3/22/09 — Newsletter this week
The past two weeks have been busier than usual due to a pair of expert-witness trial testimonies in Kansas City. (Congrats to our clients, by the way, who prevailed with flying colors!). This coming week is slightly relaxed, then I’m off to the races again for a couple of weeks, including a trip to Louisiana and some other projects here in Seattle.
In the meantime, our monthly newsletter, The Greenfield Advisor, is slated to come out this month. We had planned to unveil our new trophy property index this month, but now I believe we’ll defer that for a couple of months. This month, our newsletter will summarize our economic forecast for the 1st quarter, with emphasis (of course) on the implications for real estate. I’ll unveil this forecast at a luncheon presentation to Seattle’s “Belden Club” at the Seattle Yacht Club on Tuesday.
The crux of the forecast depends on which of two economic theories you buy into — is this recession “normal” (albeit far deeper and longer than usual) or are we looking at a real structural shift in the economy?
It’s hard to point to specific phenomenon and say, “Aha! We have a structural shift on our hands!” because these events are so rare and ideosyncratic. Recessions are easy to spot, at least in the rear-view mirror. String together a couple of quarters of negative GDP growth, and you have, definitionally, a recession. However, once a recession is over, people go back to their jobs, asset markets make-up for lost time, and generally all of the trend lines are back where they were before the recession began.
There’s a lot to suggest that this time will be different. The obvious one is the housing price bubble — Moody’s Economy.com in a report released last month predicts that the Case-Shiller Index will retreat a total of 36% before it bottoms-out in the 4th quarter of 2009. That’s not only unprecidented, it also implies a massive loss in household wealth which will take many years to re-coup. Unfortunately for many families, time is not on their side, since the crest of the baby-boom — currently in their 50’s — were looking at this accumulated equity as a major source of retirement cushion. Coupled this with the declines in the stock market — household wealth buried in the equity market (either directly or indirectly) was another significant source of retirement cushion.
Some economists think the real clincher is the pay-down in household debt, which began last year and will probably accelerate this year. There’s a double-whammy there — much (most?) of the pay-down is being done by the most credit-worth households, leaving credit card companies seeing a real shift in the aggregate credit-worthiness of their borrowers. This is happeneing at the very time when the credit card companies themselves are seeing significant retrenchment in their lines of credit. Credit card companies are left with no choice but to curtail credit limits, thus forcing less credit-worth households to either pay-down or default. Since many households were already running permanent balances, and using the monthly pay-down as their revolving purchase line, the impact on household consumption is obviously severely negative.
If we ARE in a structural shift, then the impacts will be felt differently in the U.S. and abroad. Domestically, we’ll look a lot more like the 1970’s but without the inflation. The stock market will trade in a narrow band, and without inflation, bonds will look better than equities. Younger workers coming into the job market will see stagnating expectations, with older workers deferring retirement and an economy that won’t sustain significant job growth.
Abroad — Asia and Europe will be basket cases. The more conservative oil countries (Saudi Arabia comes to mind) will fare well enough, but the economies that bet the whole farm on $100 oil (Venezuela comes to mind) will quickly go into downward spirals. Don’t even start talking about sub-Sahara Africa. Japan — already suffering — from an aging population and a stagnant economy, will face political turmoil. China may be the worst hit — they’re more than happy today to loan us whatever money it takes to get the U.S. economy rolling again, since we are the engine that pulls their 8+% GDP growth. The U.S. could face two choices — either fund our domestic recovery with severe devaluation of the dollar (a distinct possibility) or hunker-down with protectionist legislation (anyone read what a good idea this was in the 1930’s?). Either case leaves China headed back to subsistence rice farming. A significant structural shift in the U.S. away from a consumption-driven economy basically puts us and China in the same position anyway, albeit indirectly rather than directly.
I’m personally leaning 60-40 in favor of a believing in a structural shift. The Obama Administration, at its core, believes in stronger domestic-spending by the U.S. government on things like education, health care, and domestic infrastructure. All of this shifts money away from consumption and toward government expenditures. GDP grows, but the mix of components that gets us there is lower consumption (or at least lower growth in consumption), higher growth in government spending, and a dampening of the import/export red ink.
What are the implications for real estate? More on that in my next post.
