Posted on 11/26/2009 9:16:57 AM PST by wardaddy
I received this from friend who is former Goldman Sachs partner. Good read. BN
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FYI, For those of you who can stomach this, here you go.
Here are some personal insights from an attendee (not me) at ULI Meeting in San Francisco November 2009
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"This week I attended the Urban Land fall conference. ULI 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.
11. We will go back to financing real estate with long term debt, and not the short term floating rate debt used to all a quick flip.
12. The Internet completely changed unemployment trends. Instead of just pumping up the US economy and bringing back production jobs, the Internet has caused the entire world to be competitors for many jobs in the US. It ranges from call centers to research, financial analysis, medical research, and on and on. This may be one of the most historic changes in history and one everyone needs to be aware of. It likely means wages in the US will be reduced below where they might have been were it not for this competition.
As several economists put it, the young in China and India and other Asian countries are hungry to get ahead and enjoy the good life, while US kids feel entitled and poorly educated. Those of us who built businesses were very hungry. Today there are still some like us, but many are too comfortable and unwilling to really sacrifice to make it like we were. The Asians want to learn. Our young people think they already know it- whatever it happens to be.
13. The 3rd Q GDP number is inflated by clunkers home buyer subsidy etc.
Growth next year will be more like 1%-2% in the first part of the year.
14 Inflation will return in 3-4 years
15. US corporations are sitting on record cash balances way beyond any they ever had. They will be doing more acquisitions.
16. The best market in the US is Washington DC. For obvious reasons
17. Investors fled real estate completely fled real estate in the early 90's. This time they see the long tern opportunity to create wealth and will be back as soon as the opportunity to buy appears
18 There is an enormous amount of cash on the sidelines
19. The Fed is intentionally holding rates at zero to try to force investors to invest in longer term riskier assets instead of collecting nothing on money market or CD's.
20 The banks are still weak.
21 All values are still dropping and we have only gotten to 80% of the drop so far. Office and retail are only 80% there, industrial is only 60% and will be hurt by further inventory liquidation and lower levels carried going forward. Rents are only 75% of the way to the bottom.
22. In the 90's it was easier to fix the problem because the damage was much more confined to a small number of large new buildings which were revalued and then rerented. Now the damage is widespread and covers a lot of older buildings so it will take a lot longer to solve. Quality really matter now. The best buildings will return, a lot of others will struggle.
23. Office vacancy will hit 18.6% nationally, retail 23%, and multifamily 8%.
24. The unwind of the massive Fed stimulus is critical to how it goes. Everyone thinks Bernanke is great but nobody ever did this before -it is truly uncharted waters. Then there is the politics and what will the rest of the world do.
25. As you will read below there will not be the massive foreclosure and asset disposal we all expected. The lenders are going to hold on. When assets do come to market prices will be higher than they should be due to very few deals being chased by massive dollars. There is already evidence of this in the multifamily market.
26. Mobile phones, and other devices are now becoming all sorts of tools and multiple use devices. Social networking is growing faster than anything anyone can imagine. The growth rates are beyond comprehension. This is where everything in the world is going from ordering food or reserving a car on Zip Car, to reading the news or anything. If you are over 30 you can't grasp what is happening and how fast. The growth in usage is by tens of millions in months, and it is worldwide. You can't get your mind around this. There has never been anything in modern times that even is remotely like this. The growth rate makes the growth in TV usage look like it was glacial. This is the biggest transformation of how the world functions in maybe hundreds of years. You need to learn all about this or get run over.
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 I 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."
Happy Thanksgiving Day to all.
WEll, accepting this on face value, the US, printing debt (”money”)thru Oct. 2010 will not get us satisfactorily to Nov. 2010.
That is wishful thinking if health care passes and then GW legislation passes. If those two monstrosities pass, we are in for generations of European "Social Democracy" with structural 10% unemployment levels.
Bookmark
This is exactly what this administration and its cronies want. Masses of people will continue on the Gov’t dole and will not want to relinquish its teat. The republicans are in this knee deep as well. This government is not of the people but rather over the people.
Ping!
http://www.opensecrets.org/orgs/list.php?order=A
http://www.salon.com/opinion/greenwald/2009/04/04/summers/
http://www.noquarterusa.net/blog/2008/09/21/baracks-wall-street-problem-is-now-americas/
http://www.americanthinker.com/2009/07/will_dems_allow_goldman_to_man.html
Pays to pay off obama
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?
