Thanks to this website and all the informed posters, I took a lowball cash offer on my house that closes this month (I feel like I got out just in time). What to do with the 150k profit, now that banks are shakey and saving rates low? Anyone familiar with prosper.com (person to person lending)?
Very nice chartwork, sir, to show the 'lead' of lending standards to demand, and the correlation (imperfect, but there) of both with commercial construction.
Looks like commercial construction will be taking a tumble, soon, as you have been predicting for some time.
OT -- FFDIC, what do the ugly H.3 numbers mean? Is there something ugly happening with bank reserves, or do we layfolks just not understand the accounting for TAF?
"Thanks to this website and all the informed posters, I took a lowball cash offer on my house that closes this month (I feel like I got out just in time). What to do with the 150k profit, now that banks are shakey and saving rates low?"
It's not over 'till it closes. Cross you fingers....
And there's nothing wrong with parking the cash somewhere safe for a few months and seeing how things play out. The point is that nearly all asset classes are shaky right now. Nobody knows the "correct" value for anything -- or they don't want to know.
The CRE crisis is just unfolding. I'm familiar with several development projects that are, for lack of better vocabulary, floundering.
Construction is basically all ready to go, but there is no funding.
The assumptions under which these deals were underwritten are now suspect, and the financing assumptions are just wrong.
The only good sign in CRE is that there is a number of "distressed" or "opportunity" funds that have been taking in money for the last 6 months - there is still money chasing CRE. The problem for current borrowers is that they are going to pay much higher interest rate and fees than they would have a year ago, and the underlying fundamentals are still questionable.
Anyone familiar with prosper.com (person to person lending)?
I made 20 loans on Prosper last spring/summer. 4 of the deadbeats are already behind. If no one else flakes on me, I will break even. Prosper isn't looking too good to me.
When banks stop offering their product- credit- where are we going to go to get that?
Gosh do I feel olde. "Bank of Mom&Dad" comes to mind. Hey the new parents; prosper dot com.
Seriously; lenders lend. They will always lend. All we are seeing is a return of responsible lending. Responsible lending meaning enumerable risk, caps on risk, risk based rates and risk management through active lending mechanisms.
Rob-
Agreed that this really is just a return to the prudent way of banks doing business. But thats little comfort to those expecting the HELOC to get them through their next "temporary" cash flow problems.
Plus getting all the losses from your past imprudence and all the pain (less fees) from your new found prudence will certainly kill off some banks.
spoke with a mortgage broker friend of mine yesterday during the Super Bowl and he told me business sucks even out here in sunny Calif coast town supposedly immune from housing effects.
showed him the 60 min video about walking away. he fessed up to me that that is whats he's telling his former clients to do. example of a $140K house bought around 2001. she now has a mortgage balance of $1.1M from continued refis. amazing. he says the attitude out there is once u start bleeding the pain no longer matters; just keep spending.
On the chance that your question is not rhetorical... In lieu of advice, I'll say that my investments are evenly split between commodities and commodity extraction companies -- primarily agriculture, energy, and gold; and a group of short funds. Good luck.
CR said: "...This is strong evidence of an imminent slump in CRE investment."
Look at the "non-residential structures" line on the chart. During the recovery from the 1990-91 recession its rate of growth increased into 1995. Growth continued, although at a slower rate, into 1999, with recession coming 2 years after that.
If non-residential construction is truly the key as to whether the economy continues to expand or falls into recession, any talk of recession is premature by years.
What I find noteworthy is that the percentage of CRE tightening is even higher than we had during the early 90s recession (and in the wake of the S&L crisis). I mean, it was CRE lending that was a primary cause of the S&L crisis, so it made sense to see net tightening readings on CRE lending in the 60s back then.
But the current crisis was largely brought about by residential real estate lending recklessness. CRE is (or was) not as big a problem. To get a higher net tightening reading in CRE NOW than we had in the early 90s during a crisis brought about by crummy CRE lending is pretty surprising. And of course, the latest Fed figures show tigthening in several other loan categories (C&I tightening percentages at the highest since Q1 2002 ... consumer loans, ex-credit cards, tightening percentages at the highest since the Fed started tracking in 1996, etc.)
@idoc "example of a $140K house bought around 2001. she now has a mortgage balance of $1.1M from continued refis. "
Sounds like this person has made a bundle off the banks. I've heard anecdotal stories of people pulling out tens and hundreds of thousands of $$s in HEWs -- basically becoming rich off the banks. The next smart thing for them to do is to walk away. They robbed the bank and got away with it!
Rich,
You hit upon the current crisis. It isn't just person to person but every lender to every borrower that is getting gun shy. My condolences on the reliability of your gene pool but my point was that lending under the olde style rational rules bifurcates into lending on two levels an emotional basis; prosper or parents versus the enumerable basis; analytical lending.
Hopeinsd,
I've seen the shift you describe. In the olde days a rainy day fund was a 3mo CD on automatic roolover with 6 mos of living expenses. Now, it seems a HELOC with 6mos worth of tappable equity or a passel of credit cards with high lines is considered a cushion.
