Beware of the Big Bad Home Sales Revisions

We already know the housing crash was bad, perhaps the worst in history; tomorrow we will learn that it’s worse than we thought.

The National Association of Realtors, for a number of reasons I won’t get into because they’ve been widely reported, overcounted home sales during part of the last decade and has spent the better part of this past year figuring out just how badly they did that.

They consulted with economists at the Federal Reserve , Fannie Mae, Freddie Mac, the Department of Housing and Urban Development, the mortgage bankers, the home builders, as well as umpteen other housing specialists, and tomorrow they will release their results.

Expectations are that home sales could be revised down anywhere from 10 percent to 20 percent. The Realtors’ chief economist said the revision would be, “meaningful.”

The revisions will likely not change the fact that last year saw the fewest homes sold on record. They will not change estimates of home prices, nor the home price drop since the 2006 peak, nor will they change inventories of unsold homes in month’s supply (how long it takes to sell that many homes) although absolute inventories will be revised lower. They will not affect monthly or annual percentage changes in sales recently.

The revisions will also have nothing to do with how many newly built homes sold, nor will they say anything about the health of the nation’s homebuilders.

Far more importantly, the revisions will have nothing to do with how many borrowers are behind on their mortgage payments or in the process of foreclosure, which is 6.26 million, according to numbers just released from Lender Processing Services.

The Realtors’ revisions will not change the losses at banks, losses to investors, and losses to the now government-owned mortgage giants Fannie Mae and Freddie Mac, nor to the Federal Housing Administration.

The Realtors’ revisions will change perception; they may even change consumer sentiment. Headlines will scream Wednesday morning, and reporters like me will jump in with the “breaking news” that far fewer existing homes sold over the past four years than previously thought.

The crash will look bigger, as the Realtors are only revising numbers starting in 2007, because “they did a side-by-side comparison of the calculations and the drift began only in 2007,” says an NAR spokesman. “So there was no need to revise earlier data. It appears that roughly half of the revisions come from the drop in FSBO’s [For Sale By Owner].”

Let me repeat what I just wrote: The crash will look bigger. Will that change anything in the economy today? Will it affect the housing market going forward? Will it hamper the fledgling recovery (which I’m not 100 percent sure is really taking hold)?

My guess is no, but the revisions — and the hue and cry surrounding them — will hurt consumer confidence, which was beginning to come around ever so slightly.

The homebuilders reported an increase in buyer traffic and buyer inquiries in December, and said gains in the past months are “an indication that pockets of recovery are slowly starting to emerge in scattered housing markets.” These new numbers will hurt that new-found confidence, not because of anything real on the ground, but because of the perception of just how far we fell.

It is commendable that the Realtors are correcting their miscalculations, but equally distressing that just as our outlook for the future was brightening ever so slightly, and homebuying demand was beginning to awaken, we have to be reminded of a very dark past, darker than we knew.

There are still considerable headwinds facing housing’s recovery, not the least of which are foreclosures, and potential buyers have to factor that into their decision making. They should not, however, be spooked by nasty new numbers that really just put an exclamation point on what we already knew … that housing went from an unprecedented boom to an unprecedented bust and took down our economy with it.

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Beware the Shadow Office Space

Last summer I did some reporting on shadow office space, which is leased space, like individual offices, cubicles or entire floors, that was vacated during the recession. This shadow space was adding as much as 7 percent to office vacancy rates in Los Angeles and over 6 percent in Chicago, according to CoStar Group.

Now that the office market appears to be taking a turn for the better, that shadow space will start to fill up, and in most places it will have to fill well before the company looks to take on additional space. Today Grubb & Ellis, a commercial real estate services and investment company, put some numbers to the scenario.

"Grubb & Ellis expects that shadow space vacated during the recession will accommodate about one-third of all net new demand in 2011 and about one-fourth in 2012; this activity will not be reflected in the published statistics," writes Bob Bach, chief economist, in his "U.S. Office Market First Look: 2010-Q4"

Bach goes on to say that the "still-tepid rate of hiring," combined with this shadow space, will keep the office market "struggling to keep up with prior recovery cycles."

Office buildings gained 2.5 million square feet of occupied space in Q4 of 2010, the first increase since the end of 2007, according to Reis, Inc., a commercial real estate analysis firm, but the 17.6 percent vacancy rate still represents a 17-year high.

That doesn't seem overly concerning to investors in the office market. Pricewaterhouse Coopers surveyed 200 real estate executives, including investors, lenders and brokers, and found more than 70 percent believe the commercial real estate recovery is real. 32 percent say they are looking to invest in the office sector this year, second only to 45 percent who say they would opt for the apartment sector.

Yes, 28 percent of office property mortgage loans will mature in 4Q '11, or about $6.8 billion, according to Fitch, in a still healing liquidity situation. But Fitch also reports that the pace of commercial loan modifications is quickening.

"Loan modifications continue to dominate as a resolution method," writes Managing Director Stephanie Petosa. "Servicers will resolve loans with increase velocity as liquidity returns to the CMBS market."

As more jobs are created and fewer are lost, the office sector is heading toward recovery. Investors should be careful, however, to take shadow space into account when looking at specific properties and consider distressed properties, as office loan default rates remain high.

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