Wednesday, June 24, 2009

Moody’s Commercial Property Price Indices are Meaningless

The latest bad news on CRE prices, from Zero Hedge:

Moody's has released its April Moody's/REAL Commercial Property Price Indices (CPPI) update and it is a doozy: -8.6%, after what many had expected was a shooting green reading of just -1.7% in March. The problem that many don't grasp, that even Moody's has finally caught on, is that once capitulation in CRE sets in, the bottom will be torn out.

Calculated Risk’s take on the same story:

Prices in the CRE market are not as sticky as the residential market, so prices fall much quicker. We've seen plenty of half off sales for distressed CRE, and this report suggests the average decline is about 25% over the last year.

Econompic’s headline for the story: tttiiiiimmmmmbbbeeeerrrr

From the actual Moody’s report:


To put this in perspective, the total estimated value of direct commercial real estate in the United States is $5.3 trillion. The value of the properties Moody’s based its index on is 0.000113 of the total. Given the non-existent market, how can anyone say with a straight face that these 67 transactions are indicative of anything?

CR mistakes the volatility on the CRE market for a lack of price stickiness, when the reality is it’s just a very thinly traded market compared to single family residential (which is a thinly traded market itself, more on that here).

Putting out reports like this is not a way for a rating agency to reestablish its credibility. Is it so hard to just say, “We don’t have enough data to report something meaningful?” Think how many problems would have been avoided if the rating agencies had admitted they didn’t have the data needed to forecast default and loss rates when residential underwriting standards loosened at the start of the residential bubble.