We've seen the HELOC door closing. Next, expect the credit card companies to be canceling "inactive" accounts.
I guess when I get home tonight I'll only have 4 new credit card offers in the mail instead of the usual 5, because credit standards have been tightened so much.
Re: About 80 percent of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months
Why? There are no accounting rules or audits that are resulting in criminal complaints, so why is there any paranoia about loss reserves?
If this is not accounting related, I dont see why they are not ready to fuel the engines with more fuel. because risk and future value go hand in hand.. That is why MSFT is putting all the chips on a bet for Yahoo, its all about future market share and being confident about your future rewards.. MSFT may end up looking like JDSU 5 years from now, and have a share value that crashes, but they will buy a larger market share which in 10 years will result in an economic efficiency scale which will result in greater leverage. All they want to do is put a roadblock in front of Google and thus this is what homebuliders need to do today, this is what banks should be doing! If we overbuild today, we can have a greater future supply of homes that will be priced to have greater leverage. I hope we see more big deals and the HBs consolidate to really take advantage of this opportunity, versus sitting on the sidelines like a bunch of deers in the bushes frozen with fear; get the whole pack of deer in the road and screw the headlights; maybe a few of us get hit but we can do more damage to the cars as a group, if we stay together and move together as one! We all need to get behind NAR, Congress, The Senate, The Treasury, The Fed and we need to get back to work, building as many houses as we can ASAP!
Could it be because CRE projects are so much more expensive to build than they were in the early 90s?
So, if occupancy or rents collapse, the banks have more to lose?
I don't think it's just labor and materials cost. I've watched several projects in my area over time, and they seem to take forever. Maybe increased engineering, zoning, worker safety, etc. Some of these projects broke ground a year ago and they won't be leasing up until 2009 if they're lucky. By then, the market could be dead.
Yeah heard a similar tale this weekend. At my friends in OC Saturday, they showed me a flier for an identical house up the street sold for ~$790k fully furnished (new matching stuff) Tried to sell for $1.1M in the fall. The couple is divorcing, family a shambles.
When I arrived Sat afternoon, two SUV's crammed with people arrive to view a REO house two houses up the street. Very well of upper middle class area.
i think that is why i'm so bearish on RE and CRE. the amts borrowed over the yrs has been enormous and puts banks at huge risk if enough default momentum gets going. i think we've already seen the beginning of it.
We've seen the HELOC door closing. Next, expect the credit card companies to be canceling "inactive" accounts.
For people (like me) who pay their balances in full and on time, the larger issuers are already doing this in earnest. I've already earned a "Dear John" letter from Chase for this abhorrent behavior.
But not without a few months' worth of promos and convenience checkes advertising 6.99% fixed-rate payments(at a 3% fee, uncapped, of course). Shred 3-4 months' worth of these promo offers after not using your card for a few months and it'll be hit the road, Jack.
People got "rich" from MEW. However, I would be willing to wager that the money is long gone--not put into banks accounts, trading accounts, 401k's etc. Is having the opportunity to spend beyond one's means the same as "getting rich?"
Concerning Sebastian's comment. Yes, it looks like the CRI keeps going up long after loan demand has plummeted and standards have tightened. Is that because CRI is measuring the completion of projects, whereas the other two factors are mainly impacting the planning and ground breaking? I would not expect the time delay to be much over a year, unless the planning phase is very extended. If CRI is measured at completion, the effects of a downturn would start be felt when starts are below completions.
"But the current crisis was largely brought about by residential real estate lending recklessness. CRE is (or was) not as big a problem."
This is the general thinking, but it is dead wrong. CRE is a huge problems. Just like residential real estate, CRE loans were made based on projected appreciation. Cap rates on sales were foolishly low. Cash flow/rents didn't come close to justifying sales prices. As CRE falls (25% according to Goldman), these loans are going to blow up in spectacular fashion, and, only then, will people realize that CRE was just as much a bubble as residential.
Uh, Seb, the builders need credit to build. If lenders are tightening, building follows. The reason lenders are tightening is that loans are defaulting.
i think what should be concerning many folks right now is that the .IRX is up 5.85% and .TNX is up 1.19% while the stock mkt is down. foreigners had enough?
Plastech supplies Chrysler about 500 types of trim, such as door panels, floor consoles and engine covers. Losing those parts " will in turn halt the production of (Chrysler's) entire corporate fleet of vehicles, idle at least 14 plants and lay off associated workers for an undetermined amount of time," Chrysler said in the court documents.
I've read that western Europeans, with a stardard of living very comparable to that of Americans, have about 25% as much retail floor space per capita. Of course, they have much fewer of the big box stores, and many moderate sized shops in town. Next winter and spring (Jan to June) I will be working in The Netherlands. My wife and I will be happy to do our shopping via bicycle and to travel locally and across the continent by train.
Hello double dip....
This is exactly whats going to accelerate the slowdown in the second half of this year.
We're going to see commercial construction start to decline in the next few months. Money has completely dried up and loan losses are coming.
Sebastian - To compare this period to where we were in 1998-1999 is wreckless.
We're battening down the hatches and we didnt even come close to doing that in 1998-1999.
