Act two begins

So what do you know -- Merrill Lynch has more mortgage writedowns and so do other financial giants waiting in the wings, continuing to dribble out more bad news. Opening the kimonos has been a slow process -- in part because their sliced and diced mortgage securities are so inscrutable. Banks are also coming to realize that waiting for a turn around isn't going to make things better, because real estate markets will not improve in the near term.

In doing my annual round of Emerging Trends interviews, I'm struck, although not surprised, by how many industry leaders focus on resolving the ongoing credit crisis as the key to putting the real estate markets back on track. No doubt the credit crisis triggered a sudden reversal in prospects, slammed the securitization business on its back, crippled dealmaking, and put many borrowers in a bind. But the credit crisis appears to me to be only act one. The quickly deteriorating condition of the American consumer is act two. Real estate fundamentals -- still reasonably strong -- are now directly in the cross hairs of evident recession. Everybody needs to shift at least some attention to what tenants start do and the outlook is for demand to decline across all sectors thanks to all the issues we've been reading about -- housing, energy, over borrowing. The curtain is going up now and this act promises to play out well into next year. If you jump ahead into the play notes, you'll see higher vacancies, declining revenues, and value hits will be a big part of the building drama. And meanwhile act one shows no signs of ending anytime soon either.

   

Comments

[Chris]

Most people I've read seem to think the housing/credit mess is over half way through, perhaps 2/3 of the way through.

As for Act II and the consumer, there will be some retrenchment but I don't believe as much as the Chicken Littles think. Why? Because unemployment is still at 5.5% or so and below our 6.1% long-term trend. If we get to 6.5% unemployment, that means a lot more people who aren't producing INCOME, but create a double hit by asking for benefits from the government. If 94.5% of the employable population still has jobs, they still have money coming in; it may not stretch as far with energy prices rising and general inflation but it could be a lot worse.