GLG News by Paul Burns

Implications: Mr. Zuckerman, the Editor-In-Chief, writes persuasively here of declining, nay plummeting, home prices and new home construction and of the possible passing of the U.S. auto industry and of healthcare funding problems.  He makes the point that 10 million home mortgages exceed the value of the underlying security and goes on to point out that wages are not rising to cover the average $ 2,000 loss to the family budget from recent food and fuel prices.  He doesn’t tell you that the next few months will have meat prices rising again on a step upward curve and that the family budget will bulge again from this new stress.  The balance he points out is an inflation risk from low interest rates versus a progressively weaker economy.

Analysis: So where’s the pro to this con.  I can tell you that the benefactors of this adversity are not the current residential landlords of this country if they are anything like the owners of residential rental communities in the Phoenix metro area.  Flat rents (actually slightly declining), high vacancies (overall 12.5 %) and rental concessions (sometimes one to 2 months on a 12 month lease) are the indicators of the difficult Phoenix market.  It appears that Phoenix is the most impacted of the dozen or so major apartment markets, but the others can’t be far behind.  Condo re-conversions and standing single-family inventory are directly competitive with the major apartment communities.   The pro to all of this will occur when supply meets demand in the sale market.  No doubt, though, that supply is still rising although the home builders are not able to burn lots as they have for the past few years.  Foreclosures are still coming on gangbusters and more millions of holdout, underwater home-owners may be/likely are reaching the end of their savings accounts.  Now, too, we do not have third-party loan markets which will facilitate the movement of this inventory.  Funds available for housing in the average household budget, too, are moving away from supporting the current market.  
The futures market, I believe, in predicting a 30% further decline in housing values, is looking the right way.  I’m not so sure, however, that there’s going to be any support to prices, or for that matter rents, until sustainable family incomes have principal and interest, taxes and insurance payments, or rents, down around 25% of family gross income.  In my opinion, that number for most families in reality will not support prices at the futures market predicted levels either.  My thought is that we’ve got a bunch more to go on top of that for much of the housing product out there.  No doubt, too, that the timing for stabilization is still a few years away at best.               

Implications: The news here is that the chickens are coming to roost in one of the largest misapplications of capital yet.  Commercial real estate is overdone in most every sector and market and the banks of this country are among the culprits.  Ratios of three and more times capital lead to predictions that scores of banks are set to fail.  I can’t see any flaws in this thinking.

Analysis: The opportunity here will be to selectively capitalize banks whose plans and prices are attractive for the next business cycle.  There will be opportunities to acquire loan portfolios and work out individual loans profitably – maybe with the same borrower at a significant discount.  Foreclosed commercial real estate at big, big, big discounts may meet tomorrow’s markets profitably.   If you want to become an optimist, late 2009 and 2010 may be great times for your mindset.    

Implications: As it turns out, gun dealers in Phoenix are supplying some/a bunch of the weapons which are being used in the drug wars below the Mexican border.  The Mexican Cartels send $ 15 Billion drugs to the U.S. and transports $ 10 Billion cash back to Mexico over the border.  As the article also tells us, the U.S. consumes more than half of the world’s drugs.  “Much of the Heroin, most of the Marijuana and methamphetamine, and 90 % of the Cocaine comes from or through Mexico” is written.  The ATF tells us that “they will fight to the death to protect their source and supply of drugs and their trafficking routes” when discussing the Mexicans and their trade partners, the Colombians.  

Analysis:  The battles are being waged in the vicinity of the U.S./Mexico border.  Nogales sits south of Tucson which itself is south 100 miles or so of Phoenix.  Juarez sits right across the Rio Grande from El Paso. The crossings extend east from El Paso to Laredo and Brownsville.   This all takes place while border commerce between the two countries is at an all-time high, which means that the border is increasingly important to both countries   How do you invest in this atmosphere?  Carefully.  Carefully can also be defined as asset buys which are seriously below reproduction cost in the case of commercial or industrial real estate in the border towns, This analysis can also be extended to the areas of Phoenix which are obviously impacted by the Border issues.  The best way to define these areas in the Phoenix Metro area might be to track the comings and goings of Maricopa County’s Sheriff as he moves to intercept illegal traffic.  You can see the Department is obviously active in Mesa, Guadalupe and West Phoenix. A cautious attitude is required in those areas in my opinion.           

