BFP Management Blog

Archive: December 2009

Why is the Government Clouding My Crystal Ball?

2009 has been quite a year for apartment investors given the increase in vacancies and concessions coupled with a decrease in rents and NOI. The question I’m asked continually is do I think it is a good time to start buying? To qualify, I’m focused on bringing new money into real estate and not moving it around via a 1031 exchange. The simple answer is that I am not yet raising money for a new fund although there are better opportunities now than there have been in years.

 Ok, then if not now then when? To answer that, I must tell you that the US government in its zeal to spur recovery has squirted Windex all over my crystal ball. The amount of “stimulus” for corporate bail-outs, tax credits and “cash for clunkers” type programs are massive. While the intended consequences are seemingly obvious, it is the unintended which is the cloud in the crystal ball. Along with those programs, the government has changed the rules for banking institutions regarding mark to market of their distressed assets. Thusly it isn’t actively enforcing capital reserve requirements which would force more banks into default. This is in direct contrast to the official position of the United States to Japan during their banking / asset bubble crisis that lead to their lost decade.

 For those economist investors like me who thought we would see a repeat of the 1990’s where our government enforced regulations, took over banks and disposed of bad assets expeditiously by letting the highest bidder set the market price, we have so far been mistaken. In the 90’s the gauge was how long would it take to reach bottom and what were fair prices for “toxic” assets? New capital was brought in, price points were reset and foolish speculators were washed away. For the record, it wasn’t simple during the 90’s to recognize the bottom and opportunities as many potential investors called my real estate vulture funds “crazy.”

 So we find ourselves today asking where do we go from here?

 According to the Federal Reserve, total US household debt currently sits at 125% of annual after-tax income. Foreclosures, banks recasting and/or short selling loans and bankruptcies are a significant aspect of the deleveraging process. As our economy is 71% (and the world is 20%) dependent on American consumption, it will be difficult for sometime for GDP to gain real traction which equals job growth.

 Blog 1209 #1

At the same time that Americans will be shedding debt, our government will be adding to our already massive deficit. The ultimate cost will be higher taxes to service that debt and a significant bout of inflation.

 As we end 2009 and look forward to a new year, the piper will continue to reap payment for years of speculation while government intervention may slow (and include periodic upticks in economic numbers) but not stop the recasting. Inevitably, we will find a bottom and I’m confident that there will be attractive investing opportunities towards the end of the cycle.

 Most importantly, thank you for allowing me to be your Apartment Reporter and I’d like to wish you a very happy and healthy 2010!

Kyle Kazan

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