Washington State market update and general thoughts on the real estate markets....

 

It's been a while since I posted anything. I've done some traveling overseas and spent some time in the hospital (all is well now) ...anyways, it's been a hectic month to say the least, but we are back and headed full steam into election season 2024 and the Harris/ Trump election appears to be one for the ages. 

I've been looking for the last week or so and can't find hardly any articles or stats on inventory. My sense on a local level and in dealing with a lot of real estate brokers is that inventory seems to be increasing. If you have read this blog at all, you know that inventory is the main thing I'm looking at in determining the direction of the market. Frankly, it's a bit odd. I have about 10 sources I generally go to for stats/ data and none of them have any Real Estate news of substance. It's almost as if it's being shielded during the election for some reason. Nevertheless, since I have access to the Washington MLS, I thought I would pull their most recent published figures and report on those....so here we go...my feedback will follow. I have simply copied and pasted from their website....

September 2024 NWMLS Key Takeaways

Active and New Listings

• The number of homes for sale increased throughout the NWMLS coverage area, with 22 out of 26 counties seeing a double-digit year-over-year increase.
• There was a 31.4% increase in the total number of properties listed for sale, with 15,748 active listings on the market at the end of September 2024, compared to 11,983 at the end of September 2023.
• NWMLS brokers added 8,508 new listings to the database in September 2024, an increase of 12.7% compared to September 2023 (7,551).
• The five counties with highest increases in active inventory for sale were Douglas (+67.8%), Pacific (+42.2%), Clallam (+41.6%), Grant (+40.5%) and San Juan (+39.8%).

Closed Sales

• The number of closed sales increased by 1.9% year-over-year (5,828 in September 2024) compared to 5,722 in September 2023.  
• 11 out of 26 counties saw an increase in the number of closed sales year-over-year, while 15 saw a decrease.

Median Sale Price

• Overall, the median price for residential homes and condominiums sold in September 2024 was $635,000, an increase of 5.8% when compared to September 2023 ($600,000).
• The three counties with the highest median sale prices were King ($859,995), San Juan ($829,000), and Snohomish ($760,000), and the three counties with the lowest median sale prices were Ferry ($209,500), Adams ($270,000) and Columbia ($325,000).

Consumer and Broker Activity

NWMLS also provided insights into consumer activities during the month of September 2024:

• The total number of property showings scheduled through NWMLS-provided software remained steady, with 119,927 showings in August 2024 and 119,900 in September 2024.
• In September 2024, there were 16,668 listed properties that were eligible for the Down Payment Resource (DPR) program offered by NWMLS.

Weitz take: in recent posts, I've hinted that we are at or near a market top, I will double down on that take, and I believe we start to see real softening in the coming months as sellers become more desperate to sell and move on with some of their equity. 22 of 26 have double digit increases in inventory; a 34% increase in properties for sale, etc). Whether it be retirees, or relocations, or simply a need for cash, it's bound to happen as homes are starting to sit on the market longer. The Fed is waffling on rates, but frankly, it won't matter. The difference between a 6% rate and 7% at these prices is negligible for the average American as the payment is simply HIGH regardless.  Buckle up.

For more information on Snohomish Commercial Real Estate Investing, you can reach me at Scott@WeitzCommercial.com or text me at 206.306.4034.

Willy Walker: "Crisis Averted in commercial real estate"

CNBC Interview with Willy Walker of Walker & Dunlop: 

Here's what he said: 

1) Mr .Walker sees improvement coming in CRE and claims "crisis averted" 

2) Delinquent rates stayed stable in August as some loans were cured while new defaults rose;  

3) Cost of permanent debt is down after recent rate cuts; 

Weitz: Sorry. Not buying it. Way too soon to claim victory. We still have sky high delinquencies and fundamental concerns across all sectors of the economy. As the old saying goes, "don't ask your barber if you need a haircut". I believe Mr. Walker is hoping for a recovery rather than truly seeing one. Perhaps I'm wrong but I simply don't see an immediate 'U-turn' based purely on a 50 basis point cut in rates considering where we were rates wise 3-4 years ago. Time will tell - I'm excited to see where it goes. 

 

CNBC interview with Rick Caruso on CRE prospects

 

OVERVIEW

See interview with Rick Caruso, founder of ‘Caruso’. He’s a major player in the Los Angeles area Commercial Real Estate market who lost a bid for Mayor of Los Angeles in the recent years.

Caruso takes:

“I don’t think we’ve seen the bottom [of office sector] has hit…it’s not about going back to work. Its about where you want to go back to work”.

Consumer taking on more debt than ever…more ‘pay later’, yet he is confident in the future with a “little turbulence”.

What's next for him? He is looking to build more resorts and adding more residential into existing retail portfolios. Check out his current portfolio here. 

Weitz Take: 

It's hard for me to reconcile the idea that 1) the office bottom is not in; 2) we face turbulence ahead, along with 3) confidence in the future. I suppose if none of those are on the same timeline, but you simply can't have all at the same time. If you are telling me the 'bottom is not in' then the banks funding those loans will eventually have to take loses, are probably hesitant to lend now or in the near future if they see huge potential loses ahead. Reading between the lines, I think Caruso feels like he has a great high-end niche (which seems to be true) which will fare well in any economy (perhaps a bit presumptive) and yet thinks the markets as a whole will suffer in the coming years.

