Part 3 – Looking at Values and Silver Lining

Let start with the potential first “good” news of the year for most of us, the recession may end by the end of the year. According to Ben Bernanke Chairman of the Federal Reserve and outlined in this article from the AP, “Stocks up on Bernanke remarks; focus now on Obama” by Madlen Read and Tim Paradis, while the economy is in deep trouble, we could see some significant improvements by the end of the year.

In Part 2 of our current review of values and markets and in previous post we acknowledged couple of points. Real estate markets with low medium credit profile crashed first and now we are seeing stabilization. Location, is becoming even more important in today’s lending environment, both for commercial and residential properties. From a Hard Money perspective it is one primary factor for approval.

Expending on location in addition to the credit quality of borrowers the quality of the urban planning of the market in which a property is located will make a difference. Maybe because I grew up surrounded by architects, discussing urban planning and quality of life, I pay attention to these details. A striking example is downtown Sacramento CA. The city in the past 15 years or so has seen great improvements, its downtown area has been well upgraded. While values are falling, downtown Sacramento is steel very appealing. However, neighborhood further out, requiring families to have 2 or more cars are seeing accelerated losses in values.

Markets with low and medium credit profiles are starting to get out of the wood, while markets were borrower had what is considered A+ credit rating are now tumbling. They started to get depressed during the 4th quarter of 2008 and I would predict that 2009 will be one of the most difficult year ever for these markets. I believe that we may see lost in values ranging from 25% to 50% depending on location, regional economic factors etc… These markets are just starting to get affected. They are suffering from the lay offs of white collars employees. The silver lining is that most likely we will see these markets behave the same way as the medium and low credit profile markets. With this in mind we can anticipate a beginning of stabilization by the end of 2009. Interestingly, our real estate timeline correspond with the timeline of Mr. Bernanke to get out of the recession.

We need to keep in mind that this analysis primarily applies to residential real estate. Commercial real estate, will behave differently and in part in correlation to residential. Today hard money lenders understand well the values of properties in these low and medium credit markets and approve loans quite easily. However, in A+ credit markets we are seeing more uncertainties.