How Much More Decline Are We Going To See?

This will be the last post of the year and I wish the news were more positive than what we are seeing. Today was release the latest S/P Case-Shiller update on home prices. The report provides additional information on how values of real estate markets have moved in the past year and it is not pretty. On average in the 20 major metropolitan areas prices have declined by 18%. I am expecting as we have discussed in a previous post to see a continuing decline in 2009 across markets.

If we look at the San Francisco market as a whole the market saw a decline of 31% on average. For a number of people that I know and who are in San Francisco, this may come as a shock as the San Francisco market has the reputation to be strong. As everything else, the real estate market reality is different from perceptions.

Where to go from here, from a commercial perspective, I believe that we are going to start seeing significant decline in values. Commercial real estate has not been affected the same way as residential. Most commercial properties were underwritten and lending was approved based on property’s income. This was providing the commercial real estate market a better sense of reality. However, due to businesses closing and companies going out of business more commercial properties will loose revenue and potentially go into default. In addition, the lack of financing available makes it more difficult to complete transactions. The commercial real estate market is going to go down and in areas where prices were not correlated to propertyies' income higher drop will be expected.

For residential markets its going to continue to go down, however, the biggest down turn is going to happen in area that are just starting to experience a slowdown. In areas such as the California Central Valley, the blue collar suburbs etc… where price have declined up to 80% maybe there will be a further decline but to a much smaller extent. In the middle to upper end of the market we can expect to see 15% to 20% further decline. In the blue collar markets maybe an additional 5%.