I have no idea how you can possibly come to the conclusions you do by looking at the chart.
Maybe you're computer screen is upside down.
The early 90's is the part of the plot most comparable to today, IMHO. The lending standard is significantly lower than 99 or 01-02 and even lower than 91. What I'm curious about is whether a small drop in NRS investment will precede a larger one as in 00-01 or if NRSI will drop precipitously. The Markit CRMBS data suggests some cliff diving.
MaxedOutMama said: "Uh, Seb, the builders need credit to build. If lenders are tightening, building follows. The reason lenders are tightening is that loans are defaulting."
Yet non-residential investment is clearly not responding as it "should," continuing to rise regardless of the evidence "proving" that it can't.
This is yet another one of those situations where the data doesn't confirm the assumption, but there's little intellectual curiosity here about why. In fact, like the recession argument, there's open denial that the assumption is wrong at all.
It's a free country, of course, and everyone has a right to their own opinions, but simply accepting an assumption for which there is clearly contradictory evidence doesn't seem very enlightened.
Thanks for your response. What happens now to the businesses that have to go out on a credit line because they sucked the receivables pipeline dry at year-end or because they needed to distribute any income so as not to get taxed on it and therefore need an LOC to pay salaries, payables, etc. until the new receivables start coming in?
Seb,
Non-residential investment continues to rise, b/c, as people have pointed out, (1) it is an economically difficult decision to stop construction on a building once you've already poured millions into it and (2) there is a race to finish completion (first to finish has the best chance of success), so construction has ramped up. This will all come to a screeching halt once the end of the pipeline is met.
"Lenders surveyed by Commercial Mortgage Alert project that CMBS originations
will plunge by almost 50% this year, as the market retrenches amid the credit
crunch."
I would park some in an international currency fund for international bonds. Lately, these bonds have return a good return.
I would park some in cash for emergencies.
Also, I would take advantage of bank's distress. For example, some banks are offering short term CD's with good returns. Also, Washington Mutual is offering 6.5% for a savings account if you promise to deposit money for the next 12 months. Just keep your money below 100K for each bank.
hiker90 said: "The early 90's is the part of the plot most comparable to today, IMHO. The lending standard is significantly lower than 99 or 01-02 and even lower than 91. What I'm curious about is whether a small drop in NRS investment will precede a larger one as in 00-01 or if NRSI will drop precipitously. The Markit CRMBS data suggests some cliff diving."
If there's genuinely a one-to-one relationship between what happens with the "leading" indicator (lending standards, loan demand, CRMBS) and what's being measured (non-residential investment).
According to CR's chart, in late-1998 and early 2001 lending standards were "pulling" non-residential investment down when standards were looser than they are now, yet non-residential investment is shrugging off the higher standards.
Whenever there are non-confirmations like this it's because there are even larger offsetting factors at work. JMO, but I think it's simply the wrong place in the business cycle for a significant investment slowdown.
Can someone link me to the chart Sebastian is looking at? The one that CR posted is fairly clear and doesnt really jive with anything I'm reading in Sebastian's posts.
Its simple, credit tightens and demand contracts then building goes down. The more significant the tightening/contraction the farther it goes down. CRE will go down based on the credit tightening and demand contraction - probably within the next 3-6 months and probably quite severely. If you could pull up this data for 100+ years it would look the same. There is NO exception. Not even 1998-1999 - aside from a panic tightening in the late 98 fed survey that abated the next report there was a modest tightening of credit yet a continued expansion of demand - so more loans were happening but their terms were worse.
I cant possibly even begin to understand how someone would think building will expand when the demand for funding new projects has been declining for about a year.
Seb,
Apparently, he was entitled as you responded. I think it is good that you keep all your own data and don't trust others. However, the interpretation of the data is more important than the accuracy of the data itself. If you have the best data, but interpret it incorrectly, you are just like every IB out there.
In the trenches said: "Can someone link me to the chart Sebastian is looking at? The one that CR posted is fairly clear and doesnt really jive with anything I'm reading in Sebastian's posts."
I don't believe you're looking at the chart right.
Currently, non-residential investment(blue line) is rising. Loan demand (red line) is falling. That's a contradiction, since loan demand has been below the zero point since about mid-2006 and non-residential investment is still rising.
Standards (green line, which CR says is inverted on the chart) are tightening even though non-residential investment continues to rise, another contradiction since standards have been rising since the beginning of 2006.
So what do builders do to get their money, a pawnshop loan from the BRIC"s by selling their magic beans?
No money no buildee
You fail to note that NRI was flat for 3 years after the overbuild at the turn of the century. Project planning and financing has a long lead time and as credit dries up very few projects will go forward as of October 07.
Note the time periods of divergence and convergence and the lag between lending standards and NRI in both recession periods charted.
Currently, non-residential investment(blue line) is rising. Loan demand (red line) is falling. That's a contradiction....
Not at all. It is if anything a confirmation. Look back. The structures is a well correlated -lagging- metric. Compare blue and green with 30 month offsets.
