Wednesday, February 22, 2006

Commercial Real Estate Bubble?

Today, I had to investigate why my Blog was receiving more hits than usual. After examining the issue, I quickly came to the realization that my site was mentioned in a BusinessWeek blurb concerning Real Estate, and people were curiously checking in.

Anyway, a hearty “thank you” to BusinessWeek for the plug, but I must admit that my feelings go against the general thoughts/comments in the article linking to me—“No Commercial Real Estate Bubble.”

Those who have taken the time to read my Blog will quickly understand that my philosophy takes into account numerous factors, and I feel the U.S. housing bubble is only the latest (albeit huge) symptom of much larger fundamental economic imbalances that will soon start to correct.

My belief is: Our U.S. Housing Bubble is the direct result of massive Fed liquidity, several years of ultra-low interest rates, relaxed lending standards, high use of non-conventional mortgages, general economic euphoria and irrational exuberance on the part of realtors, loan agents, speculators, new homeowners and the general public.

I also feel it was part of Alan Greenspan’s “Master Plan” to create a new asset bubble in an effort to help the U.S. get out of a recessionary period (post stock market crash and 9/11). In his endeavor to stimulate the economy, Mr. Greenspan swiftly opened the money spigots, and dropped interest rates to a 40-year low. Alan then blew more oxygen into the bubble by recommending the use of adjustable & non-conventional mortgages…the bubble grew.

Ultimately his plan worked, as housing prices rose, consumers spent like crazy (using their homes as ATM’s), construction permits soared, U.S. GDP grew, the Stock market re-inflated, and here we are today… dumb, fat, happy and completely oblivious to the huge economic problems at our doorstep.

If we take a casual look at our country’s economic situation today, everything looks real good on the surface, but strip back a couple of layers and things get real ugly, real quick:

- Our trade deficit is at an all time high—again! ($726B)
- Cumulative government debt is soaring ($8.25T)
- We have exceeded our congressionally authorized debt ceiling ($8.184T)
- Massive fed liquidity; M3 is greater than $10 Trillion dollars
- Foreign Central Banks own ~ $3 Trillion U.S. Debt
- Foreigners could dump their dollars/wreck our economy at will
- We Americans consume ~ 80% of world’s savings to maintain our lifestyle
- U.S. has massively outsourced blue/white collar jobs--continues to do so
- Consumer spending/housing were responsible for 90% of growth in GDP
- U.S. savings rates are negative--not seen since the great depression
- New day of increasing interest rates—possibly higher than predicted
- Lending practices will soon start to tighten up as risks increase
- Inflation is rising—probably much higher than gvt’s manipulated figures
- Housing market cooling--taking away consumer wealth effect/housing ATM
- Interest rates will reset on > $1 Trillion in mortgages in next 18 months
- Inverted Yield curve (possible recession on the horizon?)
- GM, FORD, DELPHI, US Airlines and many others are struggling
- Oil is currently a major issue (world supply/demand and higher prices)
- Numerous issues w/ IRAN, Venezuela and Nigeria
- Oil could rise to > $100 barrel this year and clobber the world economy

Bottom Line: Far too many negative issues at play here. Our United States is quickly turning into a service based, consumer nation and we, as Americans, are currently living far beyond our means. I honestly (yet regretfully) believe that we will be in a recession by this time next year (Feb 07), and by that time, it will become quite apparent that we have both a housing bubble and a commercial real estate bubble.

Let’s all hope we can get through this next recession intact... It'll be a monster this time!

Regards... Randy

Note: I've previously discussed many of these issues here--if you like to read more


Out at the peak said...

Amazing how anyone can be in denial of our multiple problems. Congrats on the plug none the less.

MMAfia said...

Amazes me how the general public just doesn't care about these problems. I wish we could force everyone to sit and watch a concise 30 minute video that explains what is really going on.

Best part: >$1 Trillion ARMs will re-adjust by 2007.

I honestly believe that will be the trigger that starts the domino fall.

I challenge anyone to explain how we are going to get out of that mess when interest rates continue to go up and so many people enslaved themselves with these ARMs (of which a good chunk are subprime borrowers).

Throw in the fact that housing price appreciation is all but over.

And for dessert, how about the new bankruptcy laws passed last year that will pretty much eliminate people's ability to 'walk away' from their obligations.

And for coffee: what do you think is going to happen to the institutions riding on these loans, and the 'house of cards' pyramid scheme of derivative products on the Street?

Oh, and don't forget the ongoing investigation of Fannie Mae. You thought Enron was bad? These guys haven't reported their annual numbers since mid-2004. AND the SEC made a special exclusion for them to continue operations. They 'back' the 'house of cards' derivates pyramid. Next to the Fed, they are the last stop. Scandalous activities amounting to over $10 billion being investigated.

And that's just one bullet point. Forget about all the others.

It infuriates me how misinformed the general public is. "The Fed is doing a good job fighting inflation". OMG PLEASE! Don't even get me started with that one.

But seriously, congrats on the plug- your blog contains information that is easily digestable which is unique.


contrarian2day said...

Thanks for the comments guys.

MMAfia, Couldn't agree more on the Fannie Mae Scandal. This massive coverup could turn into ENRON x 100.

Keith said...

If/When the Real Estate market does get some negative momentum I think the commercial industry will take a quick hard hit.

When things get really tough, small business owners will try to hold on to their homes for their family as long as possible and have the business take the credit hit for missing payments. A lot of businesses can be run without an office if that is what is needed. Every company I have worked for (Except for Dominoes when I was 16) could easily survive a period without an office.

Also, without much or negative residential appreciation a house refinance will less likely be able to bail you out.

No doubt a residential slowdown will hurt every business. So they'll cut their costs where they can and downsize as much as possible.

Out at the peak said...

A house 60 feet away from me just went pending in about 9 days. I'm not sure if it was just priced right or what.

But there is still plenty of commercial real estate that has been vacant for years. Too many buildings were made. Last I checked, one strip mall is still on the market after nine months. All units have tenants too. I'm sure the RoR is pitiful. Both Sprint and Motorola built huge buildings around here only to abandon them. This adds to the local commercial builders who must be unhappy.

Anonymous said...

While I read different opinions regarding scenarios many believe will unfold, I'm not one to buy all of them, except, I think the general direction this all leads to is pretty much the same. America is so heavily indebted and so exposed domestically and internationally, both economically and militarily. We're stretched out and it won't take much to push us over the edge. I feel anger toward those in Washington and big business in collusion with them who profit from our war machine while jacking the printing presses and making deals with dictators for kickbacks which influence policy, but the real victims are the American people who are woefully unprepared for any serious economic severe contraction. I thank my lucky stars I started worrying about this a few years ago and prepared as best I could. I wish now I'd bought gold back in June, but then again, if Gold truly soars and we go back on a gold standard by force of need, the government will confiscate it again. And even if one successfully evaded government confiscation, one couldn't sell it anyway without, the best thing to prepare is eliminate debt and get free while one can.

contrarian2day said...


Thanks for posting up! Excellent comments. Agree, if things get bad enough, the Gvt will probably confiscate/ban gold ownership again.

There are however, alternatives to straight gold bullion: things like Morgan Silver Dollars, St Gaudens gold coins, and others that will probably survive confiscation


Adventures In Money Making said...

seems like we have a lot in common.

I sold my home in 2004 in san diego and a few rentals i owned in 2005 too.

right now i'm buying gold and canadian income funds.

Darcy said...
This comment has been removed by a blog administrator.

The housing bubble was the biggest.


Market are crazy.