Interesting E-mail between National Real Estate Market Financiers/Investors (Gloomy)

Here are some personal insights from an attendee (not me) at ULI Meeting in San Francisco November 2009

"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.

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.

15. US corporations are sitting on record cash balances way beyond any they ever had. They will be doing more acquisitions.

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

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.

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.

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.

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.

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."

Lady, when I read this, you were the first person I thought of, since you’re on top of all things financial.

Geez. What a mess.

I’m not privy to his email addy but maybe this should be emailed to KD over at the market-ticker.

Since he has been screaming about this shit for 18 months!

meh

Hope you had a great holiday!

This administration certainly is going to make the recession worse, the recovery (if it occurs) slower, and is in fact toying with total financial collapse of our economy.

This Bloomberg article shows how Spain's "shovel-ready jobs" (which, unlike here, apparently actually were jobs for a while) stimulus simply "put unemployed on ice." And now it's time to pay the fiddler.

However, we may want to think about the fact that also, boomers retiring and not working or only part-time, will have the effect that many will not spend to 'enjoy' their golden years.

Exactly. Besides dying and leaving millions of properties that no one wants, inability to spend, and penny-pinching regardless, will severely contract discretionary spending --- the engine of the real economy.

However, there's another way unemployment + boomers is effecting the economy right now. Unemployment numbers do NOT count the number of people (mostly boomers) who in the last years finally opted for EARLY RETIREMENT, including AGE 62 ENROLLMENT IN SOCIAL SECURITY ("early" enrollment) because they could not get or keep their jobs.

Early enrollment in Social Security has skyrocketed! Functionally (their effect on the economy right now), these SS payments are the same as a never-ending unemployment benefit.

They affect the economy by drawing out present dollars for payout. Moreover, this means that boomers, who not only would not have draw out of the SS fund for a few years, are also not paying in for the next years, as they otherwise would have if they'd been employed.

At the same time, they are coming into their years of potentially high medical expenses, much of which now will be paid by the government.

Every discussion of unemployment needs to include figures on early enrollment in Social Security over the last year or so.

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.

Man, you are so right on this point as well! And no one seems to reflect on the fact that the discretionary consumer spending, ESPECIALLY BY BOOMERS, likely is PERMANENTLY contracted.

Look, many boomers have about everything they need, and many have led a somewhat affluent lifestyle to the point that it doesn't even really matter to them if they can't go out to dinner so often or go on cruises, whatever.

What I'm saying is that the psychology of penny-pinching is quite different in this group and this time around. When you bought a pair of shoes because they were the new style, a getting to be senior has no problem "adjusting" to not buying new styles and instead wearing one of the many pairs of shoes in the closet.

I'm not particularly wealthy, but I think I literally could go a decade or more just wearing out the stuff I have, without buying much of anything else. In fact, I can't wait to start getting rid of much of the stuff that's been accumulating!

When financial shock is coupled with the lack of true *need* for buying much of anything --- has the world economy ever seen such a combination?

Wow...I hadn't thought about that as another big factor being unaware until you responded....thank you.

It is interesting the goobermint never considered adjusting SS payouts in the past and partial investment of SS fund intakes into something like federal toll road building bonds, etc.

One thing is fer sure...now way this side of h$ll is the goobermint going to be able to fund its retirement programs for its employees becasue of all the goobermint debt and continued growth of goobermint.

The monster has to be killed with regards to spending and unfunded liabilities.

Many at the top advocate killing off the old, sick and disabled because of just what you and I realize.

I do think that because they won’t be able to sell their homes, fewer folks will be able to downsize, move to assisted living, go into nursing homes etc.

Whether is a good thing or bad thing depends on each individual’s circumstances.

But I do think the ability to move into such higher-care settings has meant people live longer. Even simple things, such as falling at home, is much more likely to result in death for the elderly than if that person were to fall in a higher-care setting where someone was around to at least notice right away.

The monster has to be killed with regards to spending and unfunded liabilities.
AMEN.
This is why I think conservatives need exactly ONE plank in their platform, ONE plank that we all rally around and pursue relentlessly: LIMITED GOVERNMENT.
Every single issue that is immportant to conservatism, or important to some conservatives, would be advanced in our favor simply by limiting government!
Limiting government means one thing, functionally: limiting the money the government takes and prints.
Pro-life? Limiting government helps the cause.
Want school choice, educational reform? Limiting government helps the cause.
Support small business? Limiting government helps the cause.
And so on.

If a new party, such as the TEA (Taxed Enough Already) party, or a takeover of the GOP occurs, unity around the single idea of limiting government would be very powerful and keep advancing many causes.

True.

And SSDI will be the vehicle of choice for funneling more guvmint money to po people.

However, the dirty little secret for the States is that Obamacare will shift up to 50% of the cost of Medicaid to the States! Since states cannot print money, and most are required to have a balanced budget, that means one thing: MASSIVE INCREASES IN STATE TAXES.

Dick Morris had a great piece on this last week. If I find the link, I'll post it. Here, I found it.

