implicating fiscal, monetary, and macro economic factors affecting real estate values and conditions...

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P hiladelphia ~ May 16 & 17, 2006 2006 PLU S 2006 PLU S E& O Sym posium E& O Sym posium Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market Slowdown on the Frequency and Severity of Claims BY GLEN D. KIMBALL, ESQUIRE AND THOMAS J. GREGORY, ESQUIRE MURPHY & O’CONNOR, LLP

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Page 1: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Philadelphia ~ May 16 & 17, 2006

2006 PLUS2006 PLUSE&O SymposiumE&O SymposiumImplicating Fiscal,

Monetary, and Macro Economic Factors

Affecting Real Estate Values and ConditionsAn Analysis of the Impact of a Real

Estate Market Slowdown on the Frequency and Severity of Claims

BY GLEN D. KIMBALL, ESQUIREAND THOMAS J. GREGORY, ESQUIRE

MURPHY & O’CONNOR, LLP

Page 2: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Philadelphia ~ May 16 & 17, 2006

2006 PLUS2006 PLUSE&O SymposiumE&O Symposium

Is There a Real Estate Bubble?

If So Is It About to Burst?A Best Guess Analysis Presentation

BY GLEN D. KIMBALL, ESQUIRE AND THOMAS J. GREGORY, ESQUIRE

MURPHY & O’CONNOR, LLP

Page 3: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

WHAT YOU PAID FOR WHEN YOU BOUGHT IN

2000

WHAT THEY PAID YOU FOR IN 2006

WHEN YOU SOLD?

WHAT IS A BUBBLE?

Page 4: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

______________________________________________________________________________

Page 5: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 6: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

VARIABLES THAT IMPACT THE RESIDENTIAL AND

COMMERCIAL REAL ESTATE MARKETS FACTORS

● INTEREST RATES

● OVERALL ECONOMIC CONDITIONS

● OIL PRICES

● TAXES

● DEMOGRAPHIC SHIFTS

● WEATHER EVENTS, NATURAL DISASTERS,

WAR & TERRORISM

Page 7: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

THE REAL ESTATE MARKET IS NOT MONOLITHIC:

THESE VARIABLES HAVE DIFFERING IMPACTS ON:

● COMMERCIAL VS. RESIDENTIAL REAL ESTATE

● DIFFERENT GEOGRAPHIC REGIONS

● URBAN, SUBURBAN AND RURAL AREAS

Page 8: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 9: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 10: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 11: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 12: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 13: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

DEMOGRAPHIC SHIFTS IN POPULATION

Page 14: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

NATURAL CATASTROPHE

S

Page 15: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

FLUCTUATIONS IN MARKET

CONDITIONS

Page 16: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 17: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

THE LAST GREAT REAL ESTATE BUBBLE

DO YOU REMEMBER STAGFLATION?

Page 18: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

OIL

Page 19: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

The Price of Oil

The Great

Unknown

Page 20: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

BUDGETING IN THE FUTURE?

Page 21: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

WAR AND ACTS OF TERROR

Page 22: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 23: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

TAXES● AS INCENTIVES AND DISINCENTIVES

● VARIABLE IMPACT ON COMMERCIAL INVESTMENT AND RESIDENTIAL PURCHASES

Page 24: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

REAGAN’S TAX REFORM ACT OF 1986

Page 25: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

INTEREST RATES

Page 26: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

INTEREST RATES

Page 27: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

INTEREST RATES

Page 28: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 30: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

CHECK WITH t H E 8 b al l

Page 31: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

CANNOT PREDICT

NOW

Page 32: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Philadelphia ~ May 16 & 17, 2006

2006 PLUS2006 PLUSE&O SymposiumE&O Symposium

Ramifications of the Ramifications of the Real Estate BubbleReal Estate Bubble

Presented by:Mike W Smith, President

Axis Insurance Services, LLC Franklin Lakes, New Jersey

201-847-9175www.axisins.com

Page 33: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Is the Market Frozen?Is the Market Frozen?

Page 34: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 35: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market
Page 36: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Dateline NY TimesDateline NY TimesMay 9, 2006May 9, 2006

Page 37: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Concerns Expressed by Concerns Expressed by My Clients About the MarketMy Clients About the Market

• Revenues Are Down • Properties Take Longer to Sell• Less Bidders • Damages May No Longer Be Mitigated by

Other Available Buyers • Increased Insurance Requirements (SOX)• Business People Making Buying Decisions

Page 38: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Concerns Expressed by Concerns Expressed by My Clients About their Liability My Clients About their Liability

• Personal Liability

• Misrepresentations by Client

• Insurer Always Looking for a Way Out

• Independent Contractors (cutting corners)

Page 39: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Concerns Expressed about Concerns Expressed about Liability Liability

• Bad Appraisals

• High Debt to Equity Ratios

• Inability to Move Product

• Increased Disclosure Requirements

• Increased Responsibility for Client Actions

Page 40: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Who is most likely at Risk?Who is most likely at Risk?

• Appraisers

• Mortgage Brokers

• Inspectors

• Title Agents

• Residential & Commercial

Real Estate Agents

• Dual Agents

Page 41: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

From WhatFrom What

• Banks and Financial Institutions for Loans in Default

• Sellers Unable to Unload Properties

• Sellers Can’t Close on New Properties

• Buyers Who Purchased Inflated Properties

• Failure to Disclose….Anything!!!!!

Page 42: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Case StudiesCase StudiesMortgage BrokerMortgage Broker

• Mortgage broker sued because client could not make mortgage payments Client took out home equity loan >100% of equity Ran up credit cards Defaulted on Mortgage and Home Equity Loan Returned for another loan - didn’t qualify Advised to sue mortgage broker Settled for $27,000

Page 43: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Case Study Case Study Commercial Real Estate AgentCommercial Real Estate Agent

Broker sued because tenant could not make payments on lease 300,000 square foot space, internet bubble

tenant defaulted on $117 M lease Broker sued because they should have

screened tenant better Over $500,000 in legal and still going

Page 44: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Case Study AppraiserCase Study Appraiser

Appraiser sued for overvalue of appraisals New construction single family housing complex.

Over 50 houses Interest rates up, market prices down. Houses

aren’t moving very fast Several defaults… Houses are selling for 30%

less than purchased 4 suits so far with payout over $250,000 More to follow ($600 appraisers policy) Our office will not sell a policy with a financial

institutions exclusion

Page 45: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

Case Study Case Study Home InspectorHome Inspector

Home Inspector sued for losing sale• Home inspector report said roof 15 years

old (the roof was actually replaced three years ago)

• Buyer thought owner might be lying about other stuff (furnace, water damage, etc)

• Buyer walked. No other buyers at that price. In a hot market, the seller would have other options

• Case is in the initial stages

Page 46: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

What Do We See?What Do We See?

• #1 You now can lose money in real estate

• Ability to mitigate damages with other buyers is limited

• Many people getting out of the business

• Revenues down (in underwriting that usually means lower rates, but is that actuarially correct )

Page 47: Implicating Fiscal, Monetary, and Macro Economic Factors Affecting Real Estate Values and Conditions An Analysis of the Impact of a Real Estate Market

What Do We See?What Do We See?

• A Changing Market Place

• Brokers more aware of their coverages

• Higher degree of responsibility for real estate professionals

• Need to enhance coverages

• Opportunity for the insurers to support the industry