 sqft house?

Two years ago, I would have expected a similar house to sell for ~$600K.

Oy vey.

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Condo Mania!

Yesterday, I remarked in regards to WC Varones' blog post about a $349,900 crack house that I couldn't top that with an equally absurd story from here.

Today, I'm not so sure. I got this in my email from one of my regular correspondents:

In the Saturday Journal there was an ad for a new condo building. Yesterday I finally looked at the website. The initial offer is by auction. For the 30 units, the "base bid prices" range from $342,140 to $446,870 and sizes from 769 to 986 square feet. There are six extra parking spots. The price for those is fixed: $30,000. I guess the auction is suitable for a developer whose pockets are possibly not deep enough to build and then sell, which would give some leeway for rising costs. Some of that developer's other projects have had some interesting problems. In the case of one, it reputedly settled two inches, which is rather more than one might wish, if one likes intact drywall and uncracked windows.

$446K as only the opening bid on 986sqft!? Lord only knows what the final price tag will be.

I thought it was vaguely outrageous when last year someone I know bought one of the many wood-frame three story walkups that were slapped up in the Whyte Avenue area back in 1980 during the last oil boom. They renovated the ten 800sqft suites (new paint, laminate flooring, and artsy fixtures), and resold them as condos for ~$300K each.

Apparently, that was only the beginning...

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Bay Area Bargain! $349,900 for a crack den!

Whenever I'm travelling, I always read the rental and real estate section in the local papers to get a feel for the local market. When I visited San Francisco in 2004, the only thing more mindblowing in the Chronicle than the prices of 2 bedroom condos were the monthly rentals of equivalent sized apartments. Mind you, this was just before Edmonton and Calgary started to go completely insane, and I had to recalibrate my internal real estate-o-meter. I'm still adjusting to the fact that my sleepy little oil town not far south of the Arctic Circle is now in the million-dollar condo zone.

Regardless, there's a great factoid printed on the ever-irrascible WC Varones' Blog pointing to a "real fixer-upper" that won't last long!*

WC Varones: Everything you need to know about Bay Area real estate
Boarded-up crack house on tiny lot in horrible neighborhood: $349,900.

I haven't yet been able to top that story with anything going on here, but give it a couple of weeks and we'll see.


*take that in any sense you choose. If that's too subtle for you, think "Board of Health" and "bulldozer" and you'll see where I'm coming from.

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Whoa! The National Association of Realtors Actually Reports A Bummer?

Chicago Tribune: Realtor group predicts sales dip
reported on Dealbreaker's Morning Bell
NEW YORK -- The National Association of Realtors said Tuesday that it is lowering its expectations for the housing market this year to reflect stricter lending standards and the decline in mortgage originations to borrowers with poor credit.The association said it expects existing-home sales of 6.29 million in 2007, lower than sales of 6.48 million in 2006, though it forecast a rebound to 6.49 million in 2008. The median price for existing homes is forecast to dip 1 percent this year, to $219,800, but to rise 1.4 percent in 2008. The median price for a previously owned home has not declined since the real estate group's records began in 1968.The group anticipates new-home sales of 864,000 in 2007 and 936,000 next year, down from 1.05 million last year. The median new-home sales price is forecast to remain unchanged at $246,400 in 2007 and then gain 2.2 percent next year.Housing starts also will drop, the group predicts, to 1.46 million units this year from 1.80 million in 2006.

It's a watershed for an era when you see the National Association of Realtors issue a press release that isn't all candy canes and rainbows. But fear not, there is some positive spin in there:

Lawrence Yun, the association's senior economist, said speculative buyers, who pushed home prices up to record highs in the past five years, have left the market, which is a boon to traditional home buyers looking for lower prices.

So there, it is still a FANTASTIC time to buy a house!

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And the Award for Best Visual Aid Ever Goes To...

Remember yesterday when I said I was bored with the housing bubble this week?

I guess that I spoke too soon.

This is smeared all over the internet now, but I got it from Paul Kedrosky's Infectious Greed.

US home prices since 1890 plotted as a roller coaster:




As a mental exercise, I watched it twice. Once I visualized that I was on a real rollercoaster, feeling physical forces at work. The other time I visualized that it was my money rising and plunging like that. I can't decide which one made my stomach churn more.

One of Paul Kedrosky's commenters made a great point, that doesn't diminish how entertaining this video was:

">
3. Comment by Andi -- April 5, 2007 @ 10:33 PM
It is the upward climb in prices that is exhilarating if you're a home owner and the downward plunge that is slow, tedious and painful (more so if you're a buyer seeking bottom).
Even so, it's a great visual analogy...

Fun!

