From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for March 2010

…and yet another Seattle-centric post

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I had the real pleasure of serving as Editor of the Central Puget Sound Real Estate Report for a number of years, a job which I gladly passed off to Matthew Gardner a couple of years ago. This is the 60th year of publication for this fine report. As local real estate markets continue to roil, it serves as a great touchstone for researchers, investors, and others with an interest in this market.

For more information or to subscribe, contact Glenn Crellin at the Washington Center for Real Estate Research, Washington State University,, or visit their web site,

Written by johnkilpatrick

March 26, 2010 at 2:24 pm

For the Seattle-ites out there

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The latest issue of the Conway-Pedersen Economic Forecaster just hit my desk today. It’s a “must read” for anyone doing business in the Pacific Northwest. Their lead article is titled “Are We There Yet” and asks if the recession is over.

Of course, “recession” is more than just a feeling, it’s defined by a set of numbers (technically, two consecutive quarters of negative GDP growth). However, as they so aptly put it, “At the end of a recession, when the economy is in flux, numbers can get squirrely.”

We concur. The Blue Chip Economic Indicators rofecast a positive GDP growth for the US of 3.1% this year. However, employment growth for the State of Washington — normally one of the economic leaders — is forecasted for a negative half percent. Ouch. (Actually, national employment is also forecasted at -0.5% this year, since employment growth and GDP growth are not linked at the waist.)

They conclude with the observation that, “While the recession may be over, there is much work to be done before the economy recoups its losses…Our projections indicate that Puget Sound employment will not return to its pre-recession level until the end of 2012.”

For more information, or to subscribe to their very valuable newsletter, visit their web site,

Written by johnkilpatrick

March 25, 2010 at 1:58 pm

Posted in Economy, Seattle

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Just a quick note — just got my regularly scheduled e-mail newsletter from Dr. Bill Conerly ( If you have any interest at all in Washington/Oregon economy issues, he’s a must-read.

Written by johnkilpatrick

March 15, 2010 at 1:51 pm

Dallas Fed Econ Letter

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The February issue of the Dallas Fed’s Economic Letter hit my desk this week. The economic research staffs at various Federal Reserve Banks don’t directly compete with one another, but instead take very different slices of the same issues. As such, I try to glance at most of them from time to time. Dallas does a great job at the nuts-and-bolts of what makes up the economy.

The focus this month is on the way the world-wide recession has hit global trade, particularly durable goods. I won’t bore you with the whole thing — look it up yourself at However, they DO tend to assume that the reader is fully versed on how things work, and as such leave out a few details we would normally need to explain to Econ 101.

From an average persons perspective, world trade begins — and ends — with consumption. People want to buy stuff, and so other people somewhere else make it and ship it to them. If demand falls off, so does supply. Since one person’s consumption is another person’s income, a fall-off in demand creates a downward spiral that needs to be kick-started. It’s one reason why the Chinese are so apoplectic right now — they tend to be in the “supply” biz and Americans and Europeans are in the “consumption” biz. Ergo, if things get really bad, Chinese workers have too much spare time on their hands. Very few things frighten the Chinese leadership more than that.

And yes, trade REALLY got hit hard by this recession. On an annualized basis, U.S. imports fell about 15% in 4Q08 and another 35% in 1Q09 (U.S. exports fell by comparable percentages). Those are huge, but mild compare this to Japan’s experience. Remember — Japan is very much a trading hub. They import a huge share of their food and consumption and make a big chunk of their income by exporting stuff. Japan’s exports fell at an annual rate of about 45% in 4Q08 and a whopping 60% in 1Q09. Their imports fell as well, but not as badly because, let’s face it, if they don’t import stuff, they starve. (If the U.S. doesn’t import food, we end up having to eat domestic lettuce rather than Chilean arugula. It’s just not the same.)

Two things are missing from this equation, though, and need to be understood for a fuller appreciation of the trade problems. First, even if demand picks up (or for that matter, never fell off in the first place), world trade was going to get hit badly due to the almost total collapse of trade capital. Banks in free-fall were cutting lines of credit, and since import/export activities are among the riskiest (and require hedging, which was also in a tailspin), those lines got cut badly. If you were a major player, like Boeing or GE, you could finance yourself. However, if you were Joe’s Apple Orchard, you were out of business.

Second, this is interesting to the real estate community because the huge array of trade means a huge array of logistics — transportation, storage, port facilities, and associated properties dedicated to moving and storing stuff. If arugula needs to be imported from Chile, then consider all of the real estate devoted to getting a serving of it from the farm to a salad plate in middle-America.

Until credit is restored, the import-export game will continue to suffer, and the real estate devoted to serving that game will be “on hold”.

Written by johnkilpatrick

March 10, 2010 at 3:01 pm

Seattle Mortgage Bankers

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I don’t get to visit with these folks as often as I’d like (maybe…. twice in… forever?), but they had a great luncheon meeting yesterday on HUD multi-family and health care finance. As dull as that topic sounds, HUD lenders are almost the only game in town for these sectors, and as such the “deal” volume at HUD has exploded.

Also, unfortunately, the “bad deal” flow has dramatically increased. HUD is seeing a rapid increase bad loans — not the same sort of levels we see in the sub-prime housing market or even in the conventional commercial market, but given the high degree of underwriting on these projects, HUD usually expects a loan-loss problem in the fraction-of-a-percent range. Thus, when loan losses start approaching 2%, it’s time for a lot of serious soul searching.

We had heard some vicious rumors out of the east coast that HUD was “shutting down assisted living lending”. Well, that’s apparently not true. However, there are a few obvious problems in the “New Normal” (I’m increasing stealing that phrase to describe the post-recession financial reality). Based on what I heard yesterday, I think HUD multi-family borrowers are going to see three significant issues:

1. The pipeline is a LOT longer. They haven’t done this on purpose, but the volume of deals coming thru the door at HUD is disproportionately large compared to the number of underwriters. (I saw this in the residential FHA/VA market back in the early 1980’s, when FHA money was the only game in town for start-up homebuyers, and it took longer to process a loan than it did to build the house!)

2. Underwriting criteria will be more subjective, and borrowers with little track record will face significant scrutiny.

3. Terms will be more severe. In the case of assisted living, the LTV went from 90% to 75% (although the Loan-to-Cost is still 90%) and DSCR is now 1.45, up from 1.1. This is mainly reflective of the significant problems in the assisted living market.

On the positive side, some programs are being slightly liberalized (232 program, for example). All in all, though, HUD multi-family borrowers will have a somewhat tougher time in the future than they had in the immediate past. Will this change down the road? Probably. I would expect that eventually we’ll see a return to somewhat easier money, but not until HUD works through the loan-loss problems and the conventional market becomes competitive again.

Written by johnkilpatrick

March 3, 2010 at 3:25 pm

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