Aging Demographics Spell Pessimism for Housing Recovery

Great analysis of the housing market, from the perspective of generational demographics.  With 80 million baby boomers looking to sell and 65 million Generation X’ers in their home buying years, (along with the hanging oversupply in the market), prospects are grim…


National Mortgage Settlement Plays “Kick the Can”

Do we really need more “hopium” and malappropriated, government-dictated public largesse? In my opinion, the “historic” mortgage settlement is nothing more than public pablum.

First, the actual cash settlement is, (at least what’s written today, 2.11.12 on the “official” website,, $1.5 billion to 750,000 foreclosed homeowners.  There’s also $3 billion in “refinancing relief” for homeowners, $17 billion stipulated for write-downs, in plus some payouts to states. Happy day rainfall for those lucky few who actually benefit, and a token slap on the wrist with EXCULPATION for the massive fraud and willful negligence which lined individuals’ pockets. So, now that “corporations” are the bad guys (ultimately penalizing shareholders and taxpayers when the scale of bad behavior results in bailouts), no individual is held responsible and can literally stuff their bank accounts with virtual impunity.

And this does nothing to “cure” the problem.  Seriously, the stipulated write-downs are estimated at $2,000 per mortgage.  The truth is, there is a huge oversupply that needs real price discovery, and hoping the economy and the market will real soon here get us back to supporting 2008 values if we just continue to extend and pretend is just…unbelievable, in a cynical way.  The graph below (h/t Zero Hedge) shows how much is trying to be swept under the rug…

With workforce participation shrinking (now 63.7%), where is the demand and ability to pay supposed to come from?  Even if the economy can sustain something around a million units annual aborsption, the math is pretty obvious — time is not a solution.

With systemic and fundamental supply and demand issues, the investment climate is one of extreme caution…

Some global food for thought…

Interesting, fun, unusual sets of global charts and info from Goldman Sachs. Great way to think about the year to come!

MORE Government Meddling for Real Estate!

In yet another manipulation to avoid real price discovery, the taxpayer money pits known as HUD and FHA have teamed up to offer a new loan and free money to any “qualified” individual with $100 in their pocket…

The new HUD program cuts the minimum down payment from 3.5% to…$100.  PLUS, new buyers are eligible for additional money for “remodeling and renovation” (wink, wink) through HUD’s  203(k) fund!  Of course, the buyers are expected to be owner/occupants and the purchase prices will not be heavily discounted…

Although I’m sympathetic to the dilemma created by the collapse of the massive money/real estate bubble, what could “they” possibly be thinking, this time it will be different?  Free money, artificial pricing, taxpayers backstopping any losses…it is so far beyond stupidity it leaves one speechless, and worse, cynical.

Here’s a link to the reference article from The Street.

The “New World” of Commercial Real Estate Investing…

There are new paradigms in real estate investing…location, location, location is now secondary to supply, timing and pricing.

Money bubbles, like those created by the S&L’s in the 80′s and Wall Street in the last decade, create a market fueled by fee-based transactions, not fundamentals.  In the 80′s, the debacle was handled at great cost to taxpayers (Resolution Trust Corporation being saddled with the losses), but there WAS breathtakingly rapid price discovery and a transfer of assets to privately-funded ownership.  The result was a gradual balancing of the fundamentals and economic prosperity based on free market principles of economic growth.

Perhaps the scale of this latest bubble is so immense, perhaps the money powers believe if  extend and pretend long enough the disproven Keynesian economics formulas will work this time, but for whatever reason, there is no price discovery in this market, and there cannot be a systemic recovery without one.

Worse, the hope for a recovery are diminishing, and according to the highly-respected Economic Research Institute, “…the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not ‘soft landings.’”

So, just as a rising tide floats all boats, deflation can be a wealth-killer, which is where this economy will likely be heading without extraordinary intervention.  As the ERI concluded: “Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.”



Credit Markets Pessimistic About Commercial Real Estate?

I like to “follow the (professional) money” in evaluating overall market conditions, and this chart of CMBS spreads for August 29, 2011 (published by JP Morgan, h/t should give pause to commercial real estate investors:

The chart key, regarding CMBS “vintages,” is not as important as is the overall trend — spreads in AAA bundles are going up rapidly.  So, either “professionals” see higher perceived risk in real estate, or there is tremendous competition for risk capital, either condition being, um, not good…

Particularly given the paltry yield for sub-AAA US Treasuries, and the penalty some banks are charging commercial customers for parking cash, this flight from yield (and risk) needs to be heeded.

Inflation/Deflation Conundrum for Commercial Real Estate Investors

As posted previously, a seasoned investor in commercial real estate pointed out the ONLY decision which an investor must absolutely get right is — is it an inflationary environment, or a deflationary environment?

This question is particularly important to commercial real estate investors at this period of time.  There has been no widespread price “discovery” as there was in the mid 1980′s  Resolution Trust Corporation era, which increases risk to any buyer.  (As a side note, as painful as the process was, particularly in the “COLT” states, deflating the bubble quickly was far less expensive to the economy, and led to a very robust, multi-decade period of growth.  Compare and contrast to how ridiculous pumping trillions into the current “leaky balloon” is and will continue to be…seriously, the Federal Reserve may have $16 trillion on its balance sheet, which it expects the American public to make whole?  I digress…)

There is a faction that believes explosive inflation ala post-war Germany is inevitable because of a) the amount of money the Fed printed and pumped into the economy this last decade (see chart) and b) the apparent course of the Fed to devalue the dollar as a strategy for debt payment (using nominal, worthless dollars to “repay” creditors — China has already called a foul).

