On the afternoon of yesterday's post regarding housing prices, Mortimer Zuckerman, the Chairman of Boston Properties, as well as US News & World Report, weighed in with similar views to Peter Schiff's in an interview on CNBC.
It was interesting to observe Zuckerman carefully avoiding agreeing with CNBC co-anchors that commercial real estate would henceforth escape a serious crisis. What he did say was that his Boston Properties firm, which just purchased the Hancock Center in Boston, concentrates on high-end commercial properties, which do better in downturns. He implied that he expected a further softening of the market, but didn't explicitly say that.
However, he did reinforce Schiff's contentions, in the latter's recent Wall Street Journal piece. He went on to observe that with continued high unemployment and probable declines in residential real estate prices, there could well be an economic softening later this year. Further, he railed against continued excessive government spending, even in the guise of the recent tax rate extension bill.
Zuckerman isn't infallible, but he's a very shrewd guy. It seems that evidence continues to mount for worrisome, real estate-led economic developments later this year.
Showing posts with label Real Estate. Show all posts
Showing posts with label Real Estate. Show all posts
Tuesday, January 04, 2011
Tuesday, June 15, 2010
More Findings On The Dis-Utility of Homeownership in America
Richard Florida, listed in the Wall Street Journal as "a director of the Martin Prosperity Institute at the University of Toronto,"wrote a provocative editorial a week ago in the paper entitled Homeownership Is Overrated.
Florida's central contention is that today's world of greater job mobility has made homeownership a much less valuable activity than it was in the past in America.
A few years ago, the Journal published a piece by a researcher in Washington, D.C., providing evidence for this among low-income workers. Her findings were that the lower-income group of Americans had to move to follow work, as they are semi- or unskilled. Thus, houses tie them to places that may lose work, and cause them to default on the mortgage.
Florida, however, did something a little different. He examined relationships between homeownership, local economies and incomes. What he found is, at least to me, astounding.
Here's what he wrote,
"But cities with high levels of homeownership- in the range of 75%, like Detroit, St. Louis and Pittsburgh- had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.
The cities and regions with the lowest levels of homeownership- in the range of 55% to 60% like L.A., N.Y., San Francisco and Boulder- had healthier economies and higher incomes. They also had more highly skilled and professional work forces, more high-tech industry, and according to Gallup surveys, higher levels of happiness and well-being."
Thus, Florida found not only the same downsides to homeownership among lower-income workers as the earlier researcher, but he also found associations between higher incomes and less homeownership in cities with healthier economies, as well.
Isn't it ironic that our federal government began to push homeownership so heavily, from both parties, just when our economy began to value mobility more than ever? Especially as pensions have become more portable?
Perhaps, as Florida suggests, we really should reconsider the sacred mortgage deduction and let homeownership drift down to the 55-60% range. Based upon his research, it would seem that propping up homeownership beyond that interferes with the natural mobility of labor and economic activity in America.
Yet another in the growing list of federal government-originated market-distortions in our modern economy.
Florida's central contention is that today's world of greater job mobility has made homeownership a much less valuable activity than it was in the past in America.
A few years ago, the Journal published a piece by a researcher in Washington, D.C., providing evidence for this among low-income workers. Her findings were that the lower-income group of Americans had to move to follow work, as they are semi- or unskilled. Thus, houses tie them to places that may lose work, and cause them to default on the mortgage.
Florida, however, did something a little different. He examined relationships between homeownership, local economies and incomes. What he found is, at least to me, astounding.
Here's what he wrote,
"But cities with high levels of homeownership- in the range of 75%, like Detroit, St. Louis and Pittsburgh- had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.
The cities and regions with the lowest levels of homeownership- in the range of 55% to 60% like L.A., N.Y., San Francisco and Boulder- had healthier economies and higher incomes. They also had more highly skilled and professional work forces, more high-tech industry, and according to Gallup surveys, higher levels of happiness and well-being."
Thus, Florida found not only the same downsides to homeownership among lower-income workers as the earlier researcher, but he also found associations between higher incomes and less homeownership in cities with healthier economies, as well.
Isn't it ironic that our federal government began to push homeownership so heavily, from both parties, just when our economy began to value mobility more than ever? Especially as pensions have become more portable?
Perhaps, as Florida suggests, we really should reconsider the sacred mortgage deduction and let homeownership drift down to the 55-60% range. Based upon his research, it would seem that propping up homeownership beyond that interferes with the natural mobility of labor and economic activity in America.
Yet another in the growing list of federal government-originated market-distortions in our modern economy.
Wednesday, February 24, 2010
General Growth Properties' Fall From Grace
I have read, with some dismay, the articles concerning Simon Properties' bid to take over the remains of General Growth Properties.
