How Long Will It Last?

A Los Angeles based motorcycle club has a saying: "Be good to us and we'll be better to you. Be bad to us and we'll be worse to you." Developers who were used to having the banks line up at our doors and be very, very good to us can relate. Real estate has gone through a dramatic evolution these past several months, and the changes haven't been for the better.

I vividly remember December 1980 when Jimmy Carter was president and the prime rate hit 21.5%, the highest rate in U.S. history. Incredibly, if a deal could withstand that heinous rate of interest, you could get money. And plenty of it. Today interest rates are so low it's like stealing BUT......almost no bank will make construction loans. We live in a time when people are terrified of criticism and the result is paralysis. It doesn't matter what the interest rates are if lenders are too scared to make a loan in the first place.

When I started out developing real estate, over mortgaging was not uncommon. If you needed $10 million for a building, you could get an $11 million loan. Those days are long gone. Now forget about getting more than what you need; developers are often responsible for 40-60 percent of the cost up front. Even the most successful developers can have trouble with that much equity, and the tepid commitments from lenders have a domino effect. When developers can't get reasonable financing, architects aren't hired to create designs. No designs means no general contractor to implement the plans. If there's no general contractor, there are certainly no subcontractors. Workers are out of jobs and fertile real estate lies barren.

In the wake of the subprime crisis, caution is neither surprising nor unwarranted. But progress will not come from stagnation. The fact is these things run in cycles. Never only good. Never only bad. The question no one knows the answer to is: "How long will it last?" Instead of waiting to find out, we need confident lenders to take advantage of the low rates and risk making mistakes. It's the only way to avoid the certain mistake of going nowhere.

Comments

[Dblack27]

Here's hoping banks find a way to get out of this mess before overregulation becomes a necessity.

[dadw5boys]

High prices have caught many unprepared even those with regualr mortages will be in real trouble by Novermber with the changes in the bankruptize laws. They will be forced into giving up their homes too.

[handyallen1]

anyone who builds in this market is crazy, and anyone who loans money to build is insane

[drkazmd65]

As the author of this post points out - that isn't completely correct handyallen1,

IF (and it is a big if) the lender hasn't overextended (given - that is not a common thing) AND the builder has enough money / capital to guarantee reasonable success in completing a worthwhile and not completely speculative project, AND both sides expect a reasonable long-term profit,...

THEN the loan should go through.

No matter the market, there is potential money to be made IF the idea is long-term gain.

[dadw5boys]

The use of Marco Economics to SPEND YOUR WAY OUT OF CRISIS is not a good model when the MicroEconomic effect of over budgeted items, no bid contracts and cost plus contracts are increasingly draining the treasury at a higher rate! It will not work in the long run. Bush is trying to hold off a collaspe of the economy till he leaves office. I doubt it will last till Febuary before a deep recession sets in.

[Stevelagain]

Not even to mention the things that are really killing the government such as Medicare, that program that will destroy our government and that democrats refuse to fix. 1.5 years almost of democratic congress and they aren't even working on balancing the budget, Medicare, Social Security, national health care. Nothing.

So much for promises.

[ProfessorDuh]

The $3 billion a week in borrowed taxpayer money being pissed away in Iraq is the rabid elephant in the room.

[Dunnage]

The problem is that the Lending Institutions don't trust one another. Would you? Got nothing to do with criticism -- that's just the pols screwing around. Not only do they not trust one another, they do not have a clue where they themselves will be in 18 months.

Might also note that the entire world of money knows that the U.S. cash is trash -- war and tax cuts just seem to be bad investiments. And the return from those messes hasn't even returned yet.

[castlerider]

You're right, and this is exactly why regulations are so necessary, no matter what some wall street genius tells you. And a major reason why fault on this sits squarely on this administration's negligence and failed leadership.

For instance, imagine the fact that banks were never required to sell a property before they were packaged up in those loan packages that they were selling across the country and across the globe. EVEN IF THEY WERE FORECLOSED ON!!! So what you have are "black holes" in the packages, floating in cyberspace, lacking the proper legs to support it, showing this package to be valid when it really had these holes. I'm talking about properties with no one making payments on them, sucking life out of everything.... No wonder it all came crashing down!!!

Now here's something that would take BALLS: Someone in the Federal Reserve introduce a program bringing back SUBPRIME LOANS , or a specific similar program that has the proper regulations that would guarantee its success. Investors would be falling over themselves to get a piece of that.

[ProfessorDuh]

The Bushies removed the regulations so their pals could rob and defraud the American public, kicking part of the loot back to the Republican Party. No one should pretend surprise. When you elect thieves, you get kleptocracy. And kleptocracy is not a form of government that can sustain itself. It's the last act of the fiction of a republic and the rule of law rule, just a bunch of vultures dipping their beaks.

[castlerider]

Good post, Skip, thanks.

I have entertained the idea of wondering why no one in the position to make such a decision hasn't come up with the idea to freeze interest rates on properties of businesses and residences starting on a date in about 5 to 6 months, where you have until that day to close or lock in your interest rate, then on the morning of the next day allow rates to go up to 10- at least 9, where they really need to be to bring in massive amounts of investment into our infrastructure, which it damn sure would. This would also move money like crazy to get people to get off the fence and buy before the deadline.
Some regulations to protect from greedy investors that would want to manipulate the system would be easy enough to put in place.

I agree with what you say about movement, and how going nowhere is the absolute worst and most unnecessary option. It seems like whatever we do that will best get us out of this mess will be a way that captures serious momentum and actually makes money MOVE.

[joebhed]

Pump you up!

Get OUT there!
Buy STUFF!

These things always go in cycles.
Get used to it.

What's the matter with you people?
Just because you and your family lost your home or your job or your health care, which, in this country goes with your job ( at least it did in the last one of these here cycles), I mean, come on.
Somebody, somewhere will lend you back that money you borrowed and gave to them to get them out of this rathole.
It's just an economic cycle.
Get used to it.

Get up.
Buy some STUFF!
Generate some economic activity, would you?
The sooner you do, the sooner we start on another whole cycle.

Unless,.........
oh shit!
Unless,.....
maybe we're not actually completely done with that last cycle.
In which case,
crapola!!

Grab some cash.
Hunker down.
Do the best you can.
Figure out what the hell just happened.

And make damn sure it doesn't happen again.
In that next cycle.

[mbaty]

So there are vacant homes, and there are homeless people? This is absolutely immoral. It is wrong in this rich country to kick people out of their houses only for those houses to sit vacant while others go without shelter. This is wrong and evil, and what can I do about it? Seriously, if anyone knows of a plan or petition or organization that is moving to change this, post a link please. With all of the ridiculous amounts of fake money we've spent on this bloody oily war, we can surely come up with enough of the basics for everyone to be taken care of. It's not communism, it's compassion, and there IS enough.

[davedave]

if its a good deal, do it.

if its a bad deal don't.

just don't ask the american people to finance a bad deal.

"do" diligence......

d

[hopeless277]

By bailing out banks, the taxpayer is trying to borrow the very money they paid to the government. Why not just close the bank and let the taxpayer keep their money?

[zaneblue]

What's wrong with going nowhere? Baby Boomers are retiring, I think there's plenty of housing out there already for us.

[MilwaukeeDan]

zane, you are correct, according to the Census Bureau, vacant homes are at record levels. The report shows that 2.9% of U.S. homes- excluding rentals- were vacant and up for sale in the first quarter, that translates to 2.28 million homes, the highest number on record since 1956.