Implications: The Peter G. Peterson foundation will confront the dangers of America’s $ 9.5 Trillion national debt.  The article quotes Peterson as saying “Over time, taxes would have to double to pay for the debt and that's unthinkable''. 

Analysis: This weekend, the Administration is considering refunding FNMA and FHLMC before they go under in the apparent near future.  These portfolios affect some 70% of U.S. mortgages.  Meanwhile, legislation is going through Congress to shift at least a portion of the burden from defaulting loans to FHA guarantees.  Remember, too, that the burden of defaulting direct guarantee VA loans is four times the conventional loan market as soldiers, sailors and airmen can’t meet their obligations from the wages the services pay them.  To add to the problems, the Federal government took over the huge IndyMac Bank last Friday as the first of what will undoubtedly be much more of the same to come.  At the same time, Bank of America is struggling to make some sense of its $ 2.8 Billion Countrywide acquisition.  Then too, the Fed is saying that the window will be open to the investment banks as they struggle to make sense of mortgage portfolios that have no historical lessons as to how to repair the damage. In addition, commercial real estate activity and prices and occupancy stats are falling as owners seek to refinance maturing debt. Further and also … there is no end to this news.
All of this is going to do to the American economy what Manny Pacquiao did to David Diaz a few weeks ago.  No TKO here like in the past, a full retirement type KO is coming in my opinion.  Future generations will need to rebuild this country.  They’ll do it – no harm if today’s leaders fade out quickly.  The ashes of our recent generation will always be visible in the excesses of Greenwich and the Hamptons just like the 20’s could be reviewed in Newport, Rhode Island.  Lessons will be obvious.   
Read The Silence of the Lenders http://www.nytimes.com/2008/07/13/business/13mail.html and you’ll get the sense that at least a portion of the defaulting American public thinks the government should bail them out of the problem.  Denial is the name of that attitude. That article points out however that the stats to date do not show any underwriting which can solve huge capital problems at the banks.  Nor does the data show that there is any modern miracle cure for borrowers who cannot meet the beat.  For many, extensions, modifications and other mitigation measures do not promise other than a deferral of the inevitable.
The indicators here lead to a conclusion that when investments are made in housing and commercial real estate, the investor had better not only be certain of the capital to enter the deal, but also the funding to accomplish the exit.  Government programs whether Federal or local may be unreliable, the end user mortgage market and the commercial real estate debt and equity market may be problematic, and the ability of the appropriate jurisdictions to accomplish their part of development programs may be impaired.  It’s getting hard to impossible to predict reasonable future markets and that may be the beginning of future opportunity.  Careful, though, that the pricing of your intended allows a long hold to find the real investment truth.                                     

Implications: Changes to housing, autos, urban planning, public transportation, carpooling, consumer goods and retailing, manufacturing, restaurants, agriculture, mining and utility providers are coming.  There will be suppliers close to the ultimate user, zero or virtual mobility for workers and local vacations or recreation, we are told.  

Analysis:  Lately I’ve been thinking about attached Townhouses, Mini Coopers, Sedona & the Grand Canyon as opposed to Mini Mansions, SUV’s, the Rockies and Hawaii.  But really the issue is amending urban plans to allow adequate modern health, safety & welfare, a denser housing stock, modern manufacturing facilities, more efficient retailing, more productive healthcare, utilities producing from more efficient fuels, more public transportation and water conservation.   Since we’re now at $ 140 a barrel and oil shortages still loom, no real estate investor can ignore this threat to feasibility.  If you’re thinking about investing on the perimeter of the Megalopolis’, you better know how you’re going to entice buyers who will incur an enormous transportation bill.  At the same time, that buyer may have less efficient power systems clogging the budget and repairing the homestead with oil based products may cost a fortune.   The big oil producers are still not believers, if you are seeking company in misery.  Their production budgets will not allow further development unless the pencil can work it out at $60 per barrel or less.   So the latest numbers show a lack of crude resources around the world and neither the heart nor the allocated capital to explore new unknowns.  How do you invest in perimeter raw land under these conditions?  The answer is very cautiously.  I will define very cautiously as way under the 18% of original cost some are now paying the big builders for acreage and more like max 5% of those original purchases.  Impossible pricing, you say, and I say in return, not as I remember!    How about investing in the inner city?  Ok, but remember to make your affordability projections for the market after you consider the new realities of household budgets.  You’re not going to move product at 40% of income and maybe not at 30% either, think about going back to the 50’s and early 60’s at ratios down to 25% for principal and interest, taxes and insurance.  Proceed otherwise at your own risk, and my opinion is that risk is too high for prudent investors.