My own connection with the firm, though brief and passing, goes back to 2000.
At the time, a prominent hedge fund manager and former Salomon Brothers partner offered to assemble a hedge fund around my equity strategy. His anchor investor, as it were, was GGP's then-chairman, Matthew Bucksbaum. At the time, Bucksbaum was a billionaire, thanks to his personal investments in GGP. The firm had been built by his family over decades, then gone public as a REIT, providing substantial, liquid wealth for them.
As part of the process of securing Bucksbaum's investment, the partner assembling the hedge fund asked me to do some analysis of GGP's competitors, and GGP, using the consulting version of my research. It was to be a threefold activity: a chance for Matt Bucksbaum to evaluate me and my work; a good faith provision of free analysis, and; a formal reply to a question Bucksbaum had regarding GGP's valuation relative to his company's peers. Vornado, Simons and Rouse were among the REITs which I analyzed.
It didn't take me long to do the analysis, nor identify a probable cause of GGP's relatively lower valuation, particularly when compared to Vornado. Put simply, GGP had a bad habit of selling properties when they had accrued substantial gains, providing shareholders at those times with extraordinary gains. Thereafter, investors knew such gains would be years in coming.
Consequently, GGP's earnings were more volatile than Vornado's, and its valuation was lower, due to this lack of consistency. I provided some guidance as to how GGP could improve its earnings consistency, and offered to provide additional presentations to the firm's management team.
Bucksbaum understood my analysis, conclusions, and recommendations, though he evidently declined to pursue them further.
However, he agreed to back our hedge fund.
When I read of GGP's sudden spiral toward bankruptcy in the last year or so, it took me back to my meetings with Bucksbaum in the spring of 2000. I can't, of course, estimate how much of GGP's troubles were due to the operating policies which I identified as probably depressing the firm's value to investors. Articles in the Wall Street Journal suggested that, like investment and commercial banks, and many hedge funds, GGP had unwisely used too much short term borrowed funding. Adding to that problem, the firm's COO, Matthew's son, John, had apparently borrowed heavily against family-owned GGP shares. When margin calls came due during the 2008 financial debacle, the firm's and family's fortunes began to rapidly unravel.
Last I read, Matthew Bucksbaum was reduced to being worth only tens of millions. Still more money than most Americans will see at his age. But something like 1% of his peak net worth.
A good lesson in how fleeting business success can sometimes be.
My own connection with the firm, though brief and passing, goes back to 2000.
At the time, a prominent hedge fund manager and former Salomon Brothers partner offered to assemble a hedge fund around my equity strategy. His anchor investor, as it were, was GGP's then-chairman, Matthew Bucksbaum. At the time, Bucksbaum was a billionaire, thanks to his personal investments in GGP. The firm had been built by his family over decades, then gone public as a REIT, providing substantial, liquid wealth for them.
As part of the process of securing Bucksbaum's investment, the partner assembling the hedge fund asked me to do some analysis of GGP's competitors, and GGP, using the consulting version of my research. It was to be a threefold activity: a chance for Matt Bucksbaum to evaluate me and my work; a good faith provision of free analysis, and; a formal reply to a question Bucksbaum had regarding GGP's valuation relative to his company's peers. Vornado, Simons and Rouse were among the REITs which I analyzed.
It didn't take me long to do the analysis, nor identify a probable cause of GGP's relatively lower valuation, particularly when compared to Vornado. Put simply, GGP had a bad habit of selling properties when they had accrued substantial gains, providing shareholders at those times with extraordinary gains. Thereafter, investors knew such gains would be years in coming.
Consequently, GGP's earnings were more volatile than Vornado's, and its valuation was lower, due to this lack of consistency. I provided some guidance as to how GGP could improve its earnings consistency, and offered to provide additional presentations to the firm's management team.
Bucksbaum understood my analysis, conclusions, and recommendations, though he evidently declined to pursue them further.
However, he agreed to back our hedge fund.
When I read of GGP's sudden spiral toward bankruptcy in the last year or so, it took me back to my meetings with Bucksbaum in the spring of 2000. I can't, of course, estimate how much of GGP's troubles were due to the operating policies which I identified as probably depressing the firm's value to investors. Articles in the Wall Street Journal suggested that, like investment and commercial banks, and many hedge funds, GGP had unwisely used too much short term borrowed funding. Adding to that problem, the firm's COO, Matthew's son, John, had apparently borrowed heavily against family-owned GGP shares. When margin calls came due during the 2008 financial debacle, the firm's and family's fortunes began to rapidly unravel.
Last I read, Matthew Bucksbaum was reduced to being worth only tens of millions. Still more money than most Americans will see at his age. But something like 1% of his peak net worth.
A good lesson in how fleeting business success can sometimes be.
