Post Thanksgiving, time to go back to work…
In past years (say, pre-2008), the Thanksgiving thru New Years period at Greenfield was always slow, as clients and projects seemed to hunker down for the holiday season. Naturally, 2008 was an aberration on a number of levels — the real estate let-down was in full force, and while our business flow was down, we were busy “hunkering down” for what we projected would be a long recession trough.
Last year (2009) was unpredictable. The first half of the year was dreary, but the last half was a rebuilding period for us, as has been 2010. We’re not yet where we want to be (that is to say, back on our pre-recession growth curve), but the accumulations of lessons-learned have put us in a great position for the future.
I’m commenting on our specific experience at Greenfield for a reason. I think our own company experiences are emblematic of what is happening at tens of thousands of other businesses across the U.S. and other countries, and has significant implications for the future of real estate, the economy, and finance for the next few years. I’m always reluctant to get into the prediction business (I’ll leave that up to Faith Popcorn and her ilk), but I can make a few generalizations, particularly as the parallel what I saw back in the 1970’s —
1. Business profits (and valuations — as we see from the stock market) are headed upward, not so much from increased sales (flat across the board) but also thru extraordinarily increased efficiency. One might wonder, if firms are so doggone efficient today, why weren’t they acting efficiently a few years ago? Simply put, “efficient” firms don’t grow very well. Growth usually requires a significant degree of wastage. Hewlett Packard was famous for this — they would budget engineers a certain amount of time and support to just tinker with things, knowing that the sort of Edison-esque profitability that came out of such tinkering. At one time, Xerox was so inventive that they thru away lots of great ideas, the Graphical User Interface being the best known example. Additionally, efficient firms cut wa-a-a-a-a-y back on hiring, training, and marketing. We see this now on college campuses, as new graduates (even in the “vocational” schools like business and engineering) are getting no offers or offers far beneath what their big brothers and big sisters got a few years ago.
2. This “hunkering down” not only cuts the demand for commercial real estate, but also means we may have a substantial excess supply of offices, warehouses, and shopping centers for some time to come. Ironically, business travel is coming back (as executives work harder to sell the same amount as before) but everyone is going “down” a notch on the hotel food chain — executives who used to stay at a Ritz Carleton are now at Marriotts, and former Marriott customers are now at Courtyard Marriotts. (Intriguingly, the Marriott organization is highly vertically integrated, and so actually takes great advantage of this phenomenon). The interesting off-shoot is that while aggregate hotel room counts are up, hotel employment lags (as customers move from “full-service” to “limited service” stays). The same is true with hotel restaurants, as dining-out budgets get slashed.
3. The “trainee” employment picture is worsening in some ways, but may actually improve in others. As noted, new graduates are having real problems getting placed, and are having to accept entry-level jobs far below expectations. I spoke with a young woman recently who graduated in 2010 in Finance. She had great grades and a stellar resume, and fully expected to get an entry-level job commensurate with her expectations. Guess what? No one is hiring. After several frustrating months, she accepted a job as a teller at a Credit Union at about half the starting salary she’d previously expected. Is there a silver lining in this? Yes, two. From the business’ perspective, they’re getting entry-level talent at bargain basement prices, and if they’re willing to mentor and foster these kids, they’ve got talent who will have a much greater familiarity with the nuts-and-bolts of the business once expansion does return. From the “hiree’s” perspective, a foot in the door builds experience and puts her at the starting gate ahead of the rest of the pack.
