Money Sage (archive)

Those of you who are regular readers of this blog may remember our assessment and forecast for the commercial real estate market some time ago. We noted that a bear market in this asset class had been signalled quite some time ago, when two of the most astute real estate investors in American unloaded key properties at a time when prices were still climbing and bullishness remained rampant. We refer here to Sam Zell, the veteran real estate investor of remarkable prescience, and the Metropolitan Life Insurance Company, which disposed of two vast apartment complexes in Manhattan which it had owned since they were built in 1946. (The MetLife sale netted the insurance giant a tidy $5 billion). Our view was a distinct minority when we uttered it, shortly after the inception of this blog. At the time, financial magazines, talk shows, and the media generally were emblazoning their publications and shows with stories of the fortunes that had been made and were yet to be made in the invincible realm of commercial real estate.

This morning, a story on Bloomberg quotes various players in the commercial real estate business, and we would like to offer you a sample:

--"The market is locked up right now because there's a huge overhang of leveraged assets of every type..."

--"Federal Reserve Chairman Ben S. Bernanke is proving powerless to prevent a deteriorating commercial real estate market." (writer of story)

--"Delinquencies of securitized commercial mortgages may quadruple in the next 18 months..."

"If banks can't securitize the loans, they won't make them..." (i.e. -- if they can't dump them onto their greedier clients, which has become the case -- Moneysage)

"Housing weakness is likely to lead to a weaker commercial real estate market because fewer houses mean demand for shopping and schools will decline...The credit problems take it beyond the usual cyclical swings."

The author of the article noted, up front, a crucial point: while the yield on 10-year Treasury notes has FALLEN nearly 1.5 points over the past 3 months, the cost of loans for commercial properties has RISEN 1.25 points.

For some not-so-strange reason, the flight to safety (i.e., to Treasuries), we believe, will become more intense and last much longer than is generally expected. Indeed, we would treat the bearish din on Treasuries, characterized by repeated "guru" assertions that Treasury yields have gone too low and prices too high as a fairly reliable CONTRARY INDICATOR.

The developing collapse of the commercial real estate market constitutes one more important FALLING DOMINO. (See our analysis, "Deflationary Dominos? ) The deflation of the asset bubbble is ramifying and intensifying. This places a spotlight on the concern we have expressed in repeated posts that the FED may have raised rates too high, kept liquidity too constricted, for too long, and placed itself irrevocably behind the deflationary wave. It is OF SUPREME IMPORTANCE that the FED GET AHEAD OF THE WAVE AND STOP IT BEFORE A TRUE DEFLATION ARRIVES, AND THE FED FINDS ITSELF CAUGHT IN A LIQUIDITY TRAP A LA JAPAN. Moreover, we will reiterate what we have said repeatedly: the FED ALONE CANNOT DO IT. Its efforts must be complemented by a massive, effective, and prompt BAILOUT OF THE BANKING SYSTEM BY UNCLE SAM.