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3/14/09 — For Finance Students About to Graduate
On March 6, I had the real pleasure of meeting with a room full of Washington State University finance majors, most of whom are getting ready to graduate in the Spring. This may be one of the toughest markets to graduate into in many years — perhaps tougher than any since the mid-1970’s (when, coincidentally, yours truly graduated). Ever cognizant of the metaphores which will stick with college seniors, I offered up a Six Pack of Ideas for their consideration. Since then, I’ve had a couple of inquiries about this list. I’ll admit right up front that none of this is particularly magical or original. None-the-less, I’ve reproduced my comments here for any and all to read or ignore, as the case may be.
1. The economy will rebound. The real question for fresh graduates, at the beginning of their careers, is how to react both during the slump as well as during the recovery. The latter of these is probably more important than the former — there will be tremendous opportunities during the recovery, and choices made in preparation for that will really set the stage for the trajectory of their careers.
— Network: I was at a Seattle Hedge Fund Society meeting a few nights ago, and the panel of speakers were all from institutions or “funds of funds”. They were fairly unanimous that very few deals would get done this year, but that it was a great time to build new relationships and to line up funding and investment banking sources for 2010. The very same thing is true for individuals in their careers — 2009 and particularly the first half of the year) will be a survival time for businesses, but networking during these lean times will pay huge dividends during the recovery.
— Don’t Compromise Your Resume: It’s OK to take “a job” during this recession to pay the bills, but make sure that choices fit into the overall career trajectory. For example, one woman asked if now was a good time to go straight into an MBA program. I counseled against this. Even though it may be convenient right now, the MBA is best left for a point 2 to 5 years into your career, when you have built the experience on your resume to fully take advantage of the advanced education. Instead…. well, see point #2
2. Position yourself in the best environment possible, even if you have to take a huge cut in financial expectations. At this point in your career, a very high level internship is better than a high-paying job out in the corporate boondocks. Network with people who can jump-start your career, get mentoried by people who understand how to do this, and contstantly be on the lookout for opportunities.
By the way, it’s almost trivial to mention mentoring — everyone talks about it, but very few do it right. In the arc of a successful career, you’ll need more than one mentor. Looking back on it, at the end of your career, your best mentors won’t be the folks who held your hand and made you feel good about yourself. Your best mentors will be those bosses (and sometimes collateral people) who stressed you, who made you think outside your comfort zone, and who made you react to messy situations and clean up the messes. THOSE mentors are golden. You’ll learn to treasure your time with them.
3. Chase the money — not personally, but within the business. Where is the firm’s core business? Stick close to that. Last month, I was talking with a woman who’s in corporate sales with a major, 5-star hotel chain. She reminded me that even though we’re in a recession, her job is safe. The marginal revenue generated by one additional room-night is huge, so the sales force are the star players during the recovery.
Lee Iacocca was a graduate student in engineering at Lehigh University. At the time, Lehigh was basically a training ground for Ford Motors — they hired neary every engineering graduate. At the end of the program, Iacocca realized that the core of Ford wasn’t engineering, it was sales, and he requested a lateral transfer. Needless to say, his superiors weren’t happy, but he managed the shift anyway. Indeed, his engineering background gave him great credibility with the dealership network. Iacocca, of course, is the only person to ever head two of the big-three auto makers (Ford and Chrysler). He gave us not one but two category-killer new autos (the Ford Mustang and the Chrysler Mini-Van), is credited with saving Chrysler from bankruptcy, and was seriously considered as a candidate for President of the U.S. All because he chased the money.
4. Tackle the tough jobs.
Douglas MacArther was one of the greatest generals in the history of warfare. One of his biographies — written by William Manchester, who really didn’t like MacArther — is titled American Caesar. MacArthur not only became the highest ranking general of his time, but also was the son of one of America’s great generals, Arthur MacArthur. The two of them are the only father-son team to ever both win the Medal of Honor (father for the Civil War, son for WW-II). When the younger MacArther graduated number one in his class from West Point, he could have any job in the Army. As was the practice at the time, he rotated through a number of small posts, and at each one, his commander was a bit in awe of the MacArther name. Nonetheless, whenever the post commander would offer MacArther the job of heading up the best platoon or company in the regiment, MacArther would instead ask to be given the worst assignment. Why? He noted that if given the best platoon to lead, then the absolute best he could do was stay the course — keep them #1. On the other hand, if given the worst platoon to lead, simply moving them from the bottom up one notch would be a huge success.