Implications: The public is now going to be asked to support the housing mania of the 1st years of this century with tax look-backs to previous profits, with extended activity by the quasi-public lenders, Freddie Mac and Fannie Mae, and with government backing for loans written down to 85% of the new appraisal.  Industry insiders will love this direction as they seek to absolve their balance sheets of low quality assets.  If enacted to a more maximum rather than minimum degree, it’s possible that companies whose quality and liquidity issues should have sunk them will now have shifted all responsibility to the U.S. tax payer.  

Analysis: If housing is able to accomplish any such program, all consumer industries will feel entitled to make the same transfer, be they auto manufacturers, credit card issuers or the like.  Commercial real estate will feel the need too.   Indeed, as quoted in the article, “The economy has been taken hostage by people that took some very bad decisions.  The answer is to pay as little ransom as possible to the least ill-deserving people we can find.”   No doubt it is inevitable that tax-payers will rescue all this mess.  My view, however, is that we should not rescue one penny of the equity that caused all this trouble.  That’s not possible, for sure, but that maxim should be the guiding point of every rescue effort.             

Implications: This article notes the recent statement building financing of financial institutions and concludes its opening remarks with “I don’t know, you don’t know, and they don’t know”.  The article states the assumptions of current bank recapitalizations and in particular recaps the Bear Stearns acquisition.  It’s notable to me that Warren Buffet recently said that he didn’t have the appetite to pick that one up on those acquisition terms, or something to that effect.  

Analysis:  I don’t think we’re anywhere near to solving our asset quality problems so that we can turn to rebuilding the businesses to be refinanced with the loans generated by the new capital in place.  If this recent capital put in place is stated in the article as early, I believe the next round of losses will dilute this capital with further losses and further rebuilding of balance sheets.   The reason I think we have asset quality problems is I believe we are extending and modifying our loan assets to borrowers whose quality and quantity of revenues are lacking.  We’re trying to outrun our poorly conceived and funded debt whether consumer or commercial.  What is my evidence substantiating this claim?  Well, I think I can cite just Arizona’s home loan picture for likely proof.  The claim is that 92% of Arizona’s home loans are current.  At the same time, one in 70 homes in the Phoenix metro area is said to be in foreclosure.  The industry standard given normal times might be that 90% of residential loans would be current, 6 % of the remainder would be cured within the initial 30 day period and the balance would be a further problem typically leading to a foreclosure rate of less than 1%.  So here we have hard times going and better ratios than normal.  What’s happening, how come?   My view is that we’re keeping these poor quality investments alive with lenient underwriting, extensions and modifications that will lead to deferred defaults.  We’re just postponing the inevitable in the hope that unforeseen good news will carry us beyond the problem.  How does that work?  Well, ask the old American Savings investors of the early 80’s how they lost their equity position through institutional failure.   Real estate investors will need to reassess their refinancing needs, review the financing assumptions for new and to-be-renovated projects and recalculate the space needs of their proposed buyers and/or tenants to determine whether to go ahead or how they can float their operational cash needs.  There might be a few sleepless nights coming up over this one.                       

