Coping: With Harsh Reality

Every so often, a group of major real estate developers get together for a conference where folks try to look ahead. In order to protect my source, I won’t tell you which real estate/developer conference it was, but I’ve been given permission by my source to post this high-level view of what the people who put up real dough to develop properties are seeing.  This is the info that I talked about with Jeff Rense on his radio program last night — Read it and weep:

“This week I attended the [serious players] fall conference. [serious players] is the top real estate industry group in the world. All the most senior people in the industry.

1. Not one expert was willing to predict what things will look like in 3 years other than they think it will be better.

2. One top economist said if you are a developer find another career for the next 3 years-there is nothing to do and it may be 5 years.

3. Recovery will be slow. Unemployment will not drop back to more normal levels until 2014. First they will bring back people on 4 day weeks to 5 days, then they will increase hours form the average 33 hours now, then part timers will become more full time, then they will start to hire.

4. Real estate values are down generally 40% and there is a huge need for value reset to occur.

5. Nobody knows what debt will look like when it returns other than it will be far more conservative. Nobody knows what securitization will be when it does return.

6. The rating agencies will operate differently. There is a discussion among some of us that there needs to be an agency probably of Treasury that collects fees of some sort from issuers each time there is an issuance of debt to be rated and that agency will then hire a rating agency to be a analyst firm to determine the quality of the issue. There will definitely not be a continuation of investment bankers hiring the raters and paying them directly. There needs to be a rule that the I bankers cannot talk to the raters. There was far to much threats of withholding fees, and other inducements to the raters before making ratings about as accurate as appraisals which were also paid for by I bankers who needed high appraisals to justify the over leveraging.

7. Housing in some bad markets is still bad and the first time buyer credit is making it a somewhat phony market. Phoenix has 45,000 housing lots so there is a literal lifetime supply of lots. Land prices in Phoenix, S CA and other markets are 50% of the cost of the infrastructure installed on finished lots. The land has zero or negative value. In most areas it will be at least 5 years before any of this land will get built out in any quantity.

There are still 2-3 million too many houses in the US.

8. This time is really very different than any recession in the past

9. The US is no longer the world economic leader and will not lead the world out of this mess.

10. Real estate will once again be an investment and not the trading vehicle it became which is what led to this crisis.

11. We will go back to financing real estate with long term debt, and not the short term floating rate debt used to all a quick flip.

12. The Internet completely changed unemployment trends. Instead of just pumping up the US economy and bringing back production jobs, the Internet has caused the entire world to be competitors for many jobs in the US. It ranges from call centers to research, financial analysis, medical research, and on and on. This may be one of the most historic changes in history and one everyone needs to be aware of. It likely means wages in the US will be reduced below where they might have been were it not for this competition.

As several economists put it, the young in China and India and other Asian countries are hungry to get ahead and enjoy the good life, while US kids feel entitled and poorly educated. Those of us who built businesses were very hungry. Today there are still some like us, but many are too comfortable and unwilling to really sacrifice to make it like we were. The Asians want to learn. Our young people think they already know it- whatever it happens to be.

13. The 3rd Q GDP number is inflated by clunkers, home buyer subsidy, etc.

Growth next year will be more like 1%-2% in the first part of the year.

14. Inflation will return in 3-4 years

15. US corporations are sitting on record cash balances way beyond any they ever had. They will be doing more acquisitions.

16. The best market in the US is Washington DC. For obvious reasons

17. Investors fled real estate — completely fled real estate in the early 90′s. This time they see the long tern opportunity to create wealth and will be back as soon as the opportunity to buy appears

18 There is an enormous amount of cash on the sidelines

19. The Fed is intentionally holding rates at zero to try to force investors to invest in longer term riskier assets instead of collecting nothing on money market or CD’s.

20 The banks are still weak.

21 All values are still dropping and we have only gotten to 80% of the drop so far. Office and retail are only 80% there, industrial is only 60% and will be hurt by further inventory liquidation and lower levels carried going forward. Rents are only 75% of the way to the bottom.

22. In the 90′s it was easier to fix the problem because the damage was much more confined to a small number of large new buildings which were revalued and then rerented. Now the damage is widespread and covers a lot of older buildings so it will take a lot longer to solve. Quality really matter now. The best buildings will return, a lot of others will struggle.

