Continual Evolution

Musing about real estate

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The real estate slowdown has primarily hit residential housing starts so far and hence affected the home builders more than any other group. In fact the home owners seem to be in denial and hence the actual house prices have not yet come down - people seem to be sitting tight, hoping for a turnaround. As a result the inventory of unsold houses keeps growing. I think the actual markdown of residential real estate prices still has to happen in the months ahead (disclosure: I own SRS which is effectively a short position on real estate). Thus we are very far from any kind of bottom on house prices as opposed to housing starts.

In the meanwhile WSJ is now reporting the first signs of weakness in commercial real estate, suggesting that the weakness is spreading:

The report is an early sign that the commercial-property sector is being dragged down by the growing reluctance of lenders to extend credit for anything related to real estate, which in turn could create a new drag on the economy and additional problems for investors. Declining commercial-property values could lead to an increase in default rates on commercial real-estate loans and on commercial mortgage-backed securities.

I own Loopnet (LOOP), which is the leading online "MNLS" type listing service targeting brokers of commercial real estate. They make money on subscriptions and hence are indirectly driven by real estate transactions rather than on prices. I think LOOP will benefit from any change in conditions which causes more transactions; hence I think it is a buying opportunity on any further weakness.

Thus I think for now I well stick with both SRS and LOOP even though at first glance they seem to be bets in the opposite directions. SRS should directly benefit from the forthcoming markdown of prices and LOOP from the resulting froth.