Rolfe Winkler

Last month commercial real estate prices took a bit of a breather, falling just 1% after seeing prices fall 9% from March to April and an additional 8% from April to May. Those are fairly stunning rates of decline. In July, the descent picked up steam again, falling 5.1% compared to June.

Commercial real estate prices…renewed steep declines and low transaction volume in July… The [Moody's/REAL Commercial Property Price Index] was down 5.1% from June after having declined by only 1% the prior month.  It is now 30.8% below what it was a year earlier and 38.7% below the peak measured in October of 2007.

Overall market transaction volume continued the pattern of calendar 2009.  “The market has averaged about 375 sales per month for the seven months in 2009,” said Moody”s Managing Director Nick Levidy. “Over the same time period in 2008, sales were averaging nearly 1,100 a month.”

So much for improving second derivatives, at least on the CRE side.

For residential, you can see the market appears to have stabilized this summer. But that’s thanks to government support. Eventually support will go away and residential prices will likely turn back down.

As always, I want to include a caveat with the chart above. Comparing these two indices is difficult due to the number of data points available. The Case-Shiller index draws on millions of transactions over time. The Moody’s/REAL index has far fewer, just 300 this month.

So it’s tough to say anything definitive about commercial real estate prices using this index.

But the lack of transactions suggests sellers don’t want to hit the bid in the market. Though Felix makes a good point–he’s sitting next to me–that many sellers probably couldn’t hit bids if they wanted to. For particularly overlevered properties, selling at today’s prices implies wiping out equity and forcing a big haircut onto debtholders. It’s not easy getting all interested parties to agree on a short sale…

The Moody’s/REAL commercial real estate index for June was released today. Down just 1% compared to May, it suggests the pace of decline is moderating. The index was squarely in freefall the prior two months, declining 9% from March to April and 8% from April to May.

According to the index, prices are now down 35.5% from the Oct ’07 peak.

Case-Shiller data for June won’t be released till next Tuesday. But in May, the Composite 20 index actually rose slightly … for the first time since July 2006.

But don’t expect a V-shaped recovery for home prices (or for CRE prices for that matter).  While residential prices appear to have stabilized during the seasonally strong summer selling season, it’s likely they’ll turn back down later this year.

Even if prices stabilize around current levels, that would still imply large future losses for banks. They’re counting on prices to rebound sharply in order to avoid massive losses in their loan books.

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Just a reminder for everyone that comparing these two indices isn’t totally fair. There are literally millions of transactions that go into the Case-Shiller index. On the CRE side, there have been few sales recently to indicate pricing, as you can see below.  So you have to read Moody’s/REAL with a grain of salt.

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The stock market was down again last week, consumer confidence is at 30 year lows, house prices are declining nationwide for the first time. Is there any good news to report about the economy? Indeed there is: a gallon of gas is approaching $4 per gallon, which I think is just super.

How could I possibly get excited about something that is causing hardship for so many people? Precisely because it is causing hardship for so many people. Hardship, you see, leads to changes in behavior.

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