Implications: There were names like Fox & Carskadon, McNeil and Consolidated Capital among the biggest income property acquisition syndicators in the 70’s and 80’s, but no more.  And no more are thousands of other syndicators of that era big and small, who generally fell by the wayside as they could not execute.  And the reason they could not execute was they could not exit their existing portfolios to substantiate further activity.  And the reason they could not exit was that the tax write-offs that were the foundations of their business were not available to future buyers after tax code changes.  So activity slowed, and the recourse provisions of their debt put them down.

Analysis: From the ashes, the speculative activity of this century rose on the back of low cost, non-recourse, hi-ratio debt combined with unrealistic rent projections.  And now it’s going to sink once again on the embers of refinancing with recourse and flat or declining rents and accelerating expenses.  This will create bargains for those able to execute in the face of realistic prices and rents combined with restrictive and expensive and lo-ratio term debt.   A name mentioned in the reference material is Judah Hertz.  Mr. Hertz has profited from similar periods in the past.  He likes to buy prominent buildings at distress prices which have been rehabbed recently by the often defaulting party and assume the leasing risk.  I think his plan might be a good model to follow in the coming decade.    Good luck and good hunting!    

Implications: The referenced article begins with the now usual doomsday message which many including this writer have now exhausted ad nauseam.  Three relatively short paragraphs later, the Editor-in-Chief wraps up the forgone conclusions neatly and attempts to move on to some new meat.  You can read the rest of the article to absorb his wisdom.  This guy is a great real estate investor and journalist and I think he mostly always presents good food for thought.  I admire.

Analysis: I’d like to comment that the standards of the American middle class now include all the housing, cars, electronics and communications and entertainment equipment and services, healthcare, education, travel, recreation gear, sporting goods, insurance benefits, public health, safety and welfare services …ever enjoyed by mankind.  You can observe that the possessions of the dominant acquisitive 1% are nothing more in most cases than a larger or more refined or greater accumulation of more of the same.  Middle class suburbia doesn’t really want for at least a minimum supply of everything in most cases.  Sure, I know that every garage doesn’t include a hangar or RV storage, but if you want it you can usually possibly get it with one modicum of effort or another.  In my mind, there’s not a whole lot more going on at the top of the hill than on the flats.   And yet Americans want more hill-tops.  Even if guys like me tail off in their desires for more material, this is a young country yet and the immigrants at least until recently pour in with enthusiasm and huge want lists.  No doubt we’ll go to amnesty for at least a portion of those here without permission now and we’ll have to import much of our high and low end skills and labor, so I don’t really see the growth numbers diminishing.  Nor do I see new residents coming here to continue living in the poverty of their homeland. So we’ll have to put more savings into the capital of financial institutions and begin to more intensively develop industries which offer better returns on and of capital than housing, cars and other  consumer wants to get more to spend on consumerism.  Energy, infrastructure, agriculture, mining, electronics and communications look like the ticket if we’ll stick with the value added rather than the speculative side of such endeavors.    And, finally, we’ll have to educate, educate, educate to stay ahead of the other guys.   But we can’t just teach more of the same-old, as we need to get the curve of progressive education closer to the origins of the industry in order to get the U.S. in the game earlier and more profitably again.  Sounds like we need a venture capital kind of approach to funding education even more than exists now.                          

Implications: Three years after the change in the residential market, we have now come to the failure of the financial institutions which have supported the real estate backed consumer goods market of the recent past.  You might just as well have written the article about FNMA or FHLMC, as the same solvency analysis is probably supported.  The biggest banks and the last remaining major mortgage company and the last remaining huge thrift and the last 5 huge independent Wall Street firms are similarly impacted, maybe to differing degrees but nevertheless in difficulty.

