April 2010 Charleston Market Report

www.charlestonmarketreport.
com
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”
William Arthur Ward
April 2010 Issue

In This Issue
Cartoons
Charleston Residential Real Estate
Charleston Commercial Real Estate
www.charlestonmarketreport.com
Charleston Real Estate
All of Charleston
**Housing prices are still weakening in Charleston when you focus on the PSF (Price per Square Foot) instead of the
Median Sale price. You see a distinct different when you compare the two figures.
Take a look at the percentage of how much each of these price ranges represents the Tri-County market.
• Under $300k is approx. 80% of the market!
• $300-$600k is 15.12%
• Over $600k is only 5.9%
The real scary figure in the chart above is the Months Inventory for homes for sales over $600K. It must be daunting
to be a seller in this segment of the market where there is over 4 years of inventory yet your market only represents
6% of the market. This is a significant Supply/Demand problem for the upper end of the market.
The collapse of the Charleston market has been significant when you compare the volume of sales in 2005 to 2009.
We are talking 18,032 sales in 2005 vs. 8300 in 2009! This is a drop in sale of 54%, which is quite amazing in my
opinion. It demonstrates the number of people who are now underwater in regards to price during the time before the
credit collapse that I warned everyone about in 2006. These annual figures can be found on page 14.
When I look at all of these charts and figures I still see a weak housing market in Charleston. I do strongly believe it
will get better IF the global credit and currency markets do not collapse before the Boeing, Wind Turbine and other
future employees begins to arrive in 2012. If the major Black Swan event does occur and we continue to see volatility
like we saw in the stock market last week from sovereign debt nations like Greece that spreads to all the markets
around the world which are conveniently traded and connected by computers and algorithms then all bets are off for
any recovery in the housing market because we will all be in deep “doo doo.”
I would not buy residential real estate in this market right now unless I had really good circumstances. I believe that
nothing has been fixed with regards to the credit problems we experienced in 2008 and we need more bank failures in
order to have a proper correction in the market. The correction that needs to occur will be painful but the bankruptcy
process is rather efficient. The government intervention has only made matters worse and I believe most homes for
sale in Charleston just resemble future “falling knives.” I realize many of you are directly involved in the Charleston
real estate market but I am just talking reality here. I hope I am wrong. I would pay off as much debt as you can and
get “mean and lean” with your personal finances to avoid future financial shocks that are upon us. The manipulation
of markets, lending, interest rates, etc. by governments and central banks around the world is not true capitalism and
only delays the inevitable “POP” of the bubble that these morons created. If you have excess Dollars I would invest
in gold, silver and safer currencies other than the U.S. Dollar. When you buy a home in US Dollars, before interest
rates increase, in a sector of the economy that is clearly in deflationary mode you are taking a risk. You are not going
to make any money on that home because it will lack appreciation due to falling prices, increased foreclosures, erratic
credit markets, a fragile currency and you increase your personal debt service to a bank (government) in a market
where there are clearly a lower supply of home buyers versus supply of homes.
The smart move right now is protect your hard earned money in other areas outside of a sector like real estate that will
not be affected by the problems that are upon our country and the rest of world. I have talked about them in previous
issues of the CMR and my opinion has not changed.
This real estate and finance industry has done a wonderful job of brainwashing people that every time they move to a
new town they should buy a home. Owning a home in the US or the rest of the world should not be an entitlement. If
you can’t afford to put at least 20% down you should not get financing. This is the way homes were financed in the
old days and we did not have these risks to the credit markets. The market with inflation over the past 30-40 years
has backed up this investment strategy. What most people do not realize is that markets run in cycles and sometimes
strategies must change. If you can rent a home for 30% less what your payment would be why would you buy it,
incur the debt and become a future slave to a bank who holds your note? Well now you become a slave to the
government because the banks do not hold any mortgages on their books anymore.
The way it stands right now is that approximately 96% of the homes are financed via FHA, Freddie Mac and Fannie
Mae. To this date some $130 billion has been spent to keep Phoney and Fraudey propped up and still in business.
What would happen if these two worthless companies were not in business? The answer is that there would not be
any financing for home sales in Charleston or any other city around the country! If this scenario occurred what
happens to home prices? We had a small taste of this scenario in 2008 before the bailout so you all the answer.
What truly agitates me is that by propping up Fannie and Freddie the foreclosure rates and deficit just gets worse
which will bite us all in the ass down the road with higher taxes and more volatility like we see in Greece. Freddie —
already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes — recorded
a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial
position.
Serious delinquencies in Freddie’s single-family conventional loan portfolio — those more than 90 days late — came
in at 4.13 percent, up from 2.41 percent for the period a year earlier. Delinquencies in the company’s Alt-A book, one
step up from subprime loans, totaled 12.84 percent, while delinquencies on interest-only mortgages were 18.5 percent.
Delinquencies on its small portfolio of option-adjustable rate loans totaled 19.8 percent.
The company’s inventory of foreclosed properties rose from 29,145 units at the end of March 2009 to almost 54,000
units this year. Perhaps most troubling, Freddie’s nonperforming assets almost doubled, rising to $115 billion from
$62 billion.
The market is presently stitched together with buyer-assistance programs, loan modifications programs, new
homebuyer subsidies, foreclosure abatement programs, principal reduction programs, historic low interest rates,
"easy-term" financing, and government-backed loans. There is no housing market without the government right now!
There's a 9-year backlog of distressed homes. The banks are deliberately fudging the numbers to hide how bad things
really are. The number of homes in late-stage foreclosure is not 1.1 million, but nearly 6 million--- 5X more than the
