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Foreshadowing?

 
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Renting in Mass



Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011

PostPosted: Fri Jan 08, 2010 9:59 pm GMT    Post subject: Foreshadowing? Reply with quote

This Krugman post has a chart comparing the bubble in commercial real estate to the housing bubble:

http://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/

I'm thinking the CRE line has something to tell us about where the housing market is headed when government supports are removed.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Fri Jan 08, 2010 11:41 pm GMT    Post subject: Reply with quote

The Community Reinvestment Act Amendments made by the Clinton Administration fired a torpedo at the housing market. Krugman claims that because the Commercial Real Estate Market followed the same course it is evidence that the CRA was correlation and not causation.

He is right, the CRA had nothing to do with Commercial Real Estate with the exception perhaps of increasing land costs.

His analysis is wrong because the same morons who gave us the CRA fired another torpedo at the Commercial Real Estate Market and that torpedo was called:

the Riegle Community Development and Regulatory Improvement Act of 1994


http://www.thefreelibrary.com/Banking+law+facilitates+securitization+of+r.e.+loans-a015831325


Quote:
Specifically, the Riegle Community Development and Regulatory Improvement Act of 1994 extends to commercial and multi-family real estate securities the same benefits enjoyed by residential mortgage-backed securities under the Secondary Mortgage Market Enhancement Act
....

The net effect of this new policy change will be to reduce the cost of a public offering by allowing issuers of commercial mortgage-backed securities to bypass state securities registration laws and instead issue the securities through a single, federal application process.


So the liberals who say that it was deregulation that caused the problem, they're right....

Regarding the CRA:

http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6

from above:

Quote:
Finally, the Clinton adminstration threatened to subject the mortgage companies to the CRA if they didn't comply voluntarily. They promptly agreed to increase their CRA-type lending in order to escape the kind of public scrutiny that comes with official CRA regulated status.



Here are Clinton's remarks when he signed it:

http://findarticles.com/p/articles/mi_m2889/is_n38_v30/ai_16354766/

My favorite part was of course:


Quote:
Ninety-three percent of the over 4 million new jobs which have been created since I became President have been in the private sector. I am very proud of that. That's a higher percentage of jobs coming in the private sector than had been the rule in the previous decade. We need to do more of that, and if we do our jobs well in Government, we'll continue to be able to do more with fewer of us to create more of you in the private sector.


I love that he takes credit for creating over 4 million jobs in a year and a half (taking all the credit), but you wonder what Party Affiliation he was when he says that you know we're doing our jobs well when there are fewer of us in government than you in the private sector.... It is astonishing how the Democrats talked when they set the bubble in motion to when it popped: scapegoating and protecting Unions and Public Sector jobs....
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mpr



Joined: 06 Jun 2009
Posts: 343

PostPosted: Fri Jan 08, 2010 11:59 pm GMT    Post subject: Re: Foreshadowing? Reply with quote

Renting in Mass wrote:
This Krugman post has a chart comparing the bubble in commercial real estate to the housing bubble:

http://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/

I'm thinking the CRE line has something to tell us about where the housing market is headed when government supports are removed.


What makes you think they're going to be removed ?

And John, you've been listening to talk radio again, haven't you ?
Tsk Tsk Tsk.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Sat Jan 09, 2010 12:17 am GMT    Post subject: Reply with quote

Krugman wrote the story today. Talk radio will echo my point in a day or two...
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admin
Site Admin


Joined: 14 Jul 2005
Posts: 1794
Location: Greater Boston

PostPosted: Sat Jan 09, 2010 1:09 am GMT    Post subject: Re: Foreshadowing? Reply with quote

mpr wrote:
Renting in Mass wrote:
This Krugman post has a chart comparing the bubble in commercial real estate to the housing bubble:

http://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/

I'm thinking the CRE line has something to tell us about where the housing market is headed when government supports are removed.


What makes you think they're going to be removed ?


The increases in government support will cease or diminish because it's not possible to continue increasing support at the same rate indefinitely. My own personal hypothesis is that it has been the increases in support that have driven the stabilization (aka, smaller than normal declines) in the past year, rather than the level of support itself.

- admin
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Sat Jan 09, 2010 3:07 am GMT    Post subject: Reply with quote

Yes Congress didn't understand that economics can't solve all problems and decided to be economists. A friend of mine pointed out how hard it is save 20% down for a house. My response was how hard it was to save 20% down for an expensive house. Difficulty saving for the downpayment was a response to an imbalance in the supply/demand of housing and increasing debt only exasperated the problem.[/b]
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Renting in Mass



Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011

PostPosted: Mon Jan 11, 2010 4:26 pm GMT    Post subject: Reply with quote

Quote:
Krugman wrote the story today. Talk radio will echo my point in a day or two...


