Home prices in IE fall from the previous year, will commercial space follow?

From Inman News,

DataQuick reported that sales fell from 23,005 in November 2006 to 13,173 in November 2007 for the six-county Southern California region, while the median price dropped from $485,000 to $435,000.Riverside and San Bernardino counties suffered the steepest price drops among Southern California counties. The median price in Riverside County fell 16.5 percent from November 2006 to November 2007, while the median price tumbled 13.2 percent in San Bernardino. San Bernardino led Southern California counties with a 48.1 percent year-over-year sales drop in November, followed by Los Angeles County with a 46 percent drop. The other four counties in the Southern California region also experienced year-over-year price drops.

While the sub prime mess has yet to be resolved, the effects on the commercial real estate market has started to rear its ugly head.

On the short term supply side of the equation is an increase in lending standards, the so called credit-crunch that you no doubt have been hearing much about lately. Lenders face a crisis of confidence as they try to balance sub-prime "write-downs" with their existing cash flow. Since these risky assets are difficult to price, lenders are scrambling for liquidity to meet their obligations. This is the closest thing I have seen to a traditional "bank run" and a lot of respectable large banks stand to lose a lot of money. This is an eerily similar scenario akin to the S&L crisis in the 1980's although I suspect the resolution of this crisis will be different; there will be no FDIC bailout of these large banks. I do suspect that government(s) will step in to ultimately resolve the issue, but how and when is still a mystery.

Unfortunately, what this means is that funds that normally would have been allocated to real estate investments will be put into other places, since anything associated with "real estate" now inspires panic and also because commercial real estate is a very illiquid asset. Even REITS (whose primary benefit is to make commercial real estate investing much more liquid) have seen a large downturn this year; the FTSE NAREIT Index is down -8% in November and returns are a dismal -20% so far for 2007.

The long term demand side of the equation is a recession. This downturn hits homeowners in the wallet, and a decrease in consumer spending lessens the demand for imports (industrial especially) and consumer goods in general (retail especially) and could ultimately lead to job losses (all property types).

But not to worry, the FED has been cutting interest rates to stall a recession and the US government is looking at ways to step in to freeze interest rates on mortgages using voluntary measures. The department of wishful thinking has been very busy locking the gates after the horses have run off and as the curtains close on 2007, we should all move to the concession stand for that pound of cure promised to us. 2008 looks to be a very interesting year and a good opportunity to purchase long term assets, the short term shake out looks like it has some steam in it yet.