banks are admitting. Housing will be in the doldrums for a decade or more. It's shameful that people can't get basic
information like this to help them make their investment decisions. The banks are trying to keep prices artificially
high to avoid writing-down millions of mortgages that would force them into bankruptcy. It's called "extend and
pretend" and its poisonous for the broader economy because it distorts prices and keeps a broken banking system in
place that can't perform its social purpose.
The problem is not housing. The problem is the banks and the government. The banks do not have sufficient capital to
fund the mortgage market, nor do they provide the bulk of the financing for auto loans, student loans, small business
loans or credit card debt which is gathered into pools and chopped up into tranches for securities that are sold to
investors. (Securitization generates wholesale funding for the credit markets) Not only are the banks unable to fulfill
their primary social purpose--which is extending credit--they're also increasingly dependent on revenue from high-
risk speculation.
This is why I want to end the CMR because it has become agitating to write the truth. I could play the “Let’s be
Positive Game” that I see many doing in order to make a buck but I do not roll that way. I deal with reality NOT
fantasy. We truly have some diabolical and egotistical maniacs in the banking system and government running the
economy into the ground.
If we avoid a major Black Swan event in the future Charleston is poised to benefit as well as any city in the country.
There are truly some exciting things happening in this great town. However, the macro and micro events that we
witnessed in Greece, stock market and credit markets will trump any progress in the real estate industry if some of
these variables rear their ugly heads in the future. Only time will tell.
All of Charleston
Under $300k
$300k to $600k
Over $600k
Market Overview
Annual Review
March was another very good month for the Charleston real estate market with sales almost 16% higher than March
2009. Even more importantly, sales improved in all price categories showing that it isn't just first time home buyers
claiming the tax credit but both the step up buyer of mid priced homes and the high end luxury home buyer have
returned to the market strongly.
Sales on a year over year basis were up 35.2 and 60.0 percent respectively for March and 34.4 and 48.9 percent for
the first quarter and are due to several factors, lower mortgage rates for non conforming JUMBO loans, a feeling that
the market may have bottomed last year, a stronger local Charleston economy and improving consumer confidence.
Now about the tax credit, it expired yesterday and April 30th could become a new national holiday for procrastinators.
I heard stories that buyers and their agents were running around like chickens with their heads cut off trying to get
ratified (and binding) contract before the deadline. I worked with several buyers earlier in the month who were
obviously a little better prepared for the deadline and I can only wonder how anyone could rush the purchase of a
home just to get a tax credit.
A quick and early look at April indicates another strong month with 649 home sales already recorded compared to
580 last April and once again, because sales are usually entered later rather than earlier, should once again easily top
700 for the month. May and June should both still be excellent months but we will be starting to have more difficult
year over year comparisons because the tax credit started last year around this time. The first real test of housing
market stability should come in July.
Comparing the last 12 months with the prior 12 month period, if you focus on the price paid per square foot, you can
see the real decline in home prices from the highs in the market. Buyers are able to get a lot more house for their
money and with mortgage interest rates still very low (a 30 year fixed rate conventional loan is currently at 5%),
affordability is better than ever.
Buyers were more active in March vs. February as we came closer to the Tax Credit expiring on April 30th. The year
over year pending home sale figure increased to 54.4%. Obviously, low rates, tax credits and government induced
financing via FHA, Fannie Mae and Freddie Mac (who are severely in the red) are all variables helping drive sales.
Let us all keep in mind that we are comparing sales to last year, which was one of the worst years on record ever
for home sales. Just remember without government intervention and manipulation in the housing market we would
have seen a much worse correction in price that has only been temporarily delayed.
I will get into more analysis in the report later this month with regards to more macro and micro events occurring that
could wreak havoc on all the markets in the near future.
Sorry I could not deliver better news but we live in some interesting times. My gut instinct on this stuff is usually
very accurate and I am just not feeling the positive vibe right now with everything going on at a national and
international level.
I will hopefully get the next report out before the end of May. I apologize for the delay on this one.
Charleston Commercial Real Estate
I use the reports from Grubb & Ellis because they are very well done. Based on the comments from the guys over at
G&E it appears the impact of government contracts via SPAWAR and the future Boeing plant is having a positive
impact on the Industrial and Office markets. Considering how bad commercial real estate is in other markets around
the country the outlook and forecast from G&E is very positive with all of the various industries moving to
Charleston and this is reflected in lower vacancy rates and firming up of lease rates. Charleston is benefitting from
two major industries right now which are the government and aerospace industry. I think the jury is still out on
whether a bottom has formed in commercial.
The current weak spot for commercial is the banks. I have discussed this in previous CMR issues that many of our
local and national banks are hoarding cash they received from TARP and/or stock offerings because of an increase in
non performing real estate assets and weakening capital ratios. Many banks are simply “Zombie” banks and just need
to be shut down but this process will take time as the Federal examiners gradually toss out more Cease and Desist
orders. The Feds usually shut down a few banks each Friday but do not want to shut down too many at once in order
to avoid a panic.
Focus on the vacancy rates in the following reports which are very interesting. Right now the vacancy rates in all
three sectors appear to be on the decline. I hope that trend can remain in place. However industrial and office are still
in double digit vacancy rate territory which is very worrisome if they do not continue to improve because there are
many local Charleston banks with exposure to these properties.
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April 2010 Issue

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