The residential real estate has taken a big hit in the last couple of years and there are banks that don’t want to show the full impact of bad inventory they still have.  If they did, more alarm bells would sound as to the bank’s real viability and financial strength (or weakness).  This ignoring of toxic assets or keeping them off the books does not help in trying to assess where we are at as far as financial stability and economic recovery.

Do we really know the full extent of toxic assets still on the real estate books at all the banks?  No.  Are banks trying to hide some of the foreclosures that have not hit their books yet?  Yes.  To the often raised question of, “Have we hit the bottom yet?”, the answer is no.

This also goes for the commercial markets as well. There are many examples of commercial buildings being sold for nickels on the dollar and the trend looks like that will continue.  Anyone who is in doubt can look at the recent sale of the Pontiac Silverdome selling for about a penny on the dollar or buildings in major metropolitan areas like New York and Chicago.  Commercial real estate issues are a column in themselves so look for one in the near future that will cover the dynamics of technological obsolescence and its impact on appraisals as well as attracting and retaining corporate tenants.

UNDEREMPLOYMENT AND URBAN FARMERS

At a recent presentation at the Elgin Chamber of Commerce in Illinois, Chris Huecksteadt, director of Metrostudy (a market research firm that specializes in real estate) talked about the state of the residential real estate market and the decline in jobs in the Chicagoland area in the last decade.  He pointed out the decline in jobs:

4.6 million jobs in 2000

4.2 million jobs in 2009

Some would leave it at that and say it was about a 10% decline.  That is too simplistic.  He was questioned about it in the Q & A afterwards and conceded that he did not add in the complex issue of underemployment.

Many are underemployed and someone who may have been making $90,000 back in 2000 or 2001 is now making $36,000.  So from an employment standpoint, he (or she) is NOT counted in the unemployment numbers (whatever that number is today 10.5%? 11%?) but they have a lot less buying power.  This is not unique to the Chicago job market, but is actually prevalent across the country.

By not understanding and measuring this phenomenon, ALL unemployment numbers are at best, suspect and at worst, useless, when they are presented as some type of true economic barometer.  They do not provide any accuracy as to the decline in buying power that many homeowners have experienced over the last decade from losing high-paying jobs and winding up taking lesser jobs with lesser income.

The recent euphoria over the reduction in filings for unemployment is premature and should not be taken as some great turning point for the housing and real estate markets.  The issue of buying power is still a fact.

Housing starts are down and in some areas like the northwest corridor of Chicagoland which includes Elgin and other northwestern suburbs, housing starts are down 90% from 2005 according to Mr. Huecksteadt of Metrostudy.

In a separate conversation with Martin Walsh, an Illinois real estate agent who has actually closed several short sales, reveals some of the nuances the average person is not aware of.  He said if a house forecloses in the $300,000 to $400,000 range, there is a market for that type of house and the banks will expedite foreclosures on this range of houses. 

If a house is at $3,000,000 or $4,000,000 (or more), the bank is more likely to create a “friendly” foreclosure where the residents will still live there and pay whatever they can in order to avoid putting it “on the books” as a foreclosure because there is a very weak (if any) market demand for multi-million houses.  The house would sit on the books for months, if not longer.  This also happens with houses that have little value.

His observation is confirmed by a presentation of one of the federal reserve board’s governors, Elizabeth A. Duke, at the Community Stabilization Symposium, NeighborWorks Training Institute, in National Harbor, Maryland. (http://www.federalreserve.gov/newsevents/speech/duke20091209a.htm )

Within her presentation she states: 

In the most devastated neighborhoods, some lenders do not even complete the foreclosure process or record the outcome of foreclosure sales because the cost of foreclosing exceeds the value of the property.  Anecdotal evidence suggests that these "toxic titles" have placed significant numbers of properties in a difficult state of legal limbo.

Or, what I and others would call a “shadow inventory” that does not get counted.

Duke also talks about bulldozing down urban houses to create little gardens where people can grow plants and vegetables:

Several community organizations in Detroit, for instance, have joined together to promote an urban farming initiative that not only reclaims abandoned properties but capitalizes on the growing popularity of locally grown food.  Detroit's Garden Resource Program provides hundreds of home, school, and community gardens access to resources and information that empower residents to grow, harvest, prepare, and preserve food in their backyards and neighborhoods.  In 2008, the program supplied over 169 community gardens, 40 schools, and 359 families with seeds, plants, and training that produced thousands of pounds of food inside the City of Detroit.

Getting people back into a 19^th century “agrarian” society does not help our global competitiveness.  Henry Ford, who developed the concept of mass production for his Model Ts so that the average worker could afford his cars, is probably rolling over in his grave.

Until we can deal with accuracy on the economy, the effects of underemployment and the realities of the housing market, we cannot create a realistic solution.

CARLINI-ISM :  Toxic assets go down better when mixed with KoolAid.