John P: providing tomorrow's right-wing talking points today Wink

Tangent aside, what do you think of the idea that the CRE graph shows us what the housing graph would look like if it wasn't for government supports?

Quote:
What makes you think they're going to be removed ?


Wishful thinking Smile
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Mon Jan 11, 2010 8:43 pm GMT    Post subject: Reply with quote

Renting:

95% of my family are liberals so don't take anything I say as being disrespectful as I have these conversations with the people most close to my heart.....


I see economics like thermodynamics. Many different types of industries or segments within a market might behave differently to the same amount of heat. Just like certain materials melt under certain temperatures while others can absorb more heat, so too are certain market segments that feel the heat more while others are insulated a bit more.

To answer your question about the behavior of the two: commercial real estate versus housing and is housing's bump up an indication of the future for commercial real estate I would break down the nature of each of their properties i.e. their insulation and their elasticity or deformation point...

Both are about future projections. A company will pay more to lease out a commercial property if they feel that that location is the place to be in the future and being there is going to pay dividends. An individual will pay more for a home if they think that by living in that area they can make more money than say a cheaper cost of living area where the salaries might be substantially less. Now, Massachusetts was very successful and people were willing to pay a premium to set up shop here and it got so bad that wishful thinking turned into downright bubble thinking. There was also a gentrification going on in many neighborhoods and what typically results is that people have to pay more for basic services when the cost of living is so much that labor becomes more expensive. These sorts of things take time, but it can be a slow death like the frog that dies in the water that has the heat that gets turned up little by gradual.

That being said, think about when companies start to react to hopes or fears of future prospects . A company often times signs long term leases so they might be locked up and their behavior in the market might not reveal their temperature for these reasons. In certain areas like office parks that act like incubators for little companis you can see if companies are looking to expand on another floor and if competition is driving up leasing rates or if excess capacity is driving them down. I heard of one guy that rented one bay in an industrial office park building. His landlord said to him that he needed to hike up his rent because of the bad economy. The guy drove down the street and negotiated a rent that was 10% less than what he was paying because the other guy was desperate and wanted a tenant. Now, industries like mine, architecture, are getting hammered. Unemployment among architects is double what it is for other industries so we feel more of the heat than most. Obviously, Detroit is getting torched and is melting / deforming right now.

Commercial properties is about cash flows. If a building has 80% occupancy and after mortgage payments provides a 10% profit margin that is great. Now let's say that the cost of capital gets cheaper and a REIT (Real Estate Investment Trust) can refinance, even if say occupancy is slipping, the savings in cheaper cost of capital might make the property more attractive because the profit margin increases if the cost of capital is cheaper. Cheap capital has veiled a lot of slippage in the market.

Now if you want to know if housing is going to go up, you have to count how many pages there are in the "Help Wanted" section of the Newspaper. If someone is getting calls from their friends trying to recruit them or head hunters are calling you more than you're calling them, housing will go up because people will think they can afford a bigger mortgage. Now again, the lower cost of capital has veiled that wages have stagnated and people were able to afford more principal because the mortgage rates were cheaper. Increasing house prices were a false indicator of the prosperity. It was really the mortgage rate increases of early 2006 where you saw signs of stress in the housing market.

Government support is affecting the housing market. Number one, the sale of Treasuries has kept mortgage rates low and number two, the down payment help has helped people get over the hurdle of the down payment. I think that people aren't upsizing as much so the upward pressure of housing is at the lower end.

Another thing to consider is what is on the market at any given time. If there is a lot of homes in the high end market moving it might raise the median house price just because the activity is on the higher end. Imagine if you had a ton of houses at the high end that were selling at 20% discounts and the lower end homes weren't moving, you could actually see median house prices rise just because the activity was on the high end side of the see saw.

There is a famous MBA case study called the Scotts Fertilizer Case. Basically, Scotts came out with a policy where their salesmen could collect commissions when the inventory was delivered versus when it was sold. For example, if Scotts delivered 5000 bags of fertilizer to Sears, the salesmen would get a commission. Scotts didn't get paid until Sears sold it to a customer. What ended up happening was that the sales force pushed too much inventory out there and then the next year Sears said we don't need any more. Meanwhile, Scotts thought that the market was consuming all of this fertilizer so they made MORE. So they ended up having made more inventory when in fact the market needed less. It took them like 2 years to reset.

