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Annual Review & Outlook of Merabi and Sons, and our Industry Real Estate for 2006:


Leadership is difficult during times of rise and fall. As we are due for a correction in the real estate, I have asked my staff to change our approach to buying buildings for the up and coming 2006 year. We are optimistic about real estate in 2006. You should be as well.

At MAS our team of experts forecast the real estate market outlook for the up coming New Year. We feel that it is important for us to share this with you. Real estate market corrections are widely anticipated for 2006, but not as much as the late 80’s of course. Despite a continuous flow of capital into commercial real estate in late 2005, many of the biggest investors have sold shaky real estate assets. Amid so much uncertainty, what should real estate investors expect in the coming year and how can you protect your real estate portfolio?

As the New Year begins in less than a week, Merabi and Sons and the industry are expecting a stable market. Barring a catastrophe, everything should be fine. We at MAS believe that the Federal Reserve will hike the rate for another 25 basis points after Mr. Ben Bernanke takes over in January. I believe that should be followed by three or four increases, and the Federal Reserve will continue to raise the interest rate at least through early 2006. The sharp drop in gasoline prices will help the economy to grow at a faster pace, resulting in rising industrial production, giving rise to fears of inflation, that in turn help hike the interest rate .The rise in interest rate should slow the real estate market.

Imports account for about 25 percent of the merchandise that we Americans consume. It is up from less than 10 percent in the 1980’s. Due to this, we at MAS believe in diversification of our assets. Therefore, we are researching real estate investment opportunities in the Far East (mainly China), where most of our money goes for these imports.

Keep Your Eyes on the Horizon

Investors should be prepared to weather a correction by leaving their money invested long enough to realize healthy returns. With a longer horizon people will weather the storm and make money. If you are investing for the short term, 2-3 years, 2006 may be a bad year to invest. Commercial real estate is now recognized as a fourth asset class, attracting capital comparable to stocks and bonds. And, while returns on commercial real estate in the short term may be unimpressive, the same will be true for stocks and bonds which experts predict will yield a modest 6-7 percent return over the next 5-7 years.

A market correction doesn't mean that there won't be opportunities in 2006. But investors will need better guidance in finding niche investments, anticipating rising costs and keeping realistic investment horizons. If you're feeling richer these days, you probably have your real estate to thank for it. Runaway home values on the coasts and in the Southwest mean more than paper profits; they've also given people huge amounts of equity to borrow against to keep on spending.
There's anecdotal evidence that some markets may be cooling, but there's still plenty of speculation out there. Lehman Brothers economist Ethan Harris points to the fact that condos are hotter than regular houses in some towns. "You can tear down a small building and build a bigger one and triple the number of condos, but you
can't triple the size of land," says Harris. "So it's the land" -- in other words, houses with yards -- "that should be more valuable. But speculators like condos because the hassle and cost of getting in are lower than for buying a house. In other places, home prices seem to be reaching the limits of what locals can afford.

PMI Mortgage Insurance, a company that insures home mortgages against default, calculates that Boston, Long Island, Orange Country and San Diego face fifty-fifty odds of a price drop. How much should you worry about this? High energy costs and slower growth should mean milder home price gains at best and maybe even slight declines. But big price drops are generally the result of major shocks, such as the wave of unemployment that hit California in the early 1990s. "It's tough to see a traditional factor that would create a rapid pullback," says market researcher Nick Buss of PNC Real Estate Finance. Yet Buss concedes that we're sort of in uncharted territory here, with a market that seems to been driven in large measure by truly historic cheap mortgages.

"We've been stuck at low rates for such a long period of time now that it isn't going to take much to get a reaction," Buss says. "When we get to fixed rates of 6.5 percent, it will be noticeable. If we get to 7 percent it will be very noticeable."
At 7 percent, the mortgage on a $350,000 house with 10 percent down would cost a buyer $210 more a month than at today's average rate; that means it will be tougher to sell a house for $350,000. Rising rates will have an even bigger impact in such markets as California, where the majority of new buyers have been taking out adjustable-rate or interest-only loans. So 2006 looks like a bad year to stretch to buy more house. But if you have a mortgage you can afford even as rates rise, and you don't plan to move soon, you'll be fine -- home prices don't decline nearly as sharply as stocks do, and in the meantime you have a nice place to live.

The California Forecast

In his California forecast, UCLA Anderson Senior Economist Christopher Thornburg notes that the California economy "seems healthy on the surface" but below the surface there is no encouraging news. The California economy, like the national economy, is being driven in part by the housing sector and consumer spending (which is being fueled by the wealth home owners are feeling. While these sectors continue to fuel growth, core California sectors like information, manufacturing and professional services continue to languish. Dr. Thornburg says that, "The forecast for California is mediocre at best, at worst we are liable to dip into another recession." He admits that the research group has not been able to time the end of the real estate bubble. His current forecast is for a "soft landing," one in which the economy sees weak growth for the next two years, but no recession.

The Los Angeles Forecast

Mirroring the forecast for the state, the UCLA Anderson Forecast says the Los Angeles area will avoid a crash and experience a "soft landing" similar to the rest of California. UCLA Anderson Senior Economist Ryan Ratcliff says that, "any trouble in real estate markets is more than six months out, so our forecast is for a slowdown in housing in early 2006, leading to a broader economic slowdown in 2006-2007. At this time, there is not enough evidence from our leading indicators to suggest that this slowdown will become a full-blown recession." So at MAS™ we believe the rental market in the state and LA in particularly would be strong next year.

The New York forecast

The state has been attracting many new businesses even when the Olympic bid was lost. Condos are hot every where in New York City; the stock market is back in a strong position creating housing needs for the young banker. And thanks to President Clinton, Harlem is seeing a boost in the real estate economy as well

The Florida, Nevada, and Arizona forecast

As we feel the economy wind down, the effect will be greater in Miami and most of Florida. The rest of the nation will be less affected and as the turn down takes effect it will be more of a soft landing than a crash. Vegas /Nevada, and Tucson/Arizona have reached and all time high in real estate growth. In these areas Condominiums are being sold 2 years before they are even being built. This shows the confidence the consumer/investor has in the market. This perception will slow the decline.

MAS ™Company

My Company's shareholders who are my parents, aunts, brother, sister, cousins, under a condition of proxy have come to examine how I have been handling this 270 year old company at the end of the year. The success of our legacy is in the breeding of the next generation of Merabi's to take over the company and outside prospects who would in part work for the company. My goal is to preserve our family name which stands on a principal of ethics, philanthropy, and faith in mankind. We want to be a part of the elite development. We want the turns that are to take place in the world to be positive and leave an ever lasting impact. This philosophy has worked for the last 270 years at Merabi and Sons. This is why we are and will be the premiere Real Estate Company in the world.

Kambiz. Merabi
12-27-2005 Los Angeles

Merabi and Sons, the premiere Real Estate Company in the world.


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