3Fourteen's Warren Pies take on the market

 

I'll be honest. I keep hearing from people that a rate cut will "produce a soft landing" and that real estate prices will start to increase rapidly again. 

NOPE. 

Inventory is starting to rise and homes aren't selling. Will rate cuts help? Sure. Will they save this market? Zero chance unless inventory goes back down. We sure seem to have short memories as a society in that rates were hanging around 2-4% for 10-20 years YEARS, and yet we think that a small cut to say 6% is going to save the market? No chance. Simply put, nearly everyone that can afford to buy a home has bought one. Distressed markets continue to bubble and while I am seemingly a one man island right now, I don't see a big upside for real estate at all. In fact, I think the 'soft landing' is based purely on hope......... We shall see. 

4 month sales losing stretch broken according to CNBC

 

The Headline: "Existing home sales broke a 4 month losing stretch rising 1.3%/ month". 

That said, the ONLY THING THAT MATTERS HERE IS SUPPLY IS RISING. 

1.33 M homes for sale at end of month....up 18% Year over year. 

Weitz Take: What's it all mean? I suppose the 'jury is still out', but if you read this blog routinely, you know SUPPLY IS EVERYTHING in my opinion. 

With high supply comes more likely price drops if properties are not sold. I will reaffirm my previous statement that we are at or very near the top of this market cycle and it could get very ugly. 

The next 3-6 months will be very interesting. If rates aren't cut, I think we start to see major cracks in the market especially if inventory continues to rise. 

Enjoy the end of summer as we start what will surely be an interesting Fall on many levels not the least of which is the most emotional Presidential election I think our generation has ever seen. 

Government preliminary bench mark jobs off as much as 1 MILLION?!

The BLS jobs report off as much as 1 Million this year. No biggie...just 1 Million of a labor market that is approximately 167 Million people in total. 

See ARTICLE here. 

Goldman Sachs and Wells Fargo economists expect the government's preliminary benchmark provisions on Wednesday to show payroll growth was at least 600,000 weaker than currently estimated. Goldman Sachs indicates it could be as large as a million jobs that were overestimated. There are a number of caveats in the preliminary figure, but a downward revision to employment of more than 500,001 would be the largest in 15 years and suggest the labor market has been cooling for longer than originally thought. The final numbers are due early next year.

WEITZ: 

1) We seriously can't get accurate payroll numbers for an entire year?!

2) Up to 1 Milllion off?!

3) What's the point of even tracking this if the numbers are wildly off?!

Here's an article on the makeup of the BLS jobs report and its incomptence of being a notable indicator on the economy. 

Sorry- I don't buy this. Its either corrupt or incompetent. Zero in between. With the technology we have today, this is totally inexcusable considering its used as an important factor in the Fed determining interest rates. Rates have remained high because things have been 'good' yet we are only A MILLION JOB OFF..... I'm so very tired of this crap. Can you imagine if the private sector was off by this much for something substantial. Everyone involved would lose their job. It's completely absurd. 

The slow-motion economic train wreck continues on its course......

Goldman Sachs says 'recession' now unlikely

 

Goldman Sachs Chief Economist interviewed about recession possibilities: His rationale is based on the following "Better Data”: 

a.      Retail Sales up 0.3%

b.     Decline in Jobless claims

c.      Earnings reports from Q2 – positive commentary on the consumer

WEITZ- This is so aggravating. Goldman Sachs is treated as the bellwether of the economic world and even these ‘best and brightest’ have trouble in avoiding reactionary thought rather than predictive thought.

According to Attom, July foreclosure data are up 15% from a month ago and that's with no real depreciation in RE as of yet.

U.S. Foreclosure Activity Sees a Monthly Increase in July 2024 (attomdata.com)

 ….and that’s the tip of the iceberg. As I’ve outlined for months, CRE defaults are ‘off the charts’, interest rates remain unsustainably high, and inventory is increasing in the residential market(s) generally. I simply refuse to believe that we can skirt by all of these macro factors without significant market weakens - I don’t see a path out of this where a recession can be avoided, and I’d suggest it may even become a late 2007-2009 situation (or worse depending on governmental reaction or lack thereof).

Perhaps I'll be the one with 'egg on my face', but I don't see this aging well for Goldman Sachs and their spot as 'top dogs' on Wall Street... although, let's be frank, the accountability on Wall Street has been virtually non-existent since the late 2000 crisis. 

Yahoo - "Jobs Report stokes fears the Fed may have waited too long"

 See latest from the AP today; Markets down big on Job Report

Jobs Report leads to sell off

Some of the most pertinent excerpts below:  

* The US economy added fewer than expected jobs last month with softer wage gains underscoring concerns that the Fed Reserve reluctance to lower interest rates is choking off growth prospects. 

* BLS (Bureau of Labor Statistics) said that a net 114,000 new jobs were created in July.

* "Job gains have dropped below the 150,000 threshold that would be considered consistent with a solid economy". 

* Data on Thursday showed weekly jobless claims jumped to the highest levels in nearly a year with around 250,000 Americans filing for unemployment benefits. 

* "The trends in inflation were heading in the right direction but the softening labor market never seemed to get the focus when discussing their dual mandate". 