5. Develop communications skills. Business leaders consistently stress the need for excellence in this area. It really is a career-maker (or breaker!) for young business students. Three areas need to be stressed:
— Get that “elevator pitch” down pat. Be able to say what you do or who you are in a short, forceful way. Be prepared to sit across the boss’ desk and give short, direct answers to tough questions. This is essential for a good job interview, but in fact essential every day of the rest of your career.
— Hone your presentation skills. Learn how to get up in front of an audience (of either ten or a thousand) and make that killer 15 minute presentation with as few notes as possible. Taking a drama class or two isn’t a bad idea for learning stage presence, body language, and eye contact.
— Learn how to write a succinct, pithy, and compelling one-page memo. No one ever reads page 2.
6. “Stay ahead of the airplane”. The U.S. Air pilot, Capt. Sully Sullenberger, has been in the news lately for his amazing landing in the Hudson River, saving all of the passengers and crew. Every pilot, starting with the first day of flight training, is taught to stay ahead of the airplane — anticipate where the plane is going and what it’s going to do, and be prepared for the next curve, the next bump, or the next potential thing to go wrong. This doesn’t just apply to pilots — race car drivers, athetes (particularly people who “run with the ball”), surgeons, and for that matter everyone on the front-lines of everything develop the skills to be prepared for the next thing that will happen (both good and bad). A lot of this takes practice and experience, but a lot of it is just thinking ahead — what can happen from this point? Donald Trump says to always understand the downside of every decision, and the up-side will take care of itself.
Finally….
I jokingly noted to the students that a six-pack never seems to be quite enough, so I offered one more…
RELAX. Have some fun. Very few people, in their 50’s or 60’s and at the peak of their career, wouldn’t swap places in an instant with a 22 year old just getting started. It’s a great adventure. The people who do the best at business are the ones who learned to enjoy the journey.
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3/13/09 — “All the lights are on….”
I’ve been traveling this week, and actually surprised to be in the office today — I was supposed to be in court today testifying in a case. Fortunately, the case went quicker than we’d planned, and I get an “extra” day in my schedule. It’s sunny outside, with mild temperatures. Naturally, that means I’m sitting at my desk. Oh well….
But anyway, I have to share this semi-boring story with you from my travels this week. It’s 100% true, only with the name of the city and the “offending” corporation blotted out. I found it fairly humorous. You may find it terribly boring, but I thought it was emblematic of the current investment malaise.
I was in a major central-time-zone city, far away from Wall Street. I flew in late Sunday night, and checked into a hotel which I’ve frequented in the past. I’d never paid attention to it in the past, but next door to the hotel is an art museum, and next door to IT is a fairly blank, open field of perhaps 4 – 6 acres or so. As I drove past the field late at night, I couldn’t help but notice that there were some odd looking light fixtures out in the field all turned on. The fixtures themselves were fairly decorative, but they were positioned as if they were supposed to illuminate something else — but there was nothing else in the field besides the lights.
The next day, I had a few minutes to kill and went for a walk. Across the street is the very massive, multi-building headquarters for a very major mutual fund company. Full disclosure here — until mid-2008, this mutual fund company had a tidy sum of Ms. K’s money invested. They still have her money, it’s just about 1/3 less than it was a year ago. Anyway, the field, as it turns out, is the “Mutual Fund Company Sculpture Garden”, a part of the art museum paid for by the folks across the street as a gesture of good citizenship.
But… ahem…. where’s the sculpture? The lights are all there, but the supposed sculpture pieces which are to be illuminated by said lights are all gone. What’s even more galling (where’s Al Gore when you need him…), the lights were on at night even though there was nothing there to illuminate.
Seriously. A mutual fund sculpture garden, fully illuminated, with no sculptures. If that’s not emblematic of the current investment world, I don’t know what is.
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3/7/09 — Time Flies When You’re Having Fun
Sorry it’s been so long since I’ve posted. It’s been a terrifically busy few weeks. I will say this, I haven’t been totally incommunicado — I wrote the March issue of The Greenfield Advisor, which you can read for free by visiting here and clicking on “newsletters”. We use the monthly G/A to summarize our thinking on the real estate economy and to look more in-depth at what’s going on around us.