I strongly suggest people write their state agencies and casually ask, "How do you think you're going to like it when you lose 50% of your federal funding under Obamacare and somehow have to scare up funds through new state taxes?"

That ought to make even some of the Rats get all wee-weed up.

Get these folks working against Obamacare and we can increase our chances of saving the country.

"has the world economy ever seen such a combination?>

In a word...NO.

All but our parents generation (mid 70's & up) have ever seen a real Depression.

IMHO, the relentlessness in goobermint pushing to place more spending and control ASAP is becasue of what is coming.

They do not want a WW III, so killing off the boomers, the sick, and the disabled leaves infrastructure in place and lets them redistribute the wealth as they best see fit.

Has the world economy ever seen such a scheme?

Think about it.......the goobermint is practically giving away the H1N1 vaccine to the kids (not infants). I've read that this particular bug shows traits of a man-altered virus.Think about it on just how much the goobermint has recently pushed these inoculations especially for kids.?

What better way to get rid of the elderly and the sick?

The recent CRU unavailing is a prime example of my complete distrust for those at the top running the show.

I couldn't agree more:

See my post #1122 on this thread:

Your assessment is spot on as Reagan knew this too and why he begged for a balanced budget amendment to the US Constitution.

Still we have no one and I mean no one (including Ron Paul) offering a plan to seriously reduce the size of goobermint, the amendment, reigning in spending now, and paying off out debt.

In the meantime, we are 300 yards from shore and the 5 piranha are taking chunks out of legs as we try to swim back to safety. We can also see the school of piranha (hundreds) 1/2 mi away upstream swimming straight straight for us.

Few statesmen are left now serving in Congress.....Jefferson repeatedly warned us about the nature of man and goobermint.

All but our parents generation (mid 70's & up) have ever seen a real Depression.

Yes, and with the Great Depression, many of the people who went through that did not already have McMansions full to the brim with clothes, shoes, five sets of dishes, four computers, gads of electronics, appliances, cars for each driver, and on and on.

IOW, they more or less NEEDED stuff eventually, whereas many boomers don't need much of anything --- ever again. So, in the Great Depression, the motivation to spend was there once the economics of spending came back. I don't think that will be the case with our Great Crash.

For example, my mother and her sisters got a couple of new dresses most every year until the Great Depression. Then they stopped getting stuff. This meant that for the next several years they had to make do with the 3-4 dresses they already had or could get as hand-me-downs, keeping them mended and trying to let them out or rework them as the girls grew older.

Many people today have closets and dressers full of clothes. If they totally stopped buying for the next five years, they'd still not even come close to wearing out (using up) all the clothes they already have!

As a society, we were much, much more affluent when the economy crashed than were most families during the Great Depression. Many boomers could go the rest of their lives without buying much of anything and still have everything they "need." It seems to me this makes it much more likely that a downshift in discretionary consumer spending becomes permanent.

Your points 1 and 2 seem in conflict to me.

If tens of millions of boomers die off and leave homes behind, there will be an even larger glut of home inventory than today, prices have to go much lower, and therefore young people starting out will necessarily be able to afford the homes. It is one or the other. For young people starting out to not be able to afford to own homes would require a lack of a housing glut.

So, which will it be, glut from dead boomers or unaffordable homes for young couples?

IMO, I’ve never seen retirees as a very big spending group. What do they spend?

They travel a bit here and there. They eat out some, but it tends to be lower end or moderate & at senior discount prices. The whole reason to offer senior discounts is because senior’s don’t tend to eat out very often.

Seniors don’t commute to work so they don’t drive much, and their low wear cars last much longer than when they were working.

They rarely buy clothes beyond replacing worn items at Walmart or KMart, and at that men will wear worn items until they are falling off.

They generally have a paid-for home, so they are not driving the mortgage market.

They don’t tend to embrace new technology so they get by just fine with their old 19-inch TVs, no ipods, no laptops, etc... They consume way less food as they age.

OK, they crank up the furnace a bit more in the winter and run the AC all summer, so they do use a bit more energy than when they were younger.

I just don’t see senior citizens as a big consumer group driving the economy. They cause massive medical spending. Beyond that, I just don’t see senior citizens as the consumption engine that was the 70% of GDP of late. They are not big buyers or consumers. Not that I have seen, so penny-pinching seniors aren’t going to have much impact on the economy. It is the people in their prime earning years who want a move-up home and a cabin by the lake, want a Lexus, decide to send their kids to an expensive private college or a dirt cheap junior college for 2 years instead.

I see these people driving the economy, not senior citizens. What am I missing?

GREAT POST. Very informative. Thank you much for it. It reeks of honesty at least. Freepers need to know that things will not turn rosy anytime soon and plan accordingly. Soon after Obama’s election, I predicted he would be a one-term wonder because 4-years later the economy would still suck, he would be blamed for it, and his party would be punished for it. I stand firmly by that prediction, which is looking better and better all the time.

Thanks for some compelling info.

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