4. The early 1980’s recession was actually the last of a series dating back to the late 1960’s (the period was called “stag-flation”). While the early-80’s recession was the worst of the bunch, it seemed to have wrung the last of the “bad stuff” out of the economy, and set the stage for two decades of nearly continuous growth. Many credit the pro-business agenda of the Reagan Administration, but that ignores the tremendous pent-up inventiveness which had been waiting for an opportunity. Gates, Allen, Jobs, and Wozniak had been tinkering with computers and software for a decade, but needed a business expansion to really get themselves going. Sam Walton had great ideas about merchandising, but the explosive growth of WalMart depended in no small part on the availability of cheap construction and development credit to build mega-stores at seemingly every street corner. We decry the sloppiness of the mortgage market of the past few years, but no one seems to complain about the millions of construction workers and realtors who rode from apprenticeship to retirement on the wave of the housing boom. Recessions do not last forever, although this one does have the symptoms of lasting for a while longer. When 4% GDP growth returns (and remember, folks, that’s really all it takes), we should be poised for a period of expansion not-unlike the one that started in the mid-1980’s.
Well, folks, that’s really it. Like most of you, I have a lot to be thankful for. I live in a fairly free country, with an economy that considers 9% unemployment and 2% GDP growth to be unacceptable. I get the opportunity to interface with students and young folks on a daily basis, and they constantly refresh my positive outlook for the future.
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Valuation Colloquium
I’m writing this from the audience at an invitation-only colloquium on real estate valuation, held at Clemson University and sponsored by a number of high profile groups, including Argus Software, the Appraisal Institute, the Homer Hoyt Institute, the Maury Seldin Advanced Studies Institute, and of course Greenfield Advisors.
This is the third in a series of such advanced meetings, begun in 1964 and held roughly every 20 years. The first was at the U. Wisconsin, and the second at U. Connecticut. The purpose of these gatherings is to bring together both top academic scholars as well as the top practitioners to discuss the future of the profession, both organizationally and methodologically. The past meetings were decidedly U.S. in focus, while this year’s meeting is co-hosted by Nick French (U.K.) and Elaine Worzala (U.S.) and has substantial European, Latin American, and Pacific Rim participation. Consistent with the rapid changes in the field, future colloquia will be held more frequently, and the next one is tentatively slated for Oxford, England.
Papers and proceedings of the meeting will be published in the Journal of Investment and Finance in the near future.
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It’s been a busy couple of weeks
Two quickies, and then I’m off to give a talk at Clemson University in South Carolina.
First, I had the pleasure of speaking at yet another Gulf Coast Oil Spill Litigation conference, this one last week at the Fountainbleu Hotel in Miami Beach. First, a brief shout-out for the venue — a great hotel, now elevated to one of my favorites in the world. Seriously. I can’t speak to highly of it. Imagine the Bellagio, but without the casino, and a perfect view of the ocean.
But, back to the subject at hand. I’ve also given a couple of private talks to groups of attorneys in recent weeks, but this was my first “public” forum since back in the summer. A lot has changed, not the least of which is the apparent decision by the Gulf Coast Claims Facility that they will not pay property diminution claims (despite what their documents say). This will unfortunately leave claimants with no choice but to pursue in the courts. Many of the smaller (i.e. — single residential and condos) will need to band together in class actions and mass torts under the MDL. Larger claimants (and we’ve been talking to nearly all of those) will have other options.
On a different topic, the news about the mortgage foreclosure mess just gets worse and worse (see my October 18 link to John Stewart for a funny but spot-on analysis of this). The most recent turn of events is comes from the 50 state Attorneys General, all of whom are elected officials, and many of whom have names like Andrew Cuomo and Jerry Brown. Yeah. These are not wallflowers, and many (most?) AG’s find that the post can be a great stepping stone to higher office (like… Jerry Brown and Andrew Cuomo). By the way, it’s a great year to be a populist, and no one ever lost votes by beating up on Bank of America and Wells Fargo, so out come the long knives.
Seems that the banks forgot that foreclosure is essential a state action, not a Federal one, and so falsifying evidence in state court can get you in a whole heap of trouble. The Wall Street Journal has had several great articles about this in recent weeks, perhaps the best being a piece by Robbie Whelen on page B-1 in the Sat/Sun, Oct. 30-31 edition.
