Some personal observations from the field:
Almost anyone with debt is either now “under water” or well on their way to being so.
Home prices have not begun to rebound. Zillow.com reports that twelve markets can be classified as having entered into a “double dip” decline, including such places as Augusta, GA and Colorado Springs, CO. Others, such as Boston, MA, are well on their way with four months of consecutive decline.
The last three months of Case-Shiller numbers tell us that, at best, home prices are flat: presently some 4% above the bottom and 30% below the top. But, many – at least 8 of the 20 major markets tracked by C-S, have begun to decline yet again.
And, today, the Wall Street Journal reminds us that these problems have been occurring in the face of massive efforts by both the federal government and the Federal Reserve to prop up the housing market. Despite these massive efforts, they remind us that we’re now entering year five of what is now appearing to be a “permanent” crisis.
Add to this mix the rising pattern of what is being called “strategic foreclosure”, where homeowners finally come to see that paying a mortgage on a non-appreciating (err, “depreciating”) asset not only can’t be justified, it’s simply bad financial planning. Bank of America recently announced that they will begin working more seriously on principal reduction plans for under-water borrowers, mostly, it seems, to forestall the rising “strategic foreclosure” trend.
What we’ve come to, in effect, is that it may be that the ethical back-bone of our society is all that is holding (propping up) the financial system. God help us.
You do recall the “banking crisis” of the past year or two? Well, it never went away really, it’s just been swept under the rug of rushing news headlines and government assurances. TARP, et all, hasn’t made banks more solvent, it has merely patched up a broken facade of confidence.
Recently, Elizabeth Warren, the Congressional Oversight Committee chair for the TARP program, has been suggesting in various interviews that the government needs “resolution authority” to handle any and all institutions that fall into the “too big to fail” category. (This on top of her assurance that “we’ll never know where the TARP money went.)
What that means: the government wants the legal authority to confiscate (i.e. nationalize) any private institution that they (the government) deems might represent a risk to the economy. Which is to say, really, any private sector business or asset they choose. This idea, by the way, would come under the auspices of the newly proposed “Consumer Protection Agency”. Well, sure, that sounds great.
I don’t know about you, but that thought ought to send chills up your spine. If it doesn’t, you really haven’t been paying attention to the history of countries that have engaged in widespread nationalization….a path, we ought to note, that we’ve been travelling for the past several years. By all appearances, there doesn’t appear to be a turn-around in sight.
Commercial real estate, we might also remember, is even more deeply troubled than the residential market. As I’ve noted, in numerous posts, income properties are valued as a function of market yield requirements. Risk/reward is the investment function through which declining income is evaluated. As a result, underlying asset valuation is much more dramatically affected than for property that at least has some basic utility value – your home, for instance.
In most markets across the country, commercial rents have declined by more than 20%. Vacancy rates have risen to 20% or more, and are still rising. New leasing activity is virtually non-existent. Despite low interest rates, nobody can get a loan…most banks don’t have the financial wherewithal to engage in this most basic function. Investors with cash, well, they need added inducement to take the risk and that means higher yields. All of this adds up to property values that are well below 50% from the peak.
And, yet, we’re really not hearing much about this particular threat. So many office, retail, industrial, and hotel properties are so far under water that, I suspect, lenders, owners, and regulators are simply paralyzed into shocked dismay. Some banks are doing their best to accommodate the problem, just as B of A is doing for homeowners. But, I fear that even this merely underscores the fundamental problem that we’re facing: everything is worth far less than we think.
We’ve become quite used to being comforted by official reassurance that “matters are well in hand”. We’re easily confused by the swirling debate and latch on to our favorite prognosticators. In this day and age, when we really ought to know better, we’re still actually influenced by the name of new bill in Congress. We’d probably be reassured by seeing our president wearing a cape.
Perhaps, we lack some basic reasoning skills. Perhaps we’re desperate. Perhaps we’re stupid. I’m not really sure, but I think we ought to realize that we’re in over our head.