Today, certain economists and investors look at if delivery companies are expanding their fleets or selling their trucks or ships. You get a good sense of if they are getting a lot of orders or if they are shrinking. These are what they call "leading indicators". Is residiential real estate a leading indicator of commercial? I think certain aspects are. I think that if the $8k thing didn't create that bump it would have said something, that commercial properties were most likely to continue to freefall. I think with the bump, it makes guys like you pause. Commercial leases are typically long term so I think people want some sense of stablity and people need to know the differences between President Obama and Candidate Obama. If Cap and Trade passes it will destroy some areas. If we get the right type of health care reform you might see more people hiring. If we take a turn towards the direction of Socialistic Western Europe we will certainly lose a decade like they did. Their policies keep them from being competitive for a long time.

Now what happened was that during the Clinton years people started to live beyond their means and bought things on their credit cards, the cheaper cost of capital under Greenspan made certain asset bubbles like housing. Clinton's philosophy was that if the tide came in, all boats would rise. He had the CRA because he wanted to make sure that the poor participated in the climb. Clinton allowed securitization in both residential and commercial loans so it just pushed risk down the road. That is what he did that was irresponsible. It bothers me when people claim that we were all rich during Clinton when he allowed people to live beyond their means and made it easy for people to shirk their responsiblities by passing risk down the road with securitization. When housing went up, people were using the equity in their homes to buy more stuff so all the companies thought that the market was rich so they expanded their plants and increased their outputs and hired more people. Everyone thought we were rich when in fact it was all on borrowed money. The "Surplusses" under Clinton were bubble money. We were getting out of balance.

During this time, government employees were getting huge cost of living adjustments. My mother retired as a teacher with over 30 years of experience in Special Education in the mid 90's. In less than 10 years, a first year teacher made more than what she did right before she retired. Now just like a janitor at WalMart will only make so much and then they price themselves out of the job, in the public sector their cost of livings just go up and up and up. It is like a lawn that doesn't get mowed. Now when we got this market correction, the private sector got hammered and they ended up "saving jobs" in the public sector. The public sector didn't really get the correction that the private sector got. When we came up with the formulas for the Pensions, the public sector made substantially less than the private sector.

Today, Obama wants to increase government spending. Now ask yourself, who benefits from government spending? Unions who get their prevailing wages or more secure government jobs, and government contract companies. Now Candidate Obama most likely led everyone to believe that he was going to send money their way so all the Unions lined up their members to hold signs for them. They broke for Obama because Clinton got hung up with NAFTA. Now Obama is a big "global" guy and the international community loves him so I don't know how long he can keep the protectionist Unions and the international community happy. I kind of laugh that people got mad at Bush for not signing Kyoto, while Obama did nothing at Copenhagen. I think about his oratory about how he was going to lower the level of the oceans, blah, blah, blah and then when the entire national community is assembled they don't even get a heads of agreement outlined. He was really a brilliant candidate, he hoodwinked the eggheads and the Unions.

I think the future is what Obama shows up, the socialist or the practical realist. I read a lot of Charles Krauthammer lately.

I think that currency will adjust. Just like I talked about thermodynamics. If the US is cooling down economicially, lets say from 100 degrees to 60 degrees, it is possible that we just changed the amount of what a degree is so that the new 60 degrees is now measured as 100 degrees (smaller increment). I think this adjustment in currency will help companies that export products or services, while it will be bad for those that hold notes that are to be paid back in US Dollars.

My current thinking is that if a Nation is in decline is it possible that even if they debase their currency that they don't get inflation? I mean don't you need upward pressure to get inflation? Just because something happened two decades ago and it got a certain reaction doesn't mean that it will get the same reaction today. Lastly, I think that if other countries stumble, money could flow to the US as a sancturary. I fear a War based on a poor economy in an emerging nation that elects an extreme leader. I like Obama's cool temperment, but I fear that his cool temperment will embolden those that won't fear him because they know he won't do anything. The face of the new "Ugly American" is that we manipulate our currency because we all want our toys, our free health care, and we dont' want to pay back our bills. I mean think about all the immigrants who built this nation, built the roads, and tunnels and bridges and trains all without having health insurance and now we can't even maintain them and everone wants free health care.

Entitlements used to be 1/3 of our Budget, now it is 2/3d's. The interest portion of our Debt is larger than the Operating Budget of several states combined. We will go to war before we go bankrupt and irresponsiblity today forces that decision that we will be forced to become predators. That, I don't want!
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