Analysis: Do we just keep throwing money at these accelerating losses or are there mitigation efforts underway to recoup cash and capital and proceed on to greater profit programs?  The Home Builders have at least turned and burned lots to this end and restructured product in the attempt.  An impression of the financial institutions to date though might be better summarized as overwhelmed by the increase in terminal defaults.  Even if this impression is overwrought, there is no doubt that the triple threat conclusions of foreclosure, deed-in-lieu and short sales are balky beasts to administer on a one-by-one basis.  This is especially true when the most realistic view in most down markets may be that the first loss is the best/least loss and the accelerating morass of files shuts down the minds of the processing folks.  The more files there are, the less progress made per file is the rule I observe.   Look at the L.A. Times article this weekend Short Sales: A Tough Road http://www.latimes.com/classified/realestate/news/la-re-shortsale15-2008... for some recent market observations from the other sides of the desk.  This is one area where progress is not exhilarating to lender staff as continued bad news arising from good work depresses the mind.  Couple this with the pressure from above to finish and finish with the least losses as well as borrower discontent and disrespect and you have a formula for declining staff productivity.  Gridlock of the mind may be a continuing staff problem here.  
This is the future for our important financial institutions as we seek to resurrect and restructure housing.  Remember too that a similar if lesser onslaught is coming from commercial real estate financing, if not from auto financing and credit cards.  It doesn’t sound to me like this recovery will swing into being until well into the the teens as we get our minds around this problem’s total future.                

Implications: When you read that the subject poll showed that 59% of those polled believed that now is a good time to buy, you realize that the American Dream is still a great big pad with a 6.000 pound SUV or two in the garage no matter what.  JUst like land developers and builders, if you will loan money, the American public will buy and/or build.  They’ll be angry with the lender if they tip over, but that will be true even if they don’t get the loan.  So once again, we are shown that the American public wants the house no matter and the lender/investor is the only discipline in the market.  A further obvious truth is that there is no discipline among a lending corp paid on a per deal or per year basis rather than from the long term growth of the Institution.

Analysis: A short while ago, the AP reported that D.R. Horton predicted a rough sale housing market for new construction through 2010.  Horton’s President pointed out that falling order cancellation rates will signal improvement in the market and that this indicator improved in the previous quarter.   The Mortgage Bankers Association reported that the number of borrowers who became delinquent for the first time in the first quarter numbered  less than those who did so during the fourth quarter of 2007.  The Association point to this statistic as an indicator of improving health in the resale market.   Meanwhile, Cable and other communication costs continue their meteoric rise.  Healthcare costs are accelerating from a high base and co-pay percentages are increasing.  Gas is now at $ 4.00 per gallon even for the cheapest grade in the least expensive market’ Some predict this commodity will continue to rise for the intermediate term.  Utility costs are rising right along with the gas prices.  Hazard insurance premiums are moving north at a rapid rate too.  Ad Valorem taxes are stressed as governments try to maintain services.  Food is now at a premium worldwide.  Since the Detroit automakers have shifted much of their parts production offshore and many of the offshore brands do not manufacture in the U.S., your car repairs are an arm and a leg with the weak dollar.  And the auto guys are guilty in spades of producing the same premium product as the housing guys which nobody can afford, so you can’t easily replace your worn-out iron either.    Meanwhile, the wage gap is even further apart.  It seems the lower 75% work only to serve the needs of the upper 25, or are the real numbers 90/10 or 95/25.  That enormous line of cars on the freeway each morning appears to just be the trade parade to provide goods and services for the elite.   A further compounding current offset here is a 5.5% nationwide unemployment level and the recent loss of jobs.   I haven’t seen a recent quote from the NAR, but at least we have two of the big three market rooters giving us food for thought about indicators that may put the throttle to housing sales and values.  In addition, interest rates are still maintaining at low levels, which leads us back to the original thought presented here.   Will the market turn?  It appears that any glimmer will turn some buyers, but will there be enough additional sales to put the doldrums behind us?  Nah, good try, I know if you got ‘em you gotta try to sell “em and all, but not yet.  The mass market for real estate needs a major price adjustment to roll, and it’s still coming.  By the time it happens, many of the elite will be in the daily trade parade and new guys will be in the drivers’ seats.  Keep your money, don’t spend yet.                   

Implications: When you combine rents set and projected at unrealistic levels and an economy where only 22% of jobs statewide pay $17 per hour plus benefits with a surplus of single family homes, you get high vacancy rates in apartment communities.  When the government is seeking higher tax revenue from income property with increased assessments and the property insurers are raising rates and the utilities are charging way higher rates, you get losses from operations.  Then you figure that in some cases apartment community acquisition costs went from $ 50,000 per unit or less to as much as $ 90,000 per unit in just a few years for Class B units, and you get investment catastrophe.