This is going to get worse before it gets better. Best case scenario is that the cost of servicing (ultimately borne as a cost to borrowers) will increase dramatically, as the linkage between the “mortgage” and the “note” will need to be better maintained in the future. Worse and Worst Case Scenarios are hard to plumb, and could include severe state court sanctions against major banks, gumming up the mortgage process for months and years to come.
Foreclosure isn’t anyone’s dream. Banks lose, buyers lose, and in today’s market, even post-foreclosure investors are taking risky positions. However, just like getting an absessed tooth pulled (or root-canalled), the foreclosure process is necessary to get bad loans off bank books and get assets back into productivity. With foreclosure rates running 500% of just a couple of years ago, and with something like 25% of home mortgages “under water”, banks can ill afford to keep huge chunks of assets out of play while this gets adjudicated. Worse still, the cost of this mess, currently, is being borne by the servicing agents, who are seeing no new paper come IN the door, but they’re having to expend huge resources dealing with old, dead paper. The legal fees alone are enough to drown these thin-margin firms. Everyone who’s consulting on this mess is going to want to get paid, and yet there’s no new money coming in the door to pay those bills.
Yep, it’s a mess. It may actually be, in the end, the worst spill-over of the mortgage crisis.
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Foreclosure fiasco, redux
It’s not normally my practice to imbed other people’s videos, but this is absolutely a hoot, and frankly quite informative. Sad, but true.
http://www.thedailyshow.com/watch/thu-october-7-2010/foreclosure-crisis
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October 10 — Update #2
Since my last post, I also had the privilege of attending (and speaking) at the semi-annual meeting of the Real Estate Counseling Group of America (RECGA). RECGA is a small but highly influential group, founded in the 1970’s by the great real estate valuation leader, Dr. Bill Kinnard, and over the years has counted in its membership many of the presidents of the Appraisal Institute and other leading groups, editors of several of the top real estate journals, noted professors and highly influential authors in the field.
The Fall meeting was held in Washington, DC, and the core of the meeting was Friday’s educational session. Max Ramsland opened up with a presentation demonstrating the impact of the number of anchor tenants on the appropriate cap rate of shopping centers. Carl Shultz, a member of the Appraisal Standards Board, followed with a discussion of impending changes to the Uniform Standards of Professional Appraisal Practice (USPAP). These changes are currently discussed in an Exposure Draft, which he invited RECGA members to revieww and submit comments about, and will be incorporated (with appropriate changes) in the 2012 edition of USPAP. Both Mr. Ramsland and Mr. Shultz are also RECGA members.
Two non-members followed with somewhat related presentations on eminent domain. Scott Bullock from the Institute for Justice was one of the attorneys who argued the famed Kelo case before the U.S. Supreme Court, and he discussed the status of eminent domain law since that landmark case. With a somewhat different perspective, we heard from Andrew Goldfrank, a U.S. Justice Department attorney who heads up all Federal takings litigation.
The afternoon session kicked off with David Lenhoff, a RECGA member and former editor of the Appraisal Journal, who discussed the complex issues surrounding hotel valuation. I followed with a brief synopsis on the Gulf Oil Spill, focusing on the current status of the claims and litigation processes. Reeves Lukens, a RECGA member, and his son, Tripp Lukens, discussed the state of pharmaceutical properties in the U.S. Joe Magdziarz, who is the incoming president of the Appraisal Institute (AI) discussed the current issues facing that organization, with a particularly emphasis on the recent controversies between AI and the Appraisal Foundation (AF). Notably, the founding Chair of AF, Jeff Fisher, is a RECGA member and was able to provide some historic commentary. RECGA members Jeff Fisher and Ron Donahue brought the day to a conclusions with discussions about the state of the securitized real estate market, including REITs.
For more information about RECGA, visit the web site, www.recga.com.
