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."
I think you’re right that there is a point at which the glut of housing makes house prices go so low that more low-earners *can* buy houses.
However, in the meantime, the death of the baby boomers means a huge increase in vacant, unsellable properties over time.
For one thing, many of these homes will not be in locations or modern enough for people who have money to buy one of the millions of other, probably newer homes on the market.
Secondly, many young people starting out will make so little, if they even get jobs, they won’t be able to save up downpayments which (hopefully) will be required as credit standards return to more sensible parameters -— regardless of the home’s price.
At the same time, as we are starting to see now, the glut in homes for sale will lead to cheaper and cheaper rents. Renting, rather than buying, possibly will become more the norm.
Home ownership won’t be a simple question of affordability (as realtors like to say). I think the whole idea of having a bunch of money sunk into a house, and being tied there if it can’t be easily sold, yet one loses one’s job or whatever, will not be as blithely accepted in the future.
Also, I don’t think we can assume that house prices can fall and fall indefinitely, while everyone’s financial status stays relatively the same. IOW, the worse the housing market is, the worse the economy will be -— therefore, the worse wages will be and so on.
But, yes, if affordability is the only factor, more houses = more affordability.
P.S. I’m also thinking there probably won’t be as many “young couples” starting out as there as boomers dying for a while?
you’re right which is why most ads target 18-55
the Gold Standard
In my opinion, you seem to be forgetting that most boomers have children, often larger than the current 2 kid families, and that many of these adult children could never afford a home and are anxious to inherit their parent’s home. If mom’s home is local, they can move into it. If not, they can rent it out or sell it for the downpayment to buy a home locally.
It seems to me you think that a deceased boomer = vacant home. With all of their children waiting to inherit, I don’t think the glut from the demographic shift will be as dramatic as you seem to think
Look around at your own family, friends and neighbors. Dig a little and I think you will begin to realize how many of the boomers children don’t have homes and will inherit one. That is how I see it.
Interesting perspective, and if that’s what you see, that’s a factor.
But I look around and don’t see anyone who can’t wait to inherit a home or who would really want to move into their parent’s home if they did inherit it. Most have gotten their lives on their own track by the time their last parent’s home becomes vacant.
And I know a couple of people personally who, although there are several children and grandchildren in the boomer’s family, no one wants the boomer’s home, yet they can’t sell it in this market.
In fact, I personally know one family where “mom’s home” is a burden, precisely because they can’t seem to sell it at any price, nor rent it, yet it has taxes,association fees, insurance and upkeep that the kids have to pay.
So I guess it just depends on WHERE you are.
You’re right that a deceased boomer doesn’t necessarily mean a vacant home. But it does mean one more home on the market, either because it’s directly on the market or because a family member moves into it rather than possibly buying another home on the market.
Even if this doesn’t create a “dramatic” glut of houses in and of itself, it certainly adds exponentially to the decade-long glut we are already facing!
You have good points. I don’t want to pretend that the demographic shift will cause more housing inventory at the worst possible time. You are perfectly right in that regard. It sure won’t help people feel good about depressed house values any time soon. It should help reduce house prices lower and longer which will be beneficial to those who want to buy a home. It will no longer be about no money down option ARMs. Lower prices will make houses more affordable than they are today. That will help a lot of people.
I don’t see the value in houses being expensive. I don’t see it as a good thing to strive for. It is just shelter. The more people who buy a house and pay property taxes and anchor in to their communities, the better. Renters don’t tend to show the same concern for their communities that owners do. Owners understand property rights somewhat better than buyers do.
We will see what happens. I’m not worried about low house prices. I think affordable housing is a good thing. I think it is good to make people think of houses in shelter terms again, and not as some retirement plan or get-rich-quick scheme.
You make good points. I agree with you.
Same here. I agree with your points!
BM
Does anyone have an email so this can be forwarded to CalPERS and maybe the #1 & #2 leaders of California government. Tough times ahead.
I would recommend the Milk of Magnesia new half dose...works great if that is what you desire.
cherry flavored too...better than that old chalky crap
FYI.. Denninger has a writeup on this thread
http://market-ticker.org/archives/1673-They-Arent-Really-This-Stupid,-Are-They.html
site down..lol...given the title...doesn’t look complimentary
Yeah.. I noticed it was down earlier this morning but it seems to be back now. The writeup is very well spoken. Denninger is one of the good guys.
nice..thanks for turning me on to this guy...I will try to keep up.
There are in fact generational opportunities in real estate today, to borrow long at low rates and buy up distressed properties, utterly ignoring the current cash flow. No it isn't "hiding" anything for that to be acknowledged all around the table. The present state of demand is the temporary variable that won't be sustained. Sure a speculator wants another leg down to buy lower; tough toenails. There are in fact more deals out there than all of them combined care to take up, already at distressed prices.
Overall, the article is a piece of group think idiocy staring in the rear view mirror of the last quarter or two. Instead of trying to time every bottom (did he get into bonds last December? Get into stocks in March? Didn't think so...), just negotiate the price. Waiting around for other people to tell you which way prices will move is stupid. Just go bid what the price ought to be.
Oh, you don't know that? Then crap about "80% of this price adjustment" and 75% of that one, is crap...
Here’s the discussion on that column:
In it, he claims he’s got confirmation on the content from someone who was at the meeting (Denninger posts there as “Genesis”).
Good luck on “keeping up”. He (Denninger) almost writes faster than I can read.
Ping.
Thank you looks about right if you actually pay attention rather then follow the propaganda of the mainstream news!
Nice. Thank you for posting this.
> LIMITED GOVERNMENT.
Are you planning on breaking up the too-big-to-fail banks before or after you magically limit government?
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