“The growth of home mortgage debt has been the major contributor to the decline in the personal saving rate in the United States from almost 6% in 1993 to its current level of 1%,” he [Alan Greenspan, February 2005 speech in Scotland] admitted …. Then, he began a confession: The rapid growth in home mortgage debt over the past five years has been “driven largely equity extraction" [xxxiv]
Eventually, the US government will have to use taxpayer’s money to arrest the decline in house prices . [xxxv]
The conclusion of America’s housing story is that as a nation we are now becoming more of a rental society than one of home ownership. This is a sad, though realistic turn from those days when both hopes and intentions were about giving all Americans the opportunity for home ownership – and the joys that often come with such.
Of course you've probably heard what some of the smartest US commercial real estate minds are saying about that real estate sector. These voices seem to be aligned with economists and still other astute financial minds who speak of the “next shoe to drop” in referencing the US commercial real estate market.
More pessimistic analysts are warning that the next shoe could soon drop: The rapidly deteriorating commercial real estate market could be the straw that breaks the economy's back and crush U.S. stocks in 2010. [xxxvi]
These wise real estate analysts go on to warn that commercial markets are another bubble waiting to pop, because of their related debt build-up and the customary downturn, similar to what housing has experienced in recent years, which will follow and contribute to the coming world economic storm.
The following explanation by one such analyst is well read in its entirety:
Falling prices and rising delinquency rates on loans -- sounds like we're about to talk about home mortgages and residential real estate, right? Wrong. The area to watch now is commercial real estate where falling prices and rising delinquencies are the story that many banks are trying to keep under wraps. See these two eye-opening charts from Bob Prechter's recent Elliott Wave Theorist , in which he discusses why this trend of commercial loans going bad is only just beginning.
Excerpted from The Elliott Wave Theorist , by Robert Prechter, published September 15, 2009
Real Estate and the Comeback Fantasy
I had the good fortune of starting on Wall Street under the auspices of Robert J. Farrell, head of the Merrill Lynch Market Analysis Department. One of Bob’s great nuggets of wisdom was the observation that stocks enjoying inordinate focus at the end of one cycle will tend to underperform significantly in the next cycle. His prime example at the time was the famous “Nifty Fifty” “growth stocks,” to which institutional investors directed their attention in 1970-1973. When the stock market overall ended its bear market in the fourth quarter of 1974, the Nifty Fifty had fallen substantially from their highs, and many investors continued to hold them under the belief that they would come roaring back. But they underperformed most other groups of stocks throughout the rest of the 1970s and into the 1980s as the S & P and secondary indexes moved up. Investors in these big-name stocks were stuck in so many shares they wanted to sell that they created an “overhang” that kept prices dampened for years after their glory days ended in 1973….
Like the investors in Nifty-Fifty shares in the mid and late 1970s, investors in residential real estate now think that the old upside excitement will return. But it won’t, and before the final long, drawn-out, exhausting bottom arrives, they will be selling out for 10 cents or less on peak-value dollars.
Meanwhile, commercial real estate is not attracting buyers at all. On the contrary, after levitating for two years through 2007, prices are finally catching up to the residential market, as you can see in Figure 11. According to a recent report in Bloomberg (8/18), “Manhattan office sales came to a near standstill in the first half, with less than one-tenth the average number of transactions seen during the same period in the previous five years....Three office buildings valued at more than $30 million sold from January to June, down from an average of 32 in the first six months of the prior five years.”.…
Despite bankers’ desperate attempts to keep their borrowers afloat, the default rate on commercial property is rising, as shown in Figure 12. Most people think this situation is bad for banks, and they’re right. But consider also how bad it is for prospects for new mortgage lending and therefore, ultimately, for real estate prices. With collateral melting before their eyes, bankers are losing the wherewithal to lend to new buyers. Their capital is substantially a mirage, and they know it.
The continued selling in commercial real estate today can be considered a technical “non-confirmation” of the recent buying in the residential market. When only one sector rallies, it’s a bad sign for the market as a whole.
Conquer the Crash made this forecast:
In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate. (p.151)
This is exactly what is happening. Here is a recent report:
Eighty-eight percent of property owners who participated in a recent Rent.com survey said that job losses are contributing to vacancy rates. Fifty percent said would-be tenants can’t afford rent or are trying to save, and 45% said that the trend of more people doubling up with roommates is causing units to sit vacant. (MarketWatch, 8/13)
This trend is not temporary. It is only beginning . [xxxvii]
Other financial wizards have lent their voices to this next real estate sector to tumble. Their quotations are complimented by charts helping to tell this story.