Analysis: Name that catastrophe Phoenix right now.   And you can probably name California’s major communities and Las Vegas as catastrophes of like nature now too.   It’s going to take a while to get out of this one and it’s probably going to take foreclosures to do it.  In my mind the existing owners have lost their investment in many cases and the lenders that aided the run-up are going to lose a significant portion of theirs too.  I liked some of the better kept communities at under $ 50,000 per unit way back when, and I think that’s where the value is now for many of these communities.  Sorry, there was no value created here in the frenzy of the last few years, just a lot of trading of tulips.      

Implications: It’s hard to believe that the formerly largest industrial city in the nation has fallen on hard times for jobs.  But apparently so be it as the last remaining king, the Garment industry, is about to topple.  Just yesterday the entertainment industry was king here too, but we know its influence has also been dispersed to other locations.  The article points to the average 75 degree days and tourism as the last economic king or back to the beginning of the economic wheel here.

Analysis: The real future here is also well mentioned.  Immigrants whether from Oklahoma or points further east, west, north or south have always fed this machine.  Forty languages or more are spoken across the city.  The first generation doesn’t bring much but raw energy in most cases, but they have an incredible urge to educate their children like immigrants everywhere do.  And the next generation has always created an enormous small business community just like other changing coastal communities.  
Therein lies the real treasure here, the ties to the home country and the international trade that allows the city to serve the rest of the U.S., primarily the western states  No way these activities are going to shift elsewhere in their entirety, since the huge port system is irreplaceable.  Even if Mexico’s Sea of Cortez port possibilities or the eastern ports eat into the market at the edges, the ports of Los Angeles and Long Beach will carry the day for bulk goods.  Granted, air facilities within the western states will cut into the markets for finished or high value goods, but the real commerce will be in Los Angeles and the general metro area.    The result for real estate interests will be sustained if cyclical growth.  Los Angles will suffer during the coming correction, but the results overall should be relatively steady profits.         .            

Implications: Staggering numbers are presented here.  Seniors increasing from almost 5 million to 11 million in 30 years, critical shortages of skilled/professional labor with 1/3 of California’s high school students not graduating, and unparalleled diversity in a huge population. 

Analysis: Solving the housing/real estate needs of this group not only here but throughout the U.S. over the next fifty years will be a challenge.    Assuming that the production of this housing is the rote part of the production needed, the problem will be the money to get there.  Or rather, the production, assembly and funding of the money. 
Further, now that it’s pretty much established that the take home ticket for the average American will retreat to approximate more closely that of the rest of the world in the next 50, the financing will have to be accomplished in the face of affordability ratios that will prevent money from having any real value.  Our recent history might indicate that financial brute force will not be the answer.  You can ask Countrywide, Washington Mutual, Citigroup, Bear Stearns and others how that happens.  
You might look to the mid-tier banks in the U.S. as the solution.  Local management and underwriting might produce better default ratios.  International distribution through a new Wall Street with a higher participation requirement on the part of both the institution and the borrower may make for a more wholesome market.  Certainly that might produce a more concerned Wall Street banker with his/her exit only profit participation and the American consumer with his/her in your face you made it/you eat it foreclosure attitude.   Let’s see how it plays out.  The mid-tier results even now are OK to good to great and have more concerned management with a closer tie to the business and consumer client.  We’ll see if they can grow the business plans in the face of the next great opportunity.                           

Implications: The points of this article that I find important are the comments regarding property owners running out of money/cash in the commercial property sectors as they have in the homebuilding arena, and the comments regarding the overall strength and performance of   the companies that form the tenant base for the U.S. inventory. 

Analysis: Affordability is as big a key for businesses as for homeowners, transactions can not take place at higher price levels and greater velocity without attractive debt and commercial real estate is the repository of all business risks.   
I favor the points of view adopted by those who see deep drops in pricing over the near and intermediate future as contrasted with the comparatively optimistic points of view.  Optimism seems to run higher among those who have the largest stake currently in play.  To my mind, we have reached the top of an enormous speculative binge and the retreat will be similarly enormous.