Tighter loan standards, as in "being able to pay off the loan" - why, that is un-American! People have a RIGHT to free money via infinity housing equity since "housing only goes up!"
Paul Krugman added some context and comment on the Harvard article that ZackAttack pointed to above. He and the Paper both note PetroDollars in the 80's were funneled to Third World (mainly Latin) Countries. This time around they were funneled to another "country", the SubPrime US borrowers.
"Carmen Reinhart and Ken Rogoff have an alarming paper on parallels between the United States and countries that have experienced financial crises in the past. The bottom line of the paper, which has already gotten a lot of attention, is that we look an awful lot like those other countries and that if their experience is any guide, things could get really, really bad.
..."
I feel like a dolt for asking this but clearly I'm missing something.
At your bank, how has the number of inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines changed over the past three months? (Please consider only inquiries for additional C&I lines as opposed to the refinancing of existing loans.)
Looking at the fed survey (table 1), 90% are responding that "The number of inquiries has stayed about the same or decreased moderately"
So how can the data for non-residential investment be continuing up?
I don't need to look at a chart, I just need to walk down the street. I work in San Diego in an area where a number of office buildings are collected. Every single one has one or more for lease signs in front of it. Every single one. Certainly was not the case when I started working here 4 years ago, not even one year ago. CRE will crash hard in CA. If you optimists out there can figure out a way for the world's 8th largest economy to slide into a deep recession and not carry the US with it, I'm all ears.
itsallgreektome,
I've suggested this before, but it is worth repeating. I think bake sales will provide the financial stimulus to keep us out of a severe recession. (Well, at least, it is a better idea than $600 checks.)
I'm gonna guess that the blue line either represents actual execution of funding for NR structures, or possibly even NR project completions. If they're using funding from loans previously approved (2-3 year lead) the lag would make sense.
That sounds right to me - and once the project is underway there is a grim logic to completetion regardless of the CRE market - pull the plug and get blown up for sure or git 'er done and who knows...the horse may even learn to sing!
My recollection was that Sebastian was arguing about the non-confirmation of residential employment numbers (i.e they were not falling) 6 months ago. Now that employment has clearly turned down, he has latched onto the next one.
I also recall him quoting ECRI in support of his position - I suppose they are irrelevant now that they no longer confirm his view point.
I love the video. The builders used the property record systems to rip off buyers and when finally the government allowed the facts to come out the builders said they had done nothing wrong because it was "standard practice." That is great -- so it seems that in the UK you should be able to rip off a store every day and if you can get your friends to do it too, when finally you are caught you just tell the cops its okay because you have been doing it for the last year and everyone else has too so it is standard practice. Good old English common law starts at the top.
I think these charts dispel the notion that this is "limited" crises, like the dot.com bubble collapse.
When pets.com collapsed, we could still get dog food where we always did. Only stockholders were hurt.
When banks stop offering their product- credit- where are we going to go to get that?
Thanks to this website and all the informed posters, I took a lowball cash offer on my house that closes this month (I feel like I got out just in time). What to do with the 150k profit, now that banks are shakey and saving rates low? Anyone familiar with prosper.com (person to person lending)?
that there looks to be a humdinger!
Very nice chartwork, sir, to show the 'lead' of lending standards to demand, and the correlation (imperfect, but there) of both with commercial construction.
Looks like commercial construction will be taking a tumble, soon, as you have been predicting for some time.
When banks stop offering their product- credit- where are we going to go to get that?
hopeinsd | 02.04.08 - 2:58 pm | #
I don't think we'll need credit after the government sends us our free $600.
(As soon as I get mine, I'm buying a house!)
What passes for financial analysis these days:
Downgrades sack the bulls: Stocks give back last week's gains as investors largely ignore the Super Bowl's bullish indicator (DJ MarketWatch).
Geeze, don't they know that since the Giants won we'll have a bull market? Paging Punxsutawney Phil . . .
OT -- FFDIC, what do the ugly H.3 numbers mean? Is there something ugly happening with bank reserves, or do we layfolks just not understand the accounting for TAF?
Perhaps a little OT, but a fascinating piece from Harvard:
http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf
Since I am not afraid of sounding really behind the power curve here, what is C&I?
"Thanks to this website and all the informed posters, I took a lowball cash offer on my house that closes this month (I feel like I got out just in time). What to do with the 150k profit, now that banks are shakey and saving rates low?"
It's not over 'till it closes. Cross you fingers....
And there's nothing wrong with parking the cash somewhere safe for a few months and seeing how things play out. The point is that nearly all asset classes are shaky right now. Nobody knows the "correct" value for anything -- or they don't want to know.
The CRE crisis is just unfolding. I'm familiar with several development projects that are, for lack of better vocabulary, floundering.
Construction is basically all ready to go, but there is no funding.
The assumptions under which these deals were underwritten are now suspect, and the financing assumptions are just wrong.
The only good sign in CRE is that there is a number of "distressed" or "opportunity" funds that have been taking in money for the last 6 months - there is still money chasing CRE. The problem for current borrowers is that they are going to pay much higher interest rate and fees than they would have a year ago, and the underlying fundamentals are still questionable.
