March 18th, 2009 11:26 EST
When Will the Real Estate Market Hit Bottom?
Imagine sitting around a conference table with world class experts in economics, finance, credit, bonds and the markets. That discussion happened last week and it was recapped by my good friend Jeffrey F. Sax. Jeff has been practicing law since 1983 in the areas of business litigation, real estate litigation, business and real estate transaction work (contract negotiation, drafting, and long term planning issues), and estate planning. Read carefully. The outcome may surprise you.
Beginning of Contributor Comments:
The question of the day: When Will the Real Estate Market Hit Bottom?
I opened the discussion by saying I had no clue and I was man enough to admit it. After listening to many intelligent and thoughtful answers which made sense at the time, I have to admit that I still have no clue. It dawned on me that all the answers focused on symptoms, not causes or cures. I will highlight and summarize what I considered to be the best answers to make my point. There were only five, articulated in various ways:
1. The market will hit bottom when the psychology of the country (or a relevant market group under discussion) becomes positive, optimism abounds, and people are willing to stick their toes into the water again. But how and when does that occur? It is not by magic. Answers 2-5 seem to be the leading indicators.
2. The market will hit bottom when employment turns around. For this to be true, one must ask why is unemployment a problem? It`s because companies are doing poorly and cannot afford the continued expense of personnel and/or they do not have the business activity or profits to justify retaining them. So why are companies doing poorly? See answers 1 and 3.
3. The market will hit bottom when credit loosens and businesses can borrow to cover their working capital, expansion, and long term planning needs (such as research and development). For this to be true, one must ask why is credit tight? It`s because lenders do not have confidence that the collateral will fully secure the debt (due to depreciating real estate) and/or the businesses are not profitable and would not otherwise have the ability to repay the loan (i.e., receivables are uncollectable because other businesses are suffering). Why are businesses not profitable? It`s because consumer confidence is low and people are not spending money buying their products or services. See answer 1. This is true because they are not employed and have no money to spend (see answer 2), or are worried that they will not have money in the future to cover their living expenses, and their assets are depleting (see answer 4) so they save instead of spend.
4. The market will hit bottom when the stock market turns around and consumers see a positive trend. This was the answer that you liked because you believe the stock market is the powerful influence to change the psychology of consumer confidence. However, why is the stock market doing poorly? It`s because the companies that the stocks represent are doing poorly. So they are worth less. So their stock prices reflect their reduced value. So the stock market trends downward. And why are companies doing poorly? It`s because credit is tight. See answer 3. It`s because consumer confidence is low. See answer 1. It`s because of unemployment. See answer 2.
5. Finally, the market will hit bottom when the government stimulus begins to work. This will cure the above problems and bring back consumer confidence which will then reduce unemployment, loosen credit, and bring the stock market back. But is nationalization of the key components to our economy really the answer? Historically, the government does a poor job of managing industry for profit. Throwing money blindly at a situation hoping that it will cure itself does not work. (See Bush 43.) Underpaying corporate talent (see Obama condition #1) simply drives it away which will then hasten the onset of the Peter Principle (everyone in an organization rises to their level of incompetence which is why America is ultimately doomed) and force the economy down again due to incompetence. Riddling these companies with government debt that must be repaid (or the government will take back its investment which starts the cycle again) will hurt the economy because excess cash must be used to repay debt rather than invested in new technology, new products, growth, etc.
Saddling the government with unprecedented national debt to finance the stimulus is dangerous because even the government must repay its debts. Printing more money is not the answer. I know this from my Economics 101 class. Raising taxes is not the answer. I know this because when the Republicans and Democrats agree on something, it is likely to be correct. (Did I just say that?) Reducing the size of government so the existing tax revenue can cover expenses and repay the debt seems impossible because even by eliminating some inefficient or ineffective programs (as Obama says will happen), new branches of government must be established to operate and oversee the stimulus projects. Otherwise, we are again throwing unregulated and unconditional money at a problem hoping it will go away. (See Bush 43. How is that UK company that we bought for AIG doing?) I believe that these new government oversight administrative functions will dwarf the size of the programs they replace.
It is obvious to me that all of these problems are interrelated and feed upon themselves. But they are all symptoms - the outward manifestations of the problems - and not the causes or the cures. What is scary is the speed with which it happened. It is akin to a gravity principle. Nature`s tendency is to fall downward at accelerating speeds and it takes a greater focused energy to rise from what is holding you down.
So after listening to our intelligent and thoughtful discussion and mulling it over for a few days, I admit that I still have no clue as to when the market will hit bottom and what will turn it around. Perhaps voodoo is really the answer. (See answer 1.) The cycle begins anew.
* * * End of Contributor Comments * * *
It`s clear that Jeff knows what he is talking about and while he says that he doesn`t get it, clearly he does. This material is fodder for late night TV: it is circular and complicated and idiotic all at the same time. This is one discussion that has no beginning and no ending. So each of us has to take our own bull by the horns and pull ourselves out of this mess. I don`t think that the government is going to be able to do it for us.
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