October 1, 2010Kyle KazanComments 0
Reading economic reports and watching the news can get very depressing. From CNN – “Plunging home sales could sink recovery.” The Wall Street Journal characterized the latest Fed Meeting as “among the most contentious in Ben Bernanke’s four-and-a-half year tenure” as chairman. From the LA Times – “New home sales fall to a record low.”
Figure 1 – Bad News
As someone whose focus is on apartment and commercial real estate investments and management, one finger is always on that pulse. While I see the reports of GDP growth (“the recovery from the recession”), I have not noticed a positive bump in property operations. While GDP statistics may affect consumer confidence, it hasn’t been the indicator of occupancy and delinquencies that I’ve gotten from unemployment data.
During the boom days when collateralized debt obligations (CDO’s) were created, I wondered how so many didn’t see the risk in treating mortgages as bonds. When I analyzed how most firms graphed the risk of default to buyers, they made the numbers more attractive by only using more recent data. The data culled during the period of the real estate boom didn’t factor in the downside of the cycle or in other words, didn’t give a historical perspective of mortgage default rates. When the downswing came, the decisions based on poor economic models proved catastrophic.
Today when I read about the US Government’s (Congress, the Federal Reserve Board, the Treasury, et al) monetary policy, economic stimulus and corporate bailouts, I am concerned that the historic context being applied does not go back far enough. Perhaps since my bachelor’s degree is in history, I put economics on a time line and look for similarities while many economists use mathematical equations in theorizing the positives and negatives of different approaches. A book that I read earlier this summer and one that I recommend is: This Time Is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff. Their historical approach is one that I enjoyed but their compilation which is a quantitative reconstruction of hundreds of economic disasters is disconcerting when applied to our present economic situation.
My concern is that the economic “solutions” being employed today will cause greater harm to the US economy than taking an austere approach. While austerity would have been extremely painful so may the ramifications of current policy approaches.
There are some positive things happening in the economy that need to be highlighted. Bankcard delinquencies are declining. As credit has tightened, it has forced consumers to save more and credit card companies have written off a lot of bad debt.
Figure 2 – Good News
Interest rates are at or near historical lows. This has allowed many borrowers to refinance debt on real estate which lowers interest payments. I am currently in the process of refinancing several apartment loans and the new interest rates on two of the loans will be 2 – 3% lower than they have been.
Many of the CDO’s mentioned earlier are being written off as homes are foreclosed and sold to new buyers. There are a finite amount of these toxic loans and while the government isn’t pushing the banks to deal with these non-performing assets as they have in the past, a lot are being extinguished anyway.
With more saving, lower debt levels and cheaper loan payments, many people have put or are putting themselves in a better economic position. It is easy to get caught up in the negative economic news but with a historical perspective, it is clear that our current situation is nothing new and will work itself out eventually. There are and will be more investment opportunities in our future.