WEITZ: Welcome to reality everyone. This is just the beginning. The monetary expansion / money printing/ lending during COVID and under Biden was completely unsustainable. Now we must face a downward period to reach somewhat of a reasonable equilibrium and I don't see that being pretty. With inflation, many are being squeezed and attempting to pass it along in higher prices which will lead to less demand and a negative cycle that will be tough to get out. Buckle Up. I fully expect to see mortgage delinquencies rise by year's end, if not sooner. That's the next shoe to drop beyond weak jobs reports and increased layoffs in my opinion. 

Side note: Intel just came out today and said they were reducing 15% of their workforce. When the large tech companies are feeling the squeeze, it's certainly worth noting. 

WSJ- Commercial Real Estate "bottom near' as foreclosures surge?!

 

WSJ

An article from the Wall Street Journal suggests a “bottom is near” given a surge in foreclosures.

WEITZ – I’m dictating this as I’m reading so I don’t know what this article entails, but the title alone is so intriguing, I know it’s a post worthy. I can’t wait to see how this journalist spins that a ‘surge in foreclosures’ somehow is a good thing….
here we go….

Highlights from the article:

“Banks and other lenders are seizing control of distressed commercial properties at the highest rate in nearly a decade, a sign that the sector’s punishing downturn is entering its next phase and approaching a bottom”.

In Q2, portfolios of foreclosed and seized office buildings, apartments and other properties reached $20.5 B according to MSCI. That’s a 13% increase from Q1 and the highest since 2015.

Defaults and other ‘kinds’ of distress have been steadily building and near historic levels because of interest rates and slow return of workers to office buildings.  

 “It is possible that commercial property values could deteriorate even further if the US economy falls into recession and companies start to lay off works and want less office space”.

Office is by far the most troubled property class. In Q2, the volume of office property seized in foreclosures and other action was up about $5B from Q2 of 2023.

Weitz: I have to say journalism these days, even at a reputable place like the WSJ, has gone to absolute sh*t. Name one thing about these facts that would indicate a market bottom. Foreclosures are increasing so we must be close to a bottom?! Sorry…. until we see a decrease in distress assets and even a scintilla of evidence that market conditions are improving, I don’t see how anyone could remotely indicate we are ‘at or near a bottom’.

If any, this is the beginning of what I’ve been calling for on this blog…. I think this party is just getting started and the time to build your ‘war chest’ is now. As the old saying goes, don’t try and catch a falling knife. There will be many opportunities in the coming years. Every local market can be different, but for the most part, the macro-economic conditions are not good and getting worse by my estimation. It seems crazy to say that as the stock market is reaching all time highs, but the disconnect is obvious to me. Perhaps I’m wrong, but I haven’t been this confident in down turn since 2007/ 2008.

For  more information on investing in Snohomish County Commercial Real Estate, you can find me at Scott@WeitzCommercial.com or send me a text at 206.306.4034.

New Driving Range plans for Everett Mall area

The Owner of Everett Mall has filed plans to build a 3-story entertainment center with driving range, restaurant, bar and event space.

Brixton Capital is planning a 68,000 SF building with an 11-acre driving range as part of the mall’s redevelopment.

Filings from late May show plans to demolish existing LA Fitness and Burlington Coast to may way for the golf center.

Weitz: Locally, this is really exciting. I’ve always thought that Everett has tremendous potential with its airport, port, and proximity to Puget Sound.

This should make the argument even stronger and be great for the area.

WSJ - Evictions surge in major cities in the American Sunbelt

 

WSJ - Evictions surge in major cities in the American Sunbelt. Highlights below. 

The Facts: 

Tenant evictions look stuck at elevated levels in several concerns of the US.

Evictions are up 35% or more compared to 2020 norms.

The includes Las Vegas, Houston and Phoenix where landlords filed more than 8,000 eviction notices in January.

Overall, eviction notices were up 15% or more in 10 of 33 cities tracked by Eviction Lab.

“Increased rents have made it difficult for a lot of households in many areas and you can see that reflected in the eviction filing increases”.

About a quarter of renter households in American spend 50% of more of their income on housing, according to Harvard University Joint Center of Housing Studies.

GoFundMe said eviction related fundraisers have risen 40% since before the pandemic and 10% from May to June.

Weitz – I don’t think GoFundMe as popular pre-COVID so I’ll take this with a grain of salt, but 10% increase in a month is worth noting.

Overall, this is more evidence that the underlying isn’t as strong as the stock market or ‘experts’ would think. I expect this trend to continue unfortunately in the short to intermediate term. 

For more information on Snohomish County Commercial Real Estate, consider contacting our firm. 

Weitz Commercial

Scott@WeitzCommercial.com

t: 206.306.4034

Scott Weitz

CNBC Report- inventory levels increase 35% YOY

 See CNBC latest...

CNBC Article

The basics: 

For the four weeks ended June 23rd the typical home sold for slightly less than its asking price. Average home price growth slipped from 4.6% in May to 3.5% in April the slowest growth rate in seven months.

Supply is starting to build which is leading to cooling and prices. Total active listings are now 35% higher than they were at this time last year according to realtor.com.

Weitz - As I've said for a long time, I believe the biggest leading indicator by far of where we will see this market go is inventory levels. To see that they have increased 35% from a year ago likley confirms my belief in recent posts that we have reached or are very near a top. I would encourage and expect retirees to start to wake up to this in the near future, and start to try to max out their potential gains of their long term real estate holds as they head into retirement years. This will lead to a significant increase in inventory which coupled with the current interest rate environment (provided it stays relatively high) will lead to significant sluggishness in the market and market depreciation. The time bomb is slowing ticking. 