One of my frequent reads is Dr. Glenn Mueller’s Market Cycle Monitor, published quarterly by the folks at Dividend Capital. It’s based off of a journal article he wrote back in the 1990’s in which he observed that the timing of the investment characteristics of commercial real estate could be analyzed in terms of a cycle through four occupancy/supply quadrants: recession, recovery, expansion, and hypersupply. (After hypersupply, a market declines back into recession as supply outstrips demand.)
From that core thought, Dr. Mueller is able to analyze real estate not only nationally, but also by subsector (apartments, suburban office, limited service hotel, etc.) and by geographic region (about two dozen or so major markets).
In markets at equilibrium, this model works very well. Naturally neither it nor any other model is very good at picking up “shocks” to the system. As a result, his model shifted dramatically from third quarter, 2008, to fourth quarter, 2009, the latter of which was just published in February. Today, of course, the model pretty much lumps everything in “recession.
The important point is, that doesn’t at all invalidate Dr. Mueller’s work. Indeed, his model provides an excellent launch point for investors, as we peel back the layers of the empirical onion to determine which sub-sectors and geographic markets will rebound first, and which will be laggerds as a result of oversupply and under-demand.
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2/12/09 — A night in Portland
Last night, I attended the Portland Chartered Financial Analysts Society’s annual economic briefing. First, a couple of compliments — it was very well done. I’m also a regular at Seattle’s annual briefing, and I personally think Portland’s was a bit better organized. Also, they incorporate attendance by students from Portland State University, and I thought that was a nice touch.
Now for the bad news. The two speakers were very well prepared and made well-organized presentations on why the national economy is what it is… and thus where it’s headed. Timothy Duy is a professor at U. Oregon and Director of the Oregon Economic Forum. Russ Koesterich is Managing Director and Head of Investment Strategy at Barclay’s Global Investments.
Two synopses of their talks. First, I would lump both of these guys into the “glass is half empty” school of thought. Fortunate or unfortunate as the case may be, it appears that most economists today are in that category (as opposed to the “glass is half full” group). You can’t blame them — after too many years of overly-rosy forecasts and excuse-making for cracks in the world’s economic foundation, it’s tough to take an optimisic stand. Indeed, its doubtful that anyone will critize an economic forecaster for under-shooting the recovery or being overly cautious in the middle of the recession. However, it’s the “glass-is-half-full” guys and gals who will help construct the visions and structures that will lead us out of this mess.
But, that’s really not the point. The second major theme of both of these presenters was that our national economy has gone through a structural event. By that, they mean that the economy, following a recovery, will look very different in the future than it did in the past. For one, consumption spending (as a portion of GDP) has been trending upward pretty much constantly since the mid-1950’s. That’s not surprising — the mid-1950’s was the middle of the baby-boom birth cohort. Families were exploding in size and number, along with suburbs, shopping centers, and everything we now think of as our “way of life”. Remember, prior to WW-II, a very large number of Americans lived on farms and consumed what they personally grew or sewed. Today — can you personally name anyone who lives on a farm or sews their own clothes?
Commensurate with this, household savings rates have declined steadly for several decades — from about 12% of disposable income in the early 1980’s, to approximately zero for the past couple of years. We’re seeing early signs that the savings rate is trending back up — only time will tell. However, Barclay’s notes that U.S. consumers have started reducing household debt for the first time since WW-II. New home mortgage borrowing on an annualized basis topped $1.2 Trillion in 2005, butis currently very close to zero.
America is still the thousand-pound-gorilla on the world’s economic stage, and our rapid contraction in spending is being felt severely abroad, particularly in Japan and China. There are a whole lot of other factors, but in general Dr. Duy and Mr. Koesterich would suggest that we’ll see continued contraction in the months ahead. Consumer confidence continues to trend downward, and securities markets will remain highly volatile, although not nearly as bad as in 4Q08. Global trade growth has actually gone negative.
The good news — such that there is some — is that early and aggressive action by the U.S. government suggested that we will not see a U.S. repeat of the Japanese experience of the 1990’s, which was marked by a decade of stagnation, deflation, and year-after-year of economic distress. Money markets are starting to thaw again.
No one is projecting inflation for the near-term, and in fact all signs point to the government being focused on preventing deflation. (For the record, deflation is a heck of a lot harder to fix than inflation).