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October 10 — Update #1
It’s a rainy Sunday here in the ‘burbs of the Emerald City, and I have a LITTLE bit of time to catch up on things. First thingie on my mind is the somewhat back-page article in many newspapers recently about Bank of America forstalling the foreclosure process until they get the legality of certain title problems straightened out. The Washington Post syndicate had a pretty good article by Brady Dennis and Ariana Eunjung Cha on Thursday that was carried widely, including by our local Seattle Times and the Mortgage Bankers Association.
Recall that home ownership and mortgage lending (or specifically, the act of pledging a home as collateral in a lending transaction) is LEGALLY a state-governed issues. The Federal government regulates banking and the lending process, but the actual pledging of a home (or any real estate, for that matter) is strictly a state issue (subject, of course, to certain Federal oversight.) Thus, if a nationwide lender like Bank of America (or Countrywide, which it bought) wants to make loans across the U.S., it still has to get permission in each and every state in which it does business, and the lending process needs to be tailored to each state’s peculiar laws.
As it happens, property ownership had a somewhat different emphasis from one state to the next. In South Carolina, where I used to live (and for that matter, in about half the states), foreclosing on a home is a very difficult process. The lender has to go to court and prove that the mortgage is in default, and further prove that the lender has the right to foreclose. In those states, the foreclosure process simply cannot proceed without a judge’s orders. In other states (my current home of Washington, for example), the process is much easier and does not require a judge.
The distinction is less important than the fact that there is a variance in processes among the states. When you are BofA (or Wells, or Chase, or any big lender), you want to bundle the loans together and sell them as pools. The pool actually WANTS loans from different parts of the country, to benefit from diversification. To facilitate this, and to make mortgage pools fungible and tradeable, the various lenders started subscribing to a service about 10 years ago called the Mortgage Electronic Registry Service (MERS), in Reston, VA. MERS separates the “real estate pledge” (that’s what the mortgage actually is) from the promissory note (which is what investors actually want to buy). In theory, MERS wouldn’t be an issue in an individual loan unless that loan went into foreclosure.
Now, in any given mortgage pool, even in GOOD years, a few of the loans will go into foreclosure. Fortunately enough, in “good” years, there are enough foreclosure buyers out there to keep the mortgage pool solvent, and no one really cares if every “i” wasn’t dotted and every “t” wasn’t crossed in the process.
But… sigh… these are anything but normal or GOOD times, and apparently bankers are churning ou the foreclosure doc’s so fast they’re getting carpel-tunnel from filling out paperwork. Guess what? If the mortgages were made slopily in the first place (as many were), and if the mortgage-note bifurcation was handled too rapidly (as most apparently were) and if the foreclosure applications are coming out of the bank like a firehose, then… well, remember that about half of the states require a judge to sign off on each and every foreclosure, right? And judges just HATE sloppy paperwork, right?
With THAT in mind, the foreclosure process is quickly grinding to a halt. In some states, the courts have ruled that MERS does not have a valid standing to initiate foreclosure proceedings. Class action suits have been filed in California and Nevada, no doubt with more to follow. The nightmare scenario for banks is that not only are foreclosures invalid because of sloppy paperwork (let’s don’t forget the sloppy underwriting that got us in this mess in the first place) but also one might argue that any foreclosure initiated in the past 10 years is also invalid. Thus, if you lost your house at the leading edge of this mess, two years ago, assuming the statute of limitations is still in effect, you may have a case.
Sadly, the vast majority of these foreclosurse are probably valid, albeit that may be difficult to substantiate with the sloppy paperwork. Homeowners who can’t make their payments anymore need closure so they can move on with their lives. Lenders (and mortgage pool investors) need to get assets redeployed. Neighborhoods with boarded up homes need families living in those homes again, whether they are homeowners (who frequently buy “fixer-upper” foreclosures) or renters. The system is not served at all by dragging this process out.
On the other hand, we constantly teach students that one of the strengths of the western economy is the rule of law. Contracts mean something, and badly drawn or poorly executed contracts cannot have the same legal standing as good ones. To allow such in the name of expediency puts us pretty far down the slippery slope.
