Saturday, August 23, 2008

Apartment Buildings lose immunity to housing chill


WSJ Article on Apartment real estate

But now the specter of job losses is beginning to spread the gloom into that sector as well. As would-be renters are doubling up in apartments or moving in with friends and families, rents and occupancy rates are beginning to fall in many cities.

Its only going to accelerate.

Economist quoting Bernanke
he (edit: Bernanke) suggested that the worst “second-round” effects of the financial crisis are about to be felt: “the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.”

Yet the primary drivers haven't peaked. Credit is still tightening, foreclosures continue to grow, and now layoffs.

In my opinion the greatest risk to the economy is the impact of bank failures upon small businesses. Small businesses need to keep $200k to $2M of cash in their checking accounts just to operate. (e.g., payroll, inventory) Since the FDIC limit hasn't been inflation adjusted in... too long. I propose lifting it to $500k ($1M for a couple). Yes, this will weaken the dollar (due to the Fed printing money). But a planned recovery has less downside potential than the current process of covering 50% of Jumbos at Bank A, 100% at the First Bank of Podunk, and 0% at another bank.

We're in a recession that is going to get worse. But there is no reason it should be any worse than the 1974 recession; but that would require sensible regulatory changes.

But let's look back at apartments (WSJ article):
But that competition isn't nearly as big a problem as job-loss trends. "A lot of folks think it's the shadow market that's softening rents. It's really a jobs issue," says Richard Campo, chief executive of Camden Property Trust. The Houston-based REIT saw rents fall 1.4% last quarter from a year earlier in Phoenix. Arizona shed some 87,000 jobs in June and July.

Yet for only six months have the drivers been strong enough to cause doubling up. Jobs going forward will be weak for at least 18 months. Expect rents to continue to soften. The housing surplus is too great to ignore.

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