Housing, multifamily and commercial real estate prices originally fell because they were overvalued and no longer sustainable with incremental debt.  As prices fell, many of these overleveraged assets became distressed.  Distressed properties are both a function of falling prices and a contributor to this self-perpetuating trend as they force the market to clear at discounted valuations.

Since price trends originally turned negative, distressed transactions have become a leading indicator of future performance.  As the percentage of distressed sales increases, price declines accelerate.  And when the share of distressed sales shrinks, price declines moderate or invert to appreciation.

In the first quarter of 2010 the share of distressed transactions exploded by record amounts in both the housing and commercial sectors.  This bodes poorly for pricing trends across the spectrum of real estate assets.

In only two months (ending January) the share of distressed existing home sales has increased by approximately 6.4%, the steepest incline since the housing crisis began.  This steep slope marks an end to the 10 month, orchestrated attempt to prop up housing prices which began in January 2009. 



Given the high and rising percentage of distressed transactions, housing prices will fall in February and beyond in accelerating fashion.

Concurrently, in one month (ending February) the share of distressed commercial repeat-sales has increased by approximately 7% to a record 31.8%.  This represents a 14% increase in three months and a 30% increase over 15 months.  Not surprisingly commercial prices experienced steep and sustained declines during this period. 



Following three month of price appreciation, the sharply higher distressed share has contributed to an abrupt decline in commercial prices. 

Dismal Reality

After the manufactured “dead cat bounce”, housing, multifamily and commercial real estate prices are again falling, and a growing share of distressed property sales is overwhelming the market. 

It appears that distressed properties, which were “delayed and stacked” by a misguided public policy response, may become the most important force driving prices lower.

Despite substantial valuation corrections since the collapse and recent, modest appreciation, both commercial and housing prices are poised to gap lower.  Given the centrality of real estate to the recession and the fragility of a lending industry dangerously exposed to these overvalued assets, the narrative of a recovery appears to defy looming economic fundamentals.