Wednesday, July 22, 2009
The Coming Financial Sector Troubles: Commercial Real Estate
Last week, in this post, I cautioned against becoming too optimistic over Goldman Sachs' recent blowout quarterly earnings.
Sure enough, yesterday's Wall Street Journal warned that Morgan Stanley is likely to report a loss this quarter, due in large part to bad commercial real estate performances.
This is precisely the sort of thing I had in mind when I wrote about Goldman. Goldman's earnings were trading-related, something at which the firm has always excelled. And it has been rather aggressive at writing down its commercial real estate holdings.
Morgan Stanley, however, seems to be reminding investors that it is an also-ran in investment banking, and, now, commercial banking, too. It plunged into real estate late and ineptly, being burned badly enough to have to plead for a commercial banking license, and actually consider behaving like one.
But, like most investment banks, Morgan Stanley doesn't really have a great deal of successful experience with holding physical assets like real estate for long term gains. This is now becoming clearer.
In fact, the drumbeat of commercial real estate troubles, which began some months ago, are growing louder and touching more companies, including GE.
I think it's way too early to declare soundness in the banking sector, or a healthy, recovering economy.
So long as joblessness continues to grow and federal spending fuels GDP, real estate lending of both types, residential and commercial, seems destined to limp along until prices finally fall to market-clearing levels.
Morgan Stanley's imminent disclosure of more real estate losses is probably just the tip of another expensive iceberg for the financial sector.
Sure enough, yesterday's Wall Street Journal warned that Morgan Stanley is likely to report a loss this quarter, due in large part to bad commercial real estate performances.
This is precisely the sort of thing I had in mind when I wrote about Goldman. Goldman's earnings were trading-related, something at which the firm has always excelled. And it has been rather aggressive at writing down its commercial real estate holdings.
Morgan Stanley, however, seems to be reminding investors that it is an also-ran in investment banking, and, now, commercial banking, too. It plunged into real estate late and ineptly, being burned badly enough to have to plead for a commercial banking license, and actually consider behaving like one.
But, like most investment banks, Morgan Stanley doesn't really have a great deal of successful experience with holding physical assets like real estate for long term gains. This is now becoming clearer.
In fact, the drumbeat of commercial real estate troubles, which began some months ago, are growing louder and touching more companies, including GE.
I think it's way too early to declare soundness in the banking sector, or a healthy, recovering economy.
So long as joblessness continues to grow and federal spending fuels GDP, real estate lending of both types, residential and commercial, seems destined to limp along until prices finally fall to market-clearing levels.
Morgan Stanley's imminent disclosure of more real estate losses is probably just the tip of another expensive iceberg for the financial sector.
Monday, September 10, 2007
(Southern) California Dreamin' : Real Estate Woes
A friend of mine who works in the Southern California real estate industry spoke with me at length about a week ago regarding the status of the sector, buyers, and her own firm's experience.
In order to disguise her firm and the major project on which she works, I'll leave details vague.
However, what she explained both reinforced my sense of the nature and extent of the country's mortgage problems, as well as highlighted how detached from reality a particular locale can become.
One clear signal that the credit woes of the housing market are having real effects is that instead of her project's escrow closing late this fall, she now casually remarked that it won't close until, I believe, sometime late next year. In fact, there was evidently some question as to whether the entire venture was still viable. Which is why I'm being careful to completely avoid any reference to the project, beyond noting that it is residential in nature, and in southern California.
When I related MarketWatch's Herb Greenberg's observations that southern California real estate "values," meaning notional asking prices, in places like Riverside, had risen far above the national average home price, my friend agreed that the regional real estate market had become unsustainably over-valued.
Thus, her firm's project was already selling into an over-priced market, on a national basis.
Yes, I know, you're saying,
"But don't you realize, real estate is local?"
Well, yes, and no. Yes, if it's priced within reasonable, national parameters. No, if it's not, because of the securitized nature of the broad market, and the specialized nature of jumbo mortgage financing.
Put the two together, and you have expensive real estate projects which rely on short-term construction financing, and consumers taking jumbo mortgage loans to buy them, depending upon a very precarious long term credit market.
As I spoke of this situation with my business partner, we agreed that the only way my friend's project could have become insulated to credit forces was to have secured long term lines of construction financing, and, then, secured forward commitments to lend to its buyers who met certain criteria, from jumbo mortgage lenders. Absent such arrangements, a project such as my friend's, located in an area of stratospheric housing prices, was bound to be among the first to experience difficulties, once the credit market tightened.
Did I mention, by the way, that my friend told me she does not know of one person, directly, who has not bought a home in southern California without using two mortgages? The main mortgage for 80% of the purchase price, and the piggybacked alt-A or sub-prime for the remaining 20%.
