From a small northwestern observatory…

I’ve been reluctant to talk about this just yet — maybe it’s too early, and anyway, I’m a data driven guy, but here goes.  Maybe if I talk about it, it won’t happen.

The recession of 2009/10 completely changed the face of the real estate finance market in America.  The sub-prime meltdown was in no small part precipitated by the onset of the recession, with slow-rising unemployment causing a domino effect on loan distress, foreclosures, and the failure of mortgage backed securities.  Now, the parallels cannot neatly be drawn — the last recession was in many ways caused by the fools gold of crappy lending practices.  Further, as we now know, there was a huge “shadow banking system” (to use the terminology of Tim Geitner) and the underpinnings of the financial market were week and shallow.

However, it’s interesting to note that unemployment only reached about 9.6% last time.  Last week, Goldman Sachs forecasted 15% – 20% this time, and that was BEFORE this morning’s new jobless claim pronouncement.  We know this afternoon that the Treasury system to distribute loans and grants to small businesses is badly broken.  The President’s dream of a “V” shaped recession, with a sharp recovery before summer, is now a distant and dissolving cloud.  We are in this for the long slog, folks.

Which leads us to real estate.  A few cautionary notes — I hesitate to call these predictions, but these are certainly things I’d look out for:

1.  New home construction will basically stop, with all of the economic nastiness that comes with that.  We know from reports this morning that new home starts are already down 23%.
2. Despite the end of “subprime” lending, there are a LOT of 100% loan to value loans out there.  It’s not unreasonable to think of distress and foreclosure rates topping 10%.  (Some sub-prime pools saw distress and foreclosure rates topping 50% in the last recession.)
3. A lot of investors bought rental properties in the past few years.  If you own those free-and-clear, expect some retrenchment in rent collections, perhaps 20% or more.  If you leveraged your investments, as so many “flippers” and speculators did, well, I’m sorry.
4. People turning 65 with good jobs, and 401-K’s that just tanked, will not be retiring any time soon.  That stagnates the hell out of the labor pool, and makes it tough on younger folks to start households.  In 2010, household formation actually turned negative.
5. And that’s just residential real estate.  Consider retail.  Huh… Yeah…
6. A LOT of farms in America are geared to grow crops for food service, restaurants, etc.  That market will be very slow coming around, which will exacerbate the farming crisis.

Now for the other side of the coin.  We REALLY need to re-think elder care in America, and the structure and management of elder are facilities.  There is a huge and growing real estate story to be told there.  We will also most likely see a LOT of people working from home.  There is a real sadness there — people LIKE to work in groups, and get vitality and intellectual stimulation from working in groups.  That said, a lot of businesses will be looking for ways to cut back on the office overhead.

I’m just thinking out loud here.  I’d appreciate a dialog with any of you on these and other topics.  Best wishes,