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Important Real Estate news from the Department of Pointing Out the Obvious

The Alberta Oil Patch continues to boost the national average for home prices.

Canadian Business: House prices continue to increase across Canada: Royal LePage
TORONTO (CP) - Canada's housing market got off to a strong start in 2007 with average prices rising in all major markets, according to Royal LePage Real Estate Services (TSX:RSF.UN).
It says a combination of consumer confidence, moderately low interest rates and improved affordability led to greater sales in the first quarter.
Royal LePage says the highest average price appreciation was in standard condominiums, which rose 16.3 per cent to $230,146 year-over-year.
Detached bungalow prices rose 14.9 per cent to an average $316,993 and standard two-storey properties increased 11.8 per cent in price to $378,148.
Fuelled by the energy sector, Alberta's economy continued to show extremely high price appreciation and that spilled over into Saskatchewan. Year-over-year condo prices rose 72.1 per cent in Edmonton, 38.9 per cent in Calgary and 42.9 per cent in Saskatoon.
Royal LePage says more moderate increases were noted in the central and eastern regions of the country.

As an aside, some of the property boom in Saskatchewan is due to Alberta real estate gamblers investors having to look outside the province's borders for value-priced opportunities. But what many people forget is that Saskatchewan does have a resource industry that is also booming, but our Oilsands get all the media attention, leaving our neighbors with the bridesmaid status of being thought of only for farming and really boring scenery.

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Want to understand the trouble in the housing market?

Read this essay on the Pimco website about the housing market.

“The Plankton Theory, like life itself, begins and ends in the ocean. Plankton, of course, are almost microscopic organisms that serve as food for higher life forms. Without plankton almost every fish and mammal in the sea could not survive, since most species depend upon other fish for their existence and plankton are the initial building blocks of the entire process. Logic would suggest, therefore, that in attempting to forecast the well being of the Great White Whale, Jaws, or even Jaws II, that one of the factors to consider would be the status and future outlook of the plankton. That, in one hundred words or less, is the Plankton Theory.

Now, what possible significance could this have for the investment world? Plenty. Take for example, the area of real estate, especially that of single family housing. We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?

One way to measure might be via the Plankton Theory. In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can’t pull it off – either through an inability to come up with a down payment, or to service the monthly mortgage – then the ‘plankton’ would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he’ll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton. Without their presence and financial vitality, the market’s not going to repeat the experience of the past 10 years.”

Plankton are an invaluable link in the food chain, it's just too bad that they spend much of their time being eaten by whales.

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The housing bubble really is like a roller coaster!

With a grateful hat tip to WC Varones blog

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Need some US housing schadenfreude? Try getting it in bulk!

Patrick.net has all the gleeful bad news you can stomach.

And a tip of the hat to WC Varones for the link!

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Beating the housing market horse some more

I was talking over the weekend with a good friend who lives in Calgary, and he told me something very interesting: people he knows who are in the market for a house are purposefully seeking out homes that were built before 2002.

Why?

Because as the housing boom has heated up in Alberta, deficiencies and shoddy workmanship have increased exponentially. In my work, I have witnessed deficiencies in plumbing, framing, and drywalling that would curl your hair, especially the crummy plumbing being slapped in to some homes. Builders are hard pressed for labor, and have to take whatever trades are available. As a result, there's a sizeable majority of trades who just don't care, slap any old work in, and move on to the next job.

A few weeks ago, I was speaking with a client who is building, and in fact over-building her house. I commented at the time that in the face of so many million dollar homes that are quite literally slapped together, when the time comes to sell her house ten years from now, it will look very good from a resale perspective compared to so many others of the same vintage.

I knew that there would be a reckoning, I just didn't expect home buyers to catch on so fast.

I feel bad for the people who have paid $900K for a new house, and will learn that it needs $150K in fixups when the time comes to unload it.

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More blogging about the housing market

From W C Varone's Blog:
It's 2004 or 2005. You want to get rich quick in the real estate boom. So you buy a house that would normally be out of your price range, except for the creative financing your mortgage broker found you. You get an ultra-low initial interest rate. Sure, it will adjust upward in a few years, but who cares? You can always refinance, right?
WRONG!!!

And from Marketing Matters:
It's about time, but real estate speculators, one by one, are being taken out back and shot.

And as a refresher, don't forget this delightful story from California.

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Another bellweather of stormy seas in the US housing business

You know that the sub-prime lending fiasco has reached a fever pitch when New York Times' correspondent Gretchen Morgenson takes time away from her favorite windmill of executive compensation to pen a wordy piece about the sub-prime market.

Her florid, rambling prose aside, it's worth reading just for this one bon-mot:

Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.
Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.

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