Bankers are now grappling with scenarios where borrowers are upside down in terms of loan to property value because of the drop off in real estate valuations and diminished cash flow from vacancies or rent concessions. [xxxviii]
You're intelligent enough to know that these charts are suggesting commercial prices might return to the mid-1980 lows, or even lower if we had charts going further back in time to help our extrapolations.
Usually near the middle of the Kondratieff plateau, the real estate markets again become saturated and begin to selectively turn down…. Most of these investors have never seen hard times and are completely dumbfounded. Many are unaware that real estate prices are declining since there are no market quotations for residential or business properties. Weaker interests face immediate foreclosure. Most of these properties are taken over by banks or other financial institutions holding the mortgages. Properties in somewhat stronger hands continue to be held because of owner willingness to take a loss and expectation of a market reversal…. Near the end of the depression, many holders of unprofitable real estate throw their properties on the market in panic. At this point, real estate prices become so low that in many instances they fall below the value of tax payments due on the properties. This causes properties that were unencumbered to be liquidated. Patient investors typically can purchase these properties for pennies on the dollar. Eventually, when the excesses of the real estate market accumulated during the growth phase are washed out and a new set of values are instilled in society, the market stabilizes and enters the next long-term up cycle. [xxxix]
And here's a chart on farm land which will serve as a good barometer for where most raw land prices could be headed.
Needless to say, the Storm will, inevitably, hit commercial prices soon …
[xl]
Do you agree that Banking seems most appropriate and timely for this next chapter? After all, and as everyone knows, it was the Real Estate loans that so impacted US and other world banks, where Stimulus money - at least here in the US - had to come running to the rescue.
This next chapter on Banks will also speak to other financial concerns within the US and world banking systems. Whether you are a banker, a business with banking relationships, or a personal depositor, you’ll appreciate the cautions this
next chapter holds for you. Do you welcome more information helping you with safety and security for your money deposits and possible profits for you?
Banking
[xli] As you read each word in this quotation by the late British Colonial Secretary Joseph Chamberlain in his statement to bankers in 1904, tell me if it's not the most powerful and appealing words with which to begin this chapter:
Granted that you are the clearing house of the world, [but] are you entirely beyond anxiety as to the permanence of your great position? ... Banking is not the creator of our prosperity, but is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth.
Rare thinking people like you already know , that banking is “not the cause of our wealth, but ... the consequence of it.” Don't we look to the banks as a safe place to deposit our money or wealth?
A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. [xlii]
Surely, the current insecurity with banks worldwide has raised most everyone’s concern on the safety of their deposits as well as the security of banking jobs. Knowing you desire safe deposits is the central premise behind this chapter and what will be addressed.
Most Americans seem to feel safe about their banking institution and their money on deposit, because, in part, from the increase in FDIC insurance for individual accounts from $100,000 to $250,000 and the US government bailout of endangered banks after our economic contraction in the Fall of 2008. Did you know that the FDIC is not financially well, despite the increase in banking fees for all banks in support of the FDIC after the 2008 downturn? Aware of these facts, isn't it amazing that coverage was increased by 250% in 2008?
With more downside in the housing markets likely, adjustable rates continuing to adjust upwards coupled by a slow economy putting more folks out of work and more homes in foreclosure, commercial real estate loans expected to be the next shoe to drop, and our government out of money to support banks any further, are you curious about the stability of America’s banks looking ahead? Sadly, most American banks and many of the World's banks are more precarious today than they were before the Great Depression in 1929.
In fact, the most dependable and objective bank rating service, who maintain no financial ties to the banks they rate, feel that as many as 2/3s of America’s current banks could collapse in these next few years.
Congress called all the rating agencies -- Standard & Poor's (S & P), Moody's, A.M. Best, Duff & Phelps, and Weiss Research…. Weiss beat its leading competitor, A.M. Best, by a factor of three to one in forecasting future financial troubles. The three other Wall Street firms weren't even competition…. Why? ... The real answer was contained in one four-letter word: bias. To this day, the other rating agencies are paid huge fees by the companies; the ratings are literally bought and paid for by the companies they rate. [xliii]
When the next run on US banks happens, it’s likely to be like dominoes falling because banks should collapse one after the other in an ever faster pace. The FDIC will be overwhelmed, ultimately declaring bankruptcy. Depositors will be faced with losing all their bank holdings in communities throughout our 50 states – and with it even the few vestiges of trust in our government and its assurances. Can you imagine this inevitable consequence?
By the time the systematic crisis is full-blown, there will almost certainly have been a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers, and brokers. As the number of failures grows, concerns over counterparty risk will take center stage. Lenders, investors, and risk managers will fret and gossip about which institution is next. Worries about fraud and anxiety will boost anxiety to a fever pitch. Even firms not in dire straits may suddenly find themselves at risk. [xliv]
As George Soros wrote in his book The New Paradigm for Financial Markets published in April of 2008, he was predictive and uncannily accurate:
The banking system will not be allowed to collapse as it did in 1932 exactly because its collapse then caused the Great Depression.