Implications: It appears that we have been doing nothing economically during the current administration except gorging in a huge consumption and speculative binge and conducting war in the Middle East.  The subject article proposes that we will pay for this during the next administration and beyond as we rebuild the financial system of the United States.

Analysis: The impact here whether to the homebuilding arena or the commercial real estate sector is that transactions will come with more restrictive terms in a much quieter market.  The point taken in the reference material is that the government has already taken its best shots and we’re just in the opening minutes of the 1st quarter.  Certainly the band-aids supplied by the 13 or so sovereign wealth funds will limit their further exposure.  My take is that those that have already spent their money have done so at a price point that will prove to be considerably above the bottom yet to arrive.  The equation I see is more restrictive terms plus quieter activity will equal price declines way off this market level.  
An argument to be raised against this position is that consumer confidence will recover, foreign investment will jet-drive our investments and off-shore capital will revitalize our financial capacity.  Consider, though, that the U.S. represents 25% of the world’s GDP directly and influences the balance.  Every other economy and government system whether capitalistic or socialistic gains its impetus and leadership here.  The conclusion I come to is that U.S. activity will be way off and pricing levels will fall a ton in the near and mid-term as a result.  Can’t say I like it but that’s the way I’m thinking it will be.             

Implications: In my mind, the debate as to housing affordability and commercial real estate viability is over.  The game is lost as $ 21 trillion in housing value will become $ 15 trillion in the next few years and commercial real estate values will drop 25 to 50 % on the average in the next few years. 

Analysis: I understand that all are not as prone to accept the finality of this conclusion, but I think this result will be inevitable.   The question is how do we as a nation pay this bill since we’ve cashed out and levered our way to a financial system that has supplied funds against the previously record high values.    The final solution as to the vehicles we will use has yet to arise.  We do not yet know the full extent of our losses in the financial system and the severity of the threat to the sovereignty of the United States may not yet be transparent, dare I say is not transparent.  We can say only that 15 to 20 major banks across the world and the U.S. are seeking additional capital in large amounts and the U.S. Banks as well as Wall Street have tapped the tills of the U.S. Federal Government for liquidity in a serious way.  We are implementing credit policies now that are said to be the opposite of those restrictions that caused the depression of the 30’s in the hopes that we know how to avoid the coming financial free-fall.   
Local, state and federal politicians are beginning to seek relief at any trough for their constituents.  And the constituents for their part are demanding that relief or else.  To me it’s amazing how many homeowners and speculators see a way out without recourse at the beneficence of their lender or a government entity.  Bluff, bluster and posing in this matter are becoming a daily ritual.  However, I think we will strike a balance somewhere between poles which have yet to appear.  
The fear I have is that we do not have the resources as a nation or as a one world economy to meet this challenge.  The economic order that we enjoy in the States is the result of at least perceived stability in the U.S. dollar.  No merchant or other businessman yet refuses the dollar in payment for goods or services in the 50 States, but that is not the case worldwide.  Even where the local currency is junk, the dollar is sometimes refused in 3trd world countries at this point.  
As one of our colleagues here has recently written, it is a much shorter journey between riches and ruin now that we have not shown financial stability or discipline for the past 40 years.  Ruin appears to be imminent for many if not all who are participants in these real estate markets.  The problems are systemic, and while some may be very skilled at the operation or development of property, they may not be able to use these tools as they are only worthwhile when the U.S. government is capable of providing order to the financial markets.  
We have met the challenges in past administrations through our efforts and policies.  Our financial health is once again now dependent on our political skills and will to get us out of this condition.  Will we be able to develop a framework like the drafters of the Constitution or will we just put the usual band-aid on the issue to delay the inevitable?  I hope we’re able to dig deep and clear this mine field with a set of programs which will not only help the residents of the United States but reinforce/reestablish the leadership of the United States worldwide.  Time will tell.                         

Implications: If the subject analysis is realized, the return of Wall Street to advisory services will return real estate debt to the portfolio lenders.  Goodbye to the CMBS market as well as the sub-prime market.  In fact, Wall Street itself will be a unit of major banking institutions.  The major bankers will raise their capital requirements and the returns expected will escalate.

