"This
week I attended the [serious players] fall
conference. [serious players] is the top real estate
industry group in the world. All the most senior people in the
industry.
1. Not one
expert was willing to predict what things will look like in 3
years other than they think it will be better.
2. One top
economist said if you are a developer find another career for
the next 3 years-there is nothing to do and it may be 5 years.
3. Recovery
will be slow. Unemployment will not drop back to more normal
levels until 2014. First they will bring back people on 4 day
weeks to 5 days, then they will increase hours form the
average 33 hours now, then part timers will become more full
time, then they will start to hire.
4. Real estate
values are down generally 40% and there is a huge need for
value reset to occur.
5. Nobody
knows what debt will look like when it returns other than it
will be far more conservative. Nobody knows what
securitization will be when it does return.
6. The rating
agencies will operate differently. There is a discussion among
some of us that there needs to be an agency probably of
Treasury that collects fees of some sort from issuers each
time there is an issuance of debt to be rated and that agency
will then hire a rating agency to be a analyst firm to
determine the quality of the issue. There will definitely not
be a continuation of investment bankers hiring the raters and
paying them directly. There needs to be a rule that the I
bankers cannot talk to the raters. There was far to much
threats of withholding fees, and other inducements to the
raters before making ratings about as accurate as appraisals
which were also paid for by I bankers who needed high
appraisals to justify the over leveraging.
7. Housing in
some bad markets is still bad and the first time buyer credit
is making it a somewhat phony market. Phoenix has 45,000
housing lots so there is a literal lifetime supply of lots.
Land prices in Phoenix, S CA and other markets are 50% of the
cost of the infrastructure installed on finished lots. The
land has zero or negative value. In most areas it will be at
least 5 years before any of this land will get built out in
any quantity.
There are
still 2-3 million too many houses in the US.
8. This time
is really very different than any recession in the past
9. The US is
no longer the world economic leader and will not lead the
world out of this mess.
10. Real
estate will once again be an investment and not the trading
vehicle it became which is what led to this crisis.
...
Here
is the real stunner. A senior person at Treasury said
to a small group of us that it is now official Treasury policy
to extend and pretend on real estate loans. In other words,
the policy statement from last week says, if you can make an
analysis that says even if the current value is less than the
loan, if you can do a spreadsheet that shows if you extend for
3-5 years, and if the economy gets better, and if the loan can
be amortized down to where the loan is no longer more than the
value, then the lender does not have to take an impairment
-write down. Loans are to be modified by rate reductions,
deferral of reserves, deferral of amortization or what ever.
Just NOT
principal reduction. This is just like they are doing in
housing.
Giant make
believe. The free market seeking an equilibrium price is no
longer economic policy. In short, the working of the free
market is suspended. She went on to say it was administration
policy that they will create new employment and by doing so
they will boost the economy, and so then real estate values
will return to old levels. There were 50 of the most senior
and smartest real estate people in the room. They ripped her
to pieces. It looked like one of the town hall meetings of
August, except everyone there was a very senior, polished
professional. At one point everyone was calling out or moaning
at her. It was clear to all she had been given a few talking
points and she was told to stick to them no matter how foolish
she looked. The group told her in no uncertain terms this is
terrible public policy. They said for jobs to be created you
need to lower rents so the cost of occupancy was at a level to
encourage more hiring. If the loan is kept at old levels and
building values not reduced, then landlords can't reduce rents
to where they need to be to make taking space by tenants
economically viable. Retailers costs remain higher than they
should be making it harder to lower prices to induce sales. So
there is a massive make believe going on. When I pressed the
issue of political interference she said -what do you want us
to do, bankrupt all the banks.
That is the
choice.
What does this
tell you?
A. The problem
is going to take much longer to solve than it should,
B. The banks
are still very weak, so lending will not return anytime soon,
C. A massive
refi problem is getting deferred to 2013-2015.
D. The
administration is playing politics with the economy to a
degree that is dangerous. There has to be a massive value
reset for real estate. We are deferring the inevitable.
I think we
captured a lot of what was said in various panels and
conversations. We have a long way to go and the government is
making it harder to fix the problem."