I’ll be following this story. This is a complicated story, and newspapers, sadly, end up putting complex stuff on the back pages. This issue, however, deserves some front page attention.
EDIT #1 —
Since I wrote this, Foxnews.com published a very good synopsis of the problem.
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Foul weather, foul moods
It’s fall. The time of year when Seattle’s absolutely beautiful summer turns into yechy autumn.
With all of that in mind, three yechy pieces of economic info hit my desk all at once today. First, the Conference Board’s Consumer Confidence Index hit a 7-month low of 48.5, which was not only lower than last month (53.2) but also much lower than economists consensus forecast (52.1). Why? The general public has internalized the notion that significant levels of unemployment will be with us for quite a while.
Then, the Business Roundtable released it’s 3rd quarter 2010 CEO survey. You’d think, with corporate profits on the rise, that this bunch would be breaking out the good champagne. But no, even though major corporations plan to increase capital spending over the next few months, they have lower expectations of both revenues and employment.
Finally, S&P Case Shiller, who normally send out quarterly reports, sent me a July update (dated September 28), which shows housing prices continue to be disappointing. While prices are, indeed, up from a year ago (by about 4%), the price index has been cycling below 2003 levels for over a year. Among major markets, the best year-on-year performance was in San Francisco (up 11.2%) while the worst was in Las Vegas (down 4.9%). Intriguingly, all of the California major markets are looking strongly up.
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Where have I been?
LOL… sometimes this blog feels like “what did I do on my summer vacation.”
Spent a big chunk of last week in Juneau, AK, riding a float plane out to Admiralty Island. Can’t talk about it very much (lots of confidentiality), but the scenery was beautiful. If you ever get to make a trip like that, do it. Kuddos to Ward Air a the Juneau Airport for a great trip on one of their Cessna 206’s.
On Saturday, the weather here in Seattle was absolutely perfect. I had the opportunity to ride on Carlyn, the 61-foot sailboat owned by Salish Expeditions. Salish runs a great program in the Fall and Spring, taking middle- and high-school students on 3- and 4-day hands-on research excursions. The kids are guided in formulating a “do-able” research project focused around marine biology and the environment. This is a terrific program, and we at Greenfield certainly want to support programs like this.
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My upcoming schedule
The next couple of months will be pretty busy, “speaking engagement” wise. Thought I’d keep you up-to-date on what’s in store.
This month, most of my travel is for business meetings, with only ONE presentation on tap — I’m a member of the Real Estate Counseling Group of America (and allegedly the Membership Chair, but I’m not quite sure yet what that means) and our semi-annual meetings are scheduled for D.C. the last weekend in September. I’ll speak in Friday morning on the Gulf Oil Crisis (naturally). Right now, I’m figuring out how to embed YouTube videos into a powerpoint presentation. Wish me luck.
On October 7, I’m back in the Pacific Northwest as the keynote speaker for the annual Brownfields Conference, sponsored by the Northwest Environmental Business Council.
We TENTATIVELY have a web-in-ar planned for October 29 on the Gulf Oil Spill. More on that later. If you want info (as soon as we have scheduling), please send us an e-mail at info@greenfieldadvisors.com and we’ll be sure to keep you up-to-date.
Finally (well, not FINALLY, but at least for this list…) I’m scheduled to be in Miami Beach on November 4 to speak on the Gulf Oil Crisis at the Ritz Carleton Miami Beach (Yeah — terrible job I have, right?). For more info on that conference, click here.
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wow!
I hate to brag (not really… but I needed to say that…)
I JUST got the word that my paper, “Appraisal Error Terms and Confidence Intervals” won the “Best Appraisal Paper” award at the 2010 American Real Estate Society conference. The award — which includes a non-trivial cash prize, as well — is sponsored by the Appraisal Institute.
Thanks to everyone here at Greenfield who contributed to this paper. I’ll soon post a copy to our web site.
From a small northwestern observatory... 