Anyone familiar with prosper.com (person to person lending)?
I made 20 loans on Prosper last spring/summer. 4 of the deadbeats are already behind. If no one else flakes on me, I will break even. Prosper isn't looking too good to me.
Rick C&I loans means commercial and industrial loans. Basically lines of credit for businesses.
When banks stop offering their product- credit- where are we going to go to get that?
Gosh do I feel olde. "Bank of Mom&Dad" comes to mind. Hey the new parents; prosper dot com.
Seriously; lenders lend. They will always lend. All we are seeing is a return of responsible lending. Responsible lending meaning enumerable risk, caps on risk, risk based rates and risk management through active lending mechanisms.
Rob-
Agreed that this really is just a return to the prudent way of banks doing business. But thats little comfort to those expecting the HELOC to get them through their next "temporary" cash flow problems.
Plus getting all the losses from your past imprudence and all the pain (less fees) from your new found prudence will certainly kill off some banks.
I would not trust anybody with a person-to-person loan right now. Not even my neighbor. And especially not relatives.
Rick, sorry, C&I is Commericial & Industrial loans.
Best to all.
spoke with a mortgage broker friend of mine yesterday during the Super Bowl and he told me business sucks even out here in sunny Calif coast town supposedly immune from housing effects.
showed him the 60 min video about walking away. he fessed up to me that that is whats he's telling his former clients to do. example of a $140K house bought around 2001. she now has a mortgage balance of $1.1M from continued refis. amazing. he says the attitude out there is once u start bleeding the pain no longer matters; just keep spending.
Girlbear,
On the chance that your question is not rhetorical... In lieu of advice, I'll say that my investments are evenly split between commodities and commodity extraction companies -- primarily agriculture, energy, and gold; and a group of short funds. Good luck.
Lending in this climate to strangers? And, I'm assuming, strangers that are either tapped out on their CCs or have been turned down by the banks?
Also, don't forget you may have some taxes to pay on your $150k so keep some of it liquid.
CR said: "...This is strong evidence of an imminent slump in CRE investment."
Look at the "non-residential structures" line on the chart. During the recovery from the 1990-91 recession its rate of growth increased into 1995. Growth continued, although at a slower rate, into 1999, with recession coming 2 years after that.
If non-residential construction is truly the key as to whether the economy continues to expand or falls into recession, any talk of recession is premature by years.
Sebastia
What I find noteworthy is that the percentage of CRE tightening is even higher than we had during the early 90s recession (and in the wake of the S&L crisis). I mean, it was CRE lending that was a primary cause of the S&L crisis, so it made sense to see net tightening readings on CRE lending in the 60s back then.
But the current crisis was largely brought about by residential real estate lending recklessness. CRE is (or was) not as big a problem. To get a higher net tightening reading in CRE NOW than we had in the early 90s during a crisis brought about by crummy CRE lending is pretty surprising. And of course, the latest Fed figures show tigthening in several other loan categories (C&I tightening percentages at the highest since Q1 2002 ... consumer loans, ex-credit cards, tightening percentages at the highest since the Fed started tracking in 1996, etc.)
This economy has been running on an expanding credit bubble for years. When credit dries up so does the economy.
This kind of caught my eye:
"the remaining respondents noted that their lending standards had remained basically unchanged."
Were they unchanged because they never loosened? That would be my guess.
Cheers,
@idoc "example of a $140K house bought around 2001. she now has a mortgage balance of $1.1M from continued refis. "
Sounds like this person has made a bundle off the banks. I've heard anecdotal stories of people pulling out tens and hundreds of thousands of $$s in HEWs -- basically becoming rich off the banks. The next smart thing for them to do is to walk away. They robbed the bank and got away with it!
Rich,
You hit upon the current crisis. It isn't just person to person but every lender to every borrower that is getting gun shy. My condolences on the reliability of your gene pool but my point was that lending under the olde style rational rules bifurcates into lending on two levels an emotional basis; prosper or parents versus the enumerable basis; analytical lending.
Hopeinsd,
I've seen the shift you describe. In the olde days a rainy day fund was a 3mo CD on automatic roolover with 6 mos of living expenses. Now, it seems a HELOC with 6mos worth of tappable equity or a passel of credit cards with high lines is considered a cushion.
We've seen the HELOC door closing. Next, expect the credit card companies to be canceling "inactive" accounts.
When banks stop offering their product- credit- where are we going to go to get that?
hopeinsd | 02.04.08 - 2:58 pm | #
From family owned businesses, spicifically those owned by the Gambino and Gallo families.
I guess when I get home tonight I'll only have 4 new credit card offers in the mail instead of the usual 5, because credit standards have been tightened so much.
Re: About 80 percent of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months
Why? There are no accounting rules or audits that are resulting in criminal complaints, so why is there any paranoia about loss reserves?