23. Office vacancy will hit 18.6% nationally, retail 23%, and multifamily 8%.

24. The unwind of the massive Fed stimulus is critical to how it goes. Everyone thinks Bernanke is great but nobody ever did this before -it is truly uncharted waters. Then there is the politics and what will the rest of the world do.

25. As you will read below there will not be the massive foreclosure and asset disposal we all expected. The lenders are going to hold on. When assets do come to market prices will be higher than they should be due to very few deals being chased by massive dollars. There is already evidence of this in the multifamily market.

26. Mobile phones, and other devices are now becoming all sorts of tools and multiple use devices. Social networking is growing faster than anything anyone can imagine. The growth rates are beyond comprehension. This is where everything in the world is going from ordering food or reserving a car on Zip Car, to reading the news or anything. If you are over 30 you can’t grasp what is happening and how fast. The growth in usage is by tens of millions in months, and it is worldwide. You can’t get your mind around this. There has never been anything in modern times that even is remotely like this. The growth rate makes the growth in TV usage look like it was glacial. This is the biggest transformation of how the world functions in maybe hundreds of years. You need to learn all about this or get run over.

Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.

Just NOT principal reduction. This is just like they are doing in housing.

Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can’t reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on. When I pressed the issue of political interference she said -what do you want us to do, bankrupt all the banks.

That is the choice.

What does this tell you?

A. The problem is going to take much longer to solve than it should,

B. The banks are still very weak, so lending will not return anytime soon,

C. A massive refi problem is getting deferred to 2013-2015.

D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.

I think we captured a lot of what was said in various panels and conversations. We have a long way to go and the government is making it harder to fix the problem.”

Although one of the reviewer – a senior fellow at a firm I can’t mention thought it was a tad ‘too negative’ it sounds about spot-on.  This actually fits in with the model that I’ve outlined here multiple times.  Specifically, that the country is in a modern re-run of the Great Depression and it’s going to be a decade (or longer) event.  No mistaking it, however: There are key differences:

• In the Great Depression (I) people lost about $475 per capita (constant dollars) in the first three years of the event.  The losses since the initial decline from the top in the Internet Bubble has been much less but the Dow has never regained its once lofty heights since then on a purchasing power basis.  The bank bailouts of 2008/09 cost each person about $680 per capita ex car bailouts.  More if you toss those in. 

• FDIC has prevented bank losses from being immediately realized, however FDIC is ought of dough.  As evidenced in the senior-level talks most aren’t privy to, Treasury and the Fed are trying to do whatever they can to get real estate other than residential to ‘pencil out‘ so as not to have to cope with more balance sheet erosion.

• Since the problem is moving at glacial speed on the way down, with everyone pushing actually addressing debt liquidation as a “Yeah, some day maybe we’ll get to that…” it means that we could have another 10-20 years of misery ahead.

• At some juncture it will become clear to the PowersThatBe that while a global internet/electronic consciousness may initially sound like a good thing, the blowback is significant:  national borders and national employment agendas have been thrown under the rails.  People everywhere are bidding on all kinds of jobs and that could throw the power structure into unanticipated chaos.

• Just as WW II provided – ultimately – the end of the first Great Depression, the end of the Second Depression is likely to involve war as a means to bind humans together under national banners and causes, which can once again be orchestrated by the PTB.  Foremost among the agenda items will be removal of manufacturing capability (‘scarcity builds price’) and control of resources.  Which is why the Middle East and the Pakistan/India conflict are such important flashpoints, along with the Georgia/Azerbaijan regional stresses along the Muslim leaning Former Soviet Union (FSU) southern tier of states.

 

While the Dow picked up 27 points Monday amidst happy-talk about retail, I expect once we get a few weeks into the new year that reality will intrude, and that means reconciling declining earnings.  And that means an ugly spring for stockholders, if my bead on things is right.

 

Damn, I’m bright & cheery, aren’t I?

 

More Harsh Reality Checking: Who Bought Tea

And then there was this email – which makes me seem Pollyannaish:

Remember that I told you the web URLs’s and “tea party” names and the strategy was set up a year earlier (mid 2008) by some old-line Republican Party operators?

