The housing crisis is the symptom that resulted from the largest, most dangerous credit bubble in all of history. While I try to locate some compassion for the government’s and monetary authorities’ attempts to contain the damage, I remain concerned that they are focused on the wrong issues.
I see them as treating symptoms, not the underlying disease. While it is remotely possible that they can hold this thing together long enough that it can fix itself, this remains a long-shot.
This next article on real estate speaks to the heart of the crisis. Properties are overvalued But they are doing what they need to do, which is to fall in value. No amount of government seizure of bankrupt institutions is going to affect this dynamic in the least. All it will do is transfer taxpayer money into a black hole that, frankly, grew under the reckless gaze of the very same people we are now being asked to trust as they try to patch things up.
This article on commercial real estate shows that the residential housing contagion has spread to the very large and very leveraged commercial real estate market. This is not a surprise; it always follows this pattern, without fail.
NEW YORK: U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market. Since the market’s peak in 2007, the availability of debt – the lifeblood of commercial real estate – has dried up and choked off sales.
Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a huge write-down of all commercial real estate loans. But it looks as if the clock is running down. "We’re going to see a whole lot more trouble going forward," said Peter Steier, vice president of Inland Mortgage Capital in New York.
There’s still something of a standoff occurring here, as real estate investors with big losses don’t want to sell their properties, while banks don’t want to recognize the bad loans on their books either. Sooner or later this will change. How big is the problem? Pretty big, as we find out a bit later in the article:
Commercial real estate sales in the United States are expected to fall 66 percent this year from $467 billion to an estimated $159 billion. This is because debt, especially securitized debt in the form of commercial mortgage-backed securities, or CMBS, is either unavailable or prices are too high and the terms too strict for borrowers, Reis said.
"One of our biggest problem areas is pretty much the state of Ohio," said Kevin Donahue, senior vice president Midland Loan Services, a CMBS servicer that steps in when a loan is showing signs of imminent trouble. "If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland."
That pretty much sums that up. It’s a big problem. This is why I have little faith that the Fannie and Freddie bailout did anything more constructive than buy some time (at enormous taxpayer expense).