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Is 2011 Too Soon For Multifamily Prices To Hit Rock Bottom?
November 21, 2009 by Neil · 2 Comments
Multifamily Investor has theorized
that 2011 will be the year that multifamily prices hit bottom. Most estimates for commercial mortgage defaults hitting their peak of about 5 1/2% are pegged for 2011. Once these notes are resold, and/or the banks start the process to repossess, the inventory will be too large for the banks to “extend and pretend” on a large Henry Ford scale. The properties will have to get written down.
This chart from Credit Suisse shows that most residential mortgages will reset in 2011.
Agency loans were done via government agencies – Freddie Mac, Fannie Mae, and the FHA. We know how their underwriting has been lately…
Alt-A is just above subprime, and does not require full documentation from borrowers. This led to the NINA and NINJA explosion.
Option ARMs gave borrowers multiple nooses options for repaying, including a seemingly innocuous minimum payment. If enough minimum payments were made, in lieu of the traditional monthly payment, the loan would re-amortize with a higher rate and higher monthly payment. This double-edged sword brought Washington Mutual its business, as well as its demise.
Subprime loans were for borrowers with credit scores south of 600.
If the majority of these loans are resetting in 2011, and banks lack the will and/or the capital to refinance, those borrowers will have to seek loan modifications. Otherwise, millions of chiropractors will be treating borrowers throwing out their backs from throwing their keys back to the banks.
If every homeowner right now who is not in default stays current on his mortgage, it will still take 20 months for the economy to digest current excess housing inventory. This includes both homes on the market, as well as estimated shadow housing inventory.
If 2011 is going to be a bloodbath for the housing market because of mortgage resets, the economy needs to recover very soon. If, however, unemployment is expected to increase for the next 6-8 quarters, then these trends will further decrease rent and increase vacancies in multifamily properties.
Since borrowing for commercial properties at high LTV ratios is so difficult, many buyers expect sellers to provide very attractive cash-on-cash returns from Day One. Even these demands may not be enough. At the peak of the last market, buyers purchased based on projected increased returns, and were willing to gamble accordingly. Come 2011, all-cash buyers may well pencil in higher loss factors on apartment buildings to account for the housing market’s impact on CRE valuations.
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Check out what others are saying about this post...[...] you look at the chart below, 2012 will be the peak year at which commercial loans become due. (2011 wil be the peak year for residential mortgage resets. Commercial real estate lags behind residential real estate trends by about 12-18 months.) If [...]
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