Analysis: Term commercial real estate rates will escalate to provide a return on invested funds plus coverage of the corporate income tax requirement plus an inflationary coverage plus the recovery of administrative costs.  The real question here is what inflationary expectations will be.  Will lenders be real as to the numbers at over 12% or will they follow the government modified numbers which peg the number at 2 to 3 %?  The likelihood is that there will be a median tending toward the government numbers and the government will subsidize the returns through tax preferences or the like.  Rates should be on the average 8 % or higher to make the numbers work.  These rates will destroy the values of commercial real estate whether purchased recently at artificially low returns or a product of an earlier, more rational market.  An increase of 25 % in the interest rate should decrease the value of the property by the same 25% assuming there is a parallel equity yield requirement and there are no further discounts for equity returns expected.  It would appear to me, though, that the equity return requirement will escalate as easy money/liquidity is reduced and risks are perceived to be higher.  
But all bets are off if the government decides we can’t stand the pain.  That’s the conclusion we seem to be coming to in housing as the government obviously will move to protect most of the participants so that we can live another day.  The commercial real estate pain may be so high that there will be no other choice here too.  If so, overall the winners will be those who speculated in housing and the commercial real estate speculators as well as Wall Street.  Stand by to see where reality lands.                   

Implications: The economy of the western United States has been thought to have underpinnings that are too solid to be affected by recessions. Among these economic undertakings are the gaming and tourism facilities of Las Vegas. This assumption looks to be shaky as set forth in the subject article.    

Analysis: In earlier periods, similar assumptions of invincibility were made as to the aerospace industry in Southern California and Hollywood and Silicon Valley. Each fell by the wayside with some pain to the participants in past downturns. It is difficult to avoid the nectar here when the wheels are turning and pulling in capital. I think Las Vegas is the most seductive of the money traps when things are going good. It is the purest U.S. gaming play for sure, but the chips have been going elsewhere as the article has pointed out. The Las Vegas housing market has certainly shown extreme weakness, and now apparently the gaming interests here will retreat to market values which will reflect a less competitive position in the U.S. and world markets.

Implications:  The article shows what’s on the local mind as families in this average man’s town try to get from paycheck to paycheck.  Not surprisingly, the British grocer, Tesco, has called a 90 day moratorium to its aggressive market entry and store opening program in Arizona, California and Nevada.  Since the initial stores only opened within the current year, the meaning is clear.

Analysis: Nobody stops a program of this size mid-stream unless the results are way below projections.  A visit to one of the stores left me with a nothing special attitude.  The architecture reminds me of the old Circle K stores which still dot the Southwest and the prices are, shall I say it, astronomical for a firm trying to gain entry to a competitive market.  I think they missed the mark and apparently they do too.  Stand by for details of the repair program.  
At the same time, Meritage and Toll Brothers have approached the State of Arizona for a re-trade of the pricing and terms and infrastructure requirements on acreage taken down from the State in recent years.  The state has replied that it’s limited to interest rate adjustments and infrastructure delays when on–site construction is also delayed.  Stand by for details of this repair program also.  
Phoenix gained over 130,000 new residents in the period July, 2006 through July, 2007.  I wonder what the numbers for the similar 2007/2008 period will be and further what the real number of folks moving back from whence they came will be.  Since 1 out of 3 jobs in the metro area is real estate oriented and the huge illegal Mexican population is stressed from Homeland Security, the real number may be hidden, except that retail sales will reflect their absence as well as the general lack of consumer confidence in the economy.  
Gas is now almost $ 3.50 per gallon and the fiery summer season is about to begin with its big air conditioning bills.  In this heat, your car wears out about 50% earlier than in other more temperate climes.  Since the public educational system is among the most poorly funded in the nation, many households support private school attendance by the family’s kids.  Healthcare is as expensive here as anywhere else in the nation, especially since a large portion of the population has been dependent on the public institutions without repayment.  The down cycle continues as growing expenses pressure limited wage gains.