That’s it for now. See you later!
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2/2/09 — More on the Domino Theory
California is in deep hock. Not only are essential state services (police, for example) going wanting, but they’re now apparantly going to furlough every state employee two days per month. Student aid checks for colleges won’t get mailed out. I can’t imagine this not getting worse before it gets better.
From a real estate development perspective, this has some very long range implications. Except for in-fill and redevelopment, most development requires some public infrastructure — even in cases where the developer is required to pay infrastructure fees or mitigation. A little personal example — about 10 years ago, I was working with a small town in the southeast to get a low-income tax credit housing development put together. EVERYONE was in favor of this. It was a total no-brainer — demand was far in excess of our intended project, the numbers all worked out, etc., etc., etc.
Then we hit the ONE stumbling block. The proposed project, to qualify for various Federal subsidies (necessary to make everything pencil out) would have to tie into the public municipal water system, and proof of this availability would have to go into the application packet. No sweat, I figured, we’ll simply go to the right authorities and get a letter. As it happens, the local municipal water supply system suffered from years of neglect, with leaks and pressure problems. We were sympathetically informed (by a public official who really wanted this project to succeed) that hooking 200 more apartments — or even 100 — to the existing system would cause a catastrophic collapse of the entire system. What would be needed to fix this, we asked? Money, which they didn’t have. (Epilogue — we explored getting some Community Development Block Grant money for the town to get this fixed, and it became quickly clear that we were looking at a very long range problem, well beyond the scope of our abilities to fix.)
That’s what we may have in the very near future in California. Sadly, public infrastructure projects are always the first to go and always the last to return. Admittedly, the White House stimulus bill is infrastructure-oriented, but it’s looking for “shovel-ready” projects. Infrastructure in support of future real estate development rarely meets this criteria.
California’s not alone — it’s just the biggest state, and yes… the only state with a governor who is also a movie star (and married to a Kennedy, to boot). We’re going to see widespread infrastructure issues in coming months.
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And while we’re at it — Builder magazine reports a growing list of major homebuilders who are biting the dust. They estimate that about half of the top firms from the 2005 boom will not make it thru this recession.
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1/30/09 — Stacking the Dominos Back Up
I’m a Member of the Faculty of Valuation of the Royal Institution of Chartered Surveyors, headquartered in Great Britain. The only reason I mention that is they do a great job — much better than their American counterparts — at tracking and reporting information on construction, valuation, etc.
I received a very insightful missive from them this morning about U.S. residential construction. (Please don’t miss the irony here — a Seattle-based real estate economist depends on Londoners to report on U.S. construction trends.) Employment in the residential construction sector has been falling for 18 straight months, with 100,000 jobs lost in December alone. Note that all job losses in the U.S. in November and December totalled about 1-million, so residential construction losses in December accounted for about 10% of the total job losses. As of the end of 2008, housing starts are about as low as they’ve been in the past 40 years, and show no signs of doing anything but getting lower.
The President, Congress, and… well… everyone is committed to getting employment back up. Simply throwing money at the housing sector isn’t even close to being enough. There are a whole series of dominos which have fallen down, and before the residential construction domino can be picked up, all the rest have to be picked up as well. Builders and developers won’t commit to the risk of starting houses without some promise that these homes will be bought. For that to happen, the housing demand equation has to get back up on its feet again. For THAT to happen, buyers have to have some promise that home prices will quit tanking AND they have to have savings for down payments AND the nation needs a healthy lending infrastructure in place.
I tend to be a “glass half full” kinda guy, but clearly the residential construction industry will remain moribund until the employment numbers turn around, until the foreclosure mess gets fixed, and until the banking industry is working and lending again. Here’s the good news — there are glimmers of light at the end of the tunnel. Congress and the White House seem to be speaking with one voice on fixing things and getting people back at work. In general, economists forecast that unemployment will get a little bit worse this year, but not by the sort of huge numbers we saw at the end of 2008. Brace yourself for a round of corporate bankruptcies, but most of those are already discounted by the markets and most of those have already suffered layoffs.