If this is not accounting related, I dont see why they are not ready to fuel the engines with more fuel. because risk and future value go hand in hand.. That is why MSFT is putting all the chips on a bet for Yahoo, its all about future market share and being confident about your future rewards.. MSFT may end up looking like JDSU 5 years from now, and have a share value that crashes, but they will buy a larger market share which in 10 years will result in an economic efficiency scale which will result in greater leverage. All they want to do is put a roadblock in front of Google and thus this is what homebuliders need to do today, this is what banks should be doing! If we overbuild today, we can have a greater future supply of homes that will be priced to have greater leverage. I hope we see more big deals and the HBs consolidate to really take advantage of this opportunity, versus sitting on the sidelines like a bunch of deers in the bushes frozen with fear; get the whole pack of deer in the road and screw the headlights; maybe a few of us get hit but we can do more damage to the cars as a group, if we stay together and move together as one! We all need to get behind NAR, Congress, The Senate, The Treasury, The Fed and we need to get back to work, building as many houses as we can ASAP!
Mike_in_FL,
Could it be because CRE projects are so much more expensive to build than they were in the early 90s?
So, if occupancy or rents collapse, the banks have more to lose?
I don't think it's just labor and materials cost. I've watched several projects in my area over time, and they seem to take forever. Maybe increased engineering, zoning, worker safety, etc. Some of these projects broke ground a year ago and they won't be leasing up until 2009 if they're lucky. By then, the market could be dead.
Seb,
What is your take on the latest from ECRI then?
idoc,
Yeah heard a similar tale this weekend. At my friends in OC Saturday, they showed me a flier for an identical house up the street sold for ~$790k fully furnished (new matching stuff) Tried to sell for $1.1M in the fall. The couple is divorcing, family a shambles.
When I arrived Sat afternoon, two SUV's crammed with people arrive to view a REO house two houses up the street. Very well of upper middle class area.
This is going to suck.
Cheers,
rich
i think that is why i'm so bearish on RE and CRE. the amts borrowed over the yrs has been enormous and puts banks at huge risk if enough default momentum gets going. i think we've already seen the beginning of it.
betty toll,
Funny. LOL. Why can't we work together as a nation to build more houses for homeless people?
Like Habitat for Humanity, only with granite counters?
We've seen the HELOC door closing. Next, expect the credit card companies to be canceling "inactive" accounts.
For people (like me) who pay their balances in full and on time, the larger issuers are already doing this in earnest. I've already earned a "Dear John" letter from Chase for this abhorrent behavior.
But not without a few months' worth of promos and convenience checkes advertising 6.99% fixed-rate payments(at a 3% fee, uncapped, of course). Shred 3-4 months' worth of these promo offers after not using your card for a few months and it'll be hit the road, Jack.
Gosh, and I'm all torn up about it, too.
idoc,
I know what you're saying.
What could be done with a 35-floor condo in downtown Tampa, if nobody wants to buy it?
Maybe you could turn it into a mini warehouse with Bay views. You go there to store your stuff and have cocktails.
People got "rich" from MEW. However, I would be willing to wager that the money is long gone--not put into banks accounts, trading accounts, 401k's etc. Is having the opportunity to spend beyond one's means the same as "getting rich?"
Concerning Sebastian's comment. Yes, it looks like the CRI keeps going up long after loan demand has plummeted and standards have tightened. Is that because CRI is measuring the completion of projects, whereas the other two factors are mainly impacting the planning and ground breaking? I would not expect the time delay to be much over a year, unless the planning phase is very extended. If CRI is measured at completion, the effects of a downturn would start be felt when starts are below completions.
"But the current crisis was largely brought about by residential real estate lending recklessness. CRE is (or was) not as big a problem."
This is the general thinking, but it is dead wrong. CRE is a huge problems. Just like residential real estate, CRE loans were made based on projected appreciation. Cap rates on sales were foolishly low. Cash flow/rents didn't come close to justifying sales prices. As CRE falls (25% according to Goldman), these loans are going to blow up in spectacular fashion, and, only then, will people realize that CRE was just as much a bubble as residential.
Uh, Seb, the builders need credit to build. If lenders are tightening, building follows. The reason lenders are tightening is that loans are defaulting.
i think what should be concerning many folks right now is that the .IRX is up 5.85% and .TNX is up 1.19% while the stock mkt is down. foreigners had enough?
Elvis:
Yes.
OHHH
Cerberus might have some trouble
selling those pier loans:
Plastech bankruptcy could shut all of Chrysler
http://www.autonews.com/apps/pbcs.dll/article?AID=/20080204/ANA02/962588758/1128/emailblast01&refsect=emailblast01
Cigarettes and CDOs are dangerous to your health.
Moody's Weighs Warning Labels For Its Ratings - WSJ.com
Plastech supplies Chrysler about 500 types of trim, such as door panels, floor consoles and engine covers. Losing those parts " will in turn halt the production of (Chrysler's) entire corporate fleet of vehicles, idle at least 14 plants and lay off associated workers for an undetermined amount of time," Chrysler said in the court documents.
I've read that western Europeans, with a stardard of living very comparable to that of Americans, have about 25% as much retail floor space per capita. Of course, they have much fewer of the big box stores, and many moderate sized shops in town. Next winter and spring (Jan to June) I will be working in The Netherlands. My wife and I will be happy to do our shopping via bicycle and to travel locally and across the continent by train.
