I've Still Got Chills

I have to admit that I appreciate a good horror story. Stephen King and all that. But that doesn't mean I'm not occasionally feeling the effects afterward. Not that I can't sleep or anything. But the chills sometimes linger for a while.

The one thing that tends to make these stories easy to get over is the knowledge that they are just that -- stories. Fiction. The product of somebody's imagination (or maybe his or her nightmare -- who knows?)

But the same doesn't hold true when I hear about real-life nightmares. You know. The stuff on the 11 o'clock news (I'll spare you the details). Pretty scary. And hard to forget.

And maybe this is a little odd, but I sometimes feel the same way when I think about the kinds of economic and financial disasters that I see unfolding. Lots of losses. Many people hurt. Widespread suffering.

In fact, believe it or not, when I wrote my book, I had moments when I frightened myself with the things I was writing about. Those chills didn't disappear very fast at all.

All of this is a lead-up to a post, "The Real Estate Nightmare I Found In Las Vegas," I discovered (hat tip to Naked Capitalism) that tells a pretty scary tale about the real estate market. It was written by Tom Lindmark over at the Metropolitan Real Estate blog.

It’s Friday night about 8:00 and I just returned from the IMN Distressed Real Estate Conference in Las Vegas.  I want to give you some initial impressions this evening, basically just a skeleton outline and over the weekend and probably into next week I will try and add some flesh to these bones.

As a preamble, I attended an IMN Conference at the end of May 2007.  That one was also real estate oriented and approached the subject from the standpoint of pools of capital dedicated to real estate investment.  It couldn’t have been a more upbeat conference.  There were a lot of fund managers who left you with the impression that they were well on their way to controlling a better part of the real estate assets of the country.  So high was the confidence level that the buzz around the meeting rooms was all about getting into foreign markets.  Today it seems like that wasn’t a year ago but more like I am living on a different planet.

In no particular order here is a synopsis of this year’s conference:

1. No one has any idea when we will reach a bottom simply because no one knows how many classes of real estate are going down. The most optimistic guess was 2010 but most wouldn’t even hazard a guess. Some of the grey hairs think 5 or 6 years.
2. The problems in the residential side are quickly spilling over to the commercial real estate market.
3. The spread between bid and asked prices is as large as the Grand Canyon. Banks and particularly the community banks can’t afford to take the write-downs the bid price implies.
4. Aside from say multi-family and really solid income producing properties (producing solid verifiable income now, not projected income) there is no debt available. There is lots of equity looking for 20% and up returns. Since these will have to be largely unleveraged, the asset price required to deliver the return is abysmally low. Further driving down implied valuations is the fact that the equity is Wall Street money with 3 to 5 year time horizons. No one thought that was achievable (with the exception of the Wall Street boys in the audience, of course).
5. The complicated capital stacks of the past are history. Simplicity is in and you can kiss non-recourse goodbye.
6. Builder lots are selling for improvement cost or less. Basically, the land is free. There is no debt available and the volume of transactions is approaching zero.
7. Small and mid-level banks are in trouble. So are the big boys but the govies will take care of them? Several of the deal guys said that banks they contacted three months ago about buying assets are all of a sudden calling back. Three months ago they said everything was fine. The idea du jour is to buy the bank to get the bank’s real estate. Sounds screwy to me but I’ll write some more about this one tomorrow.
8. Most think this is a credit driven problem, not a supply problem which was the case in 1991. They think the crunch is really going to start hitting when commercial loans mature and need refinancing. Unlike 1991 there is lots of equity on the sidelines which is a good thing. The bad difference from 1991 is that we got into this mess with a good economy not a recession. So if the economy goes south it could get real rough.
9. Banks have been rewriting their loans and creating new interest reserves to keep the Zombies alive. The regulators have said full stop.
10. The big buzz word is “value added” as in look at my Excel spread sheet and how it shows us increasing rents and occupancy and how much money we will make with which to pay you back. Most of the fund providers aren’t buying.
11. Underwriting is getting tougher and tougher. As one participant said,” …if you have financing take it and close the deal NOW.”
12. Mezzanine is going to be important as the level of available senior debt in the capital stack shrinks. Most Mezz lenders now only going up to 85%. They are also adjusting any appraisals by five to ten percent.
13. Lot prices in the hardest hit areas are back to 2000 to 2001 levels.
14. There is an absolute disconnect on valuations among buyers, sellers, senior debt, mezzanine and equity. Thus no deals are coming together.
15. Appraisals are good for no more than a month as values are deteriorating so rapidly. Some felt that the appraisers were only picking up sales comps and missing the comps that could be derived from note sales. Basically, no one trusts appraisals.
16. The Indy Mac performing loan sale that was reported to have been done at about 60% of asking price has fallen apart. Most of the bids at the 60% level were withdrawn after further due diligence. The actual prices the stuff went for is between 20% and 45%. By the way Indy Mac had current appraisals supporting their asking price.
17. The Wall Street Wizards are proving to be particularly inept at working out real estate problems. Essentially, they don’t know anything about operating real estate. On top of that, many of the banks don’t have expertise so there seem to be a lot of bad decisions going down (much more about this later).
18. Things are going downhill so fast that deals that were struck 3 months ago need to be restructured.
19. Finally, the conference concluded with a representative from the Fed and one from the Office of Thrift Supervision. They dodged, weaved and evaded the hard issues. My take, reading between the lines, is that they are scared to death. Again, I will expand on this in the next couple of days.

