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Real Estate: Charting A New Course, Part 1

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Real Estate: Charting A New Course, Part 1

This is the first installment of Real Estate: Charting A New Course, a three-part special report on the state of the American real estate market. This series is based on Alex Schiff’s conversations with Steve Chaben, managing director and regional manager of Marcus & Millichap’s Detroit and Grand Rapids offices, and Stan Blacker, president of the Florida-based mortgage brokerage Mortgage Resource Partners.

Real Estate: Charting A New Course, Part 1

Ten years ago, America was entering a new era. Y2K turned out, like most doomsday theories, to be a myth. The presidency was about to be handed to George W. Bush. The boom in dot-com businesses was beginning to unravel and the Nasdaq was near its peak. 9/11 was still just a day in September like any other, the Middle East seemed to be headed towards peace, and no one knew about Facebook. In March 2000, the median price of a home was $165,100.

And that’s when the fun began.

From March 2000 until March 2007, median prices of homes sold in the United States rose to a peak of $262,600, which translates into an approximately 59% appreciation. Painting a more drastic picture, the Case-Shiller Home Price Index more than doubled. Then, the real estate market collapsed — and took the rest of the economy with it. Home prices fell to $200,900 as of May 2010, or a roughly 23% decline in just over three years.

Commercial real estate navigated a similar path: the Moody’s/REAL Commercial Property Price Index began at a value of 1 in December 2000, rose about 92% to a peak value of 1.918701 in October 2007, declined almost 44% to as low as 1.079808 in October 2009 and currently sits at 1.130953 as of April 2010.

Today, however, the talk on the ground is of thaw and stabilization. Property values began to rise again last year before another leg down, and the Case-Shiller Index posted its first increase in seven months in April. The Commercial Property Price Index is also starting to show signs of normalcy.

In other words, nobody’s partying like it’s 2005. But they are seeing small glimmers of hope.

“It’s like a big ocean liner that’s trying to reverse course,” observed Stan Blacker, president of the Florida-based mortgage brokerage Mortgage Resource Partners. “You just can’t do it like a V…once it turns, it’s going to bounce up about 10%. It overcorrected going down. It’s going to be sideways for 18 or 24 months.”

The unprecedented run-up in real estate prices set the stage for the precipitous collapse and the subsequent indecision of the market. Stan noted that from 2002-06, home prices in many areas rose by about 80% — including a roughly 50% appreciation in two of those years alone. “I equate it to a Ponzi scheme. The only way a Ponzi scheme can continue is if you have another layer of suckers. They were manufacturing suckers with all the fraud in the system,” Blacker said. And he’s right: according to a 2006 report by the United States Treasury Department, reported mortgage fraud increased by 1,411% from 1997-2005. By most metrics, this trend accelerated throughout the years before the crash.

“When the house of cards fell — when the Ponzi collapsed — we saw a total decrease in the value of homes from 2006 until now of 45-50%.”

Commercial real estate is experiencing a similar bottoming out process. Steve Chaben, managing director and regional manager of Marcus & Millichap’s Detroit and Grand Rapids offices, said, “Most in the industry would say that the degree of difficulty in today's market has never been [worse].” However, while “values are down 40-50% since the 2007 peak…there certainly has been a stabilization over the last year.”

The home value data used in this article can be found here at Economagic. Come back to Benzinga on Wednesday to see Part 2 of Real Estate: Charting A New Course.

--Alex Schiff

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