BFP Management Blog

Archive: July 2010

A Double Dip in Our Future?

Every week I read positive news about the U.S. being out of the recession, with consumer confidence rising, and initial unemployment claims falling (see Chart 1 below). Negative financial news is often framed in the context of threatening the “recovery” as opposed to questioning whether one is truly underway. Even with the good news, I’m still looking for the rose-colored glasses that I wore in the mid-1990s when I started on a buying binge that lasted in California through the end of 2002.

Chart 1

Blog 0710 #1

While the statistics and trends are certainly better than the high of 650,000 initial claims, they’re still near the peak of the last recession.

As mentioned in the June Apartment Reporter, I am seeing some deals in distress that, through repositioning, could yield double-digit returns. To be sure, those opportunities are few and far between. At the same time, I’m also receiving calls from frustrated investors telling me that they are making almost no yield in their savings and fixed income investments and want to know if I’m offering a fund with a better alternative.

Institutional buyers have become more aggressive (particularly those who have capital that has to be returned if not invested in 2010). According to several commercial real estate brokers, since last fall, capitalization rates for large, stable apartment complexes have fallen by approximately 100 basis points. As an example, a 90-unit apartment complex in Rancho Palos Verdes, California, sold last month at a 5.4% cap rate after receiving 23 offers. The listing broker, Ron Harris of Marcus and Millichap said he estimated that the property would have sold in the low 6 cap range in August/September of 2009, which would have meant several million dollars less than the $22,864,000 for which it was ultimately sold.

Some statistics for the housing market bottomed out in certain markets. Inventories have fallen and prices have stabilized. Those numbers belie other data that show mortgage delinquencies in most states to be above 10% with several between 15% – 25% (see Chart 2).

Chart 2

Blog 0710 #2 Ed

The time it takes banks to complete foreclosures has increased significantly, with most taking far more than a year (see Chart 3). This situation is skewing the data, because without an even bigger government bailout, there will be a bigger inventory of homes for sale.

Chart 3

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While unemployment (see Chart 4) and underemployment (see Chart 5) rates are holding relatively steady, many states are struggling with their budgets for the next fiscal year (July 2010) and more layoffs and furloughs will be coming.

Chart 4

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Chart 5

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The Federal Reserve has pushed interest rates down, which encourages borrowing and punishes savers who have money in banks. The risk is that it will lead to the same bad-investment decision-making that caused the asset bubbles which have recently popped. Clearly there is a concerted effort to grow the economy by encouraging Americans to consume, along with record borrowing by the Federal Government. These efforts have briefly stabilized the housing market and brought the U.S. GDP into positive territory; however, we may well be in the eye of the storm. A double-dip recession is my prediction.

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Proceed carefully – the headwinds are strong. Investors may regret decisions based solely on the artificially low current yields from fixed-income vehicles when more distressed options become available.




Kyle Kazan


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