Home prices begin to come down in some pandemic boomtowns.

 

See article here: 

Home prices begin to come down in pandemic boomtowns like Austin, Tampa (yahoo.com)

The basics:

Home prices in some large US cities declined in April, according to mortgage data company ICE Mortgage.

San Antonio, Austin, and Tampa saw the biggest monthly price declines.

“The key differentiator we’re seeing in terms of growing inventory levels is a rise in Sellers willingness to list their homes for s sale”.

SW – So you mean inventory is rising?

This article is horrifically written so I’m not going to waste much time on it, but it marks the first hint of price depreciation for residential caused by the obvious factor of increased inventory. The mention this isn’t a sign of ‘market crash’. I think its just the beginning of one. Time will tell.

May, 2024: US Home sales “crumble in May” on higher rates and record prices. - Reuters

 REUTERS Residential update key facts

US Home sales in May fell to the lowest levels in the past decade, according to Redfin as both SUPPLY and DEMAND remain sluggish.

See full article here. 

Housing affordability is at an ALL TIME LOW.

The number of home sales remain roughly 25% pre-pandemic levels, according to Redfin.

In May, 407k homes were sold. Only October 2023 and May, 2020 (the heart of COVID) recorded fewer sales.

Home sales dropped 2.9% from a year earlier while pricing rose 5.1% year over year.

New listings rose .3% month over month in May, and 8.8% from a year earlier.

Weitz: No surprise here. The key items I'm looking at are 1) 8.8% increase in inventory YOY. As I've said, that will be the primary leading indicator as to where this market is going. If that continues to rise, I fully expect the market forces to tread toward negative price pressure; 2) The 3rd lowest number of sales in the past 10 years with one of those months being the start of COVID where everyone was on lock down and clearly no sales were taking place. 

I'll echo my previous call that we are fast approaching a market top. I would expect this summer will end up being the top of the market for some time. This fall will be chaotic given the political climate with political and economic tensions becoming abundantly apparently. 

My info: 

Weitz Commercial

Scott Weitz

Scott@WeitzCommercial.com

Text: 206.306.4034

Past Due CRE loans increase to 9% - highest in a decade

Update on CRE loan defaults according to Bisnow.com. Find the original article here. 

The facts: 

1) Past due nonresidential commercial real estate loans increased by 1.8B or 9% form the previous quarter according to the FDIC coupled with a 64.2B (79.5%) increase in profits. 

2) The default (or "non-current" as they call it) for non-owner occupied commercial real estate loans is not at its highest level since Q4 2013. 

3) This increase is contributing to the amount of 'problem banks' that either have low capital reserves, a high number of nonperforming loans, weak management, consistent losses or liquidity problems according to CoStar. 

The number of banks on the FDIC problem list went from 52 in Q4 '23 to 63 in Q1 '24. 

Weitz Take: 

None of this is a surprise if you follow this blog. Expect more of the same. I'd expect that we start to see bank failures making the news by end of '24/ 1st half of '25. I have to say - between wars escalating across the globe, the current situation of political weaponization of the legal system in the USA, and what I perceive as obvious economic peril quickly approaching,  I've never been more uncertain of this path of this country or the world leadership. If nothing else, it will fascinating (if not sad) to watch it play out. 

Office Loan Modifications jump dramatically May, 2024

 

Office Loan Modifications Jump

Recent update from CNBC here:  

The details: 

Rising office loan modifications and delinquencies.

1.42B in office modifications in Q1 2024 vs. $117M in Q1 2023

"Government intervention may be needed".

See more on loan modifications stats in Commercial RE posted on this blog in April. 

Weitz Commercial Real Estate, Legal & Economics Blog: Office loan defaults near history levels (realestatelawwa.blogspot.com)

Weitz – I have a hard time seeing government intervention just 15 years after the last bank crisis where the “too big too fail banks” became even bigger. That said, memories are shockingly short and the importance of a healthy banking sector can’t be understated in a system based entirely on debt. Time will tell I suppose, but I’m guessing the political will to save banks won’t be there.

I'd also suggest that the 'kicking the can down the road strategy' will eventually run out of steam. I don't want to say it won't work, but owners may find that getting cash out of their properties may be better than paying large fees/ interest rates and simply hoping things rebound soon. 

For more help on Snohomish Commercial Real Estate, feel free to email or call me: 

Weitz Commercial

Scott@WeitzCommercial.com

t: 306.306.4034

New Home Build sale drop significantly. May, 2024

 CNBC article highlights new build weakness. 

See article here. 

The Highlights: 

Sales of newly built homes dropped 4.7% in April compared with March and fell 7.7% from the prior year the US consensus said Thursday.

March sales were also revised significantly lower.

Weitz take: So tired of downward revisions by the government. How is it so hard to get those figures right and why release them until you do have them accurate? 

Builders say they cannot lower prices due to the high cost from labor and materials.

Weitz take: Ummm hmmm.... Their profits would indicate otherwise. 

For all the happy talk from the big builders the entire build industry is selling new homes at a pace below the five year average according to Bleakley Financial Group.