I have no doubt that this is true. The shell-game over the last 2 years or so has been to keep the bad assets the big banks are holding from seeing the light of day. As the purported admin official alludes to, it would be the end of them.
In essence, they're perpetrating a fraud by using fake accounting methods to pretend that bad assets are good assets until they can figure out what to do with them.
It seems the Northeastern bankster clans are waiting for substantial inflation in the near future so that at least the nominal value of these assets can come up to par.
IOW, they'll be able to say "see, these assets really are (finally) worth what we paid for them a few years ago - so we haven't lost anything and our books are now balanced." Sure, a gallon of milk might have tripled by that time and the dollar may full decline, but at least their bad assets will look good nominally speaking.
The bankster clans want inflation, it's part of their business plan. Of course inflation will will suck the rest of us dry, as will the hundreds of billions we've already given them - but they'll be okay.
NO flame wars, please.
I know barely enough to know that I am ignorant.
But based on empirical evidence so far I lean towards mild Austrian school.
Cheers!
When I pressed the issue of political interference she said -what do you want us to do, bankrupt all the banks?”””
The first step in destroying all the banks was when Jimmah Carter started the CRA.
IMO, it all started there.
In essence, they're perpetrating a fraud by using fake accounting methods to pretend that bad assets are good assets until they can figure out what to do with them.
To my mind, it appears that they are trying to figure out how to deflate a bubble without exploding it...gently.
VERY tricky to do.
Complicated by the rise of the East to challenge us for economic supremacy (while they refuse to transfer to true consumer-based societies (China) or to modernize infrastructure or give up cronyism (India).
Further complicated by the (relatively new) extent of derivatives in forms and amounts unconceived of during the Reagan years; "dark pools" outside of the erstwhile watchful eyes of US regulators; and the knowledge of the ever-present threat of a suicidal "rush to the exits" mere microseconds after a fatal mistake is made.
Add to that, the Marxist Obozo screwing up by nationalizing banks and industries *while* playing favorites to his cronies (Chinese "capitalism" there); and running the nation debt up to the point that the *interest alone* will be greater than Bush's TOTAL deficit.
Yikes.
NO Cheers, unfortunately.
Interesting read.
The real question is now that you know this (given it is real) how does it change your investing profile?
Dubious 'assets' have to be liquidated, but this of necessity must be a piecemeal process, else we risk a gigantic deflationary spiral.
The fact that this nation is wildly overbuilt is apodeictic. The realty analyses in the article seem spot on to me, perhaps even too generous as to the estimate of recovery time in that industry.
The simplest way to restart the economic engine -- which, of course, will not occur -- is to suspend, indefinitely, any and all regulations, taxes and fees which operate against the creation of new jobs by the private sector. Atop this, add an enormous tax on outsourcing jobs to other nations.
Point #6, particularly, has occurred in this nation previously. Its first cousin, appraisers being in bed with lenders (S&Ls in this case, not investment banks) was the fuel added to the fire that produced the S&L meltdown in the '80s. Appraisers and raters must be kept at a long arm's length away from lenders. This is twice; if we cannot learn this lesson, might as well not bother with the rest of it; the boom-bust NEXT time will be the end of the game.
All the easier to cut your investment in half in a month, my dear.
This is why I think your wish that we step back from the edge is just wishful hoping. I don't think we can do what has to be done in this regard until a genuine crisis forces us, de facto or de jure, to deregulate. Deregulate includes a legal system that is bloated, too quick to accept lawsuits, and too slow to resolve them, as well as a regulatory system that just makes it impossible to do much of anything without a nightmare of paper and oversight.
Thanks for the post. I tend to believe scuttlebutt that rings true, even when the outlook is this dark.
I am ambivalent...not sure to be honest.
Should we have let all these financial institutions collapse and just dealt with it?
It's hard to say.
And since we “saved” them then why did we let Lehman collapse?
the damned problem is that so many small banks all over the nation and lines of credit to little Joes like me with just mid 8-10 figure commercial debt are dependent to varying degrees on Manhattan firm’s solvency.
What sucks now is that the bailout and TARP loans have just been used to create solvency at taxpayer expense and done zippo to increase credit.
Trust me on that one...it is very difficult to borrow today.
Like this letter says...cash is just sitting....folks are scared....of the economy and how the Federal government is screwing it up.
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