By Comstock Partners Inc.

발췌글입니다.

부동산 마켓이 떨어질 것이라고 예상하는 이유와 배경에 대해 설명해

놓은 글이라 관심있는 분들에게 흥미있는 글이 될거 같아 올려놓습니다.

Our regular readers know that we have concluded that real estate is

the most logical catalyst for the deflationary environment we expect

to unfold within the next 6 months to a year. We have also mentioned

a collapse in the dollar or a major bankruptcy as potential catalysts,

but real estate stands out in our minds as the prime candidate.

This real estate comment is longer than normal and will serve as to

replace the usual Tuesday and Thursday뭩 comments this week.

In the 밪pecial Report?on our home page we go into the macro-economic

reasons as to why real estate is just about the only asset which

continues to attract loans from lending institutions at an alarming

rate. We went into the historical precedents of past inflations and

deflations and determined the best way to pinpoint which areas are

the most vulnerable–you just have to determine which areas are

attracting the most capital. Usually this capital takes the form

of a loan, and lending (especially by banks) when concentrated in

any one-area drives the sector to levels of extreme overvaluation

and eventually collapses. It happened in the 1970s in lesser-

developed countries and the oil belt, followed by the oil sector

in the early 1980s and real estate in the late 1980s. The lending

came close to destroying the junk bond market while sending Mike

Milken to jail in the early 1990s. The lesson the bankers never

learned is that the reason the collateral behind the loan was rising

was due mostly to the fact that too many of the lending institutions

capital were concentrated in the same specific area.

You have to keep in mind that housing price increases fueled the

refinancing mania that has been going on until very recently.

According to the Richebacher Letter, since 1997, total housing

values have soared from 8.8 trillion to about 14 trillion presently.

According to the Center for Economic & Policy Research (CEPR), the

national rate of home price growth surpassed the overall inflation

rate by more than 30% since 1995. They concluded that 뱓he existence

of a housing bubble which is similar to the stock market bubble of

the late 1990s?

Moreover, U.S existing home prices as a percentage of median family

income just hit a new post-war high. Year over year, new home prices

have accelerated 17.5% and existing home prices were up 13.8%. This

relationship shows clearly that existing homes are less affordable

now to U.S. households than they have been for the past 50 years.

International Strategy & Investment뭩 (ISI) data shows that every

time existing home prices exceed 3 times the median income, housing

prices shortly decline. The median existing home price is presently

$182,000 and the median income nationwide is $60,000뾞ccording to

this ISI formula, housing prices are due to decline.

Despite recent evidence of an improving economy, mortgage

delinquencies rose to a seasonally adjusted 4.62% in the second

quarter from 4.52% the previous quarter. The delinquency rate for

loans insured by the FHA also rose sharply to a record 12.59% from

11.65% in the first quarter. According to the office of Federal

Housing Enterprise Oversight, a federal housing agency, home prices

rose 0.78% during the three months ended in June, the slowest

quarterly rate of appreciation since 1996. Mark Zandi, the chief

economist of economy.com, points out the fact that since home price

appreciation is slowing, it could make it harder for families that

are falling behind on their loans to sell their houses and get out

of trouble.

Another concern that Comstock has with real estate is that mortgage

debt rose at a 14% rate during the second quarter, the fastest pace

since the second quarter of 1987. This acceleration in mortgage

financings has been facilitated by the government-sponsored agencies

of Fannie Mae and Freddie Mac. This is the same quarter that home

prices rose at the slowest rate since 1996, so while mortgage debt

rose the fastest in 16 years, housing prices rose less than in any

quarter in seven years. And because home values rose less quickly

than mortgage debt, homeowner뭩 equity fell to a record low of 54.3%

of home values during the second quarter from 55.3% during the first

period.

The rush to refinance over the past few years is without precedent.

