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January 2010 Commentary on the Real Estate Market
by Peter L. Zachary, MAI, MRICS

The New York Post reported on January 6, 2010 on page 33, "Housing Data Dip is Deep". They reported: "The number of buyers who agreed to purchase previously occupied homes fell sharply in November, a sign sales will fall this winter, undermining last summer's recovery.

The National Association of Realtors said its seasonally adjusted index sales agreements dropped 16 percent from October to a November reading of 96. It was the first decline following nine straight months of gains and the lowest reading since June.

The fall was far deeper than the 2 percent expected from economists surveyed by Thomson Reuters. 'This was bound to happen at some point,' said Jennifer Lee, senior economist with BMO Capital Markets. The report indicates consumers are taking their time following the extension of a tax credit deadline. The incentive of up to $8,000 for first-time buyers was set to expire at the end of November. But Congress pushed back the date and broadened the program with a new credit of up to $6,500 for buyers who relocate."

The front page of the January 8, 2010 issue of the New York Times had an article titled, "Further Slide Seen in Commercial Real Estate". The article states that "rents for commercial office space fell faster over the past two years than in any such period in the last half century."

"'We're projecting the biggest value losses in the nation,' said Aaron Jodka, a senior real estate economist at Property and Portfolio Research, a Boston-based independent real estate research and advisory firm. He predicts that by 2011, the value of New York metropolitan area office buildings will decline by 58 percent from its late 2007 peak. It is already down 40 percent."

The article continues, "most members of the industry are in lock step in their pessimism, and the reasons are multiple: Jobs must recover first to fill offices with workers, and job growth in New York City has been all but invisible."

The Times states, "Richard Persichetti, director of New York research for Grubb & Ellis, said that when the economy started to slide, office rents fell faster than in any period recorded in at least 50 years. The city has become stuck with more available office space than any other central business district in the nation except Chicago, Washington and Boston. Mr. Persichetti predicts it will take until 2014 to make a major turnaround.

'Rents probably won't start to recover until job growth is created and some of that available space is absorbed,' he said."

The Times states the Joseph Harbert, chief operating officer for the New York Region of the commercial brokerage Cushman & Wakefield, said that everyone is "'waiting for positive signs in the economy,' he said. 'When jobs are going to recover, that's the signal of when people are going to lease and buy'."

The January 9, 2010 issue of the New York Times had a front page article "85,000 More Jobs Cut in December, Fogging Outlook – Blow to Recovery Hope – Pressure in Washington as Pace of Hiring Stays Stagnant". The article states, "The nation lost 85,000 jobs from the economy in December, the Labor Department reported Friday, as hopes for a vigorous recovery ran headlong into the prospect that paychecks could remain painfully scarce into next year."

The article continues, "'we're still losing jobs,' said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. 'It's nothing like we had in the free fall of last winter, but we're not about to turn around. We're still looking at a really weak economy.' The disappointing snapshot of the job market intensified pressure on the Obama administration to show results for the $787 billion spending bill it championed last year to stimulate the economy."

The Times states that, "at a news conference, Mr. Obama acknowledged the December data as a setback, while outlining plans to deliver $2.3 billion in tax credits to spur manufacturing jobs in clean energy. 'We have to continue to explore every avenue to accelerate the return to hiring,' the president told reporters.

The Times article continues: "Most economists assume the unemployment rate – which held steady at 10 percent in December – will worsen in coming months. The nation would then confront the highest jobless rate in a generation on the eve of November elections that will determine the balance of power in Congress."

Mark Zandi, chief economist at Moody's, forecasts that the unemployment rate will reach 10.8 percent by October. The so-called underemployment rate – which counts people who have given up looking for work and those who are working part time for lack of full-time positions – now sits at 17.3 percent.

Mr. Zandi argues that the economy requires an additional $125 billion jolt of stimulus spending on construction projects and aid to state and local governments – a proposal that confronts enormous political challenges.

Mr. Zandi argues that a failure to spend now to spur growth could leave the United States in a bigger hole. 'If we don't do it and we slide back into recession,' he said, 'that's going to exacerbate the deficit even more.'

The December jobs report included one encouraging milestone: Data for November was revised to show the economy gained 4,000 jobs that month, compared with initial reports showing a net loss of 11,000 jobs. That was the first monthly improvement since the recession began two years ago. But the December data failed to repeat the trend, disappointing economists, who had generally expected a decline of 10,000 jobs. The report showed continued slowing in the pace of job losses, but it also underscored that companies were reluctant to hire.

For a fifth consecutive month, temporary help services expanded, adding 47,000 positions in December. That buttressed the notion that companies required more labor, even as they held off hiring full-time workers.

The Times article further states: 'We're going in the right direction,' said Michael T. Darda, chief economist at MKM Partners, a research and trading firm. 'If we just have a little bit of patience, we'll start to see monthly increases of 200,000 to 300,000 jobs within six months.'

But millions of people still grappling with the bite of the worst downturn since the Great Depression have exhausted their patience – along with their savings and confidence.

Those with the gloomiest outlooks envision a 'double dip' recession, in which the economy resumes contracting. Other dear years of stagnation, like Japan's Lost Decade in the 1990s.

One point of agreement among economists is that the nation cannot recover without millions of new jobs. The economy needs about 100,000 new jobs a month just to keep pace with people entering the work force. When workers gain wages, they spend them at other businesses, creating jobs for other workers – a virtuous cycle, in the parlance of economists.

Recent months have produced tentative signs that such a cycle might be unfolding, even as economists debate its sustainability. The December jobs report added to the ambiguity.

On the one hand, job losses undermined hopes for a quick turn around. Yet the losses were a far cry from the roughly 700,000 monthly job losses seen a year ago.

'Standing still feels good when you've been used to falling backwards,' said Stuart G. Hoffman, chief economist at the PNC Financial Services Group. 'But we want to move forward'."

I attended a seminar sponsored by the New York Metropolitan Chapter of the Appraisal Institute where Mark Zandi of Moody's was one of the speakers. He said the housing market will not start to recover until the 1st Quarter of 2011 and the commercial real estate market will not start to recover until the 4th Quarter of 2011.

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