Now the accounting is getting done, and guess what? Millions of dollars donated by righteously angry Tea Party suckers was spent on — you guessed it — paying the Republican consultants that set up the scam in the first place.

Here’s the stuff on the Tea Party Express, who managed to siphon off over two thirds of the donations right back into their own pockets as “consultants” to the Tea Party “movement” Majority Of Tea Party Group’s Spending Went To GOP Firm That Created It.

This blows away the petty crimes ACORN is accused of, and strangely enough, never has been convicted of.

George, it’s time for you to get the joke:

They (the right/left parties of corpgov)  are not equally guilty. One of our major political parties, (and just one) is an organized crime syndicate that murders American soldiers for profit and sets out with the intention of stealing as much as they can, as fast as they can from their fellow citizens.

The other one is a loosely associated bunch of people that includes quite a few shoplifters….”

You know, this is a hellava lot of reality for one sitting.  Up late last night doing the radio show, up again at 3:15A AM to get my son to the airport for his flight home to Seattle, and then to have to face all this harsh reality.  Oh my…  You want MORE?  OMG you’re sick.  But since I am, too…

 

More About Post-2012

A couple of people asked for clarification about my comments the other day about the coming impact of 2012 on ‘net traffic.  What I was trying to get to was that come 2012, internet traffic tanks (for reasons unbeknownst at present since the linguistics give us the flavor of future events, not specifics).  But there’s not much ‘recovery’……if any.

 

Cliff of www.halfpasthuman.com was kind enough to explain this latest case of “George-foot-mouth-entanglement” to a concerned reader this way:

“George has stated the situation incorrectly. The data levels return in 2013 to about 5 to 6 % of what they are now. So no, they do not recover. And that may be strictly an artifact of processing that the data exists in 2013 at all. Remember these are projections of linguistics, not any actual measured data from 2013…..

So, no i am not showing data levels to what we have now.”

If you got the most recent of the “Shape of Things to Come” you can pencil in a huge number of possible solutions such as pole shift, geopolitical events that curtail energy so as to effectively shut down 95% of the net, or even something like alien wars.  Remember that since predictive linguistics is by definition reading things down at the ‘noise floor’ of human discourse, the residuals past 2012 may be the linguistic equivalent of a tight DSP (or even analog) filter circuit “ringing” when the filtering is too tight.

When I talk with Cliff about things like ‘after 2012′ data and then write something about it here, I just assume that you understand rudimentary DSP.  Well, when once you don’t even give a second thought to ringing in DSP, then the similar phenomena in language processing is a given so I apologize if I sometimes don’t take time to write out the whole background.

 

If you didn’t have a regenerative radio as a kid, where the sensitivity and bandwidth are controlled by bringing a radio to the verge of feedback (another linguistic processing trip wire, too, long as we’re talking about it…) then this Wikipedia graphic which explains “settling time ” captures the concept nicely (click the graphic for more):

 

 

For a really, really good time, you can either get a ham radio license and figure out ultimate bandwidth/ringing limits for fun, or just go with me that post 2012, data sucks and whether it’s a pole shift, government shutdown, energy disappears, massive CME/EMP outcome, nuclear war, etc. doesn’t matter so much as to understand that “Hmmm….so the post 2012 data could be we wake up telepathic one morning and no longer need the net, the net’s off, or there’s no one left around…just be the linguistic equivalent of settling time…Oh.  That sucks.”

 

Even with data persistence, a huge drop-off in data post 2012 requires retools (kind of like resetting deadbanding & rescaling) and since no one is offering us checks and party favors, screw it.  Got boats to build, gardens to plant, yada, yada…and a slice of huckleberry, please.

 

Then you get up and go to work anyway.  Or, in my case, I go take a nap.  Cliff’s the guy laying cloth & resin down between bouts at the pie oven.

 

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Send your comments to george@ure.net

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“Live on $10,000″ A Year

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The business model of this website is base Simply click here and send a link to this site to everyone on your distro list…Nothing more dangerous than sharp, clear-thinking upstarts who ask a lot of questions, eh?  Unless you believe WTC-7 fell over on its own, of course….

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