Archive for the ‘Real Estate’ Category

The Economic Wave Set

Thursday, May 7th, 2009

Warren Buffet has been quoted as saying that the larger the stone dropped into water the bigger the waves. The stone dropped that started this financial crisis was definitely a large one. Here is my interpretation of the waves that follow the stone dropping. These waves can overlap but traditionally are made up of peaks and troughs.

The “stone” dropped was the Real Estate market bubble popping. The stone impacting the water was in September 2009 when the financial markets all but shut down clogged with bad debt. When the financial system receives a shock as it did in September, the effects are felt in waves.


The first wave typically comes in the form of fear. If you asked the average US citizen what happen in September 2009, most would not be able to detail the actual impact. But this fear causes the average US consumer to stop spending as much and plan for the worst. During this financial crisis the initial fear coupled with real estate prices falling, caused an extreme contraction in consumer spending. Since 70% of US GDP comes from consumer spending, this contraction leads to the second wave.

The second wave is usually a direct result of the first wave. When consumers spend significantly less, companies are forced to reduce inventory to match this new reduced demand. This reduction in inventory typically causes high unemployment. High unemployment leads us to the third wave.

The third wave again is usually a direct result of the second wave. High unemployment with reduced consumer spending leaves a supply surplus. Actual goods surplus is reduced by lowering prices to what consumers are willing to spend to spur demand. With less demand overall for goods and services, square footage becomes a surplus, which is commercial real estate.

I believe that near term future of the US economy is largely dependent on the third wave. If the consumer can put aside their reduced wealth, fear of job loss and return to over consumption then the economy should start to recover (for the short term). If the consumer cannot jump start the economy, then commercial real estate could be the next stone dropped and we would start all over.

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What are the Real Mortgage Rates?

Wednesday, May 6th, 2009

The financial crisis is largely being blamed on the housing bubble that recently popped. Existing and New home sales had fallen considerably over the past year. Not till recently has there been a pause in the dramatic decline. This current pause has been largely attributed to the efforts of the US Government by supporting low mortgage rates and providing a home buyer tax break.

With foreclosures on the rise and property values around the USA still falling, what happens if the government runs out of political will and stops supporting the market?

Credit card rates have been steadily rising over the past few months as default rates have been gaining momentum. With very little political will for credit card debt, banks are forced to raise rates to help offset the rising risk. Over the same period of rising defaults there has also been a reduction in credit card use.

Without a doubt risk has increased on Mortgage financing. What happens when the US Government takes the “training wheels” off? Is the real estate market stabilizing or just reacting to short term government intervention?

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Who Leads the Economy?

Tuesday, April 28th, 2009

The US economy is made up of two fundamental events which are expanding and contracting credit. While an economy is expanding credit typically it is a time of prosperity. When an economy is contracting usually it is a labeled a recession. The economic cycle of expansion and contraction describes an economy as a whole.

To best visualize this cycle you should imagine a wave. As you go up the wave credit is expanding which typically means more spending; when you go down the wave credit is contracting which leads to less spending. Since US consumer makes up about 70% of GDP, it is logical to imagine the consumer is the water that makes up the wave. As the old saying goes, “Life is full of ups and downs”. People are typically either going up or down the wave.


The world is made up of cycles. The sun comes up and then is goes down and seasons change. Peoples clothing and surroundings may change but history usually repeats itself.
Individuals have short and long cycles. Groups of people also share cycles. These groups could include 2 individuals to millions or even the entire world’s population.

Gustav Le Bon in his book “The Crowd” cited that individuals are smarter than the crowd. With this assumption one could argue that the larger the group included in a cycle the slower the cycles is to repeat itself since it will take the crowd longer to move to the next part of the cycle than an individual.

Individual’s private finances most of the time go through periods of expansion and contraction just like the economy as a whole. Actually if you believe that individuals are smarter than the crowd, then you should also believe that individual’s finances lead the broader economy, since they are more efficient at moving to the next part of the cycle.

With the current economic crisis the price of real estate skyrocketed to a point where more and more individuals no longer saw value and stopped buying. With less buyer and more sellers, real estate prices started to plummet. Once the first domino falls, the rest eventually do. Since the housing bubble was so widespread and included so many people, both in the USA and abroad, the cycle should take that much longer to progress.

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Innovation in Banking

Friday, April 24th, 2009

While the real estate market was roaring, banks where feverishly competing to provide mortgages to the anxious American homebuyer. During the peak of bubble new “innovative” products were released regularly requiring less information from buyers and or more payment flexibility. Institutions that did not offer these “innovative” products fell quickly behind their competitors who did.

In every industry leaders are chased by lagers. In a top 10 list of an industry, 2 through 10 are always trying to take number ones spot. This competitiveness is what typically spurs “innovation” in an industry.

Banking is one business where “innovation” is more difficult to develop. Banks can and do develop”innovative” ways to service their customers more conveniently and efficiently without increasing risk. When banks develop “innovative” lending or insurance products, it is typically at the expense of increased risk.

Risk in banking during good times typically leads to increased profits. So during the good times typically banks look to increased product risk makes you more competitive. When times are tough, risk typically leads to losses. Then during bad times you could say reduced product risk typically makes you more competitive.

Innovation in banking is now more focused on reducing risk, since this improves their competitiveness during tough times. They are doing this by increasing lending requirements and raising fees. The US government has also attempted to reduce banks risk by artificially suppressing rates to keep the cost of lending down, therefore improving profit margins for banks.

Banks “innovation” on increased risk nearly put them out of business. Will their “innovation” on reducing risk finish them off?

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Positive Housing Numbers! Are they?

Thursday, April 2nd, 2009

So over the past few weeks lagging housing data has shown some signs of hope. We have seen an improvement in existing home sales, new home sales and pending home sales. Mortgage rates are at an all time low and mortgage applications are on the rise.


So what does this data mean in respect to the ailing housing market? Well really in the context of actual numbers, these improvements are relatively small and in a typical market time uneventful. Some see these improvements as a possible bottom forming in the housing market (sound familiar, November 2008 stock market). Others see this as a possible “dead cat bounce” in the real estate market. A “dead cat bounce” refers to a small improvement before continuing down.

Real Estate values are still declining according to the S&P Case Shiller index data released March 31rst, 2009 which showed that average housing prices are back to 2003 levels. Also more than half of sales are distressed. The increase in sales is definitely positive, but many of these sales are speculative which does not help the stabilization of pricing. Just like in the stock market, you need individuals buying with the intention of staying (no flipping) to stabilize prices.

Unemployment is on the rise and the world economies are continuing to weaken, which will add to large company layoffs especially if they rely heavily on overseas revenue. High unemployment does not help the housing.

Mortgage rates are being artificially suppressed by the US government, what happens when they stop supporting them? What should mortgage rates really be? Rates are at extreme lows, shouldn’t sales reflect this extreme a little more to the upside. If we do slide into a deflation spiral, then real estate prices will most likely fall more which would wipe away the benefit of the lower rates.

Real Estate was bought and sold like stocks over the past 8 year, so more than likely it will correct the same way. It is typically not a good idea to try to catch a falling knife, but if you are buying and selling into this market at the same time, then I guess it would be a wash.

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