We went to this conference, frankly hoping to meet some people and start networking to possibly pick up some assets on the cheap.  We did this back in the early 1990’s and it worked out well.  We were shocked by what we heard.  This is not just a problem with residential real estate.  It is a problem with every class of real estate.  There are one or two positives that may help lead us out of the situation but, so far, I think that the looming negatives may overwhelm everything.

It is no time to be buying.

And I've still got chills.

Comments

[Snappy Tom]

Several years ago, maybe five or so, I told my wife that before it's all said and done we'd see abandoned subdivisions plowed under to plant corn and beans.

The wheat harvest here in the Original South Central has been pretty tough going. There has been a surfeit of rain and plenty of hail. The problem is that the grain will sprout in the head if not brought in soon. Those farmers who've been able to harvest have seen good results. They may even make a buck or two. The corn, milo and beans are looking fantastic. Alfalfa has been hard to get baled due to the rain. Ergo more increases in costs for dairy operations and feedlots. Everyone focuses on corn and soybean prices but hay is just as important and inexplicably overlooked. Cost push inflation for meat and dairy are here to stay for quite a while.

I'm surprised that realtors and home owners nationwide haven't started a national movement to burn all the bank-owned foreclosure properties....

1)
it would drastically improve the housing market and

2)
they would actually get something for their tax money being confiscated by Congress to pay off the distressed banks who hold the titles.

I'm surprised that realtors and home owners nationwide haven't started a national movement to burn all the bank-owned foreclosure properties....

1)
it would drastically improve the housing market and

2)
they would actually get something for their tax money being confiscated by Congress to pay off the distressed banks who hold the titles.

[slackful]

So let's see. This group could not have been more clueless in May of 2007. Their projections were laughably off base. Ummm....when did they get better at prognosticating? I suspect they are just as far off this year as they were last year. The western world as we know it may be collapsing, but it's not a predictable event. I find nothing at all that's compelling about this particular article.

[comicpro]

Great work on the "misses" of the geniuses who were going to take the world to dizzying heights of wealth and in turn make themselves even richer! Bailouts are getting more bad press than they want as the "ladies of the night" of Wall Street like to keep things low key. What a mess!!

[JRB]

What I don't understand is why you never hear anyone, or rarely hear anyone, telling people that this is the time to prepare for disaster. What has transpired over the past 18 months has the word disaster all over it and it's gaining steam. You DO NOT want to be that "hindsight is 20/20" person. You just may end up in the gutter if you do.

This is no bible thumping, the prophecies are coming true kind of post (although you can bet there's a lot of finding Jesus going on right now), yet this is from the heart. This is instinct kicking in. Doesn't more than just a few people have that same sick to the stomach feeling that I have? I mean that deep-down holy crap this is going to be very very bad feeling?

Nobody can predict a damn thing because, unless you're Nostradamus, predictions are based on historical events. There are NO historical events whatsoever we can rely on for a prediction of what's to come, and I mean NONE. We've never had sub-prime loans, ALT-A loans, MBS collateralizing, leveraging, multi-trillion dollar derivative bubbles, an so on so what in the hell makes anyone think the “experts” can predict what's going to happen?

What we're hearing from the "experts" everyday are not predictions their guesses pure and simple. The number of people that have made themselves look like total idiots with their predictions is staggering. The highly educated "experts" du jour look like complete fools over an over again. Funny thing is they just keep spewing the same crap daily and it keeps getting proven totally incorrect over and over again, but they’re not being called onto the carpet for it. I can only assume they're, ridiculously, hoping for the broken clock is correct two times per day scenario. Sorry "experts" but the clock's hands were blown clean off the face months ago. There is no "correct time" anymore.

I hope I’m wrong, but I think that the total ridiculousness and criminality of all this will spark a revolt (you thought the Civil War was bad...). The greed was just too much and people went too far this time. Unfortunately, it takes a full speed kick to the head, instead of a slap to the face, to wake up an over-worked, under-paid, over-stressed American. Well, we've taken body blow after body blow up to this point and now the head kick is coming to knock us completely out cold, if it doesn’t kill us that is. The foot has already left the ground for crying out loud. Forget offense people, it's time to defend yourselves. “But I’m certain I can position myself in the market to sufficiently back-stop any major event to take place.” COME ON, DON’T BE AN IDIOT!!!

Just get your house in order NOW. Don't wait. Do what you need to do. Get yourself out of the stock market and into an all-cash position for at least 24 months. DO NOT keep your money in a bank or brokerage account!! If I'm wrong and nothing happens, no skin off your back. But, if I'm right, well, you can thank me later.

Here’s wishing everyone good luck - JRB