We may be approaching the bottom in the residential real estate market that has been in free fall since 2006.
If not this year, then sometime in the first half of 2010.
It would be a fool’s errand to try to pick the bottom.
The margin for error is much more narrow now that the exuberant excess has been wrung out of the bubble market.
It’s a different story for commercial properties…
…which now threaten to decline on an even more massive scale.
The chattering classes want to tag the sub-prime borrowers and lenders as the culprits in this debacle, but these players may be pikers compared to the outrageous and over-the-top bidding that crested in 2007 in commercial properties.
Case in point: the recent sale of the 47-story Worldwide Plaza New York City skyscraper.
Deutsche Bank was the involuntary owner after they had foreclosed on big time real estate developer Harry Macklowe.
Macklowe paid $1.74 billion in February 2007…when irrational exuberance was in full flower.
The new buyer paid $600 million. A markdown of $1.14 billion. A decline in value of 65% in less than two and a half years.
All retailers know the formula. Keep slashing prices until the merchandise moves off the shelves.
There are several lessons to be learned from these back to back transactions.
- No matter how many zeros you add to a deal, buyers and sellers tend to fall into the same trap. They are bold when they should be cautious…and then they are too cautious when they ought to be bold.
- The “experts” aren’t that much smarter than the average person. They just have access to more money.
- It’s easier by far to overbid and over-reach when you are spending OPM (other peoples money). Whether it is a nothing-down house, or a syndicated investment property, all restraint tends to vanish when it is most needed.
- The most eager sellers in this buyer’s market are the banks left holding the bag. The foreclosed property impairs their capital position and invites the regulators to threaten retaliation or even shutting the errant bank down completely.
Nothing concentrates the mind so wonderfully as the prospect of going to the gallows.
- All the money lost in the downturn is not forever lost. It has just changed hands. Fortunes were made from the carnage of the S&L meltdown of the early nineties, as Resolution Trust hammered these properties away at shotgun auctions.
- The more things change…the more they remain the same. Boom and Bust. Manias, Panics and Crashes…and Recovery. The cycle is immutable and as old as human nature.