There is a substantial generic demand for housing in the U.S. — our population continues to grow, particularly on the two coasts. Some theorists suggest that over-wrought lending preciptated too much construction (our rate of home ownership briefly touched 70%, and there are theories that this number should be closer to 60%). The prolonged construction nadir will sop up any excess supply in the market. Remember — millions of homes per year are still being bought, even though we’re in a recession. In short, once our economy starts back up out of the recession, the residential construction sector should react quickly.
In the meantime, investors who are bottom-fishing for bargains might consider that the window of opportunity won’t be open forever.
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Busy week — and it’s only Wednesday
On Monday, I spoke on Low Income Housing Tax Credits at the Rainier Club’s Real Estate Roundtable here in Seattle. It was a tag-team event — my co-speaker was Paul Cummings, who heads up Enterprise Community Partners’ Western Region. His portion of the presentation more-or-less summarized how that market works (short answer: affordable housing developers get tax substantial credits which they can either use, sell, or syndicate). My portion was to discuss the state of the market (it stinks really bad because the usual buyers of tax credits are in disarray). We both then summarized the pending legislation to fix things (Congress knows it needs to act, but is loathe to provide more aid to financial institutions. Something will be done very soon, and we hope it’s enough.)
On Tuesday, I attended an economic briefing presented by Jack Albin, chief investment officer of of Harris Private Bank. His talk was mainly centered on securities, and only briefly touched on real estate (and at that, on REITs). He found REITs a bit hard to read, because so much of their current dividend yield is in stock dividends. Fundamentally, though, I thought most of what he said was pretty good.
Then this morning, I woke up to find myself quoted in an above-the-fold article on the lead page of the business section of the Seattle Times. The article concerned the recent release of the Case-Shiller index, which essentially says that residential real estate prices tanked from October to November. I added a couple of caveats to that. While Case-Shiller is an excellent index, and one of only two residential pricing indices which currently “work” (the other being the one from the Office of Federal Housing Enterprise Oversight), the C-S index month-to-month statistics have to be taken with a huge grain of salt. These indices are based on actual sales of homes, and they work wonderfully during “up” markets (I had an article about such repeat-sales indices in the Journal of Housing Research a couple of years ago). However, during periods of market disruption, such as we have now, these pricing indices are skewed downward due to a bias in the data. In short, since the data only reflects actual transactions, it’s generally picking up a huge percentage of distress sales, foreclosure sales, and other sales under duress. My quotes in the article picked that up.
I also pointed out — for local consumption — that the Seattle market is still pretty vibrant compared to the rest of the country. While we’ve had some noteworthy lay-offs (Microsoft’s first layoffs in history), and our other basic employers are troubled, we still have one of the best economies in the world here in the Pacific Northwest. I’d much rather own a home here than in most of the other top-20 cities in the Case Shiller index.
Well, that’s it for today.
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Low Income Housing Tax Credits
This coming Monday, I’m making a presentation at Seattle’s Rainier Club to the Real Estate Roundable about Low Income Housing Tax Credits. It’ll be more-or-less a tag-team event — another fellow from the not-for-profit community will talk about their focus, while I’ll present the for-profit perspective.
These two communities (for-profit, and not-for-profit) really aren’t in competition with one another, although it seems that way sometimes. Both are recipients of a fairly finite pool of tax credits. In some locales, they work in tandem since the two groups bring different strengths to the table. In the Seattle market, where we’re headquarted and do much of our business, the two groups tend to go it “alone”.
Right now, though, these two groups are working together to try to get some sort of LIHTC relief out of Congress. In short (and this is a very truncated overview), tax credits are awarded for projects and can be used to offset other income for Federal tax purposes. The credits have to be used straight-line over a multi-year period, with no carry-backs or carry-forwards. Thus, the recipient of the tax credits (usually a developer of an affordable housing project) will sell or syndicate the tax credits to corporate buyers. Individuals can’t use the tax credits due to the passive loss rules, and corporate buyers need to be able to look down the road and predict a steady stream of taxable income in future years against which the credits can apply.
In recent years, the most likely buyers have been financial services firms — banks and insurance companies. In fact, some of these companies have subsidiaries set up just to buy the tax credits and help finance the projects. With the current roilling in the financial services sector, these industries have basically shut down buying, so the affordable rental housing development business is on the skids right now. This is a huge problem — something like half of the total apartment construction in America in the past 10 years has been in the affordable housing sector. With the collapse of home buying, the demand for affordable rental housing is soaring. In addition, this construction activity provides jobs, buys building material, and generates urban redevelopment.
