Sam Zell and The Residential Housing Market

In a recent Reuters news article, Sam Zell head of Equity Investments proclaims an end to falling home prices by the end of the summer in a speech he gave at the recent ICSC convention in Las Vegas.

While I do not have the weight of Mr. Zell, I have been telling everyone within earshot since late 2007 that this downturn (including falling real estate prices) would begin to slow between late September 2009 and February 2010.

While economists "officially" stated the recession started in September 2007, the reality is it started in April (and when this is over, it will be adjusted and I told you so!) when gas prices began to crimp spending.

In my role as GM of an asset for which I travel more than 100 miles a day to get to the office, I felt the pinch then and adjusted personal finances earlier than others. Further, as I was looking for an investment property in Nevada in December of 2007, it was already evident that home prices had fallen 10% by October of 2007 and as I did my valuations, it was clear we could easily slip another 10-20% (which we did).

What Mr. Zell said is nothing new, I guess it just needs to come from a source that's quotable or printable. However, my disagreement with Mr. Zell stem from the job situation. We still must shed another 2 percentage points in unemployment before we will begin to see a solidifying stabilization. The key benchmark for me, will be when weekly jobless claims move closer to the 300,000 level. Some will argue that weekly claims that continue to move downward for 3 or 4 consecutive weeks will trigger the first signs of stabilization. But I think those assumptions are erroneous.

My conclusions are that even though unemployment claims may be slowing, it does not account for those who are no longer counted, therefore, it gives the appearance of stabilization. What Mr. Zell (and many others) do not understand is that until job reports stabilize, there can be no stabilization in the housing market.

Further, it is unlikely that banks will be loosening credit during this period as people continue to lose jobs and personal bankruptcy protection rises. What we are likely to witness in the times ahead is class warfare. Pitting the haves vs. have-nots when it comes to purchasing real estate.

Another consideration that isn't being addressed is what will be the new acceptable credit score for home purchases? Will it be 570? 600? 630? It cannot continue to be 700 or higher. There are too many people with poor credit (or have recently filed BK) who will not qualify for 7-10 years if it remains at 700 or 720. How will they get loans? Credit of any sort?

No, housing stabilization is not coming soon and it is a fallacy to believe so given the other factors I just mentioned.