That second part? That's what we in the Midwest, where I grew up, and even out here, in the East, call the "down payment." That's the part that assures all other parties that you have sufficient personal equity invested in your commitment to buy and pay for your home.
My friend is well aware that the California market, like Las Vegas, Florida, and a few other well-contained markets, simply became over-priced, with respect to what the now-national, if not global, ultimate holders of mortgage paper, would consider affordable by the borrowers.
Thus, new residential purchases on the same old terms is finished. And my friend's project is in somewhat dire straits. Essentially, they can only complete their sales by attracting buyers who can afford the full 20% down payment, in order to take a conventional jumbo mortgage for the balance.
It's ironic. My friend is educated, intelligent, and very competent. She chose to work in an area that, until recently, added considerable value to the local economy, and promised her substantial rewards for successful job performance.
No more. As she told me recently,
"I might well be able to visit you next week, or the week after. Because I may not have a job tying me down."
Such is the manner in which a thousand or more similar stories, combined, make for a national economic event. Everyone in California, in the housing-related sectors, knew that some of their real estate values were indefensible to the larger financial markets, should credit conditions change in a tighter direction. But they still behaved as if it would not, did not, matter.
Perhaps this fact, more than any other, demonstrates why financial-related businesses need to remain vigilant about creditworthiness. Financial lending bubbles and high-growth businesses always implode when lowered lending standards at least meet initial defaults and delinquencies. It has ever been thus, and, probably, ever shall be.
In order to disguise her firm and the major project on which she works, I'll leave details vague.
However, what she explained both reinforced my sense of the nature and extent of the country's mortgage problems, as well as highlighted how detached from reality a particular locale can become.
One clear signal that the credit woes of the housing market are having real effects is that instead of her project's escrow closing late this fall, she now casually remarked that it won't close until, I believe, sometime late next year. In fact, there was evidently some question as to whether the entire venture was still viable. Which is why I'm being careful to completely avoid any reference to the project, beyond noting that it is residential in nature, and in southern California.
When I related MarketWatch's Herb Greenberg's observations that southern California real estate "values," meaning notional asking prices, in places like Riverside, had risen far above the national average home price, my friend agreed that the regional real estate market had become unsustainably over-valued.
Thus, her firm's project was already selling into an over-priced market, on a national basis.
Yes, I know, you're saying,
"But don't you realize, real estate is local?"
Well, yes, and no. Yes, if it's priced within reasonable, national parameters. No, if it's not, because of the securitized nature of the broad market, and the specialized nature of jumbo mortgage financing.
Put the two together, and you have expensive real estate projects which rely on short-term construction financing, and consumers taking jumbo mortgage loans to buy them, depending upon a very precarious long term credit market.
As I spoke of this situation with my business partner, we agreed that the only way my friend's project could have become insulated to credit forces was to have secured long term lines of construction financing, and, then, secured forward commitments to lend to its buyers who met certain criteria, from jumbo mortgage lenders. Absent such arrangements, a project such as my friend's, located in an area of stratospheric housing prices, was bound to be among the first to experience difficulties, once the credit market tightened.
Did I mention, by the way, that my friend told me she does not know of one person, directly, who has not bought a home in southern California without using two mortgages? The main mortgage for 80% of the purchase price, and the piggybacked alt-A or sub-prime for the remaining 20%.
That second part? That's what we in the Midwest, where I grew up, and even out here, in the East, call the "down payment." That's the part that assures all other parties that you have sufficient personal equity invested in your commitment to buy and pay for your home.
My friend is well aware that the California market, like Las Vegas, Florida, and a few other well-contained markets, simply became over-priced, with respect to what the now-national, if not global, ultimate holders of mortgage paper, would consider affordable by the borrowers.
Thus, new residential purchases on the same old terms is finished. And my friend's project is in somewhat dire straits. Essentially, they can only complete their sales by attracting buyers who can afford the full 20% down payment, in order to take a conventional jumbo mortgage for the balance.
It's ironic. My friend is educated, intelligent, and very competent. She chose to work in an area that, until recently, added considerable value to the local economy, and promised her substantial rewards for successful job performance.
No more. As she told me recently,
"I might well be able to visit you next week, or the week after. Because I may not have a job tying me down."
Such is the manner in which a thousand or more similar stories, combined, make for a national economic event. Everyone in California, in the housing-related sectors, knew that some of their real estate values were indefensible to the larger financial markets, should credit conditions change in a tighter direction. But they still behaved as if it would not, did not, matter.
Perhaps this fact, more than any other, demonstrates why financial-related businesses need to remain vigilant about creditworthiness. Financial lending bubbles and high-growth businesses always implode when lowered lending standards at least meet initial defaults and delinquencies. It has ever been thus, and, probably, ever shall be.
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