You would THINK that such a win-win business would have Congress jumping to provide very modest support — ad actually the dollars needed to get this sector back on its feet are trivial compared to what’s being spent for the rest of the bailout. The problem is, it’s difficult to come up with a quick solution to this problem that DOESN’T use the financial sector as the conduit. Simply put, the financial sector is so heavily intertwined with the afforable housing sector, that the solution will either have to be channeled thru the banks and insurance companies OR we have to invesnt a new and costly conduit from scratch.
The first solution (using the financial sector as a conduit) is repugnant to Congress right now, since they’ve already sent the financial sector to the woodshed. The latter solution (re-invent the wheel) is both silly and probably un-do-able. So where does that leave us? With a gaping hole in our nation’s housing strategy and no quick fix in sight.
The good news is that there is widespread agreement that SOMETHING has to be done. Unlike the auto industry, there aren’t any nay-sayers complaining that affordable housing should be allowed to collapse. However — and this is terribly ironic — affordable housing woes affect all 435 Congressional districts approximately equally (OK, urban ones a little worse than others, but you get the picture). As such, we don’t have the Congressional delegation from one state (say, Michigan) championing this bail-out above all others.
Now it’s just a matter of finding a solution that Congress can stomach.
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January 20, 2009
I’d planned to start this on January 1, but that didn’t happen. (Actually, January 1, I was in Charleston, SC, at Renaissance Weekend, recovering from the parties the night before.) Given all that, it’s probably not a bad idea to start on the first day of Barack Obama’s presidency.
First, by the way, my congratulations to our new President. I’m available for ambassadorships to smaller, peaceful countries located on or near the tropics with good, indigenous rum and liberal attitudes toward Norte Americanos. Barbados comes to mind. Do we have an embassy in St. Barts?
Seriously, though, as I write this (4:30pm EST), the Dow Jones Industrial Average is closing down 332 points at below 8000. It naturally begs two questions — what impact does all this have on real estate, and what can be done about it?
To the first question, the markets generally realize that the Obama presidency does not imply a quick fix to anything. We’ll be lucky — extremely lucky — if the markets don’t get any worse before they get better. Consensus opinions — and I like the Livingston Survey from the Philadelphia FED — are that 2009 will be a muddled mess and 2010 will be the recovery year.
The biggest problem right now is in the credit markets. The government is simultaneously telling banks to tighten down on credit (so as not to make anymore “liar loans”) and to make more loans. Great. The banks need to find their most credit-worthy clients and give them unlimited lines of credit. It sounds good, but even at zero percent interest, money won’t get borrowed if the transactional costs exceed the returns. Imagine a homebuilder with a great line of credit (none of those exist today, so we have to imagine). If s/he built houses and no one could buy them, then “free” money from the bank is still w-a-y overpriced.
What do we do about it? Our economy is a series of cogs/wheels which interact with one another. If one or a few clog up, then it’s like a very small bird flying into a very big jet engine. (Readers of this blog a dozen years from now will miss the analogy — google USAIR 1549 and see what you get.)
Assuming “google” still means something a dozen years from now.
Anway, what do we do about it? The system really needs some support from the ground-up. The recent $700B or so (I’m losing count) was spent in a top-down effort to shore up the institutional structure. It wasn’t badly spent money, on the contrary. If we hadn’t spent that money, or at least something like it, then we’d be spending several times that in the first quarter of ’09 to re-create a financial system. Now, comes phase two — individual market participants have got to feel some safety and security in their jobs and homes before they’ll become market participants again. The stimulus package being discussed in DC is heartening — it spends a lot of money locally which has the promise of creating jobs, rather than just directly dumping money into consumption. Don’t get me wrong — consumption is good, but only if there is a fundamental jobs-based economy to back it up. We could put everyone on welfare and print enough money for everyone to shop to their hearts content, and our economy would grind to a halt pretty quickly — that’s basically what third-world dictators do with THEIR money. Hyper-inflation and total economic collapse generally follow that sort of strategy.
I think we’re moving in the right direction, but it will be a slow walk rather than a fast sprint.
Is there anything individuals can/should do now? I have a few ideas, but I”ll leave those until tomorrow.
From a small northwestern observatory... 