According to ISI, the cash outs of the refi뭩 last year were in

excess of $200 billion. One of the amazing aspects of the massive

refinancing of homes, which is effectively piling on consumer debt

at record levels, is the fact that this is being done with the

blessings of our esteemed Federal Reserve Chairman, Alan Greenspan.

In various testimonies he has stated that borrowing the equity

in consumers homes is helping the economy and he supports it.

Imagine the head of the Central Bank of the world뭩 largest economy

becoming a cheerleader for individuals to continue borrowing on the

equity of their homes while they have already incurred a record

amount of debt and the homeowners?equity is falling to record lows.

Could the Fed Chairman actually think it is appropriate to use ones’s

home as an ATM cash machine?

Real estate bubbles bursting are different than stock markets bubbles

bursting because bubbles in the stock market only effect the owners

of stock and maybe a few brokerage firms that don뭪 adhere to strict

margin requirements. A collapse in real estate, not only affects the

borrower, but it also the lender. Over the past few years poor macro

economic fundamentals have diminished the demand for commercial and

industrial loans, causing commercial banks to seek other avenues of

profit. In particular, the banking sector has increased its exposure

to consumer, residential mortgage and commercial real estate (CRE)

loans.

The irony of banks currently fighting 뱓ooth and nail?over generating

loans to real estate is amazing since the spread between home prices

and incomes are the widest ever, and the spread between the cost of

owning a home to the cost of renting a home is the largest ever.

The price versus rent in real estate is similar to the price-earnings

ratio of common stocks and presently in RE this ratio is the highest

level in history. This is where we were with stock market P/Es at

the beginning of the century.

Combine the home rental record spreads with problems in the commercial

side of real estate where office vacancy rates, a key indicator of

the sector뭩 health, are at decade highs. The national vacancy rates

according to Cushman and Wakefield are 15.5% in Central Business

Districts (CBD) and 21.3% in non-CBD. These vacancy rate peaks are

not confined to areas that you would think would be in trouble like

the rust belt, but include some of the most desirable and expensive

markets such as Silicon Valley, Atlanta, and San Francisco. This

confirms the fact that the recent economic malaise was not just

confined to manufacturing, but has also impacted the service and

technology sectors.

The price to rent situation is just as bad commercially as it is

with homes. According to the New York Times last week ever since

the stock market bubble burst at the beginning of 2000, all areas

of New York City are showing increases in availability rates (space

available to sublease), decreases in asking rent prices, and the

actual deals (final agreed price) coming at larger discounts from

the asking price.

In every bubble there is a certain amount of corruption. This has

been clear in the stock market and real estate is no exception.

There were recent articles posted in the L.A. Times and Washington

Post about the pressure put on appraisers to raise their estimates

of property values to 밾it the number?needed for a sale or

refinancing to go through. Both papers quoted from a study conducted

by the October Research Corp. Joe Casa, founder of October Research

stated, 밫he reality is that pressure on appraisers is a serious

problem. Everyone knew it existed, but nobody thought it was this bad.

The pressure typically involves a direct or veiled threat to

withhold future business from an uncooperative appraiser or to

withhold payment for any appraisal that did not 밾it the number.?

In summary, we believe that real estate will be the main catalyst

for the deflationary environment we expect is inevitable. This is

the result of the tremendous demand for RE since the mid 1990s

driving valuations through the roof. The prime driver of the

appreciation was the liberal lending policies of banks and mortgage

institutions. The combination of the lax lending and the demand

from homeowners to continue to borrow against the equity in their

homes, have placed RE in a vulnerable position. The rising prices

have moderated substantially, while until just recently the borrowing

and lending continued at record levels. This dropped homeowners?equity

to record lows. Since every valuation ratio of real estate is

presently at record highs, if the slowdown in appreciation turns

into an actual decline in values, the present economic recovery and

stock market recovery could reverse and be potentially devastating

to the financial environment.

Prepared by:

by Charles Minter & Martin Weiner

By Comstock Partners Inc.

24 S. Main St.

Yardley, PA 19067

USA