There is, however, a very well-reasoned counter-argument, which argues that, speculative price action aside, you can’t really have inflation without demand, and you can’t have demand if PEOPLE don’t have money — rescuing and capitalizing financial organizations provides no real support for demand.  In this line of reasoning, PEOPLE will only have more money when wages go up, and wages will not be going up until unemployment has dried up (whether that’s 6% or 4% is immaterial at this point).

Just more to consider in these turbulent times…click here to link to the article posted on McKinsey consultants web site and, keep your powder dry! (IMHO)

Following the Money…

As discussed in previous posts, THE most important determination to be made when investing in any asset is — is the environment inflationary or deflationary?  Inflationary, buy stuff, it will go up in price.  Deflationary, maintain purchasing power (and, conventionally, go long “safe” bonds, as money pays a premium for safety and some yield — here’s a recent CNBC explanation, “Amid Deflation Worries, Pros Turn to Long-Term Bonds’).

Inflation and deflation are measured in many different ways (my cynical side adds, depending on the spin one desires to impart), and one useful, relatively spin-less measure is money supply — adding money “inflates” the monetary base, more dollars chasing stuff, destroying money “deflates” the monetary base, the dollars available can be very picky about what and when they buy.  (Federal Reserve 101 primer, yes, money is created and destroyed by a central bank through mere accounting entries, such be the vagaries of fiat money).

We can see how this relates to prices, in this case, in real estate, by the two charts below.  The first chart shows annual percent changes in a category of money supply called M3, which is pretty much large electronic money transfers between the Federal Reserve and institutions, the second chart is a measure of real estate values, with 1 representing a “baseline,” 1.5 representing a 50% increase over the baseline, etc.

The M3 stats are only for the periods after 2006, but you can see the huge annual increases, then a pause, and most importantly, you can now see not just reduced rate of increase but actual negative growth, reflected in a DECREASING M3 supply. Further you can see the run up in prices continuing as money supply increase (I’ve added shading for 2006 forward), followed by a collapse as total M3 stagnates, then shrinks.

So, what happens from here?  This is unlike any period in world history, there are so many moving parts in the picture – no one knows.  Clearly the top valuations were more a function of available money than of underlying fundamentals in the economy — can the Fed successfully “re-inflate” without pushing the dollar over the brink into hyperinflation?

Real estate in particular has not yet seen enough open market transactions to really establish a floor. And, without robust economic growth, the excess capacity in the system will only get re-distributed, likely at lower effective rates. So, big caution signs still on the horizon for vertical projects and acquisitions. Of interest, however, is spec land, which is starting to show up in REO inventories. Historically, patient, “legacy” portfolios have benefited greatly by adding attractively priced, low carry vacant land. In this environment, selective land deals can hedge an investor, positioning one for a rebound while limiting the potential cash drains inherent in other asset classes.

ULI walks the plank, calls 2010 CRE market bottom

The Urban Land Institute recently put out a new Emerging Trends 2010 report (link to 17 page downloadable pdf here).  Although the “I called the bottom first” game makes me chuckle (because it usually takes so many guesses, it’s akin to ‘even a broken clock is right twice a day’), it is a good exercise to begin to identify how to position oneself, and ULI obviously does excellent work in that area, although their calling the bottom in 2010 could be aggressive, in my opinion (as were those prognosticators who, last year were ginning their clients up for a turnaround this quarter!)

As everyone has identified, cash will be king, and ULI believes value reductions will likely be in the 40% to 50% range.  This quote from a ULI spokesperson in recent LA Times post on the report:

transactions“Our report participants find that a sense of nervous euphoria is growing among liquid investors who can make all-cash purchases,” said Stephen Blank, a senior resident fellow at the Urban Land Institute. “Those that are patient, daring and selective could score generational bargains on premium properties from both distressed sellers and banks that are clearing out unwanted bad loan and real estate-owned portfolios.”

While buyers may be optimistic, it’s important to curb one’s enthusiasm with a reality check.  The fundamentals of commercial real estate will continue to erode as long as we’re in a recession, and that call is, in my opinion, a ways off.

Additionally,  the “extend and pretend” workouts continue to thwart real price discovery.  The magnitude of the lending system’s losses, if we were in a real “mark-to-market” environment, could potentially bankrupt the system, and we know select banks, with heavy CDO exposure, have already been deemed too big to fail and bailed out once (on the taxpayer’s bill) — a second round of taxpayer largesse would be a political faux pas, with the 2010 elections on the horizon.

So, my guess is, more muddle through, while that elephant swept under the rug (equity deterioration) continues to grow.

Home Sales Not Leading the Way…

Recent article in Bloomberg shows 18.8 million homes vacant, in a total US inventory of 130.3 million homes…AND, “… 937,840 homes received a default or auction notice or were repossessed by banks, a 23 percent increase from a year earlier,” (data from RealtyTrac).

That’s over 14% current vacant inventory, with 940,000 more going “distressed.”  Further, job growth will be needed to build a demand base, and these numbers are not encouraging either — the 7 million in job losses since the “recession” began is still continuing to grow, over 530,000 new jobless claims were reported for the week of October 24 (it’s reported jobless claims need to fall below 450,000 to indicate positive job growth).

While auctions and desperation deals are becoming more common, remember to figure in the long term costs of a negative hold, and be realistic about the “hold” period — summer’s “green shoots” appear to be withering on the vine.

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