With the nationwide shortage of roughly 1.5 million homes the lack of housing units is the primary cause of growing housing affordability challenges policymakers at all levels of the government need to enact policy changes that will allow builders to construct more homes such as speeding up permit approval times providing resources for skilled labor training and fixing building material supply chains” cited Robert Dietz, the NAHBs chief economist.

Weitz: this is so true. The bureaucracy of local governments has become totally outrageous. The length and costs of simply having the 'approval/ right'  to construct does not coincide with the huge need for reasonably priced housing. 

Overall, this coincides with my call for a top in the market in the near future (if not now). It's all about inventory, but if new homes are not selling, that will add onto the inventory levels and as I've said, that is the #1 indicator for prices as we move forward. 

 

National Real Estate market update - May, 2024

 The latest Realty Check from CNBC's Diana Olick 

See article here

The basics and my analysis: 

Median Price of a home sale rose 5.7% to $407,600, a 5.7% increase. 

Inventory rose 9% month over month and up 16% YOY. 

Sales were down 1.9% from last year. 

"Home prices reaching a record high for the month of April is very good news for homeowners, said NAR Chief Economist Lawerence Yun, however the pace of price increases should taper off since more inventory is becoming available". (WEITZ - AKA - price drops). 

Weitz take: TIIIIIIIIMMMMMMMBBBBBBEEEERRRRRRR..... here is the inventory number we have been talking about and anticipating. That is by far the biggest predictor on pricing moving forward (along with interest rates at a close 2nd). If inventory continues to rise and rates stay anywhere close to where they are, we will start to see price slashing. 

I'll go ahead and make a bold prediction...... The current market top has either been reached or will be reached in the next few months....I think we will have notable price drops by year's end in almost every major market.... you don't get that on CNBC! I may be wrong, but I strongly believe this inventory increase will start to cause ripples. 

If you are interested in investing in Snohomish County Commercial Real Estate, shoot me an email or a text and I'd be happy to help. 

Weitz Commercial

108 Union St. 

Snohomish, WA 

Scott@WeitzCommercial.com

t: 206.306.4034

Multi-family Distress rate climbs significantly nationally.

 

See below excerpts from Bisnow.com article found here.

The worst isn't over for the distressed riddled multifamily industry according to new monthly financial indicators. The overall distress rate set a new record of 8.35% in April according to real estate data firm cred IQ, with multifamily leading the increase. The multifamily distress rate increased from 3.7% in March to 7.2% in April.

The jump was led by a loan backed by the 3222-unit Parkmerced, one of the largest multifamily complexes in San Francisco being transferred to a special servicing.

About $1.2B worth of multifamily CMBS loans were transferred to special servicing in April boosting the multi-family commercial mortgage backed loan ‘special servicing to 5.1% according to Trepp.

Loans on more than 58,000 multifamily properties totaling $525B will mature over the next five years according to Yardi. That accounts for almost half of the 1.1 trillion of current apartment loans. About 150 billion of that is set to mature by the end of next year multifamily dive reports.

Interest rates rose as multifamily property values fell 20% to 30% from peaks in 2022.

As refinancing long-term loans for newly built properties has become more and more difficult for owners and developers, distress numbers could rise further in coming months the outlet reports.

Ben Kreigsman, Dallas based Lion Real Estate Group’s director of acquisitions told Multi-family Dive that refi out of construction financing is “getting exceeding difficult”.

Weitz – if you read this blog, none of this should be a surprise. What I do find moderately surprising is the multi-family component of all this. They have been one of the ‘belles of the ball’ and presumably more of a safe haven than their office, and retail counterparts. A distress rate increase from 3.2% to 7.2% in a single month is nothing less than staggering – that may be a short term anomaly, but I expect the overall rate will likely increase from current levels regardless.

Sadly, I think the “party” is just getting started and we can expect more of the same in the coming months/ years…. especially if rates stay at the levels they are at. The banks have to be feeling the pinch at least modestly making re-fi’s harder in general and especially challenging in the current interest rate environment.

Our Firm

Weitz Commercial

108 Union Street 

Snohomish, WA 98290

Scott@WeitzCommercial.com

T: 206.306.4034

FREDDIE APPLIES TO BE IN SECONDARY MORTGAGE MARKET

This one is interesting.

Freddie Mac filed with the NAH to be a provider on the secondary market.

On April 16^th, Freddie MAC filed with the NAH would be able to get into secondary mortgage market.

This is just great (extreme sarcasm). Let’s get the government involved with providing even more consumer debt any other lender would ever give. This gives a short term boast to lenders, banks, etc but at what cost? 

Imagine if this becomes common amount homeowners to get cash out simply to pay for overpriced inflationary good and then the market goes down a bit…. Nothing less than a foreclosure disaster.

This is like solving diabetes with even more sugar. Our government is back peddling, realizes we have a problem coming and have no clue how to handle it.

Office loan defaults near history levels

 

Below are some highlights from a WSJ article last week. Everything we have predicted is slowly becoming a reality. We expect more for remainder of the year and will continue to follow carefully.

WSJ:

1. Defaults are reaching historic levels in the office market as a growing number of owners capitulate to persistently high interest rates and weak demand. More than $38 billion [worth of] US office buildings are threatened by defaults foreclosures or other forms of distress according to data firm MCSI. That is the highest amount since the fourth quarter of 2012 in the aftermath of the 2008/09 financial crisis.

