But first . . .
ARE WE NEAR A BOTTOM? LEFRAK ON REAL ESTATE
A friend listened to one of New York’s top real estate moguls, Richard Lefrak, a couple of months ago, and took notes:
Lefrak said that the current crisis is likely to take about another THREE years (give or take one or two) for a few very simple reasons:
First – We have the highest inventory of unsold homes/condos/apartments nationwide in 20 years.
Second – We know that home inventories will RISE for at least another year, due to a huge coming wave of foreclosures.
Third – Banks and mortgage companies do not have cash or credit available to lend to potential buyers. This won’t turn around until the real estate market itself turns around – so we have a catch-22.
Fourth – The high price of oil and food (which is largely being caused by growth in emerging markets: China, Russia, India, Middle East, South America) is putting even more pressure on over-indebted consumers in the US. Even if oil demand falls in the US, demand from overseas will suck it up. A 30% decline in oil (to $100 a barrel) will not solve the problem. It will still be too high to offer any significant help to the consumer.
Fifth – The US government will need to keep US interest rates low to try to help the consumer and real estate markets. Low interest rates will keep the US Dollar under pressure. Even if the dollar doesn’t fall much further, it certainly won’t be rising much anytime soon – and this will cause even higher consumer prices since we import almost all our consumer goods.
As for why NYC hasn’t yet been affected, but eventually will be (in a very big way):
For 30 years, the NYC real estate market has been largely driven by Wall Street profits. Until the beginning of this year, most Wall Street firms were actually MAKING money on the real estate and credit crisis, but that ended early this year. Mortgage and credit trading was the major source of income for Wall Street for the last 10 years – and that has now dried up. This doesn’t spell the end of Wall Street. Eventually, something will come along to replace real estate – but that won’t happen overnight. Nobody knows how low prices will fall in any given market, but the crisis on Wall Street is the worst in 20 years – so it’s hard to imagine that this will only have a minor or temporary impact on NY real estate. NY metro saw the biggest price rise in a generation over the past 5 years. A 10-15% decline does not correct a 300% price rise. Never has, never will.
The US real estate bubble took 10 years to build. Something that takes 10 years to build cannot be wiped clean in 6 months or a year. After the Gold bubble burst in 1980, it took 4 years for gold to hit bottom. After the S&L crisis of 1988, it took 5 years for banking to hit bottom. After the NASDAQ bubble burst in 2000, it took 3 years for the NASDAQ to hit bottom.
People are generally optimistic when it comes to economic issues because MOST of the time the economy is growing. But when a crisis does occur, it lasts a lot longer and goes a lot deeper than most people expect. During the good times, we tend to forget how bad things occasionally get. And financial advisors (and real estate brokers) are paid to give people good news, not bad news. Eventually, everything will work out fine. Real estate prices will rise again and Wall Street and the stock market will boom, but that’s years away.
☞ It should be noted that Congress in 1994 gave the Fed the authority to regulate the ‘non-bank’ mortgage originators, but – in classic no-regulation-is-ever-good Republican fashion – Chairman Greenspan chose not to use it. What possible harm could come from a real estate bubble fueled by the granting of massive credit to unqualified borrowers? (Greenspan is the author of the book that Senator McCain has promised to read to bone up on economics.)
Using the Fed’s regulatory authority would have required cracking down on, among other things, ‘liars’ loans‘ – where borrowers were not required to document their creditworthiness – and this would have significantly moderated the real estate bubble.
While it may be several years too late (horses, barn doors), Chairman Bernanke is planning to use this authority.
It should also be noted that, within the bounds of what’s possible, Congress and Treasury Secretary Paulson did a good job with the recently enacted housing bill. The overarching idea was to make it harder for people to get mortgages who can’t afford to pay them back – but easier for people to get them who can. One especially noteworthy provision: a $7,500 no-interest 15-year loan (in the form of a refundable tax credit) that Congressman Barney Frank insisted be included to help first-time home buyers get a foothold on homeownership. Another: a substantial increase in the ceiling on mortgages the FHA will insure, to over $600,000. For more about these and other homeowner benefits of the bill, click here. For the macro view, here.
(And what of the charge it’s all a bail out for the shareholders of Fannie Mae and Freddie Mac? When a former Treasury Secretary ribbed one of the principle authors of the bill with that charge, the author shot back: ‘Are you buying shares?’ To which the answer, perhaps instructive to us peons as well, was, ‘Umm, well, no.’)
MARY MATALIN PUBLISHES GARBAGE
I was on her radio show for an hour once and enjoyed it. But she long since began to grate – and now her imprint at Simon & Schuster has published this. It debuts the day after tomorrow at the top of the New York Times best-seller list:
. . . In its timing, authorship and style of reporting, the book is strikingly reminiscent of the one [the same author] wrote with John O’Neill about Mr. Kerry, ‘Unfit for Command,’ which included various accusations that were ultimately undermined by news reports pointing out the contradictions. (Some critics of Mr. Kerry quoted in the book had earlier praised his bravery in incidents they were now asserting he had fabricated; one had earned a medal for bravery in a gun battle he accused Mr. Kerry of concocting.) . . .
Speaking of which . . .
A VIDEO YOU MUST SEE
How Fox misleads its viewers about Obama – take 4 minutes to watch.
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Quote of the Day
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