Hello double dip....
This is exactly whats going to accelerate the slowdown in the second half of this year.
We're going to see commercial construction start to decline in the next few months. Money has completely dried up and loan losses are coming.
Sebastian - To compare this period to where we were in 1998-1999 is wreckless.
We're battening down the hatches and we didnt even come close to doing that in 1998-1999.
I have no idea how you can possibly come to the conclusions you do by looking at the chart.
Maybe you're computer screen is upside down.
Bill | 02.04.08 - 3:58 pm |
Yeah - but we're way fatter, so it all balances out.
Sebastian,
The early 90's is the part of the plot most comparable to today, IMHO. The lending standard is significantly lower than 99 or 01-02 and even lower than 91. What I'm curious about is whether a small drop in NRS investment will precede a larger one as in 00-01 or if NRSI will drop precipitously. The Markit CRMBS data suggests some cliff diving.
Best,
MaxedOutMama said: "Uh, Seb, the builders need credit to build. If lenders are tightening, building follows. The reason lenders are tightening is that loans are defaulting."
Yet non-residential investment is clearly not responding as it "should," continuing to rise regardless of the evidence "proving" that it can't.
This is yet another one of those situations where the data doesn't confirm the assumption, but there's little intellectual curiosity here about why. In fact, like the recession argument, there's open denial that the assumption is wrong at all.
It's a free country, of course, and everyone has a right to their own opinions, but simply accepting an assumption for which there is clearly contradictory evidence doesn't seem very enlightened.
Sebastia
Rex--
Thanks for your response. What happens now to the businesses that have to go out on a credit line because they sucked the receivables pipeline dry at year-end or because they needed to distribute any income so as not to get taxed on it and therefore need an LOC to pay salaries, payables, etc. until the new receivables start coming in?
Rick
Seb,
Non-residential investment continues to rise, b/c, as people have pointed out, (1) it is an economically difficult decision to stop construction on a building once you've already poured millions into it and (2) there is a race to finish completion (first to finish has the best chance of success), so construction has ramped up. This will all come to a screeching halt once the end of the pipeline is met.
Seb,
You are placing way too much emphasis on timing.
CRE investment in particular takes time to gear down.
You want a leading indicator on CRE investment?
From Friday's Commercial Mortgage Alert:
"Lenders surveyed by Commercial Mortgage Alert project that CMBS originations
will plunge by almost 50% this year, as the market retrenches amid the credit
crunch."
Many thanks to responses from Bob Dobbs, Pat, jay and Mike in AZ. Also to "CR University" for the great education in "Financial Information" !
girlbear:
Here is what I would do with $150K
I would park some in an international currency fund for international bonds. Lately, these bonds have return a good return.
I would park some in cash for emergencies.
Also, I would take advantage of bank's distress. For example, some banks are offering short term CD's with good returns. Also, Washington Mutual is offering 6.5% for a savings account if you promise to deposit money for the next 12 months. Just keep your money below 100K for each bank.
Congratulations on your future closing.
Seb,
ECRI? Response?
hiker90 said: "The early 90's is the part of the plot most comparable to today, IMHO. The lending standard is significantly lower than 99 or 01-02 and even lower than 91. What I'm curious about is whether a small drop in NRS investment will precede a larger one as in 00-01 or if NRSI will drop precipitously. The Markit CRMBS data suggests some cliff diving."
If there's genuinely a one-to-one relationship between what happens with the "leading" indicator (lending standards, loan demand, CRMBS) and what's being measured (non-residential investment).
According to CR's chart, in late-1998 and early 2001 lending standards were "pulling" non-residential investment down when standards were looser than they are now, yet non-residential investment is shrugging off the higher standards.
Whenever there are non-confirmations like this it's because there are even larger offsetting factors at work. JMO, but I think it's simply the wrong place in the business cycle for a significant investment slowdown.
Sebastian
Can someone link me to the chart Sebastian is looking at? The one that CR posted is fairly clear and doesnt really jive with anything I'm reading in Sebastian's posts.
Its simple, credit tightens and demand contracts then building goes down. The more significant the tightening/contraction the farther it goes down. CRE will go down based on the credit tightening and demand contraction - probably within the next 3-6 months and probably quite severely. If you could pull up this data for 100+ years it would look the same. There is NO exception. Not even 1998-1999 - aside from a panic tightening in the late 98 fed survey that abated the next report there was a modest tightening of credit yet a continued expansion of demand - so more loans were happening but their terms were worse.
I cant possibly even begin to understand how someone would think building will expand when the demand for funding new projects has been declining for about a year.
More on the Plastech BK.
freep.com | | Detroit Free Press
Looks like Chrysler is trying to force Plastech into BK by withdrawing business at a time they probably have a need to close plants anyway.
I smell a rat.
Could Plastech (private company) be getting setup for a private equity buyout? Or some other shoe to drop?
Jim
energyecon asked (as if he was entitled to an answer): "Seb,
ECRI? Response?"
Don't care. I keep all my own economic data and don't rely on outside sources for their "analysis", "take" or "spin.":)
S.
