20 predictions for real estate and the economy
By Joel Ross for HotelNewsNow.com - December 31, 2009Here are some thoughts from a recent major real-estate conference on where the industry and economy are headed:
1. No expert or economist who spoke was willing to make any prediction of where we will be in three years.
2. Development is dead for all real estate for at least three years.
3. Recovery will be slow. GDP in 3Q was over-inflated due to cash for clunkers and other stimulus. The first part of 2010 will be 1 percent to 2 percent GDP growth.
4. All real-estate values are down by at least 40 percent.
5. Nobody knows what debt structures will look like other than far more conservative underwriting, much simpler structures and a lot less debt availability. Debt likely will be long-term mortgages and fewer short-term floating rate loans.
6. The whole rating agency structure will change, but it is not yet clear what form it will take. The investment banks will no longer be paying the raters, so they will no longer able to pressure them to provide higher ratings.
7. This recession is very different, and comparisons to past recessions are not good predictors. There has never been a worldwide banking collapse like this since the Great Depression.
8. Real estate will go back to being a long-term investment instead of a trading vehicle as it became in the last 15 years.
9. The Internet has changed everything related to unemployment. Now the entire world is competing for many jobs in the U.S., such as computer-related processing, research, financial modeling, accounting work, et cetera. This means recovery from high unemployment will take much longer.
10. Unemployment will drop slowly, and it will be 2014 before coming down to 5 percent to 6 percent. Companies will first end short work weeks, expand hours, hire temporary staffing and then rehire. Wages will remain restrained for many years due to the slow recovery and overseas competition.
11. Asia will lead the world back. The young people there are hungry to learn and earn, while in the U.S. young people are “entitled.”
12. There is a lot of capital sitting on the sidelines.
13. It is now official government policy to extend and pretend. The banks are still so weak that Treasury has told banks to find ways to modify loans just like in housing. All leading real estate experts feel this is a terrible public policy error, which will only cause a deferral of the problem not a solution. Values are not returning to 2007 levels, or anything close, for a very long time, and the whole extend-and-pretend policy is very wrong. Most experts believe anyone who pays down the loan 10 percent to 15 percent and just extends is throwing good money after bad. There will never be a return on that new capital. Extending with the mindset that values will return in three years is delusional.
14. Almost no servicers will reduce principal. They will modify but will charge 1 percent to do so. There are financial structures that do work to modify and provide a return for new equity, and allow the lender to play make-believe. These take structuring expertise to effectuate.
15. There will not be the tsunami of deals in real estate in the next couple of years that everyone expected due to extend and pretend. It will happen later.
16. The Federal Reserve is intentionally holding rates low to try to force investors to make longer term and riskier investments to get capital out of Treasuries and money funds.
17. Values will still drop for another few months on all real estate.
18. The Internet, social networking and mobile devices are changing everything. Unless you adapt and understand the changes occurring at incredible speed you will be left behind.
19. The real risk is in how the Fed unwinds the massive monetary stimulus and bank support programs. Most feel Bernanke is up to the task, but politics can get in the way.
20. Inflation will return in three to four years.
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