2. Office owners are paying back their loans at a much slower rate. As recently as 2021, more than 90% of office loans that were converted into commercial mortgage-backed securities were paid off when they became due according to Moody's. Last year that figure fell to 35% - the worst rate in the history of the data which goes back to 2007.

Weitz- I'm not sure this figure can be highlighted enough. We went from 90% payoffs on maturity to 35% ..... simply put, this is a staggering issue for the owners, the general market, and arguably most importantly, the banks. Once they are forced to take losses, we have some major risks of a capital concerns, shutdowns, etc. How far does the spiral go? How does the government intervene if at all? we shall see. 

3. In the next 12 months, 18 billion of the office loans converted into securities will mature more than double the volume in 2023. Moody's projects that 73% of loans will be difficult to refinance because of the property income, debt levels, vacancy and approaching lease expirations.

Earlier this year, industry hopes were high that the Federal Reserve would begin cutting rates. In recent weeks those hopes have faded as inflation concerns have persisted.

4. The US offensive vacancy rate is currently at a record 13.8% compared with 9.4 at the end of 2019 according to data service costar group.

Weitz- more than anything, this is the real problem. Most businesses have changed the way they operate / communicate, and large offices are simply no longer a necessity or priority. Even tenants that seek to renew they leases are generally doing so with a smaller footprint given the costs and change in operational structure. 

For more information on Snohomish County Commercial Real Estate Investing, we are happy to help. 

Weitz Commercial

108 Union Street

Snohomish, WA 98290

T: 206.306.4034

www.weitzcommercial.com

 

US Commercial Foreclosures more than double YOY

 

According to Bisnow.com article, US commercial foreclosures more than doubled in March compared to the same month in 2023.

Real estate data specialist Attom counted 625 commercial foreclosures across the country last month, a monthly increase of 6% in an annual increase of 117%. 

Foreclosures have climbed steadily since the pandemic began rising from 141 in May of 2020.

California had the most foreclosures in March at 187, a 405% increase from a year earlier. Texas saw 129% increase from March of 2023, while Florida experienced an uptick of 174% over last year. 

Delinquency rates for mortgages backed by commercial properties were the same during the first quarter as quarter three with 3.2 percents of loans more than 30 days late.

Office properties remain the most common for delinquencies and foreclosures. The delinquency rate for office based commercial loans increased to 6.8% in the first quarter while hospitality back properties ticked up to 6.3% delinquent real tailback loans dropped from 5% to 4.7%.

Weitz Take: If you read this blog, you know this is something I've expected for some time. Let's see how the trends are moving forward, but I would predict more rather than the less in the immediate to intermediate future. I tell my investors to stay nimble and get ready for deals. 

For more information on Snohomish County Commercial Real Estate, consider contacting a Snohomish County Commercial Real Estate Broker. 

Our Firm: 

Weitz Commercial

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March Home sales dropped despite a surge in supply

 CNBC Report this week. 

Key Facts: 

Home says fell 4.3% in March

Mortgage rates rose to 7.5%

Inventory "improved slightly" up 4.7% month to month (3.2 month supply)

Prices were up 4.8% YOY

Weitz takeaway:

If you have read this blog, you know that my number indicator on the future of home pricing was inventory. To see rates over 7.5% and with "improve" (increased) inventory, it will be interesting to see what the next 3-6 months hold. If inventory continues to increase, I predict we will start to see modest to significant price reductions. If I had to make a prediction, I believe we will look back on this as the official start of the residential downturn. 

International Monetary Fund Warning to the US

 

AP- The International Monetary Fund recently sounded the alarm on the Biden administration’s rampant spending as “out of line with what is needed for long-term fiscal stability.”

The IMF’s latest forecast from the IMF — a group tasked with fighting financial crises worldwide — warned that the ballooning national debt and the fiscal deficit threatened to exacerbate sky-high levels of inflation while posing a long-term risk to the global economy.

The IMF noted in its forecast that the US federal budget deficit grew from $1.4 trillion in fiscal 2022 to $1.7 trillion last year.

The debt held by the public, which surpassed $34 Trillion, is on course to exceed $45.7 trillion within a decade — which is roughly 114% of the gross domestic product, according to projections by the Congressional Budget Office.

“Something will have to give,” the IMF warned.

The IMF, a financial agency run under the auspices of the United Nations, praised the US economy for its growth.

Despite rampant inflation, the US economy has continued to add jobs while spending and income have been on the rise. In the fourth quarter of last year, GDP rose at an annual rate of 3.3%. In 2023, the US economy added 2.7 million jobs.

Nevertheless, the IMF said that the Biden administration’s spending is cause for concern.

The exceptional recent performance of the United States is certainly impressive and a major driver of global growth,” the IMF said. “But it reflects strong demand factors as well, including a fiscal stance that is out of line with long-term fiscal sustainability.”

Since entering office, Biden has spent trillions on COVID relief as well as infrastructure. The US has also spent billions in helping Ukraine fight off the Russian invasion.

But the Biden administration said that tax cuts signed into law by former President Donald Trump are to blame for ballooning debt.

“The Trump tax cuts added $2 trillion to the debt with unpaid giveaways skewed to the wealthy and big corporations, and now Congressional Republicans are proposing another $5.5 trillion in tax cuts skewed to the rich, while raising taxes on millions of middle-class families,” Michael Kikukawa, a White House spokesperson, told The Post.