Marcus Aurelias,
So that's what explains all the wider aisles in our retail stores.
Seb,
Apparently, he was entitled as you responded. I think it is good that you keep all your own data and don't trust others. However, the interpretation of the data is more important than the accuracy of the data itself. If you have the best data, but interpret it incorrectly, you are just like every IB out there.
In the trenches said: "Can someone link me to the chart Sebastian is looking at? The one that CR posted is fairly clear and doesnt really jive with anything I'm reading in Sebastian's posts."
I don't believe you're looking at the chart right.
Currently, non-residential investment(blue line) is rising. Loan demand (red line) is falling. That's a contradiction, since loan demand has been below the zero point since about mid-2006 and non-residential investment is still rising.
Standards (green line, which CR says is inverted on the chart) are tightening even though non-residential investment continues to rise, another contradiction since standards have been rising since the beginning of 2006.
S.
Seb,
You have been considerably more complimentary to ECRI in the past...interesting
Seb,
So how do you interpret those contradictions?
Are you suggesting that NRI is being funded in cash?
So what do builders do to get their money, a pawnshop loan from the BRIC"s by selling their magic beans?
No money no buildee
You fail to note that NRI was flat for 3 years after the overbuild at the turn of the century. Project planning and financing has a long lead time and as credit dries up very few projects will go forward as of October 07.
Note the time periods of divergence and convergence and the lag between lending standards and NRI in both recession periods charted.
Currently, non-residential investment(blue line) is rising. Loan demand (red line) is falling. That's a contradiction....
Not at all. It is if anything a confirmation. Look back. The structures is a well correlated -lagging- metric. Compare blue and green with 30 month offsets.
Tighter loan standards, as in "being able to pay off the loan" - why, that is un-American! People have a RIGHT to free money via infinity housing equity since "housing only goes up!"
We've seen the HELOC door closing. Next, expect the credit card companies to be canceling "inactive" accounts. -- Rob Dawg
Man are you behind the curve.
Paul Krugman added some context and comment on the Harvard article that ZackAttack pointed to above. He and the Paper both note PetroDollars in the 80's were funneled to Third World (mainly Latin) Countries. This time around they were funneled to another "country", the SubPrime US borrowers.
"Carmen Reinhart and Ken Rogoff have an alarming paper on parallels between the United States and countries that have experienced financial crises in the past. The bottom line of the paper, which has already gotten a lot of attention, is that we look an awful lot like those other countries and that if their experience is any guide, things could get really, really bad.
..."
Third world America - Paul Krugman Blog - NYTimes.com
I feel like a dolt for asking this but clearly I'm missing something.
At your bank, how has the number of inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines changed over the past three months? (Please consider only inquiries for additional C&I lines as opposed to the refinancing of existing loans.)
Looking at the fed survey (table 1), 90% are responding that "The number of inquiries has stayed about the same or decreased moderately"
So how can the data for non-residential investment be continuing up?
I don't need to look at a chart, I just need to walk down the street. I work in San Diego in an area where a number of office buildings are collected. Every single one has one or more for lease signs in front of it. Every single one. Certainly was not the case when I started working here 4 years ago, not even one year ago. CRE will crash hard in CA. If you optimists out there can figure out a way for the world's 8th largest economy to slide into a deep recession and not carry the US with it, I'm all ears.
itsallgreektome,
I've suggested this before, but it is worth repeating. I think bake sales will provide the financial stimulus to keep us out of a severe recession. (Well, at least, it is a better idea than $600 checks.)
I'm gonna guess that the blue line either represents actual execution of funding for NR structures, or possibly even NR project completions. If they're using funding from loans previously approved (2-3 year lead) the lag would make sense.
cd
California could avoid a lot of problems with some pretty major tax reform (I'm in favor of a complete overhaul).
But there's no political will or intestinal fortitude for real change. Too afraid someone else in another part of the state will get a better deal.
girlbear
Before considering peer-to peer lending I suggest reading a few comment threads from any of the recent posts on default or 'Jingle mail" .
cd,
That sounds right to me - and once the project is underway there is a grim logic to completetion regardless of the CRE market - pull the plug and get blown up for sure or git 'er done and who knows...the horse may even learn to sing!
Developers are often on the hook to complete the project with their lender.
While repayment of principal and debt service may not be recourse, completion often is.
To Quartz;
Thanks, that much I have learned, too risky to loan someone monies on a (freefalling) depreciating asset!
My recollection was that Sebastian was arguing about the non-confirmation of residential employment numbers (i.e they were not falling) 6 months ago. Now that employment has clearly turned down, he has latched onto the next one.
I also recall him quoting ECRI in support of his position - I suppose they are irrelevant now that they no longer confirm his view point.
I love the video. The builders used the property record systems to rip off buyers and when finally the government allowed the facts to come out the builders said they had done nothing wrong because it was "standard practice." That is great -- so it seems that in the UK you should be able to rip off a store every day and if you can get your friends to do it too, when finally you are caught you just tell the cops its okay because you have been doing it for the last year and everyone else has too so it is standard practice. Good old English common law starts at the top.