The US government’s TARP relief has encouraged more wrongs by the "Too Big To Fail"[TBTF] banks it was intended to help. Rightfully frightened by US government control in unpaid TARP, each bank went deeper into debt and/or diluted its existing shareholders in paying TARP off.
There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leverage derivatives, (3) the optimistic safety ratings of banks debt instruments, (4) the inflated values of the property that borrowers have put up as collateral on loans and, (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the client's potential inability to pay under adverse circumstances. [xlv]
Aided by the passage of the Gramm-Leach-Bliley Act of 1999, which allowed banks, securities firms, and insurance companies to join together under one holding company umbrella, the big were getting bigger. Growing as large as possible made sense, considering how the too-big- to-fail (TBTF) doctrine had been restructured under FDICIA. More than likely, those that were unequivocally classified as TBTF would be bailed out if circumstances took an ugly turn. Most people assumed that Washington would find it politically unpalatable to allow one of the nation's largest financial institutions to go under. As a result, the ten largest banks in the United States controlled 44% of industry assets in 2005 versus 17% in 1990. Ironically, this development more or less ensured that the failure of one large operator would erupt into the sort of systemic spasm that policy makers have long feared. [xlvi]
The government did everything in its power to lower the bar so big banks could clear the stress-test hurdle; even so 10 of America’s largest banks STILL came up short and must raise $75 billion in capital they desperately need to survive this crisis. [xlvii]
In a spring 2005 speech addressing proposed commercial real estate (CRE) guidance by US banking agencies, Susan Schmidt Bies, Federal Reserve governor, noted that average CRE exposure for certain midsize banks was near 300% of capital, a level double that of the late 1980s and early 1990s. [xlviii]
Wall Street has produced a credit crisis for banks by securitizing more than $900 billion of subprime mortgage loans. The ultimate default rate on these loans could rise as high as 20-25%, so there is $200-$250 billion of bad paper now circulating in the financial system. As the credit rating agencies have issued widespread downgrades of securities that previously had scores of triple or double As, investors have taken fright and been fleeing all asset-backed securities. [xlix]
Behind America’s banks stands the Federal Reserve, commonly referred to as simply the Fed. By its very name and since its earliest, it has been misunderstood and a detriment to our country and its financial structure. As you analyze each word of this quotation, you will shortly feel a sense of disgust and possibly a new, less than comforting realization about our Fed, which resonates with my own feelings from the research behind this book.
Some people think the Federal Reserve banks are United States Government institutions. They are not Government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders. In that dark crew of financial pirates there are those who would cut a man's throat to get a dollar out of his pocket; there are those who send money into States to buy votes to control our legislation; and there are those who maintain an international propaganda for the purpose of deceiving us and of wheedling us into the granting of new concessions which will permit them to cover up their past misdeeds and set again in motion their gigantic train of crime. Those 12 private credit monopolies were deceitfully and disloyally foisted upon this country by bankers who came here from Europe and who repaid us for our hospitality by undermining our American institutions. [l]
Did you notice that the last footnote came from an Executive Order by then President John F. Kennedy? It was JFK's plan with brother Robert by his side as US Attorney General to shut down the Federal Reserve Banks.
[li] Surely, you recall the tragic assassination of President John Kennedy while in a motor pool in Dallas, Texas. Do you remember hearing about how Bobby Kennedy was later assassinated during his historic and rapidly successful campaign for the US Presidency? Horrific back-to-back losses for the Kennedy family!
Is it any surprise to you why both John and Bobby were gunned down? You can be sure the Fed was not going to take any chances that JFK as President or his brother Bobby who might become the next US President would shut them down. It is my opinion that only the Fed had the extensive connections to pull off both of these assassinations successfully without the remotest trail leading back to them.
Such actions by the Fed only scratches the surface of their deceitful, criminal actions and their selfish intents contrary to the best interests of all American citizens and our nation since the Fed was created. As such, auditing the Fed is only a small step in the right direction. Surely you know that Congressman Ron Paul is a near solitary voice leading the charge for an audit of the Fed. You might enjoy his recent testimony before committee in this regard:
http://teapartyeconomist.com/2 012/07/19/video-ron-paul-vs-be rnanke-last-time/
And you might appreciate the comments of David Stockman, former Reagan Budget Director & Congressman, on the Fed as well:
http://www.caseyresearch.com/c dd/david-stockman-austerity-no t-discretionary
America's Worst Economic Depression Page 3