“President Biden is fighting to lower the deficit by $3 trillion by making the richest Americans and big corporations pay their fair share—all while cutting taxes for the middle class and never raising taxes on households earning less than $400,000.”

The US is an outlier among the major industrial economies. Europe’s economy failed to expand by the end of last year.

The 20 countries that use the euro as a currency have not shown significant growth since the third quarter of 2022 — and even then the economy grew at just 0.5%. The eurozone grew 0.5% for the full year in 2023, while the US grew 2.5%.

China, the world’s second largest economy, said late Monday it grew a surprisingly strong 5.3% despite an ongoing property crisis. Russia, which remains mired in its invasion of Ukraine, has managed to withstand Western sanctions. Its economy is projected to grow at a 3.2% clip.

Weitz take: This is one I need to be a bit cynical and super straight forward on. 1) Do I think the USA can't keep 'printing money' (which is exactly what we do). No - I think we can and will. Frankly, most monetary systems are a bit of a ponzi scheme (that's something they don't teach you your school books). The biggest issue with this is WHO is SAYING THIS, WHAT THEY ARE SAYING and WHAT IT COULD MEAN. 

For most of our lifetimes, our status as the major reserve currency of the world gives us the ability to print money without any major repercussions globally without having to deal with what should arguably be a weakened currency. 

For the betterment of the US, we have held that status since the end of World War II. (see more on this concept here). The IMF controls which currencies make up this basket of currency that controls much of global trade. If they decide, for instance, that the Chinese Renminbi is a safer currency, the dynamics of all this would change and change dramtically. We couldn't print at infinitum without facing a severally weakened dollar in such a case. At the time of this writing, multiple countries making up the "BRIC alliance" are taking active steps to replace the dollar in this hierarchy of currency relevance. Frankly, this is by far the most important issue for the future of this country but we have too busy arguing about social issues that won't mean a darn thing if our currency collapses. 

 

Everett, WA Proposal for new multi-purpose stadium

 

EVERETT NEW STADIUM

 A local story here for those in my community. The city of Everett is taking significant steps to determine a potential stadium in downtown Everett. 

See below article link as well as a copy of the potential sites found on the Everett City Website below. 

EVERETT — The City Council unanimously approved creating a new committee Wednesday to conduct in-depth research and advise city leaders

Three options are on the table:

1)            upgrade the current Funko Field,

2)           demolish and build a new stadium on the current property, or

3)           construct a new stadium downtown near the Angel of the Winds Arena.

Everett needs significant upgrades to meet the new MLB standards. The city would be at risk of losing the minor league team if efforts to upgrade the stadium aren’t well underway by 2025.

The project could cost between $40 million and $80 million, according to figures presented by an outside consultant hired to work on the project.

For more information on Everett Commercial Real Estate, consider contacting an Everett Commercial Real Estate Broker. 

NY Landlord Rudin sees positive for CRE

 Bill Rudin sees positivity in the office market. He's mostly focused on NY city.

As we try to remain as neutral as possible despite our fairly negative / cautious outlook, it's important to look at the situation from all angles and make sure we look at all the 'pieces of the puzzle'. 

Weitz: My thoughts on this interview is 1) he leans on a lot of anecdotal evidence which I can't stand. "18 new Broadway shows are coming"; "we signed a lease". One perception doesn't make a big picture reality. I don't think we are going to truly see the the office issue resolved for years until we settle into a new normal with the work from home vs. hybrid vs 5 days in the office. This will vary industry by industry and company by company, but overall, I have to think management teams generally will want to lower their office footprint while also creating a office culture.

Janet Yellan warns inflation decline may not be "smooth"

Treasury Secretary Janet Yellen Interview release today. 

 

"Once rents cycle through, inflation will come down more"... "it take awhile for that to filter into the Consumer Price Index ('CPI'). 

Later in the interview, she said "I wouldn't expect this to be a  smooth path month to month, but the trend is clearly favorable". 

WEITZ: Let me interpret this... "(commercial) rents are falling, thus our current 'Consumer Price Index' / CPI numbers are crap. We are actually in more of a deflationary/ stagflation environment...but we are hiding the ball from the American public for whatever reason". 

I hate to say this, but I have zero faith in our current leaders to navigate what I believe is coming our way. 

In the later 2000s during the last major economic crisis, we had Ben Bernanke and Hank Paulson at the helm of Federal Reserve and Treasury respectively. Bernanke was a Princeton scholar on the Great Depression and Paulson was the former CEO of Goldman Sachs and carried a lot of weight on Wall Street. While I'd argue the bank bailouts benefitted the culpable parties and were thus were BS in some ways, that was the act of Congress and Obama at the time to not put guardrails on the use of the bailout funds.... Nevertheless, those two unequivocally saved us from a awful financial situation with collateral banking damage that likely would have mirrored a great depression like situation. I'm not so sure I have the same confidence in Mr. Powell or Ms. Yellen to navigate the ship if the 'waters get choppy'. 

Lets be frank - we have a debt based monetary system that can't withstand interest rates this high so if we are monitoring it based on crap CPI numbers, their analysis is equally crap and they will keep rates too high for too long.

CNBC - Homebuyers need to earn 80% more than in 2020 to afford a house in this market.

