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."
the fellow that sent this to me is a 70 year old man who has been in lending since after he was a Marine major in Vietnam. He is extremely conservative about everything but young women...lol
I trust him on it but can’t verify anything except the source he got it from..beyond that I don’t know.
happy thanksgiving to ya’ll
The president, you will note, DOES have the power to suspend regulations...but the Kenyan adores regulations, the more the merrier, and won't even consider realxing them.
bttt
bm
“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.”
Leaving you and I with the tax bill, while the REAL value of our assets drop. Great deal, eh?
I agree with about 90% of all of it.
Well, accepting this on face value, these points make sense. And it’s not pretty.
Last week I was at a brand new shopping center and most of the storefronts had been empty since the center was built.
All those empty spaces -— we started talking about the kinds of things people could do with them if only the rent were low enough to make a tiny business viable.
For example, I know someone who would love a small shop in which to give music lessons. Her home, both in size and situation, is limiting the number of students she can have, and she needs storage space for stuff related to her lessons, and she’d like a small area when 10-12 people could be seated for recitals and so on. With enough space, she could also take on another music teacher as a partner, and they could double the number of students.
This would be a very small business, requiring no changes to the space at all, but it would bring some life, foot traffic and possibly even a little spending at nearby restaurants to the center. Which right now is earning exactly ZERO on that space.
But then we realized the owner probably has very little room to adjust the price of rents, either because of the terms of his loan or simple government regulations.
We also said this is why in the Great Depression an unemployed business manager and his wife could make candy in the kitchen and sell it on street corners, or sell pencils or apples. Not today! The government regulations involved in pursuing the tiniest commercial enterprise are almost completely prohibitive.
Does the deferral of the foreclosure bubble until at least 2013 mean that housing values will crash AGAIN at that point?
If so, I’m wondering what homeowners need to factor in to their financial planning for the next decade or so.
Yep. Also how does it change your homeownership profile?
I’m not suggesting “rational default” (although it may come to a point where that’s widespread). But sometimes I try to sort through if it would be better -— financially -— to take a loss on my home now, get out from under the mortgage, and get a little more flexibility into our housing budget (such as by renting).
A couple of other demographic notes that never seem to be accounted for in looking at how the nation's housing supply is going to trend in the next years: 1. That big population bubble, aka the Baby Boomers, is going to burst over the next 10 years or so. As the boomers start dying off, many will leave homes that, quite literally, no one wants. The family will not want them and they will not be able to be sold. This adds millions more units to supply over the next decade or so, not to mention millions of tons of used stuff (furniture, artwork, dishes, cars, etc.) out there to be disposed of somehow. 2. Young people starting out, and other adult children, are not going to have the financial means (jobs) to start their own households. There will be many more multigenerational households (which is not a bad thing, but which does not sop up housing supply like individual homes does). 3. The recent trend toward having more than one home also will end except for the quite rich. Snowbird homes in Florida, forgetaboutit. Beach houses, no. 4. As the next generation looks at housing, fewer are getting married and actually forming families. Economic hard times will decrease the number of children people have. Single parents, for example, will share McMansion rentals instead of having their own home. 5. Without plentiful jobs, immigration (especially illegal) will slow down. Again, fewer people to use housing inventory.
If the government is determined to spend billions in bailouts, take that money and instead use it to "fund" massive across-the-board tax cuts.
Instead of the piddling stuff it's doing, the government could completely reset housing values, in a manner of speaking, in a fair and relatively safe way by quadrupling the home mortgage interest deduction for every homeowner who is current on his mortgage for that tax year.
This would immediately, effectively and proportionately reduce the homeowner's monthly cost of housing without an individualized loan modification blah blah blah. And it would not reduce principal on paper (for the banks).
Sure, that would be "expensive." But it would work, so at least the billions the guvmint spent would not be down the drain.
Whoa. Sorry for the formatting fart. Here’s what I said in non-brick format:
A couple of other demographic notes that never seem to be accounted for in looking at how the nation’s housing supply is going to trend in the next years:
1. That big population bubble, aka the Baby Boomers, is going to burst over the next 10 years or so. As the boomers start dying off, many will leave homes that, quite literally, no one wants. The family will not want them and they will not be able to be sold. This adds millions more units to supply over the next decade or so, not to mention millions of tons of used stuff (furniture, artwork, dishes, cars, etc.) out there to be disposed of somehow.
2. Young people starting out, and other adult children, are not going to have the financial means (jobs) to start their own households. There will be many more multigenerational households (which is not a bad thing, but which does not sop up housing supply like individual homes does).
3. The recent trend toward having more than one home also will end except for the quite rich. Snowbird homes in Florida, forgetaboutit. Beach houses, no.
4. As the next generation looks at housing, fewer are getting married and actually forming families. Economic hard times will decrease the number of children people have. Single parents, for example, will share McMansion rentals instead of having their own home.
5. Without plentiful jobs, immigration (especially illegal) will slow down. Again, fewer people to use housing inventory
It could happen immediately. No one would need to administer the program, or apply for it or go through an approval process. The minimum requirement might be to file with your taxes some kind of defined proof that you are current on your mortgage.
what i got was that we are just seeing band aid bumps...not any real rebounds yet
and that cash is just sitting it out
and that the Obama administration is allowing financial institutions witchcraft techniques to reamortize poorly performing debt which is often worth less than the loan...a disaster
I am trying to wrap my mind around what it would mean if our economy were to “collapse.” However that is defined at this point in history.
However, even if (a BIG if, in my estimation) employment goes up to "more normal" levels in 5 years or so, the impact of these years of un- and underemployment will be felt for decades. People simply will remain behind where they would have been, which has huge implications for the real economy far into the future.
That was once the the third last part of the American Dream.
IMHO, the retired boomers will pinch pennies like we've never seen....that in of itself is something economic forecasters (Wall Street) have not added to the equation, in fact the opposite has been their norm.
Inflation will come very soon because of asinine goobermint spending and we will see another 10-20% decline in discretionary spending habits of the US populace. Wages too will remain stagnant at best as I am hearing that blue collar pay has dropped.
Small town Joe Bloe Banks lends money to developers for near by city's new strip malls and condo office buildings.
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