The Real Estate Market
Apr 20, 2009
Posted by Jody Eisenman | Filed under Uncategorized
During the market decline, the real estate market played second fiddle to the banks. The reason for this is mainly because the banks were perceived to be in such bad shape and are so central to our economy, that most of the efforts of the economy tended to deal with what was in front of them. The theory was, if the banks fail, what’s everything else worth? Now that it appears that the banks may be stabilizing (in fact, JP Morgan managed to price a $3 billion 10 year bond at 6.3% without government assistance), focus is now moving to other areas.
The general consensus is that the commercial real estate market, especially in the shopping mall area, has not even come close to bottoming. In fact, since most mall owners have leveraged themselves in a manner similar to the banks, these companies are going to have massive refinancing problems going forward. This past week, General Growth Properties, the second largest shopping mall owner filed bankruptcy. General Growth owns high profile malls such as Faneuil hall and the South Street Seaport. What is curious is the reaction of the other large REITS (real estate investment trusts). For example, Simon Properties (SPG), which according to Yahoo Finance has an incredible $80/share in debt, has doubled from 24 to almost 50 in the last five weeks. Vornado (VNO), which has similar debt, has gone from 27 to 46. Why has this happened? The thinking is that these companies can actually benefit from the bankruptcy of their competitor by picking up properties on the cheap. Is this realistic? I don’t know, but General Growth simply could not get the credit to refinance its’ properties. If they couldn’t, why would the banks lend to anyone else?
I believe that much of the rise in these prices has been due to short covering. I suspect that this is true for many other financial stocks as well. For the first two months of this year, stocks were in a virtual unending free fall. All the “easy money” was being made on the short side of the market. Now the shorts have gotten squeezed, and the stock prices have risen rather dramatically in the last six months. How long can this continue? As I said previously, I believe the worst is probably over for the stock market. However, I’m sure we are going to get a retracement at some point. The S & P 500 closed at just below 870, and I do believe that 900 will be somewhat of a battleground. Thus, it would not surprise me to see some sort of pullback, perhaps as soon as this week. I continue to believe that this remains a traders’ market.
