BFP Management Blog

Archive: March 2011

Bubble, Bubble, Bubble

There are positives to report in the economy. The stock market recently topped 12,000. One of my bell weathers, a large company in the South Bay of Los Angeles County that manufactures paper boxes for many different industries reports that they are very busy again. The CEO told me that he is cautiously optimistic about the economy but is paying overtime instead of hiring at this point.

Statistics show that the housing market has yet to bottom out. According to the Wall Street Journal, home prices declined year over year in the 4th quarter in all of the 28 major metropolitan markets tracked. Inventory in many of those markets rose as more houses sit unsold. How many bank REO’s that aren’t yet for sale and thusly aren’t in the statistics remain to be seen.

Figure 1

Blog 0311 #1












I have been told by many real estate owners, agents, loan brokers and lenders how difficult it is to obtain financing right now and if there was “reasonability,” more sales would be closing. First hand experience was foisted upon me as two of my apartment properties (one is a 49 unit building in Hawthorne, California and the other a 48 unit property in Anaheim, California) had 10 year Fannie Mae loans coming due at the end of 2010. While I was being forced to refinance, the quoted rates were 300 basis points lower than my current loans and the loan to value on both were below 40% (meaning I have 60% of equity which I was not looking to touch). My team and I are veterans of many commercial loans and these seemed like “no brainers.”.

I decided to put 10 year fixed rate debt on each property. We completed the loan applications 90 days before the balloon payments were due and to boot we stuck with Fannie Mae since they had already accepted these “C” properties 10 years ago.

The process was extremely difficult with scrutiny at every step. Eventually we completed the refinance albeit after the existing debt’s balloon payment was due and to get it done, had to agree to holdbacks that were quite frankly unreasonable. As an example, I met personally with the head of Fannie Mae loans for this national bank to negotiate away the demand of a hold-back for flooring for every unit since none of the carpets and vinyl was brand new.

My conclusion was that even in the 1990’s when credit was constrained, it wasn’t as difficult to obtain as it is today. I welcome the cautious attitude from the lenders as I was critical when one needed to do little more than fog a mirror to get a loan although the pendulum has swung too far as it often does.

Today our government borrows 40 cents of every dollar it spends and is estimating a deficit this year of 1.5 Trillion dollars. There is a concerted effort by our leaders to not let the economy truly suffer from the housing crash. This is the same “kick the can” strategy employed by the Federal Reserve after the crash as they took interest rates to then historic lows which fueled the housing / credit bubble. The unsustainable today is our borrowing and when we institute austerity measures (see Ireland and UK) or when they are instituted on us (see Greece), there will be drastic changes.

While the US government is saying that the economy is improving, the Federal Reserve announced that it recently surpassed China as the leading holder of US Treasury securities. As of February, the Fed has spent almost half of QE2 and by June, it will hold $1.6 Trillion of securities which will be almost as much as China and Japan own combined.

In 2004-2006, I repeatedly publicly stated that the housing market was on an unsustainable path with dire consequences. Today our government’s borrowing is the new and largest bubble which can not and will not continue forever. What will happen when the government cuts or has its spending cut by 40%+? I’ll be discussing the consequences along with strategies to protect oneself in upcoming issues.



Kyle Kazan


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