CNBC Article outlines the increased costs of housing in the past 4 years. 

Some key takeaways: 

Almost 4 years ago, household earning $59,000 annually could afford a new mortgage without spending more than 30% of their monthly income with a 10% down payment according to Zillow Group. 

While the typical household in 2024 makes about $81,000 / year (up from $66k), wages have not kept up with housing costs. 

Since January, 2020, the typical mortgage payment on the typical home has almost doubled, according a a senior economist at Zillow. 

Nowadays, a potential home buyers to make $106,5000 to afford a typical home.

Tight supply is another reason behind the unaffordability. 

The number of new housing  units built throughout the years has been declining and law supply is rooted in restrictive land use and zoning regulations. 

WEITZ: Nothing new here necessarily. Yes, affordability is a problem. Yes, low inventory is a key component of that. I continue to believe you will see an inventory increase as people 1) sell 2nd or 3rd homes; 2) we see distressed listings either in the form of defaults (job losses appear to be mounting); 3) divorce, 4) elderly people moving out of their homes or passing them to the next generation; or 5) people just wanting to move to a new area. 

I have a hard time seeing this entire pricing situation as sustainable. Fed Chairman Powell all but admitted he's trying to lower prices when the rate increases were established by the Fed. I personally think he's surprised by the resiliency to this point (as am I), but I don't know if he fully thought of the collateral damage that no one would sell their home with a 2.5-3% rate to buy something at 7% and thus we have created the most stagnant market of my lifetime. The next 12-24 months will be a tug of war between inventory vs. rates. If rates fall and inventory stays the same, we will see continued growth. If inventory grows and rates stay somewhat in line, I think we see some weakness in pricing in many parts of the country. If I had to bet, I'm betting on the latter of those two. I simply don't think these prices are sustainable for the average American (certainly not young american who doesn't have equity in a current home) although I certainly feel like the black sheep with that opinion these days. 

.... Time will tell. 

Biden Announces Plan to Lower Housing Costs for Working Families

In conjunction with his State of the Union address, President Biden & the White House announced A PLAN to lower housing cost for working families. 

Below are some of they points and any insights I can provide on the matter. I do my very best to keep politics out of any commentary so I'll make best efforts to be as neutral as possible in my comments. 

1. President Biden believes housing costs are too high, and significant investments are needed to address the large shortage of affordable homes inherited from his predecessor and that has been growing for more than a decade. 

Weitz- I'd agree that costs are too high for the average American. 

2. President Biden will call on Congressional Republicans to end years of inaction and pass legislation to lower costs by providing a $10,000 tax credit for first-time homebuyers and people who sell their starter homes; build and renovate more than 2 million homes; and lower rental costs. 

Weitz- Is a $10,000 tax credit going to do much if you can't afford the home in the first place? 

3. Mortgage Relief Credit. President Biden is calling on Congress to pass a mortgage relief credit that would provide middle-class first-time homebuyers with an annual tax credit of $5,000 a year for two years. This is the equivalent of reducing the mortgage rate by more than 1.5 percentage points for two years on the median home, and will help more than 3.5 million middle-class families purchase their first home over the next two years. 

Weitz- This math doesn't work in Seattle area, but I like the concept. 

4. The President’s plan also calls for a new credit to unlock inventory of affordable starter homes, while helping middle-class families move up the housing ladder and empty nesters right size. Many homeowners have lower rates on their mortgages than current rates.

Weitz- How? See below. 

5. The President is calling on Congress to provide a one-year tax credit of up to $10,000 to middle-class families who sell their starter home, defined as homes below the area median home price in the county, to another owner-occupant.

Weitz - so I go from a 2.5% mortgage at $700k so I can buy a 7%+ mortgage at $700k. That's a horrible move if the credit only lasts a year. On a $700k home loan, that's $32,000  increase annually, but thanks for the $10,000 tax credit!

6. Lowering Closing Costs for Home Mortgages. The Consumer Financial Protection Bureau will pursue rulemaking and guidance to address anticompetitive closing costs imposed by lenders on homebuyers and homeowners.  These charges—which benefit the lender but not the borrower—can add thousands to the upfront costs of a mortgage.  Those upfront costs cut into the amount of homebuyers’ down payments and reduce homeowners’ available equity.

7. Tax Credits to Build More Housing. President Biden is calling for an expansion of the Low-Income Housing Tax Credit to build or preserve 1.2 million more affordable rental units. Renters living in these properties save hundreds of dollars each month on their rent compared with renters with similar incomes who rent in the unsubsidized market.

8. Innovation Fund for Housing Expansion. The President is unveiling a new $20 billion competitive grant fund as part of his Budget to support communities across the country to build more housing and lower rents and homebuying costs. This fund would support the construction of affordable multifamily rental units; incentivize local actions to remove unnecessary barriers to housing development; pilot innovative models to increase the production of affordable and workforce rental housing; and spur the construction of new starter homes for middle-class families. 

Weitz - intrigued by this as would be my developer contacts. I have to say its a bit concerning that this is 1/3 of what many want to send to Ukraine.

9. Fighting Rent Gouging by Corporate Landlords. The Biden-Harris Administration is taking action to combat egregious rent increases and other unfair practices that are driving up rents.

I've keep an eye on this. I'll never be made a tax credits, but this doesn't seem to solve the issue although the grant program seems very intriguing.